===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Form 10-Q/A
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1998
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
December 31, 1998 was 13,974,374
<PAGE>
INDEX
PART I FINANCIAL INFORMATION
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets as of December 31, 1998
(unaudited) and as of March 31, 1998
Unaudited Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended December 31, 1998 and 1997
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended December 31, 1998 and 1997
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 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS.
BARRA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998 (UNAUDITED) AND MARCH 31, 1998
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $20,857,464 $33,673,314
Short-term investments........................... 16,664,756 8,294,394
Investment in municipal debt securities-
available for sale.............................. 6,447,330 6,265,204
Accounts receivable:
Subscription and other (Less allowance for
doubtful accounts of $350,025 and $169,183)... 23,655,493 18,152,071
Asset Management............................... 11,766,208 2,449,324
Related parties................................ 4,103,181 3,855,057
Prepaid expenses................................. 3,017,395 1,965,819
------------- -------------
Total current assets........................... 86,511,827 74,655,183
------------- -------------
Investments in unconsolidated companies............ 2,722,772 2,128,532
Premises and equipment:
Computer and office equipment.................... 19,648,551 16,447,653
Furniture and fixtures........................... 5,845,050 5,006,947
Leasehold improvements........................... 8,918,878 6,677,300
------------- -------------
Total premises and equipment................... 34,412,479 28,131,900
Less accumulated depreciation and amortization..... (16,936,257) (13,513,701)
------------- -------------
17,476,222 14,618,199
Deferred tax assets................................ 2,282,522 2,282,522
Computer software (less accumulated amortization
of $1,689,176 and $1,051,275).................... 1,534,590 1,544,704
Other assets....................................... 1,029,767 1,463,824
Goodwill and other intangibles (less accumulated
amortization of $5,082,543 and $3,215,801)....... 28,495,608 24,767,142
------------- -------------
Total.............................................. $140,053,308 $121,460,106
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $2,866,857 $2,223,129
Due to related party............................. 62,675 1,079,199
Accrued expenses payable:
Accrued compensation........................... 7,444,059 9,663,688
Accrued corporate income taxes................. 6,646,843 4,884,113
Other accrued expenses......................... 7,129,900 7,211,705
Unearned revenues................................ 23,065,822 22,160,710
------------- -------------
Total current liabilities...................... 47,216,156 47,222,544
------------- -------------
Deferred tax liabilities........................... 1,730,173 1,486,362
Minority interest in equity of subsidiary.......... 3,825,153 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; 13,974,374 and 13,675,388
shares issued and outstanding................... 1,397 1,368
Additional paid-in capital....................... 29,899,161 27,829,967
Retained earnings................................ 57,623,772 43,875,659
Foreign currency translation adjustment.......... (242,504) (956,011)
------------- -------------
Total stockholders' equity..................... 87,281,826 70,750,983
------------- -------------
Total.............................................. $140,053,308 $121,460,106
============= =============
</TABLE>
The accompanying notes are an integral part of the BARRA, Inc. Consolidated
Financial Statements
<PAGE>
BARRA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE and NINE MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------- -------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating Revenues:
Subscription and consulting
fees....................... $28,786,503 $26,312,507 $83,814,890 $70,706,634
Electronic brokerage......... 3,905,894 2,474,830 12,191,709 7,839,192
Asset management............. 9,864,837 13,972,527 21,490,397 22,554,693
------------ ------------ ------------ ------------
Total operating revenues... 42,557,234 42,759,864 117,496,996 101,100,519
------------ ------------ ------------ ------------
Operating Expenses:
Cost of subscription products 2,197,059 2,151,763 7,156,189 5,337,191
Compensation and benefits.... 20,603,269 16,954,164 56,350,287 45,105,388
Occupancy ................... 1,892,833 1,397,947 5,514,995 3,948,129
Other operating expenses..... 7,489,733 7,734,077 20,139,928 18,683,048
One-time acquisition charges. -- -- -- 9,914,000
------------ ------------ ------------ ------------
Total operating expenses... 32,182,894 28,237,951 89,161,399 82,987,756
------------ ------------ ------------ ------------
Interest Income & Other........ 307,917 319,642 1,110,593 1,391,081
------------ ------------ ------------ ------------
Income before Equity
in Net Income and Loss of
Investees, Minority Interest
and Income Taxes............. 10,682,257 14,841,555 29,446,190 19,503,844
Equity in Net Income and Loss
of Investees................. 27,783 (5,000) (339,163) (29,118)
Minority Interest.............. (3,256,379) (5,132,980) (6,567,343) (6,915,748)
------------ ------------ ------------ ------------
Income before Income
Taxes........................ 7,453,661 9,703,575 22,539,684 12,558,978
Income Taxes................... (2,908,336) (4,045,975) (8,791,571) (9,489,934)
------------ ------------ ------------ ------------
Net Income (Loss).............. $4,545,325 $5,657,600 $13,748,113 $3,069,044
============ ============ ============ ============
Net Income (Loss) Per Share:
Basic........................ $0.33 $0.42 $0.99 $0.23
============ ============ ============ ============
Diluted...................... $0.31 $0.39 $0.94 $0.22
============ ============ ============ ============
Weighted Average Common and
Common Equivalent Shares:
Basic........................ 13,929,448 13,489,852 13,830,675 13,201,177
============ ============ ============ ============
Diluted...................... 14,644,804 14,509,595 14,592,137 14,182,470
============ ============ ============ ============
</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 NINE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss)................................. $13,748,113 $3,069,044
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Equity in net income and loss of investees... 339,163 29,118
Minority interest............................ 6,567,343 6,915,748
Depreciation and amortization................ 5,497,653 3,830,644
Gains on marketable securities............... (397,388) (250,000)
One-time acquisition charges................. 0 9,914,000
Other........................................ 747,414 (267,172)
Changes in:
Accounts receivable - subscription and other. (5,503,422) (3,007,352)
Accounts receivable - asset management....... (9,316,884) (10,537,769)
Accounts receivable - related parties........ (248,124) 501,795
Prepaid expenses............................. (1,051,576) (735,321)
Other assets................................. 434,057 (997,174)
Accounts payable, due to related party
and accrued expenses........................ (1,223,340) 569,384
