UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
|X| QUARTERLY REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended May 31, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-11869
FactSet Research Systems Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 13-3362547 | |
| (State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
| incorporation or organization) | ||
| One Greenwich Plaza, Greenwich, Connecticut | 06830 | |
| (Address of principal executive office) | (Zip Code) | |
| Registrant’s telephone number, including area code: | (203) 863-1500 |
Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes |X| No|_|
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [_]
The total number of shares of the registrant’s Common Stock, $.01 par value, outstanding on May 31, 2003, was 33,528,990.
| FactSet Research Systems Inc. | |||||
|---|---|---|---|---|---|
| Form 10-Q | |||||
| Table of Contents | |||||
| Part I | FINANCIAL INFORMATION | Page | |||
| Item 1 | Financial Statements | ||||
| Consolidated Statements of Income | |||||
| for the three months ended May 31, 2003 and 2002 | 3 | ||||
| Consolidated Statements of Comprehensive Income | |||||
| for the three months ended May 31, 2003 and 2002 | 4 | ||||
| Consolidated Statements of Financial Condition | |||||
| for the three months ended May 31, 2003 and 2002 | 5 | ||||
| Consolidated Statements of Cash Flows | |||||
| for the three months ended May 31, 2003 and 2002 | 6 | ||||
| Notes to the Consolidated Financial Statements | 7 | ||||
| Item 2 | Management’s Discussion and Analysis of Financial Condition | ||||
| and Results of Operations | 13 | ||||
| Item 3 | Quantitative and Qualitative Disclosures About Market Risk | 19 | |||
| Item 4 | Controls and Procedures | 19 | |||
| Part II | OTHER INFORMATION | ||||
| Item 1 | Legal Proceedings | 20 | |||
| Item 2 | Changes in Securities | 20 | |||
| Item 3 | Defaults Upon Senior Securities | 20 | |||
| Item 4 | Submission of Matters to a Vote of Security Holders | 20 | |||
| Item 5 | Other Information | 20 | |||
| Item 6 | Exhibits and Reports on Form 8-K | 20 | |||
| Signature | 21 | ||||
| Certifications | 22 | ||||
| ITEM 1. FINANCIAL STATEMENTS | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| FactSet Research Systems Inc. | |||||||||
| CONSOLIDATED STATEMENTS OF INCOME–Unaudited | |||||||||
| Three Months Ended | Nine Months Ended | ||||||||
| May 31, |
May 31, | ||||||||
| (In thousands, except per share data) | 2003 | 2002 | 2003 | 2002 | |||||
| Subscription Revenues | |||||||||
| Commissions | $17,109 | $15,598 | $49,404 | $44,477 | |||||
| Cash fees | 41,997 | 36,818 | 121,170 | 107,315 | |||||
| Total subscription revenues | 59,106 | 52,416 | 170,574 | 151,792 | |||||
| Expenses | |||||||||
| Cost of services | 18,947 | 17,339 | 54,653 | 50,238 | |||||
| Selling, general and administrative | 20,656 | 18,956 | 59,666 | 56,072 | |||||
| Data center relocation charge (See Note 6) | –– | –– | –– | 904 | |||||
| Total operating expenses | 39,603 | 36,295 | 114,319 | 107,214 | |||||
| Income from operations | 19,503 | 16,121 | 56,255 | 44,578 | |||||
| Other income | 509 | 522 | 1,651 | 1,704 | |||||
| Income before income taxes | 20,012 | 16,643 | 57,906 | 46,282 | |||||
| Provision for income taxes | 5,744 | 6,291 | 19,955 | 16,602 | |||||
| Net income | $14,268 | $10,352 | $37,951 | $29,680 | |||||
| ====== | ====== | ====== | ====== | ||||||
| Basic earnings per common share | $0.43 | $0.31 | $1.13 | $0.88 | |||||
| ==== | ==== | ==== | ==== | ||||||
| Diluted earnings per common share | $0.41 | $0.29 | $1.10 | $0.85 | |||||
| ==== | ==== | ==== | ==== | ||||||
| Weighted average common shares (Basic) | 33,455 | 33,746 | 33,624 | 33,590 | |||||
| ===== | ===== | ===== | ===== | ||||||
| Weighted average common shares (Diluted) | 34,607 | 35,221 | 34,626 | 34,913 | |||||
| ===== | ===== | ===== | ===== | ||||||
| The accompanying notes are an integral part of these consolidated financial statements. | |||||||||
| FactSet Research Systems Inc. | |||||||||
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME–Unaudited | |||||||||
| Three Months Ended | Nine Months Ended | ||||||||
| May 31, |
May 31, | ||||||||
| (In thousands, except per share data) | 2003 | 2002 | 2003 | 2002 | |||||
| Net income | $14,268 | $10,352 | $37,951 | $29,680 | |||||
| Change in unrealized gain (loss) on investments, net of taxes | 17 | ( 50 | ) | 4 | ( 53 | ) | |||
| Comprehensive income | $14,285 | $10,302 | $37,955 | $29,627 | |||||
| ====== | ====== | ====== | ====== | ||||||
| The accompanying notes are an integral part of these consolidated financial statements. | |||||||||
| FactSet Research Systems Inc. | |||||||||
| CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION | |||||||||
| (In thousands, except per share data) | |||||||||
| May 31, | August 31, | ||||||||
| 2003 | 2002 | ||||||||
| ASSETS | (Unaudited) | ||||||||
| CURRENT ASSETS | |||||||||
| Cash and cash equivalents | $ 39,808 | $ 44,819 | |||||||
| Investments | 113,188 | 86,017 | |||||||
| Receivables from clients and clearing brokers, net | 36,564 | 33,164 | |||||||
| Receivables from employees | 206 | 399 | |||||||
| Deferred taxes | 6,245 | 6,085 | |||||||
| Other current assets | 1,828 | 1,579 | |||||||
| Total current assets | 197,839 | 172,063 | |||||||
| LONG-TERM ASSETS | |||||||||
| Property, equipment and leasehold improvements, at cost | 104,480 | 99,264 | |||||||
| Less accumulated depreciation and amortization | ( 84,285 | ) | ( 71,709 | ) | |||||
| Property, equipment and leasehold improvements, net | 20,195 | 27,555 | |||||||
| OTHER NON-CURRENT ASSETS | |||||||||
| Goodwill | 13,677 | 9,861 | |||||||
| Intangible assets, net | 5,385 | 1,589 | |||||||
| Deferred taxes | 4,172 | 4,333 | |||||||
| Other assets | 2,108 | 2,010 | |||||||
| TOTAL ASSETS | $243,376 | $217,411 | |||||||
| ======= | ======= | ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | May 31, | August 31, | |||||||
| 2003 | 2002 | ||||||||
| CURRENT LIABILITIES | |||||||||
| Accounts payable and accrued expenses | $ 13,901 | $ 11,427 | |||||||
| Accrued compensation | 12,841 | 13,590 | |||||||
| Deferred fees and commissions | 10,229 | 11,669 | |||||||
| Dividends payable | 2,012 | 1,689 | |||||||
| Current taxes payable | 4,053 | 1,523 | |||||||
| Total current liabilities | 43,036 | 39,898 | |||||||
| NON-CURRENT LIABILITIES | |||||||||
| Other non-current liabilities | 575 | 547 | |||||||
| Total liabilities | 43,611 | 40,445 | |||||||
| Commitments and contingencies (See Note 7) | |||||||||
| STOCKHOLDERS’ EQUITY | |||||||||
| Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued | –– | –– | |||||||
| Common stock, $.01 par value | 343 | 340 | |||||||
| Capital in excess of par value | 40,441 | 33,803 | |||||||
| Retained earnings | 182,144 | 149,561 | |||||||
| Accumulated other comprehensive income | 146 | 142 | |||||||
| 223,074 | 183,846 | ||||||||
| Less treasury stock, at cost | ( 23,309 | ) | ( 6,880 | ) | |||||
| Total stockholders’ equity | 199,765 | 176,966 | |||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $243,376 | $217,411 | |||||||
| ======= | ======= | ||||||||
| The accompanying notes are an integral part of these consolidated financial statements. | |||||||||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FactSet Research Systems Inc.
