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 February 28, 2001
|_| 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 February 28, 2001
................... ................................
Common Stock, par value $.01 33,043,000
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 and six months ended February 28, 2001
and February 29, 2000 ........................................... 4
Consolidated Statements of Comprehensive Income
for the three months and six months ended February 28, 2001
and February 29, 2000 ........................................... 4
Consolidated Statements of Financial Condition
at February 28, 2001 and at August 31, 2000 ..................... 5
Consolidated Statements of Cash Flows
for the six months ended February 28, 2001
and February 29, 2000 ........................................... 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 ................................................ 16
Item 2. Changes in Securities ............................................ 16
Item 3. Defaults Upon Senior Securities .................................. 16
Item 4. Submission of Matters to a Vote of Security Holders .............. 16
Item 5. Other Information ................................................ 16
Item 6. Exhibits and Reports on Form 8-K ................................. 17
Signatures ................................................................. 17
FactSet Research Systems Inc.
CONSOLIDATED STATEMENTS OF INCOME-Unaudited Three Months Ended Six Months Ended
In thousands, except per share data Feb 28, 2001 Feb 29, 2000 Feb 28, 2001 Feb 29, 2000
............................................................................................................................
Subscription Revenues
Commissions $13,981 $11,980 $26,938 $22,876
Cash fees 28,943 20,505 56,897 39,893
------ ------ ------ ------
Total subscription revenues 42,924 32,485 83,835 62,769
------ ------ ------ ------
............................................................................................................................
Expenses
Cost of services 14,569 11,562 28,698 22,122
Selling, general, and administrative 15,818 11,676 30,817 22,718
------ ----- ------ ------
Total operating expenses 30,387 23,238 59,515 44,840
------ ------ ------ ------
............................................................................................................................
Income from operations 12,537 9,247 24,320 17,929
Other income 942 700 1,873 1,387
------ ----- ------ ------
Income before income taxes 13,479 9,947 26,193 19,316
Provision for income taxes 5,107 3,752 10,069 7,595
Non-recurring tax benefit -- (1,119) -- (1,119)
----- ------ ------ ------
Total income taxes 5,107 2,633 10,069 6,476
Net income $8,372 $7,314 $16,124 $12,840
====== ====== ======= =======
............................................................................................................................
Basic earnings per common share $0.25 $0.23 $0.49 $0.40
Diluted earnings per common share $0.24 $0.21 $0.46 $0.37
............................................................................................................................
Weighted average common shares (Basic) 32,973 31,887 32,927 31,709
Weighted average common shares (Diluted) 34,779 34,659 34,797 34,556
............................................................................................................................
The accompanying notes are an integral part of these consolidated financial statements.
FactSet Research Systems Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME-Unaudited
In thousands
Three Months Ended Six Months Ended
Feb 28, 2001 Feb 29, 2000 Feb 28, 2001 Feb 29, 2000
...................................................................................................................
Net income $8,372 $7,314 $16,124 $12,840
Unrealized gain (loss) on investments,
net of taxes 35 (4) 42 (26)
------ ------ ------- -------
Comprehensive Income $8,407 $7,310 $16,166 $12,814
====== ====== ======= =======
...................................................................................................................
The accompanying notes are an integral part of these consolidated financial statements.
FactSet Research Systems Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION-Unaudited
ASSETS
February 28, August 31,
In thousands 2001 2000
...............................................................................
CURRENT ASSETS
Cash and cash equivalents $47,433 $39,629
Investments 30,799 22,704
Receivable from clients and clearing brokers 30,397 28,449
Receivable from employees 520 789
Deferred taxes 4,940 7,365
Other current assets 1,656 937
------- ------
Total current assets 115,745 99,873
...............................................................................
LONG-TERM ASSETS
Property, equipment, and leasehold improvements, at cost 76,934 66,637
Less accumulated depreciation (46,784) (45,749)
------ ------
Property, equipment, and leasehold improvements, net 30,150 20,888
...............................................................................
OTHER LONG-TERM ASSETS
Intangible assets, net 10,267 10,734
Deferred taxes 2,773 2,232
Other assets 1,863 1,841
-------- --------
TOTAL ASSETS $160,798 $135,568
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
February 28, August 31,
In thousands 2001 2000
...............................................................................
