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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-K
|X| Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended August 31, 1999
|_| 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
incorporation or organization) Identification No.)
One Greenwich Plaza, Greenwich, Connecticut 06830
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (203) 863-1500
Securities registered pursuant to Section 12(b) of the Act: Common Stock
Name of each exchange on which registered: New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No|_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the common stock held by non-affiliates of the
registrant as of November 12, 1999 was $651,672,912.
The number of shares outstanding of the registrant's common stock as of November
12, 1999 was 15,817,209.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the fiscal year ended August
31, 1999 into Parts I and II.
Portions of the definitive Proxy Statement dated November 23, 1999 into Part
III.
FACTSET RESEARCH SYSTEMS INC.
FORM 10-K
For The Fiscal Year Ended August 31, 1999
PART I
Page
ITEM 1. Business...............................................................3
ITEM 2. Properties.............................................................4
ITEM 3. Legal Proceedings......................................................4
ITEM 4. Submission of Matters to a Vote of Security Holders....................4
PART II
ITEM 5. Market for Registrant's Common Stock and Related Stockholder Matters...4
ITEM 6. Selected Financial Data................................................4
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation...........................................................5
ITEM 7A.Quantitative and Qualitative Disclosures About Market Risk.............5
ITEM 8. Financial Statements and Supplementary Data............................5
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures..................................................5
PART III
ITEM 10.Directors and Executive Officers of the Registrant.....................6
ITEM 11.Executive Compensation.................................................7
ITEM 12.Security Ownership of Certain Beneficial Owners and Management.........7
ITEM 13.Certain Relationships and Related Transactions.........................7
PART IV
ITEM 14.Exhibits, Financial Statement Schedules and Reports on Form 8-K........8
Signatures.....................................................................9
2
PART I
ITEM 1. BUSINESS
FactSet Research Systems Inc. (the "Company" or "FactSet") supplies global
economic and financial data to analysts, investment bankers and other financial
professionals. The Company combines more than 100 databases from multiple
suppliers into a single online source of information and analytics, including
fundamental data on tens of thousands of American and international companies
and securities.
The Company obtains financial information from over 40 database vendors and when
possible, seeks to maintain contractual relationships with a minimum of two
database providers for each type of financial data. Database vendor charges are
either billed directly to FactSet or its clients. Data charges billed to FactSet
are on a flat or royalty (per client) fee basis. Contracts with database vendors
are usually renewable annually and cancelable on one year's notice. Several of
the database providers are in direct competition with each other and in some
cases, with FactSet. The Company is a major distributor for many of the
databases offered to its clients.
FactSet's clients are charged an annual flat fee, allowing them unlimited access
to the FactSet system. FactSet's unique proprietary communication and software
tools allow clients to access the Company's mainframe centers and its aggregated
data library using a private wide area network. This network provides a direct,
high-speed data transmission link between the Company's mainframes and the
client's personal computer or computer network, while also ensuring security and
reliability. The FactSet system allows clients to download, screen, manipulate
and analyze data and present it in an infinite variety of formats, including
their own custom-designed reports.
A fundamental part of FactSet's service is its consulting, training and
technical support. FactSet's client support consultants work to build lasting
client relationships. FactSet clients are provided with on-site training and
twenty-four hour technical support to assist them in gaining a stronger
understanding of the FactSet systems, as well as help in developing custom
applications and spreadsheets.
Financial professionals depend on a wide array of financial data when making
analytical and investment decisions. The Company believes that it has become
very important to many financial professionals to integrate and analyze a wide
array of financial and economic information from multiple databases. Many
vendors provide financial information databases to their clients through the
internet and online dial-up connections as well as CD-ROM and print formats.
Without the ability to integrate financial data from multiple sources,
individual users must access and retrieve data from many sources, often in
varied formats, and manually integrate the data to complete their task.
The financial information services industry is a competitive market and known
for its unrelenting technological advances by both large and well-capitalized
companies as well as smaller competitors. The Company competes directly and
indirectly in the United States and internationally with news and information
providers, market data suppliers and with many of the database providers that
supply FactSet with financial data that is incorporated in the FactSet system.
FactSet's most direct competitors in the United States include online and CD-ROM
database suppliers and integrators such as FAME, COMPUSTAT PC Plus, Baseline
Inc., StockVal Incorporated, Disclosure Inc., and IDD Information Services, and
Datastream in the international markets. Many of these competitors offer
services or products similar to those offered by the Company, in some cases at a
lower price. The Company believes that none of its competitors offer a package
of services as comprehensive and powerful as those offered by FactSet.
During fiscal 1999, the Company's new interface called Directions was released
to the client base. At the end of the fiscal year, Directions had been installed
at approximately 90% of FactSet clients. Directions is a major advance by the
Company toward an easier-to-use system which has helped broaden the Company's
potential user base. Also in fiscal 1999, the Company created a new functional
arm called FactSet Enterprises. Included in FactSet Enterprises are five new
business units - Portfolio Analytics, Quantitative Analytics, ProActive
Publishing, Fixed Income Analytics and Data Warehousing.
3
Portfolio Analytics is a business directed exclusively at portfolio managers. It
affords insight into portfolio performance through attribution analysis.
Quantitative Analytics offers highly sophisticated Alpha Testing and Backtesting
services. ProActive Publishing is a service that generates custom-designed
reports and pitch books by combining Microsoft and FactSet technologies. Fixed
Income Analytics is a service that combines FactSet data integration with
domestic and international fixed income data. Data Warehousing is a service that
allows clients to utilize FactSet's database technology and applications with
their proprietary data.
The number of employees of FactSet and its subsidiaries totaled 359 as of August
31, 1999, up from 265 at August 31, 1998.
Additional information with respect to the Company's business is included in
FactSet's fiscal year 1999 Annual Report to Stockholders incorporated herein by
reference:
Financial Highlights......................................................page 1
Five-Year Summary of Selected Financial Datapage.........................page 12
Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................pages 13-21
Note 1 to Consolidated Financial Statements entitled "Organization and
Nature of Business".....................................................page 30
Note 11 to Consolidated Financial Statements entitled "Net Capital"......page 37
Note 15 to Consolidated Financial Statements entitled "Segments".....pages 40-42
ITEM 2. PROPERTIES
Refer to footnote 12 "Lease Commitments" on pages 37-38 of FactSet's fiscal year
1999 Annual Report to Stockholders for properties information.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The following information included in FactSet's fiscal year 1999 Annual Report
to Stockholders is incorporated herein by reference:
Management's Discussion and Analysis of Financial Condition and Results of
Operations Forward-Looking Factors entitled "Cash Dividend".............page 16
Note 3 to Consolidated Financial Statements entitled "Common Stock and
Earnings per Share"...................................................page 33
Quarterly Financial Data, Common Stock and Quarterly Stock Prices.......page 44
ITEM 6. SELECTED FINANCIAL DATA
Refer to the Five-Year Summary of Selected Financial Data included on page 12 of
FactSet's fiscal year 1999 Annual Report to Stockholders, which is incorporated
herein by reference.
4
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Refer to the Management's Discussion and Analysis of Financial Condition and
Results of Operations included on pages 13-21 of FactSet's fiscal year 1999
Annual Report to Stockholders, which is incorporated herein by reference.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of business, the Company is exposed to financial risks
involving equity, interest rates and foreign currency markets.
During the past three fiscal years, the U.S. and European equity markets have
reached record highs. Historically, there has been little correlation between
results of the Company's operations and the performance of global equity
markets. However, an extended global stock market decline could negatively
impact a majority of the Company's clients (investment management firms and
investment banks) and increase the likelihood of personnel reductions among
FactSet's existing and potential clients.
The fair value of the Company's investment portfolio at August 31, 1999 was
$22.9 million. Changes in interest rates impacts this fair market value. The
portfolio of fixed income investments is managed to preserve principal and
contains instruments entered into for purposes other than trading. Under 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 portfolios are managed such that weighted average
duration of short-term investments do not exceed 18 months. The average duration
of interest sensitive investments was 0.66 years at August 31, 1999.
Accordingly, a 10% increase or decrease in interest rates would cause the fair
value of investments to change by approximately $1.5 million. Investments such
as puts, calls, strips, straddles, short sales, futures, options, or investments
on the 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 at a low
level.
All investments are held in U.S. dollars and approximately 95% of the Company's
revenues are received in U.S. dollars. Accordingly, exposure to movements in
foreign currency prices is expected to continue to be insignificant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Refer to the following information included in FactSet's fiscal year 1999 Annual
Report to Stockholders, which is incorporated herein by reference:
Consolidated Statements of Income........................................page 23
Consolidated Statements of Financial Condition.......................pages 24-25
Consolidated Statements of Changes in Stockholders'Equity............pages 26-27
Consolidated Statements of Cash Flows................................pages 28-29
Notes to Consolidated Financial Statements...........................pages 30-43
Report of Independent Accountants........................................page 45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
5
PART III
ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Directors and Executive Officers of FactSet Research Systems Inc. as of
November 23, 1999 were as follows:
Name Age Position with the Company
______________________________________________________________________________________________
Howard E. Wille 71 Chairman of the Board of Directors,
Chief Executive Officer and Director
Charles J. Snyder (1) 57 Vice Chairman of the Board of Directors and Director
Michael F. DiChristina(2) 37 President
Ernest S. Wong 45 Senior Vice President, Chief Financial Officer and Secretary
John D. Connolly 56 Director
David R. Korus 38 Director
Joseph E. Laird, Jr. 53 Director
John C. Mickle 73 Director
Walter F. Siebecker 58 Director
(1) As of August 31, 1999, Mr. Snyder retired from his position as President and
Chief Technology Officer. On September 1, 1999, he became Vice Chairman of the
Board of Directors and a consultant to the Company's engineering and technology
groups.
(2) As of September 1, 1999, Mr. DiChristina assumed the role of President.
Howard E. Wille, Chairman of the Board of Directors, Chief Executive Officer and
Director. Mr. Wille was a founder of the Company in 1978 and has held his
current positions with the Company since that time. From 1966 to 1977, Mr. Wille
was a Partner and Director of Research at Faulkner, Dawkins & Sullivan, Inc., a
Wall Street investment firm, and held a managerial position with Shearson Hayden
Stone, Inc. after its acquisition of Faulkner, Dawkins & Sullivan, Inc. in 1977.
He was President and Chief Investment Officer of Piedmont Advisory Corporation
from 1961 to 1966 and prior to that time served as a securities analyst,
investment manager and investment counselor for several firms. Mr. Wille has
been a Director of the Company since its formation in 1978.
Charles J. Snyder, Vice Chairman of the Board of Directors and Director. Mr.
Snyder retired as President and Chief Technology Officer of FactSet on August
31, 1999. At the time of his retirement, he became Vice Chairman of the Board
and agreed to continue as a consultant to the Company's engineering and
technology groups. Mr. Snyder was a founder of FactSet in 1978 and held the
position of President and Chief Technology Officer from 1978 to August 1999.
From 1964 to 1977, Mr. Snyder worked for Faulkner, Dawkins & Sullivan, Inc.,
eventually becoming Director of Computer Research, a position he retained with
Shearson Hayden Stone, Inc. after its acquisition of Faulkner, Dawkins &
Sullivan, Inc. in 1977. Mr. Snyder has been a Director of the Company since its
formation in 1978.
Michael F. DiChristina, President. Mr. DiChristina joined the Company in 1986 as
a software engineer and has held the position of Director of Software
Engineering for the past nine years. Prior to joining the Company, he was a
software engineer at Morgan Stanley & Co. Mr. DiChristina received a B.S. in
Electrical Engineering from Massachusetts Institute of Technology.
Ernest S. Wong, Senior Vice President, Chief Financial Officer and Secretary.
Mr. Wong joined the Company in his current position in June 1996. Between 1991
and 1996, he held several positions with Montedison SpA including Vice
President, Finance and Treasurer of Montedison USA, Inc. and Director of
Corporate Finance of Montedison Corporation of America. From 1988 to 1991, he
was Vice President in the North American Banking Group of The First National
Bank of Chicago, and prior to that time served as Manager of Domestic Finance at
PepsiCo, Inc. and Second Vice President in the Corporate Bank of The Chase
Manhattan Bank. Mr. Wong received a B.A. in Psychology from Cornell University
and an M.B.A. in Finance from Columbia University Graduate School of Business.
6
John D. Connolly, Director. Mr. Connolly is an experienced investment
professional with a long career in the financial services industry. He retired
as a principal/partner and portfolio manager with Miller Anderson & Sherrerd,
serving that firm from 1990 to 1998. From 1984 to 1990, Mr. Connolly served as
Senior Vice President, Chief Investment Strategist for Dean Witter Reynolds.
Prior to joining Dean Witter, he held the position of Senior Vice President,
Director of Research for Shearson/American Express. Mr. Connolly has also held
various senior positions with E.F. Hutton; White Weld, Faulkner, Dawkins &
Sullivan, Inc.; National Securities & Research; and Citibank. Mr. Connolly is a
member of the Audit Committee and has served on the board since January 1999.
David R. Korus, Director. Mr. Korus is a Managing Member and Portfolio Manager
with Owenoke Capital Management LLC. Prior to founding Owenoke in 1998, Mr.