Unearned revenues............................ 840,112 1,137,761
------------- -------------
Net cash provided (used) by operating activities.. 10,433,121 10,172,706
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.............................. (6,443,093) (7,016,956)
Short-term investments - net...................... (7,972,974) (2,122,201)
Investment in municipal debt securities -
available for sale.............................. (182,126) 4,110,097
Acquisitions - cash paid.......................... (5,356,031) (13,491,154)
Investments in unconsolidated companies........... (621,563) (1,803,559)
Repayments on note receivable..................... -- 2,105,836
------------- -------------
Net cash used in investing activities (20,575,787) (18,217,937)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments to minority shareholders................. (4,742,407) (3,271,688)
Repayments on notes payable and lines of credit... -- (713,022)
Proceeds from sale of common stock................ 2,595,673 1,695,216
Common stock repurchased.......................... (526,450) (782,900)
------------- -------------
Net cash used in financing activities............. (2,673,184) (3,072,394)
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS......... (12,815,850) (11,117,625)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.. 33,673,314 25,831,118
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........ $20,857,464 $14,713,493
============= =============
OTHER CASH FLOW INFORMATION:
Cash paid during the period for:
Interest expense............................. $13,052 $44,210
Income taxes................................. $7,028,841 $5,460,880
</TABLE>
The accompanying notes are an integral part of the BARRA, Inc. Consolidated
Financial Statements
<PAGE>
BARRA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the
accounts of BARRA, Inc. (the "Company" or "BARRA") and its wholly-
owned subsidiaries. Also included in the accompanying
consolidated financial statements are the accounts of, 1) Bond
Express, L.P. ("Bond Express"), in which the Company determined
it had controlling financial interest beginning June 1, 1996 (see
Note 7); and, 2) Symphony Asset Management, LLC ("Symphony
LLC"), a 50%-owned joint venture. All significant intercompany
transactions and balances have been eliminated. Certain
reclassifications have been made to prior year financial
statements to conform to the current year presentation.
In the opinion of management, the accompanying unaudited
consolidated financial statements include all adjustments
(consisting of normal recurring entries) necessary to present
fairly the financial position of BARRA as of December 31, 1998 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, 1998 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, 1998, filed with the Securities and Exchange Commission
on June 25, 1998 (the "Form 10-K"), but does not include all
disclosures required by generally accepted accounting principles.
It is suggested that these consolidated financial statements be
read in conjunction with the audited consolidated financial
statements and 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.
BUSINESS COMBINATIONS
On June 17, 1998, the Company completed the acquisition of
substantially all of the assets and assumption of certain
liabilities of Redpoint Software, Inc. ("Redpoint"). Redpoint
is a leading provider of integrated risk management solutions and
enterprise-wide data management systems. The purchase price was
$5.5 million in cash and 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.
The acquisition has been accounted for as a purchase and the cost
of the acquisition has been allocated on the basis of the
estimated fair value of assets acquired and liabilities assumed
and resulted in goodwill of approximately $5.5 million which is
being amortized over 10 years. Under the purchase method of
accounting, results of operations from acquired businesses are
included in the financial statements of the acquiring company from
the date of acquisition only. 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.
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.
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.
RECLASSIFICATION
Revenues from bond offering services provided by Bond Express,
L.P. of $415,328 and $1,177,066 for the three and nine months
ended December 31, 1997, respectively, have been reclassified in
the accompanying Consolidated Statement of Operations from
"Electronic Brokerage" to "Subscription and Consulting" to
conform with the current period presentation.
NEW ACCOUNTING STANDARDS
Comprehensive Income
Beginning with its 1999 fiscal year, the Company adopted SFAS No.
130, "Reporting Comprehensive Income" ("SFAS 130"), which
establishes standards for reporting and display of comprehensive
income and its components. In accordance with SFAS 130, the
Company has set forth in the table below the components of "Other
Comprehensive Income" and "Comprehensive Income":
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------- -------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Income (Loss)............ $4,545,325 $5,657,600 $13,748,113 $3,069,044
Other Comprehensive income
(loss):
Change in foreign
currency translation
adjustment during period.. 713,645 (403,685) (713,507) 176,703
------------ ------------ ------------ ------------
Comprehensive income (loss).. $5,258,970 $5,253,915 $14,461,620 $3,245,747
============ ============ ============ ============
</TABLE>
Segment Information
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"), which is effective for fiscal
years beginning after December 15, 1997. SFAS 131 establishes
standards for reporting financial and descriptive information
about an enterprise's operating segments in its annual financial
statements and selected segment information in interim financial
reports. The Company is presently in the process of evaluating
the impact, if any, of these requirements on the Company's
reporting. Although SFAS No. 131, if applicable, need not be
applied to interim financial statements in the initial year of
application, comparative information for interim periods of fiscal
1999 will be reported in the Company's interim financial
statements in fiscal 2000. Further, if applicable, all comparative
information for prior periods will be restated to conform to the
provisions of SFAS 131. Application of the disclosure
requirements of SFAS 131 will have no impact on the Company's
consolidated financial position, results of operations or earnings
per share data as currently reported.
SUBSEQUENT EVENT
On January 11, 1999, BARRA completed its acquisition of Bond
Express, L.P. ("Bond Express"). The transaction superseded the
terms of BARRA's 1995 minority investment in Bond Express and was
accomplished in two steps. The Company, which was the sole
limited partner of 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 assets and liabilities
into BARRA, where the Investment Data Products Group will absorb
the business. The purchase price was for $1,000,000 payable in
equal monthly installments over the next two years, plus certain
contingent consideration based upon total revenues from Bond
Express products earned during the Year 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 throughout the year 2000, the contingent
consideration is not expected to be less than $1,000,000.
The results of operations and financial position of Bond Express
are not material and 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.
