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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934. For the fiscal year ended March 31, 1999.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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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)
DELAWARE 94-2993326
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
2100 Milvia Street, Berkeley, California 94704-1113
(Address of principal executive offices) (zip code)
(510) 548-5442
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.0001 PAR VALUE
(Title of Class)
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, as
amended (Exchange Act), during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of the Common Stock on June 7, 1999, as
reported on The Nasdaq Stock Market(R), was approximately $229,000,000. Shares
of common stock held by each executive officer and director have been excluded
in that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
The number of shares of the registrant's Common Stock outstanding as of June 7,
1999 was 14,107,751, all of one class.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENTS TO BE INCORPORATED BY REFERENCE SECTION OF FORM 10-K
Portions of the Proxy Statement for the 1999 Annual Meeting Part III
of Shareholders, filed with the Securities and Exchange
Commission (SEC) along with this Form 10-K.
Portions of the 1999 Annual Report to Shareholders, filed Parts I, II and IV
with the SEC as an exhibit to this Form 10-K.
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TABLE OF CONTENTS
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PART I PAGE
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Item 1 Business 1
General 1
Business Segments 1
Subscription and Consulting Business 2
Electronic Trading Business 5
Asset Management Business 6
Marketing, Sales, Clients and Client Support 6
POSIT and Symphony Revenue Contributions 8
Research and Product Development 9
Competition 9
Fluctuations in Quarterly Operating Results 11
Proprietary Rights and Licenses 11
Government Regulation 12
International Operations 14
Employees 14
Risk Factors 14
Item 2 Properties 21
Item 3 Legal Proceedings 21
Item 4 Submission of Matters to a Vote of Security Holders 22
Executive Officers of the Company 22
PART II
Item 5 Market for the Company's Common Equity and Related Stockholder Matters 24
Item 6 Selected Financial Data 24
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 24
Item 7A Quantitative and Qualitative Disclosures About Market Risk 35
Item 8 Financial Statements and Supplementary Data 36
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 53
PART III
Item 10 Directors and Executive Officers of the Company 55
Item 11 Executive Compensation 55
Item 12 Security Ownership of Certain Beneficial Owners and Management 55
Item 13 Certain Relationships and Related Transactions 55
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 57
SIGNATURES 60
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PART I
ITEM 1. BUSINESS
THIS BUSINESS SECTION AND OTHER PARTS OF THIS FORM 10-K, AS WELL AS PORTIONS OF
OUR 1999 ANNUAL REPORT TO SHAREHOLDERS, CONTAIN FORWARD LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. FOR FURTHER INFORMATION REGARDING HOW TO
IDENTIFY THOSE FORWARD LOOKING STATEMENTS AND THE FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER PLEASE LOOK AT THE RISK FACTORS SECTION OF THIS PART I
AND THE SECTION TITLED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS IN PART II OF THIS FORM 10-K.
GENERAL
BARRA, Inc. (the Company, which may be referred to as BARRA, we, us or our) is a
research-based, global investment technology company. For almost 25 years, we
have applied modern portfolio theory to practical investment problems. We
combine technology, data, software and services to provide Investment Analytics
and trading solutions to investment professionals. In addition, our Investment
Data Products division markets a variety of proprietary databases along with
software and analysis products designed to make the data more useful to
investment professionals. We also offer Investment Consulting, Strategic
Consulting and Corporate Consulting services. We conduct each of these
integrated business activities throughout the world through our parent company
and wholly-owned subsidiaries.
We also have Electronic Trading and Asset Management businesses. We own 50% of
the Portfolio System for Institutional Trading (POSIT(R)) - the leading
computerized institutional trading system in the U.S. equity market. We own 50%
of Symphony Asset Management LLC (Symphony LLC) - a business providing asset
management services directly to pension funds, university endowments and
foundations, mutual fund distributors and qualified individuals.
Our fiscal year for financial reporting purposes is April 1 through March 31.
The fiscal years are referred to using the year in which the end of the fiscal
year falls. Unless otherwise noted, all references in this Form 10-K to 2000,
1999, 1998 or 1997 are to our fiscal year. This means that the fiscal year
ending March 31, 1999 is referred to as "1999".
Throughout this Form 10-K we "incorporate by reference" certain information from
parts of other documents that we have filed with the SEC. The SEC allows us to
avoid duplication and disclose important information by referring to it in that
manner. Please refer to this information.
All share and per share amounts in this Form 10-K have been restated to reflect
a three-for-two stock split effective September 22, 1997. In August 1998, we
changed the state of incorporation of our parent company from California to
Delaware.
BUSINESS SEGMENTS
We operate in three business segments:
- - SUBSCRIPTION AND CONSULTING BUSINESS, which includes our Investment
Analytics, Investment Data Products and Consulting divisions;
- - ELECTRONIC TRADING BUSINESS, which consists of the POSIT crossing networks
and decision tools; and
- - ASSET MANAGEMENT BUSINESS, which is primarily composed of the direct
management business run by Symphony LLC, but also includes the
fund-of-funds and private equity activities of the wholly-owned
subsidiaries which compose our Asset Services Group.
While these business segments serve some common clients and draw upon some
similar research, development and data resources, they each require different
marketing and distribution strategies and are subject to different regulatory
oversight. Comparative segment revenues, profits and related financial
information for 1999, 1998 and 1997 are given in the table entitled Segment
Information in Note 11 to the Notes to our Financial Statements below.
Some of our business segments are regulated in the U.S. and in some other
markets where we operate around the world. In the U.S., the main regulatory
authority we deal with is the SEC. The SEC has oversight over our activities as
a publicly traded company and over the activities of our investment advisory
businesses. It also regulates the businesses of many of our business partners
and clients. See Government Regulation below.
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- - SUBSCRIPTION AND CONSULTING BUSINESS
Our Subscription and Consulting segment is comprised of three business
groups: Investment Analytics, Investment Data Products and Consulting.
INVESTMENT ANALYTICS - For almost 25 years we have applied modern portfolio
theory to practical investment problems, capturing our insights in
databases and software. Our portfolio management and decision support tools
are used by over 2,500 organizations worldwide, including a majority of the
100 largest asset managers.
We have developed multiple factor models for risk, returns and transaction
costs for most of the world's publicly traded securities. In general, risk
models measure the exposure of a security or group of securities to risk
factors common to all securities in the model. These models analyze equity,
fixed income, currency and other financial instruments. We deliver these
models to customers worldwide in Microsoft(R) Windows(TM)-standard
software, which interfaces with each customer's own office productivity
system. These models and related applications utilize our proprietary data,
which is provided to clients in periodic updates. Using proprietary
algorithms, we have derived this data from over 100 third-party sources.
Some of our data sources are not generally available. In some cases,
sufficient data is unavailable from third parties, so we collect and input
the data directly.
We introduced our first equity risk product in 1975 for the U.S. equity
market. Since then, we have developed additional models covering new
countries, asset classes and instruments. We recently conducted a strategic
review of market trends and our existing single country market and global
market models. Based on the results of that review, we announced in April
1999 that we would focus on global and firm-wide risk platforms for future
fixed income development projects. As described below, although we will
continue to expand our coverage as new markets open, new instruments are
introduced and new data becomes available, those expansions will primarily
benefit our global and firm-wide risk platforms. Principal examples of our
global and firm-wide platforms are:
- - THE BARRA AEGIS SYSTEM(TM) - Aegis is our integrated suite of equity
products. It is used by equity professionals with a variety of our risk,
valuation and performance models. Examples of those models are:
- Aegis Portfolio Manager(TM) - This model integrates risk management
and optimization capabilities into one product that assists in
portfolio construction through balancing portfolio risk, return and
cost according to a user's predefined preferences.
- Aegis Performance Analyst(TM) - This model analyzes historical
performance by equity managers by isolating sources of historical
returns and the magnitude of risks taken to generate those returns.
- Alphabuilder(TM), Macroeconomic Model and Custom Performance - Each of
these models provides powerful returns forecasting assistance to
active equity managers.
- Market Impact Model(TM) (MIM) - MIM provides pre-trade transaction
cost estimates for U.S. equities. It also helps analyze non-linear
growth of market impact cost as a function of trade size. (Market
impact is the price change that can sometimes result when relatively
large share positions are traded.)
- - THE BARRA COSMOS SYSTEM(TM) - Cosmos is a suite of products that allows
clients to manage risk and enhance return in a global fixed income
portfolio. One Cosmos module, Global Risk Manager(TM), helps implement bond
derivative and currency strategies while controlling the overall risk of a
client's positions. As part of our re-focused product strategy, we recently
discontinued certain single country fixed income products, which could not
be integrated in our existing global or firm-wide platforms. We plan to
include much of the single country model functionality and U.S fixed income
asset coverage in our global and firm-wide risk products in the future.
- - ENTERPRISE RISK MANAGEMENT - Growth and consolidation among investment
managers have created demand for large enterprise risk management systems
that address the expanding asset coverage and fiduciary responsibilities of
these managers. In response, our Enterprise Risk Management group combined
our existing models and analytics to develop firm-wide asset and risk
management products. In December 1997, we released Total Plan Risk(TM), the
first multi-asset class risk management system for pension plans and
investment managers. In June 1998, we acquired substantially all of the
assets of Redpoint Software, Inc. (Redpoint). The data integration
technology and expertise inherited from Redpoint has helped us link asset
holdings with risk management software to establish a new
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standard for investment risk assessment. We now offer a complete range of
firm-wide asset and risk management services to banks, insurance companies,
corporate treasurers and investment managers around the world. Our
Enterprise Risk Management products include:
- BARRA Total Risk(TM) - Total Risk delivers a comprehensive solution
for firm-wide risk. It allows the user to monitor risk within
predefined limits. Total Risk also permits real-time reporting and
provides the flexibility necessary to overcome difficult data
integration and aggregation challenges.
- BARRA Total Risk(TM) for Asset Management - This product offers the
benefits of the Total Risk architecture with additional functionality
required by investment managers. It allows managers to monitor
compliance against benchmarks and fund guidelines and provides
comprehensive reporting over long horizons.
We generally provide our Investment Analytics to clients on an annual
subscription basis. The annual subscription price for most of our
individual Investment Analytics products starts at around $35,000.
Comprehensive platform subscriptions (such as Aegis, Cosmos or Enterprise
Risk Management) often consist of a combination of our Investment Analytics
products and have significantly higher annual subscription prices. Our
standard fees generally include use of the relevant models and applications
software (these applications allow users to access our proprietary derived
databases), related documentation, periodic database updates and client
support. Since we offer comprehensive solutions to all of our clients, many
of our large and complex projects (including our Enterprise Risk Management
projects) often involve a separate fee for our Consulting services. See
discussion of Consulting below.
INVESTMENT DATA PRODUCTS (IDP) - In 1997, we launched our IDP unit to
develop and market a variety of proprietary databases along with electronic
screening and analysis products to be used with the data. The IDP unit
primarily delivers its products electronically, in packaged software and
through third-party distributors, but some products are still delivered in
print and via compact disc (CD). In 1998, we began to offer the following
IDP products over the Internet from our World Wide Web site via our Online
Products Center:
- BARRA GLOBAL ESTIMATES(TM) - BARRA Global Estimates is an earnings
estimate product that covers publicly traded companies worldwide. It
is principally composed of The Estimate Directory(R) (TED) assets that
we acquired from Edinburgh Financial Publishing Limited (EFP) in 1997.
BARRA Global Estimates pools stockbrokers' research to provide a
single source of reference for sales, profit, earnings, cashflow and
dividend forecasts, as well as stockbrokers' recommendations. It is
available in a variety of delivery formats, including via our Online
Products Center, an electronic database and printed books.
- EQUITY RISK DATA - Customers can now download BARRA proprietary and
other equity risk data generated by our global and single country
equity models. For periodic access, a customer can pay-per-view from
our Online Products Center. For regular retrieval, a customer can
purchase an annual subscription to an electronic book.
- DIRECTUS(TM) - Directus is a U.K. director trading information
product. It permits users to monitor share dealings by directors of
U.K. companies. We also acquired this business from EFP in 1997. It is
available in a variety of delivery formats, including via our Online
Products Center.
- BARRA BOND EXPRESS(TM) - BARRA Bond Express products provide
information on bond offerings from hundreds of dealers. We acquired
100% of the Bond Express business in January 1999. BARRA Bond Express
data is available via our Online Products Center, a standard
Windows-based software application and through a number of third party
websites.
- INVESTWORKS(TM) - InvestWorks provides a complete package of data on
investment products, benchmarks and peer groups. InvestWorks analytics
can be used to evaluate and contrast the style and performance of
separate accounts, mutual funds and commingled funds. It is used by
money managers, plan sponsors, financial advisors and investment
consultants.
In addition, the IDP unit manages our relationships with Quote.com, Inc.
(Quote.com) and Data Downlink Corporation (Data Downlink):
- QUOTE.COM - Quote.com was founded in October 1993 to provide financial
market data and relevant business news to Internet users in a timely
fashion. We own approximately a 1.5% equity interest in Quote.com.
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- DATA DOWNLINK - Data Downlink developed and supports an online service
that aggregates and indexes quantitative business information from
multiple sources. Data Downlink makes this information available in
spreadsheet format on a subscription or pay-per-view basis. We own
approximately a 20% equity interest in Data Downlink. In May 1998, we
granted Data Downlink a non-exclusive worldwide license to market
certain of our proprietary databases via their on-line service.
We recently announced that we are seeking outside strategic investors for
our Investment Data Products business. We believe that this is the best way
to accelerate its development and take advantage of promising opportunities
in the financial information Internet business.
We provide our Investment Data Products to clients on a pay-per-view and an
annual subscription basis. We do this directly and through redistributors.
The pay-per-view price varies depending on the data accessed by each
client. The price of each hit can range from a few dollars to several
hundred dollars. An annual subscription to most of our Investment Data
Products starts at approximately $1,600. Combined subscriptions to multiple
products and sites would well exceed that amount. The royalties we receive
from redistributors are generally based on a percentage of the revenues
received by each redistributor for sales of and licenses to our Investment
Data Products.
CONSULTING - As an extension of our Investment Analytics and Investment
Data Products businesses, we offer a variety of Consulting services
designed to assist investment professionals in creating, evaluating and
trading securities portfolios. Professional teams of our consultants draw
on the wide range of research, analytical and industry expertise in the
combined organization to bring a unique set of skills to bear on each
client's needs. We offer three types of Consulting services:
- INVESTMENT CONSULTING - Through our wholly-owned subsidiary, BARRA
RogersCasey, Inc. (BRC), we offer a full range of Investment
Consulting services to pension funds, endowments, foundations, plan
sponsors and financial intermediaries (companies that provide retail
investment products). These services include:
- analyzing plan-wide risk;
- assessing different asset mixes in comparison to projected
liability funding needs;
- testing current assets against desired asset mixes;
- reviewing current defined benefit plan objectives, benchmarks and
manager mixes;
- reviewing the key features of a defined contribution plan;
- developing retail investment products such as mutual funds and
annuities;
- selecting investment vehicles and managers in light of overall
plan needs; and
- analyzing and reporting on performance by external managers and
the risk taken by those managers.
- STRATEGIC CONSULTING - Our wholly-owned subsidiary, the BARRA
Strategic Consulting Group, Inc. (BSCG), provides a wide range of
Strategic Consulting services to money management firms. These
services include:
- analyzing industry trends and the market position of a client
with regard to those trends;
- providing a detailed analysis of a client's business strategy
along with proposed enhancements to that strategy;
- evaluating the quality and consistency of a client's investment
process using our proprietary Investment Analytics;
- assessing the effectiveness of a client's acquisition and service
activities; and o advising on various merger, acquisition and
restructuring activities.
- CORPORATE CONSULTING - Our Research Department (which also performs
research functions for our Investment Analytics and Investment Data
Products divisions) performs a variety of specialized Corporate
Consulting services and analytics research for institutions such as
banks, brokerage firms and insurance companies using our proprietary
models and databases. These activities include:
- utilizing a full library of fixed income security valuation and
cashflow routines to provide customized client solutions;
- constructing investment portfolios;
- assisting in the creation of an enterprise-wide or plan-wide risk
management system; and
- evaluating balance sheet risk.
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We frequently charge fixed fees for our Consulting services, payable either
for a single project or on a recurring retainer basis. We also provide
Consulting services on a time and materials basis.
- - ELECTRONIC TRADING BUSINESS
For over a decade, our research into transactions has focused on cost
control. This focus has resulted in the development of electronic crossing
networks for equities and derivatives. Each crossing network is designed to
minimize market impact and other trading costs.
We own 50% of the POSIT technology through a general partnership with ITG,
Inc. POSIT was first introduced in 1987. We initially developed the POSIT
technology and have since jointly enhanced it with ITG. POSIT is a
computerized institutional trading system that allows institutional
investors to trade portfolios of securities directly with each other in a
confidential environment. Investors send their buy or sell orders to a
POSIT computer. Buy and sell orders are presently matched at the midpoint
between the bid and ask prices at six times during the trading day.
Under the terms of our joint venture agreement, we and ITG are prohibited
from competing, directly or indirectly, with POSIT. The related agreements
also require that we provide certain support services to the POSIT
partnership, including the availability of experienced personnel and
support for the development and maintenance of the POSIT system. The POSIT
joint venture may also earn a royalty from licensing POSIT to other
businesses in other markets.
U.S. POSIT - Through a license from the POSIT joint venture, ITG operates
the U.S. equity version of the POSIT system. All trades of U.S. equities
executed through U.S. POSIT are cleared by, and all brokerage commissions
are paid to, ITG. We receive a fee from the POSIT partnership based on
quarterly royalties paid by ITG. Our share of these royalties is
approximately 13% of the commissions received by ITG for trades of
securities on U.S. POSIT. Total U.S. POSIT trading volumes for the past
five calendar years are set forth in the chart below:
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1998 1997 1996 1995 1994
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TRADING VOLUME 5.8 billion shares 3.6 billion shares 3.3 billion shares 2.3 billion shares 1.9 billion shares
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EUROPOSIT(TM) - EuroPOSIT was developed by the POSIT partnership using the
original POSIT technology. It was launched in November 1998 and experienced
a promising round of early trading volume. It is operated by Investment
Technology Group SG Limited (ITGSG), a Republic of Ireland venture that is
owned by ITG and Societe Generale. EuroPOSIT currently covers U.K. equities
but is expected to cover French equities in the near future. ITGSG expects
to cover equities from additional European nations over time. All EuroPOSIT
trades of equities are cleared by and all brokerage commissions are paid to
ITGSG. A royalty is then paid to the POSIT partnership based upon the
commissions received by ITGSG for trades of European securities on
EuroPOSIT. We receive 50% of that royalty after expenses.
POSIT-FRA(TM) - In 1998, using technology licensed from the POSIT joint
venture, we developed POSIT-FRA, the first computer-based crossing network
for Forward Rate Agreements (FRAs). At that time, we also entered into a
joint venture with Prebon Yamane (U.S.A) Inc. (Prebon) to market POSIT-FRA.
The POSIT joint venture receives a royalty based upon the commissions
received by Prebon for trades of FRAs on POSIT-FRA.
AUSTRALIA/NEW ZEALAND POSIT - Using the original POSIT technology, we
developed an Australia/New Zealand equity version of POSIT in 1995. The
POSIT partnership initially licensed the technology to Burdette, Buckeridge
& Young (BBY), an Australian brokerage firm. That license was later
transferred to ITG Australia Ltd. (ITGA), an Australian entity jointly
owned by BBY and ITG. All trades of Australia and New Zealand equities
executed through Australia/New Zealand POSIT are cleared by, and all
brokerage commissions are paid to, ITGA. A royalty is then paid to the
POSIT partnership based on commissions received by ITGA for trades of
Australia and New Zealand securities on Australia/New Zealand POSIT. We
receive 50% of that royalty.
GLOBAL POSIT(TM) - Global POSIT was developed using the original POSIT
technology and introduced in London in late 1990 as a crossing system for
international equities. It was operated by a general partnership that was
equally owned by one of our subsidiaries and a subsidiary of ITG. Trading
on Global POSIT was never significant and its operation was shut down at
the end of calendar 1998. Most of Global POSIT's operations were replaced
by EuroPOSIT(TM).
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- - ASSET MANAGEMENT BUSINESS
We offer asset management services via direct investments, private equity
and fund-of-funds. Our 50% owned subsidiary, Symphony LLC, runs a variety
of direct investment vehicles. We provide private equity services and
fund-of-funds vehicles through our wholly-owned Asset Services Group.
SYMPHONY- DIRECT INVESTMENT - Symphony Inc. was formed in 1994 using the
personnel and strategies of our former Active Strategies Group and certain
personnel from Wells Fargo Nikko Investment Advisors, Inc. A restructuring
in 1996 led to the formation of Symphony LLC. The combined Symphony
entities (Symphony) provide a host of asset management services directly to
pension funds, university endowments and foundations, off-shore banks,
fund-of-funds, mutual fund distributors and qualified individuals. As of
March 31, 1999, Symphony directly managed over $2.7 billion in a variety of
investment vehicles including:
- OVERTURE FUND L.P. - Introduced in August 1994, Overture was
Symphony's first product. The fund typically invests in U.S. companies
with market capitalizations in excess of $1 billion. Overture invests
both long and short in approximately equal amounts.
- MINUET FUND L.P. - Symphony introduced Minuet in April 1997. Minuet
uses the same investment process as Overture, except that Minuet's
investments are restricted to smaller companies with market
capitalizations of less than $1 billion. Minuet invests both long and
short in approximately equal amounts.
- PRELUDE FUND L.P. - Symphony introduced Prelude in May 1997. Prelude
uses the same investment process as Overture, except that Prelude's
investments are restricted to companies traded in the U.K., typically
the top 300 to 400 U.K. companies. Prelude invests both long and short
in approximately equal amounts.
- CONVERTIBLE ARBITRAGE STRATEGIES FUND - Symphony introduced its
Convertible Arbitrage Strategies in October 1997. These strategies use
the screening and fundamental research processes employed by
Symphony's equity funds to identify potentially profitable positions.
The strategies typically involve long investments in investment-grade
and near investment-grade corporate bonds together with short
positions in the underlying stocks.
- OPUS 5 FUND L.P. - Symphony introduced Opus 5 in July 1998. Opus 5
uses the same investment process as Overture, except that Opus 5's
investments are restricted to companies listed in the Wilshire 4500
Index. (The Wilshire 4500 Index includes all publicly traded U.S.
companies other than those companies listed in the Standard & Poors'
500 Index.) The fund invests both long and short in approximately
equal amounts.
ASSET SERVICES GROUP - FUND-OF-FUNDS AND PRIVATE EQUITY - Our Asset
Services Group designs, implements and provides ongoing management of
various fund-of-funds and private equity investment products and plans. It
currently manages about $600 million through its various products and
services.
- FUND-OF-FUNDS - The Asset Services Group designs and manages its own
multi-manager products, as well as multi-manager investment programs
for a number of pension plans. Its fund-of-fund products include:
- Global Developing Markets Fund - The Global Developing Markets
Fund is composed of a select group of emerging markets equity
managers.
- Equity Alpha Program Market Neutral Strategy - The Market Neutral
Fund uses a diversified group of managers employing a variety of
strategies as part of an overall strategy that seeks excess
returns with reduced downside risk. The Market Neutral Fund is
currently closed to outside investors and our parent company is
the sole investor.
- PRIVATE EQUITY - The Asset Services Group's private equity service
consists of designing and managing programs for investing in private
ventures, either directly or through managers specializing in private
equity. These ventures are often characterized by a very high degree
of risk.
MARKETING, SALES, CLIENTS AND CLIENT SUPPORT
SUBSCRIPTION AND CONSULTING - We currently serve Investment Analytics and
Consulting clients at more than 2,500 institutions in over 33 countries and over
4,000 Investment Data Product users in those countries. Our clients for these
integrated
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divisions include active and passive equity managers, fixed income managers,
global managers, fund sponsors, pension and investment consultants, banks,
insurance companies, broker/dealers, master trustees and private investors. The
marketing, sales and client support activities vary across the three divisions
comprising this segment.
