===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Form 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number 0-19690
BARRA, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2993326
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2100 Milvia Street
Berkeley, California 94704-1113
(Address, including zip code, of principal executive offices)
(510) 548-5442
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the registrant's Common Stock outstanding as of
June 30, 1999 was 14,109,655
<PAGE>
INDEX
PART I FINANCIAL INFORMATION
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 1999
(unaudited) and as of March 31, 1999
Unaudited Condensed Consolidated Statements of Income
for the Three Months Ended June 30, 1999 and 1998
Unaudited Condensed Consolidated Statements of Cash Flows
for the Three Months Ended June 30, 1999 and 1998
Notes to Condensed Consolidated Financial Statements
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3 Quantitative and Qualitative Disclosures About Market Risk
PART II OTHER INFORMATION
Item 1 Legal Proceedings
Item 4 Submission of Matters to a Vote of Security Holders
Item 6 Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS.
BARRA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 (UNAUDITED) AND MARCH 31, 1999
(In thousands except for share and per share amounts)
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $33,950 $31,343
Short-term investments........................... 18,455 17,229
Investment in municipal debt securities-
available for sale.............................. 6,534 6,498
Accounts receivable:
Subscription and other (Less allowance for
doubtful accounts of $504 and $526)... 18,537 20,774
Asset Management............................... 4,954 9,059
Related parties................................ 4,452 4,326
Prepaid expenses................................. 2,439 2,361
------------- -------------
Total current assets........................... 89,321 91,590
------------- -------------
Investments in unconsolidated companies............ 2,536 2,602
Premises and equipment:
Computer and office equipment.................... 23,017 21,272
Furniture and fixtures........................... 5,927 5,872
Leasehold improvements........................... 8,672 8,647
------------- -------------
Total premises and equipment................... 37,616 35,791
Less accumulated depreciation and amortization..... (18,704) (17,312)
------------- -------------
18,912 18,479
Deferred tax assets................................ 3,036 3,036
Computer software (less accumulated amortization
of $1,089 and $1,015).................... 1,916 958
Other assets....................................... 805 1,188
Goodwill and other intangibles (less accumulated
amortization of $5,256 and $4,691)....... 25,706 25,236
------------- -------------
Total.............................................. $142,232 $143,089
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $1,991 $2,288
Due to related party............................. -- 200
Accrued expenses payable:
Accrued compensation........................... 4,616 10,770
Accrued corporate income taxes................. 5,286 5,544
Accrued restructuring charges.................. 3,475 --
Other accrued expenses......................... 9,245 9,026
Unearned revenues................................ 25,452 23,790
------------- -------------
Total current liabilities...................... 50,065 51,618
------------- -------------
Deferred tax liabilities........................... 1,430 1,398
Minority interest in equity of subsidiary.......... 1,484 1,868
STOCKHOLDERS' EQUITY:
Preferred stock, no par; 10,000,000 shares
authorized; none issued and outstanding......... -- --
Common stock, $.0001 par value; 75,000,000
shares authorized; 14,109,655 and 14,012,852
shares issued and outstanding................... 1 1
Additional paid-in capital....................... 32,535 31,764
Retained earnings................................ 57,269 56,885
Accumulated other comprehensive income (loss).... (552) (445)
------------- -------------
Total stockholders' equity..................... 89,253 88,205
------------- -------------
Total.............................................. $142,232 $143,089
============= =============
</TABLE>
The accompanying notes are an integral part of the BARRA, Inc. Consolidated
Financial Statements
<PAGE>
BARRA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(In thousands except for share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-------------------------
1999 1998
------------ ------------
<S> <C> <C>
Operating Revenues:
Subscription and consulting
fees....................... $28,545 $26,790
Electronic trading........... 4,436 3,767
Asset management............. 5,052 5,356
------------ ------------
Total operating revenues... 38,033 35,913
------------ ------------
Operating Expenses:
Cost of subscription products 2,299 2,631
Compensation and benefits.... 21,142 16,748
Occupancy ................... 1,900 1,739
Other operating expenses..... 5,603 6,342
Restructuring charges 5,561 --
------------ ------------
Total operating expenses... 36,505 27,460
------------ ------------
Interest Income & Other........ 353 573
------------ ------------
Income before Equity
in Net Income and Loss of
Investees, Minority Interest
and Income Taxes............. 1,881 9,026
Equity in Net Income and Loss
of Investees................. (112) (250)
Minority Interest.............. (1,159) (1,356)
------------ ------------
Income before Income
Taxes........................ 610 7,420
Income Taxes................... (226) (2,894)
------------ ------------
Net Income .................... $384 $4,526
============ ============
Net Income Per Share:
Basic........................ $0.03 $0.33
============ ============
Diluted...................... $0.03 $0.31
============ ============
Weighted Average Common and
Common Equivalent Shares:
Basic........................ 14,061,307 13,746,850
============ ============
Diluted...................... 14,707,963 14,572,990
============ ============
</TABLE>
The accompanying notes are an integral part of the BARRA, Inc. Consolidated
Financial Statements
<PAGE>
BARRA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
----------------------------
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ....................................... $384 $4,526
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in net income and loss of investees... 112 250
Minority interest............................ 1,159 1,356
Depreciation and amortization................ 1,919 1,607
Amortization of computer software............ 87 181
Gains on marketable securities............... -- (250)
Non-cash restructuring charges............... 3,475 --
Other........................................ (19) 211
Changes in:
Accounts receivable - subscription and other. 2,237 (1,842)
Accounts receivable - asset management....... 4,105 (2,651)
Accounts receivable - related parties........ (126) (732)
Prepaid expenses............................. (78) 305
Other assets................................. 383 (68)
