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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934. For the fiscal year ended March 31, 2000.
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the transition period from _____ to
_____.
Commissionfile number 0-19690
BARRA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2993326
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
2100 Milvia Street, Berkeley, California 94704-1113
(Address of principal executive offices) (zip code)
(510) 548-5442
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.0001 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended (Exchange Act), during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of the Common Stock on June 6, 2000, as
reported on The Nasdaq Stock Market(R), was approximately $411,813,397. Shares
of common stock held by each executive officer and director have been excluded
in that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
The number of shares of the registrant's Common Stock outstanding as of June 6,
2000 was 13,761,399, all of one class.
DOCUMENTS INCORPORATED BY REFERENCE
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DOCUMENTS TO BE INCORPORATED BY REFERENCE SECTION OF FORM 10-K
Portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders, Part III
filed with the Securities and Exchange Commission (SEC) along with this
Form 10-K.
Portions of the 2000 Annual Report to Shareholders, filed with the SEC as Parts I, II and IV
an exhibit to this Form 10-K.
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TABLE OF CONTENTS
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PART I Page
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Item 1 Business 1
General 1
Business Units and Segments 1
Marketing, Sales, Clients and Client Support 7
POSIT and Symphony Revenue Contributions 9
Research and Product Development 9
Competition 10
Fluctuations in Quarterly Operating Results 12
Proprietary Rights and Licenses 12
Government Regulation 13
International Operations 14
Employees 15
Risk Factors 15
Item 2 Properties 22
Item 3 Legal Proceedings 22
Item 4 Submission of Matters to a Vote of Security Holders 23
Executive Officers of the Company 24
PART II
Item 5 Market for the Company's Common Equity and Related Stockholder Matters 26
Item 6 Selected Financial Data 26
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 26
Item 7A Quantitative and Qualitative Disclosures About Market Risk 33
Item 8 Financial Statements and Supplementary Data 34
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 52
PART III
Item 10 Directors and Executive Officers of the Company 53
Item 11 Executive Compensation 53
Item 12 Security Ownership of Certain Beneficial Owners and Management 53
Item 13 Certain Relationships and Related Transactions 53
Other Matters 54
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 55
SIGNATURES 58
POWER OF ATTORNEY 58
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PART I
ITEM 1. BUSINESS
THIS BUSINESS SECTION AND OTHER PARTS OF THIS FORM 10-K, AS WELL AS PORTIONS OF
OUR 2000 ANNUAL REPORT TO SHAREHOLDERS, CONTAIN FORWARD LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. FOR FURTHER INFORMATION REGARDING HOW TO
IDENTIFY THOSE FORWARD LOOKING STATEMENTS AND THE FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER PLEASE LOOK AT THE RISK FACTORS SECTION OF THIS PART I
AND THE SECTION TITLED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS IN PART II OF THIS FORM 10-K.
GENERAL
BARRA, Inc. (which may be referred to as BARRA, the Company, we, us or our) is a
research-based, global investment technology company. We have two business
units. Our Core Business provides portfolio risk management and enterprise risk
management systems to investment professionals. Our Ventures Business develops
new lines of business by leveraging our core research and development, generally
through strategic partnerships.
Our fiscal year for financial reporting purposes is April 1 through March 31.
The fiscal years are referred to using the year in which the end of the fiscal
year falls. Unless otherwise noted, all references in this Form 10-K to 2001,
2000, 1999, 1998 or 1997 are to the fiscal year ending on March 31st in the year
named. This means that the fiscal year ending March 31, 2000 is referred to as
"2000."
Throughout this Form 10-K we "incorporate by reference" certain information from
parts of other documents that we have filed with the SEC. The SEC allows us to
avoid duplication and disclose important information by referring to it in that
manner. Please refer to this information.
All share and per share amounts in this Form 10-K have been restated to reflect
a three-for-two stock split effective September 22, 1997. In August 1998, we
changed the state of incorporation of BARRA from California to Delaware.
BUSINESS UNITS AND SEGMENTS
Our activities are organized into two business units, our CORE BUSINESS and our
VENTURES BUSINESS. As further described below, our Core Business consists of one
business segment, portfolio risk management systems and enterprise risk
management systems. Our Ventures Business consists of three business segments:
Portfolio System for Institutional Trading (POSIT(R)), Symphony Asset Management
(Symphony) and Other Ventures. These new business units resulted from a recent
reorganization of our activities. For a comparison of these new business units
and segments to those reported in the Form 10-K we filed last year, please see
Note 11 to the Notes to our Financial Statements below.
While our two business units serve some common clients and draw upon some
similar research, development and data resources, they each require different
marketing and distribution strategies.
- CORE BUSINESS - Our Core Business is composed of our portfolio risk
management and enterprise risk management systems.
In our Core Business, we apply modern risk theory to practical investment
problems. We entered the portfolio risk management business in 1975 when we
introduced our first product for measuring the risk of U.S. equity
portfolios. Since then, we have developed additional products covering new
countries, asset classes and instruments. As part of that process, we have
accumulated an unrivaled database of proprietary risk information on
markets and securities worldwide. Our risk methodology is acknowledged as
the industry standard for institutional investing. We have also developed a
broad range of software applications to enable our clients to integrate our
risk information into their investment process.
Our risk management systems are designed to help investment professionals
identify, measure and control risk in the context of their own investment
disciplines. These systems consist of three components: data, models and
software applications. We help each client structure the combination of
these components that best addresses their needs.
- DATABASES - To develop our databases, we license data from over 100
third party sources. We also collect data directly when it is not
generally or readily available. Using our proprietary algorithms, we
create proprietary data for equity, fixed income, currency and other
financial instruments for all major global markets and asset classes.
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- MODELS - We have used our proprietary databases and methodology to
develop risk, return and transaction cost prediction models for most
of the world's publicly traded securities. Our risk predictions are
frequently refreshed by updated feeds of our proprietary data.
- SOFTWARE APPLICATIONS - Our models and data are made available to
investment professionals through a broad range of software
applications. We deliver these applications to customers worldwide via
a variety of platforms. We primarily use Microsoft(R)
Windows(TM)-standard software, which interfaces with each customer's
own office productivity system.
Our Core Business product suite is divided into portfolio risk management
and enterprise risk management systems, offering solutions to both
portfolio and business level decision-makers.
- PORTFOLIO RISK MANAGEMENT SYSTEMS - Our portfolio risk management
products are designed to help investment professionals construct
optimal portfolios by precisely measuring and managing risk. Our
propriety risk factors help investment managers identify and confirm
the sources of risk within their portfolios, as well as make decisions
about any risks they might want to eliminate, in order to achieve a
desired level of return.
Our portfolio risk management products are divided into two application
suites - The BARRA Aegis System(TM) and The BARRA Cosmos System(TM).
- AEGIS SYSTEM - is a suite of equity risk management software
applications for managing equity securities and derivatives. It
provides a flexible, comprehensive framework for portfolio
managers to develop returns forecasts, as well as control risk,
costs and other processes.
- COSMOS SYSTEM - allows global fixed income portfolio managers to
manage risk and optimize return in a multi-currency, global bond
portfolio. This adaptable system integrates specific bond,
derivative and currency strategies to reflect each user's
investment style, while monitoring the overall risk exposure of
the user's positions.
The Aegis and Cosmos Systems are modular in design, and allow clients
to select data and models that meet their specific investment
requirements.
- ENTERPRISE RISK MANAGEMENT SYSTEMS - Our enterprise risk management
solution combines our existing models and analytics to provide senior
business managers at large asset management firms with the tools they
need to manage their investment risk firm-wide.
- BARRA TOTAL RISK SYSTEM(TM)- BARRA's enterprise risk management
system integrates our models into a firm-wide risk platform that
addresses both the business and technology issues of delivering a
consolidated view of financial risk across a given enterprise. It
offers the benefits of a flexible software architecture that
adapts to evolving business and technology requirements, and is
scalable across multiple user sites. The BARRA TotalRisk System
is used by asset managers, pension fund managers and custody
banks to monitor compliance against benchmarks and fund
guidelines. BARRA Total Risk(TM)for Asset Management, developed
to meet the unique requirements of asset managers, is the primary
product offering within the product suite.
We generally provide our Core Business products to clients on an annual
subscription basis. The annual subscription price for most of our
individual portfolio management products starts at around $50,000.
Comprehensive platform subscriptions (such as Aegis, Cosmos or TotalRisk )
often consist of a combination of our products and have significantly
higher annual subscription prices. Our standard fees generally include use
of the relevant models and applications, periodic database updates and
basic client support.
Since the comprehensive global and enterprise wide solutions that we offer
often require system integration, support and management, many of our large
and complex projects (including most of our enterprise risk management
systems) involve additional consulting services. These consulting services
include turn-key, on-site resources to assist with the migration of our
products and systems onto a client's existing infrastructure. They also
help with data gathering, integration and aggregation across a client's
complete enterprise. These consulting services are provided to our clients
for an additional fee.
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As a result of our quarter century tenure at the forefront of applied
financial research, we have amassed a unique library of research models and
a large base of historical data. We also offer some of our proprietary data
and models on a stand alone basis. Customers can purchase annual
subscriptions to these components in electronic format. A library of
published research papers and archived newsletter articles authored by
BARRA employees is also available on line.
- VENTURES BUSINESS - Our Ventures Business extends our Core Business ideas
into new markets. It consists of several distinct, generally autonomous
companies. Each venture is established as an entrepreneurial,
independently-operated business. Our Ventures Business develops new lines
of business by leveraging our core research and development. We sometimes
do this through a strategic partnership with other industry experts who
offer a unique distribution franchise - as in the case of POSIT and
Symphony. We actively consider partnering with third party investors in
many of our Ventures Businesses, some of which are only partially owned by
BARRA. Our Ventures Businesses are divided below into three business
segments: POSIT, Symphony and Other Ventures.
- POSIT (www.itginc.com) - For years, our research into transactions has
focused on cost control. We believed that technology could empower
institutional equity investors to increase investment performance by
reducing transaction costs. In 1987, this focus resulted in the launch
of POSIT, the electronic system for low-cost, confidential trade
matching during the market day. POSIT is a computerized trading system
through which clients enter buy and sell orders to trade single stocks
and portfolios of securities among themselves in a confidential
environment. The POSIT crossing network is designed to minimize market
impact and other trading costs. After 12 years of rapid growth, POSIT
provides a substantial pool of alternative liquidity; annual volume
has exceeded more than 6.5 billion shares. Now with seven daily
matches, POSIT volume and liquidity continue their pattern of
sustained growth.
We own 50% of the POSIT technology through a general partnership with
ITG, Inc. We initially developed the POSIT technology and have since
jointly enhanced it with ITG. Orders may be placed in the POSIT system
directly via computer to computer links or the QuantEX system or ITG
Platform offered by ITG. Orders may also be placed indirectly through
ITG's Electronic Trading Desk, which then enters the orders in the
central computer. In the U.S., ITG has also entered into arrangements
with vendors of other popular trading systems to allow users the
flexibility to route orders directly to POSIT from trading products
distributed by Bridge Information Systems, BRASS, Bloomberg and
others.
- U.S. POSIT - Through a license from the POSIT joint venture, ITG
operates the U.S. equity version of the POSIT system. All trades
of U.S. equities executed through U.S. POSIT are cleared by, and
all brokerage commissions are paid to, ITG. We receive a share of
the royalties paid to the POSIT partnership by ITG. Our share of
these royalties is equal to approximately 13% of the commissions
received by ITG for trades of securities on U.S. POSIT. Total
U.S. POSIT trading volumes for the past five calendar years are
shown below:
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1999 1998 1997 1996 1995
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TRADING VOLUME 6.5 billion shares 5.8 billion shares 3.6 billion shares 3.3 billion shares 2.3 billion shares
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U.S. POSIT currently accepts orders for approximately 14,600
different equity securities, but may be modified, as the need
arises, to include additional equity securities. An algorithm is
run at scheduled times during each trading day to find the
maximum possible number of any buy and sell orders that match or
"cross."
- EUROPOSIT -Trademark- EuroPOSIT was developed using the original
POSIT technology. It was launched in November 1998 as a
replacement for Global POSIT and has experienced a promising
round of early trading volume. It is operated by Investment
Technology Group (Europe) Limited (ITGE), a Republic of Ireland
venture that is owned by ITG and Societe Generale. EuroPOSIT runs
five daily matches and currently covers equities in the U.K.,
France, Germany, Italy, Spain, Switzerland, Belgium and the
Netherlands. ITGE expects to cover equities from additional
European nations over time. All EuroPOSIT trades of equities are
cleared by, and all brokerage commissions are paid to, ITGE. A
royalty is then paid to the POSIT partnership based upon the
commissions received by ITGE for trades of European securities on
EuroPOSIT. We receive a share of that royalty after expenses.
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- POSIT-FRA-TM- - In 1998, using technology licensed from the POSIT
joint venture, we developed POSIT-FRA, the first computer-based
crossing network for Forward Rate Agreements (FRAs) in the U.S.
At that time, we also entered into a joint venture with Prebon
Yamane (U.S.A) Inc. (Prebon) to market POSIT-FRA. We subsequently
developed a version of POSIT-FRA for Hong Kong. Prebon ceased
operating POSIT-FRA in the U.S. on February 1, 2000.
- AUSTRALIA/NEW ZEALAND POSIT - Using the original POSIT
technology, we developed an Australia/New Zealand equity version
of POSIT in 1995. The POSIT partnership initially licensed the
technology to Burdette, Buckeridge & Young (BBY), an Australian
brokerage firm. That license was later transferred to ITG
Australia Ltd. (ITGA), an Australian entity jointly owned by BBY
and ITG. All trades of Australia and New Zealand equities
executed through Australia/New Zealand POSIT are cleared by, and
all brokerage commissions are paid to, ITGA. A royalty is then
paid to the POSIT partnership based on commissions received by
ITGA for trades of Australia and New Zealand securities on
Australia/New Zealand POSIT. We receive a share of that royalty.
- SYMPHONY (www.symphonyasset.com) - Our Symphony business segment
offers a host of asset management services directly to pension funds,
university endowments and foundations, off-shore banks,
funds-of-funds, mutual fund distributors and qualified individuals. As
of March 31, 2000, Symphony directly managed over $5 billion ($4.25
billion net of leverage in managed portfolios) in a variety of
investment vehicles.
We formed this venture as a wholly-owned subsidiary, Symphony Asset
Management, Inc. (Symphony Inc.), in 1994 using the personnel and
strategies of our former Active Strategies Group and several
professionals who were formerly with Wells Fargo Nikko Investment
Advisors, Inc. A restructuring in 1996 led to the formation of
Symphony Asset Management, LLC (Symphony, LLC), which is owned by
BARRA and Maestro LLC. Maestro LLC is owned by the Symphony, LLC
principals, each of whom has substantial experience in the industry,
spanning quantitative analysis, portfolio management, operations and
client service.
The combined Symphony entities (Symphony) offer a diverse group of
products to meet the wide range of client investment needs:
- EQUITY STRATEGIES: These include long-only and market-neutral
strategies, invested in major markets around the world. Each
strategy incorporates elements of Symphony's proprietary approach
to money management combining quantitative screening and
qualitative analysis. Long-only strategies are benchmarked
against indices such as the S&P 500, the S&P MidCap 400 and the
Wilshire 4500. Market-neutral strategies take long and short
positions while maintaining dollar neutrality and are benchmarked
against U.S. Treasury Bills. Certain clients add market exposure
to market-neutral strategies by employing a futures overlay.
- FIXED INCOME STRATEGIES: These include convertible-arbitrage and
high-yield market-neutral investing. In evaluating bonds,
Symphony's investment process includes both equity and
fixed-income analysis. Equity analysis guides the selection
process to opportunities arising from changing default risk.
Fixed-income analysis may uncover mis-pricing opportunities in
the structure of the bond relative to other, similar instruments.
The primary investment strategies offered by Symphony include:
- OVERTURE STRATEGY - Introduced in August 1994, the Overture fund
typically invests in U.S. companies with market capitalizations
in excess of $3 billion. Overture applies the market neutral
approach of investing both long and short in approximately equal
amounts.
- MINUET STRATEGY - Symphony introduced Minuet in April 1997.
Minuet uses the same investment process (market neutral) as
Overture, except that Minuet's investments are restricted to
smaller companies with market capitalizations of less than $3
billion.
- PRELUDE STRATEGY - Symphony introduced Prelude in May 1997.
Prelude uses the same investment process as Overture (market
neutral), except that Prelude's investments are restricted to
companies traded in the U.K. and Europe, typically the top 600 to
1,000 European companies.
- RHAPSODY STRATEGY - Symphony introduced Rhapsody in October 1997.
This strategy uses the screening and fundamental research
processes employed by Symphony's equity funds to identify
potentially profitable
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positions. It typically involves long investments in
investment-grade and near investment-grade corporate bonds
together with short positions in the underlying stocks.
- ANDANTE STRATEGY AND LONG-ONLY STRATEGIES - Symphony introduced
its high-yield, long-short investment process in October 1999.
This strategy uses the screening and fundamental research
processes emphasized by Symphony's equity funds to identify
potentially profitable positions. Symphony also manages long-only
strategies for institutions. These strategies are designed to out
perform specific equity indices selected by each client.
We record both asset-based and performance based fees for accounts
managed by Symphony. See Note 2 of the Notes to our Financial
Statements.
- OTHER VENTURES - Several wholly-owned businesses comprise our other
BARRA Ventures, including our Global Estimates business, Bond Express,
BARRA RogersCasey, Strategic Consulting and Investment Strategies. We
also hold certain strategic minority interests in other businesses.
- GLOBAL ESTIMATES (www.barra.com) - The Global Estimates venture
is principally composed of The Estimate Directory(R)and
Directus(TM)assets that we acquired from Edinburgh Financial
Publishing Limited in 1997. This enterprise develops and markets
a variety of proprietary databases along with electronic
screening and analysis products to be used with the data. BARRA
Global Estimates(TM)is a dynamic warehouse of broker forecast
data covering over 16,000 publicly traded companies in more than
60 countries. It pools, integrates and aggregates forecast data
from over 800 brokers worldwide to provide a comprehensive source
of sales, profits, earnings, cashflow and dividend forecasts, as
well as brokers' recommendations. Directus(TM)is a U.K. director
share trading information product. It permits users to monitor
share dealings by directors of publicly quoted U.K. companies.
Global Estimates delivers most of its data via proprietary
on-line and packaged software products, as well as through
third-party distributors. Clients pay an annual subscription for
the proprietary Global Estimates products based upon a
combination of access and data required. Basic fees start at
approximately $2,000 per annum but can substantially exceed this
amount. Global Estimates also maintains web site redistribution
arrangements with third parties (including, www.yahoo.co.uk,
www.shareinvestor.com and www.icicidirect.com.). Royalties from
these arrangements are generally based on a license fee, as well
as a percentage of the revenue derived from the redistribution of
Global Estimates data.
- BOND EXPRESS-TM-(www.bondexpress.com) - Bond Express is a leading
aggregator of bond offerings in the United States and the most
widely used bond offering system of its type in the world. Over
400 distinct dealers place their offerings on the system each day
and thousands of traders, registered representatives, and
individuals use the system to find bonds. Asset classes include
Municipals, Corporates, U.S. Treasuries, and CMOs. The Bond
Express dealer product is used by traders at broker/dealer firms
to find bond offerings and show those offerings to their
representatives or clients. From the Bond Express web site users
can search over 20,000 current bond offerings. The Bond Express
Web Site Integration product is a private labeling service for
brokers to electronically offer bonds to individual investors and
registered representatives over the Internet. These clients
include Charles Schwab, Waterhouse and Dreyfus. In addition,
through the Web Site Integration product, Bond Express serves as
the host to numerous financial portals and data vendors that
provide fixed income information to their clientele. These
clients include CNNfn, Reuters and Thomson Financial. Clients pay
for Bond Express access on an annual subscription basis. BARRA
acquired 100% of the Bond Express business in January 1999.
- BARRA ROGERSCASEY (www.barrarogerscasey.com) - Through our
wholly-owned subsidiary, BARRA RogersCasey, Inc. (BARRA
RogersCasey), we offer a full range of investment consulting
services, a variety of funds-of-funds and private equity
investment products and plans, and the InvestWorks(TM) system.
Originally founded in 1976, this business became one of the
nation's first investment consulting firms specializing in
providing advisory services to institutional investors. We
acquired this business in 1996, and today BARRA RogersCasey
serves more than 100 clients representing a broad cross-section
of both public and private investors with over $500 billion in
assets.
- INVESTMENT CONSULTING - BARRA RogersCasey offers investment
consulting services to institutional investors, including
corporate and public retirement plans, endowments and
foundations, healthcare organizations, insurance companies
and financial intermediaries, as well as high net worth
individuals. As
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an advisor, the firm's primary objective is to partner with
its clients to design optimal investment programs. This
partnership role can vary depending on the client's needs.
In some instances, BARRA RogersCasey can serve strictly in
an advisory capacity and, in others, as an extension of the
client's investment staff and committee. The firm can also
assume the responsibilities of a completely outsourced
investment program. The Investment Consulting services
offered by BARRA RogersCasey include:
- analyzing plan-wide risk;
- assessing different asset mixes in comparison to
projected liability funding needs;
- testing current assets against desired asset mixes;
- reviewing current defined benefit plan objectives,
benchmarks and manager mixes;
- reviewing the key features of a defined contribution
plan;
- developing retail investment products such as mutual
funds and annuities;
- selecting investment vehicles and managers in light of
overall plan needs; and
- analyzing and reporting on performance by external
managers and the risk taken by those managers.
BARRA RogersCasey frequently charges fixed fees for its
Investment Consulting services, payable either for a single
project or on a recurring retainer basis. BARRA RogersCasey
also provides these services on a time and materials basis.
- ASSET SERVICES - BARRA RogersCasey also designs, implements
and provides ongoing management of various multi-manager and
private equity investment products and plans. As of the end
of 2000, it managed almost $700 million through its various
products and services, including:
- MULTI-MANAGER FUNDS - BARRA RogersCasey designs and
manages its own multi-manager product, the Global
Developing Markets Fund (GDMF), as well as
multi-manager investment programs for a number of
pension plans.
