For the fiscal quarter ended February 29, 2004
OR
Commission File Number: 1-11869
FactSet Research Systems Inc.(Exact name of registrant as specified in its charter)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No|_|
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [_]
The total number of shares of the registrant’s Common Stock, $.01 par value, outstanding on February 29, 2004, was 31,966,907.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFactSet Research Systems Inc.February 29, 2004 (Unaudited)
FactSet Research Systems Inc. (the “Company” or “FactSet”) provides online integrated database services to the global investment community. The Company combines more than 200 databases into a single online source of information and analytics. FactSet’s revenues are derived from month-to-month subscription charges. Solely at the option of each client, these charges may be paid either in commissions from securities transactions or in cash. To facilitate the payment for services in commissions, 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. Services paid in commissions are derived from securities transactions introduced and cleared on a fully disclosed basis primarily through two clearing brokers. That is, a client paying subscription charges on a commission basis directs the clearing broker, at the time the client executes a securities transaction, to credit the commission on the transaction to FDS. FactSet Limited, FactSet France, Inc., FactSet GmbH, FactSet Pacific, Inc., LionShares Europe S.A.S., Innovative Systems Techniques, Inc. (“Insyte”) and FactSet Mergerstat, LLC (“Mergerstat”) are wholly owned subsidiaries of the Company, with operations in London, Paris, Frankfurt, Tokyo, Hong Kong, Sydney, Avon (France), Boston and Santa Monica, California. The Company dissolved eLumient.com, Insyte’s wholly owned, inactive subsidiary, on December 23, 2002.
2. ACCOUNTING POLICIES
In the opinion of management, the accompanying condensed statements of financial condition and related condensed interim statements of income, comprehensive income and cash flows include all normal adjustments in order to present fairly the results of the Company’s operations for the interim periods presented in conformity with accounting principles generally accepted in the United States. The interim condensed consolidated financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and footnotes to them included in the Company’s Annual Report of Form 10-K for the fiscal year ended August 31, 2003. The significant accounting policies of the Company and its subsidiaries are summarized below.
Financial Statement PresentationThe accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany activity and balances have been eliminated from the consolidated financial statements. Cost of services is composed of employee compensation and benefits for the software engineering and consulting groups, clearing fees net of recoveries, data costs, amortization of identifiable intangible assets, computer maintenance and depreciation expenses and client-related communication costs. Selling, general and administrative expenses include employee compensation and benefits for the sales, product development and various other support departments, travel and entertainment expenses, promotional costs, rent, amortization of leasehold improvements, depreciation of furniture and fixtures, office expenses, professional fees and other expenses.
Use of EstimatesThe preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates have been made in areas that include income and other taxes, depreciable lives of fixed assets, accrued liabilities, accrued compensation, receivable reserves and allocation of purchase price to assets and liabilities acquired. Actual results could differ from those estimates.
Revenue Recognition FactSet applies Staff Accounting Bulletin No. 101 (“SAB 101”), Revenue Recognition in Financial Statements, to its business arrangements for revenue recognition. Clients are invoiced monthly, in arrears, to reflect the actual services rendered to them. Subscription revenue is earned each month as the service is rendered to clients, according to the specific subscription and the number of workstations deployed for such month. A provision is made to allow for billing adjustments as a result of cancellation of service or reduction in number of workstations. Such provisions are accounted for as a reduction of subscription revenue, with a corresponding reduction to subscriptions receivable. FactSet recognizes revenue when all the following criteria are met:
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, net. As of February 29, 2004, the amount of receivables from clients and clearing brokers, net that was unbilled totaled $21.6 million. Since the Company invoices its clients monthly in arrears, the $21.6 million unbilled as of February 29, 2004 was billed at the beginning of March 2004. Amounts that have been received through commissions on securities transactions or through cash payments that are in excess of earned subscription revenues are reflected on the Consolidated Statements of Financial Condition as deferred fees. In March 2003, EITF 00-21, Revenue Arrangements with Multiple Deliverables, was issued. The EITF consensus applies to the Company for all transactions entered into beginning with FactSet’s first quarter of fiscal 2004, effective September 1, 2003. EITF 00-21 contains further guidance on revenue recognition, particularly with respect to situations in which companies offer multiple services or deliverables to a customer for a single, bundled price. Under the guidance in SAB 101, the Company’s subscriptions represent a single earnings process. Collection of subscription revenues through FDS’s external clearing brokers does not represent a separate service or earnings process since FDS is not the principal party to the settlement of the securities transactions for which the clearing brokers charge clearing fees. The adoption of EITF 00-21 did not have a material impact on the Company’s financial condition or results of operations. In the fourth quarter of fiscal 2003, FactSet changed the presentation of its revenues in order to report them on a net rather than gross basis. This restatement, at that time, had no effect on the then previously reported operating income, net income, earnings per share or stockholders’ equity for periods prior to the restatement. All the restated quarterly and annual amounts for prior required reporting periods have previously been presented in FactSet’s Annual Report on Form 10-K for fiscal 2003. In the second quarter of fiscal 2004, revenue generated from cash paying clients totaled $48.1 million and revenue generated from commission paying clients, net of $1.6 million in clearing fees, amounted to $13.3 million. For the first six months of fiscal 2004, revenue generated from cash paying clients totaled $93.2 million and revenue generated from commission paying clients, net of $3.8 million in clearing fees, amounted to $27.4 million.