Accounts payable, due to related party
and accrued expenses........................ (6,736) (7,013)
Unearned revenues............................ 1,662 3,832
------------- -------------
Net cash provided (used) by operating activities.. 8,564 (288)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.............................. (2,870) (2,508)
Short-term investments - net...................... (1,226) (6,167)
Investment in municipal debt securities -
available for sale.............................. (36) (70)
Acquisitions - cash paid.......................... (1,053) (5,356)
------------- -------------
Net cash used in investing activities (5,185) (14,101)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments to minority shareholders................. (1,543) (1,520)
Proceeds from sale of common stock................ 771 910
------------- -------------
Net cash used in financing activities............. (772) (610)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,607 (14,999)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.. 31,343 33,673
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........ $33,950 $18,674
============= =============
OTHER CASH FLOW INFORMATION:
Cash paid during the period for:
Interest expense............................. $0 $6
Income taxes................................. $484 $1,221
</TABLE>
The accompanying notes are an integral part of the BARRA, Inc. Consolidated
Financial Statements
<PAGE>
BARRA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements
include the accounts of BARRA, Inc. (the Company, which may be
referred to as BARRA, we, us or our) and its wholly-owned
subsidiaries. All significant intercompany transactions and
balances have been eliminated. Certain reclassifications have
been made to prior period financial statements to conform to the
current period presentation.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements include all adjustments
(consisting of normal recurring entries) necessary to present
fairly the financial position of BARRA as of June 30, 1999 and the
results of its operations and cash flows for the periods presented
in conformity with generally accepted accounting principles. The
results of operations for the interim periods are not necessarily
indicative of results of operations for a full year. The
March 31, 1999 condensed consolidated balance sheet is derived
from the audited consolidated financial statements included in
BARRA's Annual Report on Form 10-K for the fiscal year ended
March 31, 1999 (Form 10-K), but does not include all disclosures
required by generally accepted accounting principles. We suggest
that these condensed consolidated financial statements be read in
conjunction with the audited consolidated financial statements and
related notes included in the Form 10-K and Management's
Discussion and Analysis of Financial Condition and Results of
Operations included in this Form 10-Q.
2. REDPOINT ACQUISITION
In June 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 us 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, we 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 us in the event certain key former employees of
Redpoint leave the Company 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.
3. RESTRUCTURING CHARGE
On April 19, 1999, our management announced a restructuring plan
to reduce the cost of operating our U.S. fixed income business and
focus future development and sales efforts on global and
enterprise-wide fixed income products. The restructuring plan
discontinued certain U.S. fixed income products and eliminated
various sales, client and product support positions and related
facilities within the U.S. Revenues from discontinued products
ceased on April 30, 1999. Customers who had prepaid subscriptions
for periods after April 30, 1999 will receive refunds on or before
August 31, 1999. Although the decision to discontinue these
products was made in April 1999, certain support activities will
continue through December 31, 1999. All termination notices and
benefits were communicated to the affected employees prior to
quarter-end. Revenues from discontinued products amounted to
approximately $8 million in fiscal 1999 or 5% of our total
revenues. Revenues from discontinued products included in the
accompanying condensed consolidated statements of income for the
three month periods ended June 30, 1999 and 1998 amounted to $.6
million and $2.0 million, respectively.
We recorded two significant charges in connection with the
restructuring plan. The first charge of approximately $4 million
($.27 per diluted share) was recorded in the quarter ended March
31, 1999. It consisted of non-cash charges for the write-off of
goodwill and capitalized software development costs related to our
1997 acquisition of a company engaged in the development of
products for the U.S. fixed income market. The second charge of
approximately $5.6 million ($.23 per diluted share) is recorded in
the quarter ended June 30, 1999. This charge consists of: a) $3.6
million in severance, termination benefits, and wages for certain
terminated employees retained exclusively for various periods up
until December 31, 1999 to support the discontinued products; b)
$1.3 million for non-cancelable services directly related to the
discontinued products including certain costs associated with
continuing to support the products up until their final
termination dates; and c) $.7 million in excess facilities costs
and other incremental expenses associated with discontinuing these
products. At June 30, 1999, approximately $3.5 million of the
$5.6 million in restructuring charges remained accrued. We expect
all but approximately $.5 million of such accrued amounts to be
paid out over the next two quarters as costs associated with
supporting these products will substantially cease on December 31,
1999.
4. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes foreign currency translation
gains and losses that have been previously excluded from net
income and reflected in equity. A summary of comprehensive income
(loss) follows:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net income .................. $384,000 $4,526,000
Other comprehensive loss:
Change in foreign
currency translation
adjustment during period.. (106,000) (125,000)
------------ ------------
Comprehensive income ....... $278,000 $4,401,000
============ ============
</TABLE>
5. SEGMENT INFORMATION
In 1999, we adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related
Information." Operating segments are defined as components of an
enterprise about which separate financial information is available
that is evaluated regularly by the chief operating decision maker
when deciding how to allocate resources and when assessing
performance. BARRA's chief operating decision making group is the
Executive Committee, which is comprised of the Chief Executive
Officer and certain other Executive Officers. BARRA currently
operates in three operating segments: Subscription and Consulting,
Asset Management and Electronic Trading.
