Form 10-Q
United States Securities And Exchange Commission
Washington, D.C. 20549
|X| Quarterly Report pursuant to Section 13 or 15(D) of the Securities Exchange
Act of 1934 for the fiscal quarter ended November 30, 1997
|_| Transition Report pursuant to Section 13 or 15(D) of the Securities Exchange
Act Of 1934 for the transition period from ____ to ____
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 60 days. Yes |X| No|_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of each class Outstanding at November 30, 1997
................... ................................
Common Stock, par value $.01 9,596,140
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 November 30, 1997 and 1996......3
Consolidated Statements of Financial Condition
at November 30, 1997 and at August 31, 1997................4
Consolidated Statements of Cash Flows
for the three months ended November 30, 1997 and 1996......5
Notes to the Consolidated Financial Statements..................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................8
Part II OTHER INFORMATION
Item 1. Legal Proceedings...................................................10
Item 2. Changes in Securities...............................................10
Item 3. Submission of Matters to a Vote of Security Holders.................10
Item 4. Other Information...................................................10
Item 5. Reports on Form 8-K.................................................10
Item 6. Exhibits............................................................10
Signatures....................................................................10
CONSOLIDATED STATEMENTS OF INCOME FactSet Research Systems Inc.
Unaudited and in thousands, except per share data
Three Months Ended November 30, 1997 1996
................................................................................
Subscription Revenue
Commissions $7,776 $6,392
Fees 9,718 6,432
------ ------
Total subscription revenue 17,494 12,824
------ ------
................................................................................
Expenses
Cost of services 6,871 5,097
Selling, general, and administrative 5,318 3,888
Other expenses 707 499
------ -----
Total operating expenses 12,896 9,484
------ ------
................................................................................
Income from operations 4,598 3,340
Other income 367 117
----- -----
Income before income taxes 4,965 3,457
Income taxes 2,190 1,495
------ ------
Net income $2,775 $1,962
====== ======
................................................................................
Weighted average common shares 10,970 10,827
................................................................................
Earnings per common share $0.25 $0.18
................................................................................
The accompanying notes are an integral part of these consolidated statements.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
FactSet Research Systems Inc.
ASSETS
November 30, August 31,
Unaudited and in thousands 1997 1997
................................................................................
CURRENT ASSETS
Cash and cash equivalents $30,087 $26,816
Investments 1,404 1,375
Receivable from clients and clearing brokers 8,006 7,335
Receivable from employees 471 549
Deferred taxes 3,097 3,149
Other current assets 372 731
------ ------
Total current assets 43,437 39,955
................................................................................
PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
Property, equipment, and leasehold improvements, at cost 27,718 26,880
Less accumulated depreciation (18,782) (17,658)
------ ------
Property, equipment, and leasehold improvements, net 8,936 9,222
................................................................................
OTHER NON-CURRENT ASSETS
Deferred taxes 1,015 927
Other assets 795 731
------- -------
TOTAL ASSETS $54,183 $50,835
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
November 30, August 31,
Unaudited and in thousands 1997 1997
................................................................................
CURRENT LIABILITIES
Accounts payable and accrued expenses $3,398 $2,216
Accrued compensation 3,759 3,676
Deferred fees and commissions 3,730 4,499
Current taxes payable 1,886 2,426
Deferred rent 68 68
------ ------
Total current liabilities 12,841 12,885
------ ------
................................................................................
NON-CURRENT LIABILITIES
Deferred taxes 193 180
Deferred rent 126 143
------ ------
Total liabilities 13,160 13,208
------ ------
................................................................................
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 10,000,000 shares
authorized, none issued - -
Common stock 118 96
Capital in excess of par value 2,676 1,995
Retained earnings 38,363 35,588
Unrealized gain on investments, net of taxes 255 239
Less treasury stock (389) (291)
------ ------
Total stockholders' equity 41,023 37,627
------ ------
................................................................................
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $54,183 $50,835
======= =======
................................................................................
The accompanying notes are an integral part of these consolidated statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FactSet Research Systems Inc.
Unaudited and in thousands Three Months Ended November 30, 1997 1996
................................................................................
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $2,775 $1,962
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 1,125 935
Deferred tax benefit (36) (22)
Accrued ESOP contribution 188 135
----- -----
Net income adjusted for non-cash items 4,052 3,010
Changes in working capital
Receivable from clients and clearing brokers (671) 323
Receivable from employees 77 14
Accounts payable and accrued expenses 1,182 467
Accrued compensation 495 508
Deferred fees and commissions (768) (324)
Current taxes payable (540) 139
Other working capital accounts, net 278 92
----- -----
Net cash provided by operating activities 4,105 4,229
................................................................................
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment, and
leasehold improvements (838) (1,535)
--- -----
Net cash used in investing activities (838) (1,535)
................................................................................