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 15,311 $ 9,874
Accrued compensation 8,530 9,576
Deferred fees and commissions 10,074 9,656
Dividend payable 991 985
Current taxes payable 5,006 1,854
------ ------
Total current liabilities 39,912 31,945
------ ------
...............................................................................
NON-CURRENT LIABILITIES
Deferred rent 607 621
------ ------
Total liabilities 40,519 32,566
------ ------
...............................................................................
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 10,000,000 shares
authorized, none issued - -
Common stock 331 328
Capital in excess of par value 22,264 19,015
Retained earnings 100,157 86,011
Unrealized gain on investments, net of taxes 47 5
------- -------
122,799 105,359
Less treasury stock, at cost (2,520) (2,357)
------- ------
Total stockholders' equity 120,279 103,002
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $160,798 $135,568
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
FactSet Research Systems Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS-Unaudited
Six Months Ended
In thousands Feb 28, 2001 Feb 29, 2000
......................................................................................
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $16,124 $12,840
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 7,635 6,069
Deferred tax provision 1,945 (406)
Accrued ESOP contribution 850 625
----- -----
Net income adjusted for non-cash operating items 26,554 19,128
Changes in working capital
Receivable from clients and clearing brokers (1,948) (3,240)
Prepaid taxes -- (1,063)
Receivable from employees 269 (119)
Accounts payable and accrued expenses 5,437 785
Accrued compensation (596) (49)
Deferred fees and commissions 418 (711)
Current taxes payable 3,152 (1,522)
Other working capital accounts, net (755) 56
Income tax benefits from option exercises 432 862
------ ------
Net cash provided by operating activities 32,963 14,127
......................................................................................
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investments, net (8,053) (4,376)
Purchases of property, equipment, and
leasehold improvements (16,487) (7,167)
------- ------
Net cash used in investing activities (24,540) (11,543)
......................................................................................
CASH FLOWS FROM FINANCING ACTIVITIES
Dividend payments (1,842) (1,461)
Repurchase of common stock from employees (163) (476)
Proceeds from exercise of stock options 1,386 1,032
----- -----
Net cash used in financing activities (619) (905)
......................................................................................
Net increase in cash and cash equivalents 7,804 1,679
Cash and cash equivalents at beginning of period 39,629 31,837
------- -------
Cash and cash equivalents at end of period $47,433 $33,516
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FactSet Research Systems Inc.
February 28, 2001
(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
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 on a cash basis (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 and FactSet Pacific, Inc. are wholly owned subsidiaries of the
Company and are U.S. corporations with foreign branch operations in London,
Frankfurt, Tokyo, Hong Kong, and Sydney.
2. ACCOUNTING POLICIES
The accompanying unaudited interim consolidated financial statements of the
Company have been prepared in conformity with generally accepted accounting
principles in the United States, consistent in all material respects with those
applied in the Annual Report on Form 10-K for the fiscal year ended August 31,
2000. Interim financial information is unaudited, but reflects all normal
adjustments, which are, in the opinion of management, necessary to present
fairly the results 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, 2000.
The significant accounting policies of the Company and its subsidiaries are
summarized below.
Financial Statement Presentation
The accompanying unaudited 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. Certain prior year amounts have been reclassified to conform to
current year presentation.
Cost of services is composed of employee compensation and benefits for the
applications engineering and consulting groups, clearing fees, data costs,
amortization of acquired technology, 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 goodwill and 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 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 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 are 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
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 clearing brokers to execute and
settle clients' securities transactions. Clearing fees are recorded when the
related 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 that have original maturities greater than 90 days are classified as
available-for-sale securities and are reported at fair value. Unrealized gains
and losses on available-for-sale securities are recognized as a separate
component of stockholders' equity, net of income taxes. Fair value is determined
for most investments from readily available quoted market prices.
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.
Intangibles
Intangible assets consist of goodwill and acquired technology. Amortization of
goodwill and acquired technology is calculated on a straight-line basis using
estimated lives of fifteen and seven years, respectively.
Income and Deferred 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.
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 ownership plan at the date authorized by the Board of Directors.