- PRIVATE EQUITY - BARRA RogersCasey designs and manages
aggressive, risk-oriented programs for investing in
private ventures, either directly or through managers
specializing in private equity.
Revenues from these services are generated by both asset
based and performance based fees for the accounts under
management.
- INVESTWORKS - InvestWorks provides a complete package of
investment products, benchmarks and peer groups for money
managers, investment consultants, financial advisors and
plan sponsors. InvestWorks is used to evaluate and contrast
the style and performance of separate accounts, mutual funds
and commingled funds. InvestWorks is offered to clients on
an annual subscription basis.
- STRATEGIC CONSULTING (www.barrascg.com) - The BARRA Strategic
Consulting Group (Strategic Consulting) provides consulting
services to asset management firms. This venture consists of
approximately thirty professionals with expertise in management
consulting, investment management, investment consulting,
investment research and/or market research. Founded in 1987 as a
unit of Rogers Casey & Associates, Inc., this consulting team
provides a wide range of services covering strategy development,
functional assessment and implementation. Some of the services
provided under these three categories include:
- analyzing industry trends and the market position of a
client with regard to those trends;
- providing a detailed analysis of a client's business
strategy along with proposed enhancements to that strategy;
- evaluating the quality and consistency of a client's
investment process using our proprietary risk management
technology;
- assessing the effectiveness of a client's sales and client
service activities; and
- advising on various merger, acquisition and integration
activities.
Strategic Consulting charges fees for its services on a fixed or
time and materials basis, payable either for a single project or
on a recurring retainer basis.
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- INVESTMENT STRATEGIES - The Investment Strategies group performs
a variety of specialized investment strategy services for
institutions such as asset management firms, banks and brokerage
firms using our proprietary models and databases. We charge for
these services in a variety of ways: a fixed fee, as a percentage
of assets under management, on a recurring retainer basis, or on
a time and materials basis.
- OTHER INVESTMENTS - The Ventures Business also includes our
investments in Data Downlink Corporation (Data Downlink) and Risk
Reporting Limited (RRL).
- DATA DOWNLINK - BARRA owns approximately 16% of Data
Downlink (www.datadownlink.com). Data Downlink's flagship
service historically has been .xls (www.xls.com). .xls
aggregates, cross-indexes and distributes over 70 different
business databases, delivering quantitative information
directly to Microsoft Excel and textual information in HTML
and Microsoft Word. In May 1998, we granted Data Downlink a
non-exclusive worldwide license to market certain of our
proprietary databases. .xls customers pay Data Downlink a
monthly fee to access the service and then purchase content
on either a pay-per-view and/or subscription basis. In May
2000 Data Downlink launched Portal B(TM), a fully integrated
business information portal. Customers will pay Data
Downlink an annual fee to access Portal B. Fees will be
dependent on the size of the organization.
- RISK REPORTING LIMITED - We also own a 50% interest in Risk
Reporting Limited (RRL), a joint venture between BARRA
Holdings, Ltd. and CAPS Ltd. RRL provides quarterly and
annual reports that focus on identifying the risk of a
pension fund relative to its benchmark, peer groups and
cash.
MARKETING, SALES, CLIENTS AND CLIENT SUPPORT
CORE BUSINESS - We currently serve portfolio risk management and enterprise risk
management clients at approximately 1,200 institutions in over 30 countries. Our
clients for these systems include active and passive equity managers, fixed
income managers, global managers, fund sponsors, pension and investment
consultants, banks, insurance companies, broker/dealers and corporate
treasurers. The marketing, sales and client support activities are integrated
across all of the products offered by this segment. The large and complex nature
of our enterprise risk management projects also require extra consulting and
support services to assist in the integration, support and management of these
systems.
We market our portfolio risk management and enterprise risk management systems
to a broad set of financial service providers and institutional investors
throughout the world. When marketing new Core Business products, we focus first
on large participants in the relevant segment of the investment community, whose
endorsement is important in generating market acceptance. Once many of the
larger participants have subscribed, we then target the broader marketplace. We
also target clients in new markets as quantitative methods and firm wide asset
and risk management products gain acceptance. These marketing efforts are
designed to increase geographical coverage and to increase interest in our Core
Business products.
We primarily use a direct sales force to distribute our portfolio risk
management and enterprise risk management systems throughout the world. In the
U.S., they are marketed directly by our parent company. Throughout the rest of
the world, they are primarily marketed by our wholly-owned subsidiaries: BARRA
International (Japan), Ltd. (BARRA Japan) in Japan and BARRA International, Ltd.
(BARRA International) elsewhere. Our sales and client support personnel are
generally required to have strong academic and financial backgrounds. Many of
these professionals work out of our Berkeley, California headquarters. The
remainder are located in our other Core Business offices around the world. Our
sales and client support professionals focus their selling efforts on both
existing clients and institutions that are not currently subscribers to our
products.
Due to the complexity of our products, the sales cycle for new clients of most
of our portfolio risk management systems is typically several months. The sales
cycle for our enterprise risk management systems can be even longer. Most sales
require one or more face-to-face meetings with the prospective client. Each new
client is introduced to one or more of our client support specialists. Sales and
client support specialists help install the product. Due to the complex nature
of the systems and the amount of client system integration involved, enterprise
risk management systems are often subject to an acceptance testing phase. For
all of our Core Business products, we work closely with clients to provide
ongoing service and support. Our client support professionals provide on-site
training in the theories underlying each product and in the use of the product,
telephone support and routine consulting services needed in connection with the
use of certain of our products.
We use a variety of communication channels to stimulate demand within target
markets. We maintain an active World Wide Web site on the Internet. We conduct
interviews with trade journals and publish articles in professional journals. We
also
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disseminate targeted mailings. Our research, development, consulting, sales and
support specialists regularly speak at industry conferences, trade shows and our
own seminars. We participate in more than 60 seminars and workshops per year
throughout the world. These seminars and workshops bring researchers and
industry professionals together. They expose those professionals to the latest
developments in investment theory and technology and give researchers an
opportunity to gain insights from our clients.
VENTURES BUSINESS - The marketing, sales and client support activities vary for
each BARRA Venture. Each venture has its own independent marketing, sales and
client support function.
- POSIT - The institutional investors currently using POSIT include corporate
and government pension plans, insurance companies, bank trust departments,
investment advisors, broker dealers and mutual funds. All marketing, sales
and direct (first tier) client support for the various POSIT crossing
networks is conducted by the entity licensed to operate each network. BARRA
generally provides second tier support to the various POSIT licensees on
behalf of the POSIT joint venture. ITG conducts the marketing and provides
the sales and first tier client support for U.S. POSIT primarily through
the sales, support and consulting activities of its research group. These
activities include introducing clients and prospects to the features,
pricing and technical/functional specifications of the system. ITGE
conducts the marketing and provides the sales and first tier client support
for EuroPOSIT. Prebon conducts the marketing and provides the sales and
first tier client support for POSIT-FRA. ITGA conducts the marketing and
provides the sales and first tier client support for Australia/New Zealand
POSIT.
- SYMPHONY - Symphony markets its products and services to pension funds,
university endowments and foundations, off-shore banks, fund-of-funds,
mutual fund distributors and qualified individuals. Approximately 90% of
the assets under management by Symphony are represented by institutional
accounts. The remainder are qualified individuals. All marketing of
Symphony's asset management activities and products is regulated by the SEC
under the Investment Advisers Act of 1940 (Advisers Act). Symphony is also
registered with the National Futures Association (NFA) and the Commodity
Futures Trading Corporation (CFTC) and is subject to the marketing
regulations administrated by those agencies. Symphony's fund products are
not registered under the Securities Act of 1933 (Securities Act) and
therefore may be marketed and offered only through private communications
with qualified investors. The sales and client support for each Symphony
Fund are conducted by professionals associated with the respective funds.
Each of these funds also sends quarterly performance reports to its
investors.
- OTHER VENTURES -
- GLOBAL ESTIMATES - Global Estimates aggressively markets its products
directly to a broad set of financial service providers and
institutional and private investors throughout the world. This venture
uses a variety of traditional and web-based marketing tactics to
target this broad ranging marketplace. It focuses particularly on
investors with data-intensive needs who require comprehensive coverage
and who enjoy the flexibility of access to data via electronic
delivery. Global Estimates also markets these products indirectly to
both financial professionals and the retail market worldwide through a
variety of redistribution arrangements. These arrangements generally
provide for the display of Global Estimates data on another entity's
financial information or electronic brokerage website. Some
arrangements permit the redistributor to display Global Estimates data
on its proprietary electronic systems or to redistribute Global
Estimates data in printed format. The marketing of certain services
provided by Directus is subjected to the regulations administered by
the Personal Investment Authority in the United Kingdom (PIA).
- BOND EXPRESS - There are approximately 350 entities using the Bond
Express Dealer product and over 50 Web Site Integration clients. Bond
Express markets its products to traders at broker/dealer firms and
business development people at financial portals. Bond Express uses a
variety of traditional and web-based marketing practices to target its
clients. Bond Express sells its products directly from its offices in
New York City and through its own website at
http:\\www.bondexpress.com. Technical support is conducted out of the
San Diego, California office. Bond Express also has over 40
redistribution arrangements, which generally provide for the display
of Bond Express data on third party websites.
- BARRA ROGERSCASEY - BARRA RogersCasey uses a variety of methods to
market its Investment Consulting and Asset Services:
- INVESTMENT CONSULTING - This venture primarily serves pension
funds, endowments, foundations and other financial
intermediaries. BARRA RogersCasey employs a variety of methods to
obtain new Investment Consulting relationships. The venture
primarily engages in a focused and deliberate sales effort aimed
at new prospects and expanding relationships with existing
clients. It often receives referrals from clients and others in
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their clients' industries. In addition, BARRA RogersCasey
frequently engages in Requests for Proposal (RFP) processes.
During the RFP process, the Investment Consulting team responds
to a series of questions and requests for information from a
potential client which are designed to determine costs and staff
for and performance of a potential project. Generally, several
RFPs are submitted simultaneously by competing consultants. The
final rounds of the RFP process often involve intensive
interviews and presentations to the prospective client. Even if a
formal RFP process is not implemented by a prospective client, a
similar proposal and competitive interview process is usually
followed. The sales process is often managed by a member of the
relevant sales group. Consultants are often introduced during the
sales cycle and, if the client is obtained, they later manage the
relationship.
- ASSET SERVICES - Asset Services' pension plan management programs
and private equity investment programs are marketed to corporate
pension plans. The sales and client support for the GDMF are
conducted by professionals associated with the fund. This fund
also sends quarterly performance reports to its investors. All
marketing of asset management activities and products is
regulated by the SEC pursuant to the Advisers Act. The GDMF is
not registered under the Securities Act and therefore may be
marketed and offered only through private communications with
qualified investors. All investors in the GDMF are pension plans.
- STRATEGIC CONSULTING - The Strategic Consulting venture primarily
serves money management firms. This venture engages in a focused and
deliberate sales effort aimed at prospects and existing clients. They
also receive frequent referrals from clients and others in their
clients' industries. In addition, the Strategic Consulting venture
also engages in the RFP process described above under Investment
Consulting. The sales process is often managed by a senior
relationship manager at the venture.
POSIT AND SYMPHONY REVENUE CONTRIBUTIONS
Other than revenue from POSIT and Symphony, no entity not entirely owned by us
and no customer of any of our business segments accounted for more than 10% of
our total operating revenues in 2000. The chart below outlines the contributions
to our total operating revenues made by POSIT and Symphony over the last three
fiscal years:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
FYE 2000 FYE 1999 FYE 1998
-----------------------------------------------------------------------------------------------------------
% OF TOTAL % OF TOTAL % OF TOTAL
OPERATING OPERATING OPERATING OPERATING OPERATING OPERATING
REVENUE REVENUE REVENUE REVENUE REVENUE REVENUE
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
POSIT $19,064,000 10% $16,235,000 10% $10,555,000 9%
-------------------------------------------------------------------------------------------------------------------------------
SYMPHONY $46,901,000 25% $25,800,000 16% $26,537,000 19%
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
We do not believe that the loss of revenue from any single customer or any
single entity not wholly-owned by us (other than Symphony or POSIT) would have a
material adverse effect on our business, operating results or financial
condition. Also see Note 4 of the Notes to our Financial Statements.
RESEARCH AND PRODUCT DEVELOPMENT
Innovations by our research and development operations are critical to the
success of our Core Business and to the efforts of several of our Ventures
Business. In research and development activities, we approach investment
problems from various angles, starting with their theoretical underpinnings and
continuing through the practical implementation of solutions. Our goal is to
develop and bring to market innovative products and solutions to help our
clients make superior investment and trading decisions. This goal has been
supported by our substantial research and development investments. We spent
approximately $19 million in 2000, $21 million in 1999 and $19 million in 1998
on BARRA-sponsored research and development. These figures include our
allocation of research and development costs for POSIT, Symphony and Other
Ventures activities. (These amounts represented 10%, 13% and 14%, respectively,
of our total operating revenues for those years.) In 2001, we anticipate
investing more than $20 million on research and development, including our
allocated expenses for Symphony, POSIT and Other Ventures activities.
We work closely with ITG on the research and development of POSIT enhancements.
We believe that this effort is necessary to remain competitive in a securities
industry with increasing demand for technology-based services. We expect to
continue this level of investment to improve existing services and continue the
development of new services.
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COMPETITION
CORE BUSINESS - The markets for our portfolio risk management and enterprise
risk management systems are competitive but fragmented into many areas of
specialization. We presently compete over many geographic areas and across many
areas of specialization. Competition exists for each of our individual product
lines and each of our divisions. We also face competition in particular
geographic markets. None of our competitors, however, currently competes across
our entire range of products, services and geographic markets for this business
segment.
- PORTFOLIO RISK MANAGEMENT SYSTEMS - We compete with several other companies
that have developed financial models, applications and databases. Few of
these competitors, however, target clients in our major portfolio risk
management market, which primarily consists of portfolio managers with an
excess of $200,000,000 under management. In addition, no single competitor
offers a suite of products that competes with our entire Aegis Suite or
Cosmos Suite of products. Certain other of our portfolio risk management
systems also face competition. For example, Vestek (a Primark company) and
Wilshire Associates each offer products that compete with some products
offered by our Aegis Suite. These products and other competitive products,
however, often offer levels of functionality different from those offered
by our products, fewer options or are designed for a somewhat different
group of end users.
- ENTERPRISE RISK MANAGEMENT SYSTEMS - Algorithmics Incorporated, Infinity (a
Sunguard company) and Askari (a business unit of State Street Corporation)
offer products and services that compete with our enterprise risk
management business. These competing products are mostly sold to banks and
insurance companies. To date we have focused our enterprise risk management
sales efforts primarily on the existing asset manager and plan sponsor
client-base for our Aegis and Cosmos portfolio risk management suites of
products. These entities represent the largest component of our client
base, but we have also targeted, and count as clients, insurance companies,
corporate treasurers and a bank.
We believe that the principal competitive factors facing our Core Business are:
- research and technical capabilities;
- product breadth and architecture;
- product features and functions;
- quality of customer support and service;
- professional and product reputation;
- asset coverage;
- ease of use; and
- price.
We believe that we have certain competitive advantages in each of these areas,
including extensive proprietary databases, skilled professional staff, a
reputation for excellence developed over years of operation, and an established
series of seminars and other training programs. The effort and cost required to
develop and maintain our risk models and related databases may present a
significant barrier to entry into the marketplaces for certain of our Core
Business products. We believe that our extensive experience in product
maintenance, together with the economies of scale available to us because of our
large client base, give us a competitive advantage in the markets for our Core
Business products.
VENTURES BUSINESSES - Due to the wide variety of our Ventures Businesses, their
markets are very diverse and often highly specialized.
- POSIT - POSIT competes with services offered by leading brokerage firms and
transaction processing firms, with providers of electronic trading and
trade order management systems and with financial information services.
POSIT also competes with various national and regional and securities
exchanges and exchange facilities, The Nasdaq Stock Market and electronic
communications networks (ECNs), such as Instinet, and alternative trading
systems (ATSs) for trade execution services. Many of POSIT's competitors
have substantially greater financial, research and development and our
resources. We believe that POSIT competes on the basis of:
- access to liquidity;
- transaction costs;
- market impact cost reduction;
- timeliness of execution; and
- probability of trade execution.
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Although we believe that POSIT competes favorably with respect to these
factors and has established certain competitive advantages, its ability to
maintain these advantages will require continued investment in the
development of POSIT.
- SYMPHONY - Symphony competes in the highly fragmented asset management
industry. Symphony's assets under management represent less than 1% of
total assets in the U.S.-based asset management industry. No one firm
dominates the asset management industry, however, Symphony has developed a
reputation for expertise in the market neutral strategy niche. Barriers to
entry are comparatively low in the industry because a few skilled
individuals could set-up an asset management business in a relatively short
period of time. We believe that competitive factors at work in the asset
management industry include product design and implementation, investment
performance, client service and retention of key employees.
- OTHER VENTURES - The various BARRA ventures compete in different market
places.
- GLOBAL ESTIMATES - The Global Estimates venture operates in a
competitive industry. Due to the breadth of our Global Estimates
offerings, we compete with other data providers who often offer U.S.
and non-U.S. estimates data along with other investment data products.
We believe that the Global Estimates venture has been able to leverage
BARRA's reputation for analytics and thoroughly cleansed data. We
believe that the principal competitive factors for this division are:
- content;
- delivery medium;
- the ability to add value to data through integration and
manipulation tools; and
- price.
In Asia and Europe, the Global Estimates venture maintains a
leadership position in the market for estimates data. We do not
provide proprietary estimate data coverage for North America, but have
partnered with a third party to cover U.S. estimates data. In the U.S.
and continental Europe, I/B/E/S and First Call are our primary
competitors.
- BOND EXPRESS - The availability of fixed income information and
transaction capability over the Internet is evolving rapidly. While no
single competitor competes with Bond Express in all of its business
lines, there are competitors in each of its target markets. Many of
Bond Express's competitors have substantially greater financial
resources, however, we believe that the venture's offering dealer
network, client base, market position and technology compete well
against these entities. In addition, we believe the venture's database
is very competitive in terms of both the number of individual
offerings and the number of contributing dealers.
- BARRA ROGERSCASEY - The Investment Consulting and Asset Services units
of BARRA RogersCasey compete in different marketplaces.
- INVESTMENT CONSULTING - Our Investment Consulting unit competes
in a fragmented industry offering various consulting services to
a variety of institutional investors, including corporate and
public retirement plans, endowments and foundations, healthcare
organizations, insurance companies and financial intermediaries,
as well as high net worth individuals. We believe that
competitive factors at work in the consulting industry include:
- client service;
- industry reputation;
- price;
- research innovation; and
- retention of key employees.
Competitors for our Investment Consulting venture include
Wilshire Associates, Callan Associates, Mercer, Evaluation
Associates and Frank Russell.
- ASSET SERVICES - Our Asset Services venture competes in the
highly fragmented asset management industry. No one firm
dominates the asset management industry. Barriers to entry are
comparatively low in the industry because a few skilled
individuals could set-up an asset management business in a
relatively short period of time. We believe that competitive
factors at work in the asset management industry include product
design and implementation, investment performance, client service
and retention of key employees.
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- STRATEGIC CONSULTING - While the Strategic Consulting Venture has a
differentiated value proposition, several niche and larger consulting
firms offer similar services. These firms include general consulting
firms such as McKinsey & Co., PriceWaterhouseCoopers and Booz-Allen &
Hamilton. We believe that competitive factors at work in the Strategic
Consulting industry include:
- client service;
- industry reputation;
- research innovation; and
- retention of key employees.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
In general, the revenues from our Core Business and from most of our Ventures
Businesses (other than POSIT, Symphony and our non-retainer consulting
businesses) are not normally subject to significant variability during a year.
We have, however, experienced variability of operating results from quarter to
quarter, due to:
- the trading volume of POSIT;
- Symphony's performance, the timing of the calculation of its performance
based fees and the growth of its assets under management;
- the volume and timing of agreements with new clients;
- timing of recognition of enterprise risk management revenue;
- acquisition or restructuring charges;
- the completion of significant non-retainer consulting engagements;
- annual employee salary adjustments in July;
- the timing and market acceptance of our new products and technological
advances or those of our competitors;
- foreign currency fluctuations;
- price levels; and
- unexpected expenses, unusual charges and write-offs.
All of these sources of variability are expected to continue for the foreseeable
future. For a further discussion of Fluctuations in Quarterly Operating Results,
see the subsection of the same name under Risk Factors below.
PROPRIETARY RIGHTS AND LICENSES
CORE BUSINESS - We rely on a combination of trade secret, copyright, trademark
and other intellectual property laws, license agreements and technical measures
to protect our rights in our intellectual property. We currently hold no
patents, but are considering applying for patents on certain of our proprietary
technologies.
The following factors contribute significantly to protecting our intellectual
property for our Core Business products:
- Access to the knowledge, ability and experience of our employees is
necessary for many of our clients to obtain the support necessary to
operate our products.
- To achieve full functionality, our products are dependent on timely product
enhancements and database updates.
- Initial and continuing access to our proprietary databases is often
required for our Core Business products to function.
- Over two decades of data collection and derivation have created an
unrivaled historical database.
For a further discussion of Proprietary Rights and Licenses, see the subsection
of the same name under Risk Factors below. Also, see Legal Proceedings in Item 3
of this Part 1 for a discussion of pending patent issues.
VENTURES BUSINESSES -
- POSIT - The technology used to operate each of the POSIT systems is owned
by the POSIT joint venture. The joint venture in turn licenses the
technology to ITG, ITGE and ITGA. Under the terms of our joint venture
agreement, we and ITG are prohibited from competing, directly or
indirectly, with POSIT. The licensee operators of POSIT are also subject to
restrictions on competition with POSIT. Related agreements also require
that we provide certain support services to the POSIT partnership,
including the availability of experienced personnel and support for the
development and
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maintenance of the POSIT system. The POSIT joint venture may also earn a
royalty from licensing POSIT to other businesses in other markets. Under
the terms of the joint venture agreement, ITG generally has the right to
approve any sale, transfer, assignment or encumbrance of our interest in
the POSIT joint venture.