May 31, 2003
(Unaudited)
1. ORGANIZATION AND NATURE OF BUSINESS
FactSet Research Systems
Inc. (the “Company”) provides online integrated database services to
the investment community. The Company’s revenues are derived from
month-to-month subscription charges. Solely at the option of each client, these
charges may be paid either in commissions on securities transactions (in which
case subscription revenues are recorded as commissions) or in cash (in which
case subscription revenues are recorded as cash fees).
To
facilitate the receipt of subscription revenues on a commission basis, the
Company’s wholly owned subsidiary, FactSet Data Systems, Inc.
(“FDS”), is a member of the National Association of Securities
Dealers, Inc. and is a registered broker-dealer under Section 15 of the
Securities Exchange Act of 1934. Subscription revenues paid in commissions are
derived from securities transactions introduced and cleared on a fully disclosed
basis primarily through two clearing brokers. That is, a client paying
subscription charges on a commission basis directs the clearing broker, at the
time the client executes a securities transaction, to credit the commission on
the transaction to FDS.
FactSet Limited, FactSet France, Inc.,
FactSet GmbH, FactSet Pacific, Inc., LionShares Europe S.A.S., Innovative
Systems Techniques, Inc. (“Insyte”) and FactSet Mergerstat, LLC
(“Mergerstat”) are wholly owned subsidiaries of the Company, with
operations in London, Paris, Frankfurt, Tokyo, Hong Kong, Sydney, Avon (France)
and Santa Monica, California. The Company dissolved elumient.com, Instye’s
wholly owned, inactive subsidiary, on December 23, 2002.
2. ACCOUNTING POLICIES
In the opinion of management, the accompanying statements of financial condition and related interim statements of income, comprehensive income and cash flows include all normal adjustments in order to present fairly the results of the Company’s operations for the interim periods presented in conformity with accounting principles generally accepted in the United States. The interim consolidated financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and footnotes thereto included in the Company’s Annual Report of Form 10-K for the fiscal year ended August 31, 2002. The significant accounting policies of the Company and its subsidiaries are summarized below.
Financial Statement Presentation
The accompanying interim consolidated financial statements include the accounts
of the Company and its subsidiaries. All intercompany activity and balances have
been eliminated from the interim consolidated financial statements.
Cost of services consists of employee
compensation and benefits for the software engineering and consulting groups,
clearing fees, data costs, amortization of identifiable intangible assets,
computer maintenance and depreciation expenses and communication costs. Selling,
general and administrative expenses include employee compensation and benefits
for the sales, product development and various other support departments, travel
and entertainment expenses, promotional expenses, rent, amortization of
leasehold improvements, depreciation of furniture and fixtures, office expenses,
professional fees and other expenses.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the 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. Significant estimates have been made in areas that include
income and other taxes, depreciable lives of fixed assets, accrued liabilities,
accrued compensation, receivable reserves and allocation of purchase price to
assets and liabilities acquired. Actual results could differ from those
estimates.
Revenue Recognition
Subscription charges are quoted to clients on an annual basis, but are earned
monthly as services are provided. Subscription revenues are earned each month,
based on one-twelfth of the annual subscription charge quoted to each client. As
a matter of policy, the Company does not seek to enter into written contracts
with its clients and clients are generally free to add to, delete portions of,
or terminate service at any time. Clients are invoiced monthly in arrears for
services rendered.
Amounts that have been earned but not
yet paid through the receipt of commissions on securities transactions or
through cash payments are reflected on the Consolidated Statements of Financial
Condition as receivables from clients and clearing brokers. Amounts that have
been received through commissions on securities transactions or through cash
payments that are in excess of earned subscription revenues are reflected on the
Consolidated Statements of Financial Condition as deferred fees and commissions.
Clearing Fees
When subscription charges are paid on a commission basis, the Company incurs
clearing fees, which are the charges imposed by the clearing brokers to execute
and settle clients’ securities transactions. Clearing fees are recorded in
the Statement of Income when the related subscription revenues are earned and
recognized. Clearing fees incurred in advance of providing the subscription
services are initially deferred and recognized in the same period in which the
related subscription revenue is recognized.
Cash and Cash
Equivalents
Cash and cash equivalents consists of demand deposits and money market
investments with maturities of 90 days or less and are reported at fair value.
Investments
Investments have original maturities greater than 90 days, are classified as
available-for-sale securities and are reported at fair value. Fair value is
determined for most investments from readily available quoted market prices.
Unrealized gains and losses on available-for-sale securities are included net of
tax in accumulated other comprehensive income in stockholders’ equity.
Property,
Equipment, and Leasehold Improvements
Computers and related equipment are depreciated on a straight-line basis over
estimated useful lives of three years or less. Depreciation of furniture and
fixtures is recognized using the double declining balance method over estimated
useful lives of five years. Leasehold improvements are amortized on a
straight-line basis over the terms of the related leases or estimated useful
lives of the improvements, whichever period is shorter.
Intangible Assets
Intangible assets consist of acquired technology resulting from the acquisitions
of the Insyte, LionShares and Mergerstat businesses. Amortization of acquired
technology is calculated on a straight-line basis using estimated useful lives
ranging between five and ten years.
Internal Use Software
The Company capitalizes only those direct costs incurred during the application
development and implementation stages for developing, purchasing or otherwise
acquiring software for internal use that management believes have a probable
future application in the Company’s subscription based service. These costs
are amortized over the estimated useful lives of the underlying software,
generally three years or less. All costs incurred during the preliminary
planning project stage, including project scoping, identification and testing of
alternatives, are expensed as incurred. Capitalized direct costs associated with
developing, purchasing or otherwise acquiring software for internal use are
reported in the Property, Equipment & Leasehold Improvements line item of
the Company’s Consolidated Statement of Financial Condition. These costs
are amortized on a straight-line basis over the expected useful life of the
software, beginning when the software is implemented and ready for its intended
use.