Diluted earnings per share are 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.
Stock-Based Compensation
In January 2001, the Company's shareholders approved the 2001 Employee Stock
Purchase Plan (the "Plan"). Under the Plan, 500,000 shares of FactSet common
stock have been made available to all U.S. employees of the Company. The
effective date of the Plan was on March 1, 2001. All U.S. employees are eligible
to participate in the Plan at the beginning of each three-month period (the
"Offering Period") which begin on March 1, June 1, September 1 and December 1.
Eligible employees may elect to withhold up to 10% of their salary to purchase
shares of the Company's common stock at a price equal to 85% of the fair market
value of the stock on the first or last day of each Offering Period, whichever
is lower. The details of the Plan are included in the Company's Proxy Statement
filed on November 22, 2000.
The Company follows the disclosure-only provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
The Company accounts for stock-based compensation plans in accordance with APB
Opinion No. 25, under which no compensation costs are recorded when the exercise
price of a stock option and fair market value of the underlying stock are
identical on the date of grant.
New Accounting Pronouncements
In December 1999, Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition
in Financial Statements, was issued. During the quarter ended February 28, 2001,
the Company implemented SAB No. 101 resulting in no impact to the Company's
financial condition or results of operations.
3. COMMON STOCK AND EARNINGS PER SHARE
In January 2001, the Company's shareholders approved the Amendment of the
Company's Certificate of Incorporation resulting in an increase in the number of
authorized shares of common stock from 40 million to 100 million.
Shares of common stock outstanding were as follows:
Six months ended
In thousands and unaudited Feb 28, 2001 Feb 29, 2000
- --------------------------------------------------------------------------------
Balance at September 1, 32,821 31,538
Additional stock issued for ESOP 42 48
Exercise of stock options 186 670
Repurchase of common stock (6) (16)
------ ------
Balance at February 28, 2001 and February 29, 2000 33,043 32,240
====== ======
- --------------------------------------------------------------------------------
A reconciliation between the weighted average shares outstanding used in the
basic and diluted EPS computations is as follows:
In thousands, except per share data and unaudited
Net Income Common Shares Per Share
(Numerator) (Denominator) Amount
- --------------------------------------------------------------------------------------------------------
For the Three Months Ended February 28, 2001
Basic EPS
Net income available to common stockholders $ 8,372 32,973 $0.25
Diluted EPS
Dilutive effect of stock options -- 1,806
------- ------
Net income available to common stockholders $ 8,372 34,779 $0.24
======= ======
- --------------------------------------------------------------------------------------------------------
For the Three Months Ended February 29, 2000
Basic EPS
Net income available to common stockholders $ 7,314 31,887 $0.23
Diluted EPS
Dilutive effect of stock options -- 2,772
------- ------
Net income available to common stockholders $ 7,314 34,659 $0.21
======= ======
- --------------------------------------------------------------------------------------------------------
For the Six Months Ended February 28, 2001
Basic EPS
Net income available to common stockholders $16,124 32,927 $0.49
Diluted EPS
Dilutive effect of stock options -- 1,870
------- ------
Net income available to common stockholders $16,124 34,797 $0.46
======= ======
- --------------------------------------------------------------------------------------------------------
For the Six Months Ended February 29, 2000
Basic EPS
Net income available to common stockholders $12,840 31,709 $0.40
Diluted EPS
Dilutive effect of stock options -- 2,847
------- ------
Net income available to common stockholders $12,840 34,556 $0.37
======= ======
- --------------------------------------------------------------------------------------------------------
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 serve
investment professionals located in Europe and other non-U.S. regions. The
European segment is headquartered in London, United Kingdom and maintains an
office presence in Frankfurt, Germany. 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.
The Europe and Asia Pacific segments have similar market characteristics and
each offers identical products and services through a common distribution method
to financial services institutions. Segment revenues reflect direct sales of
products and services to clients based in their geographic location. There are
no intersegment or intercompany sales. Each segment records compensation,
travel, office and other direct expenses related to its employees. Expenses for
software development, 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."
Segment Information
In Thousands U.S. Europe Asia Pacific Total
................................................................................................