Clearing FeesClearing fees are expensed as a cost of service in the period incurred, at the time that a client executes securities transactions through clearing brokers. The Company earns the right to recover the clearing fee from its clients at the time the securities transactions are executed, which is the period in which the clearing fees are incurred. This cost recovery is recorded as a reduction of cost of services. Clearing fees and the related cost recovery in the first six months of fiscal years 2004 and 2003 approximated $3.8 million and $3.6 million, respectively.
Cash and Cash Equivalents Cash and cash equivalents consist of demand deposits and money market investments with maturities of 90 days or less and are reported at fair value.
InvestmentsInvestments have maturities greater than 90 days from the date of acquisition, are classified as available-for-sale securities and are reported at fair value. Fair value is determined for most investments from readily available quoted market prices. Unrealized gains and losses on available-for-sale securities are included net of tax in accumulated other comprehensive income in stockholders’ equity.
Property, Equipment and Leasehold Improvements Computers and related equipment are depreciated on a straight-line basis over estimated useful lives of three years or less. Depreciation of furniture and fixtures is recognized using the double declining balance method over estimated useful lives between five and seven years. Leasehold improvements are amortized on a straight-line basis over the terms of the related leases or estimated useful lives of the improvements, whichever period is shorter.
Intangible Assets Intangible assets consist of acquired technology resulting from the acquisitions of the Insyte, LionShares and Mergerstat businesses and are amortized on a straight-line basis using estimated useful lives ranging between five and ten years.
Internal Use SoftwareThe Company capitalizes only those direct costs incurred during the application development and implementation stages for developing, purchasing or otherwise acquiring software for internal use that management believes have a probable future application in the Company’s subscription-based service. These costs are amortized over the estimated useful lives of the underlying software, generally three years or less. All costs incurred during the preliminary planning project stage, including project scoping, identification and testing of alternatives, are expensed as incurred. Capitalized direct costs associated with developing, purchasing or otherwise acquiring software for internal use are reported in the Property, Equipment & Leasehold Improvements line item of the Company’s Consolidated Statements of Financial Condition. These costs are amortized on a straight-line basis over the expected useful life of the software, beginning when the software is implemented and ready for its intended use.
Landlord Contributions to Leasehold ImprovementsIn conjunction with entering into leases for office space, the Company receives contributions from landlords towards leasehold improvements which are included in the Deferred Rent and Other Liabilities line item of the Company’s Consolidated Statements of Financial Condition. These contributions are amortized over the lives of the respective lease to which they pertain.
Income and Deferred TaxesDeferred taxes are determined by calculating the future tax consequences associated with differences between financial accounting and tax bases of assets and liabilities. A valuation allowance is established to the extent management considers it more likely than not that some portion or all of the deferred tax assets will not be realized. The effect on deferred taxes from income tax law changes is recognized immediately upon enactment. The deferred tax provision is derived from changes in deferred taxes on the balance sheet and reflected on the Consolidated Statements of Income as a component of income taxes. Income tax benefits derived from the exercise of non-qualified stock options or the disqualifying disposition of incentive stock options are recorded directly to capital in excess of par value.