The intellectual property issues for end users of POSIT mirror those
discussed above for the Core Business. Since we do not actively operate any
of the POSIT systems, these issues are primarily addressed by the
licensee-operators of each crossing system. We do, however, seek to protect
our rights through confidentiality and non-disclosure undertakings,
non-competition provisions and limitations on use in each POSIT license
agreement.
- SYMPHONY AND ASSET SERVICES - Our asset management businesses rely heavily
on the knowledge, abilities and experiences of certain employees in those
businesses. We seek to protect these knowledge bases (as well as those in
our other businesses) through non-disclosure undertakings by our employees.
In addition, Symphony uses data from proprietary sources in some of its
strategies. It uses exclusive license agreements with the proprietary data
vendors in an effort to prevent its competitors from utilizing the same
information.
- OTHER VENTURES -
- GLOBAL ESTIMATES AND BOND EXPRESS - Our Global Estimates and Bond
Express ventures are subject to the same intellectual property factors
as described for the Core Business above.
- INVESTMENT CONSULTING, STRATEGIC CONSULTING AND INVESTMENT STRATEGIES
- Our Investment Consulting and Investment Strategies ventures rely
heavily on the assets of our Core Business. To that extent, they are
vulnerable to the same factors and protected in the same manner
described above for the Core Business. In addition, all of these
activities rely heavily on the knowledge, abilities and experiences of
certain employees. We seek to protect these knowledge bases (as well
as those in our other businesses) through non-disclosure undertakings
by our employees.
For a further discussion of Proprietary Rights and Licenses, see the subsection
of the same name under Risk Factors below.
GOVERNMENT REGULATION
The financial services industry is subject to extensive regulation at the
federal and state levels, as well as by foreign governments. In the U.S., the
main governmental authority regulating us is the SEC. The SEC has oversight over
our activities due to our status as a publicly traded company and due to the
investment advisory nature of several of our businesses. It also regulates the
businesses of many of our clients and joint venture partners.
ADVISERS ACT
Our parent company, BARRA, Inc., is currently registered as an investment
adviser solely in the state of California but is seeking an exemption from the
SEC to permit federal registration under the Advisers Act. Three of our
subsidiaries, Symphony Inc., Symphony LLC and BARRA RogersCasey, are registered
under the Advisers Act but not under any parallel state statute. As registered
investment advisers these entities are required to meet certain financial
criteria, including the maintenance of minimum net capital levels. They are also
are subject to certain obligations, fiduciary duties and prohibitions with
respect to their operations, including their dealings with clients. These
include certain required disclosures to clients and potential clients,
limitations on receipt of performance-based compensation and restrictions with
respect to transactions involving potential conflicts of interest.
We have registered our parent company as an investment adviser because the
advice provided by our Investment Strategies unit and provided in one-off
consulting arrangements with clients of our Core Businesses may constitute
providing investment advice under the Advisers Act. We believe and have adopted
the position that the products of our Core Business do not otherwise provide
investment advice for purposes of the Advisers Act.
DOL, ERISA, CFTC AND NFA
BARRA RogersCasey provides Investment Consulting services to a large number of
pension plans that are regulated by the U.S. Department of Labor (DOL) under the
Employee Retirement Income Security Act of 1974 (ERISA). It is possible that
BARRA RogersCasey may, as a consultant, be deemed a fiduciary of some of those
plans. In such a case, BARRA RogersCasey would be subject to ERISA, which
imposes strict obligations on fiduciaries, especially regarding conflicts of
interest.
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Symphony and the Global Developing Markets Fund both manage funds owned by
pension plans. In addition to their normal Advisers Act fiduciary obligations
for these pension funds, they are also deemed to be fiduciaries under ERISA.
Symphony is also registered with and subject to the regulations administered by
the NFA and the CFTC. As Symphony and the Asset Services Group expand their
operations, they may become subject to certain additional government regulatory
requirements.
PERSONAL INVESTMENT AUTHORITY - PIA
As part of its business of providing information on director trading of
securities in the United Kingdom, our wholly owned subsidiary (Directus Limited)
provides analyses and advice subject to regulation by the PIA. The revenue from
the PIA regulated portion of Directus' business is not significant.
DATA PROTECTION ACT
Various statutes in the European Community regulate the collection and
distribution of personal data. In the United Kingdom, the Data Protection Act of
1998 (DPA) governs the use of such information by our subsidiaries with offices
in England and Scotland.
BROKER DEALER
Our wholly-owned subsidiary, BARRA Analytics Securities, Inc. (BAS),
discontinued operations in 1998. In 2000, it dissolved as a Delaware corporation
and withdrew its registrations as a broker/dealer with the SEC and as a member
of the National Association of Securities Dealers, Inc. (NASD).
SOFT DOLLARS
We estimate that approximately 11% of our total operating revenues are received
from U.S. brokers who direct us to provide Core Business products, Global
Estimates products and Investment Consulting services to designated clients.
These clients are money managers, fund sponsors and consultants using
commissions generated by their advised accounts with the broker to obtain
investment research and brokerage services. The funds used by these U.S. brokers
to pay for the services are referred to in the securities industry as "soft
dollars." We also have a data contract with Standard & Poor's Securities, Inc.
(SPSI). Under that contract, SPSI and its affiliates provide us with certain
U.S. equity data. In return, the contract requires that only SPSI accounts be
used for soft dollar payment for the portions of our products that use SPSI
data.
POSIT
Upon POSIT's inception, the POSIT joint venture obtained a "no-action" letter
from the SEC. In that letter, the SEC advised POSIT that it would not recommend
enforcement action to require registration as a stock exchange. Pursuant to the
conditions of the "no-action" letter and under Rule 17a-23 of the Securities
Exchange Act of 1934, as amended (Rule17a-23), the operators of POSIT in the
U.S. were required to maintain certain records and to provide the SEC with
certain reports and data. On April 21, 1999, SEC Regulation ATS became
effective. Regulation ATS repealed Rule 17a-23 and established a new regulatory
framework for ATSs such as POSIT. Regulation ATS allows ATSs to choose to
register as exchanges or as broker/dealers and requires compliance and reporting
requirements that are similar to those in Rule 17a-23.
Since the effectiveness of SEC Regulation ATS, ITG and Prebon have operated U.S.
POSIT and Fra POSIT, respectively, as part of their own broker/dealer
operations. Accordingly, POSIT is no longer subject to the restrictions of the
"no-action" letter and has not been registered with the SEC as an exchange.
BRAZILIAN CENTRAL BANK REGISTRATION
Our Brazilian subsidiary, BARRAConsult, Ltda. (BARRAConsult) is required to
register its exchange agreements with the Brazilian Central Bank (BCB). While
BARRAConsult has presented several agreements for registration, the registration
process has not been finalized.
INTERNATIONAL OPERATIONS
In 2000, 1999 and 1998, we derived approximately 30%, 33% and 33% of our total
revenues, respectively, from customers outside the U.S. We also have significant
operations for our Core Business and Global Estimates unit outside the U.S. They
are conducted primarily through our subsidiaries. During 2000, we used an
independent contractor to conduct our Core Business in Canada. We also use third
parties for the overseas distribution of our Global Estimates products. Please
refer to
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the Geographic Data table in Note 11 of the Notes to our Financial Statements
for a breakdown of revenues by major geographic areas and business segments.
In 2000, no single country, outside the U.S. and the U.K., had revenues
approaching 10%of our total revenues. In addition, our aggregate sales to
European Community countries were about 17% of our revenues.
Certain of our activities outside the U.S. are also subject to government
imposed constraints that affect our businesses, including the PIA registration
of a portion of our Directus business and the DPA constraints on the use of
personal information. See Government Regulation above.
EMPLOYEES
As of May 31, 2000, our Core Business and Ventures Businesses employed 667
persons through our parent company and its subsidiaries. Geographically, this
total breaks down approximately as follows:
- North America - 482;
- Europe and Africa - 127;
- Asia and Australia - 49; and
- South America - 9.
Except for certain of our employees in France and Australia, who were members of
state-sponsored labor unions in 2000, none of our employees was represented by a
labor union during the fiscal year. We have experienced no work stoppages and
generally believe that our employee relations are good. At the end of 2000, we
announced a restructuring plan aimed at consolidating our Core Business's sales
and client support functions worldwide. As part of that restructuring, we plan
to shut down certain offices around the world in 2001, including our office in
Paris, France. See Note 13 of the Notes to our Financial Statements.
RISK FACTORS
Our disclosure and analysis in this Form 10-K and in our 2000 Annual Report
contain several forward-looking statements. Forward-looking statements give our
current expectations or forecasts of future events. You can identify these
statements by the fact that they do not relate strictly to historical or current
facts. They use words such as anticipate, estimate, expect, project, intend,
plan, believe, designed, future, forecast, perceive, possible, potential,
targeted, may, scheduled, would, could, should, forward, assure and other words
and terms of similar meaning in connection with any discussion of future
operating or financial performance. In particular, these include statements
relating to future actions, events or results. From time to time we may also
provide oral or written forward-looking statements in other materials that we
release to the public.
Any or all of the forward-looking statements that we make in this Form 10-K, our
2000 Annual Report or any other public statements we issue may turn out to be
wrong. They can be affected by inaccurate assumptions that we might make or by
known or unknown risks and uncertainties. Many factors mentioned in this Form
10-K and our 2000 Annual Report will be important in determining future results.
Consequently, no forward looking statement can be guaranteed. Actual future
results may vary materially.
We are under no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise. We suggest,
however, that you consult any future disclosures we make on related subjects in
our subsequent Form 10-Q, 8-K and 10-K filings with the SEC. Also note the
following cautionary discussion of risks, uncertainties and possibly inaccurate
assumptions relevant to our businesses. These are factors that we think could
cause our actual results to differ materially from expected and historical
results. Other factors besides those listed here could also adversely affect us
or our business. This discussion is provided as permitted by the Private
Securities Litigation Reform Act of 1995. THIS SECTION SHOULD BE READ IN
CONJUNCTION WITH THE GENERAL DESCRIPTION OF OUR BUSINESS IN THIS PART I AND IN
OUR 2000 ANNUAL REPORT AND THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND
RELATED NOTES, THE SELECTED FINANCIAL DATA AND MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTAINED ELSEWHERE IN
THIS FORM 10-K.
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FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
Our revenues and results of operations are difficult to predict and may
fluctuate substantially from quarter to quarter, as they have in the past.
Factors specifically relating to our business segments are outlined below:
- CORE BUSINESS - Our Core Business revenues in any quarter depend
substantially upon our total contracting activity (including renewals of
existing contracts) and our ability to recognize revenue in that quarter in
accordance with our revenue recognition policies. We derive revenue from
this business segment primarily through annual subscriptions that
automatically renew unless canceled. Annual subscription fees are recorded
as revenues over each subscription period at the rate of 1/12th per month.
Consequently, sales of subscriptions in any one month impact reported
revenues evenly over the next twelve months. For this reason, our Core
Business subscription revenues are not normally subject to significant
variability during a year. Clients have historically renewed their
contracts at a high rate, but there is no assurance that these renewals
will continue.
We also include enterprise risk management system implementation consulting
fees in our Core Business revenues. These fees reflect non-recurring,
project driven revenues that are implemented in phases as contractual
milestones are met. Accordingly, they can be susceptible to a large degree
of variability depending on our ability to source new projects and the
unpredictable nature and significance of fees associated with specific
transactions.
Our earnings can be affected in our second fiscal quarter because of annual
salary adjustments for our employees in July. Our compensation policy
historically has involved significant reliance on discretionary bonuses.
Because compensation expense is a significant percentage of our operating
expenses, the amount of, timing of and accrual for discretionary bonuses
could have a material effect on the net income of our Core Business.
- VENTURES BUSINESSES - Diverse factors cause variability of operating
results in our various Ventures Businesses:
- POSIT - The several POSIT systems can experience and have experienced
significant fluctuations in trading volume. Since approximately 10% of
our operating revenue and a significant portion of our income by
segment came from this venture in 2000, these fluctuations can have a
significant impact on our revenue and operating income.
- SYMPHONY - Depending on the performance of the funds under management
by Symphony, the portion of its revenues that are derived from
performance-based fees could vary substantially. Performance based
fees are recognized only at the performance measurement dates
contained in the individual account management agreements. These dates
can be subject to renegotiation from time to time. The amount of
recognized revenues can, therefore, fluctuate significantly based not
only on the performance of the funds, but on the timing of their
recognition. Since more than 10% of our operating revenue and a
significant portion of our income by segment came from Symphony in
2000, these factors often result in significant variability in
revenues and operating income for us. Symphony's revenues will
continue to depend on its performance and the timing of its
performance fee determination dates for the funds it has under
management. We expect that this significant variability will continue
in the future.
- OTHER VENTURES -
- GLOBAL ESTIMATES AND BOND EXPRESS - The Global Estimates and Bond
Express ventures primarily produce subscription revenues, which
are subject to the same factors described above for the Core
Business.
- INVESTMENT CONSULTING, STRATEGIC CONSULTING AND INVESTMENT
STRATEGIES - Revenues for Investment Consulting and Investment
Strategies come primarily from retainer fee relationships. These
retainer revenues are recognized ratably over each month and are
subject to many of the factors described above for the Core
Business. Investment Consulting and Strategic Consulting project
revenues in any quarter depend substantially upon total
contracting activity and the ability to recognize revenue in that
quarter in accordance with BARRA's revenue recognition policies.
These revenues can be susceptible to a large degree of
variability depending on each venture's ability to source new
projects and the unpredictable nature and significance of fees
associated with specific transactions.
Investment Consulting and Strategic Consulting earnings can be
affected in our second fiscal quarter because of annual salary
adjustments for our employees in July. Our compensation policy
historically has involved significant reliance on discretionary
bonuses. Because compensation expense is a significant percentage
of our operating expenses, discretionary bonuses could have a
material effect on our net income.
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Our operating expenses are based in part on our expectations regarding future
revenue. Our consolidated operating results may be adversely affected if revenue
does not develop in a quarter as anticipated. Since expenses are usually
incurred before revenues are generated, and because only a small amount of
expenses vary with revenue, our consolidated operating results may be impacted
significantly by lower revenues. Various factors could cause these lower
revenues and could affect quarter to quarter comparisons. Also, much of our
revenues are earned under fixed price software subscriptions. Changes in our
costs of those subscriptions could have a material adverse effect on our
business, financial condition and results of operations.
Accounting standards and practices may require us to defer recognition of
license revenue for a significant period after entering into a license
agreement. Generally, the subscription fees for our Core Business and Global
Estimates products are initially deferred as unearned revenues when payment has
been received, after which revenue is recognized ratably over the term of the
subscription. Negotiated terms for some of our Core Business sales and
consulting services, particularly enterprise risk management solutions,
sometimes do not permit revenue recognition at the time of delivery or even as
work on the project is completed.
DEPENDENCE ON KEY PERSONNEL
Our future success will depend in large part on our ability to attract, train
and retain highly skilled managerial, research, development, sales, support,
technical and services personnel. Competition for people in the software and
financial services industries is intense. At times, we've had difficulty
locating candidates with appropriate qualifications and expertise. None of our
executive officers has entered into a long term employment agreement with BARRA.
Our failure to attract, train, retain and manage our key personnel, could have a
material adverse effect on our business, operating results or financial
condition.
DEPENDENCE ON AVAILABILITY OF DATA
We currently obtain data from over 100 third-party vendors that is used in our
products and services. Any interruption of our supply of data from a principal
data vendor or vendors, or an interruption of our own data operations or data
update processes, could have a material adverse effect on our business,
financial condition or results of operations. These adverse effects include, for
example, our products or services becoming inoperable or their performance being
materially reduced.
If any of the third-party data vendors change their product offerings, we may
need to incur additional costs to ensure continued performance of our products
and services. In addition, if the cost of licensing any of these third-party
data products materially increases, our gross margin levels could materially
decrease.
CATASTROPHIC EVENTS
Our operations depend on our ability to protect our equipment and the
information stored in our databases against fires, earthquakes and other natural
disasters, as well as other power loss, telecommunications failures,
unauthorized intrusions and other catastrophic events. There is no assurance
that the measures we've taken to reduce the risk of interruption in our
operations caused by these events is sufficient. Any damage or failure that
causes operational interruptions could have a material adverse effect on our
business, financial condition or results of operations.
INTERNATIONAL OPERATIONS
We anticipate that revenues from customers outside the U.S. will continue to be
a significant part of our total revenues for the foreseeable future. Our
operations outside the U.S. are subject to additional risks, including:
- unexpected changes in regulatory requirements;
- unexpected changes in exchange rates, tariffs and other trade barriers;
- political or economic instability;
- difficulties in staffing, managing and integrating foreign operations;
- longer payment cycles;
- difficulties or delays in translating products and related documentation
into foreign languages;
- currency fluctuations and conversion risks; and
- potentially adverse tax consequences.
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Any of these factors could have a material adverse effect on our business,
financial condition, or results of operations.
VOLATILITY OF STOCK PRICE; RISK OF LITIGATION
The trading price of BARRA common stock has in past and may in the future be
subject to significant fluctuations in response to factors such as: (a) revenue
or results of operations in any quarter failing to meet the expectations
(published or otherwise) of the investment community, and the timing of the
announcements of such shortfalls; (b) changes in recommendations or financial
estimates by securities analysts; (c) acquisitions or sales of significant
businesses; (d) new product announcements; (e) conditions and trends generally
in the industries in which we operate; (f) adoption of new accounting standards
affecting the software or financial services industries; and (g) general market
conditions. Further, the stock market has experienced in recent months and may
continue in the future to experience extreme price and volume fluctuations that
particularly affect the market prices of equity securities of high technology
and financial services companies. These fluctuations often are not related, or
are disproportionate, to the operating performance of those companies. These
broad market fluctuations, as well as general economic, political and market
conditions have and may continue to have a material adverse effect on the
trading price of BARRA common stock. Fluctuations in the price of our common
stock may expose us to the risk of securities class action lawsuits or claims.
Any such suit or claim, even if the outcome were to be ultimately favorable to
us, would involve a significant commitment of our management, personnel,
financial and other resources. In addition, these sorts of claims and lawsuits
could have a material adverse effect on our business, financial condition, or
results of operations.
PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE
The markets in which we compete are characterized by rapidly changing
technologies, extensive research, and new product introductions. Our future
growth and financial performance will depend on our ability to continue to
quickly develop and introduce new products and enhance our existing products in
response to advances in finance theory and computer technology, changing market
conditions and increasingly sophisticated customer requirements. We may not be
able to enhance existing products or develop and introduce new products that
receive market acceptance in a timely manner. Our failure to anticipate or
respond adequately to changing market conditions could have a material adverse
effect on our business, financial condition, or results of operations. Because
we offer products across many geographic areas and many areas of specialization,
we often must restrict our product development efforts to a limited number of
products and operating platforms. There can be no assurance, however, that
efforts we select will be successful or will achieve market acceptance. In
addition, the cost of research and development efforts required to keep pace
with technological changes may, at times, have a significant effect on our
business, operating results or financial condition.
LIMITED PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS AND POTENTIAL
INFRINGEMENT OF THIRD PARTY INTELLECTUAL PROPERTY RIGHTS
We consider certain aspects of our products, related internal data update
processes and services to be proprietary. We rely on a combination of trade
secret, copyright, trademark and other intellectual property laws, license
agreements and technical measures to protect our rights in our intellectual
property. We currently hold no patents. Despite our efforts, a third party may
still try to challenge, invalidate or circumvent the protective mechanisms that
we select. We cannot assure that any of the rights granted under any copyright
or trademark that we may obtain will protect our competitive advantages. Our
competitors may also independently develop and patent technology that is the
same or similar to ours or may obtain access to our proprietary technology. In
addition, the laws of certain foreign countries do not protect our proprietary
rights to the same extent as do the laws of the United States. Also, some
elements of our products and services are not subject to intellectual property
protection.
We believe that our products, processes and trademarks, including those obtained
in recent acquisitions, do not infringe the intellectual property rights of
third parties. There can be no assurance, however, that the intellectual
property which we have acquired will meet the warranties negotiated in these
transactions or that third parties will not otherwise assert infringement claims
in the future. These assertions could require us to enter into royalty
arrangements or could result in costly litigation.
- TRADEMARKS - We have registered "BARRA" as a trademark in the United States
and in certain foreign countries. We have also registered other trademarks
in the United States and in certain foreign countries for certain product
and services names, and have registration applications pending for product
and service names in the United States and foreign countries. When we enter
a new geographic market or introduce a new product brand, there can be no
assurance that our existing trademark or mark of choice will be available.
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- PATENTS - We currently hold no patents. Recent court rulings clarifying
U.S. patent law appear, however, to have strengthened the viability of
patents for investment-related products. In light of these developments, we
are considering applying for patents on certain of our proprietary
technologies. Patent applications can be extremely costly to process and
defend. Further, we cannot assure that any of the rights granted under any
patent that we may obtain will protect our competitive advantages.
There are numerous patents in the software and investment solutions
industries and new patents are being issued at a very rapid rate. Many of
these patents are of the "business method" variety. These recent
developments appear to be prompting many of our competitors and potential
competitors to seek patents on their investment solutions technologies.
Under current law, U.S. patent applications remain secret for 18 months and
may, depending upon other locations where patent applications are filed,
remain secret until the issuance of the patent. In light of these factors,
we do not believe it is feasible to determine in advance whether any of our
existing products or any of their components or a service or method
infringes on the patent rights of others. From time to time we will receive
notices from others containing claims or potential claims of intellectual
property infringement. We may also be called upon to defend a joint venture
partner, customer, vendor or licensee against such third party claims.
Responding to these types of claims, regardless of merit, could consume
valuable time, result in costly litigation or cause delays, all of which
could have a material adverse effect on our business, operating results or
financial condition. Responding to these claims could also require us to
enter into royalty or licensing agreements with third parties claiming
infringement. These royalty or licensing agreements, if available at all,
may not be available on terms acceptable to us. See Legal Proceedings in
Item 3 of this Part 1 for a discussion of pending patent issues.