The initial consideration of $1,000,000 plus any future contingent
consideration is expected to result in additional goodwill of
similar amounts and will be amortized over a period of 10 years.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion and analysis should be read in
conjunction with the BARRA, Inc. ("BARRA" or the "Company")
unaudited financial statements and related notes presented in this
Form 10-Q. The discussion of results, causes or trends should not
be construed to imply that such results, causes or trends will
necessarily continue in the future. The following discussion and
analysis of the Company's financial condition and results of
operations contains forward-looking statements as defined by the
Private Securities Litigation Reform Act of 1995. Each statement
made in this discussion and analysis and elsewhere in this report
containing any future verb tense or form of the words
"anticipate", "estimate", "expect", "designed",
"believe", "future", "forecasts", "intends", "perceives",
"possible", "potential", "targeted", "may", "plan",
"scheduled", "would", "could", "should", or "forward" or
similar expression is a forward-looking statement that may involve
a number of risk factors and uncertainties. The Company does not
undertake to update, revise or correct the forward-looking
information. Among other factors that could cause actual results
to differ materially are the following: business conditions and
other changes in the Company's industry; competitive factors such
as rival products and price pressures both domestically and
internationally; availability of adequate third-party data on
reasonable terms and at reasonable prices; significant delays or
excessive costs associated with product research, development
and/or introduction; the loss of a large single revenue source;
the investment performance and the timing of performance fee
determination dates for the Company's asset management businesses;
significant changes in trading volumes on the POSIT trading
system; the ability of software, data and other systems to
accommodate date changes after December 31, 1999 (as further
discussed below in this section under "General- Year 2000"); the
adoption of the Euro Currency (as further discussed below in this
section under "General - European Monetary Union ("EMU")");
and fluctuations in U.S. dollar exchange rates for non-U.S.
currencies. Further information and potential risk factors that
could affect the Company's financial results are included
throughout this Form 10-Q and in the Company's Form 10-K for the
fiscal year ended March 31, 1998.
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
As discussed in Note 2 to the financial statements, on June 17,
1998 the Company completed the acquisition of substantially all of
the assets and assumption of certain liabilities of Redpoint. The
purchase price was for $5.5 million in cash and 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. The acquisition has been accounted for as a purchase and
the cost of the acquisition has been allocated on the basis of the
estimated fair value of assets acquired and liabilities assumed
and resulted in goodwill of approximately $5.5 million which is
being amortized over 10 years.
Year 2000
The Year 2000 issue, also known as the "millennium bug" or the
"Y2K" problem, refers to the inability of many computer systems
and other equipment with computer chips to accurately process
dates in the Year 2000 and beyond. This occurs because many
software programs have been coded using a six-digit date format
(MM/DD/YY) that identifies a year as a two-digit field rather than
a four-digit field. As used below, the term "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.
The following discussion of the Y2K Project (as defined below),
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) are based upon
management estimates that are derived utilizing numerous
assumptions of future events. Such estimates are subject to
uncertainties that could cause actual results to differ materially
from such estimates. There can be no guarantee that any such
estimates will be achieved, or that there will not be a delay 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: the success and timeliness of the Company in identifying all
relevant software code data and other affected product features
and functions, the nature and amount and adequacy of programming
and research required to accommodate the year 2000 date change,
the timely responses to and corrections by third parties, the
ability to implement interfaces between any new systems and those
systems not being replaced, the rate and magnitude of labor and
consulting costs associated with the Y2K Project, the availability
and cost of personnel for the Y2K Project and other resources and
the success and timeliness of the Company's vendors and other
third parties with whom the Company has business relationships in
addressing the Y2K problem, and other uncertainties. Due to the
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, the Company
cannot make any assurances regarding its ability to timely and
cost-effectively resolve problems associated with the Year 2000
issue. Failure to resolve these problems may affect its results
of operations, liquidity and financial condition, or expose it to
third party liability.
State of Readiness. The Company must address the potential
effects of the Y2K problem on its core institutional analytics and
other products and services that consist of software applications
and proprietary databases. In addition, the Company's other
systems, including its internal hardware and software systems as
well as embedded systems contained in its non-information
technology systems, must be separately addressed. Accordingly,
the discussion below describes the Company's Year 2000 efforts
with respect to its products and services as well as its other
systems. As used below, the term "BARRA Products" refers to the
Company's software applications that allow users to access the
Company's risk, valuation and other proprietary models and
databases, but excludes the Company's proprietary data update
processes as well as third party technology, joint venture
technology and data embedded in such BARRA Products. "DUPs"
refers to the Company's internal proprietary systems that update
the data processed through the BARRA Products. "BARRA Services"
refers to the consulting services offered by the Company's
Analytics Consulting group, BARRA RogersCasey, Inc. and BARRA
Strategic Consulting Group, Inc. as well as the asset management
services provided through BARRA RogersCasey Asset Services Group,
Inc., but excludes asset management and other services provided by
various partnerships and joint ventures in which the Company
participates but is not the principal operator.
In 1997, the Company assembled a Year 2000 project team comprised
of internal and outside professionals to review and identify areas
that may be adversely affected by Y2K problems. The project team
has formulated a Year 2000 project plan to achieve the objectives
of (i) testing substantially all BARRA Products and BARRA Services
that the Company anticipates selling and supporting as of January
1, 2000 for Y2K compliance by March 31, 1999 and (ii) testing
BARRA's other systems for Y2K compliance by the end of September
1999 (the "Y2K Project"). The scope of the Y2K Project covers
the BARRA Products, DUPs, BARRA Services and third party and joint
venture products and other systems (including hardware, software,
embedded systems and other products supporting the Company's
infrastructure).
The Company has adopted seven phases for the Y2K Project as it
relates to those BARRA Products, DUPs and BARRA Services that the
Company anticipates selling and supporting as of January 1, 2000,
as described in the table below. The percentages and target
deadlines are based upon estimates at January 31, 1999 of the
total number of labor hours, including internal and outside
personnel, required for completion of each phase:
<TABLE>
<CAPTION>
Status as of January 31, 1999: Approximate
Phase Objective Percentage Complete (Target Deadline)
- ------------ -------------------------------------- ------------------------------------------------
<S> <C> <C>
Awareness Make each department aware of the Y2K 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 Complete for BARRA Products, DUPs and BARRA
BARRA Product, DUP and BARRA Service. Services.
Assessment Assess the inventoried BARRA BARRA Products: Complete
Products, DUPs and BARRA Services to DUPs: 40% (April 30, 1999)
determine what modifications or BARRA Services: Complete
enhancements are needed, if any.
