UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002 or
[ ] 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 0-19690
BARRA, INC. (Exact name of registrant as specified in its charter)
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2100 Milvia Street
Berkeley, California 94704-1113
(Address of principal executive offices including zip code)
(510) 548-5442
(Registrant's telephone number, including area code)
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 reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ],
The number of shares of the registrant's Common Stock outstanding as of November 6, 2002 was 19,797,862.
BARRA, INC.
Report On Form 10-Q For The
Quarter Ended September 30, 2002
INDEX
| PART I. Financial Information | Page No. |
| Item 1. Financial Statements |
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Condensed Consolidated Balance Sheets as of September 30, 2002 (Unaudited) and as of March 31, 2002 |
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Unaudited Condensed Consolidated Statements of Income for the Three Months and Six Month Periods Ended September 30, 2002 and 2001 |
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Unaudited Condensed Consolidated Statements of Cash Flows for the Six Month Periods Ended September 30, 2002 and 2001 |
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| Notes to Condensed Consolidated Financial Statements |
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| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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| Item 4. Controls and Procedures |
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| PART II. Other Information |
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| Item 1. Legal Proceedings |
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| Item 4: Submission of Matters to a Vote of Security Holders |
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| Item 5: Other Information |
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| Item 6. Exhibits and Reports on Form 8-K |
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| Signatures |
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| Certifications |
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| Exhibit Index |
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
BARRA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except for share and per share amounts)
September 30, March 31,
2002 2002
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents........................ $21,119 $58,499
Investments in marketable equity trading
securities..................................... 14,565 14,310
Investments in marketable debt securities
available-for-sale............................. 192,703 200,317
Accounts receivable (Less allowance for doubtful
accounts of $950 and $950):
Subscription and other......................... 5,377 5,470
Related parties................................ 4,808 5,616
Prepaid expenses................................. 1,292 2,068
------------- -------------
Total current assets........................... 239,864 286,280
------------- -------------
Investments in unconsolidated companies............ 10,310 10,344
Premises and equipment:
Computer and office equipment.................... 13,684 12,904
Furniture and fixtures........................... 4,655 4,637
Leasehold improvements........................... 6,768 6,729
------------- -------------
Total premises and equipment................... 25,107 24,270
Less accumulated depreciation and amortization..... (16,553) (14,383)
------------- -------------
8,554 9,887
Deferred tax assets................................ 6,599 8,065
Computer software (less accumulated amortization
of $3,122 and $2,766)............................ 1,424 1,551
Other assets....................................... 1,387 1,034
Goodwill and other intangibles (less accumulated
amortization of $5,539 and $5,539)............... 7,456 7,456
------------- -------------
Total.............................................. $275,594 $324,617
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $214 $1,694
Accrued expenses payable:
Accrued compensation........................... 4,725 11,208
Accrued corporate income taxes................. 11,686 10,814
Other accrued expenses......................... 9,700 9,843
Unearned revenues................................ 35,041 32,383
------------- -------------
Total current liabilities...................... 61,366 65,942
------------- -------------
Deferred tax liabilities........................... 2,796 2,362
STOCKHOLDERS' EQUITY:
Preferred stock, no par; 10,000,000 shares
authorized; none issued and outstanding......... -- --
Common stock, $.0001 par value; 75,000,000
shares authorized; 19,905,962 and 21,444,268
shares issued and outstanding................... 2 2
Additional paid-in capital....................... 82,541 79,121
Retained earnings................................ 128,699 177,518
Accumulated other comprehensive income (loss).... 190 (328)
------------- -------------
Total stockholders' equity..................... 211,432 256,313
------------- -------------
Total.............................................. $275,594 $324,617
============= =============
The accompanying notes are an integral part of the BARRA, Inc. Consolidated
Financial Statements
BARRA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands except for share and per share amounts)
Three Months Ended Six Months Ended
September 30, September 30,
------------------------- -------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Operating Revenues:
Portfolio and Enterprise Risk
Management................. $30,026 $29,880 $59,687 $59,771
POSIT........................ 4,877 5,802 9,996 12,072
------------ ------------ ------------ ------------
Total operating revenues... 34,903 35,682 69,683 71,843
------------ ------------ ------------ ------------
Operating Expenses:
Communication, data, and
seminar costs.............. 1,972 1,328 3,987 3,401
Compensation and benefits.... 16,771 15,927 31,681 31,419