- LICENSE AGREEMENTS - The software and data products of our Core Business
and Ventures Businesses are generally licensed to end users on a periodic
subscription basis in a nontransferable license signed by the client. We
also permit access to some products through the Internet under on-line
licenses that are acknowledged by the licensee. The enforceability of these
on-line licenses has not been conclusively determined by the courts. We are
frequently required to obtain licenses to the proprietary rights of data
vendors or others. There can be no assurance that these licenses will be
made available on terms acceptable to us, if at all.
- TRADE SECRET AND COPYRIGHT - Existing trade secret and copyright laws only
offer us limited protection for our proprietary assets. We believe that the
rapid pace of technological change in the software and investment solutions
industries will only make trade secret and copyright protection less
significant over time. Consequently, our competitors may independently
develop technologies that are substantially equivalent or superior to our
technology. Since most of the software and data products of our Core
Business and Ventures Businesses require access to our proprietary
databases, we also believe that trade secret and copyright protection are
not significant factors in the protection of our proprietary rights. We
also rely on the following factors:
- the knowledge, ability and experience of our employees;
- timely product enhancements and database updates; and
- the availability and quality of our support and consulting services.
- CONFIDENTIALITY UNDERTAKINGS - Our license agreements restrict clients'
disclosure of proprietary information contained in our products. It may be
possible, however, for unauthorized parties to copy aspects of our products
or to obtain and use information that we regard as proprietary. We also
rely heavily on the knowledge, abilities and experiences of certain
employees. We seek to protect these knowledge bases through non-disclosure
agreements with our employees. The laws of each jurisdiction in which we
employ personnel and enter into licenses with our clients vary with regard
to the extent these sorts of undertakings may be enforced.
POTENTIAL LIABILITY BASED ON USE OF PRODUCTS AND SERVICES
Our license and consulting agreements have provisions designed to limit our
exposure to potential liability claims brought by our clients or other third
parties. However, these provisions could be invalidated by unfavorable judicial
decisions or by federal, state, foreign or local laws. Use of our Core Business
and Ventures Businesses products and services for investment decision-making
creates the risk that clients, or the parties whose funds are managed by our
clients, may pursue a claim against us. Any such claim, even if the outcome were
to be ultimately favorable to us, would involve a significant commitment of our
management, personnel, financial and other resources. If a claim against us were
successful, the resulting damages could have a material adverse effect on our
business, financial condition, or results of operations.
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GOVERNMENT REGULATION
The financial services industry is subject to extensive regulation at the
federal and state levels, as well as by foreign governments. It is very
difficult to predict the future impact of the broad and expanding legislative
and regulatory requirements affecting our businesses. A change in or failure to
comply with any applicable laws, rules or regulations could result in fines,
penalties, suspensions or revocations of licenses or permits. We believe that
our existing products and services comply with all applicable laws, rules and
regulations. However, there can be no assurance that these laws, rules or
regulations will not change in the future, or that such changes will not
materially adversely affect our business, financial condition or results of
operations.
- ADVISERS ACT - We believe and have adopted the position that our Core
Business products and Global Estimates products do not provide investment
advice for purposes of the Advisers Act. Future developments in our product
line or in the regulatory environment could cause this status to change. If
that happens, we may have to broaden our disclosures to the SEC and to
adopt the strict compliance procedures mandated by the Advisers Act for a
much broader segment of our business. These changes could also trigger
obligations to comply with investment advisory regulations in foreign
jurisdictions where we market our products. These heightened obligations
would entail significant additional costs to us.
- PIA PRINCIPAL - The individual named in Directus' PIA registration as the
supervisor of the regulated activities ceased to be our direct employee in
1999. During 2000, he was retained by us to supervise the conduct of those
activities. If our retainer of the Directus supervisor were to terminate
during 2001, we would have to find another individual with the required
qualifications to fill this role or cease conducting the related
activities.
- DPA - The collection and dissemination of personal data relating to
individuals is regulated in the United Kingdom under the DPA. Our
subsidiaries, BARRA International, Ltd. and BARRA (U.K.), Ltd. have each
registered under the DPA, and we are currently in the process of
registering Directus, Ltd. To the extent our business practices are deemed
to conflict with the requirements of the DPA, we may be subject to fines or
other penalties.
- POSIT - Following the adoption of Regulation ATS, POSIT has continued to
operate as a broker-dealer and is not registered as an exchange. There can
be no assurance that the SEC will not in the future seek to impose more
stringent regulatory requirements on the operation of ATSs such as POSIT.
Also, certain of the securities exchanges have actively sought to have more
stringent regulatory requirements imposed on automated trade execution
systems. There can be no assurance that Congress will not enact legislation
applicable to alternative trading systems. If POSIT were to become subject
to regulation as a stock exchange, it is possible that POSIT could not
operate effectively. Loss of revenues from POSIT would materially adversely
affect our financial condition and results of operations.
- SOFT DOLLARS - We also estimate that approximately 11% of our total
revenues are received from soft dollar transactions. For several years the
investment community has debated the purchase of goods and services with
soft dollars, and the practice is regulated in the U.S. by the SEC and the
DOL. Legal or regulatory changes may restrict or prohibit us from providing
services to money managers in exchange for soft dollars. Such changes could
have a material adverse effect on our business, financial condition, or
results of operations.
- BRAZILIAN CENTRAL BANK - BARRAConsult is required to register its exchange
agreements with the BCB. While BARRAConsult has presented several
agreements for registration, the registration process has not been
finalized.
COMPETITION
Each of the markets in which our Core Business and Ventures Businesses operate
has become increasingly competitive in recent years. In some of these segments,
our competitors have substantially greater financial, research, development and
other resources. There can be no assurance that (a) we and/or our business
partners will continue to have sufficient resources to succeed in our efforts
and be successful in maintaining our competitive advantages or (b) our
competitors will not devote significantly more resources to competing
activities.
CHANGES IN GENERAL ECONOMIC CONDITIONS
The U.S. and certain other economies have experienced an extended period of
growth in recent years. In a recession, it is likely that assets under
management would decrease thereby decreasing the revenues to asset managers.
While such economic events could increase general interest in our products and
services, reduced asset management revenues would place pressure on our clients
to cut their cost of services, which could adversely impact our sales and
renewal rates.
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RISKS ASSOCIATED WITH BUSINESS COMBINATIONS
As part of our overall strategy, we may continue to acquire or invest in
complementary companies, products, and technologies and to enter into joint
ventures and strategic alliances with other businesses. Some common risks in
these arrangements include: (a) the difficulty of assimilating the operations
and personnel of the combined companies; (b) the risk that we may not be able to
integrate the acquired technologies or products with our own; (c) the
substantial management time devoted to such activities; (d) undisclosed
liabilities; (e) the inability of management to maximize our financial and
strategic position through the successful integration of acquired businesses;
(f) the failure to realize anticipated benefits (such as cost savings and
synergies); and (g) customer dissatisfaction with, or problems caused by, the
performance of any acquired technologies. We may not be successful in overcoming
these risks or any other problems encountered in these transactions. In
addition, there can be no assurance that acquired businesses will achieve
anticipated revenues and earnings.
MANAGEMENT OF GROWTH AND CHANGES IN STAFFING
We have experienced an extended period of (a) revenue growth; (b) growth into
new foreign markets; (c) expansion of our Core Business and our Ventures
Businesses and related services; and (d) substantial fluctuations in the number
of our employees. These changes have resulted in new and increased
responsibilities for our management and have placed a significant strain on our
operating and financial controls and other resources. To accommodate recent
growth, compete effectively, and manage potential future growth, we must
continue to implement and improve the speed and quality of our products and
services, management decisions, reporting systems, procedures, and controls. Our
personnel, procedures, systems, and controls may not be adequate to support our
future operations.
POSSIBLE ADVERSE EFFECTS OF OPTION EXERCISES
If holders of options to purchase our common stock exercise any significant
number of these options and resell the underlying shares, the market price of
BARRA common stock could be materially adversely affected. At March 31, 2000,
there were outstanding exercisable options to purchase approximately 1.2 million
shares of BARRA common stock issued under various BARRA stock option plans. As
of that date, options to purchase about 1.2 million shares of BARRA Common Stock
had exercise prices below our closing common stock price on March 31, 2000
($33.875).
EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS AND ANTI-TAKEOVER PROVISIONS;
POSSIBLE ISSUANCE OF PREFERRED STOCK
Our Certificate of Incorporation, Bylaws, and certain Delaware laws contain
provisions that may discourage acquisition bids for BARRA. This may deprive
stockholders of certain opportunities to receive a premium for their shares as
part of a purchase of BARRA. We may issue preferred stock in the future without
stockholder approval upon terms approved by our Board of Directors. The rights
of our common stockholders will be subject to, and may be materially adversely
affected by, the rights of the holders of any preferred stock that may be issued
in the future. The issuance of preferred stock could have the effect of making
it more difficult for a third party to buy, or of discouraging a third party
from buying, a majority of our outstanding stock. We have no present plans to
designate or issue any shares of preferred stock.
IMPACT OF LEGAL AND REGULATORY PROCEEDINGS
Throughout this Form 10-K we have made various disclosures regarding the
possibility of certain legal and regulatory proceedings. Many factors may effect
the outcome of such proceedings. Accordingly, until such proceedings are finally
resolved, it is difficult to determine the likelihood of a favorable outcome,
the direct and indirect costs associated with the proceeding, or, in the event
of an unfavorable outcome, the amount of any loss. Any proceeding, even if the
outcome were to be ultimately favorable to us, would likely involve a
significant commitment of our management, personnel, financial and other
resources. This alone could have a material adverse effect on our business,
financial condition, or results of operations.
YEAR 2000
The "Year 2000" or "Y2K" problem is the inability of computer systems and
embedded computer chips to distinguish between the year 1900 and the year 2000.
During 2000, we allocated approximately 50 full-time equivalent employees from
our research and data management groups to work almost exclusively on our Year
2000 efforts. To the extent individuals within these groups were dedicated to
these efforts, we experienced delays in developing enhancements to our products,
as well as delays in our research efforts supporting our next generation of
products. For a more comprehensive discussion of response to the Year 2000
Problem, see the Year 2000 discussion under Management's Discussion and Analysis
of Financial Condition and Results of Operations in Part II of this Form 10-K.
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ITEM 2. PROPERTIES
Our world headquarters are located in two buildings in Berkeley, California.
These buildings house our principal administrative, marketing and product
development facilities. The largest building is occupied under a lease that
expires in June 2007, subject to eight consecutive five-year renewal options.
The smaller building is occupied under a lease that expires in June 2003,
subject to one five year renewal option. All together, our headquarters occupy
over 64,000 square feet of leased space in downtown Berkeley, California.
Directly and through our subsidiaries, we leased office space in 18 cities
around the world during 2000. At the end of 2000, we announced a restructuring
plan aimed at consolidating our Core Business's sales and client support
functions worldwide. As part of that restructuring, we announced plans to shut
down certain offices around the world in 2001, including our offices in Paris,
France, Singapore, and Westborough, Massachusetts. See Note 13 of the Notes to
our Financial Statements.
CORE BUSINESS - During 2000, this business unit had employees and operations in
the following locations:
- Berkeley, California, U.S.A:
- Cape Town, South Africa;
- Edison, New Jersey, U.S.A;
- Frankfurt, Germany;
- Hong Kong, China;
- London, England;
- Mexico City, Mexico;
- New York, New York, U.S.A;
- Paris, France;
- Rio de Janeiro, Brazil;
- Singapore;
- Sydney, Australia;
- Westborough, Massachusetts, U.S.A;
- Yokohama, Japan.
VENTURES BUSINESSES -
- POSIT - Our employees for this venture are located in BARRA's New York, New
York office and in the offices of ITG. The licensees of the various POSIT
systems maintain local offices to support each of those systems.
- SYMPHONY- This venture has employees and operations in San Francisco,
California.
- GLOBAL ESTIMATES - This venture has full-time employees in Edinburgh,
Scotland.
- BOND EXPRESS - Our employees for this venture are located in New York, New
York and San Diego, California.
- BARRA ROGERSCASEY - BARRA RogersCasey has employees in Darien, Connecticut.
- STRATEGIC CONSULTING - Strategic Consulting has employees in Darien,
Connecticut.
- INVESTMENT STRATEGIES - Employees for this unit are located in Berkeley,
California.
ITEM 3. LEGAL PROCEEDINGS
- REDPOINT ROYALTY ISSUE - On June 17, 1998, we purchased substantially all
of the assets of RJM Ventures, Inc., formerly known as Redpoint Software
Inc. ("RJM"). The terms of the acquisition required that we make royalty
payments equal to a certain percentage of the software license fee for
qualifying product sales between April 1, 1999 and December 31, 2000. On
May 26, 2000, we received a notice from RJM disputing our royalty
calculation applicable to the quarter ended March 31, 2000. In particular,
RJM claimed that at least an additional $910,937 in royalties is payable as
a result of a contract signed by a client of BARRA during the March 2000
quarter. We are disputing this claim primarily on the basis that the RJM's
calculation includes revenues unrelated to this client's software license
fee. We
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continue to believe that our calculation of the royalty complies with the
terms of the acquisition agreement and we intend to vigorously defend the
claims made by RJM including, if warranted, participating in arbitration
proceedings. These types of disputes, however, are subject to inherent
uncertainties and may be costly to defend. There can be no assurance that
the claim made by RJM will be resolved favorably to us.
- POSIT PATENT ISSUE - In June 1999, we received notice from ITG of patents
purportedly owned by Belzberg Financial Markets & News International Inc.
and Sydney Belzberg, an officer of that company (the Belzberg Patents). At
that time, ITG informed us that one or more of the Belzberg Patents may
relate to the devices, means or methods used by the POSIT electronic
system, the POSIT joint venture, ITG and/or their customers, licensees or
joint venture partners in the operation of the POSIT business. ITG has also
informed us that on March 5, 1999, a Canadian licensee of ITG technology
received a letter asserting that the ITG licensee was infringing one of the
Belzberg Patents. We understand that the ITG licensee has denied the claims
of infringement and has asserted that the Belzberg Patent at issue is
invalid or unenforceable. Under certain conditions, ITG may have a duty to
defend or indemnify the licensee for any costs or damages arising out or an
infringing use of the technology licensed by ITG. In turn, under certain
conditions, the POSIT joint venture and we, as one of its general partners,
may have a duty to defend or indemnify ITG. We are monitoring the matter
with ITG and intend to take all appropriate action. We are unaware of any
actual claims of patent infringement leveled against the POSIT system, the
POSIT joint venture or any of POSIT's customers or joint venture partners
by any of the title owners of the Belzberg Patents. Based upon our review
of the matter as disclosed to us by ITG, we believe that any such claims
arising out of the Belzberg Patents would be without merit and we would
vigorously defend any such claim, including, if warranted, participating in
legal proceedings. Intellectual property disputes are, however, subject to
inherent uncertainties. There can be no assurance that any potential claim
could be resolved favorably to us or that the claims or their resolution
would not have a material adverse effect on our business, operating results
or financial condition.
- COLUMBIA PATENT ISSUE - On May 31, 2000, we received a letter from Columbia
Innovations Enterprises (CIE) a division of Columbia University in the City
of New York (Columbia). The letter noted CIE's understanding that BARRA's
"Cosmos-US Valuation products utilize quasi-random numbers," suggested that
we review two patents held by Columbia (U.S. Patent Nos. 5,940,810 and
6,058,377 (Columbia Patents)), and noted that Columbia would be prepared to
license the Columbia Patents to BARRA at reasonable terms and conditions.
We are presently reviewing the Columbia Patents with counsel. Our
preliminary review indicates that our products do not infringe either
Columbia Patent and that a license from Columbia would be unnecessary.
Based upon that preliminary review, we also believe that any claims arising
out of the Columbia Patents would be without merit and we intend to
vigorously defend any such claim, including, if warranted participating in
the initiation of legal proceedings. Intellectual property disputes are,
however, subject to inherent uncertainties and often can be very costly to
defend. There can be no assurance that any potential claim could be
resolved favorably to us or that the claims or their resolution would not
have a material adverse effect on our business, operating results or
financial condition.
In addition, we are often subject to various legal proceedings and claims,
either asserted or unasserted, arising in the ordinary course of business. While
the outcome of these proceedings and claims cannot be predicted with certainty,
we do not believe that the results of any of these matters will materially and
adversely affect our business, financial condition or results of operations. See
also Note 12 of the Notes to our Financial Statements below.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
23
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
As of June 6, 2000, the following executive officers hold the offices indicated
until their successors are chosen and qualified at the next annual meeting of
our shareholders:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Andrew Rudd 50 Chairman
Kamal Duggirala 41 President and Chief Executive Officer
James D. Kirsner 56 Chief Financial Officer
Maria Louisa Hekker 38 General Counsel, Chief Legal Officer and Secretary
Andrew Huddart 39 Executive Vice President
Claes Lekander 38 Executive Vice President
Aamir Sheikh 40 Executive Vice President
Gregory Stockett 34 Vice President of Finance
</TABLE>
Executive officers of the Company are elected annually by the Board of Directors
and serve at the Board's discretion. There are no family relationships among any
directors or executive officers of the Company.
KAMAL DUGGIRALA - Mr. Duggirala joined our predecessor in 1984. He served in
various roles of increasing responsibility in our Electronic Brokerage and
Trader products and Advanced Technology divisions from 1984 to 1993. In 1994, he
became our President and in 1999 he became our Chief Executive Officer.
MARIA LOUISA HEKKER - Ms. Hekker has been our General Counsel since 1992. Prior
to joining BARRA, she worked in the San Francisco and Milan offices of the law
firm of Graham & James from 1988 to 1992.
ANDREW HUDDART - Mr. Huddart joined BARRA in 1997. From 1997 to 1999, he served
as President of our Investment Data Products division and as a Senior Vice
President. He served as our Chief Operating Officer from 1999 to 2000. In 2000,
Mr. Huddart became an Executive Vice President and he currently runs the
Distribution division of our Core Business. Prior to joining BARRA, Mr. Huddart
worked with Reuters in the U.S. and Europe from 1983 to 1997.
JAMES D. KIRSNER - Mr. Kirsner has been our Chief Financial Officer since 1993.
In 2000, he also assumed management oversight of our Ventures Businesses. Prior
to joining BARRA, Mr. Kirsner was with Arthur Andersen & Co. from 1966 to 1993.
CLAES LEKANDER - Mr. Lekander joined BARRA in 1985 as a Consultant. He served in
various roles of increasing responsibility in our Equity Services and Product
Management divisions from 1985 to 2000. Mr. Lekander became an Executive Vice
President in 2000 and currently manages our Core Business's Applications
division.
ANDREW RUDD - Dr. Rudd joined our predecessor in 1975. He served as our
President from 1984 to 1992, our Chief Executive Officer from 1984 to 1999, as a
member of our Board of Directors since 1986 and as Chairman since 1992. Between
1977 and 1982, Dr. Rudd was a professor of finance and operations research at
Cornell University in Ithaca, New York.
AAMIR SHEIKH - Dr. Sheikh joined BARRA in 1994 as a Senior Consultant. He served
in various positions (each with increasing responsibility) in our Research
Department and with our Enterprise Risk Management enterprise from 1994 to 2000.
In 2000, Dr. Sheikh became an Executive Vice President and assumed management
responsibility for our Core Business's Content division. From 1987 to 1994, Dr.
Sheikh was an assistant professor of finance at Indiana University School of
Business in Bloomington, Indiana.
24
<PAGE>
GREGORY STOCKETT - Mr. Stockett joined BARRA in 1996 as Finance Manager. He
became Director of Finance in 1998 and Vice President of Finance in 2000. Prior
to joining BARRA, Mr. Stockett was with Deloitte & Touche LLP from 1989 to 1996.
25
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock is listed on The NASDAQ Stock Market (the "NSM") under the
trading symbol "BARZ." This table displays the range of high and low trade
prices for our common stock as reported on the NSM.
<TABLE>
<CAPTION>
1999 HIGH LOW 2000 HIGH LOW 2001 HIGH LOW
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1st Quarter 29.000 19.875 1st Quarter 26.375 17.875 1st Quarter 60.000 28.000
2nd Quarter 25.500 18.500 2nd Quarter 25.375 19.500 (through June 6, 2000)
3rd Quarter 28.000 15.625 3rd Quarter 33.000 19.125
4th Quarter 26.875 17.500 4th Quarter 39.000 26.750
</TABLE>
At June 6, 2000 there were approximately 3600 holders of our common stock. To
date, we have paid no cash dividends on our common stock. The payment of
dividends, if any, in the future is within the discretion of the Board of
Directors and will depend upon our capital requirements and financial condition
and other relevant factors. Our Board of Directors does not intend to declare
any dividends in the foreseeable future. On June 6, 2000 the closing price for
our common stock as reported by the NSM was $45.094.
ITEM 6. SELECTED FINANCIAL DATA
The information on the inside cover of the 2000 Annual Report under the heading
"Financial Highlights" regarding our selected financial data required by this
Item 6 is incorporated by reference. (See also Item 7 below in Part II of this
Report.)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis contains descriptions of our current
expectations and forecasts regarding future trends affecting our business. These
forward-looking statements and other forward looking statements made elsewhere
in this Form 10-K and in our 2000 Annual Report to Shareholders are made in
reliance on safe harbor provisions of the Private Securities Litigation Reform
Act of 1995. For further information regarding how to identify forward looking
statements and the factors that could cause actual results to differ, please
look at the Risk Factors section in Part I of this Form 10-K. Any or all of the
forward-looking statements that we make in this Form 10-K, our 2000 Annual
Report to Shareholders or any other public statements we issue may turn out to
be wrong. It is also important to remember that other factors besides those
listed in the Risk Factors section could also adversely affect us and our
business, operating results or financial condition.
THIS SECTION SHOULD BE READ IN CONJUNCTION WITH THE RISK FACTORS SECTION OF PART
I OF THIS FORM 10-K, OUR AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED
NOTES IN THIS PART II AND THE SELECTED FINANCIAL DATA CONTAINED IN OUR 2000
ANNUAL REPORT.