Solution Plan the activities, develop the BARRA Products: Complete
Design and schedule and estimate the costs of DUPs: 45% (May 31, 1999)
Planning Year 2000 modifications. In BARRA Services: 90% (February 28, 1999)
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 BARRA Products: 90% (March 31, 1999)
and achieve Y2K compliance. DUPs: less than 40% (June 30, 1999)
Modification BARRA Services: 65% (March 31, 1999)
Testing Test and verify Y2K compliance. BARRA Products: 75% (April 30, 1999)
DUPs: 14% (July 31, 1999)
BARRA Services: 15% (April 30, 1999)
Distribution Deliver Y2K compliant BARRA Products BARRA Products: 65% (May 15, 1999)
and BARRA Services to clients. DUPs: phase not applicable to DUPs
BARRA Services: phase not begun (May 31, 1999)
</TABLE>
While the Company's testing methodology varies depending upon the
relevant testing requirements, the Company generally tests 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.
The seven phases described above cover only those BARRA Products
that the Company anticipates selling and supporting as of January
1, 2000. The Company intends to deliver Y2K compliant versions of
such BARRA Products via regular maintenance services provided to
its client base. Decisions to discontinue other BARRA Products
prior to the Year 2000 will be made in the ordinary course of
business and are not expected to be based solely upon Year 2000
issues. The Company expects that all discontinued BARRA Products
will be replaced with more advanced software applications which
are Y2K compliant prior to the Year 2000.
The 65% completion percentage for BARRA Services in the
Development and Modification phase has decreased from the 80%
completion percentage reported in the Company's Form 10-Q for the
quarterly period ending September 30, 1998. This decrease was
caused by a recent decision, for non-Y2K reasons, to retain two
software programs currently used in connection with the Company's
consulting services that previously had been scheduled for
replacement.
The target completion dates for the Assessment, Solution Design
and Planning and Development and Modification project phases
applicable to DUPs have been delayed due to focused efforts to
bring certain DUPs through the testing phase before addressing
other DUPs in earlier phases. BARRA, however, continues to expect
completion of testing of DUPs by July 31, 1999, after which data
will be processed through, and distributed from, Y2K compliant
DUPs.
The Y2K Project includes the process of identifying and
prioritizing critical data vendors, and communicating with them
about their plans and progress in addressing the Y2K problem.
Accordingly, the Company has delivered questionnaires to each of
its vendors that currently provides data for the BARRA Products,
DUPs and BARRA Services in order to assess their Y2K compliance
efforts and the Company's related exposure. Approximately 85% of
such vendors had responded to such questionnaires at December 31,
1998. Most responses include statements that the data delivered
to the Company is currently, or will be prior to the Year 2000,
delivered in a Y2K compliant format. In instances where a
vendor's response indicates that its data is not currently
delivered in a Y2K compliant format, the Company has requested
that test data be made available when such vendor's data is
rendered Y2K compliant. While there can be no assurance regarding
the availability of any such test data, the Company expects that
most vendors will make such test data available by early 1999. In
addition, substantially all of the data received from such vendors
is indirectly tested by the Company for Y2K compliance as part of
the Company's Y2K compliance testing of BARRA Products, DUPs and
BARRA Services. Because no single purchaser of BARRA Products or
BARRA Services accounts for more than 2% of the Company's revenues
at December 31, 1998, the Company currently intends to review the
Y2K compliance of only its thirty largest customers by March 31,
1999.
The Y2K Project includes some review of the asset management
businesses of Symphony Asset Management, Inc., a wholly owned
subsidiary of the Company ("Symphony Inc."), and Symphony Asset
Management LLC, a 50% subsidiary of Symphony, Inc. ("Symphony
LLC" and, collectively with Symphony, Inc., "Symphony") as well
as the Portfolio System for Institutional Trading and similar
electronic brokerage systems ("POSIT Systems"). Because the
Company is not the principal operator of Symphony or the POSIT
Systems, the Company is only indirectly involved in reviewing
these businesses for Y2K compliance. Based on information
available to the Company, as of January 31, 1999, the approximate
completion percentages (and target deadlines) with respect to
these businesses were as follows: Awareness: 100%; Inventory:
100%; Assessment: 95% (February 28, 1999); Solution Design and
Planning: 70% (June 30, 1999); Development and Modification: 60%
(August 31, 1999); Testing: 10% (September 30, 1999). The
Distribution phase is inapplicable to these businesses. The Y2K
Project does not cover the businesses of other various
partnerships and joint ventures in which the Company participates
but is not the principal operator.
With respect to the Company's other systems, BARRA is
substantially dependent upon outside vendors for its internal
hardware (such as computer equipment and phone systems), software
(such as operating systems, software supporting BARRA Products,
DUPs and BARRA Services, software for its payroll, accounting and
other support systems) and other systems, including non-
information technology microcontrollers embedded in equipment and
machinery (such as elevators). The Company is in the process of
distributing questionnaires to each of its existing vendors whose
products or services support its other systems in order to assess
their Y2K compliance efforts and the Company's related exposure.
The Company currently estimates that it will complete assessment
and remediation of any Y2K compliance problems identified by the
responses to such questionnaires by September 30, 1999. However,
the Company's Y2K efforts relating to its other systems will
continue indefinitely to the extent that the Company acquires new
components for, or makes modifications or improvements to, its
existing internal systems. The Company expects to replace those
components which are not identified as Y2K compliant with
compliant versions from either the same or alternate vendors.
In addition to infrastructure-related software and systems
supported by outside sources, the Y2K Project includes an analysis
of Delphi, the Company's internally developed software used to
track its client contacts and manage its orders and invoices,
client support and distribution systems.