Earnings Per Share The computation of basic earnings per share in each period is based on the weighted average number of common shares outstanding. The weighted average number of common shares outstanding includes shares issued to the Company’s employee stock plans. Diluted earnings per share are based on the weighted average number of common shares and potentially dilutive common shares outstanding. Shares available pursuant to grants made under the Company’s stock option plans are included as common share equivalents using the treasury stock method.
Stock-Based CompensationAs discussed under New Accounting Pronouncements, the Company follows the disclosure-only provisions of SFAS No. 123,Accounting for Stock-Based Compensation. The Company accounts for stock-based compensation plans in accordance with APB Opinion No. 25. Stock option exercise prices equal the fair market value of the Company’s stock price on the date of grant. Therefore, no compensation costs are recorded.
New Accounting Pronouncements In December 2002, the Financial Accounting Standards Board issued Statement No. 148, (“SFAS 148”),Accounting for Stock-Based Compensation-Transition and Disclosure. This statement provides alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. The statement also amends the disclosure requirements of Financial Accounting Standards Board Statement No. 123, (“SFAS 123”), Accounting for Stock-Based Compensation, to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. As permitted by SFAS 123, the Company accounts for its stock option and employee stock purchase plans under APB Opinion No. 25, under which no compensation cost has been recorded. Stock option exercise prices equal the fair market value of the Company’s stock price on the date of grant; thus no compensation costs are recorded. Had compensation cost for the two types of plans been determined pursuant to the measurement principles under SFAS 123, the Company’s net income and earnings per share would have been reduced to the following pro forma amounts for the three and six months ended February 29, 2004 and February 28, 2003:
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in the first six months of fiscal 2004 and 2003:
In March 2003, EITF 00-21, Revenue Arrangements with Multiple Deliverables, was issued. The EITF consensus applies to us for all transactions entered into beginning with our first quarter of fiscal 2004, effective September 1, 2003. EITF 00-21 contains further guidance on revenue recognition, particularly with respect to situations in which companies offer multiple services or deliverables to a customer for a single, bundled price. Under the guidance in SAB 101, the Company’s subscriptions represent a single earnings process. Collection of subscription revenues through FDS’s external clearing brokers does not represent a separate service or earnings process since FDS is not the principal party to the settlement of the securities transactions for which the clearing brokers charge clearing fees. The adoption of EITF 00-21 did not have a material impact on the Company’s financial condition or results of operations.
On July 16, 2002, the Board of Directors authorized a share repurchase program to acquire shares of the Company’s outstanding common stock in open market or negotiated transactions. This program authorized the repurchase of up to 1,000,000 shares of FactSet common stock. The program established no minimum number of shares for repurchase. During the second quarter of fiscal 2004, the Company repurchased 65,000 shares at an average cost of $37.59 per share. Since the inception of the stock repurchase program, FactSet has purchased approximately 772,000 shares at an average cost of $26.64 per share. In January 2004, the Company purchased two million shares of its common stock from one of its co-founders, Howard E. Wille, at a price per share of $34.58. The purchase reduced the Company’s weighted average common shares by one million in the second quarter of fiscal 2004. In subsequent quarters, the purchase will decrease the Company’s weighted average common shares by an additional one million.
A reconciliation between the weighted average shares outstanding used in the basic and diluted EPS computations is as follows:
The Company has three reportable segments based on geographic operations: the United States, Europe and Asia Pacific. Each segment markets online integrated database services to investment managers, investment banks and other financial services professionals. The U.S. segment services financial institutions throughout North America, while the European and Asia Pacific segments service investment professionals located in Europe and other regions. The European segment is headquartered in London, England and maintains office locations in Frankfurt, Germany and Paris and Avon, France. The Asia Pacific segment is headquartered in Tokyo, Japan with office locations in Hong Kong and Sydney, Australia. Mainly sales and consulting personnel staff each of these foreign branch operations. Segment revenues reflect direct sales of products and services to clients based in their respective geographic locations. There are no intersegment or intercompany sales of the FactSet service. Each segment records compensation, travel, office and other direct expenses related to its employees. Expenditures related to the Company’s computing centers, data costs, clearing fees net of recoveries, income taxes and corporate headquarters charges are recorded by the U.S. segment and are not allocated to the European and Asia Pacific segments. Goodwill of $13,677,000 at February 29, 2004, which reflects three prior acquisitions, is included within the U.S. segment. The accounting policies of the segments are the same as those described in Note 2, “Accounting Policies”.