26
<PAGE>
RESULTS OF OPERATIONS
The following table shows the percentage of total operating revenues represented
by items in our consolidated statements of income for the years ended March 31:
<TABLE>
<CAPTION>
2000 1999 1998
------------------------------------
<S> <C> <C> <C>
Operating Revenues:
Subscription and consulting fees 64.1% 72.5% 70.7%
Electronic trading 10.2 10.3 8.8
Asset management 25.7 17.2 20.5
------------------------------------------------------------------------------------------------------
Total operating revenues 100.0% 100.0% 100.0%
------------------------------------------------------------------------------------------------------
Operating Expenses:
Cost of subscription products 4.3% 6.0% 5.3%
Compensation and benefits 47.1 49.4 45.2
Occupancy 3.9 4.8 4.0
Other operating expenses 13.7 17.6 18.2
------------------------------------------------------------------------------------------------------
Total operating expenses before acquisition and other charges 69.0 77.8 72.7
Restructuring charges 4.8 - -
Non-recurring acquisition charges and write-off of goodwill
and capitalized software costs - 2.5 7.2
------------------------------------------------------------------------------------------------------
Total operating expenses 73.8% 80.3% 79.9%
------------------------------------------------------------------------------------------------------
Interest Income and Other 2.1% 0.9% 1.4%
------------------------------------------------------------------------------------------------------
Income Before Equity in Net Income and Loss of
Investees, Minority Interest, and Income Taxes 28.3% 20.6% 21.5%
Equity in Net Income and Loss of Investees - (0.4) (0.3)
Minority Interest (8.5) (5.1) (6.2)
------------------------------------------------------------------------------------------------------
Income Before Income Taxes 19.8% 15.1% 15.0%
Income Taxes (7.2) (6.9) (9.2)
------------------------------------------------------------------------------------------------------
Net Income 12.6% 8.2% 5.8%
======================================================================================================
</TABLE>
OPERATING REVENUES
In 2000, we reorganized into two business units, BARRA Core and BARRA Ventures.
Our Core Business consists of one business segment, portfolio risk management
and enterprise risk management systems. Our Ventures Business consists of three
business segments: Symphony, POSIT and Other Ventures. See Note 11 to the Notes
to our Financial Statements for further information about our segments.
SUBSCRIPTION AND CONSULTING FEES. Subscription and consulting fees consist of
annual subscription fees and other related revenues for our Core Business
portfolio risk management and enterprise risk management systems, as well as
other revenues from the following ventures: subscription fees from Global
Estimates and Bond Express and annual retainer and project fees from our BARRA
RogersCasey, Strategic Consulting and Investment Strategies ventures. A summary
of the components of this revenue is as follows (amounts in thousands):
27
<PAGE>
<TABLE>
<CAPTION>
2000 1999 1998
--------------------------------- ---------------------------------- --------------
% CHANGE FROM % CHANGE FROM
$ PRIOR YEAR $ PRIOR YEAR $
- ---------- - ---------- -
<S> <C> <C> <C> <C> <C>
Core product subscriptions -
continuing products 86,505 16 74,430 16 64,347
Core product subscriptions -
discontinued fixed income products 595 (93) 7,885 3 7,695
Other Core product related 6,267 (20) 7,811 69 4,631
Investment and Strategic Consulting 19,320 13 17,026 (2) 17,398
Global Estimates and Bond Express
6,871 (8) 7,509 61 4,677
-----------------------------------------------------------------------------------
Total 119,558 4 114,661 16 98,748
===================================================================================
</TABLE>
Core product subscriptions are revenues for our portfolio risk management and
enterprise risk management products, including related data updates. We
generally bill and collect these fees on an annual basis, but recognize the
income 1/12th per month over each year of the subscription period. The growth in
annual subscription fees continues to be generated from a combination of
obtaining new clients (including subscriptions to enterprise risk management
systems) and increasing revenues from existing customers through the
introduction of new products, features and services.
For 2000 compared to 1999, annual subscription fee revenue for continuing
products for the U.S. and non-U.S. markets increased approximately 22% and 12%,
respectively. For 1999 compared to 1998, annual subscription fee revenue for
continuing products for the U.S. and non-U.S. markets increased approximately
22% and 13%, respectively. Revenue growth in the U.S was primarily driven by
sales of our new enterprise risk management software, which had a 69% increase
in revenues in 2000, and equity models and related data reflecting the continued
success of our Aegis suite of products. In non-U.S. markets, equity model and
global fixed income model revenues contributed to the increase.
Revenues from discontinued fixed income products represent annual subscription
fees and related revenues associated with our U.S. single country fixed income
model which we discontinued as part of a restructuring plan in April 1999.
Revenues for 2000 only represent amounts earned on these products during April
1999. As part of the restructuring, we agreed to provide license and support
services without charge from May 1, 1999 until the product termination dates.
The termination dates ranged from October to December 1999.
Other Core product related revenues include consulting and implementation fees
associated with enterprise risk management system installations, timesharing
revenues, seminar revenues and one-time fees. The decline in these revenues from
1999 to 2000 reflects increases in implementation and consulting fees from
enterprise risk management system installations, offset by declines in timeshare
and other one-time fees. The increase in implementation and consulting fees
reflects growth in the installed base for our enterprise risk software. The
decline in timeshare revenues is the result of discontinuing our timesharing
product platform at the end of calendar 1999. Our timesharing revenues have
decreased over the past few years as we have converted our timesharing platform
products to operate on our clients' in-house computers. The increase in these
revenues from 1998 to 1999 was primarily due to implementation and consulting
fees on enterprise risk management systems, which coincided with the launch of
that product line in June 1999. Also contributing to the increase that year was
an increase in one-time fees associated with some consulting projects and sales
of historical data files.
Consulting fees consist of services delivered by the BARRA RogersCasey,
Investment Consulting and Strategic Consulting ventures. The Investment
Consulting group of BARRA RogersCasey provides services to pension plan sponsors
usually under recurring, retainer-based fee arrangements. The Strategic
Consulting venture provides consulting services to asset managers, which are
usually nonrecurring, project-type engagements that are completed in phases. For
2000 compared to 1999, consulting revenues increased as a result of growth in
both retainer and project fees for both ventures. Consulting fees for 1999
compared to 1998 decreased slightly reflecting modest growth in retainers and
project fees for the Investment Consulting division offset by lower Strategic
Consulting project fees.
Revenues from Bond Express and Global Estimates primarily consist of
subscription fees to bond offering database and earnings estimate products. The
increase in revenues from 1998 to 1999 reflects modest growth in Bond Express
revenues and the inclusion of a full year of operations for Global Estimates,
which was acquired midway through fiscal 1998. The decrease in revenues from
1999 to 2000 reflects continued growth in Bond Express customer subscriptions
offset by a decline in Global Estimates revenues. In 2000, the Global Estimates
business released its first electronic version of the earnings
28
<PAGE>
estimate product but sales of this new product have not yet exceeded the
cancellations of the previous printed version of the product.
ELECTRONIC TRADING. Our electronic trading revenues increased $2.8 million or
17% in 2000 compared to 1999 and increased $5.7 million or 54% in 1999 over
1998. Our revenues from POSIT come from royalties based on commissions generated
by the trading volume in the various POSIT systems. Shares traded in the U.S.
POSIT system were 6.5 billion, 5.8 billion and 3.6 billion, for calendar years
ended December 31, 1999, 1998 and 1997, respectively. Our POSIT revenue
increases reflect higher trading volumes on U.S. and EuroPOSIT.
ASSET MANAGEMENT. Our asset management revenues increased $20.8 million or 76%
in 2000 over 1999 and decreased $.9 million or 3.2% in 1999 compared to 1998.
Asset management revenues consist of business from both Symphony and the Asset
Services division of BARRA RogersCasey.
Symphony's revenues consist primarily of asset management fees, which are a
fixed percentage of asset value, and performance fees, which are based on the
performance over a benchmark for each client account. Symphony's total revenues
were $46.9 million for 2000, $25.8 million for 1999 and $26.5 million for 1998.
Performance fees included in total revenues were $28.2 million, $10.6 million
and $14.7 million for 2000, 1999 and 1998, respectively. Performance fees are
recognized only at the measurement date for determining performance of an
account. The measurement date typically is at the end of the first year of a
client's contract and on each subsequent annual anniversary date for the years
after the first year. The performance fee increases in 2000 were principally the
result of investment performance significantly exceeding benchmarks. For 1999
compared to 1998, although Symphony again exceeded its benchmarks, its
performance fees decreased as a result of lower investment performance in excess
of benchmarks offset in part by growth in assets subject to performance fees.
The increases in performance fees in 2000 and 1998 were the result of not only
investment performance in excess of benchmarks, but the fact that assets under
management that were subject to performance fees grew significantly in each of
those years.
As of the beginning of 2001, Symphony had approximately $5.0 billion of assets
under direct management (an increase of 85% over the beginning of 2000). $3.0
billion of these assets are managed under agreements that provide for
performance fees in addition to a base management fee. This represents an
increase of 67% over the beginning of 2000. These amounts include approximately
$750 million of leverage associated with performance fee accounts in addition to
the capital invested by Symphony clients.
Symphony's future revenues will depend to a great extent on the performance of
the funds it manages and the timing of anniversary fee determination dates for
performance based funds.
REVENUES FROM NON-U.S. CUSTOMERS. The percentage of our total operating revenues
that come from our non-U.S. customers represented 30%, 33% and 33% in 2000, 1999
and 1998, respectively. The percentage of revenues derived from our non- U.S.
customers in 2000 declined from 1999 as a result of significant increases in
asset management revenues, which are all U.S. based. The percentage of our
subscription and consulting revenues (total revenues excluding electronic
trading and asset management revenues) that come from non-U.S. customers has
remained unchanged at approximately 46% for the last three fiscal years.
OPERATING EXPENSES
COST OF SUBSCRIPTION PRODUCTS. Cost of subscription products consists of our
computer access charges, software and data costs, computer leasing and seminar
expenses. This component of operating expenses decreased $1.5 million or 16% in
2000 over 1999 and increased $2.2 million or 30% in 1999 over 1998. The decrease
in 2000 was the result of lower computer leasing and access charges due to the
termination of our VAX-based platform for fixed income and equity models in
2000. Also contributing to the decrease were lower software and seminar
expenses. Software expenses declined due to lower amortization on previously
capitalized amounts as a result of writing-off capitalized software costs in
1999 associated with discontinued fixed income products. Seminar expenses
decreased as a result of fewer events in 2000. Increases in 1999 over 1998 are
primarily due to higher costs for data, computer and Internet access delivery
systems and our purchased software expenses.
COMPENSATION AND BENEFITS. Our compensation and benefits increased $9.7 million
or 13% in 2000 over 1999 and increased $15.9 million or 26% in 1999 over 1998.
Increases in our compensation and benefits costs for 2000 compared to 1999 were
primarily the result of increases in incentive compensation at Symphony, higher
Y2K project-related costs and increases in employee-related benefit costs,
offset partially by a reduction in the average full-time employee headcount of
approximately 5%. Symphony's incentive
29
<PAGE>
compensation costs are computed as a percentage of their operating profits and
therefore adjust up or down based on profitability. Y2K related costs for
outside consultants and special Y2K bonuses, which amounted to $3.7 million in
2000 and $2.0 million in 1999, increased as a result of using more outside
consultants combined with special additional incentive compensation for
employees involved with the Y2K Project. Increases in our compensation and
benefits for 1999 compared to 1998 reflect increases in full-time employees of
approximately 13% (including acquired businesses), general wage increases and
approximately $1.5 million in outside consultant costs related to Year 2000
remediation activities. Increases in our group insurance costs and other related
employee benefits have also contributed to increases in each of the past three
years.
Our annual salary administration and performance evaluation process results in
annual reviews and salary adjustments that are effective as of July 1 of each
year.
OCCUPANCY. Our occupancy costs decreased $.3 million or 4% in 2000 over 1999 and
increased $2.1 million or 38% in 1999 over 1998. The decrease in occupancy costs
for 2000 reflects additional sublease income from leasing some of our excess
facilities as well as charging a portion of some facility costs related to
supporting discontinued fixed income products to the restructuring charge during
2000. The increase in occupancy costs for 1999 compared to 1998 is the result of
the impact of acquired businesses as well as additional rental costs and related
leasehold improvements for office expansions completed in Berkeley, San
Francisco, New York and Connecticut during 1998 with further expansion and
related improvements completed in Berkeley, London and Edinburgh during 1999.
For 2000, we expect occupancy costs to rise again as a result of a planned
relocation of our Yokohama, Japan office to Tokyo and added costs from
facilities no longer engaged in restructuring activities.
OTHER OPERATING EXPENSES. Our other operating expenses decreased $2.3 million or
8% and increased $2.9 million or 11.8% in 1999 compared to 1998. Our other
operating expenses include: travel; office; maintenance; depreciation;
amortization; marketing; advertising; outside legal and accounting services;
business insurance; data and other expenses related to the asset management
operations; and other corporate expenses.
Decreases in other operating expenses in 2000 compared to 1999 consisted
primarily of lower costs for printing and postage, data costs related to asset
management activities, professional services, and amortization of intangibles.
The decreases in printing and postage reflect lower costs for distribution of
earnings estimate and other products due to greater use of electronic delivery
systems. Data costs associated with asset management activities declined due to
lower negotiated rates in 2000. The decrease in amortization of intangibles
reflects our April 1999 restructuring and the write-off of goodwill associated
with discontinued fixed income products. Decreases in professional services
reflect the absence of any significant legal or other corporate activities in
2000. Growth rates in various other operating expenses were also lower as a
result of the restructuring plans implemented during 2000.
Increases in other operating expenses in 1999 compared to 1998 consisted
primarily of increased costs for travel, telephone insurance, legal and other
professional services and amortization of intangibles. The increases in travel,
telephone and other professional services reflect associated growth in revenues,
employees and related organizational and compliance issues. The increase in
amortization of intangibles is the result of acquisition activities during 1998
and 1999.
NON-RECURRING ACQUISITION CHARGES, WRITE-OFF OF GOODWILL AND CAPITALIZED
SOFTWARE COSTS AND RESTRUCTURING COSTS. In 1998, we recorded a charge of
approximately $9.9 million related to purchased in-process research and
development in connection with our June 1997 acquisition. The portion of the
purchase price allocated to purchased in-process technology was determined based
on a valuation study completed shortly after the closing of the acquisition. The
portion of the purchase price allocated to purchased technology was immediately
expensed.
In April 1999, our management announced and implemented 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 received refunds by August 31, 1999. Although the decision to discontinue
these products was made in April 1999, certain support activities continued
through December 31, 1999.
We recorded two significant charges in connection with the April 1999
restructuring plan. The first charge of $3,990,000 was recorded in the quarter
ending March 31, 1999. It consisted of a write-off of goodwill and capitalized
software development costs related to discontinued products and is included in
non-recurring acquisition charges and write-off of goodwill in the accompanying
consolidated statements of income. The second charge, recorded in the quarter
ended June 30,
30
<PAGE>
1999, was for restructuring costs of $5,563,000 and related to severance and
termination benefits for approximately 50 employees, discontinued product
support costs between May 1, 1999 and December 31, 1999, and excess facilities
costs.
In March 2000, our management announced and implemented a restructuring plan
aimed at consolidating a global structure for our Core Business's sales and
client support organization. This restructuring plan consisted principally of
closing four offices, canceling one of our most significant outside computing
services contracts, and terminating approximately 20 employees. All termination
notices and benefits were communicated to the affected employees prior to March
31, 2000. We recorded a charge of $3,463,000 in connection with this
restructuring plan.
OTHER INCOME AND EXPENSES
INTEREST INCOME AND OTHER. Our interest income and other increased $2.5 million
or 173% in 2000 compared to 1999 and decreased $.4 million or 22% in 1999
compared to 1998. The increase in 2000 was primarily the result of a $1.7
million gain on the sale of Lycos, Inc. stock. We received the Lycos stock in
exchange for our shares of Quote.com Inc., which was acquired by Lycos in
December 1999. Also contributing to the increase in 2000 were higher gains on
marketable equity securities held for trading. These investments primarily
consist of funds managed by Symphony and the returns have improved significantly
over last year. The decrease in 1999 compared to 1998 was due to two factors.
The average invested balance of our accounts was lower in 1999 than in 1998. In
addition, consistent with changes to market interest rates, the average interest
rate for our accounts declined.
EQUITY IN NET INCOME AND LOSS OF INVESTEES. Net losses from our joint ventures
and other strategic relationships represent primarily our share of losses from
our equity investments in Data Downlink Corporation, Risk Reporting Limited, and
Global POSIT. The decrease in losses for 2000 reflects the liquidation of our
investment in Global POSIT during 1999 and the dilution of our investment in
Data Downlink in 2000 below 20% ownership so that we no longer exercise
significant influence in their operations and accordingly no longer include
their losses in our results. The increase in losses in 1999 over 1998 was
primarily due to increased losses from our investment in Data Downlink
Corporation.
MINORITY INTEREST. Minority interest represents the profits interest of the
Symphony LLC principals. Increases or decreases in minority interest reflect
corresponding changes in the level of profits from the Symphony venture.
FOREIGN CURRENCY - As an international corporation, our business generates
revenues from clients throughout the world. We maintain sales and representative
offices worldwide and hold certain deposits and accounts in foreign currencies.
Our revenues are generated in both United States and non-U.S. currencies.
Subscriptions in the United Kingdom and the European Community are priced in
pounds sterling (pounds) and Euros, respectively. Additionally, our consolidated
subsidiary, BARRA Japan, generates revenues, has expenses and has assets and
liabilities denominated in Japanese yen. All other things being equal, weakening
of the U.S. dollar has a positive impact on profits, and strengthening of the
U.S. dollar has a negative impact. Our management has considered its exposures
to foreign currency fluctuations. To this point we have decided not to engage in
hedging or managing exposures to foreign currency fluctuations through contracts
for the purchase, sale or swapping of currencies. Because we do not engage in
hedging, a strengthening of the U.S. dollar versus other non-U.S. currencies
could have a material adverse affect on our business, results of operations and
financial condition. We expect to begin hedging certain currency exposures in
2001.
For 2000 compared to 1999, the U.S. dollar strengthened against the pound and
Euro and weakened against the yen. The resulting net effect of these movements
in average exchange rates on operating revenues and net income was an increase
of approximately $1,500,000 and $400,000, respectively. For 1999 compared to
1998, the U.S. dollar strengthened against the yen and Euro and weakened against
the pound. The resulting net effect of these movements in average exchange rates
on operating revenues and net income was a decrease of approximately $1,000,000
and $400,000, respectively. For 1998 compared to 1997, the U.S. dollar
strengthened against the yen and European Currency Units and weakened against
the pound. The resulting net effect of these movements in average exchange rates
on operating revenues and net income was a decrease of approximately $1,400,000
and $200,000, respectively.
Because the functional currency of BARRA Japan is the yen, the translation gains
and losses associated with the consolidation of its balance sheets at points in
time are reported as part of shareholders' equity.
Under current operating arrangements in the countries in which we do business,
there are no significant restrictions upon the flow of funds from our foreign
subsidiaries to the parent company except in Brazil, where we are required to
register exchange agreements with the Central Bank.
31
<PAGE>
NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 "Accounting for Derivative Instruments and Hedging Activities" (Statement
133). Statement 133 establishes methods of accounting for derivative financial
statements and hedging activities related to those instruments as well as other
hedging activities. In June 1999, the FASB issues Statement No. 137, "Accounting
for Derivative Statement No. 133," which amended Statement No. 133 by deferring
the effective date to the fiscal year beginning after June 30, 2000. We have not
determined the effect, if any, that adoption will have on our consolidated
financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents, marketable equity securities held for trading,
and marketable debt securities available-for-sale totaled $81 million at March
31, 2000, representing an increase of $26 million from March 31, 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 on that line of credit.
We believe that our cash flow from operations (including prepaid subscription
fees), together with existing cash balances, will be sufficient to meet our cash
requirements for capital expenditures and other cash needs for ongoing business
operations.
PRINCIPAL FINANCIAL COMMITMENTS
As of June 6, 2000, our principal financial commitments consisted of obligations
under operating leases and contracts for office facilities, possible future
royalties payable to RJM shareholders, and severance and other related
compensation associated with the restructuring plan announced in March 2000. Our
Board of Directors has also authorized the repurchase of up to 500,000 shares of
our common stock and has authorized up to $17 million in funds as "seed"
investments for new asset management products developed by Symphony.
Approximately $2.0 million of that amount has yet to be disbursed.
YEAR 2000
As of March 31, 2000, we had not experienced any Year 2000 related failures that
we expect would have a material adverse effect on our business, operating
results or financial condition, We have not been required to utilize our
contingency plans, and as of March 31, 2000, no claims had been brought against
BARRA based upon Year 2000 issues. A small number of our data vendors
experienced Year 2000 problems that resulted in our receipt of delayed and/or
inaccurate data, but such problems do not appear to have materially affected
either our operations or our clients.
The total direct costs of our Year 2000 project include fees paid to outside
solution providers, the costs of repairing or replacing hardware and the direct
costs associated with our internal labor expenses. Cumulative Year 2000 project
costs through March 31, 2000 totaled approximately $10.5 million, of which
approximately $4.65 million were costs for outside contractors. We anticipate
that we will incur no significant Year 2000 related costs in 2001.
We believe that it is unlikely that our business will be materially adversely
affected due to the Year 2000 issue and expect that such likelihood will
continue to diminish with time. We cannot guarantee, however, that our computer
systems or the systems of other companies upon which our operations rely will
not be adversely affected by problems associated with the Year 2000 issue. For a
detailed discussion our Year 2000 state of readiness, risks and contingency
plans, please refer to our previous SEC filings on Forms 10-Q.