Korus managed technology assets for Westcliff Capital Management LLC and Kingdon
Capital Management, both of which are large diversified hedge funds. Mr. Korus
began his career in 1983 with Kidder, Peabody & Co ("Kidder") researching
technology stocks. Later he became Chairman of the Research Steering Committee
at Kidder and was responsible for managing the technology research department.
Mr. Korus is a member of the Compensation Committee and has served on the Board
since July 1997.
Joseph E. Laird, Jr., Director. Mr. Laird serves as Chairman and Chief Executive
Officer of Laird Squared LLC, an investment banking company that he formed in
1999. Previously, Mr. Laird was a Managing Director of Veronis, Suhler &
Associates, a small leading specialty investment bank that serves the media and
information industries since 1989. From 1982 to 1989, he was an institutional
equity salesman and a senior securities analyst of database information services
for Hambrecht & Quist. From 1975 to 1982, Mr. Laird was an institutional equity
salesman and investment strategist for Paine Webber Mitchell Hutchins. Mr. Laird
is the Chairman and a member of the Compensation Committee and has served on the
Board since 1993.
John C. Mickle, Director. Mr. Mickle has been President of Sullivan, Morrissey &
Mickle Capital Management Corporation since 1978. Mr. Mickle is an experienced
investment advisor, having held prior positions with Shearson Hayden Stone,
Inc., UBS-DB Corporation, and Faulkner, Dawkins & Sullivan, Inc. Mr. Mickle is
also a Director of Mickelberry Communications Inc. Mr. Mickle is the chairman
and a member of the Audit Committee and has served on the Board since November
1997.
Walter F. Siebecker, Director. Mr. Siebecker joined the National Securities
Clearing Corporation ("NSCC") in 1996 as a Managing Director in charge of the
organization's Annuity Processing Service. Mr. Siebecker's background is in
retail and institutional investment services in the domestic and global markets.
Prior to joining NSCC, Mr. Siebecker was a consultant to the Trading Services
Division at Lehman Brothers and spent 16 years at Salomon Smith Barney Inc.,
where he was responsible for the operations division as Executive Vice President
and Chief Operations Officer. Mr. Siebecker is a member of the Audit Committee
and has served on the Board since November 1997.
The information set forth under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" contained on page 3 of the definitive Proxy Statement
dated November 23, 1999 is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the captions "Information Regarding Named
Executive Officer Compensation" and "Compensation Pursuant to Stock Options"
contained on pages 4 and 5 of the definitive Proxy Statement dated November 23,
1999 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Information Regarding Beneficial
Ownership of Principal Stockholders, Directors, and Management" contained on
pages 3 and 4 of the definitive Proxy Statement dated November 23, 1999 is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Information Regarding the Board of
Directors and Related Committees" on page 3 of the definitive Proxy Statement
dated November 23, 1999 is incorporated herein by reference.
7
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
The following information from FactSet Research Systems Inc.'s fiscal
year 1999 Annual Report to Stockholders is incorporated by reference
under Items 1, 2, 5, 6, 7, and 8 and are filed as part of this report
as part of Exhibit 13.1:
Financial Highlights.....................................................................page 1
Five-Year Summary of Selected Financial Data.............................................page 12
Management's Discussion and Analysis of Results of Operations and Financial..............pages 13-21
Consolidated Statements of Income........................................................page 23
Consolidated Statements of Financial Condition...........................................pages 24-25
Consolidated Statements of Changes in Stockholders' Equity...............................pages 26-27
Consolidated Statements of Cash Flows....................................................pages 28-29
Notes to Consolidated Financial Statements...............................................pages 30-43
Quarterly Financial Data, Common Stock and Quarterly Stock Prices........................page 44
Report of Independent Accountants........................................................page 45
The following information from FactSet Research Systems Inc.'s definitive
Proxy Statement dated November 23, 1999 is incorporated by reference
under Items 10, 11, 12 and 13:
Information Regarding the Board of Directors and Related Committees......................pages 1-3
Section 16(a) Beneficial Ownership Reporting Compliance..................................page 3
Information Regarding Beneficial Ownership of Principal Stockholders,
Directors and Management.................................................................pages 3-4
Information Regarding Named Executive Officer Compensation...............................pages 4-5
Compensation Pursuant to Stock Options...................................................page 5
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of fiscal 1999.
(c) Exhibit Listing
EXHIBIT NUMBER DESCRIPTION
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 (1)
10.2............................................Letter of Agreement between the Company and Ernest S. Wong (1)
10.3....................................Form of Consulting Agreement between the Company and Charles J. Snyder
13.1...................................................The Company's fiscal 1999 Annual Report to Stockholders
21.................................................................................Subsidiaries of the Company
27.....................................................................................Financial Data Schedule
(1) Incorporated by reference to the Company's Registration Statement on Form S-1 (File No.333-4238).
8
SIGNATURES
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, in the City of Greenwich,
State of Connecticut, on November 23, 1999.
FACTSET RESEARCH SYSTEMS INC.
/s/ ERNEST S. WONG
Ernest S. Wong,
Senior Vice President, Chief Financial Officer, and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on November 23, 1999.
SIGNATURE TITLE
/s/ HOWARD E. WILLE Chairman of the Board of Directors
Howard E. Wille and Chief Executive Officer and Director
/s/ CHARLES J. SNYDER Vice Chairman of the Board of
Charles J. Snyder Directors and Director
/s/ MICHAEL F. DICHRISTINA President
Michael F. DiChristina
/s/ ERNEST S. WONG Senior Vice President, Chief Financial Officer,
Ernest S. Wong and Secretary
/s/ JOHN D. CONNOLLY Director
John D. Connolly
/s/ DAVID R. KORUS Director
David R. Korus
/s/ JOSEPH E. LAIRD, JR. Director
Joseph E. Laird, Jr.
/s/ JOHN C. MICKLE Director
John C. Mickle
/s/ WALTER F. SIEBECKER Director
Walter F. Siebecker
9
EXHIBIT 10.3
Form of Consulting Agreement between the Company and Charles J. Snyder
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (the "Agreement"), made as of this 1st day
of September, 1999, is entered into by FACTSET RESEARCH SYSTEMS INC., a Delaware
corporation with its principal offices at One Greenwich Plaza, Greenwich,
CT 06830 (the "Company"), and Charles J. Snyder, with an address at 700 Waverly
Road, Ridgewood, NJ 07450(the appointed Vice Chairman and the "Consultant").
INTRODUCTION
WHEREAS, the Consultant is one of the founders of the Company, and currently
serves as a Director, the President, and the Chief Technology Officer of the
Company and possesses an intimate knowledge of the business, affairs, policies,
methods and personnel of the Company;
WHEREAS, the Company has appointed the Consultant as its Vice Chairman of the
Board of the
Directors;
WHEREAS, the Consultant desires to terminate employment with the Company;
WHEREAS, the Company and the Consultant recognize that the continued application
of the Consultant's experience, abilities and services to the business of the
Company and its affiliates would be extremely beneficial to the Company and its
affiliates and that application of such experience, abilities and services to
the business of any competitor of the Company or its affiliates would cause
irreparable damage to the Company;
WHEREAS, subject to the provisions hereof, the Company wishes to be assured that
following the termination of the Consultant's current employment with the
Company, the Consultant will be available to consult with the Company and will
be restricted from competing with or disclosing certain information concerning
the Company; and
WHEREAS, the Company and the Consultant are willing to enter into this
Agreement;
NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants
herein set forth and for other good and valuable consideration, receipt of which
is hereby acknowledged, the parties hereto agree as follows:
1. SERVICES. The Consultant agrees to use reasonable efforts to perform such
consulting, advisory and related services (collectively, the "Services") for the
Company as may be reasonably requested from time to time by the Company,
including primarily Services pertaining to technology matters that may arise
from time to time. The delivery by the Consultant of the Services hereunder
shall be at such times and at such locations as the Consultant and the Company
may agree from time to time; provided, however, that in no
event shall the Consultant be required to render more than 60 hours of Services
in any month.
2. TERM. This Agreement shall be effective as of the first business day
immediately following the termination of the Consultant's employment with the
Company and shall continue in effect until September 1, 2000, and for successive
one year terms unless either party gives notice to the other of its intent not
to renew at least three months prior to the end of the current term, unless
sooner terminated as provided below (the "Consulting Period"). This Agreement
shall terminate, and the parties' obligations hereunder shall cease upon notice
of termination if (i) the Company fails to perform its obligations hereunder, or
(ii) the Consultant fails to perform the Services pursuant to Section 1 hereof
for any reason; provided, however, that the terms of Sections 4 and 7 shall not
terminate but shall remain in full force and effect. In the event of such
termination, the Consultant shall be entitled to payment for services performed
and expenses paid or incurred prior to the effective date of termination.
3. COMPENSATION. During the Consulting Period, the Company shall pay the
Consultant a monthly retainer of $10,000 payable in arrears monthly commencing
September 30, 1999. The Company shall reimburse the Consultant for all
reasonable and necessary expenses incurred or paid by the Consultant, after
having obtained the prior approval of the Company, in connection with, or
related to, the performance of Services hereunder within 30 days after receipt
of an itemization and documentation of such expenses.
4. PROPRIETARY INFORMATION; INVENTIONS.
4.1 PROPRIETARY INFORMATION. The Consultant acknowledges that his relationship
with the Company is one of high trust and confidence and that in the course of
his service to the Company he will have access to and contact with Proprietary
Information (as defined in this Section 4.1). The Consultant agrees that he will
not, at any time, disclose to others, or use for his benefit or the benefit of
others, any Proprietary Information or Inventions (as defined in Section 4.2
below). For purposes of this Agreement, Proprietary Information shall mean all
information (whether or not patentable and whether or not copyrightable) owned,
possessed or used by the Company or any third party, including, without
limitation, any Invention, formula, trade secret, process, research, report,
technical data, know-how, technology and marketing or business plan, that is
communicated to, learned of, developed or otherwise acquired by the Consultant
in the course of his performing consulting services to the Company hereunder.
The Consultant's obligations under this Section 4.1 shall not apply to any
information that (i) is or becomes known to the general public under
circumstances involving no breach by the Consultant of the terms of this
Section 4.1, (ii) is generally disclosed to third parties by the Company without
restriction on such third parties, (iii) is in the Consultant's possession at
the time of disclosure otherwise than as a result of a prior disclosure by the
Company to the Consultant or (iv) is disclosed to the Consultant by a third
party not under an obligation of confidentiality to the Company with respect
thereto. The Consultant represents that his retention as a consultant by the
Company and his performance under this Agreement does not, and shall not, breach
any agreement that obligates him to keep in confidence any trade secrets or
confidential or proprietary information of his or of any other party or to
refrain from competing, directly or indirectly, with the business of any other
party. The Consultant shall not disclose to the Company any trade secrets or
confidential or proprietary information of any other party.
4.2 INVENTIONS. All inventions, discoveries, technology, designs, innovations
and improvements related to the business of the Company which are made,
conceived or reduced to practice by the Consultant, solely or jointly with
others, during the Consultation Period which arise directly from information and
discussions presented to the Consultant or which are provided to the Company or
while providing consulting services to the Company (collectively, the
"Inventions") shall be the sole property of the Company. The Consultant hereby
assigns to the Company all Inventions and any and all related patents,
copyrights, trademarks, trade names and other industrial and intellectual
property rights and applications therefor, in the United States and elsewhere
and appoints any officer of the Company as his duly authorized attorney to
execute, file, prosecute and protect the same before any government agency,
court or authority. Upon the request of the Company and at the Company's
expense, the Consultant shall execute such further assignments, documents and
other instruments as may be necessary or desirable to fully and completely
assign all Inventions to the Company and to assist the Company in applying for,
obtaining and enforcing patents or copyrights or other rights in the United
States and in any foreign country with respect to any Invention.
5. NONCOMPETITION AND NONSOLICITATION. During the Consulting Period, Consultant
shall not be engaged as an employee, director, partner, principal, investor,
shareholder, consultant, advisor or independent contractor or in any similar
capacity, in any other business activity or conduct, whether or not such
business activity or conduct is pursued for gain, profit or other pecuniary
advantage, which is similar to or competes with the business of the Company or
any of its subsidiaries; provided that nothing in this Section 5 shall preclude
the Consultant from holding a less than a 1% interest in the stock of any
publicly traded corporation, trust or partnership. During the Consulting Period,
the Consultant will not solicit or otherwise induce any employee of the Company
or any of its subsidiaries to leave the employ of the Company or any such
subsidiary or to become associated, whether as an employee, officer partner,
director, consultant or otherwise, with any other business organization. The
Consultant and the Company agree that the provisions of this covenant not to
compete or solicit are reasonable. However, should any court or arbitrator
determine that any provision of this covenant not to compete is unreasonable,
either in period of time, geographical area, or otherwise, the parties agree
that this covenant not to compete should be interpreted and enforced to the
maximum extent which such court or arbitrator deems reasonable.
6. INDEPENDENT CONTRACTOR STATUS. The Consultant shall perform all services
under this Agreement as an "independent contractor" and not as an employee or
agent of the Company. The Consultant is not authorized to assume or create any
obligation or responsibility, express or implied, on behalf of, or in the name
of, the Company or to bind the Company in any manner and shall not hold himself
out to any party as an employee of the Company. The Consultant shall bear full
responsibility for all taxes owing on the compensation payable hereunder, and
the Consultant acknowledges that the Company shall not withhold any taxes on
such compensation unless otherwise required by law.