- - INVESTMENT ANALYTICS - We market our Investment Analytics to a broad set of
financial service providers and institutional investors throughout the
world. When marketing new Investment Analytics products, we focus first on
large participants in the relevant segment of the investment community,
whose endorsement is important in generating market acceptance. Once many
of the larger participants have subscribed, we then target the broader
marketplace. We also target clients in new markets as quantitative methods
and firm wide asset and risk management products gain acceptance. These
marketing efforts are designed to increase geographical coverage and to
increase interest in our Enterprise Risk Management products.
We primarily use a direct sales force to distribute our Investment
Analytics products throughout the world. In the U.S., they are marketed
directly by our parent company. Throughout the rest of the world, they are
primarily marketed by our wholly-owned subsidiaries: BARRA International
(Japan), Ltd. (BARRA Japan) in Japan and BARRA International, Ltd. (BARRA
International) elsewhere. Since our Investment Analytics products are very
sophisticated, our sales and client support personnel are generally
required to have strong academic and financial backgrounds and to
specialize in particular asset classes. Many of these professionals work
out of our Berkeley, California headquarters. The remainder are located in
our other 14 Investment Analytics offices around the world. Our sales and
client support professionals focus their selling efforts on both existing
clients and institutions that are not currently subscribers to our
products. We view sales and client support as an integrated process. A
substantial portion of our sales to existing clients are generated by our
client support personnel.
Due to the complexity of our products, the sales cycle for new clients of
most of our Investment Analytics products is typically several months. The
sales cycle for our Enterprise Risk Management products can be even longer.
Most sales require one or more face-to-face meetings with the prospective
client. Each new client is introduced to one or more of our client support
specialists. Sales and client support specialists help install the product
and then work closely with clients to provide ongoing service and support.
Our client support professionals provide on-site training in the theories
underlying each product and in the use of the product, telephone support
and routine consulting services needed in connection with the use of
certain of our products.
- - INVESTMENT DATA PRODUCTS - We market our Investment Data Products directly
to a broad set of financial service providers and institutional and private
investors throughout the world. We use a variety of traditional and
web-based marketing tactics to target this broad ranging marketplace. We
focus particularly on investors with data-intensive needs who require
comprehensive coverage and who enjoy the flexibility of access to our data
via electronic delivery. We also market these products indirectly to both
financial professionals and on the retail market worldwide through a
variety of redistribution arrangements. These arrangements generally
provide for the display of our data on another entity's financial
information or electronic brokerage website. Some arrangements permit the
redistributor to display our data on their proprietary electronic systems
or to redistribute our data in printed format. The marketing of certain
services provided by Directus is subjected to the regulations administered
by the Personal Investment Authority in the United Kingdom (PIA).
The sales cycle for Investment Data Products is somewhat shorter than
Investment Analytics products. Some products are sold through the Internet,
direct mail and telemarketing. We maintain a direct sales force in 6
offices through-out the world and have several third party redistribution
arrangements. Sales of our Investment Data Products generally do not
require significant client support, any consulting services or any on-site
training.
- - CONSULTING - The Investment Consulting group primarily serves pension
funds, endowments, foundations and other financial intermediaries. The
Strategic Consulting group primarily serves money management firms and the
Corporate Consulting group serves institutions such as banks, brokerage
firms and insurance companies. The marketing and advertising for many of
our Consulting activities are strictly regulated by the SEC under the
Investment Advisers Act of 1940 (Advisers Act).
We employ a variety of methods to obtain new Consulting projects. For our
Investment Consulting business we primarily engage in a focused and
deliberate sales effort aimed at prospects and existing clients. For all
three of our Consulting businesses, we often receive referrals from clients
and non-clients who are in the same industries as our existing clients. In
addition we often engage in Requests for Proposals (RFPs). During the RFP
process, we respond to a series of questions and requests for information
from a potential client which are designed to help the client determine how
we will staff and perform a potential project and the cost of that project.
Generally, several competing RFPs are
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submitted simultaneously. The final rounds of the RFP process often involve
intensive interviews and presentations to the prospective client. Even if a
formal RFP process is not implemented by a prospective client, a similar
proposal and competitive interview process is usually followed. The sales
process is often managed by a member of the relevant sales group.
Consultants are often introduced during the sales cycle and, if the client
is obtained, they later manage the project.
We use a variety of communication channels to stimulate demand within target
markets. We maintain an active World Wide Web site on the Internet. We grant
interviews to trade journals and our employees publish articles in professional
journals. We also disseminate targeted mailings and a newsletter. In addition,
the Forbes/BARRA Wall Street Review appears every two weeks in Forbes Magazine.
It features BARRA-generated indices and other market indicators.
Our research, development, consulting, sales and support specialists regularly
speak at industry conferences, trade shows and our own seminars. We sponsor more
than 60 seminars and workshops per year throughout the world. These seminars and
workshops bring researchers and industry professionals together. They expose
those professionals to the latest developments in investment theory and
technology and give researchers an opportunity to gain insights from our
employees and clients.
ELECTRONIC TRADING BUSINESS
There are approximately 490 clients currently using POSIT, including corporate
and government pension plans, insurance companies, bank trust departments,
investment advisors and mutual funds. All marketing, sales and direct (first
tier) client support for the various POSIT crossing networks is conducted by the
entity licensed to operate each network. We generally provide second tier
support to the various POSIT licensees on behalf of the POSIT joint venture. ITG
conducts the marketing and provides the sales and first tier client support for
U.S. POSIT primarily through the sales, support and consulting activities of its
research group. These activities include introducing clients and prospects to
the features, pricing and technical/functional specifications of the system.
ITGSG conducts the marketing and provides the sales and first tier client
support for EuroPOSIT. Prebon conducts the marketing and provides the sales and
first tier client support for POSIT-FRA. ITGA conducts the marketing and
provides the sales and first tier client support for Australia/New Zealand
POSIT.
ASSET MANAGEMENT
All marketing of our asset management activities and products is strictly
regulated by the SEC pursuant to the Advisers Act. Symphony is also registered
with the National Futures Association (NFA) and the Commodity Futures Trading
Corporation (CFTC) and is subject to the marketing regulations administrated by
those agencies. Symphony's fund products, the Global Developing Market Fund and
the Market Neutral Fund are not registered under the Securities Act of 1933
(Securities Act) and therefore may be marketed and offered only through private
communications with qualified investors. Symphony markets its products and
services to pension funds, university endowments and foundations, off-shore
banks, fund-of-funds, mutual fund distributors and qualified individuals.
(Approximately 80% of the assets under management by Symphony are represented by
institutional accounts. The remainder are qualified individuals.) All investors
in the Global Developing Market Fund are pension plans. The Market Neutral Fund
is currently closed to outside investors. Our pension plan management programs
and private equity investment programs are marketed to corporate pension plans.
The sales and client support for each Symphony Fund and for the Global
Developing Markets Fund are conducted only by personnel associated with the
respective funds. Each of these funds also sends quarterly performance reports
to its investors.
POSIT AND SYMPHONY REVENUE CONTRIBUTIONS
Other than revenue from POSIT and Symphony, no entity not entirely owned by us
and no customer of any of our business segments accounted for more than 10% of
our total operating revenues. The chart below outlines the contributions to our
total operating revenues made by POSIT and Symphony over the last three fiscal
years:
<TABLE>
<CAPTION>
FYE 1999 FYE 1998 FYE 1997
% OF TOTAL % OF TOTAL % OF TOTAL
OPERATING OPERATING OPERATING OPERATING OPERATING OPERATING
REVENUE REVENUE REVENUE REVENUE REVENUE REVENUE
<S> <C> <C> <C> <C> <C> <C>
POSIT $16,235,000 10% $10,555,000 9% $8,960,000 9%
SYMPHONY $25,800,000 16% $26,537,000 19% $16,083,000 15%
</TABLE>
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We do not believe that the loss of revenue from any single customer or any
single entity not wholly-owned by us (other than Symphony or POSIT) would have a
material adverse effect on our business, operating results or financial
condition. Also see Note 11 of the Notes to our Financial Statements.
RESEARCH AND PRODUCT DEVELOPMENT
Innovations by our research and development operations are critical to the
success of our business. We approach investment problems from various angles,
starting with their theoretical underpinnings and continuing through the
practical implementation of solutions. Our goal is to develop and bring to
market innovative products and solutions to help our clients make superior
investment and trading decisions. This goal has been supported by our
substantial research and development investments. We spent approximately $21
million in 1999, $19 million in 1998 and $17.2 million in 1997 on
BARRA-sponsored research and development. These figures include our allocation
of research and development costs for POSIT and Symphony activities. (These
amounts represented 13%, 14% and 16%, respectively, of our total operating
revenues for those years.) In 2000, we anticipate investing more than $25
million in research and development, including our allocated expenses for
Symphony and POSIT activities.
We work closely with ITG on the research and development of POSIT enhancements.
We believe that this effort is necessary to remain competitive in a securities
industry with increasing demand for technology-based services. We expect to
continue this level of investment to improve existing services and continue the
development of new services.
COMPETITION
SUBSCRIPTION AND CONSULTING - The markets for our Investment Analytics,
Investment Data Products and Consulting divisions are competitive but fragmented
into many areas of specialization. We presently compete over many geographic
areas and across many areas of specialization. Competition exists for each of
our individual product lines and each of our divisions. We also face competition
in particular geographic markets. None of our competitors, however, currently
competes across our entire range of products, services and geographic markets
for this business segment.
- - INVESTMENT ANALYTICS - In the market for our Investment Analytics, we
compete with several other companies that have developed risk models,
applications and databases. However, no single competitor offers a suite of
products that competes with our entire Aegis Suite or Cosmos Suite of
products. Historically, competition was greatest for our single country
fixed income products for the U.S. As noted above, following market
research, in early April 1999, we elected to discontinue our single country
fixed income products in the U.S. and Canada. We refocused our product
strategy to follow a general industry trend towards global and firm-wide
risk analysis. We plan to include much of the single country model
functionality in our global and firm-wide risk products. Certain other of
our Investment Analytics also face competition. For example, Vestek (a
Primark company) and Wilshire Associates each offer products that compete
with some products offered by our Aegis Suite. These products and other
competitive products, however, often offer levels of functionality
different from those offered by our products, fewer options or are designed
for a somewhat different group of end users.
Algorithmics Incorporated, Infinity (a Sunguard company) and MKIRisk offer
products and services that compete with our Enterprise Risk Management
business. These competing products are mostly sold to banks and insurance
companies. To date we have focused our Enterprise Risk Management sales
efforts primarily on the existing asset manager and plan sponsor
client-base for our Aegis and Cosmos products. These entities represent the
largest component of our client base, but we have also targeted, and count
as clients, insurance companies, corporate treasurers and a bank.
We believe that the principal competitive factors facing our Investment
Analytics are:
- technical capability;
- product breadth and architecture;
- product features and functions;
- quality of customer support and service;
- professional and product reputation;
- asset coverage;
- ease of use; and
- price.
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- - INVESTMENT DATA PRODUCTS - The investment data products business is
intensely competitive and fragmented. Numerous players, both large and
small, vie for "real estate" on the desktops of financial services
professionals. Due to the breadth of our Investment Data Product offerings,
we compete with a number of different data providers. We believe that our
Investment Data Products division has been able to leverage BARRA's
reputation for analytics and thoroughly cleansed data. We believe that the
principal competitive factors for our Investment Data Products are:
- content;
- delivery medium;
- the ability to add value to data through integration and manipulation
tools; and
- price.
In Asia and Europe, our Investment Data Products division maintains a
leadership position in the market for estimate data. We do not provide
proprietary estimate data coverage for North America and license this data
from a third party. In the U.S. and continental Europe, I/B/E/S and First
Call are our primary competitors.
- - CONSULTING - Our Consulting units compete in a fragmented industry offering
various consulting services to asset managers, pension funds, endowments,
foundations and other fund sponsors. We believe that competitive factors at
work in the consulting industry include:
- client service;
- industry reputation;
- research innovation; and
- retention of key employees.
Competitors for our Investment Consulting business include Wilshire
Associates, Callan Associates, Mercer, Evaluation Associates and Frank
Russell. No single competitor seems to be devoted solely to our Strategic
Consulting business, but some large consulting firms (such as Andersen
Consulting) offer similar services.
We believe that we have certain competitive advantages in each of these
divisions, including extensive proprietary databases, skilled professional
staff, a reputation for excellence developed over years of operation, and an
established series of seminars and other training programs. The effort and cost
required to develop and maintain our risk models and related databases may
present a significant barrier to entry into the marketplaces for certain of our
Investment Analytics and Investment Data Products. We believe that our extensive
experience in product maintenance, together with the economies of scale
available to us because of our large client base, give us a competitive
advantage in the markets for our Investment Analytics, Investment Data Products
and Consulting divisions.
ELECTRONIC TRADING - POSIT competes with services offered by leading brokerage
firms and transaction processing firms, with providers of electronic trading and
trade order management systems and with financial information services. POSIT
also competes with various national and regional and securities exchanges and
exchange facilities, The Nasdaq Stock Market and electronic communications
networks (such as Instinet) for trade execution services. We believe that POSIT
competes on the basis of:
- - access to liquidity;
- - transaction costs;
- - market impact costs;
- - timeliness of execution; and
- - probability of trade execution.
Although we believe that POSIT competes favorably with respect to these factors
and has established certain competitive advantages, its ability to maintain
these advantages will require continued investment in the development of POSIT.
ASSET MANAGEMENT - Symphony and the Asset Services Group compete in the highly
fragmented asset management industry. Symphony's assets under management
represent less than 0.06% of total assets in the U.S.-based asset management
industry. In the discrete niche of market neutral investment strategies,
however, Symphony is often ranked as one of the top 10 managers based on the
amount of assets under management. No one firm dominates the asset management
industry. Barriers to entry are comparatively low in the industry because a few
skilled individuals could set-up an asset management business in a relatively
short period of time. We believe that competitive factors at work in the asset
management industry include product design and implementation, investment
performance, client service and retention of key employees.
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FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
In general, the revenues from our Investment Analytics and Investment Data
Products subscription businesses and our retainer Consulting businesses are not
normally subject to significant variability during a year. We have, however,
experienced variability of operating results from quarter to quarter, due to:
- - the trading volume of POSIT;
- - Symphony's performance and the timing of the calculation of its performance
based fees;
- - the volume and timing of agreements with new clients;
- - acquisition or restructuring charges;
- - the completion of significant Consulting engagements;
- - annual employee salary adjustments in July;
- - the timing and market acceptance of our new products and technological
advances or those of our competitors;
- - foreign currency fluctuations;
- - price levels; and
- - unexpected expenses and unusual charges.
All of these sources of variability are expected to continue for the foreseeable
future.
SUBSCRIPTION AND CONSULTING - Diverse factors cause the variability of operating
results in the three divisions of our Subscription and Consulting business
segment.
- - INVESTMENT ANALYTICS - Our Investment Analytics business is conducted
primarily through annual subscriptions that automatically renew unless
canceled. Annual subscription fees are recorded as revenues over each
subscription period at the rate of 1/12th per month. Consequently, sales of
subscriptions in any one month impact reported revenues evenly over the
next twelve months. For this reason, Investment Analytics subscription
revenues are not normally subject to significant variability during a year.
Clients have historically renewed their contracts at a high rate, but there
is no assurance that these renewals will continue. In particular, due to
the concerns of our clients and prospects regarding Year 2000, we
anticipate that sales of new products will slow or halt during the last
half of calendar 1999.
- - INVESTMENT DATA PRODUCTS - Our Investment Data Products division primarily
consists of subscription revenue, which is subject to the same factors
described above for the Investment Analytics division. This revenue is
either earned directly or through third party redistribution arrangements.
Some Investment Data Products are sold on a pay-per-view basis. For
example, a customer may desire to obtain earnings estimates for only a few
stocks in a portfolio or may require periodic downloads to meet regular
reporting requirements for a large portfolio.
- - CONSULTING - The bulk of these fees are recurring retainer revenues from
the Investment Consulting division. Fees from our other Consulting units
are usually generated by non-recurring, project-type engagements that are
completed in phases. We also include fees related to consulting work done
in connection with large Investment Analytics projects (such as Enterprise
Risk Management system implementations) in our Consulting revenues.
Accordingly, our Consulting revenues can be susceptible to a large degree
of variability depending on our ability to source new projects and the
unpredictable nature and significance of fees associated with specific
transactions.
ELECTRONIC TRADING - The several POSIT systems can experience and have
experienced significant fluctuations in trading volume. Since more than 10% of
our operating revenue and a significant portion of our income by segment came
from POSIT in 1999, these fluctuations can have a significant impact on our
revenue and operating income.
ASSET MANAGEMENT - We record both asset-based and performance-based fees from
accounts managed by Symphony. Since more than 10% of our operating revenue and a
significant portion of our income by segment came from Symphony in 1999, the
volume of the performance-based fees and the timing of their recognition often
results in significant variability in revenues and operating income for us.
Symphony's revenues will continue to depend on its performance and the timing of
its performance fee determination dates for the funds it has under management.
We expect that this significant variability will continue in the future.
PROPRIETARY RIGHTS AND LICENSES
SUBSCRIPTION AND CONSULTING - We rely on a combination of trade secret,
copyright, trademark and other intellectual property laws, license agreements
and technical measures to protect our rights in our intellectual property. We
currently hold no
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patents. Recent developments in U.S. patent law appear, however, to have
strengthened the viability of patents for financial products. In light of these
developments, we are considering applying for patents on certain of our
proprietary technologies.
We have registered "BARRA" as a trademark in the United States and in foreign
countries. We have also registered other trademarks in the United States and in
foreign countries for certain product and services names, and have registration
applications pending for product and service names in the United States and
foreign countries.
- - INVESTMENT ANALYTICS AND INVESTMENT DATA PRODUCTS - Our Investment
Analytics and Investment Data Products are generally licensed to end users
on a periodic subscription basis in a nontransferable license signed by the
client. The licenses generally restrict the use of each product to the
client's investment-related operations at a pre-defined number of locations
and for a maximum number of users or computer terminals. We also permit
access to certain products through the Internet under on-line licenses that
are acknowledged by the licensee in advance of accessing the product. We
believe that our products, processes and trademarks, including those
obtained in recent acquisitions, do not infringe the intellectual property
rights of third parties.
The following factors contribute significantly to protecting our
intellectual property. Because of these factors, we believe that trade
secret and copyright protection are not significant factors in the
protection of our proprietary rights for our Investment Data Products and
Investment Analytics:
- Access to the knowledge, ability and experience of our employees is
necessary for many of our clients to obtain the support necessary to
operate our products.
- To achieve full functionality, our products are dependent on timely
product enhancements and database updates.
- Initial and continuing access to our proprietary databases is often
required for our Investment Data Products and Investment Analytics to
function.
- - CONSULTING - Our Consulting activities rely heavily on the assets of our
Investment Analytics and Investment Data Products businesses. To that
extent, they are vulnerable to the same factors described above. In
addition, our Consulting activities rely heavily on the knowledge,
abilities and experiences of certain employees. We seek to protect these
knowledge bases (as well as those in our other businesses) through
non-disclosure undertakings by our employees.
ELECTRONIC TRADING - The intellectual property issues for POSIT mirror those
discussed above for Investment Analytics and Investment Data Products. Since we
do not actively operate any of the POSIT systems, these issues are primarily
addressed by the licensee-operators of each crossing system. We do, however,
seek to protect our rights through confidentiality and non-disclosure
undertakings, non-competition provisions and limitations on use in each POSIT
license agreement.
ASSET MANAGEMENT - Like our Consulting divisions, our asset management
businesses rely heavily on the knowledge, abilities and experiences of certain
employees in those businesses. Our methods of protecting our Asset Management
intellectual property interests mirror those discussed above in Consulting. In
addition, Symphony uses data from proprietary sources in some of its strategies.
It uses exclusive license agreements with the proprietary data vendors in an
effort to prevent its competitors from utilizing the same information.
GOVERNMENT REGULATION
The financial services industry is subject to extensive regulation at the
federal and state levels, as well as by foreign governments. In the U.S., the
main governmental authority regulating us is the SEC. The SEC has oversight over
our activities due to our status as a publicly traded company and due to the
investment advisory nature of several of our businesses. It also regulates the
businesses of many of our clients and joint venture partners.
ADVISERS ACT
Our parent company is currently registered as an investment adviser solely in
the state of California but is seeking an exemption from the SEC to permit
federal registration under the Advisers Act. Four of our subsidiaries are
registered under the Advisers Act but not under any parallel state statute. As
registered investment advisers these entities are required to meet certain
financial criteria, including the maintenance of minimum net capital levels.
They are also are subject to certain obligations, fiduciary duties and
prohibitions with respect to their operations, including their dealings with
clients. These include certain required disclosures to clients and potential
clients, limitations on receipt of performance-based compensation and
restrictions with respect to transactions involving potential conflicts of
interest.
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We have registered our parent company as an investment adviser because of the
advice we give in some of our Consulting businesses. We have also obtained this
registration because we receive compensation for our Contour(TM) product based
upon the amount of assets under management by the Contour client. (We anticipate
that Contour will be discontinued at the end of the calendar year.) We believe
and have adopted the position that our Investment Analytics and Investment Data
Products (other than Contour) do not provide investment advice for purposes of
the Advisers Act.
DOL, ERISA, CFTC AND NFA
BRC provides Consulting services to a large number of pension plans that are
regulated by the U.S. Department of Labor (DOL) under the Employee Retirement
Income Security Act of 1974 (ERISA). It is possible that BRC may, as a
consultant, be deemed a fiduciary of some of those plans. In such a case, BRC
would be subject to ERISA, which imposes strict obligations on fiduciaries,
especially regarding conflicts of interest.
Symphony and the Global Developing Markets Fund both manage funds owned by
pension plans. In addition to their normal Advisers Act fiduciary obligations
for these pension funds, they are also deemed to be fiduciaries under ERISA.
Symphony is also registered with and subject to the regulations administered by
the NFA and the CFTC. We would likely be required to register the Market Neutral
Fund with the NFA and the CFTC before we engage in any marketing or offering of
that fund. As Symphony and the Asset Services Group expand their operations,
they may become subject to certain additional government regulatory
requirements.
PERSONAL INVESTMENT AUTHORITY - PIA
As part of its business of providing information on director trading of
securities in the United Kingdom, our wholly owned subsidiary (Directus Limited)
provides analyses and advice subject to regulation by the PIA. The revenue from
the PIA regulated portion of Directus' business is not significant.
BROKER DEALER
Our wholly-owned subsidiary, BARRA Analytics Securities, Inc. (BAS), is
currently registered as a broker/dealer with the SEC and is a member of the
National Association of Securities Dealers, Inc. (NASD). As a registered
broker/dealer BAS is required to meet certain financial criteria, including the
maintenance of minimum net capital levels. In addition, BAS is subject to
certain obligations, fiduciary duties and prohibitions regarding its operations
and its dealings with clients. These include certain required disclosures to
clients and restrictions with respect to transactions involving potential
conflicts of interest. In 1998, BAS ceased its business of providing electronic
brokerage services for fixed-income securities. BAS is now developing a new
business plan. BAS does not currently have any revenue.
SOFT DOLLARS
We estimate that approximately 9% of our total operating revenues are received
from U.S. brokers who direct us to provide Investment Analytics, Investment Data
Products and Consulting services to designated clients. These clients are money
managers, fund sponsors and consultants using commissions generated by their
advised accounts with the broker to obtain investment research and brokerage
services. The funds used by these U.S. brokers to pay for the services are
referred to in the securities industry as "soft dollars." We also have a data
contract with Standard & Poor's Securities, Inc. (SPSI). Under that contract,
SPSI and its affiliates provide us with certain U.S. equity data. In return, the
contract requires that only SPSI accounts be used for soft dollar payment for
the portions of our products that use SPSI data.