Our business segments are organized on the basis of differences in
our 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. Our organizational structure reflects this segmentation.
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 restructuring charges, 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.
Our management does not identify or allocate its assets, including
capital expenditures, by operating segment. Assets are not being
reported by segment because the information is not available by
segment and is not reviewed by our Executive Committee to make
decisions about resources to be allocated to the segments when
assessing their performance. Depreciation and amortization is
allocated to segments in order to determine segment profit or
loss.
The following tables present information about reported segments
for the three month periods ended June 30, 1999 and 1998,
respectively:
<TABLE>
<CAPTION>
For the three months ended June 30, 1999:
---------------------------------------------------------------------
Subscription
and Electronic Asset Consolidated
Consulting Trading Management Other Total
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues..................... $28,545 $4,436 $5,052 $38,033
Segment expenses............ (17,223) (335) (2,501) (20,059)
Minority interest............ (1,159) (1,159)
------------- ------------- ------------- ------------- -------------
$11,322 $4,101 $1,392 $16,815
============= ============= ============= ============= =============
Research and development..... (6,083) (6,083)
General and administrative... (4,219) (4,219)
Restructuring charges........ (5,561) (5,561)
Amortization of intangibles.. (584) (584)
Interest and other........... 354 354
Equity in joint venture
gains (losses)............. (112) (112)
------------- ------------- ------------- ------------- -------------
Income (loss) before income
taxes...................... $11,322 $4,101 $1,392 ($16,205) $610
============= ============= ============= ============= =============
Depreciation and amortization $913 $30 $30 $450 $1,423
For the three months ended June 30, 1998:
---------------------------------------------------------------------
Subscription
and Electronic Asset Consolidated
Consulting Trading Management Other Total
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues..................... $26,790 $3,767 $5,356 $35,913
Segment expenses............ (14,891) (264) (2,234) (17,389)
Minority interest............ (1,356) (1,356)
------------- ------------- ------------- ------------- -------------
$11,899 $3,503 $1,766 $17,168
============= ============= ============= ============= =============
Research and development..... (5,090) (5,090)
General and administrative... (4,435) (4,435)
Amortization of intangibles.. (546) (546)
Interest and other........... 573 573
Equity in joint venture
gains (losses)............. (250) (250)
------------- ------------- ------------- ------------- -------------
Income (loss) before income
taxes...................... $11,899 $3,503 $1,766 ($9,748) $7,420
============= ============= ============= ============= =============
Depreciation and amortization $797 $25 $50 $375 $1,241
</TABLE>
6. PER SHARE DATA
In accordance with Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share" ("SFAS 128"), basic
earnings per share is based on the weighted-average number of
common shares outstanding for the period. Diluted earnings per
share data is based on the weighted-average number of common and
dilutive potential common shares outstanding. Dilutive potential
common shares result from the assumed exercise of outstanding
stock options that have a dilutive effect when applying the
treasury stock method. For all periods presented, the only
difference between basic and diluted earnings per share for the
Company is the inclusion of dilutive stock options in the
denominator for purposes of calculating diluted earnings per
share.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
This discussion and analysis and other parts of this Form 10-Q contain
forward looking statements that involve risk and uncertainties. These
forward-looking statements are made in reliance on safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. For
further information regarding how to identify forward looking statements
and the factors that could cause actual results to differ, please refer
to the information under the heading "Cautionary Factors That May Affect
Future Results" below. Any or all of the forward-looking statements
that we make in this Form 10-Q or any other public statements we issue
may turn out to be wrong. It is also important to remember that other
factors besides those we mention could also adversely affect us and our
business, operating results or financial condition.
A. GENERAL
Certain of the information required by this item has been previously
reported under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Form 10-K.
Redpoint Acquisition
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 us 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 based on
future Redpoint product sales through December 2000. In connection with
the amended purchase agreement, we 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 us in the event
certain key former employees of Redpoint leave the Company before
required employment periods. As a result, 45% of any royalties earned
are being recorded as compensation expense over the term of the required
employment. The remaining portion of royalties are being recorded as
additional goodwill.
Year 2000 Update
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.
"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.
"DUPs" refer to our internal proprietary systems that update
the data processed through most BARRA Products and some BARRA
Services.
"Y2K compliant" means that a product or system has file
structures and naming conventions that accommodate a date
transition to the next century without performance
interruption.
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.
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 July 31, 1999 of the
total number of labor hours, including internal and outside
personnel, required for each phase:
<TABLE>
<CAPTION>
Status as of July 31, 1999: Approximate
Phase Objective Percentage Complete (Target Deadline)
- ------------ -------------------------------------- ------------------------------------------------
<S> <C> <C>
Awareness Make each department aware of the Y2K 100% Complete for BARRA Products, DUPs and
problem, and convey management's BARRA Services.
commitment to BARRA's Y2K compliance
efforts to all departments.
Inventory Create comprehensive lists of each 100% Complete for BARRA Products, DUPs and
BARRA Product, DUP and BARRA Service. BARRA Services.
Assessment Assess the inventoried BARRA 100% Complete for BARRA Products, DUPs and
Products, DUPs and BARRA Services to BARRA Services.
determine what modifications or
enhancements are needed, if any.
Solution Plan the activities, develop the 100% Complete for BARRA Products, DUPs and
Design and schedule and estimate the costs of BARRA Services.
Planning Year 2000 modifications. In
addition, establish basic management
and development processes, along with
general standards and verification
techniques applicable to the Y2K
compliance tasks.