7. MISCELLANEOUS. This Agreement constitutes the entire agreement between the
parties and supersedes all prior agreements and understandings, whether written
or oral, relating to the subject matter hereof and thereof. This Agreement may
be amended or modified only by a written instrument executed by both the Company
and the Consultant. This Agreement shall be construed, interpreted and enforced
in accordance with the laws of the State of Connecticut. The Consultant agrees
that a breach of any of the restrictions set forth in this Agreement would cause
the Company irreparable injury and damage, and that, in the event of any breach
or threatened breach, the Company, in addition to all other rights and remedies
at law or in equity, shall have the right to enforce the specific performance of
such restrictions and to apply for injunctive relief against their violation.
The invalidity or unenforceability of any provision hereof (or portion thereof)
shall not affect the validity or enforceability of any other provision hereof,
and if any such provision (or portion thereof) is so broad as to be
unenforceable, it shall be interpreted to be only as broad as is enforceable.
This Agreement shall be binding upon, and inure to the benefit of, both parties
and their respective successors and assigns, including any corporation with
which, or into which, the Company may be merged or which may succeed to
substantially all of its assets or business; provided, however, that the
obligations of the Consultant are personal and shall not be assigned by him. Any
notice or other communication hereunder to either party shall be in writing and
shall be deemed to have been duly given when delivered personally or mailed by
registered mail, return receipt requested, postage prepaid, addressed to the
party as its respective address appears in this Agreement. This Agreement maybe
executed in counterparts, each of which will be deemed to be an original, but
each of which together will constitute one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year set forth above.
FACTSET RESEARCH SYSTEMS INC., CHARLES J. SNYDER,
By:____________________ _______________________
Name: Howard E. Wille Name: Charles J. Snyder
Title: Chairman of the Board
EXHIBIT 13.1
The Company's fiscal 1999 Annual Report to Shareholders
Contents
About FactSet
1 Financial Highlights
2 To Our Shareholders
7 The New Technology Leaders
13 Management's Discussion and Analysis
23 Consolidated Statements of Income
24 Consolidated Statements of Financial Condition
26 Consolidated Statements of Changes in Stockholders' Equity
28 Consolidated Statements of Cash Flows
30 Notes to Consolidated Financial Statements
45 Report of Independent Accountants
46 Directors and Management
Corporate Information
Every year since 1979, Forbes magazine has named 200 public enterprises as the
best small companies in America. FactSet Research Systems is pleased to have
been ranked as the 15th best in the 1999 ranking.
About FactSet FactSet Research Systems Inc. supplies global economic and
financial data to analysts, investment bankers and other financial
professionals. The Company combines more than 100 databases from multiple
suppliers into a single online source of information and analytics, including
fundamental data on tens of thousands of American and international companies
and securities.
Clients have simultaneous access to a wide array of disparate data that
they can download directly into spreadsheets or other applications, including
their own custom-designed models, to combine with other data for investment
analysis.
FactSet is headquartered in Greenwich, Connecticut and employs more than
350 people in nine locations in North America, Europe and the Pacific Rim. The
Company was formed in 1978 and since 1996 has been publicly traded on the New
York Stock Exchange under the symbol FDS.
FINANCIAL HIGHLIGHTS
Thousands, except per share data Years Ended August 31, 1999 1998 % Change
- --------------------------------------------------------------------------------------------------------------
Revenues $103,831 $78,911 31.6
Income from operations 28,630 20,883 37.1
Income before income taxes and extraordinary gain 30,617 22,439 36.4
Net income before extraordinary gain 18,565 12,609 47.2
Net income 18,565 12,851 44.5
- --------------------------------------------------------------------------------------------------------------
Per Share Data
Diluted earnings per common share** $ 1.11 $ 0.78 42.3
Annual dividend rate $ 0.20 -
Weighted average common shares (diluted)** 16,651 16,470
- --------------------------------------------------------------------------------------------------------------
Performance Ratios
Operating margin 27.6% 26.5%
Pretax margin 29.5% 28.4%
Net margin 17.9% 16.0%*
Return on average stockholders' equity 28.9% 28.4%*
* Excludes an extraordinary after-tax gain of $242,000.
** Diluted earnings per share and number of shares outstanding give retroactive
effect to the 3-for-2 stock split that occurred on February 5, 1999.
Graphic Ommitted [Revenues - Fiscal Years 95,96,97,98,99]
Graphic Ommitted [Operating Margin - Fiscal Years 95,96,97,98,99]
Graphic Ommitted [Earnings per Share - Fiscal Years 95,96,97,98,99]
Graphic Ommitted [Stock Price - Fiscal Year ended August 31, 1999]
1
TO OUR SHAREHOLDERS
On behalf of the entire FactSet staff, I am pleased to report another
record-setting performance for the fiscal year ended August 31, 1999. Key
financial measures, including total revenues, operating profits, cash (beta)ows,
earnings per share and overall profitability, moved to new highs. The total
number of clients, the number of user passwords and total client commitments to
FactSet all advanced sharply. New and enhanced service offerings were important
elements in sustaining this momentum. Our engineers have tackled the Y2K issue
to ensure a smooth transition to the year 2000, and are continuing to address
the opportunities afforded by the increasingly important World Wide Web. In
summary, fiscal 1999 was a very good year, marked by gratifying progress on all
fronts.
Top-line growth showed a gain of 31.6% with total revenues rising to $103.8
million. Operating earnings, on further margin improvement, were up 37.1% to
$28.6 million. Reflecting a lower effective tax rate, net income jumped 44.5% to
$18.6 million. Earnings per share rose 42.3% to $1.11 versus last year's $0.78.
Fourth quarter financial performance slowed slightly with revenues rising
27.8%, operating income 29.2% and earnings per share 31.8%. We do not attach
particular significance to this, regarding it simply as a normal variation in
the rate of client commitment growth. While we typically report commitment
levels on a quarterly basis only, sequential growth in the months of February
and March and again in June was present although a bit sluggish, but then in
August we witnessed the year's highest month-to-month sequential growth.
Transition
As you may have read in our August press release, my friend Charles J.
Snyder, President and Chief Technology Officer and a cofounder of FactSet 21
years ago, elected to retire from active day-to-day duties with the Company. He
has been named Vice Chairman of the board of directors and will continue as a
consultant with the Company.
We will be forever indebted to Chuck for his profound contributions to the
success and quality of FactSet. His technological firsts are far too numerous to
elaborate. He gave us a gifted mind, insatiable intellectual curiosity, devoted
attention to mind-bending problems and an uncanny ability to cut through the
noise to get to the crux of things. If asked, I know
Picture Ommitted [Howard E. Wille - Chairman and Chief Executive Officer]
2
he would modestly defer most of the credit for our software and engineering
achievements to the work of others, but his mentoring and counsel were
intimately part of the process. One of his lasting achievements was the
nurturing of the next generation of extremely talented and experienced
engineering leaders.
Replacing Chuck as President is Michael F. DiChristina. Mike joined the
Company in 1986 as a software engineer. His early accomplishments include the
development of Universal Screening, one of our greatest technological coups.
This screening and report writing facility affords simultaneous access to
multiple databases, in effect transforming disparate data sources into a single
data library. The computational engine underlying this creation powers a broad
number of other FactSet applications. For the past nine years, Mike has directed
Applications Engineering, our largest software engineering group. He holds a
degree in electrical engineering from the Massachusetts Institute of Technology.
Filling Chuck's role as Chief Technology Officer is Townsend Thomas. Tom
joined the Company in 1985 and has for many years directed our Systems
Engineering and Telecommunications groups. His responsibilities have included
all computing and data storage facilities, ranging from desktops to mainframes
and all telecommunications facilities, both internal and at client and Company
sites worldwide. Tom has been a forceful advocate of leading-edge technologies
and has ably steered us through the challenging waters of technological change.
He also holds a degree in electrical engineering from MIT.
FactSet Enterprises
With changes in key personnel, the need to re-review corporate structure
and strategies became manifestly clear. In addition to the management changes
noted above, we initiated a reshuffling of the organization. One of the
hallmarks of this move was the creation of a new functional arm called FactSet
Enterprises. William F. Faulkner, who joined us in 1986 and has long served as
the Director of Product Development, is now leading the creation of a series of
new business units with much clearer mandates to focus FactSet technology on
specific market segments and industries. These enterprises are designed to
capture the entrepreneurial energies inherent in tightly organized,
mission-directed teams of professionals. In some respects this program
represents a codification of what was already present at FactSet, but with a
special twist. We are physically bringing together all of the players-the
product developers, application and platform engineers and sales specialists-in
each of these enterprises so they will function as discrete business units with
a fair degree of autonomy.
Each of these entities is charged with responsibility for long-term market
development and revenue growth. Our finance and accounting staffs will provide
oversight and advice on the cost side of the equation; we want to avoid an
incentive system based on profit budgets that can coerce managers into making
short-term decisions. Put another way, we want to avoid a system where we reward
the attainment of short-term profit goals and leave long-term goals an orphan
with no claimants.
Portfolio Analytics, a discrete new business, is one early success. Started
less than 24 months ago with the introduction of the Portfolio Analysis
application, the service affords insights into portfolio performance through
attribution analysis. This was FactSet's first attempt at dealing directly with
a function that is exclusively the province
3
of portfolio managers. Subscribers to this service today exceed 100 clients,
with more than 700 passwords. We are planning to broaden the scope of this
enterprise.
Peripherally akin to Portfolio Analytics is Quantitative Analytics, which
offers sophisticated Alpha Testing and Backtesting services. Addressing this
niche in the marketplace is also relatively new for FactSet and is an example of
how our advanced computer technology can be harnessed for a wide variety of
purposes.
Another enterprise is ProActive Publishing, which successfully combines
Microsoft and FactSet technologies. Using Microsoft Word, Excel and PowerPoint
along with a number of databases from FactSet, this service can generate
custom-designed reports with a high degree of automation. For example, ProActive
Publishing currently produces "pitch" books for investment bankers and
presentation displays for investment managers. And there is more to come.
A recent addition to FactSet Enterprises is Fixed Income Analytics. This
group, which has just released its first suite of services covering the U.S.
market, combines FactSet's traditional strengths of data integration and
powerful analytics with an expanding array of domestic and international fixed
income databases. The goal is to serve the needs of fixed income portfolio
managers and analysts at our existing clients and introduce FactSet to an
entirely new market segment.
Data Warehousing is yet another FactSet Enterprise. The aim of this unit is
to allow clients to utilize our proprietary database technology for their own
needs. To store and maintain their own proprietary data, they can leverage the
database structures and data-access tools that FactSet has developed over the
past two decades. Additionally, clients can take advantage of all analytical
tools available at FactSet.
FactSet 16-year veteran Merle Yoder is our new Director of Product
Development. Merle, who recently returned from an extended European assignment,
opened our first overseas office and was instrumental in initiating the overhaul
of FactSet service offerings from a U.S. orientation to a global one. The
globalization process will continue as we take advantage of the evident
opportunities available worldwide. We intend to quicken the pace of product
creation and to use product development activities as incubators for future
additions to FactSet Enterprises.
Looking Forward
In terms of immediate prospects, we started the new fiscal year with client
commitments of $118.9 million. This represents a gain of 28.6% over year-earlier
levels. Commitments are the equivalent of a freeze frame snapshot of the total
cost to clients of all services being rendered by FactSet at any point in time.
We use the term "freeze frame" because commitments have grown in every single
month save one in the past 120 months. While there can be no guarantee that this
pattern will persist in future, the accompanying chart depicts the history of
client commitments through August 31, 1999.
As a matter of policy, we do not seek to enter into written contracts with
our clients. Instead, clients are free to add or subtract services at any time;
to stay with us or to leave of their own volition. In order to retain clients
and to encourage the addition of services, we rely on the quality of what we
deliver.
Graphic Ommitted [Commitments - Quarterly through August 31, 1999]
4
FactSet does not consider itself to have customers; we think of them as
clients. In our minds, the first word connotes a transaction-based encounter
whereas the latter suggests a long-term professional relationship. Clients are
the foundation of our financial health and we strive passionately to treat them
accordingly. A measure of the efficacy of our philosophy is a client retention
rate in excess of 95% in each of the past nine years (when we started measuring
it).
To better explain the sources of commitment growth and its relationship to
subsequent increasing revenue, the table below sketches out our business growth
model. Rather than depending solely on price increases, we have chosen to grow
by the simple addition of clients, passwords and applications. The table shows
three-year change in client count up nearly 50%, passwords up more than 200%,
average commitments-i.e., level of service-up 56% and consequent change in
year-end commitments up 134%.