Occupancy.................... 1,458 1,395 3,005 2,674
Other operating expenses..... 3,617 4,651 8,515 9,894
------------ ------------ ------------ ------------
Total operating expenses... 23,818 23,301 47,188 47,388
------------ ------------ ------------ ------------
Interest Income and Other...... 2,673 1,819 5,351 3,017
------------ ------------ ------------ ------------
Income before Equity
in Net Income and Loss of
Investees, Income Taxes
and Discontinued Operations.. 13,758 14,200 27,846 27,472
Equity in Net Income and Loss
of Investees................. 34 17 34 15
------------ ------------ ------------ ------------
Income before Income Taxes..... 13,792 14,217 27,880 27,487
Income Taxes................... (4,827) (4,487) (9,187) (8,831)
------------ ------------ ------------ ------------
Income from Continuing
Operations................... 8,965 9,730 $18,693 $18,656
------------ ------------ ------------ ------------
Discontinued Operations:
Income from Operations....... -- 295 -- 1,629
Gain on Sale................. -- 72,225 -- 72,225
------------ ------------ ------------ ------------
Net Income $8,965 $82,250 $18,693 $92,510
============ ============ ============ ============
Income Per Share:
Continuing Operations:
Basic........................ $0.44 $0.45 $0.90 $0.87
============ ============ ============ ============
Diluted...................... $0.43 $0.43 $0.87 $0.82
============ ============ ============ ============
Discontinued Operations -
Income from Operations:
Basic........................ $0.00 $0.01 $0.00 $0.08
============ ============ ============ ============
Diluted...................... $0.00 $0.01 $0.00 $0.07
============ ============ ============ ============
Discontinued Operations -
Gain on Sale:
Basic........................ $0.00 $3.38 $0.00 $3.37
============ ============ ============ ============
Diluted...................... $0.00 $3.18 $0.00 $3.17
============ ============ ============ ============
Net Income:
Basic........................ $0.44 $3.84 $0.90 $4.32
============ ============ ============ ============
Diluted...................... $0.43 $3.62 $0.87 $4.06
============ ============ ============ ============
Weighted Average Common and
Common Equivalent Shares:
Basic........................ 20,282,708 21,398,766 20,734,912 21,409,583
============ ============ ============ ============
Diluted...................... 20,880,579 22,697,148 21,493,531 22,779,256
============ ============ ============ ============
The accompanying notes are an integral part of the BARRA, Inc. Consolidated
Financial Statements
BARRA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Six Months Ended
September 30,
----------------------------
2002 2001
------------- -------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ....................................... $18,693 $92,510
Adjustments to reconcile net income to net
cash provided by continuing operations:
Equity in net income and loss of investees... (34) (15)
Depreciation and amortization................ 2,553 2,195
Unrealized gains on marketable equity trading
securities.................................. (255) (530)
Gain on sale of discontinued operations, net
of tax...................................... -- (72,225)
Sale of marketable equity trading securities. -- 1,100
Deferred taxes............................... 1,900 5,114
Other........................................ 584 1,401
Changes in:
Accounts receivable - subscription and other. 93 180
Accounts receivable - related parties........ 808 9,532
Prepaid expenses............................. 776 36
Other assets................................. (353) (196)
Accrued income taxes......................... 872 (3,679)
Accounts payable, due to related party
and accrued expenses........................ (5,432) 7,987
Unearned revenues............................ 2,658 335
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Net cash provided by continuing operations........ 22,863 43,745
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Net cash provided by discontinued operations...... -- 1,065
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Net cash provided by operating activities......... 22,863 44,810
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.............................. (1,091) (1,544)
Sale (Purchase) - marketable debt securities -
available for sale............................... 7,614 (162,837)
Cash proceeds from sale of discontinued operations -- 128,000
Investments in unconsolidated companies........... -- (768)
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Net cash provided (used) in investing activities 6,523 (37,149)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock................ 3,168 4,057
Common stock repurchased.......................... (69,934) (38,040)
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Net cash used in financing activities.. (66,766) (33,983)
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NET DECREASE IN CASH AND CASH
EQUIVALENTS (37,380) (26,322)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.. 58,499 44,702
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CASH AND CASH EQUIVALENTS AT END OF PERIOD........ $21,119 $18,380
============= =============
OTHER CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes................................. $4,331 $6,319
The accompanying notes are an integral part of the BARRA, Inc. Consolidated
Financial Statements
BARRA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the accounts of Barra, Inc. (the Company, which may be referred to as Barra, we, us or our) and its wholly-owned subsidiaries. Discontinued operations represent the results of operations from Symphony Asset Management LLC (Symphony), Barra RogersCasey, Inc., Barra Strategic Consulting Group and Bond Express, Inc., all of which were either sold or terminated in fiscal 2002. All significant intercompany transactions and balances have been eliminated. Certain reclassifications have been made to prior period financial statements to conform to the current period presentation.