Development Execute the plans developed to 100% Complete for BARRA Products and BARRA
and achieve Y2K compliance. Services.
Modification DUPs: 80% (August 31, 1999)
Testing Test and verify Y2K compliance. BARRA Products: 99% (August 15, 1999)
DUPs: 66% (September 30, 1999)
BARRA Services: 100%
Distribution Deliver Y2K compliant BARRA Products BARRA Products: 89% (August 15, 1999)
and BARRA Services to clients. BARRA Services: 100%
DUPs: phase not applicable to DUPs
</TABLE>
As previously reported, 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, we increased
our internal staffing on the remaining DUP project phases and
decreased our reliance on, and augmented the efforts of, outside
contractors. Substantially all of our increased staffing comes
from our research and data management groups. To the extent
individuals within these groups 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.
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 issues. Except for the single
country fixed income products that BARRA has recently announced
will be discontinued during 1999, discontinued BARRA Products will
be replaced with more advanced software applications that are Y2K
compliant prior to the Year 2000.
We have now delivered questionnaires to substantially all of our
vendors that currently provide data for BARRA Products, DUPs, and
BARRA Services in order to assess their Y2K compliance efforts and
our related exposure. Substantially all of these vendors
responded to our questionnaires by July 31, 1999. However, our
Y2K inquiries will continue indefinitely to the extent that 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 June 30, 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 July 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 July 31,
1999, the awareness, inventory, assessment and solution design and
planning phases have been completed for the products and services
offered by these businesses. At July 31, 1999 the development and
modification phase for such products and services was 95% complete
(target completion: August 31, 1999) and the testing phase was
60% complete (target completion: September 30, 1999). 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 these vendor-supplied products or services. We have
made various inquiries (including written or verbal inquiries, or
review of website information) of substantially all of our
existing vendors whose products or services support such systems
in order to assess their Y2K compliance efforts and our related
exposure. Most information received in response to such inquiries
indicates that the system is currently delivered in a Y2K
compliant format, or will be prior to the Year 2000. We 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.
We estimate the total direct cost of the Y2K Project will be
approximately $11.0 million, which includes fees paid to outside
solution providers, the costs of repairing or replacing hardware
and the direct costs associated with our internal labor expenses.
The total amount we have incurred on the Y2K Project through June
30, 1999 was approximately $5.6 million, of which approximately
$2.9 million are costs associated with outside contractors. The
total amount we spent on the Y2K Project for the quarter ending
June 30, 1999 was approximately $2.3 million, of which
approximately $950,000 were costs associated with outside
contractors and another $350,000 related to special additional
internal costs. We anticipate that costs for outside contractors
and other special additional internal costs for the quarters
ending September 30, 1999 and December 31, 1999 will be
approximately $1.3 million and $1.1 million, respectively. Of the
total amount expended on the Y2K Project through June 30, 1999,
approximately $2.6 million related to internal labor expenses
(including approximately $350,000 of special incentive
compensation related directly to Y2K efforts), of which
approximately $1.4 million was spent during the quarter ending
June 30, 1999. We have spent a total of approximately $150,000 to
repair or replace hardware solely for Y2K compliance reasons
through June 30, 1999.
We estimate the future cost of completing the Y2K Project to be
approximately $5.4 million, of which approximately $2.0 million
relates to outside contractors, approximately $3.1 million relates
to internal labor expenses and approximately $340,000 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 sales in calendar
1999 caused by buyers of our products and services deferring
investments in our software products due to concerns regarding
Year 2000. Because Year 2000 related impacts on client purchasing
decisions are unprecedented, our ability to forecast the impact of
the Year 2000 issue on our quarter-to-quarter revenues is limited.
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.
We continue developing contingency plans to deal with Y2K problems
that arise despite our compliance efforts. In particular, we are
continuing deployment of 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 are being deployed in our
Berkeley office and our New York 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. 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, we are implementing a
preparedness plan under which key personnel will be placed on
standby from late December 1999 through the first week of January
2000 to address any Y2K issues that may arise. This will include
personnel from our sales and client support, facilities, software
engineering, information services and data management functions.
As part of our general disaster preparedness plan, we also expect
to have the ability to cover the critical business functions of a
BARRA office experiencing Y2K-related failures in at least one
other BARRA office. In addition, in the event that automated
financial data updates 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.
Foreign Currency and Business in Asia
As an international corporation, we generate revenue from clients
throughout the world, maintain sales and representative offices
worldwide and hold certain deposits and accounts in foreign
currencies. Our revenue is generated from both United States and
non-U.S. currencies. Prior to January 1, 1999 our subscriptions
in the United Kingdom and the European Community were priced in
British pounds sterling (pounds) and European Currency Units
(ECUs), respectively. Subsequent to December 31, 1998, European
Community subscriptions are priced in EMUs (Euro's).
Additionally, our consolidated subsidiary, BARRA International
(Japan), Ltd. (BARRA Japan), generates revenues, has expenses and
has assets and liabilities in Japanese yen.