ANATOMY OF GROWTH 3-Year
Years ended August 31, 1996 1997 1998 1999 % Change
- -------------------------------------------------------------------------------------------------------
Clients 439 498 564 658 49.9
Passwords 6,245 10,771 16,647 20,191 223.3
Average client commitment $116,000 $138,000 $164,000 $181,000 56.0
Year-end commitments $50,815,000 $68,551,000 $92,479,000 $118,900,000 134.0
- -------------------------------------------------------------------------------------------------------
[Picture Ommitted]
5
In last year's annual report, we displayed a close connection between
client commitments and subsequent actual reported revenues. In the table below
we show commitments at two time periods-the start of our fiscal year and six
months later-and reported revenues for the full fiscal year. As you can see,
client commitments have proven to be, at least for the periods shown, accurate
forecasters of full-year revenues six months hence. We have no reliable way of
knowing whether this will hold in the future or what commitments will be six
months from now, but we will obviously try to influence the outcome through
diligent attention to business.
CLIENT COMMITMENTS AND REPORTED REVENUES
Thousands Years Ended August 31, 1996 1997 1998 1999 2000
- ------------------------------------------------------------------------------------
Commitments, beginning of year $40,223 $50,815 $68,551 $92,479 $118,900
Commitments at February 28 44,099 58,357 78,652 103,185 ?
Full-year revenues 44,348 58,358 78,911 103,831 ?
- ------------------------------------------------------------------------------------
To gain a better insight into where we are headed, please turn to the
observations made by our new President, Michael F. DiChristina, following this
letter. With Mike and his team of young, highly skilled managers, we have the
ideal combination of extensive technological experience and outstanding
organizational talents to lead the company into the new millennium.
In summary, we have had another strong year and start fiscal 2000 with
client commitments well ahead of a year ago. The reorganization of key personnel
and the introduction of new departments and products has energized the Company.
Enthusiasm about future prospects is especially keen and we stand ready and
eager to take advantage of the opportunities and challenges that lie ahead.
Howard E. Wille
Chairman and Chief Executive Officer
6
THE NEW TECHNOLOGY LEADERS
Mike DiChristina, FactSet's recently appointed President and former
Director of Software Engineering, speaks about some of the opportunities and
challenges that the Company faces in the years ahead.
Last year at this time we were just releasing Directions, our own version
of a browser, which is now installed at about 90% of our client base.
Consultants in the field report that clients are enthusiastic about the new
interface. But we won't stop there. We are continuing to improve it.
FactSet's architecture involves a small communications program (the
Directions browser) installed on the client's PC that communicates with our
computer centers where all the application logic and data reside on mainframes.
This allows us to give clients immediate access not only to all the improvements
we make to our existing applications but also to any new ones we install. As far
as the client is concerned, it looks like Excel or Word or other Windows
applications. When we install a new enhancement, the PC just receives additional
instructions identifying which dialog boxes or buttons to display. The technical
term for this architecture is "thin client."
Ironically, the world is coming around to virtually the identical
architecture that FactSet has had for years, namely the Web. Think of programs
like Microsoft Internet Explorer or Netscape Navigator as thin clients that are
out there talking to servers and displaying information subject to the commands
of those servers-those Web sites you visit. We see this as a vindication of our
long-held strategy of a thin client architecture.
Picture Ommitted [Michael F. DiChristina - President]
7
While Directions serves client needs quite well, we simply cannot ignore
the opportunities and challenges afforded by the Internet. Although we've had
success in the past, we cannot rest on our laurels; we have to be constantly
vigilant in assessing the new technologies as they emerge.
As we move toward greater use of Web technology, an important thing to
remember is that clients want a great deal of security and reliability. This is
where our private wide area network (WAN) gives us a real advantage. Tom Thomas
and his team built the global wide area network from the ground up and this year
they are positioned to incorporate new technology that substantially increases
bandwidth. Given the importance of reliability to our clients, the FactSet WAN
provides three layers of communications backup.
Using a standard Web browser to view or republish FactSet information means
we have to incorporate the same level of security for clients accessing FactSet
through a browser as we have with our own software. Jon Carlson's group in San
Mateo is doing extensive research into the latest technology dealing with
security over the Web. Advances are being made every day and we will stay on top
of those changes in order to provide appropriate security.
In addition to Web development, Tom's group has been working on an exciting
project. They are building FactSet's own real-time pricing center. We looked
into buying the capability from a third party, but in the end decided to build
it ourselves.
We've arranged feeds from major U.S. exchanges and are doing the millions
of necessary calculations on our dedicated servers before transmitting the data
into our Alpha machines. A companion to this project is the sophisticated text
searching that allows us to apply filters to the SEC documents, analyst reports
and news stories we receive in real time every day. With this technology,
clients can personalize their accounts by setting up specific criteria for what
they want to see.
Picture Ommitted [Townsend Thomas - Chief Technology Officer, Director, Systems
Engineering
8
A companywide Y2K project headed by Ed Martin has involved engineers,
database managers, quality assurance people and others in ensuring that our
systems, databases, applications and clients' proprietary models are Y2K
compliant. In addition, we're staffing key departments throughout the millennium
weekend and will be prepared to handle any questions that may arise.
It's going to be an interesting few years coming up as we roll into the
21st century. The Web is quickly becoming ubiquitous and technology is changing
faster than ever before; we think we're well poised to thrive in this exciting
new information economy.
Picture Ommitted [Jon D. Carlson - Director, Platform Engineering]
Picture Ommitted [Edward A. Martin - Director, Information Research]
9
FINANCIAL REVIEW
Management's Discussion and Analysis
Consolidated Statements of Income
Consolidated Statements of Financial Condition
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Accountants
The following section summarizes selected information with respect to the
operations and financial condition of FactSet Research Systems Inc. Further
detail is available in the Company's Form 10-K, filed with the U.S. Securities
and Exchange Commission.
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
Thousands, except per share data
Years Ended August 31, 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------
Revenues $103,831 $78,911 $58,358 $44,348 $36,188
Income from operations 28,630 20,883 14,862 10,633 8,100
Income before taxes and extraordinary gain 30,617 22,439 15,733 11,384 8,670
Net income 18,565 12,851* 8,930 6,470 4,939
- -------------------------------------------------------------------------------------------------
Diluted earnings per share** 1.11 0.78* 0.55 0.40 0.32
Weighted average common shares (diluted)** 16,651 16,470 16,257 16,151 15,395
Cash dividends declared per share*** 0.15 - - - -
- -------------------------------------------------------------------------------------------------
Total assets 101,544 70,556 50,835 36,510 28,663
Stockholders' equity 77,614 51,025 37,627 28,197 21,373
- -------------------------------------------------------------------------------------------------
*Includes an extraordinary after-tax gain of $242,000.
** Diluted earnings per share and number of shares outstanding give retroactive
effect to the 3-for-2 stock split that occurred on February 5, 1999.
*** On January 8, 1999, the board of directors announced a regular quarterly
dividend of $0.05 per share.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
Years Ended August 31, 1999 1998 1997
- -------------------------------------------------------------------------------------
Revenues (millions) $ 103.8 $ 78.9 $ 58.4
Commitments (millions) $ 118.9 $ 92.5 $ 68.6
Client count 658 564 498
Passwords 20,191 16,647 10,771
Client retention rate >95% >95% >95%
- -------------------------------------------------------------------------------------
REVENUES
Revenues increased 31.6% to a record $103.8 million in fiscal 1999. In
fiscal 1998, revenues rose 35.2% to $78.9 million from $58.4 million in fiscal
1997. The main factors driving growth in both years were international
expansion, new products and services, an increasing number of subscriptions from
existing users and the addition of new clients.
Revenues from international operations grew 49.1% to $14.9 million for
fiscal 1999. Revenues from European operations increased 44.7%; Asia Pacific
revenues grew by 61.7%. International operations accounted for 14% of
consolidated revenues, up from 13% in fiscal 1998. In fiscal 1998, international
revenues grew 58% to $10.0 million. Revenues from European operations jumped
69.4%, while the Asia Pacific business generated a 32.6% revenue increase.
COMMITMENTS. Client commitments at August 31, 1999 rose 28.6% to $118.9 million.
Commitments improved 34.9% in fiscal 1998 to $92.5 million. ("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.) New products and
services aimed at portfolio managers and the rollout of a new FactSet "front
end" were significant factors in the increase in the average commitment per
client over the past two fiscal years. At the end of fiscal 1999, the average
commitment per client was $181,000, up from $164,000 and $138,000 for the
comparable periods in fiscal 1998 and 1997, respectively. At August 31, 1999, no
individual client accounted for more than 4% of total commitments, and
commitments from the top ten clients did not exceed 15% of total commitments.
The Company does not seek to enter into written contracts with its clients;
clients are free to add to, delete from or terminate service at any time.
CLIENT COUNT AND RETENTION. The number of FactSet clients grew by 94 on a net
basis to 658 in fiscal 1999; 42% more than the 66 net client additions in fiscal
1998. Client retention for 1999 continued at a rate in excess of 95%.
PASSWORDS. Passwords, which represent the number of FactSet users, grew 21%
during the fiscal year, totaling 20,191 by August 31, 1999. In fiscal 1998,
client passwords increased more than 50% to 16,647, due to the expansion of
several large investment banking relationships.
Graphic Ommitted [Total Employees - Fiscal Years 97,98,99]
Graphic Ommitted [Number of Clients - Fiscal Years 97,98,99]
Graphic Ommitted [Revenues - Fiscal Years 97,98,99]
13
COST OF SERVICES
Cost of services for fiscal 1999 increased 22% to $37.3 million. In fiscal
1998, cost of services rose 31.1% to $30.6 million. These increases were mainly
due to higher employee compensation and benefits and additional depreciation and
maintenance costs on computer equipment.
EMPLOYEE COMPENSATION AND BENEFITS. Employee compensation and benefits for the
engineering and consulting groups increased $4.9 million in fiscal 1999 and $3.5
million in fiscal 1998. To sustain current revenue growth levels, the
engineering and consulting groups increased staff by 33% and 42% in fiscal years
1999 and 1998, respectively.
DEPRECIATION EXPENSE. Depreciation expense on computer-related equipment
increased $2.0 million for the year ended August 31, 1999. In fiscal 1998,
depreciation expense increased $1.5 million. Such increases were the result of
higher levels of capital spending to upgrade and increase capacity of the
Company's data centers. During the past two fiscal years, six Compaq GS 140
mainframe systems were added, system-wide memory more than doubled to 192
gigabytes and disk storage capacity increased to 2.5 terabytes.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses ("SG&A") increased 38.1% in
fiscal 1999, totaling $37.9 million. In fiscal 1998, SG&A rose 36.1% to $27.4
million. Increases in fiscal 1998 and 1999 were mainly the result of higher
employee compensation and benefits and office facility expansion.
EMPLOYEE COMPENSATION AND BENEFITS. Employee compensation and benefits for the
sales, product development and various other support departments grew $4.6
million in fiscal 1999. For fiscal 1998, employee compensation and benefits
increased $4.1 million over the prior year. The number of employees in the
sales, product development and various other support departments increased by
38.7% and 30% in fiscal years 1999 and 1998, respectively.
OFFICE FACILITY EXPENSES. Rent, amortization of leasehold improvements and
office expenses were up $2.7 million in fiscal 1999 and up $1.0 million in
fiscal 1998. These increases were the result of office openings in New York;
Boston; Stamford, Connecticut; Hong Kong; and Sydney and office expansions in
San Mateo, California and Tokyo during the past two fiscal years.
FOREIGN CURRENCY. Approximately 95% of the Company's revenues are received in
U.S. dollars and the net monetary position of the Company's foreign offices are
not significant. Therefore, foreign currency gains and losses have not been
material.
14
OPERATING MARGIN
The operating margin for fiscal 1999 was 27.6%, up from 26.5% and 25.5% in
fiscal years 1998 and 1997, respectively. The improvement in fiscal 1999 was
largely due to declining clearing fees, communication expenses and data costs as
a percentage of revenues, partially offset by increased compensation costs and
amortization expenses. In fiscal 1998, the higher operating margin was
attributable to decreased clearing costs, data charges and rent as a percentage
of revenues, partially offset by increased compensation expenses.
CLEARING FEES. Cash fees generate higher margins than commission revenues,
although net revenues to the Company are approximately the same under both
payment methods. Clients who pay for services using commissions on securities
transactions are charged a higher fee than cash-paying clients in order to cover
clearing broker charges paid by the Company. Over the past two fiscal years,
commissions, while growing in absolute terms, have been declining as a
percentage of total revenues, representing 38.5% of the total for fiscal 1999
compared to 42.6% in fiscal 1998 and 46.3% in fiscal 1997.
DATA COSTS. Data costs declined as a percentage of revenues in both fiscal 1999
and 1998. This decline is a result of a change in the way a particular database
supplier bills FactSet clients. Prior to January 1, 1998, the database supplier
was paid through FactSet; after January 1, 1998, this database supplier moved to
direct billing of clients. This change in billing practices had the effect of
decreasing revenues and expenses by the same amount.
INCOME FROM OPERATIONS
Income from operations rose 37.1% to $28.6 million in fiscal 1999 compared
with an increase of 40.5% in fiscal 1998 to $20.9 million.
INCOME TAXES
The effective tax rate for fiscal 1999 was 39% compared to 44% a year ago.
Included in the 1999 effective tax rate was the net effect of concluding two
state income tax audits. Without considering the favorable effect of the audits,
the effective tax rate would have been 42%.