In our opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments (consisting of normal recurring entries) necessary to present fairly our financial position as of September 30, 2002 and the results of our operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States. The results of operations for the interim periods are not necessarily indicative of results of operations for a full year. The March 31, 2002 condensed consolidated balance sheet is derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2002 (Form 10-K), but does not include all disclosures required by generally accepted accounting principles. We suggest that these condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and related notes included in the Form 10-K and Management's Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-Q.
2. COMPREHENSIVE INCOME
Comprehensive income includes unrealized gains on investments in marketable debt securities. A summary of comprehensive income follows (in thousands):
Three Months Ended September 30,
-------------------------
2002 2001
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Net Income .................. $8,965 $82,250
Unrealized gain on
investments in marketable
debt securities available
for sale................... 151 1,401
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Comprehensive income ........ $9,116 $83,651
============ ============
Six Months Ended September 30,
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2002 2001
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Net Income .................. $18,693 $92,510
Unrealized gain on
investments in marketable
debt securities available
for sale................... 518 1,401
------------ ------------
Comprehensive income ........ $19,211 $93,911
============ ============
3. SEGMENT INFORMATION
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker when deciding how to allocate resources and when assessing performance. Our chief operating decision-making group is the Executive Committee, which is comprised of the Chief Executive Officer and other Executive Officers (the "Committee").
Barra's business segments are organized on the basis of differences in their related products and services. The Core Business is the portfolio and enterprise risk management segment and consists of developing, marketing and supporting portfolio and enterprise risk software. The Barra Ventures Businesses consists of investments, joint ventures or significant licensing arrangements that leverage the ideas and intellectual property of the Core Business. The POSIT joint venture licenses institutional trading systems that allow institutional investors to trade portfolios of securities directly with each other in a confidential environment.
Segment income from operations is defined as segment revenues net of segment expenses and equity in joint venture gains and losses for the current year. Segment expenses include costs for sales and client support activities, the cost of delivering the product or service including data and data processing costs, and allocated amounts of depreciation and amortization. Segment expenses also include allocated portions of research and development, general and administrative expenses and interest income for the current year.
For all years presented, segment expenses exclude income taxes.
There are no differences between the accounting policies used to measure profit and loss for segments and those used on a consolidated basis. Revenues are defined as revenues from external customers and there are no inter-segment revenues or expenses.
Our management does not identify or allocate its assets, including capital expenditures, by operating segment. Accordingly, assets are not being reported by segment because the information is not available by segment and is not reviewed to make decisions about resources to be allocated to the segments, when assessing their performance. Depreciation and amortization is allocated to segments in order to determine segment profit or loss.