CASH FLOWS FROM FINANCING ACTIVITIES
Repurchase of common stock from employees (4) (95)
Proceeds from exercise of stock options 8 -
--- ---
Net cash provided by (used in) financing activities 4 (95)
................................................................................
Net increase in cash and cash equivalents 3,271 2,599
Cash and cash equivalents at beginning of period 26,816 15,700
------- -------
Cash and cash equivalents at end of period $30,087 $18,299
======= =======
................................................................................
The accompanying notes are an integral part of these consolidated statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FactSet Research Systems Inc.
November 30, 1997
(Unaudited)
1. ORGANIZATION AND NATURE OF BUSINESS
FactSet Research Systems Inc. (the "Company") provides online integrated
database services to the financial community. The Company's revenue is derived
from subscription charges. Solely at the option of each client, these charges
may be paid either in commissions on securities transactions (in which case
subscription revenue is recorded as "Commissions") or on a cash basis (in which
case subscription revenue is recorded as "Fees").
To facilitate the receipt of subscription revenue 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. FDS's only function is to facilitate the receipt of payments with respect
to subscription charges and it does not otherwise engage in the securities
business.
Subscription revenue paid in commissions is based on securities transactions
introduced and cleared on a fully disclosed basis through one of two designated
clearing brokers. 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's account.
FactSet Pacific, Inc. and FactSet Limited are wholly owned subsidiaries of the
Company and are U.S. corporations with branches in Tokyo and London,
respectively.
2. ACCOUNTING POLICIES
The significant accounting policies of the Company and its subsidiaries are
summarized below.
Financial Statement Presentation
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany activity and balances
have been eliminated from the consolidated financial statements.
The financial reporting format of the Consolidated Statements of Income has been
revised to enhance comparability with other companies in the online information
services industry and to improve understanding of the Company's results of
operations. The Consolidated Statements of Income have been reclassified in all
prior periods presented to conform to the current year presentation.
Cost of services is composed of compensation and benefits for the employees of
the software engineering and consulting departments, clearing fees, data costs,
computer maintenance and depreciation expenses, and communication costs.
Selling, general, and administrative expenses include compensation and benefits
for employees involved with sales, product development and various support
functions, promotional expenses, rent, amortization of leasehold improvements,
depreciation of furniture and fixtures, and office expenses. The components of
other expenses are professional fees and miscellaneous expenses.
Use of 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 revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Revenue Recognition
Subscription charges are quoted to clients on an annual basis, but are earned as
services are provided on a month-to-month basis. Subscription revenue, whether
commissions or fees, is recorded as earned each month, based on one-twelfth of
the annual subscription charge quoted to each client. 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 receivable from clients. Amounts that have
been received through commissions on securities transactions or through cash
payments that are in excess of earned subscription revenue are reflected on the
Consolidated Statements of Financial Condition as deferred fees and commissions.
Clearing Fees
When subscription charges are recorded on a commission basis, the Company incurs
clearing fees, which are the charges imposed by the clearing brokers used to
execute and settle clients' securities transactions.
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposits and money market
investments with original maturities of three months or less.
Investments
Investment securities are classified as available-for-sale securities and are
reported at market value or fair value as determined by management. Unrealized
gains and losses on available-for-sale securities are recognized as a separate
component of stockholders' equity, net of tax.
Property, Equipment, and Leasehold Improvements
Depreciation of computers and related equipment acquired before September 1,
1994 is recognized using the double declining balance method over estimated
useful lives of five years. Computers and related equipment acquired after
September 1, 1994 are depreciated on a straight-line basis over estimated useful
lives of three years. 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.
Deferred Taxes
Deferred taxes are determined using a balance sheet approach. The income
statement effect is derived from changes in deferred taxes on the balance sheet.
This approach gives consideration to 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 be realized. The effect on deferred taxes from income tax law
changes are recognized immediately upon enactment. The Company records deferred
taxes for such items as accrued compensation, deferred fees and commissions, and
property, equipment, and leasehold improvements.
Stock-Based Compensation
The Company follows the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation.
Earnings Per Share
The computation of earnings per share in each year is based on the weighted
average number of common shares and common share equivalents outstanding. The
weighted average number of shares outstanding includes shares issued to the
Company's employee stock ownership plan at the date authorized by the Board of
Directors. Shares available pursuant to grants made under the Company's stock
option plans are included as share equivalents using the treasury stock method.
On June 4, 1996, the Company increased the number of shares of common stock
authorized from 5 million to 40 million, authorized 10 million shares of
preferred stock issuable in series, and effected a 4-for-1 stock split with
respect to the common stock. In connection with the stock splits, the par value
of the common stock was reduced from $1.00 to $0.01 per share. For purposes of
these financial statements, all common stock and per share amounts have been
restated to reflect the stock splits.