32
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates primarily to
the interest bearing portions of our direct investment portfolio. We place our
direct investments with high quality credit issuers and, by policy, limit the
amount of credit exposure to any one issuer. Our first priority is to reduce the
risk of principal loss. Consequently, we seek to preserve our invested funds by
limiting default risk, market risk, and re-investment risk. We attempt to
mitigate default risk by investing only in high quality credit securities that
we believe to be low risk and by positioning our portfolio to respond
appropriately to a significant reduction in credit rating of any investment
issuer or guarantor. The direct investment portfolio includes only marketable
securities with active secondary or resale markets to ensure portfolio
liquidity. We do not use derivative financial instruments in our investment
portfolio.
Our direct interest bearing investment portfolio primarily consists of
investments in short-term, high-credit quality money market funds and U.S.
Treasury securities. These investments totaled approximately $61 million at
March 31, 2000 with an average interest rate of approximately 5.3%. At March 31,
2000, the portfolio also had approximately $6.7 million of short-term, high
credit quality municipal debt securities with an average taxable equivalent
interest rate of 7.2%. The short-term money market funds, U.S Treasury
securities 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. 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
$13.3 million at March 31, 2000, are non-interest bearing and consist
principally of long and short positions placed directly through other fund
managers in U.S and non-U.S. equity securities of both public and private
issuers. Although the intent of the managers of these funds is to structure
portfolios that are hedged against general market movements, these investments
can be subject to significant changes in market value and are not insured. All
investment decisions with respect to these market neutral programs are made by
professional investment advisers and the performance of the funds is reviewed
periodically by our management and our Board of Directors.
FOREIGN CURRENCY RISK
We invoice customers in Europe in both British Pound Sterling and Euros. In
Japan, we bill our customers in Japanese Yen. Excluding customers in these
locations, we generally bill for our services in U.S. dollars. We have not
engaged in foreign currency hedging activities. To the extent we invoice our
customers in local currency (Yen, Pound and Euro), our international revenues
are subject to currency exchange fluctuation risk. To the extent that
international revenues that are invoiced in local currencies increase in the
future, our exposure to fluctuations in currency exchange rates will
correspondingly increase. Currency fluctuations may also effectively increase
the cost of our products and services in countries in which customers are
invoiced in U.S.
dollars.
We have no foreign debt and non-U.S. dollar cash balances held overseas are
generally kept at levels necessary to meet current operating and capitalization
needs. The capitalization of BARRA Japan includes approximately $1.9 million
invested in a yen-denominated mutual fund. (See Note 2 to the Notes to our
Financial Statements.)
33
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
BARRA, Inc.
Berkeley, California
We have audited the accompanying consolidated balance sheets of BARRA, Inc. and
subsidiaries as of March 31, 2000 and 1999, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended March 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of BARRA, Inc. and subsidiaries as of
March 31, 2000 and 1999 and the results of their operations and their cash flows
for each of the three years in the period ended March 31, 2000 in conformity
with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
-------------------------
April 20, 2000
34
<PAGE>
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 AND 1999
(IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 53,320 $ 31,343
Investments in marketable equity trading securities 13,334 11,638
Investments in marketable debt securities available-for-sale 14,090 12,089
Accounts receivable:
Subscription and other (Less allowance for doubtful accounts of $755 and 18,411 20,774
$526)
Asset management 8,984 9,059
Related parties 7,392 4,326
Prepaid expenses 2,116 2,361
-------------------------------------------------------------------------------------------------------------------------------
Total current assets 117,647 91,590
-------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS IN UNCONSOLIDATED COMPANIES 1,775 2,602
PREMISES AND EQUIPMENT:
Computer and office equipment 20,909 21,272
Furniture and fixtures 6,029 5,872
Leasehold improvements 8,747 8,647
-------------------------------------------------------------------------------------------------------------------------------
Total premises and equipment 35,685 35,791
Less accumulated depreciation and amortization (18,366) (17,312)
-------------------------------------------------------------------------------------------------------------------------------
17,319 18,479
DEFERRED TAX ASSETS 4,355 3,036
COMPUTER SOFTWARE
(Less accumulated amortization of $1,455 and $1,015) 1,994 958
OTHER ASSETS 832 1,188
GOODWILL AND OTHER INTANGIBLES
(Less accumulated amortization of $7,304 and $4,691) 24,840 25,236
-------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 168,762 $ 143,089
===============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 975 $2,288
Due to related party - 200
Accrued expenses payable:
Accrued compensation 14,084 10,770
Accrued corporate income taxes 13,437 5,544
Accrued restructuring charges 2,654 -
Other accrued expenses 9,966 9,026
Unearned revenues 26,579 23,790
-------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 67,695 51,618
-------------------------------------------------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES 1,994 1,398
MINORITY INTEREST IN EQUITY OF SUBSIDIARY 2,287 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; 13,675,550 and
14,012,852
Shares issued and outstanding 1 1
Additional paid-in capital 16,208 31,764
Retained earnings 80,321 56,885
Accumulated other comprehensive income (loss) 256 (445)
-------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 96,786 88,205
-------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 168,762 $ 143,089
===============================================================================================================================
</TABLE>
The accompanying notes are an integral part of the BARRA, Inc.
Consolidated Financial Statements.
35
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
(IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
OPERATING REVENUES:
Subscription and consulting fees $119,558 $114,661 $98,748
Electronic trading 19,064 16,235 10,555
Asset management 47,927 27,163 28,075
-------------------------------------------------------------------------------------------------------------------------------
Total operating revenues 186,549 158,059 137,378
-------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Cost of subscription products 7,953 9,471 7,266
Compensation and benefits 87,825 78,080 62,143
Occupancy 7,195 7,512 5,462
Other operating expenses 25,680 27,931 24,994
Restructuring charges 9,024 - -
Non-recurring acquisition charges and write-off of goodwill and
capitalized software costs - 3,990 9,914
-------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 137,677 126,984 109,779
-------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME AND OTHER 3,980 1,460 1,877
-------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE EQUITY IN NET INCOME AND LOSS OF INVESTEES,
MINORITY INTEREST, AND INCOME TAXES 52,852 32,535 29,476
EQUITY IN INCOME AND LOSS OF INVESTEES (113) (582) (377)
MINORITY INTEREST (15,824) (8,073) (8,438)
-------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 36,915 23,880 20,661
INCOME TAXES (13,479) (10,871) (12,752)
-------------------------------------------------------------------------------------------------------------------------------
NET INCOME $23,436 $13,009 $7,909
===============================================================================================================================
Net Income Per Share:
Basic $1.68 $.94 $.59
Diluted $1.60 $.89 $.55
Shares used in Net Income Per Share Calculation:
Basic 13,986,430 13,868,988 13,300,198
Diluted 14,634,919 14,603,203 14,264,565
</TABLE>
The accompanying notes are an integral part of the BARRA, Inc.
Consolidated Financial Statements.
36
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $23,436 $13,009 $7,909
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in income and loss of investees 113 582 377
Minority interest 15,824 8,073 8,438
Depreciation and amortization 7,682 6,683 5,106
Amortization of computer software 495 807 541
Unrealized gains on marketable equity securities held for (2,420) (509) (573)
trading
Purchase of marketable equity securities held for trading (958) (5,190) (2,833)
Non-cash restructuring charges 2,654 - -
Write-off of goodwill and capitalized software development - -
costs 3,990
Write-off of acquired in-process technology - - 9,914
Other (279) (764) (29)
Changes In:
Accounts receivable - Subscription and other 2,363 (2,622) (3,308)
Accounts receivable - Asset management 75 (6,609) (342)
Accounts receivable - Related parties (2,957) (471) (838)
Prepaid expenses 245 (396) (469)
Other assets 356 276 (179)
Accounts payable, due to related party and accrued expenses 13,007 4,357 4,150
Unearned revenues 2,789 1,564 2,359
---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 62,425 22,780 30,223
---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,769) (8,734) (8,857)
Sale (purchase) of marketable debt securities - available for 430 (3,469) 4,591
sale, net
Acquisitions - cash paid (1,631) (5,517) (14,491)
Investments in unconsolidated companies (144) (886) (1,853)
Payments on notes receivable - - 5,419
---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (7,114) (18,606) (15,191)
---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash payments to minority shareholders (15,405) (8,205) (8,403)
Payments on notes payable and lines of credit - - (713)
Proceeds from sales of common stock 4,325 3,349 2,740
Common stock repurchased (22,254) (1,648) (814)
---------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (33,334) (6,504) (7,190)
---------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 21,977 (2,330) 7,842
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 31,343 33,673 25,831
---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR 53,320 $31,343 $33,673
===========================================================================================================================
OTHER CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ -- $ 2 $ 64
Income taxes 3,668 8,119 6,948
Non-cash investing transactions - See Note 3
</TABLE>
The accompanying notes are an integral part of the BARRA, Inc.
Consolidated Financial Statements.
37
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
(IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON STOCK PAID-IN COMPREHENSIVE RETAINED
---------------------------
SHARES AMOUNT CAPITAL INCOME (LOSS) EARNINGS EQUITY
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1997 12,625,971 $1 $12,877 $(471) $35,967 $48,374
---------------------------------------------------------------------------------------
Repurchase of Stock (28,194) (814) (814)
Stock issued 1,077,611 12,606 12,606
Tax benefit from Option Exercises 3,161 3,161
---------------------------------------------------------------------------------------
Subtotal 13,675,388 1 27,830 (471) 35,967 63,327
---------------------------------------------------------------------------------------
Foreign Currency Translation
Adjustment (485) (4 85)
Net Income 7,909 7,909
--------------
Comprehensive Income - subtotal 7,424
---------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1998 13,675,388 1 27,830 (956) 43,876 70,751
---------------------------------------------------------------------------------------
Repurchase of Stock (84,829) (1,648) (1,648)
Stock issued 422,293 3,349 3,349
Tax benefit from Option 2,233 2,233
Exercises
---------------------------------------------------------------------------------------
Subtotal 14,012,852 1 31,764 (956) 43,876 74,685
---------------------------------------------------------------------------------------
Foreign Currency Translation
Adjustment 511 511
Net Income 13,009 13,009
--------------
Comprehensive Income - subtotal 13,520
---------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1999 14,012,852 1 31,764 (445) 56,885 88,205
---------------------------------------------------------------------------------------
Repurchase of Stock (801,600) (22,254)
(22,254)
Stock issued 464,298 4,325 4,325
Tax benefit from Option 2,373 2,373
Exercises
---------------------------------------------------------------------------------------
Subtotal 13,675,550 1 16,208 (445) 56,885 72,649
---------------------------------------------------------------------------------------
Foreign Currency Translation
Adjustment 701 701
Net Income 23,436 23,436
--------------
Comprehensive Income - subtotal 24,137
---------------------------------------------------------------------------------------
BALANCE, MARCH 31, 2000 13,675,550 $1 $16,208 $256 $80,321 $96,786
=======================================================================================
</TABLE>
The accompanying notes are an integral part of the BARRA, Inc.
Consolidated Financial Statements.
38
<PAGE>
BARRA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2000,
1999 AND 1998:
NOTE 1 - THE COMPANY
BARRA, Inc. ("BARRA", the "Company", "we", "us" or "our") and its subsidiaries
are engaged in integrated business activities that combine technology, data,
software and services to help clients make investment and trading decisions. Our
clients and target markets include investment managers, plan sponsors and
consultants, brokers and dealers, insurance companies, banks, and other
institutional and private investors throughout the world. BARRA has two business
units - BARRA Core and BARRA Ventures. BARRA's Core business unit focuses on
delivering software and related services for portfolio decision support and
enterprise risk management solutions. BARRA's Venture businesses are
investments, joint ventures or significant licensing arrangements that leverage
the ideas and intellectual property of the Core business.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The accompanying consolidated financial statements
include the accounts of BARRA, its wholly-owned subsidiaries and Symphony Asset
Management, LLC ("Symphony LLC"). (See Note 4.) All significant intercompany
transactions and balances have been eliminated. Certain amounts previously
reported have been reclassified to conform to the 2000 presentation.
ACCOUNTING ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
STOCK SPLIT - In 1997, the Company's Board of Directors declared a three-for-two
stock split, payable in the form of a dividend of one share of the Company's
common stock for every two shares owned by the stockholders. The stock split
resulted in the issuance of approximately 4.5 million additional shares of
common stock from authorized but unissued shares. All share and per share data
in these financial statements and related notes have been adjusted to
retroactively reflect the stock split.
CASH AND CASH EQUIVALENTS include money market funds and certificates of deposit
with original maturities of three months or less.
INVESTMENTS IN MARKETABLE EQUITY TRADING SECURITIES include $13,334,000 at March
31, 2000 and $11,638,000 at March 31, 1999 invested in funds managed by Symphony
LLC and the Asset Services group of BARRA RogersCasey Inc., two of the Company's
registered investment adviser subsidiaries. The funds hold both long and short
positions in equity securities and at times buy and sell short-term market index
instruments, which the managers use to hedge general market risk. These
investments are considered to be trading securities and accordingly are recorded
at their fair value and any unrealized gains or losses are included in interest
income and other.
INVESTMENTS IN MARKETABLE DEBT SECURITIES AVAILABLE-FOR-SALE - At March 31,
2000, we had $5.5 million invested short-term U.S. Treasury obligations maturing
in June 2000. Also included in available-for-sale securities is a U.S. dollar
equivalent of $1,876,000 at March 31, 2000, and $5,591,000 at March 31, 1999,
invested in a Japanese yen-denominated mutual fund which is invested primarily
in government and other bonds and certificates of deposit in Japan. The Company
also had investments in municipal debt securities of $6,714,000 at March 31,
2000 and $6,498,000 at March 31, 1999. Interest on these municipal securities is
tax exempt and adjusts to market rates during designated interest reset periods
which occur at least every month. The municipal securities have stated maturity
dates ranging from July 1999 to May 2029, but each security grants the investor
the option to put the security back to the issuer during exercise periods which
generally coincide with interest reset dates. All marketable debt securities are
considered to be available-for-sale and are recorded at fair value which
approximates their cost.
INVESTMENTS IN UNCONSOLIDATED COMPANIES are accounted for on the cost or equity
method depending on the Company's ownership interest in the voting stock and
upon its ability to exert significant influence over the investee's operations.
(See Note 8.)
39
<PAGE>
PREMISES AND EQUIPMENT are stated at cost. Computer and office equipment and
furniture and fixtures have economic useful lives of five years and are
depreciated using straight-line methods. Leasehold improvements are amortized
using the straight-line method over the periods of the corresponding leases
which range from five to ten years.
GOODWILL AND OTHER INTANGIBLES includes purchased goodwill and purchased model
rights which are amortized on a straight line basis over the remaining estimated
economic life of the underlying products and technologies (original lives
assigned are ten to twenty years). It is reasonably possible that the estimates
of anticipated future gross revenue, the remaining estimated economic life of
the products and technologies, or both, could differ from those used to assess
the recoverability of these costs in which case there would be a write-down of
the carrying amount or a shortened life of the intangibles in the near term.
LONG-LIVED ASSETS - The Company reviews long-lived assets, certain identifiable
intangibles and goodwill related to these assets for impairment in accordance
with Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-lived Assets and For Long-lived Assets to be Disposed of."
For assets to be held and used, including acquired intangibles, BARRA initiates
its review whenever events or circumstances indicate that the carrying amount of
a long-lived asset may not be recoverable. Recoverability of an asset is
measured by comparison of its carrying amount to the future undiscounted cash
flows that the asset is expected to generate. Any impairment to be recognized is
measured by the amount by which the carrying amount of the asset exceeds its
fair market value.
Assets to be disposed of and for which management has committed to a plan to
dispose of the assets, whether through sale or abandonment, are reported at the
lower of carrying amount or fair market value less cost to sell.
COMPUTER SOFTWARE that has been purchased is stated at cost less accumulated
amortization. Amortization is calculated using the straight-line method over
three years. Under the criteria set forth in Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed," capitalization of software development costs
begins upon the establishment of technological feasibility of a product. The
establishment of technological feasibility and the ongoing assessment of the
recoverability of costs require considerable judgment by management with respect
to certain external factors, including, but not limited to, anticipated future
gross product revenues, estimated economic life and changes in software and
hardware technology. Amounts that could have been capitalized under this
statement after consideration of the above factors were immaterial and,
therefore, no internal software development costs have been capitalized by the
Company to date.
REVENUE RECOGNITION - Subscription fees are initially deferred as unearned
revenues when payment has been received and revenue is recognized ratably over
the subscription term. Timesharing revenues, which are included in subscription
and consulting fees, are recognized as computer resources are utilized.
Consulting fees for recurring, retainer-based services are recognized ratably
over the term of the service contract. Consulting fees for non-recurring
projects are recognized on a percentage of completion basis.
Asset management revenues are derived from two sources: base fees and
performance fees. Base fees are recognized ratably over the period that assets
are under management. Performance fees are recognized only at the performance
measurement dates contained in the individual account management agreements and
are dependent upon performance of the account exceeding agreed upon benchmarks.
Electronic trading revenues, which consist primarily of royalties based on
trading volume of U.S. equities from the Portfolio System for Institutional
Trading ("POSIT") joint venture, are recognized as trades are executed.
INCOME TAXES are provided at current rates. Deferred income taxes are computed
based on the difference between the financial statement and tax basis of assets
and liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
FOREIGN CURRENCY TRANSLATION - The functional currency of all non-U.S.
operations except BARRA International (Japan), Ltd., the company's wholly-owned
Japan subsidiary ("BARRA Japan"), is deemed to be the U.S. dollar. For non-U.S.
operations other than Japan, assets and liabilities are translated into U.S.
dollars using current exchange rates, and the translation adjustment effects are
included in net income. The functional currency of BARRA Japan is the Japanese
yen and, therefore, the effects of currency translation adjustments on its
assets and liabilities are recorded as other comprehensive income or loss which
is included as a component of stockholders' equity.
40
<PAGE>
STOCK-BASED AWARDS to employees are accounted for using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees. We also comply with the disclosure requirements
of Statement of Financial Accounting Standards No. 123. (See Note 10.)
NET INCOME PER SHARE - Basic net income per share is calculated by dividing net
income by the weighted average shares of common stock outstanding during the
year. For diluted net income per share, net income is divided by the weighted
average shares of common stock outstanding and potential common shares
outstanding during the year. Potential common shares included in the dilution
calculation consist of dilutive shares issuable upon the exercise of outstanding
common stock options computed using the treasury stock method. For all years
presented, the only difference between basic and diluted income per share is the
inclusion of dilutive stock options in the denominator for purposes of
calculating diluted income per share.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial instruments
include cash and cash equivalents, short-term and municipal debt securities,
accounts receivable, prepaid expenses, accounts payable, certain accrued
liabilities and deferred revenue. The carrying amounts of these items are a
reasonable estimate of their fair values.
CONCENTRATION OF CREDIT RISK - The Company licenses its products and services to
investment managers primarily in the United States, Europe and Asia (primarily
Hong Kong and Japan). The Company evaluates the credit of its customers and does
not require collateral. The Company maintains reserves for potential credit
losses and such losses have been within management's expectations. Financial
instruments which may potentially subject the Company to concentrations of
credit risk consist principally of cash investments and short-term investments.
The Company's investment policy limits investments to short-term, low-risk
instruments.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE - In 1997 the FASB issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (Statement 131), which establishes standards
for the way public business enterprises report information about operating
segments in annual financial statements. Statement 131 requires that those
enterprises report selected information about operating segments in interim
financial reports issued to stockholders. In addition, it establishes standards
for related disclosures about products and services, geographic areas and major
customers (See Note 11.)
NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 "Accounting for Derivative Instruments and Hedging Activities" (Statement
133). Statement 133 establishes methods of accounting for derivative financial
instruments and hedging activities related to those instruments as well as other
hedging activities. In June 1999, the FASB issues Statement No. 137, "Accounting
for Derivative Statement No. 133," which amended Statement No. 133 by deferring
the effective date to all fiscal quarters of all fiscal years beginning after
June 15, 2000. We have not determined the effect, if any, that adoption will
have on our consolidated financial position or results of operations.
NOTE 3 - BUSINESS COMBINATIONS
BOND EXPRESS - In January 1999, we completed the acquisition of the general
partnership interest in Bond Express LP ("Bond Express"). The purchase price for
the remaining interest was $1 million, plus certain contingent consideration
based upon total revenues of Bond Express products earned during calendar 2000.
In February 2000, we modified the terms of our acquisition of the Bond Express
business. The modification eliminated the contingent payment that otherwise
would have been payable in exchange for paying the seller an additional $1.1
million. The initial consideration of $1 million plus the additional
consideration of $1.1 million have been added to goodwill and are being
amortized over 10 years. The results of operations and financial position of
Bond Express have been consolidated in our financial statements since June 1996.
REDPOINT - On June 17, 1998 we paid $5.5 million for substantially all of the
assets and assumption of certain liabilities of Redpoint Software Inc., which
was renamed RJM Ventures Inc. following the closing ("RJM"). Initial terms of
the acquisition agreement also provided for payments of 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 software license fees 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 BARRA before required employment periods. As
a result, 45% of any royalties earned will be recorded as compensation expense
over the term of the required employment.
41
<PAGE>
The remaining portion of royalties will be recorded as additional goodwill.
Compensation expense related to prepaid royalties is $202,500 for the year ended
March 31, 2000. RJM, however, has claimed at least an additional $910,937 in
royalties under a client contract executed in the March 2000 quarter. We dispute
this claim and intend to vigorously defend our position. We made no additional
royalty payments during 2000.
The acquisition has been accounted for as a purchase, and the results of the
business acquired from RJM are included in the accompanying consolidated
financial statements from the date of acquisition only. The cost of the
acquisition has been allocated to the assets acquired and liabilities assumed
based on estimated fair values. This allocation resulted in tangible assets of
$200,000, consisting principally of premises and equipment, and goodwill of $6.4
million which is being amortized on a straight-line basis over ten years.
Comparative pro forma financial information has not been presented as the
results of operations of Redpoint were not material to our consolidated
financial statements.