The following tables present information about reported segments for the three and six month periods ended September 30, 2002 and 2001, respectively (amounts in thousands):
For the three months ended September 30, 2002:
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BARRA CORE BARRA VENTURES
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POSIT Total
Core Joint Venture Other Ventures Total
------------- ------------- ------------- ------------- -------------
Portfolio and Enterprise Risk
Management................ $30,026 $30,026
POSIT........................ $4,877 4,877 4,877
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Total revenues 30,026 4,877 -- 4,877 34,903
Compensation and benefits... (16,207) (564) (564) (16,771)
Other segment expenses...... (6,810) (237) (237) (7,047)
Interest income and other... 2,673 2,673
Equity in net income and
losses of investees........ 56 (22) 34 34
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Total segment expenses (20,344) (745) (22) (767) (21,111)
------------- ------------- ------------- ------------- -------------
Segment income (loss) $9,682 $4,132 ($22) $4,110 $13,792
============= ============= ============= ============= =============
Depreciation and
amortization $1,217 $26 -- $26 $1,243
For the three months ended September 30, 2001:
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BARRA CORE BARRA VENTURES
------------- ----------------------------------------- -------------
POSIT Total
Core Joint Venture Other Ventures Total
------------- ------------- ------------- ------------- -------------
Portfolio and Enterprise Risk
Management................ $29,880 $29,880
POSIT........................ $5,802 5,802 5,802
------------- ------------- ------------- ------------- -------------
Total revenues 29,880 5,802 -- 5,802 35,682
Compensation and benefits... (15,312) (615) (615) (15,927)
Other segment expenses...... (7,085) (289) (289) (7,374)
Interest income and other... 1,819 1,819
Equity in net income and
losses of investees........ 35 (18) 17 17
------------- ------------- ------------- ------------- -------------
Total segment expenses (20,578) (869) (18) (887) (21,465)
------------- ------------- ------------- ------------- -------------
Segment income (loss) $9,302 $4,933 ($18) $4,915 $14,217
============= ============= ============= ============= =============
Depreciation and
amortization $1,058 $26 -- $26 $1,084
For the six months ended September 30, 2002:
------------- -----------------------------------------
BARRA CORE BARRA VENTURES
------------- ----------------------------------------- -------------
POSIT Total
Core Joint Venture Other Ventures Total
------------- ------------- ------------- ------------- -------------
Portfolio and Enterprise Risk
Management................ $59,687 $59,687
POSIT........................ $9,996 9,996 9,996
------------- ------------- ------------- ------------- -------------
Total revenues 59,687 9,996 -- 9,996 69,683
Compensation and benefits... (30,791) (890) (890) (31,681)
Other segment expenses...... (15,039) (468) (468) (15,507)
Interest income and other... 5,351 5,351
Equity in net income and
losses of investees........ 67 (33) 34 34
------------- ------------- ------------- ------------- -------------
Total segment expenses (40,479) (1,291) (33) (1,324) (41,803)
------------- ------------- ------------- ------------- -------------
Segment income (loss) $19,208 $8,705 ($33) $8,672 $27,880
============= ============= ============= ============= =============
Depreciation and
amortization $2,501 $52 -- $52 $2,553
For the six months ended September 30, 2001:
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BARRA CORE BARRA VENTURES
------------- ----------------------------------------- -------------
POSIT Total
Core Joint Venture Other Ventures Total
------------- ------------- ------------- ------------- -------------
Portfolio and Enterprise Risk
Management................ $59,771 $59,771
POSIT........................ $12,072 12,072 12,072
------------- ------------- ------------- ------------- -------------
Total revenues 59,771 12,072 -- 12,072 71,843
Compensation and benefits... (30,279) (1,140) (1,140) (31,419)
Other segment expenses...... (15,429) (540) (540) (15,969)
Interest income and other... 3,017 3,017
Equity in net income and
losses of investees........ 51 (36) 15 15
------------- ------------- ------------- ------------- -------------
Total segment expenses (42,691) (1,629) (36) (1,665) (44,356)
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Segment income (loss) $17,080 $10,443 ($36) $10,407 $27,487
============= ============= ============= ============= =============
Depreciation and
amortization $2,143 $52 -- $52 $2,195
4. PER SHARE DATA
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share", basic earnings per share is based on the weighted-average number of common shares outstanding for the period. Diluted earnings per share data is based on the weighted-average number of common and dilutive potential common shares outstanding. Dilutive potential common shares result from the assumed exercise of outstanding stock options that have a dilutive effect when applying the treasury stock method. For all periods presented, the only difference between basic and diluted earnings per share for the Company is the inclusion of dilutive stock options in the denominator for purposes of calculating diluted earnings per share.
5. NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141 - Business Combinations and SFAS No. 142 - Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. The Company adopted SFAS No. 142 for its fiscal year beginning April 1, 2001. The adoption of SFAS No. 142 did not have a significant impact on the financial position, results of operations, or cash flows of the Company.
In August 2001, the FASB issued SFAS No. 144 - Accounting for the Impairment or Disposal of Long-lived Assets, which addresses the financial accounting and reporting for the impairment or disposal of long-lived assets (e.g. equipment and office facilities). This statement supersedes SFAS No. 121 - Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of, and certain accounting and reporting provisions of Accounting Principles Board Opinion No. 30 - Reporting the Results of Operations. We adopted this statement on January 1, 2002. The adoption of SFAS No. 144 did not have a significant impact on the financial position, results of operations, or cash flows of the Company.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3. The Company will adopt the provisions of SFAS No. 146 for restructuring activities initiated after December 31, 2002. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue No. 94-3, a liability for an exit cost was recognized at the date of the Company's commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized.