NET INCOME AND EARNINGS PER SHARE
Net income in fiscal 1999, prior to the recognition of an extraordinary
gain in fiscal 1998, grew by 47.2% to $18.6 million and diluted earnings per
share advanced 44.2% to $1.11. The percentage gains after inclusion of the 1998
extraordinary gain were 44.5% for net income and 42.3% for diluted earnings per
share.
In fiscal 1998, net income increased 43.9% to $12.9 million and diluted
earnings per share were up 41.8% to $0.78. Excluding the extraordinary gain of
$242,000, net income increased 41.2% and diluted earnings per share rose 40%.
NET MARGIN
Net margin for fiscal 1999 was 17.9%. In fiscal 1998, net margin was 16.0%,
excluding a $242,000 extraordinary gain, up from 15.3% in fiscal 1997.
Graphic Ommitted [Operating Margin - Fiscal Years 97,98,99]
Graphic Ommitted [Income from Operations - Fiscal Years 97,98,99]
Graphic Ommitted [Net Income - Fiscal Years 97,98,99]
15
LIQUIDITY
Cash generated by operating activities advanced 20.3% to $25.6 million for
fiscal 1999 compared to $21.3 million in fiscal 1998. This increase reflected
higher levels of profitability, increased deferred fees and commissions and
higher depreciation and amortization expenses.
CAPITAL EXPENDITURES
Capital expenditures in fiscal 1999 were $16.5 million, compared to $12.0
million in fiscal 1998. During fiscal 1999, the Greenwich, Connecticut, and New
York computer centers underwent major upgrades. Two Compaq GS 140 mainframe
systems were purchased and installed. Main memory in each of the 12 mainframe
systems increased 60% to 16 gigabytes and system-wide disk storage space was
boosted to 2.5 terabytes. Furniture and fixture and leasehold improvements
contributed $6.2 million to the capital expenditure total. Four new offices were
opened in North America and Asia Pacific during fiscal 1999.
FINANCING OPERATIONS AND CAPITAL NEEDS
Cash, cash equivalents and investments totaled $54.8 million and
represented 54% of total assets at August 31, 1999. All capital and operating
expenses were financed with cash generated from operations. The Company has no
outstanding debt.
REVOLVING CREDIT FACILITIES
The Company has two revolving credit facilities in an aggregate principal
amount of up to $25 million available 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
In June 1999, the board of directors approved a quarterly dividend of $0.05
per share. The cash dividend was paid in September 1999 to common stockholders
of record on August 31, 1999.
INCOME TAXES
The effective tax rate for fiscal 1999 was 39% compared to 44% a year ago.
Included in the 1999 effective tax rate was the net effect of concluding two
state income tax audits. Without considering the favorable effect of the audits,
the effective tax rate would have been 42% and is expected to approach that rate
in fiscal 2000.
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 in the audit process but the
Company has no reason to believe that the audits will result in additional tax
payments that would have a material adverse effect on its results of operations
or financial position.
16
MARKET SENSITIVITIES
In the ordinary course of business, the Company is exposed to financial
risks involving equity, interest rates and foreign currency markets.
During the past three fiscal years, the U.S. and European equity markets
have reached record highs. Historically, there has been little correlation
between results of the Company's operations and the performance of global equity
markets. However, an extended global stock market decline could negatively
impact a majority of the Company's clients (investment management firms and
investment banks) and increase the likelihood of personnel reductions among
FactSet's existing and potential clients.
The fair market value of the Company's investment portfolio at August 31,
1999 was $22.9 million. Changes in interest rates impact this fair market value.
The portfolio of fixed income investments is managed to preserve principal and
contains instruments entered into for purposes other than trading. Under 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 portfolios are managed such that weighted average
duration of short-term investments does not exceed 18 months. The average
duration of interest sensitive investments was 0.66 years at August 31, 1999.
Accordingly, a 10% increase or decrease in interest rates would cause the fair
value of investments to change by approximately $1.5 million. Investments such
as puts, calls, strips, straddles, short sales, futures, options 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 at a low
level.
All investments are held in U.S. dollars and approximately 95% of the
Company's revenues are received in U.S. dollars. Accordingly, exposure to
movements in foreign currency prices is expected to continue to be
insignificant.
YEAR 2000
Many companies are confronted with business risks associated with the Year
2000 (Y2K) because many computer hardware systems and software programs use only
two digits to indicate a year. These systems and programs may incorrectly
process dates beyond 1999, resulting in information errors or system failures.
FactSet has been working on issues concerning Y2K since the fall of 1997 and has
made substantial efforts to ensure against significant problems resulting from
Y2K-related issues. The Y2K issue extends beyond the Company's internal
back-office systems to its mainframe centers, related application programs and
the communication network that support the entire client base. Given the
importance of this issue, the Company has taken numerous actions to analyze,
assess and remediate Y2K vulnerability.
THE COMPANY'S STATE OF READINESS. Three broad areas have been identified as
potential concerns for Y2K-related problems. They are 1) the FactSet online
system, 2) FactSet's internal infrastructure and 3) client remediation efforts
relating to Y2K.
THE FACTSET ONLINE SYSTEM. The core product FactSet provides is extremely
dependent on its computer systems correctly handling and manipulating dates; it
is a critical aspect
17
of FactSet's ability to do business and the Company has taken a number of steps
to make the FactSet online system Y2K compliant.
With respect to Y2K compliance, the FactSet online system can be broken up
into four components. They are: 1) the user interface, 2) the internal
applications that deliver data from databases to the end user's desktop, 3) the
databases that contain the information received from vendors and 4) the method
of transmitting the data from vendors to FactSet and from FactSet to clients.
The Company has tested the FactSet online system and believes that no further
significant Y2K alterations are necessary to be Y2K compliant.
Determining the specific enhancements necessary to make the online system
compliant was a major priority and, consequently, Y2K enhancements to the
FactSet online system's user interface are in place. Having achieved this, the
Company's clients are able to proceed with their own remediation efforts without
concern for any unexpected changes in the FactSet online system. The online
system now universally accepts four-digit years wherever a year specification
can be made.
Source code comprising the FactSet online system has been reviewed by
application engineers to ensure that dates beyond the year 2000 are handled
properly. To ensure the completion of the process, an inventory of all system
applications was made to confirm that all systems have been updated. Quality
assurance testing has also been done on all online applications to test for Y2K
compliance problems.
Underlying all FactSet online applications are the databases. Many of them
contain historical information and therefore dates to which those data items
correspond. As part of FactSet's compliance effort, all such databases have been
reviewed to ensure that dates and historical data beyond the year 2000 can be
accommodated. Many of the databases were already compliant, with most of the
more recently added databases designed to store years as four-digit integers. An
inventory of all FactSet databases has been made to identify which databases are
compliant and which are not. Virtually all of FactSet's databases are now
internally Y2K compliant. Remediation efforts to make all databases compliant
are expected to be completed in the fourth calendar quarter of 1999.
The online system contains information received from more than 40 vendors.
A critical part of FactSet's compliance effort involves insuring that the flow
of information from the suppliers to FactSet continues uninterrupted into the
new millennium. Fortunately, FactSet has flexibility in processing the
information; instead of receiving tightly packaged "databases" from its vendors,
the Company receives transmissions upon which programs are written to load the
information contained therein into databases stored on mainframes. These
programs have all been written by in-house engineers and can therefore be
customized to accommodate changes that a vendor may make to its transmission
format in order to achieve compliance.
FactSet continues to assess the Y2K readiness of its database suppliers.
The Company maintains regular discussions with its vendors and has been
encouraging them to prepare and transmit data that is Y2K compliant. Where
applicable, test transmissions were also requested to simulate the update
process with post-2000 data. FactSet has also reviewed public statements made by
many of its database vendors with respect to Y2K issues. The Company believes
that data transmitted after December 31, 1999 will be compliant.
18
INTERNAL INFRASTRUCTURE. FactSet is no different from many organizations in its
dependence on external systems that are a critical part of its infrastructure.
These systems include, but are not limited to, the mainframe systems, phone
systems, accounting and payroll systems and the physical systems including
heating, air conditioning and utilities. FactSet has 12 Compaq GS 140 mainframe
systems and has reviewed public information from Compaq's Web site stating that
no interruption or failure of its mainframe systems is anticipated from Y2K
issues. The Company also faces Y2K issues from third-party telecommunications
systems over which clients access its services. The Company has reviewed public
information from its significant telecommunications providers concerning Y2K
compliance and there has been no indication that Y2K issues will cause a
significant failure or interruption of telecommunications services. The
suppliers of significant internal back-office systems (accounting and payroll)
have also been queried for confirmation that their software is Y2K ready. The
Company has reviewed public statements made by these suppliers and, to date,
there has been no indication that the systems/software provided by these
suppliers will result in any Y2K-related problems.
CLIENT REMEDIATION EFFORTS. FactSet is concerned not only with ensuring the
compliance of its online system, but also with ensuring that its clients do not
encounter significant Y2K difficulties when using FactSet. The flexibility of
the FactSet system provides its clients the opportunity to create customized
"models" that can take the form of spreadsheet reports, private databases or
formulas. Users can program their use of FactSet in much the same way a systems
programmer does. However, the compliance of a programming language does not
necessarily ensure the compliance of all the programs written in that language.
Some of FactSet's most sophisticated clients have thousands of proprietary
models on the FactSet mainframes. A certain amount of remediation effort is
needed by the Company's clients, regardless of what FactSet had done to provide
a smooth Y2K transition.
FactSet has been and is continuing to facilitate the remediation efforts of
its clients and has developed tools for this purpose. The Company has
implemented a test to simulate the operation of its online system in a post-2000
environment. The "Y2K Testbed" provides clients with the ability to perform
remediation testing on their internal systems that may depend on information
from FactSet's online system. The testbed connects the live FactSet online
system and all its applications to databases cast forward beyond the year 2000.
This allows for testing of the entire process that takes the data from the
mainframes through the applications and ultimately to the user desktop.
FactSet released the Y2K Auditor in March 1999, a software program to
facilitate further remediation testing by clients. The Y2K Auditor is an online
application that scans client models for potential Y2K issues, identifying
whether a given model should continue to operate properly, or whether some
remediation is required.
FactSet has made efforts to heighten client awareness of its Y2K
initiatives, including a direct mail campaign and making available documentation
concerning Y2K on its Web site. Clients have also had opportunities to attend
Y2K forums sponsored by FactSet. Held in over a dozen cities worldwide, the
forums presented an overview of FactSet's compliance strategy and introduced the
remediation tools available to assist each client's transition into the next
millennium.
19
During the course of 1999, three "rollforward" tests were conducted to
fully test the operation of the online system with the mainframe system clocks
actually cast forward into the next millennium. None of these tests revealed any
material problems about FactSet's Y2K readiness; however, the rollforward tests
did not cover data delivery methods. During the final two tests, clients were
also allowed to conduct their own tests while connected to the online system in
this "rollforward" environment. Dozens of users participated in these tests and
none reported significant Y2K-related problems.
CONTINGENCY PLANS. The Company's Y2K project team has developed contingency
plans to address worst case scenarios regarding Y2K. These plans supplement many
levels of redundancy already built into the FactSet information technology
structure.
The New York and Greenwich, Connecticut, data centers are operated as "hot"
sites, each designed to run at roughly 50% of capacity. If one data center
should fail or require shutdown, the other should have more than sufficient
capacity to carry the entire client base. Each data center is serviced by
separate public utility companies, thus reducing the dependency on a single
source of electrical power. In addition, nearly every client has at least two
methods of accessing the data centers, reducing dependency on a single
communications carrier.
The extent of preparation and readiness for Y2K varies among the Company's
data vendors. Contingency plans have been made so that FactSet will not rely on
the ability of data vendors to provide Y2K compliant data. Programs have been
tested and are designed to adjust data to be Y2K compliant if a data supplier
does not provide it in a specifically compliant format. Should the electronic
transmission of any data from any of the Company's vendors fail, there are plans
to secure data on tape from major vendors for separate upload to FactSet's two
data centers.
COSTS TO ADDRESS YEAR 2000. Costs relating to Y2K projects principally relate to
salaries of in-house software engineers and are not incremental to recurring
operating expenses. Internal costs incurred are not separately tracked and
recorded; however, based on the estimated time needed by FactSet staff to
prepare all FactSet systems to be Y2K compliant, past and future costs amount to
approximately $2.0 million and $1.0 million, respectively, and have been
expensed as incurred. Y2K changes take place at the Company's mainframe centers
and do not require a separate program installation on each client's personal
computer or supporting network. Y2K compliance matters have not delayed and are
not expected to delay any upcoming information technology projects.
RISKS OF YEAR 2000. The failure to correct a material Y2K problem could result
in an interruption in, or a failure of, certain normal business activities.
There can be no assurances that the databases distributed by the Company, or
related applications, the mainframes, communications and back-office systems, do
not contain undetected errors or defects associated with Y2K date functions. Due
to the general uncertainty inherent in the Y2K problem, resulting in part from
the Y2K readiness or lack of readiness of third parties beyond the Company's
control, including clients, it is impossible to determine at this time whether
the Y2K problem will have a material impact on the Company. Although the Company
believes its Y2K efforts will be successful and does not anticipate the cost
20
of compliance to be material, any failure or delay to address Y2K issues could
result in a major disruption of its business, damage to the Company's
reputationand a material adverse change in its results of operations, cash flows
and financial position.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use, was issued. This
statement is effective for the Company's fiscal year ending August 31, 2000. The
impact from adopting this statement on the Company's results of operations and
financial position will not be material.