Costs. The estimated total cost of the Y2K Project is
approximately $6.0 million, which includes fees paid to outside
solution providers, the costs of repairing or replacing hardware
and the costs associated with the Company's internal labor
expenses. The total amount expended on the Y2K Project through
the three months and nine months ending December 31, 1998 was
approximately $1.5 million and $2.3 million, respectively, of
which approximately $800,000 and $1.3 million, respectively,
consist of costs associated with outside contractors. It is
anticipated that costs for outside contractors for the quarter
ending March 31, 1999 and June 30, 1999 will be approximately $1.3
and $1.2 million, respectively, and then it is anticipated these
costs will decline as December 31, 1999 approaches. Of the total
amount expended on the Y2K Project for the nine months ending
December 31, 1998, approximately $930,000 related to internal
labor expenses. The estimated future cost of completing the Y2K
Project is approximately $3.7 million, of which approximately $2.7
million relates to outside contractors, approximately $570,000
relates to internal labor expenses and approximately $430,000
relates to the cost of repairing or replacing hardware. Internal
labor costs include the salaries of those employees other than
senior management who devote a portion of their time to the Y2K
Project.
The foregoing costs include those costs incurred by the Company in
connection with its review of the Y2K compliance of Symphony and
the POSIT Systems, but exclude the Company's potential share of
other costs that may be incurred by those and other various
partnerships and joint ventures in which the Company participates
but is not the principal operator. The Company expenses costs of
the Y2K Project during the period in which they are incurred.
Funds for the Y2K Project are provided from the Company's
available cash resources, including cash provided from operations
and short-term investments. The Company does not expect funds
necessary for completion of the Y2K Project to be in excess of
such available cash resources.
Risks. The failure to correct a material Y2K problem could result
in an interruption in, or a failure of, certain normal business
activities, operations or systems. Such failures could materially
and adversely affect the Company's results of operations,
liquidity and financial condition. The Company's data vendors,
for example, may be unable to provide timely and accurate data as
a result of the Y2K problem. In addition, most BARRA Products and
some BARRA Services require data processed by DUPs and,
consequently, any Y2K problems affecting DUPs will adversely
affect BARRA Products. Since the underlying financial data
received from vendors and/or processed by DUPs fuel BARRA Products
and/or BARRA Services, any inability to receive accurate data, as
well as timely data updates, could significantly undermine the
quality of the Company's risk, valuation and other proprietary
models and databases, as well as the quality and timely delivery
of the BARRA Products and BARRA Services. Because the Company
derives significant revenue from licenses for its software
applications, the Company generally faces additional risks of
product disruption and potential liability not applicable to non-
software providers. In addition, the BARRA Products scheduled to
be discontinued for which full replacements are not currently
available represent approximately 2% of the estimated total annual
operating revenues for fiscal year 1999. To the extent that
customers receiving the discontinued BARRA Products elect not to
await their replacements and instead terminate their
subscriptions, the Company will lose the revenues associated with
such subscriptions.
Due to the general uncertainty inherent in the Y2K problem,
resulting in part from the uncertainty of the Year 2000 readiness
of vendors and other third parties (including joint venture
partners) with whom the Company has business relationships, the
Company is unable to determine at this time whether the
consequences of the Y2K problem will have a material impact on the
Company's results of operations, liquidity or financial condition.
The Y2K Project is expected to significantly reduce the Company's
level of uncertainty about the Y2K problem and, in particular,
about the compliance and readiness of its material third parties
with whom the Company has business relationships. The Company
believes that, assuming the successful completion of the Y2K
Project as currently scheduled, the possibility of significant
interruptions of normal operations should be reduced.
Contingency Plans. The Company's Y2K project team is continuing
to develop contingency plans in the event that Y2K problems arise
despite the Company's compliance efforts. In particular, the
Company intends to identify potential replacements for vendors
supporting certain of its BARRA Products, DUPs and BARRA Services
and expects to continue identifying such replacements throughout
1999. In addition, in the event that automated data updates
supporting the Company's and Symphony's asset management services
fail as a result of Y2K non-compliance, the Company's and
Symphony's employees may execute the updates manually, to the
extent available. In the event that the products and services of
vendors supporting the Company's other systems are not Y2K
compliant, the Company intends to replace such products and
services through upgrades or replacements. There is no assurance,
however, that any potential replacements of vendors supporting
BARRA Products, DUPs, BARRA Services or other systems will be
available, that their products and services will be Y2K compliant
or that the Company will be able to quickly incorporate such
products and services into its own businesses.
As a result of their status as a registered investment adviser or
broker-dealer, certain of the Company's subsidiaries and
affiliates are subject to specific reporting requirements
promulgated by the Securities and Exchange Commission and must
file publicly available Y2K reports. Additional information
regarding the Company's Y2K compliance efforts may be found in
such reports.
European Monetary Union ("EMU")
On January 1, 1999 the EMU replaced certain European currencies
with the "Euro". As of January 31, 1999 the Company had
delivered EMU-compatible software for all of its principal global
equity and fixed income products. Certain changes to the Company's
data update processes were also necessitated by the introduction
of the Euro. These data update process revisions were complete as
of January 31, 1999. Costs associated with EMU modifications are
expected to total approximately $.5 million, substantially all of
which related to internal labor costs. Costs associated with the
completion of EMU modifications during the quarter ended March 31,
1999 are not expected to be significant.
Foreign Currency and Business in Asia
BARRA, as an international corporation, generates revenues from
clients throughout the world, maintains sales and representative
offices worldwide and holds certain deposits and accounts in
foreign currencies. BARRA's revenues are generated from both
United States and non-U.S. currencies. Prior to January 1, 1999
BARRA's subscriptions in the United Kingdom and the European
Community are priced in British pounds sterling ("pounds") and
European Currency Units ("ECUs"), respectively. Subsequent to
December 31, 1998, European Community subscriptions are priced in
EMUs. Additionally, BARRA's consolidated subsidiary, BARRA
International (Japan), Ltd. ("BARRA Japan"), generates revenues,
has expenses and has assets and liabilities in Japanese yen.
The Company has customers and three sales and client support
offices in Asia. For the three and nine months ended December 31,
1998, revenues from Asia totaled approximately $4.0 million and
$11.6 million ($3.1 million and $8.9 million in Japan),
respectively, or approximately 10% of total revenues. Excluding
Japan, the Company bills its customers in Asia in US dollars and
has 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. The Company has considered its exposures
to foreign currency fluctuations and to this point has decided not
to engage in hedging or managing exposures to foreign currency
fluctuations through contracts for the purchase, sale or swapping
of currencies. Accordingly, a strengthening of the U.S. dollar
versus non-U.S. currencies could have a material adverse impact on
the Company's results of operations and financial condition.