Income and Deferred Taxes
Deferred taxes are determined by calculating the future tax consequences
associated with differences between financial accounting and tax bases of assets
and liabilities. A valuation allowance is established to the extent management
considers it more likely than not that some portion or all of the deferred tax
assets will not be realized. The effect on deferred taxes from income tax law
changes is recognized immediately upon enactment. The deferred tax provision is
derived from changes in deferred taxes on the balance sheet and reflected on the
Consolidated Statements of Income as a component of income taxes. Income tax
benefits derived from the exercise of non-qualified stock options or the
disqualifying disposition of incentive stock options are recorded directly to
capital in excess of par value.
Earnings Per Share
The computation of basic earnings per share in each year is based on the
weighted average number of common shares outstanding. The weighted average
number of common shares outstanding includes shares issued to the Company’s
employee stock plans. Diluted earnings per share is based on the weighted
average number of common shares and potentially dilutive common shares
outstanding. Shares available pursuant to grants made under the Company’s
stock option plans are included as common share equivalents using the treasury
stock method.
New Accounting Pronouncements
On September 1, 2002, the Company adopted Financial Accounting Standards Board
Statement No. 144, Accounting for the Impairment or Disposal of Long-lived
Assets. This statement establishes a single accounting model for the
impairment of long-lived assets. The impact of adopting SFAS 144 on the
Company’s results of operation and financial position was not material.
In December 2002, the Financial
Accounting Standards Board issued Statement No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure. This statement provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. The statement also
amends the disclosure requirements of Financial Accounting Standards Board
Statement No. 123, (“SFAS 123”) Accounting for Stock-Based
Compensation, to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. As permitted
by SFAS 123, the Company accounts for its stock option and employee stock
purchase plans under APB Opinion No. 25, under which no compensation cost has
been recorded. Stock option exercise prices equal the fair market value of the
Company’s stock price on the date of grant, thus no compensation costs are
recorded. Had compensation cost for the two types of plans been determined
pursuant to the measurement principles under SFAS 123, the Company’s net
income and earnings per share would have been reduced to the following pro forma
amounts for the three months and nine months ended May 31, 2003 and May 31,
2002:
| Three Months Ended | Nine Months Ended | ||||||||
| May 31, |
May 31, | ||||||||
| In thousands, except per share data and unaudited | 2003 | 2002 | 2003 | 2002 | |||||
| Net income, as reported | $14,268 | $10,352 | $37,951 | $29,680 | |||||
| Deduct: Stock-based employee | |||||||||
| compensation expense determined | |||||||||
| under fair value based method for | |||||||||
| all awards, net of related tax effects | ( 2,019 | ) | ( 1,836 | ) | ( 5,648 | ) | ( 5,417 | ) | |
| Pro forma net income | $12,249 | $ 8,516 | $32,303 | $24,263 | |||||
| ===== | ===== | ===== | ===== | ||||||
| Basic - as reported | $ 0.43 | $ 0.31 | $ 1.13 | $ 0.88 | |||||
| ==== | ===== | ==== | ===== | ||||||
| Basic - pro forma | $ 0.37 | $ 0.25 | $ 0.96 | $ 0.72 | |||||
| ==== | ===== | ==== | ===== | ||||||
| Diluted - as reported | $ 0.41 | $ 0.29 | $ 1.10 | $ 0.85 | |||||
| ==== | ===== | ==== | ===== | ||||||
| Diluted - pro forma | $ 0.35 | $ 0.24 | $ 0.93 | $ 0.69 | |||||
| ==== | ===== | ==== | ===== | ||||||
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in the first nine months of fiscal years 2003 and 2002:
| STOCK OPTION PLANS | ||||
|---|---|---|---|---|
| Nine months ended May 31, | 2003 | 2002 | ||
| Risk-free interest rate | 2.29% | 3.66% | ||
| Expected life | 4.1 years | 4.0 years | ||
| Expected volatility | 53% | 52% | ||
| Dividend yield | 0.6% | 0.6% | ||
| 3. COMMON STOCK AND EARNINGS PER SHARE | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Nine Months Ended | |||||||||
| Shares of common stock outstanding were as follows: | May 31, | ||||||||
| In thousands and unaudited | 2003 | 2002 | |||||||
| Balance at September 1, | 33,788 | 33,356 | |||||||
| Common stock issued for employee stock plans | 373 | 500 | |||||||
| Repurchase of common stock | ( 632 | ) | ( 90 | ) | |||||
| Balance at May 31, | 33,529 | 33,766 | |||||||
| ===== | ===== | ||||||||
On July 16, 2002, the Board of Directors authorized a share repurchase program to acquire shares of the Company’s outstanding common stock in open market or negotiated transactions. This program authorized the repurchase of up to 1,000,000 shares of FactSet common stock. The program established no minimum number of shares for repurchase. During the third quarter of fiscal 2003, the Company did not repurchase any shares. During the first nine months of fiscal 2003, the Company repurchased approximately 630,000 shares at an aggregate cost of $16.4 million. Since the inception of the stock repurchase program, FactSet has purchased approximately 707,000 shares at an aggregate cost of $18.1 million.
A reconciliation between the weighted average shares outstanding used in the basic and diluted EPS computations is as follows:
| Weighted Average | |||||||||
| In thousands, except per share data and unaudited | Net Income | Common Shares | Per Share | ||||||
| (Numerator) | (Denominator) | Amount | |||||||
| For the Three Months Ended May 31, 2003 | |||||||||
| Basic EPS | |||||||||
| Income available to common stockholders | $14,268 | 33,455 | $0.43 | ||||||
| Diluted EPS | |||||||||
| Dilutive effect of stock options | –– | 1,152 | |||||||
| Income available to common stockholders | $14,268 | 34,607 | $0.41 | ||||||
| ====== | ===== | ||||||||
| For the Three Months Ended May 31, 2002 | |||||||||
| Basic EPS | |||||||||
| Income available to common stockholders | $10,352 | 33,746 | $0.31 | ||||||
| Diluted EPS | |||||||||
| Dilutive effect of stock options | –– | 1,475 | |||||||
| Income available to common stockholders | $10,352 | 35,221 | $0.29 | ||||||
| ====== | ===== | ||||||||
| Weighted Average | |||||||||
| In thousands, except per share data and unaudited | Net Income | Common Shares | Per Share | ||||||
| (Numerator) | (Denominator) | Amount | |||||||
| For the Nine Months Ended May 31, 2003 | |||||||||
| Basic EPS | |||||||||
| Income available to common stockholders | $37,951 | 33,624 | $1.13 | ||||||
| Diluted EPS | |||||||||
| Dilutive effect of stock options | –– | 1,002 | |||||||
| Income available to common stockholders | $37,951 | 34,626 | $1.10 | ||||||
| ====== | ===== | ||||||||
| For the Nine Months Ended May 31, 2002 | |||||||||
| Basic EPS | |||||||||
| Income available to common stockholders | $29,680 | 33,590 | $0.88 | ||||||
| Diluted EPS | |||||||||
| Dilutive effect of stock options | –– | 1,323 | |||||||
| Income available to common stockholders | $29,680 | 34,913 | $0.85 | ||||||
| ====== | ===== | ||||||||
4. SEGMENTS
The Company has three
reportable segments based on geographic operations: the United States, Europe
and Asia Pacific. Each segment markets online integrated database services to
investment managers, investment banks and other financial services
professionals. The U.S. segment services financial institutions throughout North
America, while the European and Asia Pacific segments service investment
professionals located in Europe and other regions.