For the Three Months Ended February 28, 2001
Revenues from external clients $ 34,692 $ 6,043 $ 2,189 $ 42,924
Segment operating profit* 8,997 2,671 869 12,537
Total assets at February 28, 2001 148,570 9,601 2,627 160,798
Capital expenditures 12,047 339 212 12,598
................................................................................................
For the Three Months Ended February 29, 2000
Revenues from external clients $ 27,345 $ 3,627 $ 1,513 $ 32,485
Segment operating profit* 7,312 1,290 645 9,247
Total assets at February 29, 2000 105,796 5,303 2,426 113,525
Capital expenditures 2,939 753 60 3,752
................................................................................................
For the Six Months Ended February 28, 2001
Revenues from external clients $ 68,092 $11,442 $ 4,301 $ 83,835
Segment operating profit* 16,743 5,560 2,017 24,320
Capital expenditures 16,465 767 242 17,474
................................................................................................
For the Six Months Ended February 29, 2000
Revenues from external clients $ 52,857 $ 6,936 $ 2,976 $ 62,769
Segment operating profit* 13,866 2,667 1,396 17,929
Capital expenditures 6,125 978 64 7,167
................................................................................................
* 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 headquarters charges are
recorded by the U.S. segment.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS-Unaudited
Three Months Ended Six Months Ended
Feb 28, Feb 29, Feb 28, Feb 29,
In thousands, except per share data 2001 2000 Change 2001 2000 Change
..................................................................................................................
Revenues $42,924 $32,485 32.1% $83,835 $62,769 33.6%
Operating expenses 30,387 23,238 30.8 59,515 44,840 32.7
------ ------ ------ ------
Operating income 12,537 9,247 35.6 24,320 17,929 35.6
Provision for income taxes 5,107 3,752 36.1 10,069 7,595 32.6
Non-recurring tax benefit -- (1,119) -- (1,119)
------ ------ ------ ------
Total income taxes 5,107 2,633 10,069 6,476
Net income 8,372 7,314 14.5 16,124 12,840 25.6
Diluted earnings per common share* $0.24 $0.21 14.3 $0.46 $0.37 24.3
..................................................................................................................
* Diluted earnings per share give retroactive effect to the 2-for-1 stock split that occurred on February 4, 2000.
REVENUES
Revenues for the quarter ended February 28, 2001 were $42.9 million, an increase
of 32.1% over second quarter fiscal 2000 revenues earned of $32.5 million.
Revenues increased 33.6% to $83.8 million during the first half of fiscal 2001.
Excluding the August 2000 acquisition of Insyte, revenues grew by 29.4% and
30.7%, respectively, for the quarter and six months ended February 28, 2001.
Revenue growth was driven by international expansion, incremental subscriptions
to additional databases and applications by existing clients, as well as the net
addition of 96 clients over the past twelve months.
Revenues from international operations for the quarter ended February 28, 2001
increased 60.2% to $8.2 million. Revenues from European operations increased
66.6%. Revenues in Asia Pacific grew 44.7%. Overseas revenues for the first six
months of fiscal 2001 were $15.7 million, up 58.8% from the same period in
fiscal 2000. Revenues from international operations accounted for 19.2% of
consolidated revenues for the second quarter of fiscal 2001 and 18.8% of
consolidated revenues for the first half of fiscal 2001. Over 95% of the
Company's revenues are received in U.S. dollars. Net monetary assets held by
FactSet's international branch offices during the quarter ended February 28,
2001 were immaterial. Accordingly, the Company's exposure to foreign currency
fluctuations was not material.
Demand for the Company's value added applications, including Data Warehousing,
Premium Workstations, and, in particular, Portfolio Analytics continued to
increase. At February 28, 2001, there were approximately 200 clients
representing an estimated 1,600 subscribers to the Company's Portfolio Analytics
applications compared to approximately 140 clients and nearly 1,000 subscribers
for the same period a year ago.
The Company had 786 clients at February 28, 2001 compared to 690 clients for the
same period a year ago, a 13.9% increase. Passwords, a measure of users of
FactSet, was virtually the same at the beginning and end of the second quarter
of fiscal 2001, and totaled 25,700 at February 28, 2001. Passwords, at quarter
end, increased 25.3% from the comparable period a year ago.