The following table presents a summary of revenue by geographic region
for the three months ended June 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
----------------------------- -----------------------------
% of Total % of Total
Revenues Revenues Revenues Revenues
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
North America:
United States............ $24,843 65% $23,455 66%
Other.................... 792 2 718 2
-------------- -------------- -------------- --------------
Total North America...... 25,635 67 24,173 68
============== ============== ============== ==============
Europe:
United Kingdom........... 4,694 13 4,762 13
France................... 1,300 3 1,065 3
Germany.................. 1,300 3 1,145 3
Other.................... 239 1 290 1
-------------- -------------- -------------- --------------
Total Europe............. 7,533 20 7,262 20
============== ============== ============== ==============
Asia and Australia:
Japan.................... 3,517 9 2,925 8
Other.................... 1,348 4 1,553 4
-------------- -------------- -------------- --------------
Total Asia and Australia. 4,865 13 4,478 12
============== ============== ============== ==============
-------------- -------------- -------------- --------------
TOTAL $38,033 100% $35,913 100%
============== ============== ============== ==============
</TABLE>
We have customers and three sales and client support offices in
Asia. For the three months ended June 30, 1999, revenues from
Asia totaled approximately $4.3 million ($3.5 million in Japan),
or approximately 11% of total revenues. Excluding Japan, we bill
our customers in Asia in U.S. dollars and have nominal expenses in
local currencies. Recent volatility in Asian capital markets has
negatively impacted revenues and could adversely impact future
subscription renewals and related revenues for customers
throughout Asia.
All other things being equal, weakening of the U.S. dollar has a
positive impact on profits, and strengthening of the U.S. dollar
has a negative impact. We have considered our exposure to foreign
currency fluctuations and to this point have decided not to engage
in hedging or managing exposures to foreign currency fluctuations
through contracts for the purchase, sale or swapping of
currencies. Accordingly, a strengthening of the U.S. dollar versus
non-U.S. currencies could have a material adverse impact on our
results of operations and financial condition.
For the three month period ended June 30, 1999, when compared to
the same period a year ago, the U.S. dollar strengthened
significantly against the pound and Euro and weakened against the
yen - all of which had the net effect of increasing net revenues
and net income by approximately $135,000 and $25,000,
respectively, compared to exchange rates in effect for the three
month period ended June 30, 1998.
Because the functional currency of BARRA Japan is the yen, the
translation gains and losses associated with the consolidation of
its balance sheets at points in time are reported as part of
stockholders' equity.
Under current operating arrangements in the countries in which we
do business, there are no significant restrictions upon the flow
of funds from our foreign subsidiaries to the parent company.
B. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The dollar and percentage increases or decreases set forth below
in this discussion and analysis of our consolidated financial
condition result from a comparison of BARRA's balance sheet at
June 30, 1999 (unaudited) to the balance sheet at March 31, 1999.
Financial Condition
Total assets decreased $857,000 or 1%.
Total current assets decreased $2,269,000 or 2%. This net decrease
was primarily due to lower accounts receivable for subscription
and asset management sales. (Refer to the accompanying unaudited
condensed consolidated statement of cash flows for more
information on cash flows.)
Computer software increased $958,000 due to the purchase of a new
accounting and human resources system expected to be fully
implemented by January 2000.
Goodwill and other intangibles increased $470,000, net of related
amortization, as a result of additional payments made to Redpoint
in connection with the amended purchase agreement. (See Note 2 to
the accompanying condensed consolidated financial statements.)
Total current liabilities decreased $1,553,000 or 3%. This net
decrease primarily reflects lower accrued compensation as a result
of the payment of annual bonuses to employees in May 1999 offset
partially by increases in unearned revenue related to product
subscriptions and accrued expenses associated with the
restructuring plan announced in April 1999.
Minority interest in equity of subsidiary represents minority
equity interests in the net assets of Symphony LLC.
Liquidity and Capital Resources
Cash and cash equivalents, short-term investments and investment
in municipal debt securities available-for-sale totaled
$58,939,000 at June 30, 1999. 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.
We believe that our cash flow from operations (including prepaid
subscription fees), together with existing cash balances, will be
sufficient to meet cash requirements for capital expenditures and
other cash needs for ongoing business operations. Other than
commitments described in this discussion and analysis and in the
financial statements and notes, we have no present binding
understandings or commitments with respect to any significant
expenditures.
Principal Financial Commitments. Our principal financial
commitments consist of obligations under operating leases and
contracts for the use of computer and office facilities, possible
future royalties payable to Redpoint shareholders, possible future
consideration for the acquisition of Bond Express, and severance
and other related compensation 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
$10,000,000 of our common stock and has authorized up to $17
million in funds as "seed" investments for new asset management
products developed by Symphony or our Asset Services Group.
Approximately $7.0 million of that amount has not yet been
disbursed.
C. RESULTS OF OPERATIONS
References to the dollar and percentage increases or decreases set
forth below in this discussion and analysis of our results of
operations are derived from comparisons of our condensed
consolidated statements of income for the three month periods
ended June 30, 1999 and June 30, 1998.
Net Income. Net income for the three month period ended June 30,
1999 was $384,000 or $0.03 per share (diluted) compared to net
income of $4,526,000 or $0.31 per share (diluted) for the same
quarter a year ago. Results for the three month period ended June
30, 1999 included restructuring charges of $5,561,000 ($.23 per
diluted share).
Operating Revenues. Total operating revenues increased $2,120,000
or 6% compared to the same quarter a year ago.
Subscription and Consulting fees consist of annual subscription
fees for our software and investment data products, revenues from
other sources related to the institutional analytics business and
consulting services to pension plan sponsors and investment
managers. A summary of the components and related changes is as
follows (amounts in $000's):
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------------------------
1999 1998 %Change
-------- -------- --------
<S> <C> <C> <C>
Analytics subscriptions-
continuing products.... $19,195 $16,799 14
Analytics subscriptions-
discontinued fixed
income products........ 595 1,981 (70)
Other analytics related.. 1,002 1,327 (24)
Consulting............... 5,826 4,460 31
Investment Data Products. 1,927 2,223 (13)
-------- -------- --------
TOTAL.................... $28,545 $26,790 7
======== ======== ========
</TABLE>
Analytics Subscriptions are for our software and related updates.