The European segment is headquartered
in London, England and maintains office locations in Frankfurt, Germany and
Paris and Avon, France. The Asia Pacific segment is headquartered in Tokyo,
Japan with office locations in Hong Kong and Sydney, Australia. Mainly sales and
consulting personnel staff each of these foreign branch operations. Segment
revenues reflect direct sales of products and services to clients based in their
respective geographic locations. There are no intersegment or intercompany sales
of the FactSet service. Each segment records compensation, travel, office and
other direct expenses related to its employees. Expenditures related to the
Company’s computing centers, data costs, clearing fees, income taxes and
corporate headquarters charges are recorded by the U.S. segment and are not
allocated to the European and Asia Pacific segments. The accounting policies of
the segments are the same as those described in Note 2, “Accounting
Policies.”
Goodwill
of $13,677,000 at May 31, 2003, which reflects three prior acquisitions, is
included within the U.S. segment.
| Segment Information | |||||||||
| In thousands and unaudited | U.S. | Europe | Asia Pacific | Total | |||||
| For The Three Months Ended May 31, 2003 | |||||||||
| Revenues from clients | $ 47,898 | $ 8,730 | $ 2,478 | $ 59,106 | |||||
| Segment operating profit * | 14,936 | 3,855 | 712 | 19,503 | |||||
| Total assets at May 31, 2003 | 229,705 | 10,025 | 3,646 | 243,376 | |||||
| Capital expenditures | 1,094 | 10 | 15 | 1,119 | |||||
| For The Three Months Ended May 31, 2002 | |||||||||
| Revenues from clients | $ 42,323 | $ 7,714 | $ 2,379 | $ 52,416 | |||||
| Segment operating profit * | 11,080 | 3,711 | 1,330 | 16,121 | |||||
| Total assets at May 31, 2002 | 191,314 | 10,237 | 3,601 | 205,152 | |||||
| Capital expenditures | 1,485 | 850 | 2 | 2,337 | |||||
| For The Nine Months Ended May 31, 2003 | |||||||||
| Revenues from clients | $137,735 | $ 25,281 | $ 7,558 | $170,574 | |||||
| Segment operating profit * | 42,347 | 11,100 | 2,808 | 56,255 | |||||
| Capital expenditures | 4,886 | 128 | 33 | 5,047 | |||||
| For The Nine Months Ended May 31, 2002 | |||||||||
| Revenues from clients | $122,762 | $ 22,020 | $ 7,010 | $151,792 | |||||
| Segment operating profit * | 31,005 | 10,236 | 3,337 | 44,578 | |||||
| Capital expenditures | 5,832 | 1,279 | 6 | 7,117 | |||||
| * Expenses, including income taxes, are not allocated or charged between segments. Expenditures associated with the Company’s computer centers, clearing fees, data fees, income taxes, and corporate headquarters charges are recorded by the U.S. segment. | |||||||||
5. MERGERSTAT ACQUISITION
On January 23, 2003, the Company acquired all the ownership interests of Mergerstat for $7.7 million in cash. Mergerstat is a provider of mergers and acquisition information to the United States and European markets. The acquisition expands the existing portfolio of services and products offered on the FactSet system. The purchase price of Mergerstat was allocated to tangible and intangible assets and liabilities based on estimated fair value. The difference between the purchase price and the fair value of tangible and intangible assets less liabilities was recorded as goodwill. A summary of the Mergerstat purchase price allocation consists of the following:
| In thousands and unaudited | ||
| Current assets | $ 330 | |
| Acquired technology | 4,195 | |
| Goodwill | 3,815 | |
| 8,340 | ||
| Other liabilities assumed | ( 638 | ) |
| Purchase price | $ 7,702 | |
Operating results of Mergerstat are included in the Company’s consolidated financial statements from the date of the acquisition. Pro forma statements of income have not been presented because the effect of the acquisition was not material to the Company’s consolidated financial results.
6. DATA CENTER RELOCATION CHARGE
During November 2001, the Company moved its New York City data center operations into a new data center facility in Manchester, New Hampshire. The New Hampshire data center and its associated lease were acquired by the Company from Vitts Networks, Inc. in July 2001. The Company placed the Manchester data facility into operation in November 2001 and incurred a charge of approximately $904,000, of which $604,000 related to non-cash expenses associated with the accelerated depreciation of the carrying value of the abandoned unamortized leasehold improvements in the former New York City data center. Approximately $300,000 related to moving and other direct relocation costs.
7. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases office space domestically in Greenwich and Stamford, Connecticut; Boston and Newton,
Massachusetts; New York, New York; Chicago, Illinois; Manchester, New Hampshire; Tuscaloosa, Alabama; San Mateo
and Santa Monica, California; and internationally in London; Tokyo; Hong Kong; Sydney; Frankfurt; and Paris and
Avon, France. The leases expire on various dates through February 2010. Total minimum rental payments associated
with the leases are recorded as rent (a component of selling, general and administrative expenses) on a
straight-line basis over the periods of the respective lease terms.
At May 31, 2003, the Company’s lease
commitments for office space provide for the following future minimum rental
payments under non-cancelable operating leases with remaining terms in excess of
one year:
| In thousands and unaudited | ||
| Years Ended August 31, | ||
| 2003 (Remainder) | $ 2,021 | |
| 2004 | 8,362 | |
| 2005 | 3,715 | |
| 2006 | 2,902 | |
| 2007 | 1,611 | |
| Thereafter | 3,495 | |
| Minimum lease payments | $22,106 | |
Revolving Credit Facilities
In fiscal 2003, the Company renewed its 364-day revolving credit facility and
continued to maintain its existing three-year credit facility. The credit
facilities (the “facilities”) are available in an aggregate principal
amount of up to $25.0 million for working capital and general corporate
purposes, with the facilities split into two equal tranches and maturing March
2004 and November 2004. Approximately $766,000 in aggregate of these credit
facilities has been utilized for letters of credit issued during the ordinary
course of business as of May 31, 2003. The Company is obligated to pay a
commitment fee on the unused portion of the facilities at a weighted average
annual rate of 0.175%. The facilities also contain covenants that, among other
things, require the Company to maintain minimum levels of consolidated net worth
and certain leverage and fixed charge ratios.
Taxes
In the normal course of business, the Company’s tax filings are subject to
audit by federal and state tax authorities. Audits by six local tax authorities
are currently ongoing. There is inherent uncertainty in the audit process.
Nevertheless, the Company has no reason to believe that these audits will result
in additional tax payments that would have a material adverse effect on its
results of operations or financial position.
