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 May 31, 2000 |_| 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 90 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 May 31, 2000 ................... ........................... Common Stock, par value $.01 32,538,980 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 and nine months ended May 31, 2000 and 1999..........3 Consolidated Statements of Comprehensive Income for the three and nine months ended May 31, 2000 and 1999..........4 Consolidated Statements of Financial Condition at May 31, 2000 and at August 31, 1999.............................5 Consolidated Statements of Cash Flows for the nine months ended May 31, 2000 and 1999....................6 Notes to the Consolidated Financial Statements......................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........................................11 Part II OTHER INFORMATION Item 1. Legal Proceedings...................................................15 Item 2. Changes in Securities...............................................15 Item 3. Defaults Upon Senior Securities.....................................15 Item 4. Submission of Matters to a Vote of Security Holders.................15 Item 5. Other Information...................................................15 Item 6. Exhibits and Reports on Form 8-K....................................15 Signatures....................................................................15 FactSet Research Systems Inc. CONSOLIDATED STATEMENTS OF INCOME Three Months Ended Nine Months Ended May 31, May 31, In thousands, except per share data and unaudited 2000 1999(1) 2000 1999(1) ....................................................................................................... Subscription Revenues Commissions $12,349 $10,091 $35,225 $29,613 Cash fees 21,946 16,360 61,839 45,903 ------ ------ ------ ------ Total subscription revenues 34,295 26,451 97,064 75,516 ------ ------ ------ ------ ....................................................................................................... Operating Expenses Cost of services 11,415 9,503 33,537 27,067 Selling, general, and administrative 12,700 9,641 35,418 27,594 Non-recurring retirement bonus (see Note 5) 2,750 - 2,750 - ------ ------ ------ ------ Total operating expenses 26,865 19,144 71,705 54,661 ------ ------ ------ ------ ....................................................................................................... Income from operations 7,430 7,307 25,359 20,855 Other income 958 461 2,345 1,406 ----- ----- ----- ------ Income before income taxes 8,388 7,768 27,704 22,261 Provision for income taxes 3,238 2,922 10,833 8,580 Non-recurring tax benefit - - (1,119) - ----- ----- ------ ----- Total income taxes 3,238 2,922 9,714 8,580 Net income $5,150 $4,846 $17,990 $13,681 ===== ===== ====== ====== ....................................................................................................... Basic earnings per common share .16 .16 .56 .45 Diluted earnings per common share .15 .14 .52 .41 ....................................................................................................... Weighted average common shares (Basic) 32,431 31,148 31,933 30,588 Weighted average common shares (Diluted) 34,505 34,090 34,525 33,190 ....................................................................................................... (1)Diluted earnings per share and weighted average common shares give retroactive effect to the 2-for-1 stock split that occurred on February 4, 2000. The accompanying notes are an integral part of these consolidated financial statements. FactSet Research Systems Inc. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Three Months Ended Nine Months Ended May 31, May 31, In thousands and unaudited 2000 1999 2000 1999 ....................................................................................................... Net income $5,150 $4,846 $17,990 $13,681 Unrealized loss on investments, net of taxes (55) - (81) - ----- ----- ------ ------ Comprehensive income $5,095 $4,846 $17,909 $13,681 ===== ===== ====== ====== ....................................................................................................... The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION FactSet Research Systems Inc. ASSETS May 31, August 31, In thousands and unaudited 2000 1999 ............................................................................... CURRENT ASSETS Cash and cash equivalents $42,596 $31,837 Investments 22,874 22,934 Receivables from clients and clearing brokers 18,070 14,399 Receivables from employees 761 614 Prepaid taxes 2,223 - Deferred taxes 5,585 6,437 Other current assets 418 413 ------ ------ Total current assets 92,527 76,634 ............................................................................... LONG-TERM ASSETS Property, equipment, and leasehold improvements, at cost 64,314 55,334 Less accumulated depreciation (42,656) (33,951) ------ ------ Property, equipment, and leasehold improvements, net 21,658 21,383 ............................................................................... OTHER LONG-TERM ASSETS Deferred taxes 2,601 1,785 Other assets 1,771 1,742 ------- ------- TOTAL ASSETS $118,557 $101,544 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY May 31, August 31, In thousands, except per share data and unaudited 2000 1999 ............................................................................... CURRENT LIABILITIES Accounts payable and accrued expenses $4,934 $6,657 Accrued compensation 8,453 7,558 Deferred fees and commissions 7,667 6,964 Dividend payable 976 788 Current taxes payable - 1,522 ------ ------ Total current liabilities 22,030 