We generally bill and collect fees on an annual basis, but
recognize the income 1/12th per month over each year of the
subscription period. The growth in annual subscription fees
continues to be generated from a combination of obtaining new
clients, increasing revenues from existing customers through the
introduction of new products and services, and acquisitions.
Revenue growth primarily came from equity models and related data
reflecting the continued success of the BARRA Aegis System?.
Various new single country and global enhancements of this equity
analytics system have been introduced during the past year. Sales
of the international versions of the fixed income products also
contributed as a result of sales of the BARRA COSMOS System?.
Increases in subscription revenues continue to come most
significantly from net increases in the number of subscriptions
and less significantly from changes in the prices of
subscriptions.
Revenues from discontinued fixed income products for the three
months ended June 30, 1999 represent amounts earned on these
products during April 1999 as we agreed to provide license and
support services free of charge from May 1, 1999 forward until the
product termination dates which range from October to December,
1999.
Other Analytics Related revenues associated with other
institutional analytics business sources include timesharing
revenues, seminar revenues and other recurring fees. Fluctuations
in these revenue sources result primarily from the timing of
seminars and the amount of timesharing billed to clients.
We anticipate that there will not be any significant improvements
in growth rates or in margins in the analytics businesses until
after the end of the calendar year. We base this projection on the
near term decline in fixed income revenues from discontinued
products, the additional costs associated with the Year 2000
remediation and testing, and the concern that there will be a
worldwide slowdown in software purchasing as the millennium
approaches.
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. Revenues from consulting services increased over the
same three month periods a year ago as a result of significant
growth in enterprise wide risk project revenue and modest growth
from investment consulting.
Investment Data Products (IDP) revenues consist of subscription
and other revenues from the sale of data and related software. The
IDP division had pre-tax losses on a fully allocated basis of $2.3
million for the three month period ended June 30, 1999. It is
anticipated that losses could continue at current levels until
sales of newly developed and enhanced products become significant.
We continue to consider various strategic alternatives for this
business.
Electronic Trading revenues consist of fees from licenses of the
Portfolio System for Institutional Trading (POSIT), which
increased $669,000 or 18% compared to the same quarter a year ago.
Our revenues from POSIT are derived from commissions generated by
the trading volume of the various licensees. POSIT revenue
increases reflect higher trading volumes as compared to the same
periods a year ago and new license fees from EuroPOSIT, the joint
venture established to operate the POSIT system in European equity
markets.
Asset Management revenues decreased $304,000 or 6% compared to the
same quarter a year ago. Asset management revenues consist of fees
generated from active management of investor accounts by Symphony
and fees earned by our Asset Services Group from management of
customized multi-manager programs.
Symphony's revenues consist primarily of asset management fees
which are a fixed percentage of asset value and performance fees
that are based on the performance over a benchmark for each
account. Symphony's total revenues were $4,819,000 for the
current quarter compared to $4,883,000 for the same period a year
ago. This net decrease in total revenues was the net result of
increases in base fees due to growth in assets under management
offset by lower performance fees. As of June 30 1999, Symphony had
approximately $3.1 billion under direct management. Of the funds
under direct management, approximately $2.1 billion are managed
under agreements that provide for performance fees in addition to
a base management fee.
Performance fees included in total revenues were $657,000 for the
current quarter and $1,384,000 for the same period a year ago.
Performance fees are recognized only at the measurement date for
determining performance of an account, which typically is at the
end of each year of the contract. Symphony's performance fees for
the June 1999 quarter were for accounts representing approximately
9% of the current total of assets subject to performance fees
compared to approximately 11% for the same quarter in the prior
year. The decrease in performance fee revenue for the June 1999
quarter over the same period a year ago was the result of an
increase in the value of investor account anniversaries offset by
a decrease in the net return for those investor accounts compared
to the same period a year ago. Assets under management subject to
performance fees have increased approximately $500 million or 30%
from June 30, 1998. The pattern of anniversaries can change from
quarter to quarter because of the addition, termination or re-
negotiation of account agreements. There is also, of course, no
assurance that the investment performance will continue at
historical levels. It is presently estimated that approximately
30% and 55% of the performance-based funds under management will
have performance fee determination dates in the quarters ended
September 30, 1999 and December 31, 1999, respectively.
Symphony's future revenues will depend on levels of assets under
management, the performance of the funds it manages and the timing
of anniversary fee determination dates for performance based
funds.
Operating Expenses. For the quarter ended June 30, 1999 compared
to the same quarter a year ago, total operating expenses,
including restructuring charges, increased $9,045,000 or 33%.
Excluding restructuring charges, operating expenses increased
$3,484,000 or 13%.
Cost of Subscription Products consists of computer access and
communication charges, data and software acquisition expenses,
BARRA's computer leasing expenses, and seminar expenses. This
component of expense decreased $332,000 or 13% compared to the
same quarter a year ago. This decrease is primarily the result of
lower computer access and data costs. Lower contract costs for
certain outside computer facilities and the write-off of certain
communication and data costs attributable to the discontinued
fixed income products both contributed to this decrease.