8. IDENTIFIED INTANGIBLE ASSETS
The Company’s identifiable intangible assets consist of acquired technology resulting from the acquisitions of the Insyte, LionShares and Mergerstat businesses in August 2000, April 2001 and January 2003, respectively. The weighted average useful life of the acquired technology is 8.83 years. These intangible assets have no assigned residual values. The gross carrying amounts and accumulated amortization totals related to the Company’s acquired technology were approximately $6,438,000 and $1,053,000 at May 31, 2003, and $2,243,000 and $568,000 at May 31, 2002, respectively. During the second quarter of fiscal 2003, $4,195,000 of intangible assets were added as a result of the acquisition of Mergerstat. Amortization expense of approximately $191,000 and $398,000 was recorded in the three and nine months ended May 31, 2003. Estimated amortization expense of the identifiable intangible assets (acquired technology) for the remainder of fiscal 2003 and the remaining fiscal years is as follows:
| Estimated | ||
| Amortization | ||
| In thousands and unaudited | Fiscal Year | Expense |
| 2003 (Remainder) | $ 191 | |
| 2004 | 764 | |
| 2005 | 764 | |
| 2006 | 736 | |
| 2007 | 659 | |
| Thereafter | $2,271 | |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
| RESULTS OF OPERATIONS - Unaudited | |||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||
| May 31, |
May 31, | ||||||||||
| In thousands, except per share data | 2003 | 2002 | Change | 2003 | 2002 | Change | |||||
| Revenues | $ 59,106 | $ 52,416 | 12.8% | $170,574 | $151,792 | 12.4% | |||||
| Cost of services | 18,947 | 17,339 | 9.3 | 54,653 | 50,238 | 8.8 | |||||
| Selling, general and administrative | 20,656 | 18,956 | 9.0 | 59,666 | 56,072 | 6.4 | |||||
| Data center relocation charge | –– | –– | –– | –– | 904 | –– | |||||
| Operating income | 19,503 | 16,121 | 21.0 | 56,255 | 44,578 | 26.2 | |||||
| Net income | 14,268 | 10,352 | 37.8 | 37,951 | 29,680 | 27.9 | |||||
| Diluted earnings per common share | $ 0.41 | $ 0.29 | 41.4% | $ 1.10 | $ 0.85 | 29.4% | |||||
REVENUES
Revenues for the quarter ended May 31, 2003 increased 12.8% to $59.1 million compared to $52.4 million for the same period in fiscal 2002. During the first nine months of fiscal 2003 revenues increased 12.4% to $170.6 million. The primary drivers of revenue growth for both periods were the continued demand for our value-added applications and databases, international expansion and the net addition of 43 clients over the past twelve months. Approximately half of our revenue is derived from sales of databases and applications, while the remaining revenue generated from our base fee and subscriptions for incremental passwords.
Our value-added applications, particularly Portfolio Analytics, were the recipients of increased demand during the third quarter of fiscal 2003. At May 31, 2003, there were approximately 340 clients consisting of approximately 2,500 users to our Portfolio Analytics applications compared to approximately 310 clients and nearly 2,100 users for the same period a year ago.
International revenues for the quarter ended May 31, 2003 increased 11.0% to $11.2 million compared to $10.1 million for the same period in fiscal 2002. During the quarter, revenues from European operations rose 13.2% while revenues in Asia Pacific advanced 4.2%. For the first nine months of fiscal 2003, overseas revenues were $32.8 million, an increase of 13.1% from the same period in fiscal 2002. Revenues from international operations accounted for 18.9% of consolidated revenues for the third quarter of fiscal 2003 and 19.2% of consolidated revenues for the nine months ended May 31, 2003. Over 95% of the Company’s revenues are received in U.S. dollars. Net monetary assets held by our international branch offices during the quarter ended May 31, 2003 were immaterial. Accordingly, our exposure to foreign currency fluctuations during the quarter was not material.
At May 31, 2003 our client count grew 4.8% to 942 clients compared to 899 clients for the same period in fiscal 2002. Passwords, a measure of users of FactSet, declined to 19,000 as of May 31, 2003 compared to 21,900 from the same period in fiscal 2002, representing a 13.2% decline. Staffing cutbacks among our major investment banking clients over the past 12 months was the main reason for the password reduction. This password decline was primarily limited to the investment banking segment of our business, as the aggregate user count for our investment management clients decreased slightly over the same period. Approximately a quarter of our revenue is generated from our investment banking clients, while most of the remaining revenue derived from our investment management clients.
Total client subscriptions at May 31, 2003 grew to $235.9 million, an increase of 10.8% from a year ago. At quarter end, the average subscription per client was $250,000, up from an average of $237,000 a year ago, an increase of 5.5%. Subscriptions from international clients were $44.6 million, representing approximately 18.9% of total client subscriptions.
No individual client accounted for more than 5% of total subscriptions. Subscriptions from the ten largest clients did not surpass 25% of total client subscriptions. At May 31, 2003, client retention remained at a rate in excess of 95%.
OPERATING EXPENSES
Cost of Services
For the quarter ended May 31, 2003, cost of services increased 9.3% to $18.9
million from $17.3 million in the same period in fiscal 2002. For the nine
months ended May 31, 2003, cost of services grew to $54.7 million or 8.8% from
$50.2 million in the prior year period. Increases in cost of services for the
first nine months of fiscal 2003 were attributed primarily to increases in
employee compensation and benefits, clearing costs, data costs and
client-related communication costs.
Employee compensation and benefits expense grew $363,000 in the quarter ended May 31, 2003, versus the same period a year ago and $2.0 million in the first nine months of fiscal 2003 compared to the prior year period. These increases are largely the result of employee additions and increases in merit compensation. Data costs increased $190,000 in the third quarter of fiscal 2003 compared to the three months ended May 31, 2002 and $1.0 million for the first nine months of fiscal 2003 versus the same period a year ago. Additional data costs were the result of new databases as well as increased data fees resulting from a larger number of client users over the comparable periods in fiscal 2002. Client-related communication costs advanced approximately a total of $600,000 in the three and nine months ended May 31, 2003 due to additional costs incurred during the third quarter related to the implementation of FactSet Marquee, a streaming display of news, quotes and broker research.
Selling, General and Administrative
For the quarter ended May 31, 2003, selling, general and administrative
(“SG&A”) expenses grew 9.0% to $20.7 million from $19.0 million in
the third quarter of fiscal 2002. For the first nine months of fiscal 2003,
SG&A expenses rose 6.4% to $59.7 million from $56.1 million. Increases in
both periods were due to higher costs related to employee compensation and
benefits and travel and entertainment, offset by lower corporate-related
communication costs.
Employee compensation and benefits expense grew $1.4 million in the third quarter of fiscal 2003 compared to the third quarter of fiscal 2003 and $3.7 million for the nine months ending May 31, 2003 versus the same period a year ago. These increases are largely the result of the hiring additional employees and increased merit compensation. Travel and entertainment expense grew $264,000 during third quarter of fiscal year 2003 compared to the prior year period and $819,000 during the first nine months of fiscal 2003 versus the same period in fiscal 2002. Increases in both periods were due to additional travel by our sales force as compared to the prior year periods. Corporate-related communication costs declined $200,000 in the three months ended May 31, 2003 compared to the prior year period and $335,000 for the first nine months of fiscal 2003 versus the comparable period in fiscal 2002. This reduction is due to lower costs borne for corporate-related communication lines.