POSIT
POSIT is deemed to be a crossing network. It is not currently registered as a
stock exchange with the SEC. Upon POSIT's inception, the POSIT joint venture
obtained a no action letter from the SEC. In that letter the SEC advised POSIT
that it would not recommend enforcement action to require registration as a
stock exchange. ITG and Prebon, as the licensees of POSIT systems in the U.S.,
are required to register as broker/dealers with the SEC. As broker/dealers, they
are required to adhere to certain fiduciary obligations and meet certain
financial criteria, including the maintenance of minimum net capital levels.
Pursuant to the conditions of the no-action letter and under Rule 17a-23 of the
Securities Exchange Act of 1934 (Rule 17a-23), ITG and Prebon are also required
to maintain certain records and to provide the SEC with certain reports and data
on a regular basis and with prior notice of material changes to the relevant
crossing networks. On December 2, 1998, the SEC adopted Regulation ATS, which
repealed Rule 17a-23 and establishes a new regulatory framework for alternative
trading systems such as POSIT. Regulation ATS allows alternative trading systems
to choose to register as exchanges or as broker/dealers and will require
compliance information requirements that are similar to those in Rule 17a-23.
However,
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POSIT will no longer be subject to the restrictions of the no-action letter.
Upon effectiveness of Regulation ATS in April 1999, ITG and Prebon continued to
operate U.S. POSIT and POSIT-FRA, respectively, as part of their broker/dealer
operations.
INTERNATIONAL OPERATIONS
In the fiscal years ended March 31, 1999, 1998 and 1997, we derived
approximately 33.1%, 32.7% and 31.9% of our total revenues, respectively, from
customers outside the U.S. We also have significant operations for our
Investment Analytics and Investment Data Products businesses outside the U.S.
They are conducted primarily through our subsidiaries, but we do use an
independent contractor to conduct our Investment Analytics business in Canada.
We also use third parties for the overseas distribution of Investment Data
Products. Please refer to the Geographic Data table on page 52 of this Form 10-K
for a breakdown of revenues by major geographic areas and business segments.
No single country outside the U.S. had revenues approaching 10% of our total
revenues. Our aggregate sales to European Community countries were, however,
about 19% of our revenues.
Certain of our activities outside the U.S. are also subject to government
imposed constraints that affect our businesses, including the PIA registration
of a portion of our Directus business. See Government Regulation above.
EMPLOYEES
In our innovation intensive business, our employees are vital to our success. As
of May 31, 1999, we employed approximately 790 persons through our parent
company and its subsidiaries. Geographically, this total breaks down
approximately as follows:
- - North America - 592;
- - Europe and Africa - 136;
- - Asia and Australia - 56; and
- - South America - 6.
Except for certain of our employees in France and Australia, who are members of
state-sponsored labor unions, none of our employees is represented by a labor
union. We have experienced no work stoppages and believe that our employee
relations are good.
RISK FACTORS
Our disclosure and analysis in this Form 10-K and in our 1999 Annual Report
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,
targeted, 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-K, our
1999 Annual Report 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-K and our 1999 Annual Report 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 future disclosures we make on related subjects in
our subsequent Form 10-Q, 8-K and 10-K filings with the SEC. Also note that we
provide the following cautionary discussion of risks, uncertainties and possibly
inaccurate assumptions relevant to our businesses. These are factors that we
think could cause our actual results to differ materially from expected and
historical results. Other factors besides those listed here could also adversely
affect us or our business. This discussion is provided as permitted by the
Private Securities Litigation Reform
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Act of 1995. THIS SECTION SHOULD BE READ IN CONJUNCTION WITH THE GENERAL
DESCRIPTION OF OUR BUSINESS IN THIS PART I AND IN OUR 1999 ANNUAL REPORT AND THE
AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES, THE SELECTED
FINANCIAL DATA AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTAINED ELSEWHERE IN THIS FORM 10-K.
FLUCTUATIONS OF QUARTERLY OPERATING RESULTS
Our revenues and results of operations are difficult to predict and may
fluctuate substantially from quarter to quarter, as they have in the past.
Factors specifically relating to our business segments are outlined below:
- - ELECTRONIC TRADING - The several POSIT systems can experience and have
experienced significant fluctuations in trading volume. Since more than 10%
of our operating revenue and a significant portion of our income by segment
came from POSIT in 1999, these fluctuations can have a significant impact
on our revenue and operating income.
- - ASSET MANAGEMENT - Depending on the performance of the funds under
management by Symphony, the portion of our total Asset Management revenues
that are derived from performance-based fees could vary substantially.
Performance based fees are recognized only at the performance measurement
dates contained in the individual account management agreements. The amount
of recognized revenues can, therefore, fluctuate significantly based not
only on the performance of the funds, but on the timing of their
recognition. Since more than 10% of our operating revenue and a significant
portion of our income by segment came from Symphony in 1999, these factors
often result in significant variability in revenues and operating income
for us. Symphony's revenues will continue to depend on its performance and
the timing of its performance fee determination dates for the funds it has
under management. We expect that this significant variability will continue
in the future.
- - SUBSCRIPTION AND CONSULTING - Subscription and Consulting revenues in any
quarter depend substantially upon our total contracting activity and our
ability to recognize revenue in that quarter in accordance with our revenue
recognition policies. Our Consulting revenues can be susceptible to a large
degree of variability depending on our ability to source new projects and
the unpredictable nature and significance of fees associated with specific
transactions.
In addition, we anticipate that our clients' and prospects' concerns
regarding Year 2000 will slow or halt sales of new products during the last
half of calendar 1999. We believe that many clients and potential clients
are heavily engaged in testing and correcting Year 2000 problems. These
clients may, therefore, choose to defer investments in our software
products during 1999. This deferral might not have an immediate impact on
our revenues because we recognize subscriptions fees ratably over the
entire year. It would, however, have a cumulative negative effect on our
revenues. Because Year 2000 related impacts on client purchasing decisions
are unprecedented, our ability to forecast accurately the effect of the
Year 2000 issue on our quarter-to-quarter revenues is limited.
Frequently our earnings are materially affected in our second fiscal
quarter because of annual salary adjustments for our Subscription and
Consulting employees in July. Our compensation policy historically has
involved significant reliance on discretionary bonuses. Because
compensation expense is a significant percentage of our operating expenses,
discretionary bonuses could have a material effect on our net income.
Our operating expenses are based in part on our expectations regarding future
revenue. Our consolidated operating results may be adversely affected if revenue
does not appear in a quarter as anticipated. Since expenses are usually
committed before revenues are generated, and because only a small amount of
expenses vary with revenue, our consolidated operating results may be impacted
significantly by lower revenues. Various factors could cause these lower
revenues and could affect quarter to quarter comparisons. Also, much of our
revenues are earned under fixed price software subscriptions. Changes in our
costs associated with those subscriptions could have a material adverse effect
on our business, financial condition and results of operations.
Accounting standards and practices may require us to defer recognition of
license revenue for a significant period after entering into a license
agreement. Generally, the subscription fees for our Investment Analytics and
Investment Data products are initially deferred as unearned revenues when
payment has been received, after which revenue is recognized ratably over the
term of the subscription. However, mutually acceptable terms and conditions for
some of our Investment Analytics sales and Consulting services, particularly
Enterprise Risk Management solutions, sometimes do not permit revenue
recognition at the time of delivery or even as work on the project is completed.
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DEPENDENCE ON KEY PERSONNEL
Our future success will depend in large part on our ability to attract, train
and retain highly skilled managerial, research, development, sales, support,
technical and services personnel. Competition for people in the software and
financial services industries is intense. At times, we've had difficulty
locating candidates with appropriate qualifications and expertise. None of our
executive officers has entered into an employment agreement with BARRA. Over the
last several months we have experienced departures of several senior executives,
including our Chief Operating Officer and our Managing Director of Research. In
addition, we are currently seeking a new Chief Executive Officer. Because this
individual will be the leader of our company, he or she will significantly
impact our future success. Our failure to quickly hire a qualified and
successful chief executive officer, or our failure to attract, train, retain and
manage other key personnel, could have a material adverse effect on our
business, operating results or financial condition.
DEPENDENCE ON AVAILABILITY OF DATA
We currently obtain data from over 100 third-party vendors that is used in our
products and services. Any interruption of our supply of data from a principal
data vendor or vendors, or an interruption of our own data operations or data
update processes, could have a material adverse effect on our business,
financial condition or results of operations. These adverse effects include, for
example, our products or services becoming inoperable or their performance being
materially reduced.
If any of the third-party data vendors change their product offerings, we may
need to incur additional costs to ensure continued performance of our products
and services. In addition, if the cost of licensing any of these third-party
data products materially increases, our gross margin levels could materially
decrease.
YEAR 2000
The "Year 2000" or "Y2K" problem is the inability of computer systems and
embedded computer chips to distinguish between the year 1900 and the year 2000.
We are continuing 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 failure to correct a material Y2K problem could result in an interruption
in, or a failure of, our normal business activities, operations, or systems.
These failures could result in claims and lawsuits. Any such claim or suit, even
if the outcome were to be ultimately favorable to us, would involve a
significant commitment of our management, personnel, financial and other
resources. In addition, these sorts of claims and lawsuits could materially
adversely affect our business, financial condition, or results of operations.
Because we derive significant revenue from licenses for our software
applications, we also generally face additional Year 2000 risks of product
disruption and potential liability inapplicable to non-software providers.
Our ability to continue normal business operations itself depends on the Y2K
readiness 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 of our products and some of our services require that
data be processed through our proprietary data update processes. 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 data update
processes, could significantly undermine the quality and delivery of our
products and services.
In March 1999, we allocated approximately 50 full-time equivalent employees from
our research and data management groups to work almost exclusively on our Year
2000 efforts. To the extent individuals within these groups are dedicated to
these efforts, we will likely experience delays in developing enhancements to
our products, as well as delays in our research efforts supporting our next
generation of products.
As is the case with other similarly situated software companies, if our current
or future clients fail to achieve Year 2000 compliance or if they divert
technology expenditures (especially technology expenditures that were reserved
for our products or services) to address Year 2000 compliance problems, our
business, financial condition or results of operations could be materially
adversely affected.
For a more comprehensive discussion of our Year 2000 plans and exposures, see
the Year 2000 discussion under Management's Discussion and Analysis of Financial
Condition and Results of Operations in Part II of this Form 10-K.
INTERNATIONAL OPERATIONS
We anticipate that revenues from customers outside the U.S. will continue to be
a significant part of our total revenues for the
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foreseeable future. Our operations outside the U.S. are subject to additional
risks, including:
- - unexpected changes in regulatory requirements;
- - unexpected changes in exchange rates, tariffs and other trade barriers;
- - political or economic instability;
- - difficulties in staffing, managing and integrating foreign operations;
- - longer payment cycles;
- - difficulties or delays in translating products and related documentation
into foreign languages;
- - currency fluctuations and conversion risks; and
- - potentially adverse tax consequences.
Any of these factors could have a material adverse effect on our business,
financial condition, or results of operations. Volatility in Asian capital
markets, for example, has negatively impacted our revenues during the past
fiscal year and could adversely impact future subscription renewals and related
revenues for clients throughout that region.
VOLATILITY OF STOCK PRICE; RISK OF LITIGATION
The trading price of BARRA common stock has in past and may in the future be
subject to significant fluctuations in response to factors such as: (a) revenue
or results of operations in any quarter failing to meet the expectations
(published or otherwise) of the investment community, and the timing of the
announcements of such shortfalls; (b) changes in recommendations or financial
estimates by securities analysts; (c) acquisitions of significant businesses;
(d) new product announcements; (e) conditions and trends generally in the
industries in which we operate; (f) adoption of new accounting standards
affecting the software or financial services industries; and (g) general market
conditions. Further, the stock market has experienced in recent months and may
continue in the future to experience extreme price and volume fluctuations that
particularly affect the market prices of equity securities of high technology
and financial services companies. These fluctuations often are not related, or
are disproportionate, to the operating performance of those companies. These
broad market fluctuations, as well as general economic, political and market
conditions have and may continue to have a material adverse effect on the
trading price of BARRA common stock. Fluctuations in the price of our common
stock may expose us to the risk of securities class action lawsuits or claims.
Any such suit or claim, even if the outcome were to be ultimately favorable to
us, would involve a significant commitment of our management, personnel,
financial and other resources. In addition, these sorts of claims and lawsuits
could have a material adverse effect on our business, financial condition, or
results of operations.
PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE
The markets in which we compete are characterized by rapidly changing
technologies, extensive research, and new product introductions. Our future
growth and financial performance will depend on our ability to continue to
quickly develop and introduce new products and enhance our existing products in
response to advances in finance theory and computer technology, changing market
conditions and increasingly sophisticated customer requirements. We may not be
able to enhance existing products or develop and introduce new products that
receive market acceptance in a timely manner. Failure to anticipate or respond
adequately to changing market conditions could have a material adverse effect on
our business, financial condition, or results of operations. Because we offer
products across many geographic areas and many areas of specialization, we often
must restrict our product development efforts to a limited number of products
and operating platforms. There can be no assurance, however, that efforts we
select will be successful or will achieve market acceptance. In addition, the
cost of research and development efforts required to keep pace with
technological changes may, at times, have a significant effect on our business,
operating results or financial condition.
LIMITED PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS AND POTENTIAL
INFRINGEMENT OF THIRD PARTY INTELLECTUAL PROPERTY RIGHTS
We consider certain aspects of our Investment Analytics, Investment Data
Products, related internal data update processes and other products and services
to be proprietary. We rely on a combination of trade secret, copyright,
trademark and other intellectual property laws, license agreements and technical
measures to protect our rights in our intellectual property. A third party may
still try to challenge, invalidate or circumvent the protective mechanisms that
we select. We cannot assure that any of the rights granted under any copyright
or trademark that we may obtain will protect our competitive advantages. Our
competitors may also independently develop and patent technology that is the
same or similar to ours or may obtain access to our proprietary technology. In
addition, the laws of certain foreign countries do not protect our proprietary
rights to
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the same extent as do the laws of the United States. Also, some elements of our
products and services are not subject to intellectual property protection.
We believe that our products, processes and trademarks, including those obtained
in recent acquisitions, do not infringe the intellectual property rights of
third parties. There can be no assurance, however, that the intellectual
property which we have acquired will meet the warranties negotiated in these
transactions or that third parties will not otherwise assert infringement claims
in the future. These assertions could require us to enter into royalty
arrangements or could result in costly litigation.
- - TRADEMARKS - We have registered "BARRA" as a trademark in the United States
and in certain foreign countries. We have also registered other trademarks
in the United States and in certain foreign countries for certain product
and services names, and have registration applications pending for product
and service names in the United States and foreign countries. When we enter
a new geographic market or introduce a new product brand, there can be no
assurance that our existing trademark or mark of choice will be available.
- - PATENTS - We currently hold no patents. Recent developments in U.S. patent
law appear, however, to have strengthened the viability of patents for
financial products. In light of these developments, we are considering
applying for patents on certain of our proprietary technologies. Patent
applications can be extremely costly to process and defend. Further, we
cannot assure that any of the rights granted under any patent that we may
obtain will protect our competitive advantages.
There are numerous patents in the computer and financial services industry
and new patents are being issued at a very rapid rate. These recent
developments appear to be prompting many of our competitors and potential
competitors to seek patents on their financial technologies. It is not
economically practicable to determine in advance whether any of our
existing products or any of their components or a service or method
infringes on the patent rights of others. It is likely that from time to
time we will receive notices from others of claims or potential claims of
intellectual property infringement. It is also likely that we may be called
upon to defend a joint venture partner, customer, or licensee against such
third party claims. Responding to these types of claims, regardless of
merit, could consume valuable time, result in costly litigation or cause
delays, all of which could have a material adverse effect on our business,
operating results or financial condition. Responding to these claims could
also require us to enter into royalty or licensing agreements with third
parties claiming infringement. Such royalty or licensing agreements, if
available, may not be available on terms acceptable to us.
- - LICENSE AGREEMENTS - Our Investment Analytics and Investment Data Products
are generally licensed to end users on a periodic subscription basis in a
nontransferable license signed by the client. We also permit access to
certain products through the Internet under on-line licenses that are
acknowledged by the licensee. The enforceability of these on-line licenses
has not yet been determined by the courts. We are frequently required to
obtain licenses to the proprietary rights of data vendors or others. There
can be no assurance that these licenses will be made available on terms
acceptable to us, if at all.
- - TRADE SECRET AND COPYRIGHT - Existing trade secret and copyright laws only
offer us limited protection for our proprietary assets. We believe that the
rapid pace of technological change in the software and financial services
industries will only make trade secret and copyright protection less
significant over time. Consequently, our competitors may independently
develop technologies that are substantially equivalent or superior to our
technology. Since use of most of our Investment Analytics and Investment
Data Products requires access to our proprietary databases, we also believe
that trade secret and copyright protection are not significant factors in
the protection of our proprietary rights. The following factors also
contribute significantly to protecting our intellectual property:
- The knowledge, ability and experience of our employees;
- timely product enhancements and database updates; and
- the availability and quality of our support and Consulting services.
- - CONFIDENTIALITY UNDERTAKINGS - Our license agreements restrict clients'
disclosure of proprietary information contained in our products. It may be
possible, however, for unauthorized parties to copy aspects of our products
or to obtain and use information that we regard as proprietary. We also
rely heavily on the knowledge, abilities and experiences of certain
employees. We seek to protect these knowledge bases through non-disclosure
undertakings by our employees. The laws of each state within the United
States and of the various countries in which we employ personnel and
license to clients vary with regard to the extent and manner in which these
sorts of undertakings may be enforced.
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POTENTIAL LIABILITY BASED ON USE OF PRODUCTS AND SERVICES
Our license and consulting agreements have provisions designed to limit our
exposure to potential liability claims brought by our clients or other third
parties. However, these provisions could be invalidated by unfavorable judicial
decisions or by federal, state or local laws or ordinances. Although we have not
yet experienced any of these claims, use of our Investment Analytics, Investment
Data Products and/or Consulting services for investment decision-making creates
the risk that clients, or the parties whose funds are managed by our clients,
may pursue a claim against us. Any such claim, even if the outcome were to be
ultimately favorable to us, would involve a significant commitment of our
management, personnel, financial and other resources. If a claim against us were
successful, the resulting damages could have a material adverse effect on our
business, financial condition, or results of operations.
GOVERNMENT REGULATION
The financial services industry is subject to extensive regulation at the
federal and state levels, as well as by foreign governments. It is very
difficult to predict the future impact of the broad and expanding legislative
and regulatory requirements affecting our businesses. A change in or failure to
comply with any applicable laws, rules or regulations could result in fines,
penalties, suspensions or revocations of licenses or permits. We believe that
our existing products and services comply with all applicable statutes, rules
and regulations, including those that we are subject to as a registered
investment adviser. However, there can be no assurance that these statutes,
rules or regulations will not change in the future, or that such changes will
not materially adversely affect our business, financial condition or results of
operations.
- - ADVISERS ACT - We believe and have adopted the position that our Investment
Analytics and Investment Data Products (other than Contour) do not provide
investment advice for purposes of the Advisers Act. Future developments in
our product line or in the regulatory environment could cause this status
to change. In that event, we may be required to broaden our disclosures to
the SEC and to adopt the strict compliance procedures mandated by the
Advisers Act with respect to a much broader segment of our business. These
changes could also trigger obligations to comply with investment advisory
regulations in foreign jurisdictions where we market our products. These
heightened obligations would entail significant additional costs to us.
- - PIA AND BROKER/DEALER PRINCIPALS - The individuals named respectively in
Directus' PIA registration as the supervisor of the regulated activities
and in Bas's broker/dealer registration as its principal have ceased to be
our direct employees. They are now each retained by us to supervise the
conduct of those activities. If our retainers of those individuals
terminate, we will be required to find other individuals with the required
qualifications to fill these roles or cease conducting the related
activities.
- - POSIT - Following the adoption of Regulation ATS, POSIT has continued to
operate as a broker-dealer and is not registered as an exchange. There can
be no assurance that the SEC will not in the future seek to impose more
stringent regulatory requirements on the operation of alternative trading
systems such as POSIT. In addition, certain of the securities exchanges
have actively sought to have more stringent regulatory requirements imposed
on automated trade execution systems. There can be no assurance that
Congress will not enact legislation applicable to alternative trading
systems. If POSIT were to become subject to regulation as a stock exchange,
it is possible that POSIT could not operate effectively. Loss of revenues
from POSIT would materially adversely affect our financial condition and
results of operations.
- - SOFT DOLLARS - We also estimate that approximately 9% of our total revenues
are received from soft dollar transactions. See Government Regulation
below. For several years the investment community has debated the purchase
of goods and services with soft dollars, and the practice is regulated in
the U.S. by the SEC and the DOL. Legal or regulatory changes may restrict
or prohibit us from providing services to money managers in exchange for
soft dollars. Such changes could have a material adverse effect on our
business, financial condition, or results of operations.
COMPETITION
Each of the markets in which our Subscription and Consulting, Electronic Trading
and Asset Management segments conduct business has become increasingly
competitive in recent years. In some of these segments, our competitors have
substantially greater financial, research, development and other resources.
There can be no assurance that (a) we and/or our joint venture partners will
continue to have sufficient resources to succeed in our efforts and be
successful in maintaining our competitive advantages or (b) our competitors will
not devote significantly more resources to competing services.
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- - SUBSCRIPTION AND CONSULTING - The effort and cost required to develop and
maintain our risk models and related databases may present a significant
barrier to entry into the marketplaces for certain of our Investment
Analytics and Investment Data Products. We believe that our extensive
experience in product maintenance, together with the economies of scale
available to us because of our large client base, give us a competitive
advantage in the markets for our Investment Analytics, Investment Data
Products and Consulting divisions.
- - ELECTRONIC TRADING - We cannot predict the effect that changes in
regulation may have on the competitive environment for POSIT. In
particular, the adoption of Regulation ATS (discussed above under
regulation) may make it easier for securities exchanges, The Nasdaq Stock
Market(R) and others to establish competing trading systems.
- - ASSET MANAGEMENT - No one firm dominates the Asset Management industry.
Barriers to entry are comparatively low in the industry because a few
skilled individuals could set-up an asset management business in a
relatively short period of time.
RISKS ASSOCIATED WITH BUSINESS COMBINATIONS
As part of our overall strategy, we plan to continue to acquire or invest in
complementary companies, products, and technologies and to enter into joint
ventures and strategic alliances with other businesses. Some common risks in
these arrangements include: (a) the difficulty of assimilating the operations
and personnel of the combined companies; (b) the risk that we may not be able to
integrate the acquired technologies or products with our own; (c) the
substantial management time devoted to such activities; (d) undisclosed
liabilities; (e) the inability of management to maximize our financial and
strategic position through the successful integration of acquired businesses;
(f) the failure to realize anticipated benefits (such as cost savings and
synergies); and (g) customer dissatisfaction with, or problems caused by, the
performance of any acquired technologies. We may not be successful in overcoming
these risks or any other problems encountered in these transactions. In
addition, there can be no assurance that acquired businesses will achieve
anticipated revenues and earnings.
MANAGEMENT OF GROWTH AND CHANGES IN STAFFING
We have experienced an extended period of (a) significant revenue growth; (b)
growth into new foreign markets; (c) expansion of our Investment Analytics and
Investment Data Products and related services; (d) significant expansion in our
number of offices; and (d) substantial fluctuations in the number of our
employees. These changes have resulted in new and increased responsibilities for
our management and have placed a significant strain on our operating and
financial controls and other resources. To accommodate recent growth, compete
effectively, and manage potential future growth, we must continue to implement
and improve the speed and quality of our products and services, management
decisions, reporting systems, procedures, and controls. Our personnel,
procedures, systems, and controls may not be adequate to support our future
operations.