For the three month period ended December 31, 1998, when compared
to the same period a year ago, the U.S. dollar weakened
significantly against the yen and was relatively unchanged against
the pound and ECU - all of which had the net effect of increasing
net revenues and net income by approximately $125,000 and $25,000,
respectively, compared to exchange rates in effect for the three
month period ended December 31, 1997.
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
BARRA does business, there are no restrictions upon the flow of
funds from BARRA's 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 BARRA's consolidated financial
condition result from a comparison of BARRA's balance sheet at
December 31, 1998 (unaudited) to the balance sheet at March 31,
1998. All amounts have been rounded to the nearest $1,000.
Financial Condition
Total assets increased $18,593,000 or 15%.
Total current assets increased $11,863,000 or 16%. This net
increase consists primarily of decreased cash and equivalents
resulting from investing activities which, in turn, were offset by
increases in trade and other receivables associated with increases
in sales and asset management fees. See the accompanying
unaudited condensed consolidated statement of cash flows for more
information.
Premises and equipment increased $6,281,000 or 22%. This increase
reflects computer and other communication equipment purchases
associated with ongoing internal network upgrade projects, growth
in headcount, and purchases related to the Company's Y2K Project.
In addition, the Company undertook office relocation expansions in
London, New York, San Francisco and Berkeley during the past nine
months.
Goodwill and other intangibles increased $3,728,000, net of
related amortization, as a result of the Redpoint purchase
discussed in Note 2 to the accompanying condensed consolidated
financial statements.
Total current liabilities decreased $6,000. This net decrease
primarily reflects growth in BARRA product subscriptions, changes
in the level of accrued income taxes based on the timing of income
and estimated payments, offset by decreases in accrued
compensation, as a result of the payment of annual bonuses to
employees in May 1998, and amounts due to a related party as a
result of payments associated with the termination of a joint
venture.
Minority interest in equity of subsidiary represents minority
equity interests in the net assets of Bond Express and Symphony
LLC.
Liquidity and Capital Resources
Cash and cash equivalents, short-term investments and investment
in municipal debt securities available-for-sale totaled
$43,970,000 at December 31, 1998. In addition, the Company has a
commitment from a bank for an unsecured short-term line of credit
of up to $5 million - of which no amounts have been, or are
presently anticipated to be, drawn down.
BARRA believes that its cash flow from operations (including
prepaid subscription fees), together with existing cash balances,
will be sufficient to meet its cash requirements for capital
expenditures and other cash needs for ongoing business operations.
Other than commitments described in this discussion and analysis
and in the financial statements and notes, the Company has no
present binding understandings or commitments with respect to any
significant expenditures.
Principal Financial Commitments. The Company's principal
financial commitments consist of obligations under operating
leases, contracts for the use of computer and office facilities
and contingent payments associated with certain business
combinations (see Notes 2 and 7 in the accompanying unaudited
consolidated financial statements).
C. RESULTS OF OPERATIONS
References to the dollar and percentage increases or decreases set
forth below in this discussion and analysis of BARRA's results of
operations are derived from comparisons of BARRA's consolidated
statements of operations for the three and nine month periods
ended December 31, 1998 and December 31, 1997. All amounts, except
per share amounts, have been rounded to the nearest $1,000.
Net Income (Loss). Net income for the three month period ended
December 31, 1998 was $4,545,000 or $0.31 per share (diluted),
compared to net income of $5,658,000 or $0.39 per share (diluted)
for the same quarter a year ago. Net income for the nine month
period ended December 31, 1998 was $13,748,000 compared to net
income of $3,069,000 for the same period a year ago. Results for
the nine month period ended December 31, 1997 included a one-time
acquisition charge of $9,914,000 ($.70 per share) related the
write-off of in-process research and development in connection
with the acquisition of Global Advanced Technology Corporation
("GAT").
Operating Revenues. Total operating revenues decreased $203,000 or
1% compared to the same quarter a year ago and increased
$16,396,000 or 16% compared to the same nine month period a year
ago. Operating revenues from GAT (acquired on June 17, 1997) and
the TED and Directus assets (acquired on October 9, 1997) included
in the three and nine months ended December 31, 1998 were
$2,772,000 and $8,375,000, respectively.
Subscription and Consulting fees consist of annual subscription
fees for BARRA's 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 Nine Months Ended
December 31, December 31,
-------------------------- --------------------------
1998 1997 %Change 1998 1997 %Change
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Analytics subscriptions.. $19,884 $17,504 14 $57,828 $49,533 17
Other analytics related.. 996 1,319 (24) 4,029 3,860 4
Consulting............... 5,780 5,274 10 15,495 14,630 6
Investment Data Products. 2,127 2,216 (4) 6,463 3,099 109
-------- -------- -------- -------- -------- --------
TOTAL.................... $28,787 $26,313 9 $83,815 $71,122 18
======== ======== ======== ======== ======== ========
</TABLE>
Analytics Subscriptions are for BARRA's software and related
updates. The Company generally bills and collects fees on an
annual basis, but recognizes 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 versions of this equity
analytics system have been introduced continuously since July
1995. 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.
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.
It is anticipated that there will not be any significant
improvements in growth rates or in margins in the analytics
businesses until the new U.S. fixed income products are released
and sales have commenced, new enterprise risk management projects
are sold and installed, and the Y2K Project is completed.
Consulting Fees consist of services to pension plan sponsors
("Sponsor Services") which are usually recurring retainer-based
fee arrangements; and consulting to money managers, banks and
insurance companies ("Strategic and Risk Services"), which are
usually non-recurring, project engagements that are completed in
phases. Also included in Strategic and Risk Services revenues are
fees related to consulting work done in connection with strategic
transactions involving clients. Accordingly, Strategic and Risk
Services revenues are susceptible to a large degree of variability
depending on the ability to source new projects and the
unpredictable nature and significance of fees associated with
strategic transactions. Revenues from consulting services
increased over the same three and nine month periods a year ago as
a result of significant growth in enterprise wide risk project
revenue and modest growth from sponsor consulting.