Data Center Relocation Charge
During November 2001, the Company moved its New York City data center operations
into a new data center facility in Manchester, New Hampshire. The New Hampshire
data center and its associated lease were acquired by the Company from Vitts
Networks, Inc. in July 2001. The Company placed the Manchester data facility
into operation in November 2001 and, in the first quarter of fiscal 2002,
incurred a non-recurring charge of approximately $904,000, of which $604,000
related to non-cash expenses associated with the accelerated depreciation of the
carrying value of the abandoned unamortized leasehold improvements in the former
New York City data center. Approximately $300,000 related to moving and other
direct relocation costs.
Operating Margin
Operating margin for the quarter ended May 31, 2003 was 33.0% compared to 30.8%
for the same period a year ago. The operating margin for the first nine months
of fiscal 2003 was 33.0% compared to 29.4% for the comparable period in fiscal
2002. Decreasing employee compensation and benefits, computer depreciation and
professional fees, partially offset by increases in client-related communication
costs, as a percentage of revenues were the major contributors to the
improvement in the Company’s operating margin for the third quarter of
fiscal 2003. The operating margin for the nine months ended May 31, 2003,
improved as a result of lower employee compensation and benefits, computer
depreciation, promotional costs, occupancy-related costs and professional fees,
as a percentage of revenue in fiscal 2003 and a data center relocation charge in
fiscal 2002.
Income Taxes
For the quarter ended May 31, 2003, income tax expense decreased to $5.7 million
from $6.3 million for the comparable period in fiscal 2002. The effective tax
rate for the third quarter of fiscal 2003 was 28.7% compared to 37.8% a year
ago. The third quarter of fiscal year 2003 included a tax benefit of $1.3
million, which was related to additional federal tax planning and certain
changes in estimates relating to fiscal 2002 income taxes payable. In addition
to reducing fiscal 2002 taxes payable, the federal tax planning completed in the
third quarter of fiscal 2003 also generated recurring tax benefits. As a result,
the effective tax rate for the third quarter of fiscal 2003, excluding the
one-time tax benefit of $1.3 million, was 35.2% compared to 37.0% a year ago.
Income tax expense for the first nine months of fiscal 2003 was $20.0 million,
an increase of $3.4 million from the same period a year ago. The effective tax
rate for the first nine months of fiscal 2003 was 34.5%, versus 35.9% in the
same period a year ago. Excluding the tax benefit of $1.3 million in the third
quarter of fiscal year 2003 and the tax benefit of $893,000 in the second
quarter of fiscal year 2002, the effective tax rate for the first nine months of
fiscal 2003 was 36.7% versus 37.8% in the same period a year ago. The decrease
in the effective tax rate is due to the recurring benefit from the additional
federal tax planning completed in third quarter of fiscal 2003.
Liquidity
Cash generated by operating activities for the first nine months of fiscal 2003
was $52.7 million, an increase of $2.9 million over the comparable period in
fiscal 2002. The year over year increase in operating cash was primarily due to
higher levels of profitability and current taxes payable, partially offset by
higher accounts receivable and decreases in deferred fees and commissions.
Capital Expenditures
Our capital expenditures for the third quarter totaled $1.1 million and $5.0
million for the first nine months of fiscal year 2003. Capital expenditures
during the third quarter and first nine months of fiscal 2003 consisted largely
of computer-related equipment purchases for our data centers.
Financing Operations and Capital Needs
Cash, cash equivalents and investments totaled $153.0 million or 62.9% of the
Company’s total assets at May 31, 2003. All our operating and capital
expense requirements were financed entirely from cash generated from the
Company’s operations. We have no outstanding indebtedness.
Revolving Credit Facilities
In fiscal 2003, we renewed our 364-day revolving credit facility and continued
to maintain our existing three-year credit facility. Both credit facilities (the
“facilities”) are available in an aggregate principal amount of up to
$25.0 million for working capital and general corporate purposes, with the
facilities split into two equal tranches maturing March 2004 and November 2004.
Approximately $766,000 in aggregate of these credit facilities has been utilized
for letters of credit issued during the ordinary course of business. We have no
present plans to draw any portion of the remaining available credit of
approximately $24.2 million. We are obligated to pay a commitment fee on the
unused portion of the facilities at a weighted average annual rate of 0.175%.
The facilities also contain covenants that, among other things, require us to
maintain minimum levels of consolidated net worth and certain leverage and fixed
charge ratios.
Share Repurchase Program
On July 16, 2002, our Board of Directors authorized a stock repurchase program
to acquire shares of our outstanding common stock in open market or negotiated
transactions. This program authorized the repurchase of up to 1,000,000 shares
of our common stock. The program established no minimum number of shares for
repurchase. During the third quarter of fiscal 2003, we did not repurchase any
shares. During the first nine months of fiscal 2003, we repurchased
approximately 630,000 shares at an aggregate cost of $16.4 million. Since the
inception of the stock repurchase program, we purchased approximately 707,000
shares at an aggregate cost of $18.1 million.
New Accounting Pronouncements
On September 1, 2002, we adopted Financial Accounting Standards Board Statement
No.144, Accounting for the Impairment or Disposal of Long-lived
Assets. This statement establishes a single accounting model for the
impairment of long-lived assets. The impact of adopting SFAS 144 on our results
of operation and financial position was not material.