Compensation and Benefits increased $4,394,000 or 26% compared to
the same quarter a year ago. The increase from the same period a
year ago is primarily the result of: (a) annual salary adjustments
that take effect on July 1 each fiscal year; (b) increases in
incentive compensation including the effect of changes in the
pattern of accrual during each year; (c) an increase in total
average headcount; (d) increases in consultant costs associated
with Year 2000 and other projects; (e) increases in other related
employee benefit costs associated with more employees; and (f)
general cost increases.
External and other incremental costs associated with the Y2K
project and included in compensation and benefits were $1.3
million for the quarter ended June 30, 1999 compared to $190,000
for the quarter ended June 30, 1998. Y2K project costs for the
current quarter consisted of external costs for contractors of
$950,000 and special incentive compensation of $350,000. Costs
associated with the Y2K project are expected to be approximately
$1.3 million for the three month period ended September 30, 1999
after which such costs are expected to decline until Y2K project
completion. (See also "Year 2000 Update" in Part I, Item 2,
Management's Discussion and Analysis.)
Occupancy Expense increased $161,000 or 9% compared to the same
quarter a year ago. This increase reflects costs from acquired
operations plus new or expanded office space in London, New York,
San Francisco, Berkeley and Darien.
Other Operating Expenses decreased $739,000 or 12% compared to the
same quarter a year ago. Other operating expenses include travel,
office, maintenance, depreciation, amortization, data and other
expenses related to asset management operations, marketing,
advertising, outside legal and accounting services, foreign
currency translation gains and losses, and other corporate
expenses. Other operating expenses decreased from the same quarter
a year ago as a result of: a) lower data costs associated with
asset management operations due to decreased revenues; b) lower
printing and other general office expenses due to both a reduction
in publishing costs for certain products as well as the timing of
various product releases; c) lower foreign currency translation
losses; and d) lower professional service fees.
Restructuring Charge - On April 19, 1999, our management announced
a restructuring plan to reduce the cost of operating our U.S.
fixed income business and focus future development and sales
efforts on global and enterprise-wide fixed income products. The
restructuring plan discontinued certain U.S. fixed income products
and eliminated various sales, client and product support positions
and related facilities within the U.S. Revenues from discontinued
products ceased on April 30, 1999. Customers who had prepaid
subscriptions for periods after April 30, 1999 will receive
refunds on or before August 31, 1999. Although the decision to
discontinue these products was made in April 1999, certain support
activities will continue through December 31, 1999. All
termination notices and benefits were communicated to the affected
employees prior to quarter-end. Revenues from discontinued
products amounted to approximately $8 million in fiscal 1999 or 5%
of our total revenues. Revenues from discontinued products
included in the accompanying consolidated statements of income for
the three month periods ended June 30, 1999 and 1998 amount to $.6
million and $2.0 million, respectively.
We recorded two significant charges in connection with the
restructuring plan. The first charge of approximately $4 million
($.27 per diluted share) was recorded in the quarter ending March
31, 1999. It consisted of non-cash charges related to the write-
off of goodwill and capitalized software development costs related
to our 1997 acquisition of a company engaged in the development of
products for the U.S. fixed income market. The second charge of
approximately $5.6 million ($.23 per share) is recorded in the
quarter ended June 30, 1999 and consists primarily of wages,
severance, termination benefits and other costs associated
directly with supporting the discontinued products until their
final termination dates. (Refer to Note 3 in the accompanying
notes to the condensed consolidated financial statements for more
information on the restructuring charges.)
Interest income and other decreased $220,000 or 38% compared to
the same period a year ago as a result of lower unrealized gains
on short-term investments.
Equity in net income (loss) of investees represents losses from
our equity investments in Data Downlink Corporation and Risk
Reporting Limited.
Minority Interest primarily represents the share of profits from
Symphony Asset Management LLC that is due to the minority
shareholders.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
Our disclosure and analysis in this Form 10-Q contain several
forward-looking statements. Forward-looking statements give our
current expectations or forecasts of future events. You can
identify these statements by the fact that they do not relate
strictly to historical or current facts. They use words such as
anticipate, estimate, expect, project, intend, plan, believe,
designed, future, forecast, perceive, possible, potential,
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-Q or any other public statements we issue may turn out to
be wrong. They can be affected by inaccurate assumptions that we
might make or by known or unknown risks and uncertainties. Many
factors mentioned in this Form 10-Q will be important in
determining future results. Consequently, no forward looking
statement can be guaranteed. Actual future results may vary
materially.
We are under no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events
or otherwise. We suggest, however, that you consult any further
disclosures we make on related subjects in our Form 10-Q, 8-K and
10-K filings with the SEC. Our Form 10-K filing for the 1999
fiscal year listed various important factors that could cause
actual results to differ materially from expected and historic
results. We note these factors for investors as permitted by the
Private Securities Litigation Reform Act of 1995. Readers can
find them in Part I of that filing under the heading "Risk
Factors." We incorporate that section of that Form 10-K in this
filing and investors should refer to it. Those are factors that
we think could cause our actual results to differ materially from
expected and historical results. Other factors besides those
listed in our Form 10-K or elsewhere in this Form 10-Q could also
adversely affect us or our business. You should understand that
it is not possible to predict or identify all such factors.
Consequently, you should not consider any such list to be a
complete set of all potential risks or uncertainties.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates
primarily to the interest bearing portions of our direct investment
portfolio. We place our direct investments with high quality credit
issuers and, by policy, limit the amount of credit exposure to any one
issuer. Our first priority is to reduce the risk of principal loss.