5. COMMITMENTS AND CONTINGENCIES
Lease CommitmentsThe Company leases office space domestically in Greenwich and Stamford, Connecticut; Boston and Newton, Massachusetts; New York, New York; Chicago, Illinois; Manchester, New Hampshire; Reston, Virginia; Tuscaloosa, Alabama; San Mateo and Santa Monica, California; and internationally in London; Tokyo; Hong Kong; Sydney; Frankfurt; and Paris and Avon, France. The leases expire on various dates through August 2013. Total minimum rental payments associated with the leases are recorded as rent (a component of selling, general and administrative expenses) on a straight-line basis over the periods of the respective lease terms. During January 2004, the Company authorized, at its sole option, the release from escrow of its 15-year global headquarter lease, which will consolidate the Company’s current Greenwich and Stamford offices into a single office in Norwalk, CT. The Company is expected to take possession of the leased property in the fourth quarter of fiscal 2004. The future minimum rental payments are included in the table below. At February 29, 2004, the Company’s lease commitments for office space provide for the following future minimum rental payments under non-cancelable operating leases with remaining terms in excess of one year:
Revolving Credit Facilities In fiscal 2004, the Company renewed its 364-day revolving credit facility and continued to maintain its existing three-year credit facility. The credit facilities (the “facilities”) are available in an aggregate principal amount of up to $25.0 million for working capital and general corporate purposes, with the facilities split into two equal tranches and maturing in March 2005 and November 2004. Approximately $1.6 million in aggregate of these credit facilities has been utilized for letters of credit issued during the ordinary course of business as of February 29, 2004. The Company is obligated to pay a commitment fee on the unused portion of the facilities at a weighted average annual rate of 0.175%. The facilities also contain covenants that, among other things, require the Company to maintain minimum levels of consolidated net worth and certain leverage and fixed charge ratios.
TaxesIn the normal course of business, the Company’s tax filings are subject to audit by federal, state and foreign tax authorities. Audits by four tax authorities are currently ongoing. Although there is inherent uncertainty in the audit process, the Company has no reason to believe that such audits will result in the payment of additional taxes or penalties or both that would have a material adverse effect on its results of operations or financial position, beyond current estimates.
6. IDENTIFIED INTANGIBLE ASSETS
The Company’s identifiable intangible assets consist of acquired technology resulting from the acquisitions of the Insyte, LionShares and Mergerstat businesses in August 2000, April 2001 and January 2003, respectively. The weighted average useful life of the acquired technology is 8.83 years. These intangible assets have no assigned residual values. The gross carrying amounts and accumulated amortization totals related to the Company’s acquired technology were approximately $6,438,000 and $1,626,000 at February 29, 2004, and $6,438,000 and $862,000 at February 28, 2003, respectively. Amortization expense of approximately $191,000 and $382,000 was recorded in the three and six months ended February 29, 2004. Estimated amortization expense of the identifiable intangible assets (acquired technology) for the remainder of fiscal 2004 and the remaining fiscal years is as follows:
7. SUBSEQUENT EVENT
In March 2004, the Company purchased one million shares of its common stock from one of its co-founders, Charles J. Snyder, at a price per share of $38.12. The purchase will reduce FactSet’s weighted average common shares by 833,333 in the third quarter of fiscal 2004. In subsequent quarters, the purchase will decrease the Company’s weighted average common shares by an additional 166,667. This purchase had no effect on earnings per share for the three and six months ended February 29, 2004.