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
was issued in 1998 and establishes accounting and reporting standards for
derivative instruments. It requires that derivatives be recorded at fair value
as either assets or liabilities in the Statements of Financial Condition.
Additionally, the fair value adjustments will impact either stockholders' equity
or net income, depending whether the derivative instrument qualifies as a hedge
and, if so, the nature of the hedging activity. The Company is required to adopt
this new standard in fiscal year 2001. The impact from adoption on the Company's
results of operations and financial position is not expected to be material
because, at present, the Company does not use derivatives to hedge risks
associated with equity, interest rates or foreign currency markets. The actual
impact, however, will depend on the fair values of derivative instruments the
Company may hold at the time of adoption.
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," "believes," "could," "continues," "will not," "is
expected," "may," "does not anticipate," "will have," "will result," "are
expected," "are not expected," "can," "will be," "is anticipated," "is
continuing," "should have," "no indication" and "will not" 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 success of Y2K compliance activities; the negotiation of contract terms
supporting new and existing databases; the 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
sustaining the past growth in rates of profitability and cash flow generation.
21
CONSOLIDATED STATEMENTS OF INCOME
FactSet Research Systems Inc.
Thousands, except per share data Years Ended August 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Subscription Revenues
Commissions $ 39,982 $ 33,581 $ 27,028
Cash fees 63,849 45,330 31,330
------ ------ ------
Total subscription revenues 103,831 78,911 58,358
------- ------ ------
- --------------------------------------------------------------------------------------------------------------------
Expenses
Cost of services 37,335 30,605 23,353
Selling, general and administrative 37,866 27,423 20,143
------ ------ ------
Total operating expenses 75,201 58,028 43,496
------ ------ ------
- --------------------------------------------------------------------------------------------------------------------
Income from operations 28,630 20,883 14,862
Other income 1,987 1,556 871
----- ----- ---
Income before income taxes and extraordinary gain 30,617 22,439 15,733
Income taxes 12,052 9,830 6,803
------ ----- -----
Net income before extraordinary gain 18,565 12,609 8,930
Extraordinary gain, net of $191 of taxes - 242 -
------ ------ ------
Net income $ 18,565 $ 12,851 $ 8,930
========= ========= =========
- --------------------------------------------------------------------------------------------------------------------
Weighted average common shares (basic)* 15,405 14,445 14,319
Weighted average common shares (diluted)* 16,651 16,470 16,257
- --------------------------------------------------------------------------------------------------------------------
Basic earnings per common share* $ 1.21 $ 0.89 $ 0.62
Diluted earnings per common share* $ 1.11 $ 0.78 $ 0.55
- --------------------------------------------------------------------------------------------------------------------
* Number of shares outstanding and earnings per share amounts give retroactive
effect to the 3-for-2 stock split that occurred on February 5, 1999.
The accompanying notes are an integral part of these consolidated
financial statements.
23
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
FactSet Research Systems Inc.
Assets
Thousands At August 31, 1999 1998
- --------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $ 31,837 $ 37,631
Investments 22,934 -
Receivables from clients and clearing brokers 14,399 11,121
Receivables from employees 614 533
Deferred taxes 6,437 4,034
Other current assets 413 921
--- ---
Total current assets 76,634 54,240
------ ------
- --------------------------------------------------------------------------------------------------
Long-Term Assets
Property, equipment and leasehold improvements, at cost 55,334 38,839
Less accumulated depreciation (33,951) (24,159)
------- -------
Property, equipment and leasehold improvements, net 21,383 14,680
- --------------------------------------------------------------------------------------------------
Other Long-Term Assets
Deferred taxes 1,785 1,250
Other assets 1,742 386
- --------------------------------------------------------------------------------------------------
Total Assets $ 101,544 $ 70,556
========= =========
- --------------------------------------------------------------------------------------------------
24
Liabilities and Stockholders' Equity
Thousands, except per share data At August 31, 1999 1998
- --------------------------------------------------------------------------------------------------
Current Liabilities
Accounts payable and accrued expenses $ 6,657 $ 4,847
Accrued compensation 7,558 6,155
Deferred cash fees and commissions 6,964 4,546
Dividend payable 788 -
Current taxes payable 1,522 3,513
----- -----
Total current liabilities 23,489 19,061
------ ------
- --------------------------------------------------------------------------------------------------
Non-Current Liabilities
Deferred rent 441 471
--- ---
- --------------------------------------------------------------------------------------------------
Total liabilities 23,930 19,532
------ ------
Lease commitments (see Note 12)
- --------------------------------------------------------------------------------------------------
Stockholders' Equity
Preferred stock, $0.01 par value, 10,000,000
shares authorized, none issued - -
Common stock, $0.01 par value, 40,000,000 shares
authorized, 15,882,409 and 14,604,399 shares issued;
15,769,316 and 14,509,560 shares outstanding at
August 31, 1999 and 1998, respectively 158 148
Capital in excess of par value 14,160 2,933
Retained earnings 64,610 48,388
Unrealized gain on investments, net of taxes 7 -
------ ------
78,935 51,469
Less treasury stock - 113,093 and 94,839 shares at
August 31, 1999 and 1998, respectively, at cost 1,321 445
--- ---- ----- ----- ---
Total stockholders' equity 77,614 51,024
------ ------
- --------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 101,544 $ 70,556
========= =========
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
25
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FactSet Research Systems Inc.
Thousands Years Ended August 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Common Stock
Balance, beginning of year $ 148 $ 147 $ 147
Exercise of stock options 10 1 -
- --------------------------------------------------------------------------------------------------------------------
Balance, end of year 158 148 147
- --------------------------------------------------------------------------------------------------------------------
Capital in Excess of Par Value
Balance, beginning of year 2,933 1,995 1,431
Additional stock issued for ESOP 874 600 500
Exercise of stock options 2,861 338 64
Income tax benefits from
option exercises 7,492 - -
- --------------------------------------------------------------------------------------------------------------------
Balance, end of year 14,160 2,933 1,995
- --------------------------------------------------------------------------------------------------------------------
Unrealized Gain on Investments,
Net of Taxes
Balance, beginning of year - 239 176
Change in unrealized gain
on investments, net of taxes 7 (239) 63
- --------------------------------------------------------------------------------------------------------------------
Balance, end of year 7 - 239
- --------------------------------------------------------------------------------------------------------------------
Retained Earnings
Balance, beginning of year 48,388 35,537 26,607
Net income 18,565 12,851 8,930
Dividends (2,343) - -
- --------------------------------------------------------------------------------------------------------------------
Balance, end of year 64,610 48,388 35,537
- --------------------------------------------------------------------------------------------------------------------
26
Thousands Years Ended August 31, 1999 1998 1997
Treasury Stock
Balance, beginning of year (445) (291) (164)
Repurchase of common stock (876) (154) (127)
- --------------------------------------------------------------------------------------------------------------------
Balance, end of year (1,321) (445) (291)
- --------------------------------------------------------------------------------------------------------------------
Total Equity
Balance, beginning of year 51,024 37,627 28,197
Additional stock issued for ESOP 874 600 500
Repurchase of common stock (876) (154) (127)
Exercise of stock options 2,871 339 64
Change in unrealized gain on investments, net of taxes 7 (239) 63
Income tax benefits from option exercises 7,492 - -
Net income 18,565 12,851 8,930
Dividends (2,343) - -
- --------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 77,614 $ 51,024 $ 37,627
- --------------------------------------------------------------------------------------------------------------------
Comprehensive Income
Net income $ 18,565 $ 12,851 $ 8,930
Unrealized gain on investments, net of taxes 7 - 63
- --------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 18,572 $ 12,851 $ 8,993
- --------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
27
CONSOLIDATED STATEMENTS OF CASH FLOWS
FactSet Research Systems Inc.
Thousands Years Ended August 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 18,565 $ 12,851 $ 8,930
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 9,792 6,557 4,737
Deferred tax benefit (2,938) (1,208) (1,238)
Accrued ESOP contribution 1,000 750 600
Gain on sale of investment - (433) -
------ ------ ------
Net income adjusted for non-cash items 26,419 18,517 13,029
Changes in working capital
Receivables from clients and clearing brokers (3,278) (3,786) (1,154)
Receivables from employees (81) 16 397
Accounts payable and accrued expenses 1,810 2,539 1,061
Accrued compensation 1,153 2,329 1,596
Deferred cash fees and commissions 2,418 47 701
Current taxes payable (1,991) 1,086 1,633
Other working capital accounts, net (883) 508 (231)
------ ------ ------
Net cash provided by operating activities 25,567 21,256 17,032
- --------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
(Purchases) Sales of investments (22,923) 1,389 (43)
Purchases of property, equipment and
leasehold improvements (16,495) (12,015) (6,268)
Retirements of property, equipment and
leasehold improvements - - 458
------- ------- ------
Net cash used in investing activities (39,418) (10,626) (5,853)
- --------------------------------------------------------------------------------------------------------------------
28
Thousands Years Ended August 31, 1999 1998 1997
Cash Flows from Financing Activities
Dividend payments (1,430) - -
Repurchase of common stock from employees (876) (154) (127)
Proceeds from exercise of stock options 2,871 339 64
Income tax benefits from option exercises 7,492 - -
----- ----- -----
Net cash provided by (used in) financing activities 8,057 185 (63)
- --------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (5,794) 10,815 11,116
Cash and cash equivalents at beginning of year 37,631 26,816 15,700
------ ------ ------
Cash and cash equivalents at end of year $ 31,837 $ 37,631 $ 26,816
========= ======== =========
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for income taxes $ 11,868 $ 10,134 $ 6,145
========= ========= =========
- --------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Non-Cash Flow Information
Issuance of stock during the year for purchase of
common shares for the ESOP $ 750 $ 600 $ 500
========= ========= =========
Dividends declared, not paid $ 788 - -
========= ========= =========
- --------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
29
Notes to Consolidated Financial Statements
FactSet Research Systems Inc.
August 31, 1999, 1998 and 1997
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 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 and Exchange Act of
1934. FDS does not otherwise engage in the securities business.
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 FDA's
account.
FactSet Limited and FactSet Pacific, Inc. are wholly owned subsidiaries of
the Company and are U.S. corporations with foreign branch operations in London,
Tokyo, Hong Kong and Sydney.
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. A reclassification of $3,064 and $2,097 in
fiscal 1998 and 1997, respectively, was made this year. These amounts were
previously listed on the financial statements as other expenses and are now
included as SG&A to conform with the current year presentation.
Cost of services is composed of employee compensation and benefits for the
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 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
30
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 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
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 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 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. 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.
INCOME AND DEFERRED TAXES. Deferred taxes are determined by calculating the
future tax consequences associated with differences between financial accounting
and tax bases of assets and liabilities. A valuation allowance is established to
the extent management considers it more likely than not that some portion or all
of the deferred tax assets will not be realized. The effect on deferred taxes
from income tax law changes is recognized immediately upon enactment. The
deferred tax provision is derived from changes in deferred taxes on the balance
sheet and reflected on the Consolidated Statements of Income as a component of
income taxes. The Company records deferred taxes for such
31
items as accrued liabilities; deferred cash fees and commissions; deferred rent;
and property, equipment and leasehold improvements, net of depreciation and
amortization.
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 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
all years presented for the 3-for-2 stock split that occurred on February 5,
1999. Diluted earnings per share is based on the weighted average number of
common shares and potentially dilutive common shares. 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. As discussed in Note 14, "Stock Option Plans," the
Company follows the disclosure-only provisions of SFAS No. 123, Accounting for
Stock-Based Compensation.
NEW ACCOUNTING PRONOUNCEMENTS. The Company adopted SFAS No. 130, Reporting
Comprehensive Income, in fiscal year 1999. SFAS 130 establishes standards for
the reporting and display of comprehensive income and its components in the
financial statements. The difference between comprehensive income and net income
is displayed in the Consolidated Statements of Changes in Stockholders' Equity.
This statement did not have any effect on the Company's financial position or
results of operations, as it requires only additions to current disclosures.
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
was issued in 1998 and establishes accounting and reporting standards for
derivative instruments. It requires that derivatives be recorded at fair value
as either assets or liabilities in the Statements of Financial Condition.
Additionally, the fair value adjustments will impact either stockholders' equity
or net income, depending whether the derivative instrument qualifies as a hedge
and, if so, the nature of the hedging activity. The Company is required to adopt
this new standard in fiscal year 2001. The impact from adoption on the Company's
results of operations and financial position is not expected to be material
because, at present, the Company does not use derivatives to hedge risks
associated with equity, interest rates or foreign currency markets. The actual
impact, however, will depend on the fair values of derivative instruments the
Company may hold at the time of adoption.
In March 1998, Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use, was issued. This
statement is effective for the Company's fiscal year ending in August 31, 2000.
The impact from adopting this statement on the Company's results of operations
and financial position will not be material.