Investment Data Products ("IDP") revenues consist of
subscription and other revenues from the sale of data and related
software. IDP was set up to extend the BARRA franchise into new
market segments and broaden the range of BARRA users within its
existing customer base. The Internet will be IDP's principal
channel of distribution for subscription-based packages of
proprietary data, third party and analytics in addition to various
vendor distribution arrangements. The division will be a
distributor of BARRA Risk Data and has subsumed the Investworks,
Bond Express, Estimate Directory and Directus businesses.
The IDP division had pre-tax losses on a fully allocated basis of
$1.6 million and $4.2 million for the three and nine month periods
ended December 31, 1998, respectively. It is anticipated that
losses will continue at current levels until the development of
new and enhanced products is completed and sales of those products
have commenced, which is expected to be at least six months from
now.
Electronic Brokerage revenues consist of licnse fees from
Portfolio System for Institutional Trading ("POSIT"), which
increased $1,431,000 or 58% compared to the same quarter a year
ago and $4,768,000 or 64% compared to the same nine month period a
year ago. BARRA's revenues from POSIT are derived from commissions
generated by the trading volume in the system. POSIT revenue
increases reflect higher trading volumes as compared to the same
periods a year ago. POSIT crossed approximately 5.8 billion
shares for the 1998 calendar year.
Asset Management revenues decreased $4,108,000 or 29% compared to
the same quarter a year ago and $1,064,000 or 5% compared to the
same nine month period a year ago. Asset management revenues
consist of fees generated from active management of investor
accounts by Symphony and fees earned by BARRA RogersCasey Asset
Services Group, Inc. 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 $9,603,000 for the
current quarter and $20,491,000 for the current year-to-date
period compared to $13,648,000 and $21,435,000, respectively, for
the same periods a year ago. These net decreases in total revenues
were the result of increases in base fees due to growth in assets
under management offset by lower performance fees. As of December
31 1998, Symphony had approximately $2.5 billion under direct
management. Of the funds under direct management, approximately
$1.7 billion are managed under agreements that provide for
performance fees in addition to a base management fee.
Performance fees included in total revenues were $5,936,000 for
the current quarter and $9,635,000 for the current year-to-date
period compared to $10,683,000 and $12,895,000 for the same
periods a year ago. Performance fees are recognized only at the
measurement date for determining performance of an account, which
typically is at the end of each year of the contract. Symphony
performance fees for the December, 1998 quarter were for accounts
representing approximately 66% of the current total of assets
subject to performance fees and included fees for some accounts
that had partial year performance periods. The decrease in
performance fee revenues for the quarter and year-to-date periods
over the same periods a year ago was the result of an increase in
the number and 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 $400 million or 30%
from December 31, 1997. 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 2%
and 7% of the performance-based funds under management will have
performance fee determination dates in the quarters ended March
31, 1999 and June 30, 1999, respectively. Because it is
anticipated that less than 10% of the assets subject to
performance fees will have anniversaries in the next two quarters,
it is expected that there will be a decrease in revenues and
earnings from the asset management business in the March 1999 and
June 1999 quarters when compared to the December 1998 quarter.
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 December 31, 1998
compared to the same quarter a year ago, total operating expenses
increased $3,945,000 or 14%. For the nine month period ended
December 31, 1998 compared to the same period a year ago, total
operating expenses, including one-time acquisition charges,
increased $6,174,000 or 7%. Excluding one-time acquisition
charges, operating expenses increased $16,088,000 or 22%.
Cost of Subscription Products consists of computer access charges,
data and software acquisition expenses, BARRA's computer leasing
expenses, and seminar expenses. This component of expense
increased $45,000 or 2% compared to the same quarter a year ago
and $1,678,000 or 31% compared to the same nine month period a
year ago. Including the impact of acquired operations, cost of
subscription products increased compared to the same periods a
year ago as a result of higher software amortization and data
costs associated with expanding product lines and acquired
products offset partially by lower seminar expenses principally as
a result of seminar timing.
Compensation and Benefits increased $3,649,000 or 22% compared to
the same quarter a year ago and increased $11,245,000 or 25%
compared to the same nine month period a year ago. Including
compensation and benefit costs from business acquired, the
increases from the same periods a year ago are primarily the
result of annual salary adjustments that take effect on July 1
each fiscal year, increases in incentive compensation including
the effect of changes in the pattern of accrual during each year,
an increase in total average headcount (excluding the effect of
acquired employees), increases in consultant costs associated with
Year 2000 and other projects, increases in other related employee
benefit costs associated with more employees, and general cost
increases. External consultant costs associated with the Y2K
project are expected to increase approximately $500,000 and
$630,000 in the three month periods ended March 31, 1999 and June
30, 1999, respectively, compared to the level of expense incurred
for such services during the quarter ended December 31, 1998 (see
also "Year 2000" in Part I, Item 2, Management's Discussion and
Analysis.)
Occupancy Expense increased $495,000 or 35% compared to the same
quarter a year ago and increased $1,567,000 or 40% compared to the
same nine month period a year ago. The increase for both period
comparisons reflects costs from acquired operations plus new or
expanded office space in London, New York, San Francisco, Berkeley
and Darien.
Other Operating Expenses decreased $244,000 or 3% compared to the
same quarter a year ago and increased $1,598,000 or 9% compared to
the same nine month period a year ago. Other operating expenses
include travel, office, maintenance, depreciation, amortization,
data and other expenses related to asset management operations,
marketing, advertising, outside legal and accounting services,
foreign currency translation gains and losses, and other corporate
expenses. Including expenses from acquired operations, other
operating expenses decreased from the same quarter a year ago as a
result of lower data costs associated with asset management
operations offset partially by increases in travel and
entertainment, outside professional fees and various other
operating costs associated with business growth. The increase in
other operating expenses for the nine month period ended December
31, 1998 compared to the same period a year ago was primarily the
result of increases in various other operating costs associated
with business growth plus the impact of acquired operations that
are only included in the prior year period from the date of
acquisition.