At February 28, 2001, client commitments grew to $177.9 million, an increase of
34.5% from the year ago period. ("Commitments" at a given point in time
represent the forward-looking revenues for the next twelve months from all
services being currently supplied to clients.) At the end of the second quarter
of fiscal 2001, the average commitment per client was $226,000, an 18% increase
from the same period a year ago. Commitments from international clients were
$34.0 million, representing approximately 19% of total client commitments. No
individual client accounted for more than 4% of total commitments. Commitments
from the ten largest clients did not surpass 25% of total client commitments.
Client retention for both the second quarter of fiscal 2001 and for the first
half of the year continued at a rate in excess of 95%. As a matter of policy,
the Company does not seek to enter into written contracts with its clients and
clients may add, delete, or terminate services at any time. Historically,
commitments have increased in virtually every month.
Operating Expenses
Cost of Services
For the quarter ended February 28, 2001, cost of services grew to $14.6 million,
a 26.0% increase compared to the same period for fiscal 2000. Cost of services
increased 29.7% to $28.7 million for the first six months of fiscal 2001.
Increases in cost of services for the second quarter were attributed primarily
to higher employee compensation costs. Increases in cost of services for the
first half of fiscal 2001 were due to higher employee compensation costs and
computer-related costs.
Employee Compensation and Benefits
During the second quarter of fiscal 2001, employee compensation and benefits for
the applications engineering and consulting groups increased $2.2 million. For
the six months ended February 28, 2001, there was an increase of $3.4 million in
employee compensation and benefits related to the applications engineering and
consulting groups. This growth is primarily attributable to the addition of new
employees and increases in merit compensation. Employee headcount in the
applications engineering and the consulting groups grew 45.3% over the past
twelve months.
Computer-Related Costs
Computer-related costs grew $1.7 million for the six months of the fiscal year
over the same period a year ago. The Company made capital expenditures of $16.5
million thus far in fiscal 2001 primarily to purchase and install four of
Compaq's new generation Wildfire mainframe machines. The implementation of this
new technology also resulted in accelerated depreciation of existing mainframe
equipment.
Selling, General and Administrative
For the quarter ended February 28, 2001, selling, general, and administrative
(SG&A) expenses rose to $15.8 million, an increase of 35.5% from the same period
a year ago. For the first six months of fiscal 2001, SG&A expenses were $30.8
million, up 35.7% from the first half in fiscal 2000. Increases in both periods
were due to higher costs related to employee compensation and benefits, travel
expenses and office related expenses.
Employee Compensation and Benefits
For the three months ended February 28, 2001, employee compensation and benefits
for the sales, product development and other support departments rose $3.5
million compared to the same period in the prior year. During the first half of
fiscal 2001, employee compensation and benefits increased $5.4 million. Employee
headcount for these departments increased 33.1% during the past twelve months.
Travel and Entertainment Expense
Travel and entertainment ("T&E") expense grew $318,000 for the three months
February 28, 2001. For the first half of fiscal 2001, T&E increased $1.4
million. Increase in T&E was the result of continued servicing of an expanding
global client base.
Office Expenses
For the three months ended February 28, 2001, rent, amortization of leasehold
improvements and depreciation of furniture and fixtures rose $630,000 compared
to the second quarter of fiscal 2000. At the end of the first half of fiscal
2001, these expenses increased $1.3 million over the same period a year ago.
Increases were the result of office expansions in Stamford, Connecticut, New
York, New York and Tokyo, Japan and an office opening in Frankfurt, Germany
during the last twelve months.
Operating Margin
Operating margin for the quarter ended February 28, 2001 was 29.2% compared to
28.5% for the same period a year ago. For the first six months of fiscal 2001,
operating margin was 29.0% compared to 28.6% for the first six months of fiscal
2000. The improvement in the Company's operating margin for the second quarter
was largely the result of declining clearing fees, depreciation on
computer-related equipment and taxes other than income taxes, as a percentage of
revenues, offset by increased employee compensation and benefits.