CATASTROPHIC EVENTS
Our operations depend on our ability to protect our equipment and the
information stored in our databases against fires, earthquakes and other natural
disasters, as well as other power loss, telecommunications failures,
unauthorized intrusions and other catastrophic events. There is no assurance
that the measures we've taken to reduce the risk of interruption in our
operations caused by these events is sufficient. Any damage or failure that
causes operational interruptions could have a material adverse effect on our
business, financial condition or results of operations.
POSSIBLE ADVERSE EFFECTS OF OPTION EXERCISES
If holders of options to purchase our common stock exercise any significant
number of these options and resell the underlying shares, the market price of
BARRA common stock could be materially adversely affected. At March 31, 1999,
there were outstanding exercisable options to purchase approximately 1.2 million
shares of BARRA common stock issued under various BARRA stock option plans. As
of that date, options to purchase about 1.15 million shares of BARRA Common
Stock had exercise prices below our closing common stock price on March 31, 1999
($24.625).
EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS AND ANTI-TAKEOVER PROVISIONS;
POSSIBLE ISSUANCE OF PREFERRED STOCK
Our Certificate of Incorporation, Bylaws, and certain Delaware laws contain
provisions that may discourage acquisition bids for BARRA. This may deprive
stockholders of certain opportunities to receive a premium for their shares as
part of an acquisition of BARRA. We may issue preferred stock in the future
without stockholder approval upon terms approved by our Board of Directors. The
rights of our common stockholders will be subject to, and may be materially
adversely affected
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by, the rights of the holders of any preferred stock that may be issued in the
future. The issuance of preferred stock could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, a majority of our outstanding stock. We have no present plans to
designate or issue any shares of preferred stock.
IMPACT OF LEGAL AND REGULATORY PROCEEDINGS
Throughout this Form 10-K we have made various disclosures regarding the
possibility of certain legal and regulatory proceedings. Many factors may effect
the outcome of such proceedings. Accordingly, until such proceedings are finally
resolved, it is difficult to determine the likelihood of a favorable outcome,
the direct and indirect costs associated with the proceeding, or, in the event
of an unfavorable outcome, the amount of any loss. Any proceeding, even if the
outcome were to be ultimately favorable to us, would likely involve a
significant commitment of our management, personnel, financial and other
resources. This alone could have a material adverse effect on our business,
financial condition, or results of operations.
ITEM 2. PROPERTIES
Our world headquarters are located in two buildings in Berkeley, California.
These buildings house our principal administrative, marketing and product
development facilities. The largest building is occupied under a lease that
expires in June 2007, subject to eight consecutive five-year renewal options.
The smaller building is occupied under a lease that expires in June 2003,
subject to one five year renewal option. All together, our headquarters occupy
over 64,000 square feet of leased space in downtown Berkeley, California.
Directly and through our subsidiaries, we lease office space in 18 cities around
the world.
SUBSCRIPTION AND CONSULTING - This business segment has employees and operations
in the following locations:
- - Berkeley, California, U.S.A:
- - Cape Town, South Africa;
- - Darien, Connecticut, U.S.A;
- - Edinburgh, Scotland;
- - Edison, New Jersey, U.S.A;
- - Frankfurt, Germany;
- - Hong Kong, China;
- - London, England;
- - Mexico City, Mexico;
- - New York, New York, U.S.A;
- - Paris, France;
- - Rio de Janeiro, Brazil;
- - San Diego, California, U.S.A;
- - Singapore;
- - Sydney, Australia;
- - Westborough, Massachusetts, U.S.A;
- - Yokohama, Japan.
ELECTRONIC TRADING - Our employees for this business segment are located only in
our New York City office. The licensees of the various POSIT systems maintain
local offices to support each of those systems.
ASSET MANAGEMENT - This business segment has employees and operations in the
following locations:
- - San Francisco, California, U.S.A; and
- - Darien, Connecticut, U.S.A.
ITEM 3. LEGAL PROCEEDINGS
In June 1999, we received notice from ITG of patents purportedly owned by
Belzberg Financial Markets & News International Inc. and Sydney Belzberg, an
officer of that company (the Belzberg Patents). At that time, ITG informed us
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that one or more of the Belzberg Patents may relate to the devices, means or
methods used by the POSIT electronic system, the POSIT joint venture, ITG and/or
their customers, licensees or joint venture partners. ITG has also informed us
that on March 5, 1999, a Canadian licensee of ITG technology received a letter
asserting that the ITG licensee was infringing one of the Belzberg Patents. We
understand that the ITG licensee has denied the claims of infringement and has
asserted that the Belzberg Patent at issue is invalid or unenforceable. Under
certain conditions, ITG may have a duty to defend or indemnify the licensee for
any costs or damages arising out or an infringing use of the technology licensed
by ITG. In turn, under certain conditions, the POSIT joint venture and we, as
one of its general partners, may have a duty to defend or indemnify ITG. We are
monitoring the matter with ITG and intend to take all appropriate action. We are
unaware of any actual claims of patent infringement leveled against the POSIT
system, the POSIT joint venture or any of POSIT's customers or joint venture
partners by any of the title owners of the Belzberg Patents. Based upon our
review of the matter as disclosed to us by ITG, we believe that any such claims
arising out of the Belzberg Patents would be without merit and we would
vigorously defend any such claim. Intellectual property disputes are, however,
subject to inherent uncertainties and the claims or their resolution could have
a material adverse effect on our business, operating results or financial
condition.
In addition, we are often subject to various legal proceedings and claims,
either asserted or unasserted, arising in the ordinary course of business. While
the outcome of these proceedings and claims cannot be predicted with certainty,
we do not believe that the results of any of these matters will materially and
adversely affect our business, financial condition or results of operations. See
also Note 12 of the Notes to our Financial Statements below.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE COMPANY
As of June 7, 1999, the following executive officers hold the offices indicated
until their successors are chosen and qualified at the next annual meeting of
our shareholders:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Andrew Rudd 49 Chairman and Chief Executive Officer of BARRA
Kamal Duggirala 40 President of BARRA
C.E. Beckers 47 President of BARRA International, Ltd., President of Investment
Analytics Division and Senior Vice President of BARRA
Sean Dickinson 36 Chief Technology Officer of BARRA
James D. Kirsner 55 Chief Financial Officer of BARRA
Maria Louisa Hekker 37 General Counsel, Chief Legal Officer and Secretary of BARRA
Andrew Huddart 38 President of Investment Data Products Division and Senior Vice
President of BARRA
Daniel Beck 45 Vice President of Business Development of BARRA
</TABLE>
Executive officers of the Company are elected annually by the Board of Directors
and serve at the Board's discretion. There are no family relationships among any
directors or executive officers of the Company. In January 1999, Dr. Rudd
announced his intention to resign as our Chief Executive Officer when a
replacement is found and qualified. A committee of our Board of Directors is
currently searching for a new CEO. We expect that, following his resignation,
Dr. Rudd will continue to serve as our Chairman.
DANIEL BECK joined our predecessor in 1978; served in various roles of
increasing responsibility in our Fixed Income and Operations units from 1978 to
present; currently is Vice President of Business Development.
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C.E. BECKERS joined our predecessor in 1981; served in various roles of
increasing responsibility in our international operations from 1981 to present;
currently is a Senior Vice President of our parent company and President of our
Investment Analytics division. Dr. Beckers has also served on the faculty of
K.U. Leuven (Belgium) since 1989.
SEAN DICKINSON worked in various capacities within our global software
engineering group since joining us in 1995; became Chief Technology Officer and
Director of Software Engineering in February 1999; served as a Software
Development Manager from 1991 until 1995 at Bacon & Woodrow, Actuaries and
Consultants, an actuarial firm in the United Kingdom.
KAMAL DUGGIRALA joined our predecessor in 1984; served in various roles of
increasing responsibility in our Electronic Brokerage and Trader products and
Advanced Technology divisions from 1984 to 1993; became our President in 1994.
MARIA LOUISA HEKKER has been our General Counsel since 1992. She worked in the
San Francisco and Milan offices of the law firm of Graham & James from 1988 to
1992.
ANDREW HUDDART has been President of our Investment Data Products division and a
Senior Vice President of our parent company since 1997. He worked with Reuters
in the U.S. and Europe from 1983 to 1997.
JAMES D. KIRSNER has been our Chief Financial Officer since 1993. He was with
Arthur Andersen & Co. from 1966 to
1993.
ANDREW RUDD joined our predecessor in 1975; served as our president from 1984 to
1992, our Chief Executive Officer since 1984, as a member of our Board of
Directors since 1986 and as Chairman since 1992. Between 1977 and 1982, Dr. Rudd
was a professor of finance and operations research at Cornell University in
Ithaca, New York.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock is listed on The NASDAQ Stock Market (the "NSM") under the
trading symbol "BARZ." This table displays the range of high and low trade
prices for our common stock as reported on the NSM.
<TABLE>
<CAPTION>
1998 HIGH LOW 1999 HIGH LOW 2000 HIGH LOW
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1st Quarter 22.000 16.333 1st Quarter 29.000 19.875 1st Quarter 26.375 17.875
2nd Quarter 28.500 21.170 2nd Quarter 25.500 18.500 (through June 7, 1999)
3rd Quarter 29.625 23.250 3rd Quarter 28.000 15.625
4th Quarter 28.500 22.000 4th Quarter 26.875 17.500
</TABLE>
At June 7, 1999 there were approximately 3,900 holders of our common stock. To
date, we have paid no cash dividends on our common stock. The payment of
dividends, if any, in the future is within the discretion of the Board of
Directors and will depend upon our capital requirements and financial condition
and other relevant factors. Our Board of Directors does not intend to declare
any dividends in the foreseeable future. On June 7, 1999 the closing price for
our common stock as reported by the NSM was $24.50.
ITEM 6. SELECTED FINANCIAL DATA
The information on the inside cover of the 1999 Annual Report under the heading
"Financial Highlights" regarding our selected financial data required by this
Item 6 is incorporated by reference. (See also Item 7 below in Part II of this
Report.)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis contains descriptions of our current
expectations and forecasts regarding future trends affecting our business. These
forward-looking statements and other forward looking statements made elsewhere
in this Form 10-K and in our 1999 Annual Report 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 look at the Risk
Factors section in Part I of this Form 10-K. Any or all of the forward-looking
statements that we make in this Form 10-K, our 1999 Annual Report or any other
public statements we issue may turn out to be wrong. It is also important to
remember that other factors besides those listed in the Risk Factors section
could also adversely affect us and our business, operating results or financial
condition.
THIS SECTION SHOULD BE READ IN CONJUNCTION WITH THE RISK FACTORS SECTION OF PART
I OF THIS FORM 10-K, OUR AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED
NOTES IN THIS PART II AND THE SELECTED FINANCIAL DATA CONTAINED IN OUR 1999
ANNUAL REPORT.
GENERAL
We completed the following business combinations during 1999:
- - REDPOINT - In June 1998, we acquired substantially all of the assets and
assumed certain liabilities of Redpoint for cash plus future contingent
consideration. In April 1999, we negotiated amendments to the price and
other terms of the acquisition. As amended, the total cash purchase price,
excluding future contingent royalties, was $6.7 million. The acquisition
was accounted for as a purchase.
- - BOND EXPRESS - In January 1999, we completed our acquisition of Bond
Express. The purchase price for acquiring the remaining partnership
interest was $1 million in cash, plus contingent consideration. The
acquisition was accounted for as a purchase.
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 will discontinue
certain U.S. fixed income products and eliminate various sales, client and
product support positions and related facilities within the U.S. Revenues from
discontinued products ceased on April 30,
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<PAGE>
1999. Customers who had prepaid subscriptions for periods after April 30, 1999
will receive refunds by June 30, 1999. Revenues from discontinued products
amounted to approximately $8 million in 1999, or 5% of our total revenues.
Although the decision to discontinue these products was made in April 1999,
certain support activities will continue through December 31, 1999.
We are recording 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 ending March 31, 1999. It consisted of a 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 will consist of restructuring costs
estimated to be approximately $6 million. This amount will be charged to
operating expense in the quarter ending June 30, 1999 and will consist
principally of estimates related to severance and related benefits, discontinued
product support costs between May 1, 1999 and December 31, 1999, and excess
facilities costs.
Despite the fact that these two charges are related to the same restructuring,
current accounting standards prohibit the recognition of restructuring charges
unless certain decisions have been made, including the identification and
communication of employee dismissals. Since we did not meet some of these
criteria by March 31, 1999, the charge for these costs will occur in the quarter
ended June 30, 1999.
FOREIGN CURRENCY - As an international corporation, our business generates
revenues from clients throughout the world. We maintain sales and representative
offices world-wide and hold certain deposits and accounts in foreign currencies.
Our revenues are generated in both United States and non-U.S. currencies.
Subscriptions in the United Kingdom and the European Community are priced in
pounds sterling (pounds) and Euros, respectively. Additionally, our consolidated
subsidiary, BARRA Japan, generates revenues, has expenses and has assets and
liabilities denominated 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. Our management has considered its exposures
to foreign currency fluctuations. To this point we have decided not to engage in
hedging or managing exposures to foreign currency fluctuations through contracts
for the purchase, sale or swapping of currencies. Because we do not engage in
hedging, a strengthening of the U.S. dollar versus other non-U.S. currencies
could have a material adverse affect on our business, results of operations and
financial condition.
For 1999 compared to 1998, the U.S. dollar strengthened against the yen and Euro
and weakened against the pound. The resulting net effect of these movements in
average exchange rates on operating revenues and net income was a decrease of
approximately $1,000,000 and $400,000, respectively. For 1998 compared to 1997,
the U.S. dollar strengthened against the yen and ECU and weakened against the
pound. The resulting net effect of these movements in average exchange rates on
operating revenues and net income was a decrease of approximately $1,400,000 and
$200,000, respectively.
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 we do business,
there are no significant restrictions upon the flow of funds from our foreign
subsidiaries to the parent company.
25
<PAGE>
RESULTS OF OPERATIONS
The following table shows the percentage of total operating revenues represented
by items in our consolidated statements of income for the years ended March 31:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------
<S> <C> <C> <C>
Operating Revenues:
Subscription and consulting fees 72.5% 70.7% 70.6%
Electronic trading 10.3 8.8 9.6
Asset management 17.2 20.5 19.8
- ------------------------------------------------------------------------------------------------------
Total operating revenues 100.0% 100.0% 100.0%
- ------------------------------------------------------------------------------------------------------
Operating Expenses:
Cost of subscription products 6.0% 5.3% 6.5%
Compensation and benefits 49.4 45.2 47.4
Occupancy 4.8 4.0 4.1
Other operating expenses 17.6 18.2 18.4
- ------------------------------------------------------------------------------------------------------
Total operating expenses before acquisition and other charges 77.8 72.7 76.4
Non-recurring acquisition charges and write-off of goodwill
and capitalized software costs 2.5 7.2 1.7
- ------------------------------------------------------------------------------------------------------
Total operating expenses 80.3% 79.9% 78.1%
- ------------------------------------------------------------------------------------------------------
Interest Income and Other 0.9% 1.4% 2.0%
- ------------------------------------------------------------------------------------------------------
Income Before Equity in Net Income and Loss of
Investees, Minority Interest, and Income Taxes 20.6% 21.5% 23.9%
Equity in Net Income and Loss of Investees (0.4) (0.3) (0.1)
Minority Interest (5.1) (6.2) (1.4)
- ------------------------------------------------------------------------------------------------------
Income Before Income Taxes 15.1% 15.0% 22.4%
Income Taxes (6.9) (9.2) (9.5)
- ------------------------------------------------------------------------------------------------------
Net Income 8.2% 5.8% 12.9%
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
OPERATING REVENUES
SUBSCRIPTION AND CONSULTING FEES. Subscription and consulting fees consist of
subscription fees for our Investment Analytics and Investment Data Products
businesses, and revenues from other sources related to the Investment Analytics
business (which include timesharing revenues, seminar revenues and other
recurring and one-time fees); and annual retainer and project fees for
Consulting services provided to pension plan sponsors, investment managers and
others. A summary of the components of this revenue is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------- ---------------------------------- --------------
% CHANGE FROM % CHANGE FROM
$(000) PRIOR YEAR $(000) PRIOR YEAR $(000)
------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C>
Analytics and data subscriptions 86,844 19.2 72,840 39.6 52,170
Other analytics related 5,979 (2.6) 6,136 (6.3) 6,550
Consulting 21,838 10.4 19,772 21.2 16,319
------ ---- ------ ---- ------
Total 114,661 16.1 98,748 31.6 75,039
------ ---- ------ ---- ------
------ ---- ------ ---- ------
</TABLE>
Analytics and data subscriptions are revenues for our Investment Analytics and
Investment Data Products, including related data updates. We generally bill and
collect these fees on an annual basis, but recognize the income 1/12th per month
over each year of the subscription period.
Revenues for 1998 shown above include subscription and related fees of $7.7
million from acquisitions that we completed during the year. In addition to
revenue from these acquisitions, our growth in annual subscription fees
continues to be generated from a combination of obtaining new clients and
increasing revenues from existing customers through the introduction of new
products and services.
For 1999 compared to 1998, annual subscription fee revenue for the U.S. and
non-U.S. markets increased approximately 22% and 18%, respectively. For 1998
compared to 1997, annual subscription fees for the U.S. and
26
<PAGE>
non-U.S. markets increased approximately 46% and 32%, respectively. Excluding
revenues from 1998 acquisitions, subscription fees for the U.S. and non-U.S.
markets increased 26% and 23%, respectively. For both markets, revenue growth
primarily came from equity models and related data reflecting the continued
success of our Aegis suite of products. We have introduced various new single
country and global versions of this equity analytics system continuously since
July 1995. Our fixed income product sales also contributed to this growth,
primarily to the non-U.S. increase, as a result of sales of the global version
of our COSMOS System. Increases in our 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.
Approximately $8.5 million of Investment Data Products division revenues is
included in analytics and data subscriptions for 1999. This division had pre-tax
losses on a fully allocated cost basis of approximately $5.8 million for 1999.
Other analytics related revenues are derived from our Institutional Analytics
business. They include timesharing revenues, seminar revenues and other
recurring and one-time fees. The decline in the relative and absolute amounts of
this component of revenue reflects a continued decrease in our timesharing
revenues and a decline in our seminar revenues. Our timesharing revenues (which
were $1.3 million in 1999) have decreased over the past few years as we have
converted our timesharing platform products (which are now almost exclusively
U.S. fixed income products) to operate on our clients' in-house computers. We
have also moved clients for our remaining timesharing products from variable to
fixed fee arrangements. We will discontinue our timesharing product platform at
the end of calendar 1999. As a result of all of these factors, our timesharing
revenues will continue to decline and will not exist by the end of 2000. During
1999, we held fewer seminars and similar events than we had in prior periods.
This resulted in the decline in our seminar revenue.
Consulting fees consist of services delivered by our Enterprise Risk Management,
Investment Consulting, Corporate Consulting, and Strategic Consulting business
groups. Our Enterprise Risk Management group provides firm-wide risk management
solutions. 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. 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. Our Investment Consulting group provides services to pension plan
sponsors usually under recurring retainer-based fee arrangements. Our Strategic
Consulting group provides consulting services to money managers, which are
usually nonrecurring, project-type engagements that are completed in phases. Our
Strategic Consulting revenues also include fees related to consulting work done
in connection with our clients' strategic transactions. Because our Strategic
Consulting revenues are project related, they are susceptible to a large degree
of variability depending on the ability of the group to source new projects and
the unpredictable nature and significance of fees associated with strategic
transactions. Our Research Department (which also performs research functions
for our Investment Analytics and Investment Data Products divisions) performs a
variety of specialized Corporate Consulting services and analytics research
using our proprietary models and databases for clients principally involved with
fixed-income financial instruments.
The increase in total Consulting fees for 1999 compared to 1998 was primarily
due to increases in Enterprise Risk Management revenues, which in turn resulted
from increases in customer installations and related fees. The increase in total
Consulting revenues from 1998 over 1997 includes $1.4 million of consulting
revenues from Investment Analytics generated from businesses acquired in 1998.
ELECTRONIC TRADING. Our electronic trading revenues increased $5.7 million or
54% in 1999 over 1998 and increased $2.1 million or 21.0% in 1998 over 1997.
Electronic trading revenues consist of license fees from our various POSIT
systems. Our revenues from POSIT come from royalties based on commissions
generated by the trading volume in the various POSIT systems. Shares traded in
the U.S. POSIT system were 5.8 billion, 3.6 billion and 3.3 billion, for
calendar years ended December 31, 1998, 1997, and 1996, respectively. Our POSIT
revenue increases reflect higher trading volumes on U.S. POSIT.
ASSET MANAGEMENT. Our asset management revenues decreased $.9 million or 3.2% in
1999 compared to 1998 and increased $7.3 million or 35.2% in 1998 over 1997.
Asset management revenues consist of business from both Symphony and the Asset
Services Group (which provides customized multi-manager programs).
Symphony's revenues consist primarily of asset management fees, which are a
fixed percentage of asset value, and performance fees, which are based on the
performance over a benchmark for each account. Symphony's total revenues were
$25.8 million for 1999, $26.5 million for 1998 and $16.1 million for 1997.
Performance fees included in total revenues were $10.6 million, $14.7 million
and $11.6 million for 1999, 1998 and 1997, respectively. Performance fees are
recognized only at the measurement date for determining performance of an
account. The measurement date typically is at the end of the first year of a
client's contract and on each subsequent annual anniversary date for the years
after the first year. Although Symphony again exceeded its benchmarks, its
performance fees decreased from 1998 to 1999. This decrease was the result of
27
<PAGE>
lower investment performance in excess of benchmarks offset in part by growth in
assets subject to performance fees. The increases in performance fees in 1998
and 1997 were the result of not only investment performance in excess of
benchmarks, but the fact that assets under management that were subject to
performance fees grew significantly.
As of the beginning of 2000, Symphony had approximately $2.7 billion of assets
under direct management (an increase of 23% over the beginning of 1999). $1.8
billion of these assets are managed under agreements that provide for
performance fees in addition to a base management fee. This represents an
increase of 22% over the beginning of 1999.
Symphony's future revenues will depend to a great extent on the performance of
the funds it manages and the timing of anniversary fee determination dates for
performance based funds.
REVENUES FROM NON-U.S. CUSTOMERS. The percentage of our total operating revenues
that come from our non-U.S. customers represented 33.1%, 32.7% and 31.9% in
1999, 1998 and 1997, respectively. The percentage of revenues derived from our
non-U.S. customers continued to increase due primarily to our acquisition of the
TED assets in late 1998. The percentage of our subscription and consulting
revenues (total revenues excluding electronic trading and asset management
revenues) that come from non-U.S. customers was 45.6%, 45.4% and 44.3% in 1999,
1998 and 1997, respectively. The change in the percentage of revenue from
non-U.S. customers in 1999 compared to 1998 reflects faster growth rates in the
U.S. offset in part by the inclusion of revenue from The Estimate Directory for
the entire year. Increases in the percentage of our revenue from non-U.S.
customers in 1998 compared to 1997 reflects growth in our non-U.S. revenues
including the impact of revenues from the acquisition of the TED assets (which
are primarily from non-U.S. customers).
OPERATING EXPENSES
COST OF SUBSCRIPTION PRODUCTS. Cost of subscription products consists of our
computer access charges, data costs, computer leasing expenses and seminar
expenses. This component of operating expenses increased $2.2 million or 30.3%
in 1999 over 1998 and increased $.4 million or 6% in 1998 over 1997. Excluding
the impact of businesses acquired in 1998, our costs of subscription products
decreased $.4 million from 1997. Increases in 1999 over 1998 are primarily due
to higher costs for data, computer and Internet access delivery systems and our
purchased software expenses. The decrease in 1998 compared to 1997 reflects
higher data costs offset by lower outside computer costs as a result of lower
contract costs for these services. We anticipate that data and computer access
costs will continue to increase in the future as our requirements for new and
expanded data sources and delivery channels increase in order to meet product
development, enhancement and market needs.