REVENUES
Revenues for the quarter ended February 29, 2004 grew 11.4% to $61.4 million from $55.1 million in the second quarter of fiscal 2003. During the first half of fiscal 2004, revenues expanded 11.8% to $120.6 million. Incremental subscriptions to our value-added applications and databases by our existing clients as well as the net addition of 64 clients over the past year were the main catalysts for this growth for both of these periods. Approximately half of our revenue is derived from sales of databases and applications, while the remaining revenue is generated from our base fee and sales of incremental passwords. During the second quarter of fiscal 2004, overseas revenues increased 13.9% to $12.4 million compared to $10.9 million in the same period in the prior year. Revenues from European operations advanced 14.4% and revenues from our Asia Pacific operations grew 12.2%. International revenues for the first six months of fiscal 2004 were $24.4 million, an increase of 13% from the same period a year ago. Approximately 20% of our total revenues for both the second quarter and first half of fiscal 2004 were attributed to our international operations. Over 95% of the Company’s revenues are received in U.S. dollars. Net monetary assets held by our international branch offices during the quarter ended February 29, 2004 were immaterial. Accordingly, our exposure to foreign currency fluctuations was not material. Demand for our Portfolio Analytics applications continued to rise during the second quarter of fiscal 2004. Portfolio Analytics had over 360 clients representing approximately 2,700 subscribers at February 29, 2004 compared to approximately 335 clients and 2,400 subscribers at the end of the second quarter of fiscal 2003. During the second quarter of fiscal 2004, client count increased 6.9% to 992 versus 928 clients for the same period a year ago. Passwords, a measure of users of our services, remained constant at 19,400 as of February 29, 2004. Approximately one quarter of our revenue is generated from our investment banking clients, with most of the remaining revenue derived from our investment management clients. Total client subscriptions at February 29, 2004 rose 11.8% from a year ago to $249.2 million. Subscriptions at a given point in time represent the forward-looking revenues for the next twelve months from all services currently being supplied to our clients. At February 29, 2004, the average subscription per client increased 4.6% to $251,000, up from an average of $240,000 a year ago. International subscriptions were $50.5 million, representing over 20% of total client subscriptions. No individual client accounted for more than 5% of total subscriptions. Subscriptions from the ten largest clients did not surpass 25% of total client subscriptions. At February 29, 2004, client retention remained at a rate in excess of 95%.
OPERATING EXPENSES
Cost of ServicesCost of services increased 11.1% to $18.2 million for the second quarter of fiscal 2004 from $16.4 million in the same period in fiscal 2003. During the first six months of fiscal 2004, cost of services grew 12.2% to $36.1 million compared to $32.1 million during the first half of fiscal 2003. The primary drivers for increases in cost of services for both the second quarter and first half of fiscal 2004 were increases in employee compensation and benefits and data costs. During the second quarter of fiscal 2004, this increase was partially offset by a decrease in depreciation on computer-related equipment. Employee compensation and benefits expense grew $1.7 million in the quarter ended February 29, 2004 and $3.1 million in the first half of fiscal 2004 versus the comparable periods in fiscal 2003. The increases in both periods were primarily the result of employee additions and increases in merit compensation during the past twelve months. Data costs expanded $800,000 during the second quarter of fiscal 2004 and $1.1 million compared to the same periods in fiscal 2003. Expanded database offerings and higher data fees resulting from a higher number of client users during the second quarter and first half of fiscal 2004 caused the increase from the same year ago periods. During the first quarter of fiscal 2004, we completed our upgrade of our mainframe computers located in our two data centers. The acquisition cost of our new Hewlett-Packard Marvel mainframe computers was significantly lower than the acquisition cost of the replaced mainframes resulting in a $900,000 decrease in depreciation of computer-related equipment during the second quarter of fiscal 2004 as compared to the prior year period.
Selling, General and AdministrativeSelling, general, and administrative (SG&A) expenses rose 9.4% to $21.7 million from $19.8 million in the second quarter of fiscal 2003. During the first six months of fiscal 2004, SG&A expenses grew 7.7% to $42.0 million from $39.0 for the six months ended February 28, 2003. The increase during the three months ended February 29, 2004 were due to higher costs related to employee compensation and benefits, travel and promotional expenses and professional fees partially offset by lower miscellaneous expenses. The increase for the first half of fiscal 2004 compared to the first half of 2003 was due to growth in employee compensation and benefits and professional fees partially offset by lower miscellaneous expenses. Employee compensation and benefits expense increased $1.4 million in the second quarter of fiscal 2004 compared to the second quarter of fiscal 2003 and $2.4 million for the first half of fiscal 2004 versus the same period in fiscal 2003. Growth in employee headcount and increased merit compensation largely contributed to the increases in the second quarter and the six months ended February 29, 2004. Travel and promotional expenses grew $500,000 in the second quarter of fiscal 2004 compared to the second quarter of fiscal 2003 due to increased travel by our sales force as well as increased spending on promotional product conferences. Professional fees grew $600,000 during the three months ended February 29, 2004 and $700,000 for the first half of fiscal 2004 versus the comparable fiscal 2003 periods as a result of higher legal, tax planning and other consulting fees. Lower accruals related to taxes other than incomes taxes were primarily responsible for the $700,000 decrease in miscellaneous expenses for both the second quarter and first half of fiscal 2004 versus the same periods in fiscal 2004.