Clearing Fees
Clients who elect to pay for FactSet services via commissions on securities
transactions are charged a greater amount than cash-paying clients to compensate
for clearing broker fees paid by the Company. Cash fees result in greater margin
percentages than commission revenues, however, revenues net of clearing fees are
approximately the same under both of these payment methods. Commission revenues,
as a percentage of total revenues, for the three months and six months ended
February 28, 2001, decreased from 37% to 33% and 36% to 32%, respectively.
Taxes Other Than Income Taxes
During the third quarter of fiscal 2000, the Company reached an agreement with a
state tax authority regarding an ongoing tax audit. As a result, provision for
taxes other than income taxes declined in the quarter ended February 29, 2000
compared with the quarter ended February 28, 2001.
Income Taxes
Income tax expense for the second quarter of fiscal 2001 increased $2.5 million
from the same period a year ago. Pretax income grew $3.5 million compared to the
year ago period. Income tax expense of $2.6 million in the second quarter of
fiscal 2000 included a non-recurring tax benefit of $1.1 million. The effective
tax rate for the second quarter of fiscal 2001 was 37.9%. Excluding the
non-recurring income tax benefit for the second quarter of fiscal 2000, the
effective tax rate was 37.7%. Income tax expense for the first half of fiscal
2001 was $10.1 million, an increase of $3.6 million. Without the one-time income
tax benefit in the first half of 2000, the increase was $2.5 million. The
effective tax rate for the first half of fiscal 2001 was 38.4%. The effective
tax rate for the first half of fiscal 2000 was 39.3% excluding the non-recurring
income tax benefit.
Liquidity
Cash generated by operating activities was $33.0 million, an increase of $18.9
million over the comparable period in fiscal 2000. The increase resulted from
higher profitability, timing of income tax payments, and timing of accounts
payable disbursements (due largely to an $8.5 million increase in accounts
payable related to the Company's investment in new mainframes).
Capital Expenditures
The Company's capital expenditures for the six months ended February 28, 2001
amounted to $16.5 million. The Company made significant technological upgrades
related to its two data centers. During the first half of fiscal 2000, the
Company replaced four Compaq Alpha GS 140 systems at each of the data centers
with two Compaq GS 320 systems, enabling the Company to increase capacity in the
data centers by 50% and double system-wide main memory to 576 gigabytes. Office
expansions in Stamford, Connecticut, New York, New York and Tokyo, Japan and an
office opening in Frankfurt, Germany also resulted in additional capital
expenditures during the first half of 2001.
Financing Operations and Capital Needs
Cash, cash equivalents and investments totaled $78.2 million or 49% of the
Company's total assets at February 28, 2001. All of the Company's operating and
capital expense requirements were financed entirely from cash generated from the
Company's operations. The Company has no outstanding indebtedness.
Revolving Credit Facilities
The Company is a party to two credit facilities totaling $25.0 million for
working capital and general corporate purposes. Approximately $250,000 of the
credit facility is reserved for letters of credit issued during the ordinary
course of business. The Company has no present plans to utilize any portion of
the remaining available credit of $24.7 million.
Forward-Looking Factors
Business Outlook
The following forward-looking statements reflect FactSet's expectations as of
April 12, 2001. Given the number of risk factors, assumptions and uncertainties
enumerated and discussed below, actual results may differ materially. The
Company does not intend to update its forward-looking statements until its next
quarterly results announcement, other than in publicly available statements.
At February 28, 2001, total commitments were $177.9 million. Historically, total
commitments at the end of the second quarter have been a reliable indicator of
revenues for the fiscal year ending six months after quarter end.
Third Quarter Fiscal 2001 Expectations
o Revenues are expected to range between $44.5 million and $45.5 million.
o Operating margins should be comparable with the first half of fiscal 2001.
Full Year Fiscal 2001 Expectations
o Capital expenditures should total approximately $30 million.
Recent Market Trends
In the ordinary course of business, the Company is exposed to financial risks
involving equity, foreign currency and interest rate fluctuations.