COMPENSATION AND BENEFITS. Our compensation and benefits increased $15.9 million
or 25.6% in 1999 over 1998 and increased $12.5 million or 25.1% in 1998 over
1997. Excluding compensation and benefits from businesses acquired during 1998,
compensation and benefits increased $6.4 million or 12.9% from 1997.
Increases in our compensation and benefits for 1999 compared to 1998 reflect
increases in full-time employees of approximately 13% (including acquired
businesses), general wage increases and approximately $1.5 million in outside
consultants related to Year 2000 remediation activities. Increases in our
compensation and benefits for 1998 compared to 1997, excluding compensation and
benefits from businesses acquired during 1998, were attributable to wage
increases and growth in the number of our full-time employees of approximately
8%. Increases in our group insurance costs and other related employee benefits
have also contributed to increases in each of the past three years.
Our annual salary administration and performance evaluation process results in
annual reviews and salary adjustments that are effective as of July 1 of each
year.
OCCUPANCY. Our occupancy costs increased $2.1 million or 37.5% in 1999 over 1998
and $1.2 million or 28.1% in 1998 over 1997. Excluding occupancy costs from
businesses acquired during 1998, our occupancy costs increased $.7 million or
17% in 1998. Increases in occupancy costs for all years is the result of the
impact of acquired businesses as well as additional rental costs and related
leasehold improvements for office expansions completed in Berkeley, San
Francisco, New York and Connecticut during 1998 with further expansion and
related improvements completed in Berkeley, London and Edinburgh during 1999. We
have no new plans for major facilities expansions. Due to the restructuring of
our fixed income business, we have a surplus of office space and may seek to
sublease some of our space in New York City. As a result, we anticipate that the
rate of increase in our occupancy costs will slow substantially in 2000.
OTHER OPERATING EXPENSES. Our other operating expenses increased $2.9 million or
11.8% in 1999 compared to 1998 and increased $5.7 million or 29.8% in 1998 over
1997. Excluding other operating expenses from business acquired during 1998,
other operating expenses increased $2.7 million or 13.9%. Our other operating
expenses include: travel; office; maintenance;
28
<PAGE>
depreciation; amortization; marketing; advertising; outside legal and accounting
services; business insurance; data and other expenses related to the asset
management operations; and other corporate expenses.
Increases in other operating expenses in 1999 compared to 1998 consisted
primarily of increased costs for travel, telephone, legal and other professional
services and amortization of intangibles. The increases in travel, telephone and
other professional services reflect associated growth in revenues, employees and
related organizational and compliance issues. The increase in amortization of
intangibles is the result of acquisition activities during 1998 and 1999.
Excluding the impact of acquired businesses on other operating costs for 1998,
the increase in other operating expenses compared to 1997 resulted from
increases in data costs related to the asset management business (which are in
part a function of certain asset management revenues); increases in foreign
exchange losses associated with strengthening of the U.S. dollar versus certain
foreign currencies; and other general increases in travel and entertainment,
advertising and marketing, insurance and taxes and licenses associated with
office expansions and increases in sales.
NON-RECURRING ACQUISITION CHARGES AND WRITE-OFF OF GOODWILL AND CAPITALIZED
SOFTWARE COSTS. In 1999, we recorded a charge of approximately $4.0 million
($.27 per diluted share) in connection with the decision to restructure our
fixed income business. The charge consisted of the write-off of the remaining
unamortized amounts 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.
In 1998, we recorded a charge of approximately $9.9 million related to purchased
in-process research and development in connection with our June 1997
acquisition. The portion of the purchase price allocated to purchased in-process
technology was determined based on a valuation study completed shortly after the
closing of the acquisition. The portion of the purchase price allocated to
purchased technology was immediately expensed.
In 1997, in connection with our merger with Rogers Casey & Associates, Inc.
(RCA), we recorded acquisition costs of approximately $1.3 million. We also
recorded a charge of approximately $.4 million for the write-off of capitalized
software related to a product under development by RCA because the development
costs for this product were not recoverable based on revenue estimates.
OTHER INCOME AND EXPENSES
INTEREST INCOME AND OTHER. Our interest income and other decreased $.4 million
or 22% in 1999 compared to 1998 and decreased $.2 million or 11% in 1998
compared to 1997. The decrease in 1999 compared to 1998 was due to two factors.
The average invested balance of our accounts was lower in 1999 than in 1998. In
addition, consistent with changes to market interest rates, the average interest
rate for our accounts declined from 1998 to 1999. The decrease in 1998 compared
to 1997 was the result of lower dividend income and interest earnings on notes
receivable.
EQUITY IN NET INCOME AND LOSS OF INVESTEES. Net losses from our joint ventures
and other strategic relationships represent primarily our share of losses from
our equity investments in Data Downlink Corporation, Risk Reporting Limited, and
Global POSIT. We liquidated our investment in Global POSIT during 1999 and,
therefore, no further losses on this joint venture are expected. The consecutive
increase in losses over the past three fiscal years is primarily due to
increased losses from our investment in Data Downlink Corporation.
MINORITY INTEREST. Minority interest represents the profit interest of the
Symphony LLC principals. Increases or decreases in minority interest reflect
corresponding changes in the level of profits from the Symphony business.
NEW ACCOUNTING STANDARDS
In 1999, our company adopted Statement of Financial Accounting Standards No.
130, "Comprehensive Income," ("SFAS 130"). SFAS 130 requires companies to report
a new additional measure of income on the income statement or to create a new
financial statement that has the new measure of income on it. SFAS 130 did not
have a material impact on our consolidated financial statements.
In 1999, we adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). This new accounting pronouncement requires companies like ours to report
financial and descriptive information about our reportable operating segments.
Required segment information includes segment profit or loss, certain specific
revenue and expense items, segment assets, as well as information about the
revenue derived from our products and services, the countries in which we earn
revenues and hold assets, and our major customers.
29
<PAGE>
In 1999, we adopted Statement of Position (SOP) 97-2, "Software Revenue
Recognition," issued by the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants. It provides guidance on
applying generally accepted accounting principles in recognizing revenue on
software transactions. The adoption of SOP 97-2 did not have a material impact
on our consolidated financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents, short-term investments and investments in
municipal debt securities available-for-sale totaled $55.1 million at March 31,
1999, representing an increase of $6.9 million from March 31, 1998. In addition,
we have 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 on that line of credit.
We believe that our cash flow from operations (including prepaid subscription
fees), together with existing cash balances, will be sufficient to meet our cash
requirements for capital expenditures and other cash needs for ongoing business
operations.
PRINCIPAL FINANCIAL COMMITMENTS
As of June 7, 1999, our principal financial commitments consisted 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 and refunds of prepaid revenues associated with the
restructuring plan announced in April 1999. Our Board of Directors has also
authorized the repurchase of up to $2,000,000 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 the Asset Services Group.
Approximately $7.0 million of that amount has yet to be disbursed.
YEAR 2000
The Year 2000 problem is the inability of computer systems and embedded computer
chips to distinguish between the year 1900 and the year 2000. 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 Investment 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.
- - "DUPs" refer to our internal proprietary systems that update the data
processed through most BARRA Products and some BARRA Services.
- - "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 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 and Symphony.
- - "Y2K compliant" means that the product or system referred to has file
structures and naming conventions that accommodate a date transition to the
next century without performance interruption.
In 1997, we assembled a Year 2000 project team made up of internal and outside
professionals to identify and review areas that might experience Y2K problems.
The project team formulated a plan (the "Y2K Project") to achieve 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.
(2) Testing our other systems for Y2K compliance by September 30, 1999.
30
<PAGE>
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 May 31, 1999 of the total number of labor hours, including internal and
outside personnel, required for each phase:
<TABLE>
<CAPTION>
Phase Objective Status as of May 31, 1999: Approximate Percentage
Complete (Target Deadline)
<S> <C> <C>
Awareness Make each department aware of the Y2K 100% Complete for BARRA Products, DUPs and BARRA
problem, and convey management's 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
BARRA Product, DUP, and BARRA Service. Services.
Assessment Assess the inventoried BARRA Products, 100% Complete for BARRA Products, DUPs and BARRA
DUPs, and BARRA Services to determine Services.
what modifications or enhancements are
needed, if any.
Solution Design Plan the activities, develop the 100% Complete for BARRA Products, DUPs and BARRA
and Planning schedule, and estimate the costs of Services.
Y2K modifications. In addition,
establish basic management and
development processes, along with
general standards and verification
techniques for the Y2K compliance
tasks.
Development and Execute the plans developed to achieve 100% Complete for BARRA Products and BARRA Services
Modification Y2K compliance. DUPs: 60% (August 31, 1999)
Testing Test and verify Y2K compliance. BARRA Products: 94% (July 31, 1999)
DUPs: 14% (September 30, 1999)
BARRA Services: 75% (June 30, 1999)
Distribution Deliver Y2K compliant BARRA Products BARRA Products: 89% (August 15, 1999)
and BARRA Services to clients. BARRA Services: 50% (June 30, 1999)
DUPs: phase not applicable to DUPs
</TABLE>
In March 1999, we implemented a more comprehensive approach to our Y2K efforts
regarding DUPs. We adopted more extensive testing procedures for all DUPs,
including those that we had previously tested. In addition, because our own
employees possess greater knowledge and expertise regarding our DUPs, we
increased our internal staffing on the remaining DUP project phases and
decreased our reliance on, and augmented the efforts of, outside contractors. As
a result of this more comprehensive approach, the target completion dates for
the development/modification phase for DUPs has been extended. Substantially all
of our increased staffing, which currently includes approximately 50 full-time
equivalents, comes from our research and data management groups. To the extent
individuals within these groups are dedicated to the Y2K Project, we will likely
experience delays in developing enhancements to BARRA Products, as well as
delays in our research efforts supporting our next generation of products. In
addition, this allocation has had the corresponding effect of reallocating to
the Y2K Project the existing salaries and other direct costs associated with
these employees.
While we have experienced some delays in the testing and distribution phases for
BARRA Services, we expect to complete these phases by June 30, 1999.
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, except for a small number of new releases of products
(which account for less than 1% of our total revenues) that we expect to release
by August 15, 1999. Decisions to discontinue other BARRA Products before the
Year 2000 are made in the ordinary course of business and are not expected to be
based solely on Y2K
31
<PAGE>
issues. Except for the recently discontinued single country fixed income
products, discontinued BARRA Products will be replaced with more advanced
software applications that are Y2K compliant prior to the Year 2000.
Our test methods vary depending upon the relevant requirements. However, we
generally test for Y2K compliance by performing each BARRA Product, DUP and
BARRA Service from the end user's perspective using various Year 2000 dates. In
addition, independent parties have performed Y2K compliance audits on some of
the more significant BARRA Products, including several Aegis suite and Cosmos
Global products.
We continue to identify and prioritize critical data vendors, and inquire about
their plans and progress in addressing the Y2K problem. We have 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. Approximately 95% of these vendors
responded to our questionnaires by May 31, 1999. However, our Y2K inquiries will
continue indefinitely to the extent 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. If a vendor's response
indicates that its data is not currently delivered in a Y2K compliant format, we
normally request test data be provided when it is rendered Y2K compliant. There
can be no assurance, however, regarding the availability of any such test data,
or that the data vendors responding to our questionnaires have accurately
evaluated their own Y2K readiness. We do, however, indirectly test substantially
all of the vendors' data as part of our general Y2K testing of BARRA Products,
DUPs, and BARRA Services.
Because no single client of BARRA Products or BARRA Services accounts for more
than 2% of our total revenues at March 31, 1999, we are reviewing the Y2K
compliance of only our thirty largest customers. Approximately two-thirds of
these clients had responded to questionnaires as of May 31, 1999, and all such
responses indicate 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 May 31, 1999, the approximate completion percentages (and target
deadlines) for the products and services offered by these businesses were as
follows:
<TABLE>
<CAPTION>
Status as of May 31, 1999:
Phase Approximate Percentage Complete (Target Deadline)
<S> <C>
Awareness 100%
Inventory 100%
Assessment 100%
Solution Design & Planning 100%
Development & Modification 80% (August 31, 1999)
Testing 55% (September 30, 1999)
</TABLE>
The distribution phase is inapplicable to the products and services of these
businesses. The 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, the 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, the 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 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 currently plan to complete
assessment and remediation of any Y2K compliance problems discovered by us
before September 30, 1999. 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.
32
<PAGE>
We have successfully completed Y2K testing of Delphi, our internally developed
software used to track our client contacts and manage orders, invoices, client
support, and distribution systems.
We estimate the total direct cost of the Y2K Project will be approximately $10.7
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. As noted earlier, we recently directed additional
employees from our data management and research groups to work almost
exclusively on the Y2K Project. The increase in internal personnel has had the
corresponding effect of reallocating to the Y2K Project the existing salaries
and other labor expenses associated with these internal personnel. The
adjustments in internal and external resources have resulted in a net increase
of $4.1 million above the estimated $6.0 million total cost of the Y2K Project
we reported previously.
The total amounts we spent on the Y2K Project through the 3 months and 12 months
ending March 31, 1999 were approximately $900,000 and $3.2 million,
respectively, of which approximately $700,000 and $2 million, respectively, are
costs associated with outside contractors. We anticipate that costs for outside
contractors for the quarters ending June 30, 1999 and September 30, 1999 will be
approximately $1.0 million each quarter, and then we anticipate these costs will
decline as the Year 2000 approaches. Of the total amount expended on the Y2K
Project for the year ended March 31, 1999, approximately $1.2 million related to
internal labor expenses. We estimate the future cost of completing the Y2K
Project to be approximately $7.5 million, of which approximately $2.9 million
relates to outside contractors, approximately $4.2 million relates to internal
labor expenses and approximately $400,000 relates to the cost of repairing or
replacing hardware. Internal labor costs include the salaries 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
that may be 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 revenues 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. However, we
currently anticipate that sales of new products will slow or halt during the
last half of calendar 1999. See Risk Factors elsewhere in this report.
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
believe that, assuming the successful completion of the Y2K Project as currently
scheduled, the possibility of significant interruptions of normal operations
should be reduced.
33
<PAGE>
We continue developing contingency plans to deal with Y2K problems that arise
despite our compliance efforts. In particular, we are implementing a contingency
plan that seeks to ensure that a limited failure by key vendors does not lead to
a material adverse affect on our clients. The plan has been developed based on
the following contingencies:
- - A single major data vendor is offline for two months; or
- - A local temporary failure by a utility company occurs.
The contingency plan involves our receipt of redundant key data from two sources
in order to avoid disruption in the event a single source experiences Y2K
disruptions. The computer systems implementing this contingency plan will be
deployed in our Berkeley office and another BARRA 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, but the plan
goal is to avoid a material adverse effect on our clients. Assuming the
availability of redundant data, we currently expect to deploy the contingency
system by June 30, 1999. However, there can be no assurance that redundant data
will be made available and, to the extent we are unable to obtain such data and
Y2K disruptions occur, our products and services could be adversely affected.
Difficulties in obtaining redundant data are particularly apparent in certain
emerging market countries. 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, in the event that automated financial
data updates supporting our asset management services fail because of Y2K
non-compliance, we may execute the updates manually, 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) the 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 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.
34
<PAGE>
ITEM 7A. 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 $36.9 million at March 31, 1999 with an
average interest rate of 4.3%. At March 31, 1999, the portfolio also had
approximately $6.5 million of short-term, high credit quality municipal debt
securities with an average interest rate of 4.3%. 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
$11.6 million at March 31, 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. 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 British Pound Sterling 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 $5.6 million
invested in a yen-denominated mutual fund. (See Note 2 to the Notes to our
Financial Statements.)
35
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
BARRA, Inc.
Berkeley, California
We have audited the accompanying consolidated balance sheets of BARRA, Inc. (the
"Company") and subsidiaries as of March 31, 1999 and 1998, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended March 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of BARRA, Inc. and subsidiaries as of
March 31, 1999 and 1998 and the results of their operations and their cash flows
for each of the three years in the period ended March 31, 1999 in conformity
with generally accepted accounting principles.
/S/ Deloitte & Touche LLP
- -------------------------
April 27, 1999 (June 23, 1999 as to Note 13)
36
<PAGE>
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 31,343,616 $ 33,673,314
Short-term investments 17,229,111 8,294,394
Investment in municipal debt securities- available for sale 6,497,758 6,265,204
Accounts receivable:
Subscription and other (Less allowance for doubtful accounts of $525,532 and 20,773,728 18,152,071
$169,183)
Asset management 9,058,633 2,449,324
Related parties 4,325,861 3,855,057
Prepaid expenses 2,361,386 1,965,819
- -------------------------------------------------------------------------------------------------------------------------------
Total current assets 91,590,093 74,655,183
- -------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS IN UNCONSOLIDATED COMPANIES 2,601,524 2,128,532
PREMISES AND EQUIPMENT:
Computer and office equipment 21,272,192 16,447,653
Furniture and fixtures 5,871,763 5,006,947
Leasehold improvements 8,647,314 6,677,300
- -------------------------------------------------------------------------------------------------------------------------------
Total premises and equipment 35,791,269 28,131,900
Less accumulated depreciation and amortization (17,311,593) (13,513,701)
- -------------------------------------------------------------------------------------------------------------------------------
18,479,676 14,618,199
DEFERRED TAX ASSETS 3,036,050 2,282,522
COMPUTER SOFTWARE
(Less accumulated amortization of $1,015,174 and $1,051,275) 957,623 1,544,704
OTHER ASSETS 1,187,700 1,463,824
GOODWILL AND OTHER INTANGIBLES
(Less accumulated amortization of $4,690,882 and $3,215,801) 25,236,541 24,767,142
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 143,089,207 $ 121,460,106
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,287,491 $2,223,129
Due to related party 200,000 1,079,199
Accrued expenses payable:
Accrued compensation 10,770,354 9,663,688
Accrued corporate income taxes 5,543,847 4,884,113
Other accrued expenses 9,025,930 7,211,705
Unearned revenues 23,790,097 22,160,710
- -------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 51,617,719 47,222,544
- -------------------------------------------------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES 1,398,162 1,486,362
MINORITY INTEREST IN EQUITY OF SUBSIDIARY 1,868,254 2,000,217
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; 14,012,852 and
13,675,388
Shares issued and outstanding 1,401 1,368
Additional paid-in capital 31,764,328 27,829,967
Retained earnings 56,884,737 43,875,659
Accumulated other comprehensive income (loss) (445,394) (956,011)
- -------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 88,205,072 70,750,983
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 143,089,207 $ 121,460,106
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the BARRA, Inc. Consolidated
Financial Statements.
37
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
OPERATING REVENUES:
Subscription and consulting fees $114,660,857 $98,747,915 $75,038,884
Electronic trading 16,234,842 10,554,800 8,959,797
Asset management 27,163,039 28,074,612 20,763,231
- -------------------------------------------------------------------------------------------------------------------------------
Total operating revenues 158,058,738 137,377,327 104,761,912
- -------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Cost of subscription products 9,470,986 7,266,183 6,873,860
Compensation and benefits 78,080,158 62,143,333 49,665,261
Occupancy 7,511,899 5,461,718 4,263,055
Other operating expenses 27,930,293 24,993,548 19,253,106
Non-recurring acquisition charges and write-off of goodwill
and capitalized software costs 3,990,276 9,914,000 1,756,189
- -------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 126,983,612 109,778,782 81,811,471
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME AND OTHER 1,459,795 1,876,915 2,121,871
- -------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE EQUITY IN NET INCOME AND LOSS OF INVESTEES,
MINORITY INTEREST, AND INCOME TAXES 32,534,921 29,475,460 25,072,312
EQUITY IN NET INCOME AND LOSS OF INVESTEES (582,183) (376,725) (106,013)
MINORITY INTEREST (8,073,424) (8,438,143) (1,419,125)
- -------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 23,879,314 20,660,592 23,547,174
INCOME TAXES (10,870,236) (12,751,990) (10,001,721)
- -------------------------------------------------------------------------------------------------------------------------------
NET INCOME $13,009,078 $7,908,602 $13,545,453
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Net Income Per Share:
Basic $.94 $.59 $1.08
Diluted $.89 $.55 $.97
Shares used in Net Income Per Share Calculation:
Basic 13,868,988 13,300,198 12,524,678
Diluted 14,603,203 14,264,565 14,002,355
</TABLE>
The accompanying notes are an integral part of the BARRA, Inc. Consolidated
Financial Statements.
38
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,009,078 $ 7,908,602 $ 13,545,453
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in net income and loss of investees 582,183 376,725 106,013
Minority interest 8,073,424 8,438,143 1,419,125
Depreciation and amortization 6,683,150 5,106,295 3,229,319
Amortization of computer software 806,612 541,193 386,265
Dividends received from investee -- -- (226,583)
Gains on marketable securities (508,843) (573,000) (455,832)
Write-off of goodwill and capitalized software development
costs 3,990,276 -- 448,426
Write-off of acquired in-process technology -- 9,914,000 --
Other (766,161) (28,531) (153,065)
Changes In:
Accounts receivable - Subscription and other (2,621,657) (3,308,280) (3,630,374)
Accounts receivable - Asset management (6,609,309) (341,686) (1,206,231)
Accounts receivable - Related parties (470,804) (837,893) (340,503)
Prepaid expenses (395,567) (469,044) 281,639
Other assets 276,124 (178,755) (719,984)
Accounts payable, due to related party and accrued expenses 4,356,905 4,149,545 6,460,594
Unearned revenues 1,564,387 2,359,051 86,162
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 27,969,798 33,056,365 19,230,424
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (8,734,073) (8,857,657) (3,671,299)
Short-term investments purchased - net (8,425,874) (2,299,553) (1,454,491)
Sale (purchase) of municipal debt securities - available for (232,554) 4,058,255 (10,323,459)
sale, net
Acquisitions - cash paid (5,517,000) (14,491,154) --
Investments in unconsolidated companies (886,011) (1,852,888) (874,746)
Dividends received -- -- 226,583
Payments on notes receivable -- 5,419,474 1,804,869
Other investing activities, net -- -- 190,155
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (23,795,512) (18,023,523) (14,102,388)
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash payments to minority shareholders (8,205,386) (8,403,446) --
Payments on notes payable and lines of credit -- (713,022) (2,138,294)
Proceeds from sales of common stock 3,349,336 2,739,878 1,164,973
Common stock repurchased (1,647,934) (814,056) (816,960)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (6,503,984) (7,190,646) (1,790,281)
- ---------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,329,698) 7,842,196 3,337,755
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 33,673,314 25,831,118 22,493,363
- ---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 31,343,616 $ 33,673,314 $ 25,831,118
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
OTHER CASH FLOW INFORMATION Cash paid during the year for:
Interest $ 1,810 $ 64,209 $ 95,133
Income taxes 8,119,406 6,947,963 7,830,285
Non-cash investing transactions - See Note 3
</TABLE>
The accompanying notes are an integral part of the BARRA, Inc. Consolidated
Financial Statements.