23,489 ------ ------ ............................................................................... NON-CURRENT LIABILITIES Deferred rent 517 441 ------ ------ Total liabilities 22,547 23,930 ------ ------ ............................................................................... STOCKHOLDERS' EQUITY Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued - - Common stock 329 316 Capital in excess of par value 18,029 14,160 Retained earnings 79,702 64,452 Treasury stock (1,976) (1,321) Unrealized (loss) gain on investments, net of tax (74) 7 ------ ------ Total stockholders' equity 96,010 77,614 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $118,557 $101,544 ======= ======= The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS FactSet Research Systems Inc. In thousands and unaudited Nine Months Ended May 31, 2000 1999 ...................................................................................... CASH FLOWS FROM OPERATING ACTIVITIES Net income $17,990 $13,681 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 8,705 6,835 Deferred tax provision (benefit) 36 (446) Accrued ESOP contribution 938 750 ------ ------ Net income adjusted for non-cash operating items 27,669 20,820 Changes in working capital Receivable from clients and clearing brokers (3,671) (3,589) Other receivables - (2,374) Prepaid taxes (2,223) (435) Accounts payable and accrued expenses (1,723) 2,059 Accrued compensation 957 (1,011) Deferred fees and commissions 703 1,969 Current taxes payable (1,522) (2,843) Other working capital accounts, net (97) 576 ------ ------ Net cash provided by operating activities 20,093 15,172 ...................................................................................... CASH FLOWS FROM INVESTING ACTIVITIES Purchases of investments, net (21) - Purchases of property, equipment, and leasehold improvements (8,980) (12,793) ----- ------ Net cash used in investing activities (9,001) (12,793) ...................................................................................... CASH FLOWS FROM FINANCING ACTIVITIES Dividend payments (2,353) (733) Repurchase of common stock from employees (655) (437) Proceeds from stock option exercises 1,708 2,369 Income tax benefits from stock option exercises 967 6,747 ----- ----- Net cash (used in) provided by financing activities (333) 7,946 ...................................................................................... Net increase in cash and cash equivalents 10,759 10,285 Cash and cash equivalents at beginning of period 31,837 37,631 ------ ------ Cash and cash equivalents at end of period $42,596 $47,916 ====== ====== The accompanying notes are an integral part of these consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FactSet Research Systems Inc. May 31, 2000 (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 revenues are 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 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, clients direct trades to the Company's wholly owned subsidiary, FactSet Data Systems, Inc. ("FDS"). 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. 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 Limited and FactSet Pacific, Inc. are wholly owned subsidiaries of the Company and are U.S. corporations. FactSet Limited has foreign branch operations in London, and FactSet Pacific has foreign branch operations in Tokyo, Hong Kong, and Sydney. 2. ACCOUNTING POLICIES The accompanying interim consolidated financial statements of the Company have been prepared in conformity with generally accepted accounting principles, consistent in all material respects with those applied in the Annual Report on Form 10-K for the fiscal year ended August 31, 1999. Interim financial information is unaudited, but reflects all normal adjustments which are, in the opinion of management, necessary to present fairly the results of operation and financial position for the interim periods presented. The interim financial statements should be read in connection with the audited financial statements (including the footnotes thereto) in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1999. 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. Cost of services is composed of employee compensation and benefits for the applications engineering and consulting groups, clearing fees, data costs, 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, promotional expenses, rent, amortization of leasehold improvements, depreciation of furniture and fixtures, office expenses, 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 revenues and expenses during the reporting period. Significant estimates have been made in areas including valuation allowances for deferred tax assets, depreciable lives of fixed assets, accrued liabilities, income tax provision and allowances for doubtful accounts. 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 recorded as commissions and subscription revenues recorded as cash fees are each recognized 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 receivables from clients. 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 cash 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 used to execute and settle clients' securities transactions. Clearing fees are recorded when subscription revenues recorded as commissions are earned. Cash and Cash Equivalents Cash and cash equivalents consists of demand deposits and money market investments with maturities of 90 days or less. Investments Investments have original maturities greater than 90 days and are classified as available-for-sale securities in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, and are reported at market value. 