6. DISCONTINUED OPERATIONS
Symphony Asset Management LLC- On July 16, 2001, Barra completed the sale of its 50 percent ownership interest in Symphony to The John Nuveen Company. Barra received approximately $128 million in initial cash proceeds and is eligible to receive up to an additional $12 million in future contingent payments based on Symphony's business performance. A gain of $72.2 million or $3.18 per diluted share, after taxes of approximately $44.8 million, was recorded from the sale.
Bond Express, Inc.- On August 31, 2001, Barra sold its subsidiary, Bond Express, Inc., to ValuBond, Inc. As consideration for the sale Barra received preferred stock valued at $5.9 million and representing approximately 8% of ValuBond, Inc.'s equity on a fully diluted basis. No gain or loss was recognized upon the sale of the business.
Barra RogersCasey, Inc. and Barra Strategic Consulting Group- On March 27, 2002, Barra announced the disposition of its consulting ventures, Barra RogersCasey, Inc. and the Barra Strategic Consulting Group. Barra RogersCasey, the Company's pension fund consulting venture, was sold to a subsidiary of Capital Resource Advisors LLC for $14 million in cash in exchange for all of the stock of Barra RogersCasey. Barra Strategic Consulting Group, which provided project-based management consulting to asset managers, ceased operations as of February 15, 2002. Barra's gain on sale of its interest in Barra RogersCasey, net of approximately $1.5 million in closure costs associated with the Barra Strategic Consulting Group and $2.2 million in income taxes, was $3.8 million or $0.17 per diluted share.
Gross revenues, pre-tax income and net income for discontinued operations for the three and six months ended September 30, 2001 are set forth in the table below:
Three Six
Months Months
--------- ---------
Gross revenues.............. $6,575 $20,208
Income before taxes......... 466 2,607
Income taxes................ (171) (978)
--------- ---------
Income from discontinued
operations................. $295 $1,629
========= =========
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes (included elsewhere in this report), as well as with our Annual Report on Form 10-K for the fiscal year ended March 31, 2002. This discussion and analysis and other parts of this Form 10-Q contain forward looking statements that involve risks and uncertainties, as well as assumptions made by us regarding our expectations and other future events. We make those forward-looking statements in reliance on the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. For further information regarding how to identify forward looking statements and the factors that could cause actual results to differ, please refer to the information under the heading "RISK FACTORS" below. Any or all of the forward-looking statements that we make in this Form 10-Q or any other public statements we issue may turn out to be wrong. It is also important to remember that other factors besides those we mention could also adversely affect us and our business, operating results or financial condition.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
General
Management's Discussion and Analysis of Financial Condition and Results of Operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies affect its more significant estimates and assumptions used in the preparation of its consolidated financial statements.
Revenue Recognition
Portfolio and Enterprise Risk Management - Subscription fees are initially deferred as unearned revenues when payment has been received and revenue is recognized ratably over the subscription term. Implementation fees are recorded as earned, generally on a time and materials basis.
POSIT - POSIT revenues, which consist primarily of royalties based on the trading volume of U.S. equities from the Portfolio System for Institutional Trading ("POSIT") joint venture, are recognized as trades are executed on POSIT.
The timing and certain methods of recognizing revenues require management to make estimates with respect to cost incurred, milestones reached and other factors.
Allowance for Doubtful Accounts
We evaluate the collectibility of our trade receivables on a combination of factors. When we become aware of a specific customer's inability to meet its financial obligation to us, such as in the case of bankruptcy filings or deterioration in the customer's financial position, we record a specific reserve for bad debt to reduce the related receivable to the amount we reasonably believe is collectible. We also record reserves for bad debt for all other customers based on a variety of factors including the length of time the receivables are past due and historical experience. If circumstances related to specific customers change, our estimates of the recoverability of receivables could be further adjusted.