39
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
--------------------------- PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL INCOME (LOSS) EARNINGS EQUITY
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1996 12,450,726 $1,245 $12,485,939 $15,746 $22,421,604 $34,924,534
Contractual Share Repurchases-
RogersCasey - - (800,000) (800,000)
Repurchase of Stock (3,414) - (16,960) (16,960)
Stock Issued 178,659 18 1,164,955 1,164,973
Deferred Compensation 42,989 42,989
---------------------------------------------------------------------------------------
Subtotal 12,625,971 1,263 12,876,923 15,746 22,421,604 35,315,536
---------------------------------------------------------------------------------------
Foreign Currency Translation
Adjustment (487,139) (487,139)
Net Income 13,545,453 13,545,453
--------------
Comprehensive Income - subtotal 13,058,314
--------------
---------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1997 12,625,971 1,263 12,876,923 (471,393) 35,967,057 48,373,850
---------------------------------------------------------------------------------------
Repurchase of Stock (28,194) (3) (814,053) (814,056)
Stock issued 1,077,611 108 12,605,637 12,605,745
Tax benefit from Option 3,161,460 3,161,460
Exercises
---------------------------------------------------------------------------------------
Subtotal 13,675,388 1,368 27,829,967 (471,393) 35,967,057 63,326,999
---------------------------------------------------------------------------------------
Foreign Currency Translation
Adjustment (484,618) (484,618)
Net Income 7,908,602 7.908,602
--------------
Comprehensive Income - subtotal 7,423,984
---------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1998 13,675,388 1,368 27,829,967 (956,011) 43,875,659 70,750,983
---------------------------------------------------------------------------------------
Repurchase of Stock (84,829) (9) (1,647,925) (1,647,934)
Stock issued 422,293 42 3,349,294 3,349,336
Tax benefit from Option 2,232,992 2,232,992
Exercises
---------------------------------------------------------------------------------------
Subtotal 14,012,852 1,401 31,764,328 (956,011) 43,875,659 74,685,377
---------------------------------------------------------------------------------------
Foreign Currency Translation
Adjustment 510,617 510,617
Net Income 13,009,078 13,009,078
--------------
Comprehensive Income - subtotal 13,519,695
---------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1999 14,012,852 $1,401 $31,764,328 ($445,394) $56,884,737 $88,205,072
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the BARRA, Inc. Consolidated
Financial Statements.
40
<PAGE>
BARRA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 1999,
1998 AND 1997:
NOTE 1 - THE COMPANY.
BARRA, Inc. ("BARRA" or the "Company") and its subsidiaries are engaged in
integrated business activities that combine technology, data, software and
services to help clients make investment and trading decisions. The Company's
clients and target markets include investment managers, plan sponsors and
consultants, brokers and dealers, insurance companies, banks, and other
institutional and private investors throughout the world.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
BASIS OF PRESENTATION - The accompanying consolidated financial statements
include the accounts of BARRA, its wholly-owned subsidiaries and Symphony Asset
Management, Inc. ("Symphony Inc."). (See Note 4.) All significant intercompany
transactions and balances have been eliminated. Certain amounts previously
reported have been reclassified to conform to the 1999 presentation.
REINCORPORATION - Effective August 14, 1998, the Company changed its state of
incorporation from California to Delaware. The reincorporation was accomplished
through a merger (the "Merger") of BARRA, Inc., a California corporation ("BARRA
California"), into its wholly owned Delaware subsidiary, BARRA (DE), Inc.
("BARRA Delaware"). Upon the Merger, BARRA Delaware changed its name to BARRA,
Inc. As a result of the Merger, each outstanding share of BARRA California
Common Stock, no par value, was automatically converted into one share of BARRA
Delaware Common Stock, par value $.0001 per share. Accordingly, prior period
common stock amounts have been reclassified to reflect the $.0001 par value of
Common Stock issued and outstanding. Also in connection with the
reincorporation, the Company increased the authorized number of shares of Common
Stock from 40,000,000 to 75,000,000.
ACCOUNTING ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
STOCK SPLIT - In 1997, the Company's Board of Directors declared a three-for-two
stock split, payable in the form of a dividend of one share of the Company's
common stock for every two shares owned by the stockholders. The stock split
resulted in the issuance of approximately 4.5 million additional shares of
common stock from authorized but unissued shares. All share and per share data
in these financial statements and related notes have been adjusted to
retroactively reflect the stock split.
CASH AND CASH EQUIVALENTS include money market funds and certificates of deposit
with original maturities of three months or less.
SHORT-TERM INVESTMENTS include $11,637,760 at March 31, 1999 and $5,939,584 at
March 31, 1998 invested in funds managed by Symphony Asset Management LLC
("Symphony LLC") and BARRA RogersCasey Asset Services Group, Inc., two of the
Company's registered investment adviser subsidiaries. The funds hold both long
and short positions in equity securities and at times buy and sell short-term
market index instruments which the managers use to hedge general market risk.
These investments are considered to be trading securities and accordingly are
recorded at their fair value and any unrealized gains or losses are included in
interest income and other. Also included in short-term investments is a U.S.
dollar equivalent of $5,591,351 at March 31, 1999, and $2,354,810 at March 31,
1998, invested in a Japanese yen-denominated mutual fund which is invested
primarily in government and other bonds and certificates of deposit in Japan.
The investment is recorded at cost which approximates its fair value.
INVESTMENTS IN MUNICIPAL DEBT SECURITIES - AVAILABLE FOR SALE are recorded at
fair value which approximates cost. Interest on the securities is tax exempt and
adjusts to market rates during designated interest reset periods which occur at
least every month. While the securities have stated maturity dates ranging from
July 1999 to May 2029, each security grants the investor the option to put the
security back to the issuer during exercise periods which generally coincide
with interest reset dates.
41
<PAGE>
INVESTMENTS IN UNCONSOLIDATED COMPANIES are accounted for on the cost or equity
method depending on the Company's ownership interest in the voting stock and
upon its ability to exert significant influence over the investee's operations.
(See Note 8.)
PREMISES AND EQUIPMENT are stated at cost. Computer and office equipment and
furniture and fixtures have economic useful lives of five years and are
depreciated using straight-line methods. Leasehold improvements are amortized
using the straight-line method over the periods of the corresponding leases
which range from five to ten years.
GOODWILL AND OTHER INTANGIBLES includes purchased goodwill and purchased model
rights which are amortized on a straight line basis over the remaining estimated
economic life of the underlying products and technologies (original lives
assigned are ten to twenty years). It is reasonably possible that the estimates
of anticipated future gross revenue, the remaining estimated economic life of
the products and technologies, or both, could differ from those used to assess
the recoverability of these costs and result in a write-down of the carrying
amount or a shortened life of the intangibles in the near term.
LONG-LIVED ASSETS - The Company reviews long-lived assets, certain identifiable
intangibles and goodwill related to these assets for impairment in accordance
with Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-lived Assets and For Long-lived Assets to be Disposed of."
For assets to be held and used, including acquired intangibles, BARRA initiates
its review whenever events or circumstances indicate that the carrying amount of
a long-lived asset may not be recoverable. Recoverability of an asset is
measured by comparison of its carrying amount to the future undiscounted cash
flows that the asset is expected to generate. Any impairment to be recognized is
measured by the amount by which the carrying amount of the asset exceeds its
fair market value.
Assets to be disposed of and for which management has committed to a plan to
dispose of the assets, whether through sale or abandonment, are reported at the
lower of carrying amount or fair market value less cost to sell.
(See Note 13).
COMPUTER SOFTWARE that has been purchased is stated at cost less accumulated
amortization. Amortization is calculated using the straight-line method over
three years depending on the estimated useful life of the software. Under the
criteria set forth in Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," capitalization of software development costs begins upon the
establishment of technological feasibility of a product. The establishment of
technological feasibility and the ongoing assessment of the recoverability of
costs require considerable judgment by management with respect to certain
external factors, including, but not limited to, anticipated future gross
product revenues, estimated economic life and changes in software and hardware
technology. Amounts that could have been capitalized under this statement after
consideration of the above factors were immaterial and, therefore, no internal
software development costs have been capitalized by the Company to date.
REVENUE RECOGNITION - Subscription fees are initially deferred as unearned
revenues when payment has been received and revenue is recognized ratably over
the subscription term. Timesharing revenues, which are included in subscription
and consulting fees, are recognized as the Company's computer resources are
utilized. Consulting fees for recurring, retainer-based services are recognized
ratably over the term of the services contract. Consulting fees for
non-recurring projects are recognized on a percentage of completion basis.
Asset management revenues are derived from two sources: base fees and
performance fees. Base fees are recognized ratably over the period that assets
are under management. Performance fees are recognized only at the performance
measurement dates contained in the individual account management agreements and
are dependent upon performance of the account exceeding agreed upon benchmarks.
Electronic trading revenues, which consist primarily of royalties based on
trading volume of U.S. equities from the Portfolio System for Institutional
Trading ("POSIT") joint venture, are recognized as trades are executed.
INCOME TAXES are provided at current rates. Deferred income taxes are computed
based on the difference between the financial statement and tax basis of assets
and liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
FOREIGN CURRENCY TRANSLATION - The functional currency of all non-U.S.
operations except BARRA International (Japan), Ltd., the company's wholly-owned
Japan subsidiary ("BARRA Japan"), is deemed to be the U.S. dollar. For non-U.S.
operations other than Japan, assets and liabilities are translated into U.S.
dollars using current exchange rates, and the
42
<PAGE>
translation adjustment effects are included in net income. The functional
currency of BARRA Japan is the Japanese yen and, therefore, the effects of
currency translation adjustments on its assets and liabilities are recorded as
other comprehensive income or loss which is included as a component of
shareholders' equity.
STOCK-BASED AWARDS to employees are accounted for using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees. (See Note 10.)
NET INCOME PER SHARE - Basic net income per share is calculated by dividing net
income by the weighted average shares of common stock outstanding during the
year. For diluted net income per share, net income is divided by the weighted
average shares of common stock outstanding and potential common shares
outstanding during the year. Potential common shares included in the dilution
calculation consist of dilutive shares issuable upon the exercise of outstanding
common stock options computed using the treasury stock method. For all years
presented, the only difference between basic and diluted income per share is the
inclusion of dilutive stock options in the denominator for purposes of
calculating diluted income per share.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial instruments
include cash and cash equivalents, short-term and municipal debt securities,
accounts receivable, prepaid expenses, accounts payable, certain accrued
liabilities and deferred revenue. The carrying amounts of these items are a
reasonable estimate of their fair values.
CONCENTRATION OF CREDIT RISK - The Company licenses its products and services to
investment managers primarily in the United States, Europe and Asia (primarily
Hong Kong and Japan). The Company evaluates the credit of its customers and does
not require collateral. The Company maintains reserves for potential credit
losses and such losses have been within management's expectations. Financial
instruments which may potentially subject the Company to concentrations of
credit risk consist principally of cash investments and short-term investments.
The Company's investment policy limits investments to short-term, low-risk
instruments.
NEW ACCOUNTING STANDARDS
In 1997, the FASB issued Statement of Financial Accounting Standards No. 130,
"Comprehensive Income" ("Statement 130"), which requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income (revenues, expenses, gains and losses) be reported in the
financial statements. Other comprehensive income consists of foreign currency
translation adjustments associated with net investments in non-U.S. operations.
The Company adopted Statement 130 effective April 1, 1998.
In 1997, the FASB issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
("Statement 131"), which establishes standards for the way public business
enterprises report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim reports issued to stockholders. In addition, it establishes
standards for related disclosures about products and services, geographic areas
and major customers. The Company adopted Statement 131 effective for the year
ended March 31, 1999. (See Note 11.)
NOTE 3 - BUSINESS COMBINATIONS
YEAR ENDED MARCH 31, 1999:
REDPOINT - On June 17, 1998 the Company paid $5.5 million for substantially all
of the assets and assumption of certain liabilities of Redpoint Software Inc.
("Redpoint"). Initial terms of the acquisition agreement also required BARRA to
pay up to an additional $12.5 million over a period of two years following the
closing based upon the financial performance of the acquired assets. In April
1999, the acquisition agreement was amended to replace the payment of contingent
consideration based on financial performance with a provision for royalty
payments equal to a certain percentage of future Redpoint product sales through
December 2000. In connection with the amended purchase agreement, BARRA paid an
additional $1.5 million in cash representing additional purchase price of
$600,000 and prepaid royalties of $900,000. Approximately 45% of the prepaid
royalty and any future royalties are partially or fully refundable to BARRA in
the event certain key former employees of Redpoint leave BARRA before required
employment periods. As a result, 45% of any royalties earned will be recorded as
compensation expense over the term of the required employment. The remaining
portion of royalties will be recorded as additional goodwill.
43
<PAGE>
The acquisition has been accounted for as a purchase, and the results of
Redpoint are included in the accompanying consolidated financial statements from
the date of acquisition only. The cost of the acquisition has been allocated to
the assets acquired and liabilities assumed based on estimated fair values. This
allocation resulted in tangible assets of $.2 million, consisting principally of
premises and equipment, and goodwill of $6.4 million which is being amortized on
a straight-line basis over ten years. Comparative pro forma financial
information has not been presented as the results of operations of Redpoint were
not material to the Company's consolidated financial statements.
BOND EXPRESS - In January 1999, BARRA completed the acquisition of the general
partnership interest in Bond Express LP ("Bond Express"). The transaction
superseded the terms of BARRA's 1995 initial investment in Bond Express and was
accomplished in two steps. The Company, which was the sole limited partner in
Bond Express, first converted certain indebtedness issued by Bond Express into
additional partnership interests. Immediately following such conversion, BARRA
purchased the remaining general partnership interests held by Bond Express, Inc.
The transaction resulted in the automatic dissolution of Bond Express and the
transfer of all of its asset and liabilities into BARRA. The purchase price for
this remaining interest was $1 million payable in equal monthly installments
through December 2000, plus certain contingent consideration based upon total
revenues of Bond Express products earned during calendar 2000. The amount of
contingent consideration to be paid cannot be determined at this time, but
assuming revenues from Bond Express products maintain their current levels, the
contingent consideration is not expected to be less than $.5 million. At March
31, 1999 there was approximately $1.4 million in purchase price and probable
contingent consideration payable included in other accrued expenses in the
accompanying consolidated balance sheet.
The results of operations and financial position of Bond Express have been
consolidated with BARRA's results of operations since June 1996 when BARRA
determined it had acquired both financial and operational control of Bond
Express. Financial results for Bond Express prior to June 1996 were not material
to BARRA's consolidated financial statements. The initial consideration of $1
million plus the estimated contingent consideration of $.5 million have been
added to goodwill and will be amortized over a period of 10 years.
YEAR ENDED MARCH 31, 1998:
GLOBAL ADVANCED TECHNOLOGY ("GAT") AND INNOSEARCH CORPORATION ("INNOSEARCH") -
On June 24, 1997, the Company completed the acquisition of a 100% equity
interest in GAT and a majority ownership interest in Innosearch, an affiliate of
GAT. The total purchase price of approximately $19,904,000 included 704,589
shares of unregistered BARRA common stock valued at $9,866,000, liabilities
assumed of $6,058,000, and cash and transaction costs of $3,980,000. In February
1998, an additional $1,000,000 was paid in connection with the acquisition of
the remaining minority interest in Innosearch, which resulted in additional
goodwill of $469,500. The acquisitions were accounted for as a purchase, and the
results of GAT and Innosearch are included in the accompanying consolidated
financial statements from the date of acquisition only.
The cost of the acquisitions were allocated on the basis of the estimated fair
value of assets acquired and liabilities assumed. This allocation resulted in
tangible assets of $3,762,700 consisting principally of accounts receivable and
premises and equipment, capitalized software of $1,217,000, purchased in-process
technology of $9,914,000, deferred tax assets of $1,100,000 and goodwill of
$3,910,300. The amount allocated to purchased in-process technology was
immediately expensed. Goodwill from the acquisition was amortized on the basis
of a ten year life until March 31, 1999 when it was written off. (See Note 13.)
THE ESTIMATE DIRECTORY ("TED") AND DIRECTUS - On October 9, 1997, BARRA (U.K.),
Ltd., a wholly-owned subsidiary of the Company, completed the acquisition of the
assets and assumption of certain liabilities of two businesses from Edinburgh
Financial Publishing Limited ("EFP") and two of EFP's affiliates for a total
purchase price of $17,411,727. The two businesses are TED, a database of
analysts' earnings estimates, and Directus, a corporate directors equity trading
information service. The total purchase consisted of $11,777,625 in cash,
liabilities assumed of $4,896,652 and transaction costs of $737,450. The
acquisition was accounted for as a purchase, and the results of BARRA (U.K.),
Ltd. are included in the accompanying consolidated financial statements from the
date of acquisition only.
The cost of the acquisition was allocated on the basis of the estimated fair
value of assets acquired and liabilities assumed and resulted in goodwill of
$15,536,065 which is being amortized over 20 years.
The following unaudited pro-forma information shows the consolidated results of
operations for the years ended March 31, 1998 and 1997 as if the acquisitions of
GAT, Innosearch, TED, and Directus had occurred as of April 1, 1995 and at the
44
<PAGE>
purchase prices established on the actual dates of acquisition. Acquisition
charges of approximately $10 million were assumed to have been incurred on April
1, 1995 and are, therefore, not included in the following presentation.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1998 1997
<S> <C> <C>
Operating revenues $142,479,154 $119,061,121
Net income $16,980,657 $11,957,089
Net income per share - diluted $1.18 $.81
</TABLE>
The pro-forma financial information is presented for informational purposes only
and is not necessarily indicative of the operating results that would have
occurred had these acquisitions been acquired as of the above dates. In
addition, the pro-forma results are not intended to be a projection of future
results and do not necessarily reflect the financial impact of combining these
acquired operations with BARRA's.
YEAR ENDED MARCH 31, 1997:
ROGERS, CASEY & ASSOCIATES, INC. ("ROGERSCASEY") - On July 24, 1996, BARRA
merged with RogersCasey, a firm specializing in investment consulting to money
managers and pension plan sponsors. All of the common stock and outstanding
options of RogersCasey were exchanged for 722,046 shares of BARRA's common stock
and 45,386 options on BARRA common stock. The merger was accounted for as a
pooling-of-interests. Fees and expenses related to the merger amounted to
$1,756,189 and were expensed as required under the pooling-of-interests method
of accounting.
NOTE 4 - SYMPHONY INC.
Effective July 1, 1996, the Company's wholly-owned subsidiary, Symphony Inc.,
contributed its assets, liabilities and business to Symphony Asset Management
LLC, a newly formed entity ("Symphony LLC" and together with Symphony Inc.
"Symphony"), in exchange for interests in Symphony LLC pursuant to the Operating
Agreement of Symphony LLC (the "Operating Agreement"). The capitalization of
Symphony LLC consists of four Interest Classes (Class 1, Class 2, Class 3 and
Class 4, as defined in the Operating Agreement). Class 1, Class 2 and Class 4
interests belong to Symphony Inc. (which continues to be wholly-owned by BARRA)
while Class 3 interests belong to a newly formed limited liability company,
Maestro LLC, whose owners are principals of Symphony LLC. At March 31, 1999, the
total capital accounts attributable to BARRA was $4 million and the capital
account of Maestro LLC was $1.9 million. In the event of sale or liquidation of
the business, BARRA's class 1 interest would receive a preferential distribution
prior to the payout of any other capital account.
The Operating Agreement provided for a bonus to be paid to the principals of
Symphony LLC equal to 25% of Symphony LLC profits (as defined in the Operating
Agreement). This bonus was only in effect until the Class 2 interests were
redeemed. In the quarter ended December 31, 1996, the Class 2 interests were
redeemed and the bonus was replaced by a profits interest (the Class 3 interest)
that started at 25% and grew to a maximum of 50% based on future levels of
Symphony LLC operating income (as defined in the Operating Agreement). The Class
3 interest attained the maximum profits interest in the quarter ended March 31,
1998.
The Company has consolidated the financial position and results of operations of
Symphony LLC and separately recorded the Class 3 interest share of net assets
and net income as a minority interest. The Class 3 interests share of profits
was $8,073,424, $8,422,661 and $1,787,073 for the years ended March 31, 1999,
1998 and 1997, respectively.
45
<PAGE>
NOTE 5 - INCOME TAXES.
The provision for income taxes for the years ended March 31, 1999, 1998 and 1997
consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
CURRENT:
Federal $7,816,012 $10,581,887 $6,024,179
State 792,942 106,887 1,280,149
Foreign 3,103,010 1,489,354 2,499,334
------------- ------------ ------------
Total current 11,711,964 12,178,128 9,803,662
-------------- ------------- ------------
DEFERRED:
Federal (1,053,049) 346,232 217,405
State (51,011) 38,470 --
Foreign 262,332 189,160 (19,346)
------------- ---------- -------------
Total deferred (841,728) 573,862 198,059
---------------- ---------- ------------
TOTAL TAX PROVISION $10,870,236 $12,751,990 $10,001,721
------------- ---------- -------------
------------- ---------- -------------
</TABLE>
Deferred taxes are determined based on the estimated future tax effects of
differences between the financial statement and tax basis of assets and
liabilities given the provisions of the enacted tax laws. No valuation
allowances for deferred tax assets were deemed to be necessary at the balance
sheet dates presented. The tax effect of significant temporary differences
representing deferred tax assets and liabilities as of March 31 is as follows:
<TABLE>
<CAPTION>
1999 1998
----------- ------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Accrued vacation pay not currently deductible $ 514,859 $ 432,061
Other accrued expenses not deductible 484,702 346,805
Research and development costs not currently deductible 397,311 --
Deferred rent 344,247 149,339
Basis difference in fixed assets 190,000 196,407
Capitalized software 1,064,000 1,099,882
Other 40,931 58,028
---------------- -----------
Total $3,036,050 $2,282,522
---------------- -----------
DEFERRED TAX LIABILITIES:
Differing tax years of equity investee $ -- $ 784,679
Prepaid expenses currently deductible 190,407 196,407
Income recognized for book purposes not currently taxable 176,320 --
Intangibles 736,913 474,570
Other 294,522 30,706
---------------- -----------
Total $1,398,162 $1,486,362
---------------- -----------
NET DEFERRED TAX ASSET: $1,637,888 $ 796,160
---------------- -----------
---------------- -----------
</TABLE>
46
<PAGE>
The reconciliation between the tax rate computed by applying the United States
federal statutory tax rate of 35% to income before income taxes and the actual
effective tax rate is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- -------------- ------------
<S> <C> <C> <C>
Income tax at statutory rate 35.0% 35% 35%
State income tax, net of federal income tax effect 3.6 4.0 3.5
Foreign taxes higher than federal rate 1.4 3.7 1.5
Non-taxable portion of dividends and interest (.5) (.6) (.7)
Effect of foreign sales corporation earnings (1.4) (1.4) (.8)
Nondeductible acquisition charges and write-offs 5.8 16.8 2.2
Other 1.6 4.2 1.8
---------------- -------------- ------------
---------------- -------------- ------------
Income tax at effective rate 45.5% 61.7% 42.5%
---------------- -------------- ------------
---------------- -------------- ------------
</TABLE>
NOTE 6 - LEASES AND OTHER COMMITMENTS.
Aggregate minimum future annual lease payments for facilities under operating
leases are as follows:
<TABLE>
<CAPTION>
AGGREGATE ANNUAL
YEAR ENDING MARCH 31: LEASE PAYMENTS
<S> <C>
2000 $4,492,399
2001 4,314,150
2002 4,487,098
2003 4,443,992
2004 3,506,251
Thereafter 11,864,279
--------------
Total $33,108,169
--------------
--------------
</TABLE>
Rental expense was $5,509,998, $4,225,131 and $4,263,055 for the years ended
March 31, 1999, 1998 and 1997, respectively.
The Company has an agreement with an outside computer service provider for
computer facilities through March 2000. Under the agreement the Company is
committed to pay minimum fees of approximately $900,000 per year, plus
additional amounts based on usage and/or services provided. The Company's
expense for outside computer usage was $2,796,102, $2,705,816 and $2,922,655 for
the years ended March 31, 1999, 1998 and 1997, respectively.
The Company has also committed to funding an additional $7.0 million for certain
asset management products developed by Symphony. This funding is expected to
occur within 2000.
NOTE 7 - ELECTRONIC TRADING
POSIT is a computerized institutional trading system that is owned by a general
partnership between the Company and Investment Technology Group, Inc. ("ITG").