Since March 2000, major equity indices (Dow Jones 30 Industrials, Russell 2000,
NASDAQ Composite, MSCI European Index) have experienced significant declines
coupled with increased levels of volatility. Historically, there has been little
correlation between the results of the Company's operations and the performance
of the global equity markets. Nevertheless, a prolonged decline in the global
equity markets could negatively impact a large number of the Company's clients
(investment management firms and investment banks) and increase the possibility
of personnel reductions among FactSet's existing and potential clients.
Continued and prolonged deterioration in the performance of the global equity
markets would make operating conditions difficult and likely result in
year-over-year increases in revenues and net income to trend below 30%.
The fair market value of the Company's investment portfolio at February 28, 2001
was $30.8 million. It is anticipated that the fair market value of the Company's
portfolio will continue to be immaterially affected by fluctuations in interest
rates. Preservation of principal is the primary goal of the Company's investment
portfolio. Pursuant to the investment guidelines established by the Company,
third-party managers construct portfolios to achieve high levels of credit
quality, liquidity and diversification. The Company's 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 the
Company's investment guidelines. Because the Company has no outstanding debts
and, for the reasons enumerated above, the Company's financial exposure to
fluctuations in interest rates is expected to continue to be low.
All of the Company's investments are held in U.S. dollars and greater than 95%
of the Company's revenues are transacted in U.S. dollars. Accordingly, the
Company's exposure to fluctuations in foreign currency rates is expected to
continue to be immaterial.
Income Taxes
During 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 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 the Company's strategy for growth, product
development, market position, commitments 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," "commitments" 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. The Company undertakes no
obligation to publicly update any forward-looking statements as a result of new
information, future events, or otherwise.
These factors include, but are not limited to, 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; 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.
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:
The Annual Meeting of Shareholders of FactSet Research Systems Inc. was held on
January 11, 2001.
1. Four nominees to the Board of Directors were elected:
Director Term For Not For Abstain
-------- ---- --- ------- -------
Scott A. Billeadeau 3 yrs. 25,111,742 87,369 -
Michael F. DiChristina 2 yrs. 25,058,912 140,199 -
Philip A. Hadley 3 yrs. 25,110,582 88,529 -
John C. Mickle 3 yrs. 24,748,631 450,480 -
2. The appointment of PricewaterhouseCoopers LLP as independent public
accountants of the Company was ratified:
For 25,171,808
Not for 17,260
Abstain 10,043
3. The adoption of the 2001 Employee Stock Purchase Plan was ratified:
For 25,071,556
Not for 112,634
Abstain 14,921
4. The Amendment of the Company's Certificate of Incorporation to increase the
number of authorized shares of common stock from 40 million to 100 million was
ratified:
For 23,258,689
Not for 1,931,477
Abstain 8,945
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(1)
4.1 ................................................... Form of Common Stock(1)
10.1 ..Form of Consulting Agreement between the Company and Charles J. Snyder(2)
10.2 ............. Letter of Agreement between the Company and Ernest S. Wong(1)
10.31 .............. Amendment to 364-Day Credit Agreement, dated March 12, 2001
10.32 ........................................... Three-Year Credit Agreement(3)
10.33 ......... Retirement Agreement between the Company and Howard E. Wille (4)
10.4 .............. The FactSet Research Systems Inc. 2000 Stock Option Plan (5)
10.41 ........... The FactSet Research Systems Inc. 2001 Stock Purchase Plan (6)
10.5 ................. The FactSet Research Systems Inc. Non-Employee Directors'
Stock Option Plan(7)
27...................................................... Financial Data Schedule
(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 annual report on Form 10-K for
the fiscal year 1999.
(3) Incorporated by reference to the Company's quarterly report on Form 10-Q
for the first quarter of fiscal year 1999.
(4) Incorporated by reference to the Company's quarterly report on Form 10-Q
for the third quarter of fiscal year 2000.
(5) Incorporated by reference to the Company's Registration Statement on Form
S-8 (File No. 333-56870).
(6) Incorporated by reference to the Company's Registration Statement on Form
S-8 (File No. 333-57880).
(7) Incorporated by reference to the Company's Registration Statement on Form
S-8 (File No. 333-59839).
(b) Reports on Form 8-K
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: April 12, 2001 BY: /s/ ERNEST S. WONG
Ernest S. Wong,
Senior Vice President, Chief Financial Officer
and Secretary