New Accounting Pronouncements
In February 1997, SFAS No. 128, Earnings Per Share ("SFAS 128"), was issued.
This statement requires dual presentation of basic and diluted earnings per
share ("EPS") on the face of the income statement and reconciliation of the
numerator and the denominator between the basic and diluted EPS computations.
SFAS 128 will be effective for the Company's 1999 fiscal year. Had SFAS 128 been
effective for fiscal years 1998 and 1997 basic EPS for the three months ended
November 30, 1997 and 1996 would have been $0.29 and $0.21, respectively.
Diluted EPS is already reported on the face of the income statement.
In June 1997, SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information, were
issued. Disclosures required by these statements will be effective for the
Company's 1999 fiscal year.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company
FactSet Research Systems Inc. is the leading provider of online integrated
database services to the financial community. The Company's software technology
combines multiple large-scale databases into a single mainframe information
system accessible from clients' personal computers. Simultaneous access to over
85 databases creates a comprehensive, "one stop" source for financial and
economic information, news, and commentary on tens of thousands of companies and
securities worldwide. The Company's proprietary software tools enable clients to
easily download, screen, manipulate, and analyze data in a virtually infinite
array of formats, principally custom reports designed by and for the user.
FactSet markets its services to investment managers, investment banks, and other
financial services institutions throughout the world.
Business Environment
Demand for online information by the financial community is, to some degree,
influenced by global financial market conditions.
The US and several European stock markets reached record highs during the past
three years, resulting in an expanded audience for FactSet's services. While
there is no reason to believe that future demand for online information will
decrease, a significant decline in US and European equity markets could
adversely impact the Company's results of operations.
Revenue derived from the Company's Asian and Pacific Rim clients is not a
significant portion of the Company's total consolidated revenue. Accordingly,
the significant volatility in recent months in Asian and Pacific Rim stock
markets is not expected to materially impact the Company's future results of
operations, cash flows and financial position.
Future Investments
Substantial investments in people and technology are likely to be necessary to
maintain the Company's growing presence in the global marketplace. Significant
password growth, additional databases and office expansion have also caused the
Company's capital spending requirements to increase. Enhancements to the
Company's data centers are ongoing, office openings in New York City and Hong
Kong are planned and expansion of the Tokyo office facility is scheduled.
Accordingly, capital spending in fiscal 1998 is projected to be significantly
higher than the $6.0 million in fiscal 1997. Based on its strong financial
position and historical levels of cash generation, the Company anticipates that
foreseeable investments in people and technology will continue to be fully
funded from operations.
The Company is actively developing programs to adjust mainframe applications and
data provided by third parties to be fully year 2000 compliant. The Company does
not expect this transition to have a material impact on future results of
operations, cash flows, or financial position.
RESULTS OF OPERATIONS
Unaudited and in thousands, except per share data
Three Months Ending November 30, 1997 1996 % Change
................................................................................
Revenue $17,494 $12,824 36.4
Operating expenses 12,896 9,484 36.0
Income from operations 4,598 3,340 37.7
Income before income taxes ` 4,965 3,457 43.6
Net income 2,775 1,962 41.4
Earnings per share $0.25 $0.18 38.9
................................................................................
Revenue
Revenue for the quarter ended November 30, 1997 was $17.5 million, an increase
of 36.4% over the year ago period. New clients, additional users at existing
clients and incremental subscriptions to databases and services drove this
growth.
At quarter end, client count totaled 512, a net addition of 64 new clients over
the past twelve months. The Company's client retention rate continued to be in
excess of 95%. The number of passwords in use grew to over 11,000 representing
more than a 50% increase from the first quarter of fiscal 1997.
Total client commitments at November 30, 1997 rose to $72.6 million, up 35% from
the comparable period in fiscal 1997. The average commitment per client reached
a new record of $142,000, up 18% from $120,000 per client a year ago.
("Commitments" represent a freeze frame of the annual revenue that the Company
would receive from a particular client based on the services currently being
supplied to that client.) At November 30, 1997, no individual client accounted
for more than 4% of total commitments. In addition, commitments among the top
ten clients represented less than 15% of total commitments. As a matter of
policy, the Company does not seek to enter into written contracts with its
clients. Accordingly, clients are free to add or delete services at any time.
Historically, commitments have grown in virtually every month.
For the first quarter of fiscal 1998, revenue from overseas operations came in
at $2.1 million, a 80% increase over fiscal 1997's comparable amount. As a
result, international operations represented 12% of consolidated quarterly
revenue compared to 9% a year ago. The impact on the Company's results of
operations from foreign currency fluctuations was immaterial. The majority of
international clients pay for services in U.S. dollars and the net monetary
asset position maintained by the Company's non-U.S. offices was insignificant.