Consequently, we seek to preserve our invested funds by limiting default
risk, market risk, and re-investment risk. We attempt to mitigate
default risk by investing only in high quality credit securities that we
believe to be low risk and by positioning our portfolio to respond
appropriately to a significant reduction in credit rating of any
investment issuer or guarantor. The direct investment portfolio includes
only marketable securities with active secondary or resale markets to
ensure portfolio liquidity. We do not use derivative financial
instruments in our investment portfolio.
Our direct interest bearing investment portfolio primarily consists of
investments in short-term, high-credit quality money market funds. These
investments totaled approximately $40.7 million at June 30, 1999 with an
average interest rate of 4.6%. At June 30, 1999, the portfolio also had
approximately $6.5 million of short-term, high credit quality municipal
debt securities with an average interest rate of 5.1%. 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 $11.7 million at June 30, 1999, are non-interest bearing
and consist principally of long and short positions placed directly (in
the case of funds managed by Symphony) or indirectly (in the case of
funds managed by our Asset Services Group) through other fund managers
in U.S and non-U.S. equity securities of both public and private
issuers. Although the intent of the managers of these funds is to
structure portfolios that are hedged against general market movements,
these investments can be subject to significant changes in market value
and are not insured. In both cases the managers may use derivative
financial instruments in connection with hedging activities. All
investment decisions with respect to these market neutral programs are
made by professional investment advisers and the performance of the
funds is reviewed periodically by our management and our Board of
Directors.
Foreign Currency Risk
We invoice customers in Europe in both pounds and euros. In Japan, we
bill our customers in Japanese Yen. Excluding customers in these
locations, we generally bill for our services in U.S. dollars. We have
not engaged in foreign currency hedging activities. To the extent we
invoice our customers in local currency (Yen, Pound and Euro), our
international revenues are subject to currency exchange fluctuation
risk. To the extent that international revenues that are invoiced in
local currencies increase in the future, our exposure to fluctuations in
currency exchange rates will correspondingly increase. Currency
fluctuations may also effectively increase the cost of our products and
services in countries in which customers are invoiced in U.S. dollars.
We have no foreign debt and non-U.S. dollar cash balances held overseas
are generally kept at levels necessary to meet current operating and
capitalization needs. The capitalization of BARRA Japan includes
approximately $6.7 million invested in a yen-denominated mutual fund.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
All information required by this item was reported under the
heading "Legal Proceedings" in our Form 10-K. There have been no
other material developments in our legal proceedings since the
date of our Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of the Shareholders of BARRA was held on Wednesday,
August 5, 1998.
The meeting was held to consider and vote upon (i) electing directors
to serve for the ensuing year and until their successors are duly
elected and qualified; and (ii) ratifying the selection of Deloitte &
Touche LLP as independent auditors of BARRA for the fiscal year ended
March 31, 1999. The votes cast with respect to each director are
summarized as follows: A. George Battle, for 7,692,252, withheld
3,063,776; John F. Casey, for 10,458,127, withheld 297,901; M. Blair
Hull, for 10,505,832, withheld 250,196; Norman J. Laboe, for
10,505,385, withheld 250,643; Ronald J. Lanstein, for 7,681,814,
withheld 3,074,214; Andrew Rudd, for 10,505,042, withheld 250,986. The
votes cast to ratify the selection of Deloitte & Touche LLP as
independent auditors are summarized as follows: for 10,685,261, against
12,751, abstain 58,016.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) the following exhibits are required by Item 601 of the Regulation
S-K:
Exhibit
Number Exhibit Description
- ------ -------------------
27.1 Financial Data Schedule
(electronic filing only)
(b) Reports on Form 8-K:
On April 23, 1999, we filed a Current Report on Form 8-K dated April
22, 1999 containing our press release announcing certain management
decisions about our product strategy.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
BARRA has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BARRA, Inc.
(Registrant)
Date: August 13, 1999 /s/ Kamal Duggirala
Kamal Duggirala, Chief
Executive Officer
Date: August 13, 1999 /s/ James D. Kirsner
James D. Kirsner, Chief
Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Description
27.1 Financial Data Schedule
(electronic filing only)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM CONDENSED CONSOLIDATED BALANCE SHEETS, CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 33,950
<SECURITIES> 24,989
<RECEIVABLES> 28,447
<ALLOWANCES> 504
<INVENTORY> 0
<CURRENT-ASSETS> 89,321
<PP&E> 37,616
<DEPRECIATION> 18,704
<TOTAL-ASSETS> 142,232
<CURRENT-LIABILITIES> 50,065
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 89,252
<TOTAL-LIABILITY-AND-EQUITY> 142,232
<SALES> 38,033
<TOTAL-REVENUES> 38,033
<CGS> 2,299
<TOTAL-COSTS> 34,206 <F3>
<OTHER-EXPENSES> 1,271 <F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (353)<F2>
<INCOME-PRETAX> 610
<INCOME-TAX> 226
<INCOME-CONTINUING> 384
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 384
<EPS-BASIC> 0.03
<EPS-DILUTED> 0.03
<FN>
<F1>MINORITY INTEREST SHARE OF NET INCOME AND LOSS ON EQUITY JOINT VENTURES
<F2>REPRESENTS NET INTEREST INCOME
<F3>INCLUDES RESTRUCTURING CHARGES OF 5,561,000 (.23 PER DILUTED SHARE)
</FN>
</TABLE>