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 Computers and related equipment 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. Taxes Deferred taxes are determined by calculating the estimated 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. The Company records deferred taxes for such items as accrued compensation and other liabilities; deferred cash fees and commissions; deferred rent; and property, equipment, and leasehold improvements, net of depreciation and amortization. Included in income taxes for the nine months ended May 31, 2000 was a non-recurring tax benefit of $1.1 million from adjustments to prior years' federal and state income tax returns. 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. Included in accounts payable and accrued expenses are accrued taxes other than income taxes of $1.8 million and $3.7 million at May 31, 2000 and August 31, 1999, respectively. 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 ownership plan at the date authorized by the Board of Directors. Earnings per share and number of shares outstanding give retroactive effect for the 2-for-1 stock split announced on January 13, 2000 and distributed on February 4, 2000, for all years presented. Diluted earnings per share is based on the weighted average number of common shares and common share equivalents 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. Stock-Based Compensation In January 2000, the Company's shareholders approved the Year 2000 Employee Stock Option Plan. Under this plan, stock options to purchase up to 4,000,000 shares of Common Stock, after adjustment for the 2-for-1 stock split, were made available for grant to employees of the Company and its subsidiaries selected by the Company's Compensation Committee. The Company follows the disclosure-only provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. New Accounting Pronouncement In March 1998, Statement of Position 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE, was issued. The Company adopted this statement effective September 1, 1999. The impact on the Company's results of operations and financial position was not material. In December 1999, Staff Accounting Bulletin ("SAB") No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS, was issued. The Company's is evaluating accounting policies pertaining to SAB No. 101 and does not expect the impact of implementation to be material. 3. COMMON STOCK AND EARNINGS PER SHARE Shares of common stock and related amounts give retroactive effect to the 2-for-1 stock split, effected as a stock dividend, that occurred on February 4, 2000. Shares of common stock outstanding were as follows: In thousands and unaudited 2000 1999 - -------------------------------------------------------------------------------------------- Balance at September 1, 31,538 29,020 Additional stock issued for ESOP 50 72 Exercise of stock options 975 2,221 Repurchase of common stock (24) (20) ------ ------ Balance at May 31, 32,539 31,293 ====== ====== - -------------------------------------------------------------------------------------------- A reconciliation between the weighted average shares outstanding used in the basic and diluted EPS computations is as follows: Net Income Shares Per Share In thousands, except per share data and unaudited (Numerator) (Denominator) Amount - ------------------------------------------------------------------------------------------------------------------------ May 31 May 31 May 31 For the Three Months Ended 2000 1999 2000 1999 2000 1999 ---- ---- ---- ---- ---- ---- Basic EPS Net income available to common stockholders $5,150 $4,846 32,431 31,148 $0.16 $0.16 Diluted EPS Dilutive effect of stock options - - 2,074 2,942 ----- ----- ----- ----- Net income available to common stockholders $5,150 $4,846 34,505 34,090 $0.15 $0.14 ===== ===== ====== ====== - ------------------------------------------------------------------------------------------------------------------------ May 31 May 31 May 31 For the Nine Months Ended 2000 1999 2000 1999 2000 1999 ---- ---- ---- ---- ---- ---- Basic EPS Net income available to common stockholders $17,990 $13,681 31,933 30,588 $0.56 $0.45 Diluted EPS Dilutive effect of stock options - - 2,592 2,602 ------ ------ ------ ------ Net income available to common stockholders $17,990 $13,681 34,525 33,190 $0.52 $0.41 ====== ====== ====== ====== - ------------------------------------------------------------------------------------------------------------------------ 4. SEGMENTS The Company follows Statement of Financial Accounting Standards ("SFAS") No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. The Company has two reportable segments based on geographic operations: the United States and International. Each segment markets online integrated database services to investment managers, investment banks, and other financial services professionals. The U.S. segment consists of services provided to financial institutions throughout North America while the International segment consists of services provided to investment professionals primarily in Europe and the Pacific Rim. The International segment includes operations from four branch offices that are primarily staffed by sales and consulting personnel. Segment revenues reflect direct sales of products and services to clients based on their geographic location. There are no intersegment or intercompany sales. Each segment records compensation, travel, office, and other direct expenses related to its employees. The accounting policies of the segments are the same as those described in Note 2, "Accounting Policies." Segment Information In thousands and unaudited U.S. International Total ................................................................................ For Three Months Ended May 31, 2000 Revenues from external clients $28,455 $5,840 $34,295 Segment operating profit* 5,238 2,192 7,430 Total assets at May 31, 2000 110,089 8,468 118,557 Capital expenditures 738 1,076 1,814 ................................................................................ For Three Months Ended May 31, 1999 Revenues from external clients $22,693 $3,758 $26,451 Segment operating profit* 5,936 1,371 7,307 Total assets at May 31, 1999 86,442 6,556 92,998 Capital expenditures 2,133 1,498 3,631 ................................................................................ For the Nine Months Ended May 31, 2000 Revenues from external clients $81,312 $15,752 $97,064 Segment operating profit* 19,104 6,255 25,359 Capital expenditures 6,862 2,118 8,980 ................................................................................ For the Nine Months Ended May 31, 1999 Revenues from external clients $64,885 $10,631 $75,516 Segment operating profit* 16,464 4,391 20,855 Capital expenditures 10,628 2,165 12,793 ................................................................................ * Expenses are not allocated or charged between segments. Expenditures associated with the Company's computer centers, software development costs, clearing fees, data fees, income taxes, and corporate headquarter charges are recorded by the U.S. segment. Two separate regions (Europe and the Pacific Rim) were aggregated to form the International segment. The Europe and Pacific Rim segments have similar market characteristics and each offers identical products and services through a common distribution method to financial services institutions. 5. NON-RECURRING RETIREMENT BONUS On May 22, 2000, the Company announced the retirement of Howard E. Wille as Chief Executive Officer of the Company. He will also retire as Chairman of the Board effective August 31, 2000 and will remain a director of the Company. In recognition of his service and contribution for the past 22 years, the Company awarded Mr. Wille a retirement bonus, to be paid upon his retirement as Chairman of the Board. This resulted in a non-recurring charge of $2.75 million in the third quarter. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Revenues For the third quarter ended May 31, 2000, revenues increased 29.7% to $34.3 million versus $26.5 million for the same period a year ago. Revenues during the first nine months of fiscal 2000 increased 28.5% from $75.5 million to $97.1 million. Subscriptions by existing users to additional services and databases, as well as the net addition of 97 new clients over the past twelve months drove revenue growth. Quarterly revenues from international operations were up 55.4% and totaled $5.8 million. Revenue growth from European operations was 55.5% over the same period a year ago and Asia Pacific revenues grew by 55.3% for the same period. Overseas revenues over the first nine months of fiscal 2000 increased 48.2% to $15.8 million versus the comparable period of fiscal 1999. Revenues from international sources accounted for over 16% of consolidated revenues for both the third fiscal quarter and the first nine months of fiscal 2000. Client Retention and Commitments Client retention for fiscal 2000, including the third quarter, continued at a rate in excess of 95%. As of May 31, 2000, total client commitments were $142.5 million, a 29.5% increase over the $110.1 million reported a year ago. The addition of new clients, additional workstations by existing clients and new products and services aimed at portfolio managers and investment bankers were among the key contributors to the commitment increase. During the quarter, the number of clients using FactSet rose to 717. At May 31, 2000, approximately 160 clients, representing nearly 1,200 users subscribed to FactSet's portfolio analytics applications. ("Commitments" at a given point in time represent the forward-looking revenues for the next 12 months from all services currently being supplied to clients.) In addition, during the quarter, a leading investment bank agreed to purchase 950 ProActive Publishing workstations for installation on a global basis. Internationally, commitments totaled $25 million, representing approximately 18% of total commitments. The average commitment from clients increased 12% to $199,000. As a matter of policy, the Company generally does not seek to enter into written contracts with its clients and clients can add or delete services at any time. Commitments have historically grown in virtually every month. Password count, which represents the number of FactSet users, at the end of May 2000 was approximately 22,000, up 22% from the comparable period in 1999. Operating Expenses Cost of Services Cost of services for the quarter ended May 31, 2000 increased 20.1% to $11.4 million compared to the prior year period. For the first nine months of the year, cost of services increased 23.9% to $33.5 million. The increase in cost of service expenses for the third quarter was primarily the result of higher employee compensation. For the nine months ended May 31, 2000, cost of services increased largely due to higher employee compensation, clearing fees, and depreciation expenses. Employee Compensation and Benefits Employee compensation and benefits for the applications engineering and consulting groups increased $1.1 million for the quarter and rose $3.1 million for the nine months ended May 31, 2000. Employee additions and additional merit compensation drove this increase. In order to sustain the continuing growth and the expanding client base of the Company, the applications engineering and consulting groups have increased staff by 17% since the third quarter of fiscal 1999. Clearing