Operating MarginOperating margin for the quarter ended February 29, 2004 was 35.0% compared to 34.3% for the same period a year ago. The operating margin for the first six months of fiscal 2004 was 35.3% compared to 34.1% for the first half of fiscal 2003. Declines in computer-related expenses, occupancy costs and miscellaneous expenses as a percentage of revenues, partially offset by increases in employee compensation and benefits, data costs, travel and promotional expenses and professional fees as a percentage of revenues, contributed to the improvement in second quarter operating margins. The improvement in operating margin during the first half of 2004 is attributable to declines in computer-related expenses, occupancy costs and miscellaneous expenses as a percentage of revenues, partially offset by increases in employee compensation and benefits data costs and professional fees.
Income TaxesFor the quarter ended February 29, 2004, income tax expense rose to $7.5 million from $7.3 million in the second quarter of fiscal 2003. Income tax expense for the six months ended February 29, 2004 increased to $15.3 million from $14.2 million in the first six months of fiscal 2003. The effective tax rate for the second quarter of fiscal 2004 was 33.6% compared to 37.5% in the prior year period. During the first six months of fiscal 2004, the effective tax rate was 34.8% compared to 37.5% in the six months ended February 28, 2003. The decrease in the effective tax rate in the three and six months ended February 29, 2004 compared to the prior year periods is due to additional federal income tax planning completed in the past twelve months and a tax benefit of $776,000 recognized in the quarter ended February 29, 2004 which related primarily to the settlement of prior year tax returns for certain state credits.
LiquidityFor the six months ended February 29, 2004, cash generated by operating activities was $26.7 million, an increase of $6.1 million over the same period in fiscal 2003. The year over year increase in cash flow from operating activities was primarily due to higher levels of profitability, decreased year over year growth rates in receivables from clients and clearing brokers, higher deferred fees collected and an increase in current taxes payable, partially offset by a higher payout of accrued compensation and a reduction in accounts payable and accrued expenses during the first six months of fiscal 2004. In January 2004, we purchased two million shares of our common stock from one of our co-founders, Howard E. Wille, at a price per share of $34.58. In addition, we purchased one million shares of our common stock in March 2004, from another co-founder, Charles J. Snyder, at a price per share of $38.12.
Capital ExpendituresOur capital expenditures for the second quarter of fiscal 2004 totaled $2.2 million and $6.4 million for the six months ended February 29, 2004. Approximately $1.0 million in capital expenditures during the second quarter of fiscal 2004 related to computer-related equipment purchases for our data centers while the remainder related to expansion of our offices in the U.S. During the first six months of fiscal 2003, approximately $4.9 million related to the acquisition of computer-related assets primarily for our data centers and $1.5 million related to expansion of our domestic offices. We completed our mainframe computer upgrade by placing in service five Hewlett-Packard Marvel mainframe computers during the first quarter of fiscal 2004, for a total of eight installed at our two data centers. Capital expenditures for fiscal 2004 should total approximately $35 million, net of landlord contributions to leasehold improvements.
Revolving Credit FacilitiesIn fiscal 2004, we renewed our 364-day revolving credit facility and continued to maintain our existing three-year credit facility. The credit facilities (the “facilities”) are available in an aggregate principal amount of up to $25.0 million for working capital and general corporate purposes, with the facilities split into two equal tranches and maturing in March 2005 and November 2004. Approximately $1.6 million in aggregate of these credit facilities has been utilized for letters of credit issued during the ordinary course of business as of February 29, 2004. We are obligated to pay a commitment fee on the unused portion of the facilities at a weighted average annual rate of 0.175%. The facilities also contain covenants that, among other things, require us to maintain minimum levels of consolidated net worth and certain leverage and fixed charge ratios.