Operating Expenses
Cost of services includes employee compensation and benefits, clearing fees,
data costs, computer maintenance and depreciation expenses, and communication
costs. During the first quarter of fiscal 1998, cost of services increased to
$6.9 million, a 34.8% increase over the year earlier period. A larger employee
base and additional data expenses were the primary catalysts of this increase.
The engineering and consulting staff increased by over 45% the past twelve
months causing employee compensation and benefits to rise by $750,000 on a
quarter over quarter basis. New databases caused data cost to rise $300,000, or
32.6% over the year ago period.
Selling, general, and administrative ("SG&A") expenses include employee
compensation and benefits, promotional expenses, rent, amortization of leasehold
improvements, depreciation of furniture and fixtures, and office expenses. For
1998's first fiscal quarter, SG&A expenses totaled $5.3 million up 36.8% versus
the comparable period a year earlier. Merit pay raises and new employees
produced this increase. The number of employees in the sales, product
development, and various support departments increased by 20% compared to the
end of 1997's first fiscal quarter. Accordingly, for the three months ended
November 30, 1997 employee compensation increased by $1.0 million versus fiscal
1997's comparable period.
Operating Margins
Operating margins for the quarter ending November 30, 1997 increased by 30 basis
points when compared to the year ago period. Margin improvements were largely
the result of a change in the mix between Fee and Commission revenue and
declining depreciation expense on computer equipment as a percentage of revenue.
These improvements were partially offset by higher compensation levels related
to the increased staffing levels.
Fee (cash) revenue produces a higher margin than Commission revenue. While net
revenue to the Company is essentially the same under both payment methods, to
cover the clearing charges, Commission clients pay a higher amount than clients
who pay in cash. During 1998's first fiscal quarter, the percentage of cash
revenue increased to 56% of the consolidated total versus 50% during the year
ago quarter. Depreciation expense on computer equipment decreased as a
percentage of revenue due to an increase in computer equipment that had become
fully depreciated at 1997's fiscal year end.
Liquidity
Cash generated by operating activities totaled $4.1 million for the three months
ended November 30, 1997 versus $4.2 million a year ago. Cash used in investing
activities were $840,000, up from 1996's comparable total of $1.5 million. As
discussed above under the caption "Future Investments," the Company expects that
capital expenditures for fiscal 1998 will be significantly higher than the $6.0
million incurred during fiscal 1997.
All capital and operating expense requirements have been financed by cash from
operations. At November 30, 1997, cash, cash equivalents, and investments
totaled $31.5 million. The Company has no outstanding indebtedness.
Accounting Pronouncements
In fiscal 1998, SFAS No. 128, Earnings Per Share; SFAS No. 130, Reporting
Comprehensive Income; and SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, were issued. Refer to Note 2, "Accounting
Policies" for further information.
Forward-Looking Statements
This Management's Discussion and Analysis of the Company's results of operations
and financial condition contains forward-looking statements that are based on
management's current expectations and beliefs. The phrases "no reason to
believe," "could adversely impact," "are not expected," "are likely necessary,"
"are ongoing," "are planned," "is scheduled," "is projected," "it is
anticipated," "will continue," "does not expect," and "commitments" are intended
to identify such forward-looking statements. These statements are not guarantees
of future performance and involve certain risks, uncertainties, and assumptions
which are difficult to predict ("future factors"). Therefore, actual results may
differ materially from what is expressed or forecasted in such forward-looking
statements. The Company undertakes no obligation to publicly update any
forward-looking statements as a result of new information, future events, or
otherwise. Future factors include the Company's ability to locate and hire
qualified personnel and to maintain its leading technological position; the
successful negotiation of contract terms to add and maintain databases; the
ongoing employment of key personnel; the absence of U.S. or foreign governmental
policy restricting international business; and the sustainability of historical
levels of profitability and growth rates in cash flow generation.
Part II OTHER INFORMATION
Item 1. Legal Proceedings: None
Item 2. Changes in Securities: None
Item 3. Submission of Matters to a Vote of Security Holders: None
Item 4. Other Information: None
Item 5. Reports on Form 8-K: None
Item 6. Exhibits
Exhibit Number
3.1....................................Restated Certificate of Incorporation (1)
3.2..................................................................By-laws (1)
4.1.....................................................Form of Common Stock (1)
10.1............................Form of Employment Agreement between the Company
and Howard E. Wille and Charles J. Snyder (1)
10.2.................Letter Agreement between the Company and Ernest S. Wong (1)
(1)Incorporated by reference to the Company's Registration Statement on Form S-1
(File No.333-4238)
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: January 12, 1998 BY: /s/ ERNEST S. WONG
Ernest S. Wong,
Senior Vice President, Chief Financial Officer
and Secretary