The partnership has licensed the U.S. equity version of POSIT to ITG, which
operates the POSIT system for US equities. The Company's revenues represent its
share of license royalties paid by ITG to the partnership.
Global POSIT was established as a 50% owned joint venture in the United Kingdom
on May 31, 1990. It operated a computerized trading network that was designed to
facilitate trading in international equities. Profit and loss was allocated 50%
to the Company and 50% to ITG, the other joint venture partner. The Company's
share of losses is included in equity in net loss of investees and was $169,164,
$287,348 and $63,100 in the years ended March 31, 1999, 1998 and 1997,
respectively. During 1999, BARRA and ITG terminated the Global POSIT joint
venture.
In November 1998 the POSIT partnership granted a license to a joint venture
between ITG and Societe Generale to use the POSIT technology for the trading of
equities of European issuers. EuroPOSIT currently covers U.K. equities but is
expected to cover French equities in the near future and equities from
additional European countries over time. A royalty is paid to the POSIT
partnership based upon the commissions received for trades of European
securities on EuroPOSIT. BARRA receives
47
<PAGE>
50% of that royalty after the payment of certain enhancement and development
costs. Revenues from EuroPOSIT in 1999 were not significant.
NOTE 8 - INVESTMENTS IN UNCONSOLIDATED COMPANIES.
In March 1997, the Company purchased 68,037 shares of Series C Convertible
Preferred Stock in Quote.Com, Inc. ("Quote.Com") for $445,644. In April 1997,
the Company purchased an additional 46,368 shares of the same securities for
$304,366. The Company owns approximately 1.5% of the outstanding shares of
Quote.Com and accounts for its investment in Quote.Com using the cost method.
In April 1997, the Company purchased 272.7 shares of Series A Convertible
Preferred Stock of Data Downlink Corporation for $1,500,000. During 1999, the
Company purchased 47.29 shares of Series C Convertible Preferred Stock for
$371,564. At March 31, 1999 the Company owns approximately 20% of Data Downlink
Corporation and accounts for its investment in Data Downlink Corporation using
the equity method which resulted in equity in losses of $ 273,019 and $170,000
for the years ended March 31, 1999 and 1998, respectively.
The Company made investments of $514,448 and had equity in losses of $140,000 in
various other companies or joint ventures during the year ended March 31, 1999.
NOTE 9 - RETIREMENT PLANS.
The Company sponsors a tax-qualified employee savings and retirement plan ("the
Savings Plan") for all eligible U.S. employees. Eligible employees may
contribute up to 15% of their earnings, subject to annual limitations. The
Company matches employee contributions dollar for dollar up to an annual maximum
of $2,000 and employees vest in the Company match over the first five years of
their employment. Contribution expense was $801,534, $781,568, and $631,194 for
the years ended March 31, 1999, 1998 and 1997, respectively.
NOTE 10 -STOCK-BASED PLANS.
Fixed Stock Option Plans
STOCK OPTION PLAN.
On July 29, 1991, the Company adopted a Stock Option Plan (the "Plan") for the
granting of stock options to employees (including officers and employee
directors) and non-employee directors or consultants engaged by the Company, up
to a maximum of 1,800,000 shares of the Company's common stock. The Plan was
modified in 1994 and 1997 and provided for a maximum of 4,350,000 options on
shares of the Company's common stock to be granted. Under the Plan, incentive
stock options ("ISO") may be granted to employees only, and are to be granted at
not less than fair market value on the date of grant; and non-statutory stock
options ("NSO") may be granted to employees, consultants and non-employee
directors, and are to be granted at not less than 85% of such fair market value.
The Board of Directors, or a committee thereof, determines vesting period,
payment form and exercise date of the options granted under the Plan, provided
that no ISO may be exercised later than ten years after its date of grant and no
NSO may be exercised later than ten years and one day after its date of grant.
For options issued under the Plan through March 31, 1999, the vesting periods
have generally been set at 20% per year over five years and all options issued
have been NSO's.
DIRECTORS STOCK OPTION PLAN.
On July 31, 1997, the Company adopted a Directors Option Plan (the "Directors
Plan") for the granting of stock options to non-employee directors and employee
directors for up to a maximum of 150,000 shares of the Company's common stock.
The Directors Plan permits the Company to grant NSO's in accordance with a fixed
formula to non-employee directors of the Company. In addition, the Directors
Plan allows discretionary grants of ISO's to employee directors and NSO's to all
directors. NSO grants will be made automatically to non-employee directors under
the Directors Plan in accordance with a nondiscretionary formula. Following the
adoption of the Directors Plan, each current eligible director received NSO
grants for 7,500 shares and each person who subsequently becomes a non-employee
director will receive a grant of 10,000 shares (the "Initial" grants). In
addition, on each anniversary of an initial grant, the optionee will receive NSO
grants for an additional 2,000 shares (the "Succeeding" grants). The exercise
price for all NSO's and ISO's will not be less than the fair market value of the
common stock at the date of grant. NSO's granted pursuant to initial grants will
vest over a period of five
48
<PAGE>
years at a rate of 20% per year. NSO's granted pursuant to Succeeding grants
will be immediately vested. ISO's will vest over discretionary periods not to
exceed to five years.
A summary of the status of all the Company's fixed stock option plans as of and
during the years ended March 31, 1997, 1998, and 1999 follows:
<TABLE>
<CAPTION>
SHARES SUBJECT TO WEIGHTED AVERAGE SHARES AVAILABLE FOR
OUTSTANDING OPTIONS EXERCISE PRICE FUTURE GRANTS
-------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding, Balance at March 31, 1996 2,308,915 $6.07 905,640
Granted 519,000 15.94 (519,000)
Canceled (92,760) 10.13 92,760
Exercised (162,273) 5.64 --
-------------------------------------------------------------------------
Outstanding, Balance at March 31, 1997 2,572,882 7.94 479,400
(including 992,018 exercisable at a weighted
average exercise price of $5.79)
Additional share authorized 1,200,000
Granted 585,550 23.72 (585,550)
Canceled (150,480) 12.92 150,480
Exercised (339,875) 6.21 --
-------------------------------------------------------------------------
Outstanding, Balance at March 31, 1998 2,668,077 11.35 1,244,330
(including 1,129,052 excercisable at a
weighted average exercise price of $6.50)
Granted 555,700 21.62 (555,700)
Canceled (217,725) 16.69 217,725
Exercised (378,434) 6.59 --
-------------------------------------------------------------------------
Outstanding, Balance at March 31, 1999 2,627,618 13.73 906,355
Exercisable at March 31, 1999 1,221,653 $8.41 --
Weighted average fair value of options granted
during the year -- $12.95 --
</TABLE>
Additional information regarding options outstanding as of March 31, 1999 is as
follows:
<TABLE>
<CAPTION>
Stock Options Outstanding Options Exercisable
--------------------------------------------------------------------------------------------------
Weighted Average Weighted
Range of Exercise Number Remaining Weighted Average Number Exercisable Average
Prices Outstanding Contractual Life Exercise Price Exercise Price
(yrs)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 4.00 to $4.67 567,320 4.8 $ 4.40 458,090 $4.41
$ 4.83 to $8.33 526,903 4.6 6.21 418,123 6.08
$ 9.58 to $18.33 566,520 7.1 14.14 253,005 13.38
$ 20.62 to 24.25 670,475 9.3 21.70 25,635 22.31
$ 25 and over 296,400 8.8 26.17 66,800 26.23
----------------- --------------------
2,627,618 6.9 $13.73 1,221,653 $ 8.41
----------------- --------------------
----------------- --------------------
</TABLE>
49
<PAGE>
EMPLOYEE STOCK PURCHASE PLAN.
Under the 1996 Employee Stock Purchase Plan, (the "Purchase Plan"), the Company
is authorized to issue up to 1,125,000 shares of common stock to its employees.
Under the terms of the Purchase Plan, employees can choose to have up to 15% of
their annual base earnings withheld, subject to an annual limitation, to
purchase the Company's common stock. The purchase price of the stock is 85% of
the lesser of the fair market value as of the beginning or end of each
three-month offer period, subject to an annual limitation. Under the Purchase
Plan, the Company issued 43,859 and 35,248 shares in 1999 and 1998. The weighted
average purchase price and the weighted-average fair value of shares issued in
1999 was $19.17 and $22.57, respectively and in 1998 was $18.38 and $24.00,
respectively. At March 31, 1999 there were 1,028,610 shares of common stock
reserved for future issuance under the Purchase Plan.
ADDITIONAL STOCK-BASED AWARD INFORMATION
As discussed in Note 2, the Company continues to account for its stock-based
awards to employees using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and its related interpretations. Accordingly no compensation expense
has been recognized in the financial statements for employee stock arrangements.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), requires the disclosure of pro forma net income and
earnings per share had the Company adopted the fair value method as of the
beginning of 1995. Under SFAS 123, the fair value of stock based awards to
employees is calculated through the use of option pricing models, even though
such models were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require subjective
assumptions, including future stock volatility and expected time to exercise,
which greatly affect the calculated values. The Company's calculations were made
using the Black-Scholes option pricing model with the following weighted average
assumptions: weighted average expected life, 72 months in 1999, 84 months in
1998 and 60 months for 1997; stock volatility, 60% in 1999, 45% in 1998 and
1997; risk free interest rates, 5.00% in 1999, 6.00% in 1998 and 6.27% in 1997;
and no dividends during the expected term for all years. If the computed fair
values of the 1999, 1998, and 1997 awards under the Plan had been amortized to
expense over the vesting period of the awards, pro forma net income would have
been $11,546,091 ($.83 per basic share and $.79 per diluted share) in 1999,
$6,931,350 ($.52 per basic share and $.49 per diluted share) in 1998 and
$12,347,913 ($.99 per basic share and $.88 per diluted share) in 1997. The
effects of applying SFAS No. 123 on pro forma disclosures of net income and net
income per share for 1999, 1998 and 1997 are not likely to be representative of
the pro forma effects on net income and net income per share in future years.
NOTE 11 - SEGMENT INFORMATION
In 1999, BARRA 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. BARRA currently operates in three operating
segments: Subscription and Consulting, Asset Management and Electronic Trading.
BARRA's business segments are organized on the basis of differences in its
related products and services. The subscription and consulting segment consists
of developing, marketing and supporting Investment Analytics software,
Investment Data Products, and related Consulting services to portfolio fund
managers, pension sponsors and others engaged in the management of financial
assets. Electronic trading services consist of POSIT and its derivative systems.
POSIT operates computerized institutional trading systems that allow
institutional investors to trade portfolios of securities directly with each
other in a confidential environment. Asset management services consist of money
management services either via direct investments or customized multi-manager
programs. BARRA's organizational structure reflects this segmentation, and
segments have not been aggregated for purposes of this disclosure.
Segment income from operations is defined as segment revenues less segment
expenses which 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 exclude
research and development and general and administrative expenses as they benefit
all segments. For all years presented, segment expenses also exclude
non-recurring
50
<PAGE>
acquisition charges and write-off of goodwill and capitalized software costs,
amortization of acquired intangibles, interest income and other, equity in joint
venture gains and losses and 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.
BARRA's management does not identify or allocate its assets, including capital
expenditures, by operating segment. Accordingly, assets are not being reported
by segment because the information is not available by segment and is not
reviewed by BARRA's 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 years
ended March 31, 1999, 1998 and 1997, respectively (amounts in thousands):
YEAR ENDED MARCH 31, 1999:
<TABLE>
<CAPTION>
------------------- ---------------- ------------------- --------------- ----------------
Subscription and Electronic Asset Consolidated
Consulting Trading Management Other Total
------------------- ---------------- ------------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Revenues $114,661 $16,235 $27,163 $158,059
Segment expenses (71,950) (1,451) (11,591) (84,992)
Minority interest (8,073) (8,073)
------------------- ---------------- ------------------- --------------- ----------------
Segment income 42,711 14,784 7,499 64,994
------------------- ---------------- ------------------- --------------- ----------------
Research and development ($21,854) (21,854)
General and administrative (13,754) (13,754)
Non-recurring acquisition charges
and write-off of goodwill and
capitalized software (3,990) (3,990)
Amortization of intangibles (2,395) (2,395)
Interest and other 1,460 1,460
Equity in JV gains (losses) (582) (582)
------------------- ---------------- ------------------- --------------- ----------------
Income (loss) before income taxes $42,711 $14,784 $7,499 $(41,115) $23,879
------------------- ---------------- ------------------- --------------- ----------------
------------------- ---------------- ------------------- --------------- ----------------
Depreciation and amortization $3,241 $100 $254 $1,500 $5,095
</TABLE>
YEAR ENDED MARCH 31, 1998:
<TABLE>
<CAPTION>
------------------- ---------------- ------------------- --------------- ----------------
Subscription and Electronic Asset Consolidated
Consulting Trading Management Other Total
------------------- ---------------- ------------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Revenues $98,748 $10,555 $28,074 $137,377
Segment expenses (55,437) (648) (10,965) (67,050)
Minority interest (8,438) (8,438)
------------------- ---------------- ------------------- --------------- ----------------
Segment income 43,311 9,907 8,671 61,889
------------------- ---------------- ------------------- --------------- ----------------
Research and development ($19,000) (19,000)
General and administrative (12,250) (12,250)
Non-recurring acquisition charges
and write-off of goodwill and
capitalized software (9,914) (9,914)
Amortization of intangibles (1,564) (1,564)
Interest and other 1,877 1,877
Equity in JV gains (losses) (377) (377)
------------------- ---------------- ------------------- --------------- ----------------
Income (loss) before income taxes $43,311 $9,907 $8,671 $(41,228) 20,661
------------------- ---------------- ------------------- --------------- ----------------
------------------- ---------------- ------------------- --------------- ----------------
Depreciation and amortization $2,533 $75 $215 $1,260 $4,083
</TABLE>
51
<PAGE>
YEAR ENDED MARCH 31, 1997:
<TABLE>
<CAPTION>
------------------- ---------------- ------------------- --------------- ----------------
Subscription and Electronic Asset Consolidated
Consulting Trading Management Other Total
------------------- ---------------- ------------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Revenues $75,039 $8,960 $20,763 $104,762
Segment expenses (41,068) (686) (10,526) (52,280)
Minority interest 368 (1,787) (1,419)
------------------- ---------------- ------------------- --------------- ----------------
Segment income 34,339 8,274 8,450 51,063
------------------- ---------------- ------------------- --------------- ----------------
Research and development ($17,200) (17,200)
General and administrative (9,808) (9,808)
Non-recurring acquisition charges
and write-off of goodwill and
capitalized software ($1,756) (1,756)
Amortization of intangibles (768) (768)
Interest and other 2,122 2,122
Equity in JV gains (losses) (106) (106)
------------------- ---------------- ------------------- --------------- ----------------
Income before income taxes $34,339 $8,274 $8,450 ($27,516) $23,547
------------------- ---------------- ------------------- --------------- ----------------
------------------- ---------------- ------------------- --------------- ----------------
Depreciation and amortization $1,718 $50 $175 $905 $2,848
</TABLE>
Revenues are distributed to geographic areas based on the country in which the
BARRA sales office is located. For all years presented, no one customer
accounted for more than 10% of total revenues. Long-lived assets are attributed
to geographic areas based on the country where the assets are located.
The following table presents a summary of revenue and long-lived assets by
geographic region as of and for the years ended March 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------- ----------------------------------- -----------------------------------
Long Lived Long Lived Long Lived
Revenues Assets Revenues Assets Revenues Assets
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
North America:
United States $105,718,324 $27,306,165 $92,609,585 $23,399,475 $71,538,784 $11,543,683
Other 3,190,171 171,630 2,485,642 109,858 1,523,607 22,459
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
Total North
America 108,908,495 27,477,795 95,095,227 23,509,333 73,062,391 11,566,142
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
Europe:
United Kingdom
19,861,020 16,700,811 15,095,983 16,811,128 10,971,606 952,429
France 4,561,633 49,242 4,492,784 29,929 3,546,651 29,466
Germany 4,937,019 53,806 4,606,901 32,051 3,569,832 41,719
Other 1,058,300 19,137 715,866 3,968 439,900 -
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
Total Europe 30,417,972 16,822,996 24,911,534 16,877,076 18,527,989 1,023,614
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
Asia and
Australia:
Japan 12,321,346 3,587,599 10,849,406 3,409,386 8,923,410 4,050,093
Other 6,410,925 170,643 6,521,160 195,572 4,248,122 223,690
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
Total Asia and
Australia 18,732,271 3,758,242 17,370,566 3,604,958 13,171,532 4,273,783
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
Total $158,058,738 $48,059,033 $137,377,327 $43,991,367 $104,761,912 $16,863,539
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
</TABLE>
52
<PAGE>
NOTE 12 - CONTINGENCIES.
The Company is subject to various legal proceedings and claims either asserted
or unasserted arising in the normal course of business. While the outcome of
these proceedings and claims cannot be predicted with certainty, it is
management's opinion that the results of any such legal matters will not be
material to the Company's consolidated financial statements.
NOTE 13 - SUBSEQUENT EVENT
On April 19, 1999, BARRA announced a restructuring plan to reduce the cost of
operating its U.S. fixed income business and focus future development and sales
efforts on global and enterprise-wide fixed income products. The restructuring
plan will discontinue certain U.S. fixed income products and eliminate various
sales, client and product support positions and related facilities within the
U.S. Revenues from discontinued products ceased on April 30, 1999 and customers
who had prepaid subscriptions for periods subsequent to April 30, 1999 will
receive refunds by June 30, 1999. Revenues from discontinued products amounted
to approximately $8 million in 1999 or 5% of total revenues. Although the
decision to discontinue these products was made in April 1999, certain support
activities will continue through December 31, 1999.
The Company is recording 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 ending March 31, 1999 and consisted
of a write-off of goodwill and capitalized software development costs related to
a 1997 acquisition of a company engaged in the development of products for the
U.S. fixed income market. The second charge will consist of restructuring costs
estimated to be approximately $6 million which will be charged to operating
expense in the quarter ending June 30, 1999 and will consist principally of
estimates related to severance and related benefits, discontinued product
support costs between May 1, 1999 and December 31, 1999, and excess facilities
costs.
Despite the fact that these two charges are related to the same restructuring,
current accounting standards prohibit the recognition of restructuring charges
until certain decisions have been made, including the identification and
communication of employee dismissals. Since the Company did not meet some of
these criteria by March 31, 1999, the charge for these costs will occur in the
quarter ended June 30, 1999.
NOTE 14 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED).
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1999 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER
<S> <C> <C> <C> <C>
Total operating revenues $40,561,742 $42,557,234 $39,026,614 $35,913,148
Total operating revenues net of operating expenses $2,739,529 $10,374,340 $9,508,465 $8,452,792
Net income (loss) ($739,035) $4,545,325 $4,676,485 $4,526,303
Net income (loss) per share - diluted ($0.05) $0.31 $0.32 $0.31
YEAR ENDED MARCH 31, 1998 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER
Total operating revenues $36,276,808 $42,759,864 $31,234,193 $27,106,462
Total operating revenues net of operating expenses $9,485,782 $14,521,913 $6,956,504 ($3,365,654)
Net income (loss) $4,839,558 $5,657,600 $3,673,451 ($6,262,007)
Net income (loss) per share - diluted $0.33 $0.39 $0.25 ($0.49)
</TABLE>
Income per share calculations for each of the quarters is based on the weighted
average common and common equivalent shares outstanding for each period, and the
sum of the quarters may not necessarily be equal to the full year income per
share amount. Loss per share is calculated based on the weighted average common
shares outstanding for the period, excluding all common equivalent shares.
Quarterly financial data reflects a write-off of goodwill and capitalized
software development costs of $3,990,276 ($.29 per basic and diluted share) in
the fourth quarter of 1999 and the write-off of acquired in-process technology
of $9,914,000 ($.74 per basic and diluted share) in the first quarter of 1998.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
53
<PAGE>
54
<PAGE>
PART III
We have omitted from this Report certain information required by Part III as we
intend to file our definitive Proxy Statement pursuant to Regulation 14A not
later than 120 days after the end of the year covered by this Form 10-K, and
certain information in the Proxy Statement is incorporated here by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
DIRECTORS
The information regarding our directors required by this Item 10 is incorporated
by reference to pages 2 through 4 of the Proxy Statement under the headings
"Proposal No. 1 - Election of Directors - Nominees, Business Experience of the
Directors, and Board Meetings and Committees."
EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding our Executive Officers required by this Item 10 is
included at the end of Part I of this Form 10-K.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
The information regarding compliance with Section 16(a) of the Exchange Act
required by this Item 10 is incorporated by reference to page 6 of the Proxy
Statement under the heading "Compliance with Section 16(a) of the Securities
Exchange Act of 1934."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference to pages 6
through 9 of the Proxy Statement under the headings "Executive Compensation" and
"Report of the Compensation Committee and of the Board of Directors on Executive
Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated by reference to pages 4
through 6 of the Proxy Statement under the heading "Principal Stockholders and
Share Ownership by Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated by reference to page 8
of the Proxy Statement under the heading "Executive Compensation - Compensation
Committee Interlocks, Insider Participation and Other Transactions."
55
<PAGE>
56
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Form 10-K:
(1) Financial Statements.
The following financial statements are included in Item 8 of
Part II of this Form 10-K:
<TABLE>
<CAPTION>
Reference Page
<S> <C>
Independent Auditors' Report 35
Consolidated Financial Statements
Consolidated Balance Sheets 36
Consolidated Statements of Income 37
Consolidated Statements of Cash Flows 38
Consolidated Statements of Shareholders' Equity 39
Notes to Consolidated Financial Statements 40
</TABLE>
(2) Financial Statement Schedules.
All Financial Statement Schedules are omitted because they are
not applicable or required, or because the required
information is given elsewhere in Part II, Items 7 and/or 8 of
this Form 10-K.
(3) Exhibit Index.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
<S> <C>
2.1 Agreement and Plan of Reorganization, dated April 25,
1996, by and among BARRA, Inc., Rogers, Casey &
Associates, Inc., Stephen Rogers, and John F. Casey
(incorporated by reference to Exhibit 99.10 to our
Amendment No. 1 to Current Report on Form 8-K/A dated
June 27, 1996 filed July 3, 1996).
2.2 Amendment to Agreement and Plan of Reorganization,
dated July 23, 1996, by and among BARRA, Inc.,
Rogers, Casey & Associates, Inc., Stephen Rogers, and
John F. Casey (incorporated by reference to Exhibit
2.1 to our Amendment No. 2 and Final Amendment to
Current Report on Form 8-K/A dated August 8, 1996 and
filed August 8, 1996).
2.3 Agreement and Plan of Merger of BARRA (DE), Inc. (a
Delaware Corporation) and BARRA, Inc. (a California
Corporation) dated as of August 5, 1998 (incorporated
by reference to Exhibit No. 2.1 to our Current Report
on Form 8-K filed August 14, 1998).
3.1 Certificate of Incorporation of BARRA, Inc.
(incorporated by reference to Exhibit 3.1 of our
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998).
3.2 Bylaws of BARRA, Inc. (incorporated by reference to
Exhibit 3.2 of our Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998).
4.1 Specimen stock certificate (incorporated by reference
to Exhibit 4.3 to our Form S-1 Registration
Statement, as amended (No. 33-42951), filed August
20, 1991 (Registration Statement).
10.1 POSIT Joint Venture Agreement, dated October 1, 1987,
between BARRA, Inc. and Jefferies & Company, Inc. and
related Exclusive Software License Agreement, dated
as of October 1, 1987, and amended as of August 1990
(incorporated by reference to Exhibit 10.3 to the
Registration Statement).