Investments in Unconsolidated Companies
We monitor our investments in unconsolidated companies for impairment on a periodic basis. In the event that the carrying value of an investment exceeds its fair value and the decline in value is determined to be other than temporary, an impairment charge is recorded and a new cost basis for the investment is established. Fair values for investments in privately held companies are estimated based on one or more of the following: pricing models using historical and forecasted financial information, liquidation values, the values of recent rounds of financing or quoted market prices of comparable public companies. In order to determine whether a decline in value is other than temporary, we evaluate, among other factors: the duration and extent to which the fair value has been less than the carrying value; the financial condition of and business outlook for the company, including key operational and cash flow metrics, current market conditions and future trends in the company's industry, and the company's relative competitive position within the industry; and our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value.
Accounting for Income Taxes
We make estimates related to our income taxes in each of the jurisdictions in which we operate. These estimates include the allocation of revenue, cost of revenue, depreciation, expenditures and tax credits within and between jurisdictions. Deferred taxes are determined by calculation of the future tax consequences associated with differences between financial accounting and tax bases of assets and liabilities. As a result of this process, we recognize deferred tax assets and liabilities, which are recorded in its Consolidated Statements of Financial Condition. A valuation allowance is established to the extent that we consider it more likely than not that some portion or all of the deferred tax assets will not be realized. To the extent a valuation allowance is established or adjusted in a period, this amount is included in our Consolidated Statements of Income as an expense or benefit within the provision for income taxes.
GENERAL
Certain of the information required by this item has been previously reported under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Form 10-K.
Barra provides investment risk management solutions to financial professionals world-wide. We have two business units. Our Core Business provides portfolio risk management and enterprise risk management systems to investment professionals. Our Ventures Business develops new lines of business by leveraging our core research and development, generally through strategic partnerships.
Foreign Currency
As an international corporation, we generate revenue from clients throughout the world, maintain sales and representative offices worldwide and hold certain deposits and accounts in foreign currencies. Our revenue is generated from both United States and non-U.S. currencies. Our subscriptions in the United Kingdom and the European Community are priced in British pounds sterling (pounds) and euros, respectively. Additionally, our consolidated subsidiary, Barra Japan Co., Ltd. generates revenues, has expenses and has assets and liabilities in Japanese yen (yen). All other international clients are billed in U.S. dollars. The functional and reporting currency of all non-U.S. operations is the U.S. dollar. Accordingly, gains and losses on translation of current assets and liabilities denominated in foreign currencies to the U.S. reporting currency are included in other operating expenses.
The following table presents a summary of revenue by geographic region for the three months ended September 30, 2002 and 2001 (in thousands). Revenues are distributed to geographic areas based on the country in which the Barra sales office is located:
2002 2001
----------------------------- -----------------------------
% of Total % of Total
Revenues Revenues Revenues Revenues
-------------- -------------- -------------- --------------
North America:
United States............ $19,089 55% $19,070 54%
Other.................... 1,030 3 1,064 3
-------------- -------------- -------------- --------------
Total North America...... 20,119 58 20,134 57
============== ============== ============== ==============
Europe and Africa:
United Kingdom........... 7,182 21 7,233 20
Germany.................. 1,744 5 1,938 5
Other.................... 225 1 309 1
-------------- -------------- -------------- --------------
Total Europe and Africa.. 9,151 27 9,480 26
============== ============== ============== ==============
Asia and Australia:
Japan.................... 4,301 12 4,683 13
Other.................... 1,332 3 1,385 4
-------------- -------------- -------------- --------------
Total Asia and Australia. 5,633 15 6,068 17
============== ============== ============== ==============
-------------- -------------- -------------- --------------
TOTAL $34,903 100% $35,682 100%
============== ============== ============== ==============
All other things being equal, weakening of the U.S. dollar has a positive impact on profits, and strengthening of the U.S. dollar has a negative impact. Our management has implemented a hedging program designed to partially mitigate our exposure to foreign currency fluctuations through the use of forward commitments to sell certain foreign currencies. This hedging program is specifically designed to hedge our net assets denominated in pounds, euros and yen.
For the three month period ended September 30, 2002, when compared to the same period a year ago, the U.S. dollar strengthened against the pound, euro and yen. This had the net effect of decreasing net revenues and net income by approximately $319,000 and $223,000, respectively, compared to exchange rates in effect for the three month period ended September 30, 2001.
Under current operating arrangements in the countries in which we do business (other than Brazil), there are no significant restrictions upon the flow of funds from our foreign subsidiaries to the parent company. In Brazil, our local subsidiary is required to register exchange agreements with the Brazilian Central Bank.