32
3. COMMON STOCK AND EARNINGS PER SHARE
Shares of common stock and related amounts give retroactive effect for a
3-for-2 stock split for all years presented. The stock split was effected as a
stock dividend and occurred on February 5, 1999. Shares of common stock
outstanding were as follows:
Thousands Years Ended August 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Balance, beginning of year 14,510 14,353 14,290
Additional stock issued for ESOP 40 33 36
Exercise of stock options 1,237 132 36
Repurchase of common stock (18) (8) (9)
--- -- --
Balance, end of year 15,769 14,510 14,353
====== ====== ======
- --------------------------------------------------------------------------------------------------------------------
A reconciliation between the weighted average shares outstanding used in
the basic and diluted EPS computations is as follows:
Income Shares Per Share
Thousands, except per share data (Numerator) (Denominator) Amount
- ------------------------------------------- -------------------------------------------------------------------------
Fiscal 1999
Basic EPS
Income available to common stockholders $ 18,565 15,405 $1.21
Diluted EPS
Dilutive effect of stock options - 1,246
------ -----
Income available to common stockholders $ 18,565 16,651 $1.11
====== ======
- ---------------------------------------------------------------------------------------------------------------------
Fiscal 1998
Basic EPS
Income available to common stockholders $ 2,851 14,445 $0.89
Diluted EPS
Dilutive effect of stock options - 2,025
------ ------
Income available to common stockholders $ 12,851 16,470 $0.78
======== ======
- ---------------------------------------------------------------------------------------------------------------------
Fiscal 1997
Basic EPS
Income available to common stockholders $ 8,930 14,319 $0.63
Diluted EPS
Dilutive effect of stock options - 1,938
------ ------
Income available to common stockholders $ 8,930 16,257 $0.55
======== ======
- ---------------------------------------------------------------------------------------------------------------------
33
4. SUBSCRIPTION REVENUES
Each client has the option to pay subscription charges either in the form
of commissions on securities transactions or on a cash basis, regardless of the
nature or amount of the services provided by FactSet to such client. When a
client elects to pay subscription charges in the form of commissions, the
Company incurs clearing fees, which are charges imposed by the clearing broker
used to execute and settle clients' securities transactions. For commission
transactions, the dollar amount payable to the Company is higher than the fee
that would be payable for the same services on a cash basis because of the
associated clearing fees incurred by the Company. However, commissions net of
related clearing fees approximate fees that would be paid by a client on a cash
basis.
Subscription revenues consists of the following:
Thousands Years Ended August 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
Commissions $ 39,982 $ 33,581 $ 27,028
Cash fees 63,849 45,330 31,330
------ ------ ------
$ 103,831 $ 78,911 $ 58,358
========= ====== ======
- ----------------------------------------------------------------------------------------------------------------
Clearing fees paid by the Company related to commissions on securities
transactions were $6,496,000, $5,842,000 and $4,687,000 for fiscal years 1999,
1998 and 1997, respectively.
5. RECEIVABLES FROM CLIENTS AND CLEARING BROKERS
Receivables from clients and clearing brokers consists of the following:
Thousands At August 31, 1999 1998
- ----------------------------------------------------------------------------------------------
Receivables from clients-cash fees $ 9,706 $ 6,950
Receivables from clients-commissions 2,948 2,896
Receivables from clearing brokers 1,745 1,275
----- -----
$ 14,399 $ 11,121
========= =========
- ----------------------------------------------------------------------------------------------
Receivables from clients-cash fees and receivables from clients-commissions
are reflected net of aggregate allowances for doubtful accounts of $927,000 and
$672,000 at August 31, 1999 and 1998, respectively.
6. INVESTMENTS
The Company maintains a portfolio of investments that is managed to
preserve principal. Under the investment guidelines established by the Company,
third-party managers construct portfolios to achieve liquidity, credit quality
and diversification. The weighted average duration of the Company's portfolios
are managed not to exceed 18 months. Eligible investments include obligations
issued by the United States Treasury and other governmental agencies, money
market securities and highly rated commercial paper. Investments such as puts,
calls, strips, straddles, short sales, futures, options, commodities, precious
metals or investments on margin are not permitted under the Company's investment
guidelines. All investments are held in U.S. dollars.
34
The Company held an investment in a limited partnership that invested
primarily in convertible bonds and preferred stocks. During fiscal 1998, this
investment was sold and a $242,000 after-tax extraordinary gain was recorded.
There were no investments at August 31, 1998.
Investments, classified as available-for-sale securities, consists of the
following:
Unrealized
Thousands At August 31, 1999 Cost Basis Fair Value Gain
- ----------------------------------------------------------------------------------------------------------------
Investment portfolios $22,923 $22,934 $11
====== ====== ==
- ----------------------------------------------------------------------------------------------------------------
7. RECEIVABLES FROM EMPLOYEES
Receivables from employees consists of the following interest-bearing and
non-interest-bearing promissory notes and advances to employees of the Company:
Thousands At August 31, 1999 1998
- ----------------------------------------------------------------------------------------------
Non-interest-bearing promissory demand notes and
advances to employees $ 32 $252
6% demand notes from employees 582 281
--- ---
$614 $533
=== ===
- ----------------------------------------------------------------------------------------------
8. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consists of the following:
Thousands At August 31, 1999 1998
- ----------------------------------------------------------------------------------------------
Computers and related equipment $39,844 $29,543
Leasehold improvements 8,516 4,531
Furniture, fixtures and other 6,974 4,765
----- -----
Subtotal 55,334 38,839
Less accumulated depreciation and amortization (33,951) (24,159)
------- -------
$21,383 $14,680
====== ======
- ----------------------------------------------------------------------------------------------
9. DEFERRED CASH FEES AND COMMISSIONS
Subscription revenues recorded as commissions and subscription revenues
recorded as cash fees are each recorded as earned each month, based on
one-twelfth of the annual subscription charge quoted to each client. 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.
35
Deferred cash fees and commissions consists of the following:
Thousands At August 31, 1999 1998
- ----------------------------------------------------------------------------------------------
Deferred cash fees $ 837 $ 500
Deferred commissions 6,127 4,046
----- -----
$6,964 $4,546
====== =====
- ----------------------------------------------------------------------------------------------
10. INCOME TAXES
The provision for income taxes consists of the following:
Thousands Years Ended August 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
Current tax expense
U.S. federal $12,190 $ 7,691 $ 5,654
State and local 2,800 3,347 2,387
----- ----- -----
Total current taxes 14,990 11,038 8,041
====== ====== =====
Deferred tax benefit
U.S. federal (2,195) (842) (870)
State and local (743) (366) (368)
---- ---- ----
Total deferred taxes (2,938) (1,208) (1,238)
------ ------ ------
Total tax provision $12,052 $ 9,830 $ 6,803
====== ===== =====
- ----------------------------------------------------------------------------------------------------------------
Deferred tax assets consists of the following:
Thousands At August 31, 1999 1998
- ----------------------------------------------------------------------------------------------
Deferred tax assets
Current
Deferred fees and commissions $2,918 $1,955
Accrued liabilities 3,519 2,079
----- -----
Total current deferred taxes 6,437 4,034
----- -----
Non-current
Property, equipment and
leasehold improvements, net 1,575 1,008
Deferred rent 210 242
--- ---
Total non-current deferred taxes 1,785 1,250
----- -----
Gross deferred tax assets 8,222 5,284
Deferred tax asset valuation allowance - -
----- -----
$8,222 $5,284
===== =====
- ----------------------------------------------------------------------------------------------
36
Included in accounts payable and accrued expenses are accrued taxes other
than income taxes of $3.7 million and $1.8 million at August 31, 1999 and 1998,
respectively.
In the normal course of business, the Company's tax filings are subject to
audit by federal and state tax authorities. There is inherent uncertainty in the
audit process but the Company has no reason to believe that audits will result
in additional tax payments that would have an adverse effect on its results of
operations or financial position.
The provisions for income taxes differ from the amount of income tax
determined by applying the U.S. statutory federal income tax rate to income
before income taxes as a result of the following factors:
Thousands Years Ended August 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
Tax at statutory U.S. tax rate $10,716 $7,854 $5,396
Increase (Decrease) in taxes from
state and local taxes, net of
U.S. federal income tax benefit 2,013 1,660 1,308
Tax benefit from
income tax audits, net (776) - -
Other, net 99 316 99
-- --- --
Provision for income taxes $12,052 $9,830 $6,803
======= ===== =====
- ----------------------------------------------------------------------------------------------------------------
11. NET CAPITAL
As a registered broker-dealer, FDS is subject to Rule 15c3-1 under the
Securities and Exchange Act of 1934, which requires that FDS maintain minimum
net capital equal to the greater of $5,000 or 6.67% of aggregate indebtedness
and a ratio of aggregate indebtedness to net capital of not more than 15 to 1
(the "minimum net capital requirement"). FDS may be prohibited from paying cash
dividends to the Company if such dividends would result in its net capital
falling below the minimum net capital requirement or its ratio of aggregate
indebtedness to net capital exceeds 15 to 1.
At all times during the years presented, FDS had net capital in excess of
its minimum net capital requirement. At August 31, 1999, FDS had net capital of
$3,112,168, which was $2,703,680 in excess of its minimum net capital
requirement of $408,488. The ratio of aggregate indebtedness to net capital was
1.97 to 1.
12. LEASE COMMITMENTS
The Company leases office space in Greenwich and Stamford, Connecticut; New
York; Boston; San Mateo, California; London; Tokyo; Hong Kong and Sydney. The
leases have a weighted average remaining term of 5.2 years, expire on various
dates through July 2009 and require a minimum annual aggregate rental payment of
$3,459,884. Total minimum rental payments associated with the leases are
recorded as rent (a component of selling, general and administrative expenses)
on a straight-line basis over the period of the lease term.
37
At August 31, 1999, the Company's lease commitments for office space, with
noncancelable lease terms in excess of one year, provide for the following
minimum annual rentals:
Thousands
- -----------------------------------------------------------------------
Years Ended August 31,
2000 $ 3,460
2001 3,449
2002 3,321
2003 3,305
2004 1,298
Thereafter 3,184
-----
Minimum lease payments $18,017
======
- -----------------------------------------------------------------------
During fiscal 1999, 1998 and 1997, rental expense amounted to approximately
$3,902,000, $2,850,000 and $2,502,000, respectively.
At August 31, 1999, standby letters of credit aggregating approximately
$301,412 have been issued on behalf of the Company serving as security deposits
for leased premises.
13. EMPLOYEE STOCK OWNERSHIP PLAN
The Company sponsors an Employee Stock Ownership Plan (the "Plan" or
"ESOP"). The Company may make optional annual contributions for the benefit of
participating employees in such amounts as designated by the board of directors.
The board of directors authorized contributions in the amounts of $1,000,000,
$750,000 and $600,000, for the years ended August 31, 1999, 1998 and 1997,
respectively. Such contributions are recorded in cost of services and selling,
general and administrative as compensation expense. Issuance of the related
common shares occurs shortly after contributions are authorized, generally in
the following fiscal year.
Employees of the Company and its subsidiaries who have performed at least
1,000 hours of service during the year are generally eligible to participate in
the Plan. The Company contribution allocated to an individual account begins to
vest upon completion of the employee's third year of service at the rate of 20%
in each successive year of service. Forfeited non-vested interests in the Plan
are allocated to the other participants' accounts.
The Plan held 1,227,821, 1,243,251 and 1,210,449 shares of the Company's
common stock at August 31, 1999, 1998 and 1997, respectively, after considering
the retroactive effect of the 3-for-2 stock split that occurred on February 5,
1999.
14. STOCK OPTION PLANS
The Company's Stock Option Plans (the "Plans") make available for purchase
3,946,500 shares of common stock in aggregate. In fiscal 1995, incentive and
non-qualified stock options to purchase 2,221,500 shares of common stock at
prices which
38
ranged from $1.67 to $1.80 per share were granted to employees of the Company.
In fiscal years 1999, 1998 and 1997, incentive and non-qualified stock options
to purchase 390,800, 535,500 and 316,500 shares of common stock, respectively,
at prices which ranged from $12.50 to $46.75 were granted to employees and
non-employee directors of the Company. Option shares and exercise prices give
retroactive effect to the 3-for-2 stock split that occurred on February 5, 1999.
Options granted under the Plans expire not more than ten years from the
date of grant and vest at a rate of 20% per year beginning one year after the
grant date. The option exercise prices equal the fair market value of the
Company's stock on the date of the option grant. Options are not transferable or
assignable other than by will or the laws of descent and distribution. During
the grantee's lifetime, they may be exercised only by the grantee.
A summary of the status of the Company's stock option plans at August 31,
1999, 1998 and 1997, and changes during each of the years then ended is
presented below:
1999 1998 1997
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Exercise Exercise Exercise
Thousands, except price data Shares Price Shares Price Shares Price
- ----------------------------------------------------------------------------------------------------------------
Outstanding, beginning of
fiscal year 2,889 $ 6.35 2,503 $ 3.31 2,236 $ 2.03
Granted 392 38.68 536 19.87 316 12.5
Exercised (1,237) 2.31 (132) 2.65 (36) 1.80
Forfeited (26) 16.85 (18) 14.26 (13) 11.75
--- ----- --- ----- --- -----
Outstanding at fiscal year end 2,018 14.95 2,889 6.35 2,503 3.31
===== ===== ===== ==== ===== ====
Exercisable at fiscal year end 683 5.76 1,473 2.32 1,116 1.85
===== ===== ===== ==== ===== ====
- ----------------------------------------------------------------------------------------------------------------
Shares and weighted average exercise price give retroactive effect to the
3-for-2 stock split that occurred on February 5, 1999.