In December 2002, the Financial
Accounting Standards Board issued Statement No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure. This statement provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. The statement also
amends the disclosure requirements of Statement No. 123, Accounting for
Stock-Based Compensation, to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. As
permitted by SFAS 123, Accounting for Stock-Based Compensation, we
account for our stock option and employee stock purchase plans under APB Opinion
No. 25, under which no compensation cost has been recorded. Had compensation
cost for the two types of plans been determined pursuant to the measurement
principles under SFAS 123, our net income and earnings per share would have been
reduced to the following pro forma amounts for the three months and nine months
ended May 31, 2003 and May 31, 2002:
| Three Months Ended | Nine Months Ended | ||||||||
| May 31, |
May 31, | ||||||||
| In thousands, except per share data and unaudited | 2003 | 2002 | 2003 | 2002 | |||||
| Net income, as reported | $14,268 | $10,352 | $37,951 | $29,680 | |||||
| Deduct: Stock-based employee | |||||||||
| compensation expense determined | |||||||||
| under fair value based method for | |||||||||
| all awards, net of related tax effects | ( 2,019 | ) | ( 1,836 | ) | ( 5,648 | ) | ( 5,417 | ) | |
| Pro forma net income | $12,249 | $ 8,516 | $32,303 | $24,263 | |||||
| ===== | ===== | ===== | ===== | ||||||
| Basic - as reported | $ 0.43 | $ 0.31 | $ 1.13 | $ 0.88 | |||||
| ==== | ===== | ==== | ===== | ||||||
| Basic - pro forma | $ 0.37 | $ 0.25 | $ 0.96 | $ 0.72 | |||||
| ==== | ===== | ==== | ===== | ||||||
| Diluted - as reported | $ 0.41 | $ 0.29 | $ 1.10 | $ 0.85 | |||||
| ==== | ===== | ==== | ===== | ||||||
| Diluted - pro forma | $ 0.35 | $ 0.24 | $ 0.93 | $ 0.69 | |||||
| ==== | ===== | ==== | ===== | ||||||
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in the first nine months of fiscal years 2003 and 2002:
| STOCK OPTION PLANS | ||||
|---|---|---|---|---|
| Nine months ended May 31, | 2003 | 2002 | ||
| Risk-free interest rate | 2.29% | 3.66% | ||
| Expected life | 4.1 years | 4.0 years | ||
| Expected volatility | 53% | 52% | ||
| Dividend yield | 0.6% | 0.6% | ||
Critical Accounting Policies
In December of 2001, the SEC issued FR 60, Cautionary Advice Regarding
Disclosure About Critical Accounting Policies, and in January of 2002, the
SEC issued FR 61, Commission Statement about Management’s Discussion and
Analysis of Financial Condition and Results of Operations. We are making
certain incremental disclosures in our critical accounting policies below
pursuant to these changes. We do not engage in off-balance sheet financing
activities, make use of derivatives transactions or engage in significant
related party transactions. Lease commitments and credit lines are disclosed in
the quarterly report on Form 10-Q and annual report on Form 10-K for each fiscal
year. Moreover, we have determined that the following represent our critical
accounting policies.
Revenue Recognition
As a matter of policy, we do not seek to enter into written contracts with our
clients and promote flexibility in which clients are typically free to add to,
delete portions of, or terminate service at any time. We recognize revenue using
a subscription-based model in which we quote subscription charges to a client on
an annual basis. Subscription revenues are earned monthly as services are
provided and are based on one-twelfth of the annual subscription charge quoted
to each client. Clients are quoted two prices for each subscription, depending
upon the method of payment. We bill our clients in arrears for services provided
on a monthly basis. Clients frequently add and delete users, change the mix of
services they require from us and, occasionally, cancel our services. Due
provision is made each month to accrue for such cancellations and billing
adjustments based on estimates developed using historical activity and taking
known changes in client activity into account. An appropriate reserve is
maintained to account for such estimated cancellations and adjustments and is
included in receivable reserves, discussed below. Amounts that have been billed
to clients and therefore earned, but have not yet been paid in cash or through
commissions on securities transactions are reflected on the Consolidated
Statements of Financial Condition as receivables from clients and clearing
brokers. Amounts that have been received as commissions on securities
transactions or in cash that exceed earned subscription revenues are reflected
on the Consolidated Statements of Financial Condition as deferred fees and
commissions.
EITF 00-21, “Multiple Element
Arrangements” contains further guidance on revenue recognition,
particularly with respect to situations in which companies offer multiple
services or deliverables to a customer for a single, bundled price. The EITF
consensus applies to us for all transactions entered into beginning with our
first quarter of fiscal 2004, effective September 1, 2003. We are currently
evaluating the effects of adopting this EITF consensus on our revenue
recognition policies, as well as our financial statement presentation and
disclosure.
Clearing Fees
When subscription charges are paid on a commission basis, the Company incurs
clearing fees, which are the charges imposed by the clearing brokers to execute
and settle clients’ securities transactions. Clearing fees are recorded in
the Statement of Income when the related subscription revenues are earned and
recognized. Clearing fees incurred in advance of providing the subscription
services are initially deferred and recognized in the same period in which the
related subscription revenue is recognized.
Receivable Reserves
Our client base has historically been of a high quality and, as such, we have
not historically experienced high credit-related write-offs. Aged client
receivables are analyzed each month and our collection efforts are directed
accordingly. We take historical company information, industry trends and general
market conditions into account in estimating reserves, and apply a percentage to
the month-end client receivable balance. Additionally, we also include amounts
relating to the estimated cancellations and billing adjustments we discussed
above in our receivable reserves.
Valuation of Goodwill and Other Intangible Assets
We adopted SFAS 142, which requires that a traditional goodwill impairment test
be completed during the first six months of the year the standard is adopted.
SFAS 142 further requires a separate annual goodwill impairment test to be
performed each year along with additional goodwill impairment tests on an
event-driven basis. We performed our transitional goodwill impairment tested
during the quarter ended February 28, 2002, and noted that goodwill had not been
impaired. On an ongoing basis, we will evaluate the acquired businesses and
related assets for indications of potential impairment. We may base our judgment
regarding the existence of impairment indicators by relying on market
conditions, legal and technological factors and the operational performance of
the acquired businesses and related assets. Future events could cause us to
conclude that indicators of impairment do exist and that goodwill associated
with our previous acquisitions is impaired.
After we acquired the Insyte, LionShares
and the Mergerstat businesses, we recorded assets for acquired technology on our
Consolidated Statements of Financial Condition. We review intangibles for
evidence of impairment whenever changes in circumstances or events indicate that
the carrying value of the intangible assets may not be recoverable.
Property, Equipment and Leasehold Improvements
We depreciate computers and related equipment on a straight-line basis over
estimated useful lives of three years or less. Furniture and fixtures are
depreciated over estimated useful lives of five years using a double declining
balance method. We amortize leasehold improvements on a straight-line basis over
the shorter of the terms of the related leases or the estimated useful lives of
the improvements. The potential impairment of our fixed assets is evaluated
whenever changes in circumstances or events indicate that the carrying value of
the fixed assets may not be recoverable. Factors that may cause an impairment
review of fixed assets include, but are not limited to, the following:
| o significant changes in technology that make current computer-related assets that we use in our operations |
| obsolete or less useful; and |
| o significant changes in the way we use these assets in our operations. |
Accounting for Income Taxes
We estimate our income taxes in each of the jurisdictions in which we operate.
Deferred taxes are determined by calculation of the future tax consequences
associated with differences between financial accounting and tax bases of assets
and liabilities. As a result of this process, we recognize deferred tax assets
and liabilities, which are recorded in the Consolidated Statements of Financial
Condition. A valuation allowance is established to the extent that it is
considered more likely than not that some portion or all of the deferred tax
assets will not be realized. To the extent a valuation allowance is established
or adjusted in a period, this amount is included in the Consolidated Statements
in Income as an expense or benefit within the provision for income taxes.
Accrued Liabilities
In conformity with generally accepted accounting principles, we make significant
estimates in determining our accrued liabilities. Accrued liabilities include
estimates relating to employee compensation, operating expenses and tax
liabilities. Most of our employee incentive compensation programs are
discretionary. A final review of departmental performance is conducted each year
end with senior management and the Board of Directors determining the ultimate
amount of discretionary bonus pools in connection with this review. We also
review compensation throughout the year to determine how overall performance
tracks against managers’ expectations. Management takes these and other
factors, including historical performance, into account in reviewing accrued
compensation estimates quarterly and adjusting accrual rates as appropriate.