Liquidity and Capital Resources
Cash and cash equivalents, marketable equity securities held for trading and marketable debt securities available for sale totaled $228.4 million at September 30, 2002. In addition, we have a commitment from a bank for an unsecured short-term line of credit of up to $25 million. No amounts have been, or are presently anticipated to be, drawn down on that line of credit.
During the quarter ended September 30, 2002, we repurchased 823,800 shares of our common stock on the open market at a total cost of $26,946,000, or an average price of $32.71 per share, pursuant to our stock repurchase plan.
We believe that our cash flow from operations (including prepaid subscription fees), together with existing cash balances, will be sufficient to meet cash requirements for capital expenditures and other cash needs for ongoing business operations and existing financial commitments.
Principal Financial Commitments
Our principal financial commitments consist of obligations under operating leases and contracts for the use of computer and office facilities. Other than commitments described in this discussion and analysis and in the financial statements and notes, we have no present binding understandings or commitments with respect to any significant capital expenditures.
Share Repurchase Plan
On November 7, 2002, our Board of Directors authorized Barra to repurchase up to 1,500,000 shares of our Common Stock pursuant to our stock repurchase plan (inclusive of all previously authorized amounts that had not been repurchased).
RESULTS OF OPERATIONS
References to the dollar and percentage increases or decreases set forth below in this discussion and analysis of our results of operations are derived from comparisons of our condensed consolidated statements of income and operating segment results for the three and six month periods ended September 30, 2002 and September 30, 2001.
Barra Core- Portfolio and Enterprise Risk Management Business
Revenue growth for our Core business has slowed significantly over the past fiscal year as a result of fewer subscription sales of our portfolio and enterprise risk products and higher cancellation rates on existing customer subscriptions as compared to previous periods. We believe these results reflect the general cost reduction measures many of our asset management clients have initiated in the face of significant declines in asset-based fees.
Revenues:
Portfolio and Enterprise Risk Management. Portfolio and Enterprise Risk Management fees consist of annual subscription fees and other related revenues for our Core Business portfolio risk management and enterprise risk management systems. A summary of the components of this revenue is as follows (amounts in thousands):
Three Months Ended Six Months Ended
September 30, September 30,
---------------------------- -----------------------------
2002 2001 %Change 2002 2001 %Change
--------- --------- -------- --------- --------- ---------
Core product subscriptions.. $28,545 $28,506 0 $56,920 $56,724 0
Implementation fees......... 676 704 (4) 1,026 1,397 (27)
Other Core product related.. 805 670 20 1,741 1,650 6
--------- --------- -------- --------- --------- ---------
TOTAL.................... $30,026 $29,880 0 $59,687 $59,771 0
========= ========= ======== ========= ========= =========
Core Product Subscriptions are revenues for our portfolio risk management and enterprise risk management products, including related updates. We generally bill and collect fees on an annual basis, but recognize the revenue 1/12th per month over each year of the subscription period. Excluding the negative impact of changes in foreign currency translation rates subscription revenues increased 1% compared to the same quarter last year.
Implementation Fees are revenues related to implementation services in connection with enterprise risk management system installations. Implementation fees are recorded as earned, generally on a time and materials basis. The timing of the recording of enterprise risk management implementation fees is governed by the terms of the implementation contracts and other factors that can cause significant variations from quarter to quarter. The decrease in implementation fees reflects a decline in the number of new enterprise risk system installations and general weakness in the demand for such services amidst spending constraints at some of our client installations.
Other Core Product Related revenues include seminar and other one-time fees.
Expenses: A summary of core operating expenses is as follows (amounts in thousands):
Three Months Ended Six Months Ended
September 30, September 30,
---------------------------- -----------------------------
2002 2001 %Change 2002 2001 %Change
--------- --------- -------- --------- --------- ---------
Communication, data and
seminar costs............. $1,968 $1,324 49 $3,978 $3,390 17
Compensation and benefits... 16,207 15,312 6 30,791 30,279 2
Occupancy................... 1,405 1,356 4 2,895 2,598 11
Other operating expenses.... 3,437 4,405 (22) 8,166 9,441 (13)
--------- --------- -------- --------- --------- ---------
TOTAL.................... $23,017 $22,397 3 $45,830 $45,708 0
========= ========= ======== ========= ========= =========
Communication, data and seminar costs consist of computer access and communication charges, software and data costs, computer leasing and seminar expenses. This component of expense increased $644,000 or 49% compared to the same quarter a year ago and increased $588,000 or 17% compared to the same six month period a year ago. The increase in the current quarter reflects higher seminar costs resulting from more events being held in the current quarter as compared to the same quarter last year and higher purchased data costs due to an increase in the number of data offerings purchased as well as increased costs on current data subscriptions.