GLOBAL ADVANCED TECHNOLOGY ("GAT") AND INNOSEARCH CORPORATION ("INNOSEARCH") -
On June 24, 1997, we completed the acquisition of a 100% equity interest in GAT
and a majority ownership interest in Innosearch, an affiliate of GAT. The total
purchase price of approximately $19,904,000 included 704,589 shares of
unregistered BARRA common stock valued at $9,866,000, liabilities assumed of
$6,058,000, and cash and transaction costs of $3,980,000. In February 1998, an
additional $1,000,000 was paid in connection with the acquisition of the
remaining minority interest in Innosearch, which resulted in additional goodwill
of $469,500. The acquisitions were accounted for as a purchase, and the results
of GAT and Innosearch are included in the accompanying consolidated financial
statements from the date of acquisition only.
The cost of the acquisitions was allocated on the basis of the estimated fair
value of assets acquired and liabilities assumed. This allocation resulted in
tangible assets of $3,763,000 consisting principally of accounts receivable and
premises and equipment, capitalized software of $1,217,000, purchased in-process
technology of $9,914,000, deferred tax assets of $1,100,000 and goodwill of
$3,910,000. The amount allocated to purchased in-process technology was
immediately expensed. Goodwill from the acquisition was initially amortized over
ten years until March 31, 1999 when it was written off. We recorded a charge of
$3,990,000 in March 1999 to write-off the remaining unamoritized amounts of
goodwill and capitalized software costs in connection with discontinuing certain
U.S. fixed income products. (See Note 13)
THE ESTIMATE DIRECTORY ("TED") AND DIRECTUS - On October 9, 1997, BARRA (U.K.),
Ltd., our wholly-owned subsidiary, completed the acquisition of the assets and
assumption of certain liabilities of two businesses from Edinburgh Financial
Publishing Limited ("EFP") and two of EFP's affiliates for a total purchase
price of $17,412,000. The two businesses are TED, a database of analysts'
earnings estimates, and Directus, a corporate directors equity trading
information service. The total purchase consisted of $11,778,000 in cash,
liabilities assumed of $4,897,000 and transaction costs of $737,000. The
acquisition was accounted for as a purchase, and the results of BARRA (U.K.),
Ltd. are included in the accompanying consolidated financial statements from the
date of acquisition only.
The cost of the acquisition was allocated on the basis of the estimated fair
value of assets acquired and liabilities assumed and resulted in goodwill of
$15,536,000 which is being amortized over 20 years.
42
<PAGE>
The following unaudited pro-forma information shows the consolidated results of
operations for the year ended March 31, 1998 as if the acquisitions of GAT,
Innosearch, TED, and Directus had occurred as of April 1, 1997 and at the
purchase prices established on the actual dates of acquisition. Acquisition
charges of approximately $10 million were assumed to have been incurred on April
1, 1997 and are, therefore, not included in the following presentation (in
thousands except for per share amount).
<TABLE>
<CAPTION>
1998
----
<S> <C>
Operating revenues $142,479
Net income $16,981
Net income per share - diluted $1.18
</TABLE>
The pro-forma financial information is presented for informational purposes only
and is not necessarily indicative of the operating results that would have
occurred had these acquisitions been acquired as of the above dates. In
addition, the pro-forma results are not intended to be a projection of future
results and do not necessarily reflect the financial impact of combining these
acquired operations with BARRA's.
NOTE 4 - SYMPHONY LLC
The capitalization of Symphony LLC consists of three Interest Classes (Class 1,
Class 3 and Class 4, as defined in the Operating Agreement). Class 1 and Class 4
interests belong to Symphony Inc. (which is a wholly-owned by BARRA) while the
Class 3 interest belongs to Maestro LLC, whose owners are the principals of
Symphony LLC. At March 31, 2000, the total capital accounts attributable to
BARRA were $4.4 million and the capital account of Maestro LLC was $2.3 million.
In the event of sale or liquidation of the business, BARRA's Class 1 interest
would receive a preferential distribution of $2.1 million prior to the payout of
any other capital account and the remaining amount would be split equally
between Symphony Inc. and Maestro LLC.
The Operating Agreement provides for a profits interest (the Class 3 interest)
that started at 25% and grew to a maximum of 50% based on levels of Symphony LLC
operating income (as defined in the Operating Agreement). The Class 3 interest
attained the maximum profits interest in the quarter ended March 31, 1998.
Beginning April 1, 1999, Symphony LLC granted awards to certain key employees
under an Equity Appreciation Plan ("EAP"). The EAP provides discretionary awards
equal to a certain percentage interest in the equity of Symphony LLC which vest
over time until retirement or immediately in the event of death, disability or
sale of Symphony LLC. At March 31, 2000, awards representing an interest of
approximately 7% in Symphony LLC had been granted. Compensation expense on each
award is measured as the difference between the fair market value of the award
and the exercise price of the award. Compensation expense for each award is
initially deferred and then charged to compensation expense evenly over the
remaining period of the employee's service until retirement. Compensation
expense on EAP awards for the year ended March 31, 2000 was $266,000.
We have consolidated the financial position and results of operations of
Symphony LLC and separately recorded the Class 3 interest share of net assets
and net income as a minority interest. The Class 3 interests share of profits
was $15,824,000 $8,073,000 and $8,423,000 for the years ended March 31, 2000,
1999 and 1998, respectively.
43
<PAGE>
NOTE 5 - INCOME TAXES
The provision for income taxes for the years ended March 31, consists of the
following (in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
----------- ------------ ------------
<S> <C> <C> <C>
CURRENT:
Federal $11,523 $7,816 $10,582
State 742 793 107
Foreign 1,937 3,103 1,489
--------- -------- --------
Total current 14,202 11,712 12,178
---------- --------- ---------
DEFERRED:
Federal (711) (1,053) 346
State (3) (50) 39
Foreign (9) 262 189
--------- ------ --------
Total deferred (723) (841) 574
------------ -------- --------
TOTAL TAX PROVISION $13,479 $10,871 $12,752
======= ======= =======
</TABLE>
Deferred taxes are determined based on the estimated future tax effects of
differences between the financial statement and tax basis of assets and
liabilities given the provisions of the enacted tax laws. No valuation
allowances for deferred tax assets were deemed to be necessary at the balance
sheet dates presented. The tax effect of significant temporary differences
representing deferred tax assets and liabilities as of March 31 is as follows
(in thousands):
<TABLE>
<CAPTION>
2000 1999
----------- ------------
<S> <C> <C>
DEFERRED TAX ASSETS
Accrued vacation pay not currently deductible $ 784 $ 515
Other accrued expenses not deductible 1,300 485
Restructuring charges not currently deductible 1,039 -
State taxes 608 -
Deferred rent 320 344
Research and development costs not currently deductible - 397
Capitalized software - 1,064
Other 304 231
-------- --------
Total $4,355 $3,036
------ ------
DEFERRED TAX LIABILITIES
Intangibles $ 240 $ 737
Basis difference in fixed assets 1,591 -
Prepaid expenses currently deductible 163 190
Income recognized for book purposes not currently taxable - 176
Other - 295
---------- --------
Total $1,994 $1,398
------ ------
NET DEFERRED TAX ASSET $2,361 $1,638
====== ======
</TABLE>
44
<PAGE>
The reconciliation between the tax rate computed by applying the United States
federal statutory tax rate of 35.0% to income before income taxes and the actual
effective tax rate is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---------------- -------------- ------------
<S> <C> <C> <C>
Income tax at statutory rate 35.0% 35.0% 35.0%
State income tax, net of federal income tax effect 3.4 3.6 4.0
Foreign taxes higher than federal rate 2.7 1.4 3.7
Non-taxable portion of dividends and interest (.2) (.5) (.6)
Effect of foreign sales corporation earnings (1.5) (1.4) (1.4)
Nondeductible acquisition charges and write-offs - 5.8 16.8
Other (2.9) 1.6 4.2
---------------- -------------- ------------
Income tax at effective rate 36.5% 45.5% 61.7%
================ ============== ============
</TABLE>
NOTE 6 - LEASES AND OTHER COMMITMENTS
Aggregate minimum future annual lease payments for facilities under operating
leases are as follows (in thousands):
<TABLE>
<CAPTION>
AGGREGATE ANNUAL
YEAR ENDING MARCH 31: LEASE PAYMENTS
--------------------- ----------------
<S> <C>
2000 $5,034
2001 5,472
2002 5,109
2003 4,148
2004 3,339
Thereafter 9,810
------
Total $32,912
=======
</TABLE>
Rental expense was $5,179,000, $5,510,000 and $4,225,000 for the years ended
March 31, 2000, 1999 and 1998, respectively.
We had an agreement with an outside computer service provider for computer
facilities which was terminated as of March 31, 2000. Our expense for outside
computer usage was $1,891,000, $2,796,000 and $2,706,000 for the years ended
March 31, 2000, 1999 and 1998, respectively.
We have also committed to funding an additional $2.0 million for certain asset
management products developed by Symphony. This funding is expected to occur
during 2001.
NOTE 7 - ELECTRONIC TRADING
POSIT is a computerized institutional trading system that is owned by a general
partnership between us and ITG, Inc. ("ITG"). The partnership has licensed the
U.S. equity version of POSIT to ITG, which operates the POSIT system for U.S.
equities. Our revenues represent a 95% share of license royalties paid by ITG to
the partnership.
Global POSIT was established as a 50% owned joint venture in the United Kingdom
on May 31, 1990. It operated a computerized trading network that was designed to
facilitate trading in international equities. Profit and loss was allocated 50%
to the Company and 50% to ITG, the other joint venture partner. Our share of
losses is included in equity in net loss of investees and was $169,000 and
$287,000 in the years ended March 31, 1999 and 1998, respectively. During 1999,
BARRA and ITG terminated the Global POSIT joint venture.
In November 1998, the POSIT partnership granted a license to a joint venture
between ITG and Societe Generale to use the POSIT technology for the trading of
equities of European issuers. EuroPOSIT currently covers U.K. and European
Country equities. A royalty is paid to the POSIT partnership based upon the
commissions received for trades of European securities on EuroPOSIT. We receive
a share of that royalty after the payment of certain enhancement and development
costs. Revenues to BARRA from EuroPOSIT for the years ended March 31, 2000 and
1999 were $1,199,000 and $73,000, respectively.
45
<PAGE>
NOTE 8 - INVESTMENTS IN UNCONSOLIDATED COMPANIES
In March 1997, we purchased 68,037 shares of Series C Convertible Preferred
Stock in Quote.Com, Inc. ("Quote.Com") for $446,000. In April 1997, we purchased
an additional 46,368 shares of the same securities for $304,000. In December
1999, we received 33,903 shares of Lycos, Inc. stock as part of Lycos'
acquisition of Quote.Com. In January 2000, we sold all of our shares in Lycos
for a pre-tax gain of $1,682,000.
In April 1997, we purchased 272.7 shares of Series A Convertible Preferred Stock
of Data Downlink Corporation ("DDL") for $1,500,000. During 1999, we purchased
47.29 shares of Series C Convertible Preferred Stock for $372,000. At March 31,
1999 we owned approximately 20% of DDL and accounted for our investment in DDL
using the equity method. In June 1999, DDL received additional funding which
diluted our ownership below 20% and resulted in our change to the cost method of
accounting for the remainder of fiscal 2000. Our equity in DDL's losses was
$66,000, $273,000 and $170,000 for the years ended March 31, 2000, 1999 and
1998, respectively. In April 2000, we purchased 964,630 shares of Series F
Convertible Preferred Stock of DDL for $3,000,000 which increased our ownership
to approximately 16%.
In 2000, we made investments of $144,000 and had equity in losses of $47,000 in
various other companies or joint ventures. In 1999, we made investments of
$514,000 and had equity in losses of $140,000 in other investments.
NOTE 9 - RETIREMENT PLANS
We sponsor a tax-qualified employee savings and retirement plan for all eligible
U.S. employees. Eligible employees may contribute up to 15% of their earnings,
subject to annual limitations. We match qualified employee contributions dollar
for dollar up to an annual maximum of $2,000 and employees vest in our match
over the first five years of their employment. Contribution expense was
$827,000, $802,000 and $782,000 for the years ended March 31, 2000, 1999 and
1998, respectively.
NOTE 10 -STOCK-BASED COMPENSATION PLANS
Stock Option Plans
STOCK OPTION PLAN.
On July 29, 1991, we adopted a Stock Option Plan (the "Plan") for the granting
of stock options to employees (including officers and employee directors) and
non-employee directors or consultants. The Plan was modified in 1994 and 1997 to
provide for a maximum of 4,350,000 options on shares of our common stock to be
granted. Under the Plan, incentive stock options ("ISO") may be granted to
employees only, and are to be granted at not less than fair market value on the
date of grant; and non-statutory stock options ("NSO") may be granted to
employees, consultants and non-employee directors, and are to be granted at not
less than 85% of such fair market value. The Board of Directors, or a committee
thereof, determines vesting period, payment form and exercise date of the
options granted under the Plan, provided that no ISO may be exercised later than
ten years after its date of grant and no NSO may be exercised later than ten
years and one day after its date of grant. For options issued under the Plan
through March 31, 2000, the vesting periods have generally been set at 20% per
year over five years.
DIRECTORS STOCK OPTION PLAN.
On July 31, 1997, we adopted a Directors Option Plan (the "Directors Plan") for
the granting of stock options to non-employee directors and employee directors
for up to a maximum of 150,000 shares of our common stock. The Directors Plan
permits us to grant NSO's in accordance with a fixed formula to non-employee
directors. In addition, the Directors Plan allows discretionary grants of ISO's
to employee directors and NSO's to all directors. NSO grants will be made
automatically to non-employee directors under the Directors Plan in accordance
with a non-discretionary formula. Following the adoption of the Directors Plan,
each current eligible director received NSO grants for 7,500 shares and each
person who subsequently became a non-employee director received a grant of
10,000 shares (the "Initial" grants). In addition, on each anniversary of an
Initial grant, the optionee would receive NSO grants for an additional 2,000
shares (the "Succeeding" grants). The Directors Plan was later amended to
increase the options subject to Initial grants to 15,000 shares and the options
subject to the Succeeding grants to 4,000 shares. The exercise price for all
NSO's and ISO's will not be less than the fair market value of the common stock
at the date of grant. NSO's granted pursuant to Initial grants will vest over a
period of five years at a
46
<PAGE>
rate of 20% per year. NSO's granted pursuant to Succeeding grants will be
immediately vested. ISO's will vest over discretionary periods not to exceed
five years.
A summary of the status of all our stock option plans as of and during the years
ended March 31, 1998, 1999, and 2000 follows:
<TABLE>
<CAPTION>
SHARES SUBJECT TO WEIGHTED AVERAGE SHARES AVAILABLE FOR
OUTSTANDING OPTIONS EXERCISE PRICE FUTURE GRANTS
-------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding, Balance at March 31, 1997 2,572,882 7.94 479,400
(including 992,018 exercisable at a weighted
average exercise price of $5.79)
Additional share authorized 1,200,000
Granted 585,550 23.72 (585,550)
Canceled (150,480) 12.92 150,480
Exercised (339,875) 6.21 --
-------------------------------------------------------------------------
Outstanding, Balance at March 31, 1998 2,668,077 11.35 1,244,330
(including 1,129,052 exercisable at a weighted
average exercise price of $6.50)
Granted 555,700 21.62 (555,700)
Canceled (217,725) 16.69 217,725
Exercised (378,434) 6.59 --
-------------------------------------------------------------------------
Outstanding, Balance at March 31, 1999 2,627,618 13.73 906,355
(including 1,221,653 exercisable at a weighted
average exercise price of $8.41)
Granted 787,000 28.13 (787,000)
Canceled (238,195) 17.66 238,195
Exercised (422,100) 8.25 --
-------------------------------------------------------------------------
Outstanding, Balance at March 31, 2000 2,754,323 18.31 357,550
Weighted average fair value of options granted
during 2000 $13.90
</TABLE>
Additional information regarding options outstanding as of March 31, 2000 is as
follows:
<TABLE>
<CAPTION>
Stock Options Outstanding Options Exercisable
--------------------------------------------------------------------------------------------------
Weighted Average Weighted
Range of Exercise Number Remaining Weighted Average Number Exercisable Average
Prices Outstanding Contractual Life Exercise Price Exercise Price
(yrs)
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 4.00 to $6.00 569,562 3.8 $ 4.78 569,562 $4.78
$ 6.33 to $17.83 551,896 5.6 11.59 369,976 10.95
$ 18.33 to $21.38 655,750 8.7 21.05 94,550 20.84
$ 21.54 to 30.00 638,115 8.3 26.08 135,210 25.10
$ 32 and over 339,000 9.8 32.06 - -
---------------- -----------------------------------------------------------
2,754,323 7.1 $18.31 1,169,298 $10.38
================= ===========================================================
</TABLE>
47
<PAGE>
EMPLOYEE STOCK PURCHASE PLAN.
Under the 1996 Employee Stock Purchase Plan, (the "Purchase Plan"), we are
authorized to issue up to 1,125,000 shares of common stock to our employees.
Under the terms of the Purchase Plan, employees can choose to have up to 15% of
their annual base earnings withheld, subject to an annual limitation, to
purchase BARRA common stock. The purchase price of the stock is 85% of the
lesser of the fair market value as of the beginning or end of each three-month
offer period, subject to an annual limitation. Under the Purchase Plan, we
issued 45,270, 43,859 and 35,248 shares in 2000, 1999 and 1998. The weighted
average purchase price of shares issued in 2000, 1999 and 1998 was $18.90, 19.17
and 18.38, respectively. The weighted-average fair value of shares issued in
2000, 1999 and 1998 was $26.08, $22.57 and $24.00, respectively. At March 31,
2000 there were 983,340 shares of common stock reserved for future issuance
under the Purchase Plan.
ADDITIONAL STOCK-BASED AWARD INFORMATION
As discussed in Note 2, we continue to account for our stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
its related interpretations. Accordingly no compensation expense has been
recognized in the financial statements for employee stock arrangements.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), requires the disclosure of pro forma net income and
earnings per share had we adopted the fair value method as of the beginning of
1995. Under SFAS 123, the fair value of stock based awards to employees is
calculated through the use of option pricing models, even though such models
were developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ from our stock
option awards. These models also require subjective assumptions, including
future stock volatility and expected time to exercise, which greatly affect the
calculated values. Our calculations were made using the Black-Scholes option
pricing model with the following weighted average assumptions: weighted average
expected life, 72 months in 2000 and 1999, and 84 months in 1998; stock
volatility, 50% in 2000, 60% in 1999 and 45% in 1998; risk free interest rates,
6.2% in 2000, 5.00% in 1999 and 6.00% in 1998; and no dividends during the
expected term for all years. If the computed fair values of the 2000, 1999 and
1998 awards under the Plan had been amortized to expense over the vesting period
of the awards, pro forma net income would have been $19,816,000 ($1.42 per basic
share and $1.35 per diluted share) in 2000, $11,546,000 ($.83 per basic share
and $.79 per diluted share) in 1999 and $6,931,000 ($.52 per basic share and
$.49 per diluted share) in 1998. The effects of applying SFAS No. 123 on pro
forma disclosures of net income and net income per share for 2000, 1999 and 1998
are not likely to be representative of the pro forma effects on net income and
net income per share in future years.
NOTE 11 - SEGMENT INFORMATION
In 1999, 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. Our chief operating decision making group is the
Executive Committee, which is comprised of the Chief Executive Officer and
certain other Executive Officers (the "Committee).
YEAR ENDED MARCH 31, 2000 - Effective in the September 1999 quarter, BARRA was
reorganized into two business units, BARRA Core and BARRA Ventures. Segment
financial information for the year ended March 31, 2000 is presented as if the
reorganization had taken place at the beginning of the fiscal year. The Core
Business unit is one segment and the Ventures unit has three segments: Symphony
Asset Management, The POSIT Joint Venture and all other Venture Businesses.
BARRA's business segments are organized on the basis of differences in their
related products and services. The Core Business is the investment analytics
segment and consists of developing, marketing and supporting portfolio and
enterprise risk software. The BARRA Ventures Businesses consists of investments,
joint ventures or significant licensing arrangements that leverage the ideas and
intellectual property of the Core Business. The POSIT joint venture licenses
institutional trading systems that allow institutional investors to trade
portfolios of securities directly with each other in a confidential environment.
The Symphony Asset Management venture is a jointly owned subsidiary that
provides asset management services. Other Ventures include Global Estimates,
Bond Express, BARRA RogersCasey, Strategic Consulting and Investment Strategies.
Segment income from operations is defined as segment revenues net of segment
expenses, restructuring charges, and equity in joint venture gains and losses
for the current year. Segment expenses include costs for sales and client
support activities,
48
<PAGE>
the cost of delivering the product or service including data and data processing
costs, and allocated amounts of depreciation and amortization. Segment expenses
also include allocated portions of research and development, general and
administrative expenses, amortization of acquired intangibles, and interest
income for the current year.
YEARS ENDED MARCH 31, 1999 AND 1998 - In prior years, the business was organized
and reported on differently. Subscription and consulting revenue included the
portfolio and enterprise risk software business along with the Global Estimates,
Bond Express, BARRA RogersCasey, Strategic Consulting and Investment Strategies
businesses. Electronic trading was the POSIT business and substantially all of
the asset management business was Symphony Asset Management. Also in prior
years, there was no allocation of research and development, general and
administrative expenses, amortization of intangibles, interest and other income
or non-recurring acquisition charges and write-offs to the segments.
For all years presented, segment expenses exclude income taxes.
There are no differences between the accounting policies used to measure profit
and loss for segments and those used on a consolidated basis. Revenues are
defined as revenues from external customers and there are no inter-segment
revenues or expenses.
Our management does not identify or allocate its assets, including capital
expenditures, by operating segment. Accordingly, assets are not being reported
by segment because the information is not available by segment and is not
reviewed by the Committee to make decisions about resources to be allocated to
the segments, when assessing their performance. Depreciation and amortization is
allocated to segments in order to determine segment profit or loss.