Share RepurchasesOn July 16, 2002, the Board of Directors authorized a share repurchase program to acquire shares of our outstanding common stock in open market or negotiated transactions. This program authorized the repurchase of up to 1,000,000 shares of our common stock. The program established no minimum number of shares for repurchase. During the second quarter of fiscal 2004, we repurchased 65,000 shares at an average cost of $37.59 per share. Since the inception of the stock repurchase program, we have purchased approximately 772,000 shares at an average cost of $26.64 per share. In January 2004, we purchased two million shares of our common stock from one of our co-founders, Howard E. Wille, at a price per share of $34.58. The purchase reduced our weighted average common shares by one million in the second quarter of fiscal 2004. In subsequent quarters, the purchase will decrease our weighted average common shares by an additional one million. In March 2004, we purchased one million shares of our common stock from our other co-founder, Charles J. Snyder, at a price per share of $38.12. The purchase will reduce our weighted average common shares by 833,333 in the third quarter of fiscal 2004. In subsequent quarters, the purchase will decrease our weighted average common shares by an additional 166,667.
New Accounting PronouncementsIn December 2002, the Financial Accounting Standards Board issued Statement No. 148, (“SFAS 148”)Accounting for Stock-Based Compensation-Transition and Disclosure. This statement provides alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. The statement also amends the disclosure requirements of Financial Accounting Standards Board Statement No. 123, (“SFAS 123”), Accounting for Stock-Based Compensation, to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. As permitted by SFAS 123, we account for our stock option and employee stock purchase plans under APB Opinion No. 25, under which no compensation cost has been recorded. Stock option exercise prices equal the fair market value of our stock price on the date of grant; thus no compensation costs are recorded. Had compensation cost for the two types of plans been determined pursuant to the measurement principles under SFAS 123, our net income and earnings per share would have been reduced to the following pro forma amounts for the three and six months ended February 29, 2004 and February 28, 2003:
In March 2003, EITF 00-21, Revenue Arrangements with Multiple Deliverables, was issued. The EITF consensus applies to us for all transactions entered into beginning with our first quarter of fiscal 2004, effective September 1, 2003. EITF 00-21 contains further guidance on revenue recognition, particularly with respect to situations in which companies offer multiple services or deliverables to a customer for a single, bundled price. Under the guidance in SAB 101, our subscriptions represent a single earnings process. Collection of subscription revenues through FDS’s external clearing brokers does not represent a separate service or earnings process since FDS is not the principal party to the settlement of the securities transactions for which the clearing brokers charge clearing fees. The adoption of EITF 00-21 did not have a material impact on our financial condition or results of operations.
Critical Accounting Policies Our accounting policies, which are in compliance with accounting principles generally accepted in the United States, require us to apply methodologies, estimates and judgments that have a significant impact on the results we report in our financial statements. In our annual report on Form 10-K, we have discussed those policies that we believe are critical and require the use of judgment in their application. Since the date of that Form 10-K, there have been no material changes to our critical accounting policies or the methodologies or assumptions applied under them.
Forward-Looking Factors
Business OutlookThe following forward-looking statements reflect our expectations as of March 16, 2004. Given the number of risk factors, uncertainties and assumptions discussed below, actual results may differ materially. We do not intend to update our forward-looking statements until our next quarterly results announcement, other than in publicly available statements.
Third Quarter Fiscal 2004 Expectations
Full Year Fiscal 2004
Recent DevelopmentsIn March 2004, we purchased one million shares of FactSet common stock from one of our co-founders, Charles J. Snyder, at a price per share of $38.12. The purchase will reduce our weighted average common shares by 833,333 in the third quarter of fiscal 2004. In subsequent quarters, the purchase will decrease our weighted average common shares by an additional 166,667. This purchase had no effect on earnings per share for the three and six months ended February 29, 2004.