Fees Clearing fees rose $1.3 million for the first nine months of the fiscal year. This increase was the result of higher client commission payments and clearing rates emanating from clients paying through international trades. Depreciation Expense For the quarter ended May 31, 2000, depreciation expense growth was relatively flat. Increased depreciation expense related to new capital spending was partially offset by a decrease in depreciation expense caused by equipment becoming fully depreciated in the third fiscal quarter of 2000. For the nine months ended May 31, depreciation expense grew by $1.4 million over the same period a year ago. This increase is the result of higher levels of computer and communication equipment spending to support FactSet's growing user base. Capital spending for the first nine months of fiscal 2000 was $9 million. Selling, General, and Administrative During the third quarter of fiscal 2000, selling, general, and administrative (SG&A) expenses grew 31.7% over the comparable period in the prior year, totaling $12.7 million. During the first nine months of fiscal 2000, SG&A expenses rose 28.4% to $35.4 million. The increase in SG&A expenses for the third quarter was primarily the result of higher employee compensation and travel, offset by lower taxes other than income taxes. For the nine months ended May 31, 2000, SG&A increased largely due to higher employee compensation, travel and entertainment expense, and rent expense and amortization of leasehold improvements. Employee Compensation and Benefits During the third quarter of fiscal 2000, employee compensation and benefits for the sales, product development, and various other support departments grew by $1.8 million. For the nine months ended May 31, 2000, employee compensation rose $3.6 million. These increases were the result of employee headcount growth of 34% during the 12 months ended May 31, 2000. Travel and Entertainment Expense Travel and entertainment (T&E) expense increased $540,000 for the quarter ended May 31, 2000. For the nine months ended May 31, 2000, T&E grew $1.3 million. The growth in T&E expense for both periods resulted from employees servicing an expanding global client base. Taxes Other Than Income Taxes In the third fiscal quarter of 2000, the Company reached a settlement with a state tax authority, thereby reducing the expense for taxes other than income taxes for the third quarter of fiscal 2000 versus the same period a year ago. The settlement did not have a negative impact on the Company's results of operations or financial position, as the payment made on settlement was charged to existing reserves. Rent Expense and Amortization of Leasehold Improvements For the nine months ended May 31, 1999, rent and amortization expense increased $1.1 million. These increases were the result of office openings in New York, Stamford, Hong Kong and Sydney, and office expansions in San Mateo and Tokyo. Non-recurring Retirement Bonus In the third quarter of fiscal 2000, the Company recorded a non-recurring charge of $2.75 million in connection with a retirement bonus awarded by the Board of Directors to Howard E. Wille, Co-Founder, Chairman of the Board, and former CEO. Mr. Wille retired as CEO on May 22, 2000 and will retire as Chairman of the Board effective August 31, 2000. Mr. Wille will remain a director of the Company. Foreign Currency More than 95% of the Company's revenues are collected in U.S. dollars. The net monetary assets held by the Company's foreign offices during fiscal 2000 were immaterial. As a result, the Company's exposure to foreign currency fluctuations was insignificant. Operating Margin Operating margin for the quarter ended May 31, 2000, was 21.7%, down from 27.6% a year ago. Not including the non-recurring retirement bonus, the operating margin was 29.7% for the quarter, an increase of over two percent. Operating margin for the nine months ended May 31, 2000 was 26.1%, down from 27.6% from the same period a year ago. Not including the non-recurring retirement bonus, the operating margin was 29.0% for the nine months ended May 31, an increase of over one percent. These increases were largely the result of three factors; first, the reduction in depreciation expense as a percent of revenues, second, the elimination of the need to accrue for taxes other than income taxes, both of which are discussed above, and third, declining data costs. Income Taxes Income tax expense for the first nine months of fiscal 2000 was $9.7 million. Included in this amount was a non-recurring tax benefit of $1.1 million, recorded in the second quarter. Without this one-time benefit, the effective tax rate would have been 39% for both nine-month periods ended May 31, 1999 and 2000. Liquidity For the nine months ended May 31, 2000, cash generated by operating activities was $20.1 million compared to $15.2 million in the year earlier period. This $4.9 million increase was the result of higher levels of profitability, higher levels of depreciation and amortization expense, and income tax refunds received in the second quarter, offset by a reduction in accounts payable and accrued expenses. Capital Expenditures The Company's capital expenditures totaled $9.0 million for the first nine months of fiscal 2000. Capital expenditures related primarily to purchases of computer and communications equipment, including the purchase of a new computer integration phone system. When installed, this system will allow for more efficient servicing of incoming client support calls. Currently, each of the Company's two data centers consists of six Compaq Alpha GS 140 systems, containing a total of 48 700-megahertz/64 bit CPUs, 96 GB of RAM and over 3.3 terabytes of disk