The following tables present information about reported segments for the years
ended March 31, 2000, 1999 and 1998, respectively (amounts in thousands):
YEAR ENDED MARCH 31, 2000:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
| BARRA | |
| Core | BARRA Ventures |
-----------------------------------------------------------------------------------------------
Symphony
Investment POSIT Asset Total
Analytics Joint Venture Management Other Ventures Consolidated
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Subscription and consulting $93,208 26,350 26,350 $119,558
Electronic trading 19,064 19,064 19,064
Asset management 46,901 1,026 47,927 47,927
-----------------------------------------------------------------------------------------------
Total Segment revenues 93,208 19,064 46,901 27,376 93,341 186,549
-----------------------------------------------------------------------------------------------
Segment expenses (83,333) (1,315) (15,342) (28,663) (45,320) (128,653)
Interest income and other 1,434 864 1,682 2,546 3,980
Equity in joint venture gains
(losses) and minority
interest 109 (15,824) (222) (15,937) (15,937)
Restructuring charges (9,024) (9,024)
-----------------------------------------------------------------------------------------------
Total Segment expenses (90,923) (1,206) (30,302) (27,203) (58,711) (149,634)
-----------------------------------------------------------------------------------------------
Segment income $2,285 $17,858 $16,599 173 $34,630 $36,915
=============== ================ ================ ============= ============= =================
Depreciation and
amortization $4,696 $150 $235 $3,096 $3,481 $8,177
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1999:
-----------------------------------------------------------------------------------------
Subscription and Electronic Asset Consolidated
Consulting Trading Management Other Total
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $114,661 $16,235 $27,163 $158,059
Segment expenses (71,950) (1,451) (11,591) (84,992)
Minority interest (8,073) (8,073)
-----------------------------------------------------------------------------------------
Segment income 42,711 14,784 7,499 64,994
-----------------------------------------------------------------------------------------
Research and development ($21,854) (21,854)
General and administrative (13,753) (13,753)
Non-recurring acquisition charges
and write-off of goodwill and
capitalized software (3,990) (3,990)
Amortization of intangibles (2,395) (2,395)
Interest and other 1,460 1,460
Equity in JV gains (losses) (582) (582)
-----------------------------------------------------------------------------------------
Income (loss) before income taxes $42,711 $14,784 $7,499 $(41,114) $23,880
=================== ================ =================== =============== ================
Depreciation and amortization $3,241 $100 $254 $1,500 $5,095
</TABLE>
YEAR ENDED MARCH 31, 1998:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Subscription and Electronic Asset Consolidated
Consulting Trading Management Other Total
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $98,748 $10,555 $28,075 $137,378
Segment expenses (55,437) (648) (10,966) (67,051)
Minority interest (8,438) (8,438)
-----------------------------------------------------------------------------------------
Segment income 43,311 9,907 8,671 61,889
-----------------------------------------------------------------------------------------
Research and development ($19,000) (19,000)
General and administrative (12,250) (12,250)
Non-recurring acquisition charges
and write-off of goodwill and
capitalized software (9,914) (9,914)
Amortization of intangibles (1,564) (1,564)
Interest and other 1,877 1,877
Equity in JV gains (losses) (377) (377)
-----------------------------------------------------------------------------------------
Income (loss) before income taxes $43,311 $9,907 $8,671 $(41,228) 20,661
=================== ================ =================== =============== ================
Depreciation and amortization $2,533 $75 $215 $1,260 $4,083
</TABLE>
Revenues are distributed to geographic areas based on the country in which the
BARRA sales office is located. For all years presented, no one customer
accounted for more than 10% of total revenues. Long-lived assets are attributed
to geographic areas based on the country where the assets are located.
50
<PAGE>
The following table presents a summary of revenue and long-lived assets by
geographic region as of and for the years ended March 31, 2000, 1999 and 1998
(in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
-----------------------------------------------------------------------------------------------------------
Long Lived Long Lived Long Lived
Revenues Assets Revenues Assets Revenues Assets
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
North America:
United States $131,119 $29,992 $105,719 $27,306 $92,611 $23,399
Other 3,114 74 3,190 172 2,485 110
-----------------------------------------------------------------------------------------------------------
Total North
America 134,233 30,066 108,909 27,478 95,096 23,509
-----------------------------------------------------------------------------------------------------------
Europe:
United Kingdom 21,288 15,958 19,861 16,701 15,096 16,811
France 4,599 60 4,562 49 4,493 30
Germany 4,851 36 4,937 54 4,607 32
Other 1,201 32 1,058 19 716 4
-----------------------------------------------------------------------------------------------------------
Total Europe 31,939 16,086 30,418 16,823 24,912 16,877
-----------------------------------------------------------------------------------------------------------
Asia and
Australia:
Japan 14,400 3,833 12,321 3,588 10,849 3,409
Other 5,977 147 6,411 171 6,521 196
-----------------------------------------------------------------------------------------------------------
Total Asia and
Australia 20,377 3,980 18,732 3,759 17,370 3,605
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
Total $186,549 $50,132 $158,059 $48,060 $137,378 $43,991
===========================================================================================================
</TABLE>
NOTE 12 - CONTINGENCIES
The Company is subject to various legal proceedings and claims either asserted
or unasserted arising in the normal course of business. While the outcome of
these proceedings and claims cannot be predicted with certainty, it is
management's opinion that the results of any such legal matters will not be
material to the Company's consolidated financial statements.
NOTE 13 - RESTRUCTURING CHARGES
We had two restructuring events during 2000. First, in April 1999, our
management announced and implemented a restructuring plan to reduce the cost of
operating our U.S. fixed income business and focus future development and sales
efforts on global and enterprise-wide fixed income products. The restructuring
plan discontinued certain U.S. fixed income products and eliminated various
sales, client and product support positions in the U.S. Revenues from
discontinued products ceased on April 30, 1999. Customers who had prepaid
subscriptions for periods after April 30, 1999 received refunds. Although the
decision to discontinue these products was made in April 1999, certain support
activities continued through December 31, 1999. All termination notices and
benefits were communicated to the affected employees prior to June 30, 1999. We
recorded a charge of $5,561,000 in connection with this restructuring. The
charge consisted of: (a) $3.6 million in severance, termination benefits, and
wages for approximately 50 terminated employees (some of which were retained for
various periods up until December 31, 1999 to exclusively support the
discontinued products); (b) $1.3 million for non-cancelable services directly
related to the discontinued products including certain costs associated with
continuing to support the products up until their final termination dates; and
(c) $.4 million in excess facilities costs. At March 31, 2000, all amounts
previously accrued related to these restructuring activities had been paid.
In March 2000, our management announced and implemented a second restructuring
plan aimed at consolidating a global structure for our sales and client support
organization for the Core business. This restructuring plan consisted
principally of
51
<PAGE>
closing four offices, terminating one of our most significant outside computing
services contracts, and terminating approximately 20 employees. All termination
notices and benefits were communicated to the affected employees prior to March
31, 2000. We recorded a charge of $3,463,000 in connection with this
restructuring plan which consisted of: a) $2,328,000 in severance and related
termination benefits; b) $600,000 in termination fees associated with the
computing services contract; and c) $535,000 in excess facilities and other
miscellaneous costs.
At March 31, 2000, $2,654,000 in restructuring charges remained accrued most of
which related to severance and termination benefits payable to terminated
employees from the second restructuring, substantially all of which was paid in
the fiscal quarter ended June 30, 2000. Activity in the restructuring accrual
for the period from March 31, 1999 to March 31, 2000 is summarized as follows
(in thousands):
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
Severance and
termination Computer Other
benefits Services contract Excess Facilities Restructuring Total
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1999 $0 $0 $0 $0 $0
Restructuring charges 5,883 $600 567 1,974 9,024
Cash payments (3,764) (600) (357) (1,649) (6,370)
----------------------------------------------------------------------------------------------
Balance at March 31, 2000 $2,119 $0 $210 $325 $2,654
==============================================================================================
</TABLE>
NOTE 14 - SELECTED QUARTERLY FINANCIAL DATA (IN THOUSANDS - UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 2000 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER
<S> <C> <C> <C> <C>
Total operating revenues $44,531 $60,177 $43,808 $38,033
Total operating revenues net of operating expenses $9,539 $24,933 $12,872 $1,528
Net income $6,758 $10,342 $5,952 $384
Net income per share - diluted $0.46 $0.71 $0.41 $0.03
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1999 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER
<S> <C> <C> <C> <C>
Total operating revenues $40,562 $42,557 $39,027 $35,913
Total operating revenues net of operating expenses $2,740 $10,374 $9,508 $8,453
Net income (loss) ($738) $4,545 $4,676 $4,526
Net income (loss) per share - diluted ($0.05) $0.31 $0.32 $0.31
</TABLE>
Income per share calculations for each of the quarters is based on the weighted
average common and common equivalent shares outstanding for each period, and the
sum of the quarters may not necessarily be equal to the full year income per
share amount. Loss per share is calculated based on the weighted average common
shares outstanding for the period, excluding all common equivalent shares.
Quarterly financial data for the first quarter of 2000 includes restructuring
charges of $5,561,000 or $.23 per diluted share. Quarterly financial data for
the fourth fiscal quarter of 2000 includes restructuring charges of $3,463,000
or $.15 per diluted share and gain on sale of equity securities of $1,682,000 or
$.07 per diluted share. Quarterly financial data for the fourth fiscal quarter
of 1999 reflects a write-off of goodwill and capitalized software development
costs of $3,990,000 or $.29 per diluted share).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
52
<PAGE>
PART III
We have omitted from this Report certain information required by Part III as we
intend to file our definitive Proxy Statement pursuant to Regulation 14A not
later than 120 days after the end of the year covered by this Form 10-K, and
certain information in the Proxy Statement is incorporated here by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
DIRECTORS
The information regarding our directors required by this Item 10 is incorporated
by reference to pages 2 through 4 of the Proxy Statement under the headings
"Proposal No. 1 - Election of Directors - Nominees, Business Experience of the
Directors, and Board Meetings and Committees."
EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding our Executive Officers required by this Item 10 is
included at the end of Part I of this Form 10-K.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
The information regarding compliance with Section 16(a) of the Exchange Act
required by this Item 10 is incorporated by reference to page 23 of the Proxy
Statement under the heading "Compliance with Section 16(a) of the Securities
Exchange Act of 1934."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference to pages 7
through 11 of the Proxy Statement under the headings "Executive Compensation"
and "Report of the Compensation Committee and of the Board of Directors on
Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated by reference to pages 5
and 6 of the Proxy Statement under the heading "Principal Stockholders and Share
Ownership by Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated by reference to pages 9
and 10 of the Proxy Statement under the heading "Executive Compensation -
Compensation Committee Interlocks, Insider Participation and Other
Transactions."
53
<PAGE>
OTHER MATTERS
As previously reported under Part II, Item 5 in our December 31, 1999 Form 10-Q,
at its January 31, 2000 quarterly meeting, our Board of Directors authorized our
officers to use up to $10,000,000 (including all previously authorized but
unused amounts) to repurchase additional shares of our Common Stock on The NSM
and in private transactions. At its May 4, 2000 quarterly meeting, our Board of
Directors authorized our officers to repurchase up to 500,000 shares of our
Common Stock on the NMS and in private transactions.
During the quarter ended March 31, 2000, we made the following repurchases of
our own Common Stock:
<TABLE>
<CAPTION>
TYPE OF NUMBER OF SHARES OF BARRA
DATE TRANSACTION COMMMON STOCK AGGREGATE PURCHASE PRICE
<S> <C> <C> <C>
January 27, 2000 NMS purchase. 85,200 $3,077,850.00
February 4, 2000 Private repurchase.* 15,000 $555,000.00
February 11, 2000 NMS purchase. 56,000 $2,054,500.00
February 14, 2000 NMS purchase. 95,300 $3,490,362.50
February 28, 2000 NMS purchase. 25,000 $878,125.00
March 1, 2000 NMS purchase. 39,700 $1,414,312.50
</TABLE>
*On February 4, 2000, we repurchased in a private transaction 15,000 shares of
our Common Stock from the Rudd Family Trust for an aggregate price of $555,000.
Andrew Rudd, the Chairman of our Board of Directors and a principal stockholder
is (along with his wife, Virginia Rudd) a beneficiary and trustee of the Rudd
Family Trust.
54
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Form 10-K:
(1) Financial Statements.
The following financial statements are included in Item 8 of
Part II of this Form 10-K:
<TABLE>
<CAPTION>
Reference Page
<S> <C>
Independent Auditors' Report 34
Consolidated Financial Statements
Consolidated Balance Sheets 35
Consolidated Statements of Income 36
Consolidated Statements of Cash Flows 37
Consolidated Statements of Stockholders' Equity 38
Notes to Consolidated Financial Statements 39
</TABLE>
(2) Financial Statement Schedules.
All Financial Statement Schedules are omitted because they are
not applicable or required, or because the required
information is given elsewhere in Part II, Items 7 and/or 8 of
this Form 10-K.
(3) Exhibit Index.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
<S> <C>
2.1 Agreement and Plan of Reorganization, dated April 25,
1996, by and among BARRA, Inc., Rogers, Casey &
Associates, Inc., Stephen Rogers, and John F. Casey
(incorporated by reference to Exhibit 99.10 to our
Amendment No. 1 to Current Report on Form 8-K/A dated
June 27, 1996 filed July 3, 1996).
2.2 Amendment to Agreement and Plan of Reorganization,
dated July 23, 1996, by and among BARRA, Inc.,
Rogers, Casey & Associates, Inc., Stephen Rogers, and
John F. Casey (incorporated by reference to Exhibit
2.1 to our Amendment No. 2 and Final Amendment to
Current Report on Form 8-K/A dated August 8, 1996 and
filed August 8, 1996).
2.3 Agreement and Plan of Merger of BARRA (DE), Inc. (a
Delaware Corporation) and BARRA, Inc. (a California
Corporation) dated as of August 5, 1998 (incorporated
by reference to Exhibit No. 2.1 to our Current Report
on Form 8-K filed August 14, 1998).
3.1 Certificate of Incorporation of BARRA, Inc.
(incorporated by reference to Exhibit 3.1 of our
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998).
3.2 Bylaws of BARRA, Inc. (incorporated by reference to
Exhibit 3.2 of our Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998).
4.1 Specimen stock certificate (incorporated by reference
to Exhibit 4.3 to our Form S-1 Registration
Statement, as amended (No. 33-42951), filed August
20, 1991 (Registration Statement).
10.1 POSIT Joint Venture Agreement, dated October 1, 1987,
between BARRA, Inc. and Jefferies & Company, Inc. and
related Exclusive Software License Agreement, dated
as of October 1, 1987, and amended as of August 1990
(incorporated by reference to Exhibit 10.3 to the
Registration Statement).
55
<PAGE>
<S> <C>
10.2 Stock Option Plan of BARRA, Inc. (incorporated by
reference to Exhibit 10.19 to the Registration
Statement). (1)
10.3 Agreement for Services, dated February 1, 1991 and
July 1, 1991 between BARRA, Inc. and Ziff
Communications Company (incorporated by reference to
Exhibit 10.16 to the Registration Statement).
10.4 Agreement for Services between BARRA, Inc. and Ziff
Information Services, a division of Ziff
Communications Company, dated February 1, 1994
(incorporated by reference to Exhibit 10.1 to our
Annual Report on Form 10-K for the fiscal year ended
March 31, 1994).
10.5 Revolving Line of Credit Note, dated February 28,
1996, made by BARRA, Inc. to the Sumitomo Bank of
California (incorporated by reference to Exhibit 10.5
to our Annual Report on Form 10-K for the fiscal year
ended March 31, 1996).
10.6 Commercial Loan Agreement, dated as of February 28,
1996, between BARRA, Inc. and The Sumitomo Bank of
California (incorporated by reference to Exhibit 10.6
to our Annual Report on Form 10-K for the fiscal year
ended March 31, 1996).
10.7 BARRA, Inc. Net Office Lease, dated as of May 21,
1996, by and between BARRA, Inc. and First Milvia,
LLC (incorporated by reference to Exhibit 10.1 to our
Annual Report on Form 10-K for the fiscal year ended
March 31, 1996).
10.8 Rogers, Casey & Associates, Inc. 1992 Stock Option
and Restricted Stock Plan and Addendum thereto
(incorporated by reference to Exhibit 4.3 to our
registration statement on Form S-8 filed September
11, 1997 (File No. 333-11771). (1)
10.9 Form of Stock Option Agreement for Rogers, Casey &
Associates, Inc. 1992 Stock Option and Restricted
Stock Plan (incorporated by reference to Exhibit 4.4
to our registration statement on Form S-8 filed
September 11, 1997 (File No. 333-11771). (1)
10.10 Operating Agreement for Symphony Asset Management LLC
(incorporated by reference to Exhibit 10.2 to our
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996).
10.11 1996 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 4.3 to our registration
statement on Form S-8 filed August 15, 1996 (File No.
333-10259).
10.12 Form of Stock Purchase Agreement for 1996 Employee
Stock Purchase Plan (incorporated by reference to
Exhibit 4.4 to our registration statement on Form S-8
filed August 15, 1996 (File No. 333-10259).
10.13 Form of Officers' Stock Purchase Agreement for 1996
Employee Stock Purchase Plan (incorporated by
reference to Exhibit 4.5 to our registration
statement on Form S-8 filed August 15, 1996 (File No.
333-10259). (1)
10.14 Amended and Restated Global Advanced Technology
Corporation Stock Purchase Agreement dated as of June
24, 1997, between Global Advanced Technology
Corporation ("GAT"), BARRA, Inc. and the GAT
Stockholders (incorporated by reference to Exhibit
10.1 to our Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997).
10.15 Stock Purchase Agreement among BARRA, Inc. and the
Shareholders of Innosearch Corporation, dated as of
May 23, 1997, between Innosearch Corporation, BARRA,
Inc. and certain of the Innosearch shareholders
(incorporated by reference to Exhibit 10.2 to our
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997).
10.16 Asset Purchase Agreement, dated September 8, 1997,
between Edinburgh Financial Publishing Limited,
Edinburgh Financial Publishing (Asia) Limited,
Edinburgh Financial Publishing (USA), Inc., BARRA
(U.K.), Ltd., BARRA, Inc., Jeremy Salvesen, Angus
MacDonald, BARRA International, Ltd. and BARRA
56
<PAGE>
<S> <C>
International (Japan), Ltd. (incorporated by
reference to Exhibit 10.1 to our Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997).
10.17 BARRA Directors Option Plan (incorporated by
reference to Exhibit No. 4.3 to BARRA, Inc.'s
registration statement on Form S-8 filed September
11, 1997 (File No. 333-35381)). (1)
10.18 Form of Stock Option Agreement for BARRA Directors
Option Plan (incorporated by reference to Exhibit No.
4.4 to our registration statement on Form S-8 filed
September 11, 1997 (File No. 333-35381)). (1)
10.19 BARRA Stock Option Plan and Amendment No. 1 thereto
(incorporated by reference to Exhibit No. 4.3 to our
registration statement on Form S-8 filed September
11, 1997 (File No. 333- 35379)). (1)
10.20 Amendment No. 2 to BARRA Stock Option Plan dated
January 28, 1999 (incorporated by reference to
Exhibit No. 4.3 to our registration statement on Form
S-8 filed January 29, 1999 (File No. 333-35379)). (1)
10.21 Form of Indemnification Agreement between BARRA, Inc.
and its officers and directors (incorporated by
reference to Exhibit D to the Proxy Statement for the
BARRA, Inc. 1998 Annual Meeting of Shareholders filed
June 25, 1998).
13.1 2000 Annual Report to Shareholders of BARRA, Inc.,
which, except for those portions expressly
incorporated herein by reference, is furnished solely
for the information of the Securities Exchange
Commission and is not to be deemed "filed."
21.1 List of Subsidiaries of BARRA, Inc. (electronic
filing only)
23.1 Consent of Deloitte & Touche LLP (electronic filing
only)
27.1 Financial Data Schedule - Year ended March 31, 2000
(electronic filing only).
-----------------------------
(1) Management contract or compensatory plan or
arrangement required to be filed as an exhibit to
this Annual Report on Form 10-K pursuant to Item
14(a).
</TABLE>
THE EXHIBITS LISTED ABOVE ARE FILED AS PART OF, OR ARE
INCORPORATED BY REFERENCE INTO, THIS REPORT. COPIES OF THE
EXHIBITS LISTED ABOVE WILL BE FURNISHED UPON WRITTEN REQUEST
AT REASONABLE COST TO ANY STOCKHOLDER. SUCH REQUEST SHOULD BE
SENT TO BARRA, INC., 2100 MILVIA STREET, BERKELEY, CALIFORNIA
94704, ATTENTION: MARIA HEKKER, GENERAL COUNSEL.
(b) Reports on Form 8-K:
None.
57
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BARRA, Inc.
By: /s/ James D. Kirsner
-------------------------------------------------------------
Name: James D. Kirsner
-------------------------------------------------------------
Title: Chief Financial Officer
-------------------------------------------------------------
Date: June 28, 2000
-------------------------------------------------------------
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints jointly and severally, Kamal Duggirala and James
D. Kirsner, and each one of them, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any and all amendments
to this Annual Report on Form 10-K and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each said
attorneys-in-fact, or his substitute or substitutes, may do cause to be done by
virtue hereof.
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934,
this report has been signed by the following persons, on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S><C>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ A. George Battle Director June 28, 2000
-------------------------------------------------
A. George Battle
/s/ John F. Casey Director June 28, 2000
-------------------------------------------------
John F. Casey
/s/ Kamal Duggirala Chief Executive Officer (Principal Executive Officer) June 28, 2000
-------------------------------------------------
Kamal Duggirala
/s/ M. Blair Hull Director June 28, 2000
-------------------------------------------------
M. Blair Hull
/s/ James D. Kirsner Chief Financial Officer (Principal Financial and June 28, 2000
------------------------------------------------- Accounting Officer)
James D. Kirsner
/s/ Norman J. Laboe Director June 28, 2000
-------------------------------------------------
Norman J. Laboe
/s/ Ronald J. Lanstein Director and Vice Chairman June 28, 2000
-------------------------------------------------
Ronald J. Lanstein
/s/ Clyde Ostler Director June 28, 2000
-------------------------------------------------
Clyde Ostler
/s/ Andrew Rudd Director and Chairman June 28, 2000
-------------------------------------------------
Andrew Rudd
</TABLE>
58