Recent Market TrendsWe are exposed to various economic and financial risks associated with equity and foreign currency markets as well as risks related to interest rate fluctuations during the normal course of business. The major equity indices (for example Dow Jones 30 Industrials, Russell 2000®, Nasdaq Composite®, and MSCI European Index) have experienced significant volatility since March 2000. Continued volatility in general economic and market conditions is still possible in the near future. External factors such as the threat of hostilities among various nations or continued military actions by the United States could undermine any potential continued economic recovery. A decline in the worldwide markets could adversely impact a significant number of our clients (primarily investment management firms and investment banks) and increase the likelihood of personnel and spending reductions among our existing and potential clients. Continued investigations into the investment management industry by various regulatory bodies could have an adverse effect on our business. In addition, changes to regulations regarding soft dollar payments could have an negative impact to our operations. The fair market value of our investment portfolio at the February 29, 2004 was $86.5 million. It is anticipated that the fair market value of our portfolio will continue to be immaterially affected by fluctuations in interest rates. Preservation of principal is the primary goal of our investment portfolio. Pursuant to our established investment guidelines, third-party managers construct portfolios to achieve high levels of credit quality, liquidity and diversification. Our investment policy dictates that the weighted-average duration of short-term investments may not exceed two years. Our investment guidelines do not permit us to invest in puts, calls, strips, short sales, straddles, options or futures, nor are we permitted to invest on margin. Because we have no outstanding long-term indebtedness and we have a restrictive investment policy, our financial exposure to fluctuations in interest rates is expected to remain low.
TaxesIn the normal course of business, our tax filings are subject to audit by federal, state and foreign tax authorities. Audits by four tax authorities are currently ongoing. Although there is inherent uncertainty in the audit process, we have no reason to believe that such audits will result in the payment of additional taxes or penalties or both that would have a material adverse effect on our results of operations or financial position, beyond current estimates.
Forward-Looking StatementsThis Management’s Discussion and Analysis contains forward-looking statements that are based on management’s current expectations, estimates and projections. All statements that address expectations or projections about the future, including statements about our strategy for growth, product development, market position, subscriptions and expected expenditures and financial results are forward-looking statements. Forward-looking statements may be identified by words like “expected,” “anticipates,” “plans,” “intends,” “projects,” “should,” “indicates,” “continues,” “subscriptions,” “commitments” and similar expressions. These statements are not guarantees of future performance and involve a number of risks, uncertainties and assumptions (“future factors”). Therefore, actual results may differ materially from what is expressed or forecasted in such forward-looking statements. We will publicly update forward-looking statements as a result of new information or future events in accordance with applicable Securities and Exchange Commission regulations. Future factors include, but are not limited to, our ability to hire and retain qualified personnel; the maintenance of our leading technological position; the impact of global market trends on our revenue growth rate and future results of operations; the negotiation of contract terms supporting new and existing databases or products; retention of key clients and their current service levels; increased competition in our industry; the successful resolution of ongoing and other probable audits by tax authorities; the continued employment of key personnel; the absence of U.S. or foreign governmental regulation restricting international business; and the sustainability of historical levels of profitability and growth rates in cash flow generation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate risk primarily through our portfolio of cash, cash equivalents and investments. Cash and cash equivalents consist of demand deposits and money market investments with maturities of 90 days or less. Our investment portfolio, which is designed for the preservation of principal, consists of U.S. Treasury notes and bonds, corporate bonds and municipal bonds. The investment portfolio is subject to interest rate risk as investments are sold or mature and are reinvested at current market rates. Derivative financial instruments are not permitted by our investment guidelines.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this report, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls, subsequent to the date of such evaluation.
We filed or furnished one report on Form 8-K during the quarter ended February 29, 2004. Information regarding the item on which we reported is as follows:
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
EXHIBIT INDEX
I, Philip A. Hadley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of FactSet Research Systems Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
I, Ernest S. Wong, certify that:
FACTSET RESEARCH SYSTEMS INC.CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of FactSet Research Systems Inc. (the “Company”) on Form 10-Q for the period ending February 29, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Philip A. Hadley, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
/s/ Philip A. Hadley Philip A. Hadley Chief Executive Officer April 14, 2004
A signed original of this written statement required by Section 906 has been provided to FactSet Research Systems Inc. and will be retained by FactSet Research Systems Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
In connection with the Quarterly Report of FactSet Research Systems Inc. (the “Company”) on Form 10-Q for the period ending February 29, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ernest S. Wong, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
/s/ Ernest S. Wong Ernest S. Wong Chief Financial Officer April 14, 2004