</TABLE>
57
<PAGE>
<TABLE>
<S> <C>
10.2 Stock Option Plan of BARRA, Inc. (incorporated by
reference to Exhibit 10.19 to the Registration
Statement). (1)
10.3 Agreement for Services, dated February 1, 1991 and
July 1, 1991 between BARRA, Inc. and Ziff
Communications Company (incorporated by reference to
Exhibit 10.16 to the Registration Statement).
10.4 Agreement for Services between BARRA, Inc. and Ziff
Information Services, a division of Ziff
Communications Company, dated February 1, 1994
(incorporated by reference to Exhibit 10.1 to our
Annual Report on Form 10-K for the fiscal year ended
March 31, 1994).
10.5 Revolving Line of Credit Note, dated February 28,
1996, made by BARRA, Inc. to the Sumitomo Bank of
California (incorporated by reference to Exhibit 10.5
to our Annual Report on Form 10-K for the fiscal year
ended March 31, 1996).
10.6 Commercial Loan Agreement, dated as of February 28,
1996, between BARRA, Inc. and The Sumitomo Bank of
California (incorporated by reference to Exhibit 10.6
to our Annual Report on Form 10-K for the fiscal year
ended March 31, 1996).
10.7 BARRA, Inc. Net Office Lease, dated as of May 21,
1996, by and between BARRA, Inc. and First Milvia,
LLC (incorporated by reference to Exhibit 10.1 to our
Annual Report on Form 10-K for the fiscal year ended
March 31, 1996).
10.8 Rogers, Casey & Associates, Inc. 1992 Stock Option
and Restricted Stock Plan and Addendum thereto
(incorporated by reference to Exhibit 4.3 to our
registration statement on Form S-8 filed September
11, 1997 (File No. 333-11771). (1)
10.9 Form of Stock Option Agreement for Rogers, Casey &
Associates, Inc. 1992 Stock Option and Restricted
Stock Plan (incorporated by reference to Exhibit 4.4
to our registration statement on Form S-8 filed
September 11, 1997 (File No. 333-11771). (1)
10.10 Operating Agreement for Symphony Asset Management LLC
(incorporated by reference to Exhibit 10.2 to our
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996).
10.11 1996 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 4.3 to our registration
statement on Form S-8 filed August 15, 1996 (File No.
333-10259).
10.12 Form of Stock Purchase Agreement for 1996 Employee
Stock Purchase Plan (incorporated by reference to
Exhibit 4.4 to our registration statement on Form S-8
filed August 15, 1996 (File No.
333-10259).
10.13 Form of Officers' Stock Purchase Agreement for 1996
Employee Stock Purchase Plan (incorporated by
reference to Exhibit 4.5 to our registration
statement on Form S-8 filed August 15, 1996 (File No.
333-10259). (1)
10.14 Amended and Restated Global Advanced Technology
Corporation Stock Purchase Agreement dated as of June
24, 1997, between Global Advanced Technology
Corporation ("GAT"), BARRA, Inc. and the GAT
Stockholders (incorporated by reference to Exhibit
10.1 to our Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997).
10.15 Stock Purchase Agreement among BARRA, Inc. and the
Shareholders of Innosearch Corporation, dated as of
May 23, 1997, between Innosearch Corporation, BARRA,
Inc. and certain of the Innosearch shareholders
(incorporated by reference to Exhibit 10.2 to our
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997).
10.16 Asset Purchase Agreement, dated September 8, 1997,
between Edinburgh Financial Publishing Limited,
Edinburgh Financial Publishing (Asia) Limited,
Edinburgh Financial Publishing (USA), Inc., BARRA
(U.K.), Ltd., BARRA, Inc., Jeremy Salvesen, Angus
MacDonald, BARRA
</TABLE>
58
<PAGE>
<TABLE>
<S> <C>
International, Ltd. and BARRA International (Japan),
Ltd. (incorporated by reference to Exhibit 10.1 to
our Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997).
10.17 BARRA Directors Option Plan (incorporated by
reference to Exhibit No. 4.3 to BARRA, Inc.'s
registration statement on Form S-8 filed September
11, 1997 (File No. 333-35381)). (1)
10.18 Form of Stock Option Agreement for BARRA Directors
Option Plan (incorporated by reference to Exhibit No.
4.4 to our registration statement on Form S-8 filed
September 11, 1997 (File No.
333-35381)). (1)
10.19 BARRA Stock Option Plan and Amendment No. 1 thereto
(incorporated by reference to Exhibit No. 4.3 to our
registration statement on Form S-8 filed September
11, 1997 (File No. 333- 35379)). (1)
10.20 Amendment No. 2 to BARRA Stock Option Plan dated
January 28, 1999 (incorporated by reference to
Exhibit No. 4.3 to our registration statement on Form
S-8 filed January 29, 1999 (File No. 333-35379)).
(1)
10.21 Form of Indemnification Agreement between BARRA, Inc.
and its officers and directors (incorporated by
reference to Exhibit D to the Proxy Statement for the
BARRA, Inc. 1998 Annual Meeting of Shareholders filed
June 25, 1998).
13.1 1999 Annual Report to Shareholders of BARRA, Inc.,
which, except for those portions expressly
incorporated herein by reference, is furnished solely
for the information of the Securities Exchange
Commission and is not to be deemed "filed."
21.1 List of Subsidiaries of BARRA, Inc. (electronic
filing only)
23.1 Consent of Deloitte & Touche LLP (electronic filing
only)
24.1 Power of Attorney (electronic filing only)
27.1 Financial Data Schedule - Year ended March 31, 1999
(electronic filing only)
</TABLE>
(1) Management contract or compensatory plan or
arrangement required to be filed as an exhibit to
this Annual Report on Form 10-K pursuant to Item
14(a).
THE EXHIBITS LISTED ABOVE ARE FILED AS PART OF, OR ARE
INCORPORATED BY REFERENCE INTO, THIS REPORT. COPIES OF THE
EXHIBITS LISTED ABOVE WILL BE FURNISHED UPON WRITTEN REQUEST
AT REASONABLE COST TO ANY STOCKHOLDER. SUCH REQUEST SHOULD BE
SENT TO BARRA, INC., 2100 MILVIA STREET, BERKELEY, CALIFORNIA
94704, ATTENTION: MARIA HEKKER, GENERAL COUNSEL.
(b) Reports on Form 8-K:
On March 2, 1999, we filed a Current Report on Form 8-K dated March 1,
1999 regarding our press release announcing our search for a new Chief
Executive Officer.
59
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
BARRA, Inc.
By: /s/ James D. Kirsner
----------------------------------------------------
Name: James D. Kirsner
--------------------------------------------------
Title: Chief Financial Officer
-------------------------------------------------
Date: June 29, 1999
--------------------------------------------------
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints jointly and severally, Andrew Rudd and
James D. Kirsner, and each one of them, his attorneys-in-fact, each with the
power of substitution, for him in any and all capacities, to sign any and all
amendments to this Annual Report on Form 10-K and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each said attorneys-in-fact, or his substitute or substitutes, may do cause to
be done by virtue hereof.
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act
of 1934, this report has been signed by the following persons, on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ A. George Battle Director June 29, 1999
- -------------------------------------------------
A. George Battle
/s/ John F. Casey Director June 29, 1999
- -------------------------------------------------
John F. Casey
/s/ M. Blair Hull Director June 29, 1999
- -------------------------------------------------
M. Blair Hull
/S/ James D. Kirsner Chief Financial Officer (Principal Financial and June 29, 1999
- -------------------------------------------------
James D. Kirsner Accounting Officer)
/s/ Norman J. Laboe Director June 29, 1999
- -------------------------------------------------
Norman J. Laboe
/s/ Ronald J. Lanstein Director and Vice Chairman June 29, 1999
- -------------------------------------------------
Ronald J. Lanstein
/s/ Andrew Rudd Director, Chairman and Chief Executive Officer June 29, 1999
- -------------------------------------------------
Andrew Rudd (Principal Executive Officer)
</TABLE>
60
<PAGE>
Exhibit 13.1
1999
BARRA
ANNUAL
REPORT
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDING MARCH 31
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Operating revenues $158,058,738 $137,377,327 $104,761,912 $77,568,076 $64,267,194
Operating expenses 126,983,612(1) 109,778,782(1) 81,811,471(1) 65,980,135 57,682,702
Minority interest in net income (8,073,424) (8,438,143) (1,419,125) (211,525) (193,343)
Net income 13,009,078(1) 7,908,602(1) 13,545,453(1) 6,869,256 3,852,967
Income per share--diluted(2) $ 0.89(1) $ 0.55(1) $ 0.97(1) $ 0.52 $ 0.31
Total assets $143,089,207 $121,460,106 $ 84,201,101 $64,340,376 $52,380,659
Current liabilities 51,617,719 47,222,544 32,604,486 27,479,253 20,492,078
Deferred taxes and other liabilities 1,398,162 1,486,362 1,241,763 1,936,589 2,404,603
Minority interest 1,868,254 2,000,217 1,981,002 -- 1,010,308
Shareholders' equity $ 88,205,072 $ 70,750,983 48,373,850 $34,924,534 $28,473,670
</TABLE>
Note 1: Operating expenses for 1999 include charges of $3,990,276 ($.27 per
share) for the write-off of goodwill and capitalized software
development costs. Operating expenses for 1998 and 1997 include
one-time acquisition related charges of $9,914,000 ($.70 per share) and
$1,756,189 ($.07 per share) respectively.
Note 2: All share and per share amounts reflect a 3-for-2 stock split
effective September 1997.
This annual report contains forward-looking statements. For more information
identifying those statements and the factors that could cause actual results to
differ, please see the enclosed Form 10-K Part I, Item I, "Risk Factors" and
Part II, Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<PAGE>
TO OUR SHAREHOLDERS
In spite of some significant challenges, we have just completed another very
profitable year. Our revenues for the fiscal year ended March 31, 1999 were over
twice what they were just three years ago. Excluding one-time charges, our net
income was almost two-and-a-half times our income three years ago. Our equity
and global fixed income analytics businesses and our electronic trading joint
venture both continued to have strong growth in revenues and profits. Also, our
asset management business increased its assets under management by half a
billion dollars.
We, however, like many others, saw a slowdown in our business in Asia and we had
extra expense associated with making changes to our software in preparation for
the year 2000. Our single country fixed income products continued to be
unprofitable, and market conditions caused our asset management performance fee
revenues to be lower than in the prior year.
The balance of this letter discusses the significant developments in each of our
businesses. It also provides some insight into recent significant decisions that
we think will have a very positive impact on the future of our company.
ANALYTICS AND CONSULTING
Today we serve over 2500 clients worldwide who collectively are responsible for
more than $10 trillion in investment assets. These clients include nine of the
top ten pension plan sponsors in the United States, the top ten largest
investment managers in the world, and many of the largest securities dealers in
the U.S. and abroad.
We continue to deliver new and enhanced products and services for these markets.
Most recently we pioneered research into market impact, the price change that
can sometimes result when relatively large share positions are traded. This
research resulted in a new product for both "buyside" and "sellside" traders. We
have released a new equity performance measurement
<PAGE>
product and we have further integrated our suite of equity products to improve
ease of use. We have also refocused our fixed income product development agenda
to concentrate on our successful global and enterprise risk management products.
As part of this process, we recently decided to discontinue unprofitable single
country fixed income product offerings for the U.S. and Canada.
Organic growth and consolidation among the world's largest asset managers has
created the demand for large enterprise risk management systems that cover all
asset classes and all major worldwide markets. Senior managers at these very
large firms need to control fiduciary risk, understand global exposures, be
confident of the integrity of the strategies behind their products and above
all, avoid surprises. The future of investment analytics will require a
consistent analysis at both the portfolio and aggregate firm-wide levels. We are
uniquely positioned to provide these solutions. We have almost 25 years
experience in the risk management business. We offer a robust set of solutions
with global asset coverage across all asset classes, and we have superior
research, education and consulting services. Our recent acquisition of the
Redpoint Software business has given us the ability to provide the data
integration needed to link asset holdings with risk management software. Our
initial projects in this area have demonstrated our ability to deliver these
systems and we believe that this is the next significant area of expansion for
our institutional analytics business.
INVESTMENT DATA PRODUCTS
Just over a year and a half ago, as a natural extension of our analytics
business, we hired professionals with experience in the investment data business
and consolidated a number of our data products into a new division. This new
group has focused on improving the infrastructure supporting the products,
adding screening and analytics tools, and expanding third party distribution
agreements. Most importantly, this group is migrating most of its products to
the Internet, and we are poised to launch important new products in our earnings
estimates and manager returns businesses. We invested approximately $6 million,
or 24 cents per share, in building this business during the year just ended. We
have announced that we are seeking outside strategic investors for this business
because we think this is the best way to accelerate development and take
advantage of promising opportunities in the financial information Internet
business.
ASSET MANAGEMENT
Our asset management business primarily consists of our 50 percent ownership in
Symphony Asset Management, LLC. Symphony's assets under direct management have
grown 23 percent to $2.7 billion and asset based fees have grown 28 percent
during the last year. Although assets under management were up, performance
based fees were down 28 percent from the year before. We believe that this was
more a case of exceptional returns in the prior year and unusual market
conditions than any failure of the investment strategies in the current year.
This represented a decrease of just over $4 million in performance fee revenue
and was significant to
<PAGE>
our results. However, the business has now had 12 consecutive quarters where
performance fees for beating benchmarks have been recognized. Symphony has an
outstanding reputation for performance with the market neutral strategies that
make up the major portion of its business.
ELECTRONIC TRADING
Royalties from our POSIT electronic trading joint venture increased 54 percent
over the previous year. These revenues are directly related to increased trading
volumes in the system. More institutional investors are making use of this
electronic crossing network every day, thereby creating increased liquidity and
demand for use of the system. During the year, POSIT licensed its trading
technology to a European joint venture that has had a very promising start.
Although our share of the revenues have not been significant to date, this new
use of POSIT in the European markets represents the potential for increased
revenues to us in the future.
MORE INFORMATION
Our annual report on Form 10-K is enclosed. It contains a comprehensive
description of our business, our financial results and other information you
should know about the company. The SEC has recently encouraged companies to use
"plain English" for some regulatory filings. We actively endorse this drive
toward wider understanding of financial and business reporting, so the enclosed
10-K represents our voluntary attempt at this more reader-friendly format.
LOOKING FORWARD
In March of this year I announced the decision to expand BARRA's management team
by beginning a search for a new CEO. There is a natural division between my
roles as CEO and Chairman. I will continue to do my best to advance BARRA's
interests around the world, consult with clients, and lead some research
projects, and the new CEO will ensure that we efficiently execute on our
strategy and align the company to achieve further growth.
Our plans for the coming year can be summed up in one word -- focus. First and
foremost we will focus on the core analytics businesses. We have decided to
reduce the number of our fixed income initiatives, we are seeking strategic
investors in our data products business, we are committed to continuing to
improve our equity analytics business and we plan to pursue enterprise risk
management opportunities aggressively.
BARRA is truly a unique company with a very strong market position based on
almost 25 years of building an industry that we helped invent. Today we have
more than 750 employees worldwide who give us the intellectual power to deliver
the very best products and services to our clients. I thank each of them for
their hard work and commitment to making BARRA the industry leader.
/s/ Andrew Rudd
Andrew Rudd, Chairman and Chief Executive Officer
<PAGE>
Corporate Information
INVESTOR INFORMATION AND FORM 10-K
For financial and general information, or to receive, without charge, a copy of
BARRA's filings with the Securities and Exchange Commission, please contact:
Jennifer Hinchman
Investor Relations
BARRA, Inc.
2100 Milvia Street
Berkeley, California 94704-1113
Telephone: 510.548.5442
ANNUAL MEETING
BARRA's annual meeting of shareholders will be held at:
The Claremont Resort
41 Tunnel Road
Berkeley, California 94705
on August 4, 1999 at 2:00 P.M.
AUDITORS
Deloitte & Touche LLP
50 Fremont Street
San Francisco, California 94105
TRANSFER AGENT
Chase Mellon Shareholder Services, LLC
Overpeck Centre
85 Challenger Road
Ridgefield Park, New Jersey 07660
WORLD WIDE WEB SITE
Information on BARRA is also
available on the worldwide web at
www.barra.com.
<PAGE>
AMERICAS
BERKELEY
BARRA, Inc.
2100 Milvia Street
Berkeley, California 94704
United States
510.548.5442
Fax:510.548.4374
DARIEN
BARRA RogersCasey, Inc.
One Parklands Drive
Darien, Connecticut 06820
United States
203.656.5900
Fax: 203.656.2233
EDISON
BARRA, Inc.
110 Fieldcrest Avenue, 4th floor
Edison, New Jersey 08837
United States
732.346.1700
Fax: 732.346.0800
MEXICO CITY
BARRA, Inc.
Insurgentes Sur 1796 Piso 8
Colonia Florida
Mexico, D.F. 01030
Mexico
5.662.2622
Fax: 5.662.2675
MONTREAL
BARRA International
774 Decarie Boulevard North, Suite 300
St-Laurent, Quebec H4L 3L5
Canada
514.855.0606
Fax: 514.855.0060
NEW YORK
BARRA, Inc.
Wall Street Plaza
88 Pine Street, 2nd Floor
New York, New York 10005
United States
212.785.9630
Fax: 212.785.9639
RIO DE JANEIRO
BARRAconsult, Ltda.
Avenida Luis Carlos Prestes 410 Sala 310
Barra de Tijuca
Rio de Janeiro CEP 22775-050
Brazil
21.430.9515
Fax: 21.430.9587
SAN DIEGO
BARRA, Inc.
7220 Trade Street, Suite 315A
San Diego, California 92121
Untied States
619.578.7300
Fax: 619.689.2346
SAN FRANCISCO
Symphony Asset Management, LLC
555 California Street, Suite 2975
San Francisco, California 94104
United States
415.676.4000
Fax: 415.676.2480
WESTBOROUGH
BARRA, Inc.
1500 West Park Drive, Suite 370
Westborough, Massachusetts 01581
United States
508.870.0070
Fax: 508.870.0090
EUROPE | AFRICA
CAPE TOWN
BARRA International, Ltd.
1st Floor Colinton House
Norwich Oval, #1 Oakdale Road
Newlands 7700
South Africa
21.683.3245
Fax: 21.683.3267
EDINBURGH
BARRA (U.K.), Ltd.
10-12 Young Street
Edinburgh EH2 4JB
United Kingdom
0131.473.7070
Fax: 0131.473.7080
FRANKFURT
BARRA International, Ltd.
Goethestra(beta)e 5
Frankfurt D-60313
Germany
069.28.17.00
Fax: 069.28.37.00
LONDON
BARRA International, Ltd.
75 King William Street
London EC4N 7BE
United Kingdom
0171.283.2255
Fax: 0171.220.7555
PARIS
BARRA International, Ltd.
35, rue des Mathurins
Paris 75008
France
1.42.66.90.51
Fax: 1.42.66.90.42
ASIA | PACIFIC
HONG KONG
BARRA International, Ltd.
Unit C2, 21st Floor
United Centre
95 Queensway
Hong Kong
2521.3083
Fax: 2537.1375
SINGAPORE
BARRA International, Ltd.
15B Circular Road
Singapore 049371
435.0430
Fax: 438.1736
SYDNEY
BARRA International, Ltd.
Level 14
9 Castlereagh Street
Sydney, NSW 2000
Australia
2.9223.9333
Fax: 2.9233.1666
YOKOHAMA
BARRA International (Japan), Ltd.
YCS Building, 11F, 5-1 Sakae-cho
Kanagawa-ku, Yokohama 221-0052
Japan
045.451.6161
Fax: 045.451.6221
<PAGE>
BARRA
www.barra.com
<PAGE>
EXHIBIT 21.1 - LIST OF SUBSIDIARIES OF BARRA, INC.
<TABLE>
<CAPTION>
State or Other Jurisdiction
Name of Subsidiary* of Incorporation or Organization
- ------------------- --------------------------------
<S> <C>
BARRA Analytics Securities, Inc. Delaware
BARRA CONSULT Brazil
BARRA Fixed Income Services, Inc. (formerly Global Advanced Technology Corporation) Delaware
BARRA (FSC), Inc. U.S. Virgin Islands
BARRA Holdings, Ltd. England, Wales
BARRA International, Ltd. Delaware
BARRA International (Japan), Ltd. (formerly N.B. Investment Technology Co., Ltd.) Japan
BARRA RogersCasey Asset Services Group, Inc. (formerly Rogers, Casey Asset Services,
Inc. and Rogers, Casey Investment Advisors, Inc.) Delaware
BARRA RogersCasey, Inc. (formerly Rogers, Casey Consulting, Inc. and Rogers, Casey
Sponsor Services, Inc.) Delaware
BARRA Strategic Consulting Group, Inc. (formerly Rogers, Casey Manager Services, Inc.) Delaware
BARRA (U.K.), Ltd. England, Wales
Directus Limited England
Edinburgh Financial Publishing Limited England
Global POSIT Joint Venture England
Innosearch Corporation New York
POSIT Joint Venture California
Risk Reporting Limited England, Wales
Rogers, Casey & Associates, Inc. Delaware
Rogers, Casey Alternative Investments, Inc. Delaware
Symphony Asset Management, Inc. California
Symphony Asset Management, LLC California
TED Limited England
The Estimate Directory Limited England
</TABLE>
- ------------------------------
*All subsidiaries do business only under the names listed.
<PAGE>
EXHIBIT 23.1 - CONSENT OF DELOITTE & TOUCHE LLP
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-35379, 333-35381, 333-11771 and 333-10259 of BARRA, Inc.
on Form S-8 of our report dated April 27, 1999 (June 23, 1999 as to Note 13),
appearing in the Annual Report on Form 10-K of BARRA, Inc. for the year ended
March 31, 1999.
/s/ Deloitte & Touche LLP
June 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BARRA,
INC. FORM 10-K AS OF AND FOR THE FISCAL YEAR ENDED MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-1999
<PERIOD-START> JAN-01-1999 APR-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1999
<CASH> 31,343,616 31,343,616
<SECURITIES> 23,726,869 23,726,869
<RECEIVABLES> 21,299,260 21,299,260
<ALLOWANCES> 525,532 525,532
<INVENTORY> 0 0
<CURRENT-ASSETS> 91,590,093 91,590,093
<PP&E> 35,791,269 35,791,269
<DEPRECIATION> 17,311,593 17,311,593
<TOTAL-ASSETS> 143,089,207 143,089,207
<CURRENT-LIABILITIES> 51,617,719 51,617,719
<BONDS> 0 0
0 0
0 0
<COMMON> 1,401 1,401
<OTHER-SE> 88,203,671 88,203,671
<TOTAL-LIABILITY-AND-EQUITY> 143,089,207 143,089,207
<SALES> 40,561,742 158,058,738
<TOTAL-REVENUES> 40,561,742 158,058,738
<CGS> 2,314,797 9,470,986
<TOTAL-COSTS> 37,822,213<F3> 126,983,612<F4>
<OTHER-EXPENSES> 1,749,101<F1> 8,655,607<F1>
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 349,202<F2> 1,459,795<F2>
<INCOME-PRETAX> 1,339,630 23,879,314
<INCOME-TAX> 2,078,665 10,870,236
<INCOME-CONTINUING> (739,035) 13,009,078
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (739,035) 13,009,078
<EPS-BASIC> (.05) .94
<EPS-DILUTED> (.05) .89
<FN>
<F1>REPRESENTS MINORITY INTEREST AND EQUITY IN JOINT VENTURE LOSS.
<F2>REPRESENTS NET INTEREST INCOME
<F3> INCLUDES A CHARGE OF $3,990,276 ($.29 PER DILUTED SHARE) RELATED TO THE
WRITE-OFF OF GOODWILL AND CAPITALIZED SOFTWARE COSTS.
<F4> INCLUDES A CHARGE OF $3,990,276 ($.27 PER DILUTED SHARE) RELATED TO THE
WRITE-OFF OF GOODWILL AND CAPITALIZED SOFTWARE COSTS.
</FN>
</TABLE>