Of the 2,018,000 options outstanding at August 31, 1999, 828,000 have an
exercise price of $1.80 per share and a weighted average remaining contractual
life of 5.2 years. Of these options, 493,000 were exercisable at August 31,
1999, at a weighted average exercise price of $1.80. The remaining 1,190,000
options outstanding have exercise prices between $11.33 and $46.75 per share,
with a weighted average exercise price of $24.11 per share and a weighted
average remaining contractual life of 8.6 years. Of these options, 190,000 were
exercisable at August 31, 1999, at a weighted average exercise price of $16.01.
The Company follows the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. As permitted by SFAS No. 123, the
Company accounts for the Plans under APB Opinion No. 25, under which no
compensation cost has been recorded. Had compensation cost for the Plans been
determined pursuant to the
39
measurement principles under SFAS No. 123, the Company's net income and earnings
per share would have been reduced to the following pro forma amounts for fiscal
years 1999, 1998 and 1997:
Thousands, except per share data As Reported Pro Forma
- ----------------------------------------------------------------------------------------------
Year Ended August 31, 1999
Net income $18,565 $17,110
Diluted earnings per common share $ 1.11 $ 1.03
Weighted average fair value of option grants $ 15.36
- ----------------------------------------------------------------------------------------------
Year Ended August 31, 1998
Net income $12,851 $12,142
Diluted earnings per common share $ 0.78 $ 0.74
Weighted average fair value of option grants $ 7.02
- ----------------------------------------------------------------------------------------------
Year Ended August 31, 1997
Net income $ 8,930 $ 8,760
Diluted earnings per common share $ 0.55 $ 0.54
Weighted average fair value of option grants $ 4.23
- ----------------------------------------------------------------------------------------------
Shares and weighted average exercise price give retroactive effect to the
3-for-2 stock split that occurred on February 5, 1999.
Disclosure of the pro forma impact from the method of accounting prescribed
by SFAS No. 123 is effective for fiscal years beginning after December 15, 1994.
As such, options granted in fiscal 1995 are excluded from the calculations of
compensation costs included in the pro forma net income and earnings per share
amounts above.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in fiscal years 1999, 1998 and 1997:
Years Ended August 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
Risk-free interest rate 5.24% 5.51% 6.10%
Expected lives of options 4.1 years 4.2 years 4 years
Expected volatility 43% 38% 31%
Dividend yield 0.4% - -
- ----------------------------------------------------------------------------------------------------------------
15. SEGMENTS
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 services financial institutions throughout North
America, while the International segment serves investment professionals located
in Europe and the Pacific Rim.
40
The International segment consists of two foreign branch operations that are
staffed mainly 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.
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 International segment. The accounting policies of the segments are the same
as those described in Note 2, "Accounting Policies."
Segment Information
Thousands U.S. International Total
- ----------------------------------------------------------------------------------------------------------------
Year Ended August 31, 1999
Revenues from external clients $88,962 $14,869 $103,831
Interest income 1,977 10 1,987
Depreciation and amortization 9,118 674 9,792
Segment operating profit* 22,579 6,051 28,630
Income tax expense 12,052 - 12,052
Total assets 95,377 6,167 101,544
Capital expenditures 15,572 923 16,495
- ----------------------------------------------------------------------------------------------------------------
Year Ended August 31, 1998
Revenues from external clients $68,938 $9,973 $78,911
Interest income 1,543 13 1,556
Depreciation and amortization 6,239 318 6,557
Segment operating profit* 16,155 4,728 20,883
Income tax expense 9,830 - 9,830
Extraordinary gain, net of $191 of taxes 242 - 242
Total assets 66,858 3,698 70,556
Capital expenditures 11,573 442 12,015
- ----------------------------------------------------------------------------------------------------------------
Year Ended August 31, 1997
Revenues from external clients $52,046 $6,312 $58,358
Interest income 867 4 871
Depreciation and amortization 4,488 249 4,737
Segment operating profit* 12,572 2,290 14,862
Income tax expense 6,803 - 6,803
Total assets 48,607 2,228 50,835
Capital expenditures 5,226 584 5,810
- ----------------------------------------------------------------------------------------------------------------
* Expenses are not allocated or charged between the 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. 41
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.
Geographic Information
Thousands Years Ended August 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
Revenues
United States $88,962 $68,938 $52,046
-------- ------- -------
United Kingdom 8,049 6,045 3,569
Other European countries 2,641 1,343 793
Asia Pacific 4,179 2,585 1,950
-------- ------- -------
Total International 14,869 9,973 6,312
-------- ------- -------
Total revenues $103,831 $78,911 $58,358
======== ======= =======
- ----------------------------------------------------------------------------------------------------------------
Long-lived Assets
United States $20,283 $13,829 $ 8,495
-------- ------- -------
United Kingdom 745 608 549
Other European countries - - -
Asia Pacific 355 243 178
-------- ------- -------
Total International 1,100 851 727
-------- ------- -------
Total revenues $21,383 $14,680 $ 9,222
======== ======= =======
- ----------------------------------------------------------------------------------------------------------------
Fees quoted by the Company are based on subscriptions to its products and
services. Around-the-clock consulting, unlimited client training and payment of
daily communication costs are significant services provided to all clients. Fees
for these services are included in subscription charges and are not separately
stated in client invoices or in the Company's accounting records. Accordingly,
disclosure of revenues by products and services is not practicable.
For the fiscal year ended August 31, 1999, no individual client accounted
for more than 4% of total revenues. Revenues from the top ten clients did not
exceed 15% of the total.
16. REVOLVING CREDIT FACILITIES
In fiscal 1999, the Company entered into two revolving credit facilities
("the facilities") that are available in aggregate principal amount of up to $25
million for working capital and general corporate purposes. The Company has not
drawn on either of the facilities. The facilities are split into two equal
tranches of $12.5 million and have terms of 364 days and three years. The
Company is obligated to pay a commitment fee on the unused portion of the
facilities at a weighted average annual rate of .175%. The facilities also
contain covenants that require the Company to maintain minimum levels of
consolidated net worth and certain leverage and fixed charge ratios. The Company
has complied with each covenant during fiscal 1999.
42
17. OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
In the normal course of business, securities transactions of clients of FDS
are introduced and cleared through clearing brokers. Pursuant to agreements
between FDS and its clearing brokers, the clearing brokers have the right to
charge FDS for unsecured losses that result from a client's failure to complete
such transactions. The Company seeks to control the credit risk of
nonperformance by evaluating the creditworthiness of its clients and by
reviewing their trading activity on a periodic basis.
Receivable from clearing brokers represents a concentration of credit risk
and relates to securities transactions cleared through two clearing brokers.
43
QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly results of operations and earnings per common share for fiscal
1999 and 1998 are as follows:
Thousands, except per share data First Second Third Fourth
- ------------------------------------------------------------------------------------------------------------------------------------
1999
Revenues $23,830 $25,235 $26,451 $28,315
Cost of services 8,511 9,053 9,503 10,268
Selling, general and administrative 8,725 9,228 9,641 10,272
Income from operations 6,594 6,954 7,307 7,775
Net income 4,320 4,515 4,846 4,884
Diluted earnings per common share* $ 0.26 $ 0.27 $ 0.28 $ 0.29
Wtd. avg. common shares (diluted)* 16,613 16,805 17,045 17,133
- ------------------------------------------------------------------------------------------------------------------------------------
1998
Revenues $17,494 $19,057 $20,196 $22,164
Cost of services 6,871 7,630 7,727 8,377
Selling, general and administrative 6,025 6,571 7,056 7,771
Income from operations 4,598 4,856 5,413 6,016
Net income 2,775 3,171 3,267 3,638
Diluted earnings per common share* $ 0.17 $ 0.19 $ 0.20 $ 0.22
Wtd. avg. common shares (diluted)* 16,455 16,424 16,562 16,617
- ------------------------------------------------------------------------------------------------------------------------------------
* Earnings per share and shares outstanding give retroactive effect to the
3-for-2 stock split that occurred on February 5, 1999.
COMMON STOCK
The principal stock exchange on which the Company's common stock (par value
$0.01 per share) is listed is the New York Stock Exchange. At October 4, 1999,
there were approximately 2,500 stockholders of the Company's common stock.
QUARTERLY STOCK PRICES
Quarterly stock prices reflect the high and low prices for FactSet's common
stock on the New York Stock Exchange composite tape for the last two fiscal
years.
First Second Third Fourth
- --------------------------------------------------------------------------------
1999*
High $28.67 $54.00 $51.25 $59.38
Low 17.33 26.92 36.68 42.19
- --------------------------------------------------------------------------------
1998*
High $22.42 $21.33 $24.67 $27.17
Low 16.67 15.58 19.71 20.46
- --------------------------------------------------------------------------------
Share prices give retroactive effect to the 3-for-2 stock split that occurred on
February 5, 1999.
44
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of FactSet Research Systems Inc.
In our opinion, the accompanying Consolidated Statements of Financial
Condition and the related Consolidated Statements of Income, Changes in
Stockholders' Equity, and Cash Flows present fairly, in all material respects,
the financial position of FactSet Research Systems Inc. and its subsidiaries at
August 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years ended August 31, 1999, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
September 10, 1999
45
DIRECTORS
Howard E. Wille
Chairman of the Board
Chief Executive Officer
Charles J. Snyder
Vice Chairman of the Board
Retired President
FactSet Research Systems Inc.
John D. Connolly
Retired Partner
Miller, Anderson & Sherrerd
West Conshohocken, Pennsylvania
David R. Korus
Managing Member
Owenoke Capital Management, LLC
New York, New York
Joseph E. Laird, Jr.
Chairman and Chief Executive Officer
Laird Squared, LLC
New York, New York
John C. Mickle
President
Sullivan, Morrissey & Mickle
Capital Management Corporation
New York, New York
Walter F. Siebecker
Managing Director
National Securities Clearing Corporation
New York, New York
MANAGEMENT
Howard E. Wille
Chairman of the Board
Chief Executive Officer
Michael F. DiChristina
President
Ernest S. Wong
Senior Vice President
Chief Financial Officer and Secretary
Timothy J. Aune
Director, Pacific Rim Operations
President of FactSet Pacific, Inc.
Scott L. Beyer
Director of European Operations
Managing Director, FactSet Limited
Jon D. Carlson
Director, Platform Engineering
Michael E. Cham
Director, Database Engineering
William F. Faulkner
Director, FactSet Enterprises
Michael D. Frankenfield
Director, Investment Banking
Philip A. Hadley
Director, Sales and Marketing
Kieran M. Kennedy
Director, Consulting Services
Edward A. Martin
Director, Information Research
Adelaide P. McManus
Chief Administrative Officer
Maurizio Nicolelli
Comptroller
Townsend Thomas
Chief Technology Officer
Director, Systems Engineering
Peter G. Walsh
Director, Planning and Control
Susan L. Warzek
Director, Marketing Communications
Daniel B. Weinstein
Director, Applications Engineering
Merle E. Yoder
Director, Product Development and Strategy
46
CORPORATE INFORMATION
Headquarters
FactSet Research Systems Inc.
One Greenwich Plaza
Greenwich, Connecticut 06830
203.863.1500 /203.863.1501 fax
Internet Address
www.factset.com
Offices
FactSet Research Systems Inc.
One Cummings Point Road
Stamford, Connecticut 06902
203.356.3700
FactSet Research Systems Inc.
90 Park Avenue
New York, New York 10016
212.476.4300
FactSet Research Systems Inc.
One Federal Street
Boston, Massachusetts 02110
617.757.1100
FactSet Research Systems Inc.
2600 Campus Drive
San Mateo, California 94403
650.286.4900
FactSet Limited
One Angel Court
London EC2R 7HJ
United Kingdom
44.207.606.0001
FactSet Pacific Inc.
Daini Okamotoya Building 8F
1-22-16 Toranomon
Minato-ku, Tokyo 105-0001
Japan
81.3.5512.7700
FactSet Pacific Inc.
Bank of America Tower, Suite 801
12 Harcourt Road
Central, Hong Kong
85.2.2584.6278
FactSet Pacific Inc.
14 Martin Place, Level 7
Sydney, NSW 2000, Australia
61.2.9224.8930
Additional information, including the Form 10-K, can be obtained from our Web
site at www.factset.com or by contacting Investor Relations at 203.863.1500.
Legal Counsel
Cravath, Swaine & Moore
New York, New York
Stock Transfer Agent/Registrar
The Bank of New York
800.524.4458
[email protected]
Common Stock Information
FactSet trades on the New York Stock Exchange under the ticker symbol "FDS."
ANNUAL MEETING
The annual meeting of stockholders will be held at 10:00 a.m. on
Thursday, January 13, 2000, at the FactSet Corporate Office
One Greenwich Plaza
Greenwich, Connecticut
On November 24, 1999, proxy material will be sent to stockholders of record as
of November 12, 1999.
Cover artwork: Trois Formes Sur Fond Blanc by J. Friedlander, 1976, oil on
canvas.