Minority Interest primarily represents the share of profits from
Symphony Asset Management LLC that is due to its principals.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
Investment Portfolio
The Company does not use derivative financial instruments in its
investment portfolio. The Company's investment portfolio
primarily consists of investments in: a) short-term, high-credit
quality money market funds - amounting to approximately $26.2
million at December 31, 1998; b) short-term, high credit quality
municipal debt securities - amounting to approximately $6.4
million at December 31, 1998; and c) market-neutral investment
programs managed by two of the Company's subsidiaries - amounting
to approximately $11.3 million at December 31, 1998. 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.
The Company's investments in market-neutral programs consist
principally of long and short positions placed directly (in the
case of funds managed by Symphony LLC) or indirectly (in the case
of funds managed by BARRA RogersCasey 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 the Company's professional investment advisers and the
performance of the funds is reviewed periodically by management
and the Company's Board of Directors.
Impact of Foreign Currency Rate Changes
The Company invoices customers in Europe in both British Pound
Sterling and European Currency Units. In Japan, the Company bills
its customers in Japanese Yen. Excluding customers in these
locations, the Company generally bills for its services in U.S.
dollars. BARRA has not engaged in foreign currency hedging
activities. To the extent of its local currency (Yen, Pound and
ECU) invoicing, its 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, the Company's exposure to fluctuations in currency
exchange rates will correspondingly increase. Currency
fluctuations may also effectively increase the cost of BARRA's
products and services in countries in which customers are invoiced
in U.S. dollars. See also Part I, Item 2, "Foreign Currency and
Business in Asia" for a description of the impact of changes in
foreign currency exchange rates during the quarter ended December
31, 1998.
The Company has 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.
<PAGE>
PART II - OTHER INFORMATION
This Quarterly Report on Form 10-Q contains forward-looking
statements as defined by the Private Securities Litigation Reform
Act of 1995. Each statement made in this Part II containing any
future verb tense or any form of the words "anticipate",
"estimate", "expect", "designed", "believe," "future",
"forecasts", "intends", "perceives", "possible",
"potential", "targeted", "may", "plan", "scheduled",
"would", "could", "should", or "forward" or similar
expression is a forward-looking statement that may involve a
number of risk factors and uncertainties. The Company does not
undertake to update, revise or correct the forward-looking
information. A discussion of those risk factors is located in the
first paragraph of Part I, Item 2, throughout this Form 10-Q and
in the Company's Form 10-K for the fiscal year ended March 31,
1998.
Item 1. Legal Proceedings.
All information required by this item has been previously reported
under the heading "Legal Proceedings" in the Form
10-K. There have been no other material developments in the legal
proceedings of BARRA since the date of the Form 10-K.
Item 5. Other Information.
As previously reported under Part II, Item 5 in the Company's
September 30, 1998 Form 10-Q, at its October 23, 1998 quarterly
meeting, the Board of Directors of the Company authorized BARRA's
officers to use up to $4,000,000 to purchase additional shares of
the Company's Common Stock on The Nasdaq Stock Market.
On November 17, 1998 Posit Joint Venture, the Company's 50/50
joint venture with ITG, Inc. ("ITG") entered into a license
agreement with Investment Technology Group SG Limited ("ITGSG"),
a newly formed entity owned 50% by Societe Generale, a French
banking organization, and 50% by an affiliate of ITG. Under the
license agreement, in exchange for future royalties, Posit Joint
Venture will be providing to ITGSG software to operate within
Europe an anonymous crossing network for UK and other European
equities similar to the POSIT crossing network for US equities
which is licensed to, and operated by, ITG. Simultaneously, the
Company and ITG agreed to liquidate their 50/50 Global POSIT Joint
Venture which had been entered into in 1990 to operate a crossing
network for stocks traded on the International Stock Exchange and
which had operated at a loss since inception.
On January 11, 1999, the Company completed its acquisition of Bond
Express, L.P. ("Bond Express"). For further information
regarding the Bond Express acquisition see Note 7 of the Notes to
Consolidated Financial Statements.
Stockholder proposals intended to be included in the Company's
proxy statement for the 1999 Annual Meeting of Stockholders must
be received by the Company no later than February 26, 1999.
Stockholders who expect to present a proposal at the 1999 Annual
Meeting of Stockholders which is not included in the Company's
proxy statement should notify the Secretary of the Company at 2100
Milvia Street, Berkeley, California 94704 of the proposal by May
16, 1999. Without such notice, proxy holders appointed by the
Board of Directors of the Company will be entitled to exercise
their discretionary voting authority when the proposal is raised
at the annual meeting, without any discussion of the proposal in
the proxy statement.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are required by Item 601 of the
Regulation S-K:
Exhibit Description
Number
27 Financial Data Schedule
(electronic filing only)
(b) Reports on Form 8-K: None
<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: March 4, 1999 /s/ Andrew Rudd
Andrew Rudd, Chairman of the
Board of Directors and Chief
Executive Officer
Date: March 4, 1999 /s/ James D. Kirsner
James D. Kirsner, Chief
Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Description
27 Financial Data Schedule
(electronic filing only)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM CONDENSED CONSOLIDATED BALANCE SHEETS, CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 20,857,464
<SECURITIES> 23,112,086
<RECEIVABLES> 39,874,907
<ALLOWANCES> 350,025
<INVENTORY> 0
<CURRENT-ASSETS> 86,511,827
<PP&E> 34,412,479
<DEPRECIATION> 16,936,257
<TOTAL-ASSETS> 140,053,308
<CURRENT-LIABILITIES> 47,216,156
<BONDS> 0
0
0
<COMMON> 1,397
<OTHER-SE> 87,280,429
<TOTAL-LIABILITY-AND-EQUITY> 140,053,308
<SALES> 117,496,996
<TOTAL-REVENUES> 117,496,996
<CGS> 7,156,189
<TOTAL-COSTS> 82,005,210
<OTHER-EXPENSES> 6,906,506 <F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,110,593)<F2>
<INCOME-PRETAX> 22,539,684
<INCOME-TAX> 8,791,571
<INCOME-CONTINUING> 13,748,113
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,748,113
<EPS-PRIMARY> 0.99
<EPS-DILUTED> 0.94
<FN>
<F1>MINORITY INTEREST SHARE OF NET INCOME AND LOSS ON EQUITY JOINT VENTURES
<F2>REPRESENTS NET INTEREST INCOME
</FN>
</TABLE>