Because final reviews are not normally completed until after the year-end
closing cycle, it is possible that actual amounts ultimately approved could
differ from amounts previously accrued based upon information available prior to
the final reviews. As such, the difference, if any, will be recorded in the
period in which the estimate is changed.
Forward-Looking Factors – Update Numbers
Business Outlook
The following forward-looking statements reflect our expectations as of July 15,
2003. Given the number of risk factors, assumptions and uncertainties enumerated
and discussed below, actual results may differ materially. We do not intend to
update our forward-looking statements until the next quarterly results
announcement, other than in publicly available statements.
| Fourth Quarter Fiscal 2003 Expectations |
| o Revenues are expected to range between $58.5 million and $60.0 million. |
| o Operating margins should be comparable with the first nine months of fiscal 2003. |
| o The effective tax rate should be approximately 36.7% |
| Full Year Fiscal 2003 Expectations |
| o Capital expenditures should total approximately $9 million, a reduction of $3 million from guidance |
| previously given by the Company. |
Recent Market Trends
In the ordinary course of business, we are exposed to various financial risks involving equity and foreign currency markets as well as risks related to interest rate fluctuations. During the past three years, major equity indices (e.g., Dow Jones 30 Industrials, Russell 2000, NASDAQ Composite, MSCI European Index, Nikkei 225) have experienced significant levels of volatility. The potential for a continued high level of volatility coupled with stagnant or further deterioration of general economic and market conditions is still possible. External factors such as the threat of hostilities among various nations or military actions by the United States could undermine any potential economic recovery. A decline in the worldwide markets could adversely impact a large number of our clients (investment management firms and investment banks) and increase the likelihood of personnel and spending reductions among our existing and potential clients.
The fair market value of our portfolio of cash, cash equivalents and investment at May 31, 2003 was $153.0 million. It is anticipated that the fair market value of our portfolio will continue to be immaterially affected by fluctuations in interest rates. Preservation of principal is the primary goal of our investment portfolio. Pursuant to the investment guidelines we established, third-party managers construct portfolios to achieve high levels of credit quality, liquidity and diversification. Our investment policy dictates that the weighted-average duration of short-term investments is not to exceed eighteen months. Investments such as puts, calls, strips, short sales, straddles, options, futures or investments on margin are not permitted by our investment guidelines. Since we have no outstanding indebtedness and for the reasons enumerated above, our financial exposure to fluctuations in interest rates is expected to continue to be low.
All our investments are held in U.S. dollars and greater than 95% of our revenues are transacted in U.S. dollars. Accordingly, our exposure to fluctuations in foreign currency rates is expected to continue to be immaterial.
Taxes
During the normal course of business, our tax filings are subject to audit by
federal and state tax authorities. Audits by six local tax authorities are
currently ongoing. There is inherent uncertainty contained in the audit process
but we have no reason to believe these audits will result in additional tax
payments that would have a material adverse effect on our results of operations
or financial position.
Forward-Looking Statements
This Management’s Discussion and Analysis contains forward-looking statements that are based on management’s current expectations, estimates and projections. All statements that address expectations or projections about the future, including statements about our strategy for growth, product development, market position, subscriptions and expected expenditures and financial results are forward-looking statements. Forward-looking statements may be identified by the words like “expected,” “anticipates,” “plans,” “intends,” “projects,” “should,” “indicates,” “continue,” “subscriptions” and similar expressions. These statements are not guarantees of future performance and involve a number of risks, uncertainties and assumptions (“future factors”). Therefore, actual results may differ materially from what is expressed or forecasted in such forward-looking statements. We undertakes no obligation to update publicly any forward-looking statements as a result of new information, future events, or otherwise.
These future factors include, but are not limited to, the ability to hire qualified personnel; maintenance of our leading technological position; the impact of global market trends on our revenue growth rate and future results of operations; the negotiation of contract terms supporting new and existing databases; retention of key clients; the successful resolution of ongoing audits by tax authorities; the continued employment of key personnel; the absence of U.S. or foreign governmental regulation restricting international business; and the sustainability of historical levels of profitability and growth rates in cash flow generation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate risk primarily through our portfolio of cash, cash equivalents and investments. Cash and cash equivalents consist of demand deposits and money market investments with maturities of 90 days or less. Our investment portfolio, which is designed for the preservation of principal, consists of U.S. Treasury notes and bonds, corporate bonds and municipal bonds. The investment portfolio is subject to interest rate risk as investments are sold or mature and are reinvested at current market rates. Derivative financial instruments are not permitted by our investment guidelines.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this report, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls, subsequent to the date of such evaluation.
| (a) Exhibits: | ||
| EXHIBIT | ||
| NUMBER | DESCRIPTION | |
| 99.1 | Certification of the Chief Executive Officer of FactSet Research Systems Inc. | |
| Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| 99.2 | Certification of the Chief Financial Officer of FactSet Research Systems Inc. | |
| Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| (b) Reports on Form 8-K: None | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| FACTSET RESEARCH SYSTEMS INC. | |||
| Registrant | |||
| Date: | July 15, 2003 | /s/ ERNEST S. WONG | |
| –––––––––––––––––––––––––––––––– | |||
| Ernest S. Wong, | |||
| Senior Vice President, Chief Financial Officer, | |||
| Treasurer and Secretary |
CERTIFICATION PURSUANT TO RULE 13a-14 OR 15d-14 OF THE SECURITIES
EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Philip A. Hadley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of FactSet Research Systems Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| Date: July 15, 2003 | ||
| /s/ Philip A. Hadley | ||
| Philip A. Hadley | ||
| Chief Executive Officer |
CERTIFICATION PURSUANT TO RULE 13a-14 OR 15d-14 OF THE SECURITIES
EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Ernest S. Wong, certify that:
1. I have reviewed this quarterly report on Form 10-Q of FactSet Research Systems Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| Date: July 15, 2003 | ||
| /s/ Ernest S. Wong | ||
| Ernest S. Wong | ||
| Chief Financial Officer |
EXHIBIT INDEX
| EXHIBITS |
| 99.1 | Certification of
the Chief Executive Officer of FactSet Research Systems Inc. Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 99.2 | Certification of
the Chief Financial Officer of FactSet Research Systems Inc. Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
EXHIBIT 99.1
FACTSET RESEARCH SYSTEMS INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of FactSet Research Systems Inc. (the “Company”) on Form 10-Q for the period ending May 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Philip A. Hadley, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Philip A. Hadley
Philip A. Hadley
Chief Executive Officer
July 15, 2003
A signed original of this written statement required by Section 906 has been provided to FactSet Research Systems Inc. and will be retained by FactSet Research Systems Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 99.2
FACTSET RESEARCH SYSTEMS INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of FactSet Research Systems Inc. (the “Company”) on Form 10-Q for the period ending May 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ernest S. Wong, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Ernest S. Wong
Ernest S. Wong
Chief Financial Officer
July 15, 2003
A signed original of this written statement required by Section 906 has been provided to FactSet Research Systems Inc. and will be retained by FactSet Research Systems Inc. and furnished to the Securities and Exchange Commission or its staff upon request.