space. Total capital spending for the fiscal year is expected to be close to $15 million. Financing Operations and Capital Needs At quarter end, cash, cash equivalents and investments represented 55% or nearly $66 million of the Company's total assets. All of the Company's capital and operating expense requirements have been financed by cash from operations. The Company has no outstanding indebtedness. Revolving Credit Facilities The Company is a party to two revolving credit facilities totaling $25 million for working capital and general corporate purposes. The Company has not drawn on either facility and has no present plans to utilize any portion of the available credit. Forward-Looking Factors CASH DIVIDEND On May 15, 2000, the Company announced that its Board of Directors approved a regular quarterly cash dividend of $0.03. The regular quarterly cash dividend was paid on June 21, 2000 to Common Stockholders of record at the close of business on May 31, 2000. RECENT MARKET TRENDS In the ordinary course of business, the Company is exposed to financial risks involving equity, foreign currency markets, and interest rates. Throughout the past three fiscal years, the U.S. and European equity markets have achieved record highs. Traditionally, there has been little correlation between results of the Company's operations and the performance of global equity markets. Nevertheless, a prolonged decline in the various worldwide markets could negatively impact a large number of the Company's clients (investment management firms and investment banks) and increase the probability of personnel reductions among FactSet's existing and potential clients. The fair market value of the Company's investment portfolio at May 31, 2000 was $22.9 million. The fair market value of the portfolio is impacted by fluctuations in interest rates. The portfolio of fixed income investments is managed to preserve principal. Under the investment guidelines established by the Company, third-party managers construct portfolios to achieve high levels of credit quality, liquidity, and diversification. The weighted average duration of short-term investments included in the Company's portfolios is not to exceed 18 months. Investments such as puts, calls, strips, short sales, straddles, options, futures, or investments on margin are not permitted by the Company's investment guidelines. For these reasons, in addition to the fact that the Company has no outstanding debt, financial exposure to changes in interest rates is expected to continue to be minimal. All investments are held in U.S. dollars and over 95% of the Company's revenues are paid in U.S. dollars. As a result, exposure to movements in foreign currency prices is expected to continue to be insignificant. Income Taxes In the normal course of business, the Company's tax filings are subject to audit by federal and state tax authorities. Audits by two taxing authorities are currently ongoing. There is inherent uncertainty contained in the audit process but the Company has no reason to believe that such audits will result in additional tax payments that would have a material adverse effect on its results of operation or financial position. FORWARD-LOOKING STATEMENTS This Management's Discussion and Analysis contains forward-looking statements that are based on management's current expectations and beliefs. The phrases "commitments", "will be", "is likely", "will account", "could negatively", "likelihood", "may incorrectly", "may result", "believes", "is expected", "may make", "will continue", "are anticipated", "may depend", "should continue", "could result", "will have", "is not expected", "believes that", 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 ability to hire qualified personnel; maintenance of the Company's leading technological position; the impact of global market trends on the Company's revenue growth rate and future results of operations; the negotiation of contract terms supporting new and existing databases; 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. Part II OTHER INFORMATION Item 1. Legal Proceedings: None Item 2. Changes in Securities: None Item 3. Defaults Upon Senior Securities: None Item 4. Submission of Matters to a Vote of Security Holders: None Item 5. Other Information: None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number 3.1....................................Restated Certificate of Incorporation (1) 3.2......................................................................By-laws 4.1.....................................................Form of Common Stock (1) 10.1............................Form of Employment Agreement between the Company and Charles J. Snyder (1) 10.2..............Letter of Agreement between the Company and Ernest S. Wong (1) 10.31.................Amendment to 364-Day Credit Agreement, dated April 3, 2000 10.32.............................................Three Year Credit Agreement(2) 10.33...............Retirement Agreement between the Company and Howard E. Wille 27......................................................Financial Data Schedules (1)Incorporated by reference to the Company's Registration Statement on Form S-1 (File No.333-4238) (2)Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the first quarter of fiscal year 1999. (b) Reports on Form 8-K: On May 26, 2000, the Company filed a report on Form 8-K which announced the retirement of Chief Executive Officer, Howard E. Wille. A copy of the Company's press release announcing this matter was attached and incorporated by reference therein. 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: July 14, 2000 BY: /s/ ERNEST S. WONG Ernest S. Wong, Senior Vice President, Chief Financial Officer and Secretary