Compensation and Benefits increased $895,000 or 6% compared to the same quarter a year ago and increased $512,000 or 2% compared to the same six month period a year ago. The increase reflects the effect on wages of increased headcount and scheduled wage increases. Core business headcount was 513 at September 30, 2002, an increase of 4% from the same period last year.
Occupancy Expense increased $49,000 or 4% compared to the same quarter a year ago and increased $297,000 or 11% compared to the same six month period a year ago. The increase is due primarily to higher rental costs for our Japan facilities associated with new and expanded office space in Tokyo, along with increases in rents in existing offices.
Other Operating Expenses decreased $968,000 or 22% compared to the same quarter a year ago and decreased $1,275,000 or 13% compared to the same six month period a year ago. Other operating expenses include travel, office, maintenance, depreciation, amortization, marketing, advertising, insurance, outside legal and accounting services, foreign currency translation gains and losses, and other corporate expenses. The decrease is primarily the result of lower foreign currency translation losses and lower charitable contributions. In the same quarter last year, we donated $250,000 to various client organizations directly impacted by the terrorist attacks on September 11, 2001.
POSIT
Revenues:
POSIT revenues decreased $925,000 or 16% compared to the same quarter a year ago and decreased $2,076,000 or 17% compared to the same six month period a year ago. Our revenues from POSIT come from royalties based on commissions generated by the trading volume in the various POSIT systems. Included in POSIT revenues this quarter is approximately $400,000 related to an insurance recovery for lost POSIT royalties during the 4 days following the September 11, 2001 terrorist attacks in New York when the system was unable to operate. No additional claims are pending. The decline in POSIT revenues reflects principally the impact of lower trading volumes on the POSIT trading systems due to increased price competition and lower overall market trading volumes.
Expenses:
A summary of POSIT operating expenses is as follows (amounts in thousands):
Three Months Ended Six Months Ended
September 30, September 30,
---------------------------- -----------------------------
2002 2001 %Change 2002 2001 %Change
--------- --------- -------- --------- --------- ---------
Communication, data and
seminar costs............. $4 $3 33 $8 $10 (20)
Compensation and benefits... 564 615 (8) 890 1,140 (22)
Occupancy................... 53 39 36 110 76 45
Other operating expenses.... 180 247 (27) 350 454 (23)
--------- --------- -------- --------- --------- ---------
TOTAL.................... $801 $904 (11) $1,358 $1,680 (19)
========= ========= ======== ========= ========= =========
Compensation and benefits decreased $51,000 or 8% from the same quarter a year ago and decreased $250,000 or 22% compared to the same six month period a year ago. This decrease resulted primarily from lower consulting costs in the current quarter.
Occupancy costs increased $14,000 or 36% compared to the same quarter a year ago and increased $34,000 or 45% compared to the same six month period a year ago. The increase was due to increased rental and utility costs in the office where POSIT personnel are housed.
Other operating expenses decreased $67,000 or 27% compared to the same quarter a year ago and decreased $104,000 or 23% compared to the same six month period a year ago. The decrease is due to lower travel, legal and support costs associated with this venture.
Equity in Net Income (Loss) of Investees:
Equity in Net Income (Loss) of Investees represents net gains from our equity investment Australian POSIT.
Other Ventures
Equity in Net Income (Loss) of Investees represents net losses from our equity investments in Risk Reporting Limited.
Interest Income and Other
Interest income and other increased $854,000 or 47% compared to the same quarter a year ago and increased $2,334,000 or 77% compared to the same six month period a year ago. The increase is due to substantially higher cash balances in the current quarter and realized and unrealized gains in our investment portfolio as compared to the same periods last year. The increase in cash reflects primarily the proceeds from the sale of various Barra ventures in fiscal 2002.
Income Taxes
Our effective tax rate for the quarter ended September 30, 2002 was 35% compared to 31.6% for the same quarter last year, and 32.9% for the six months ended September 30, 2002 as compared to 32.1% for the same six month period last year. This increase principally resulted from a lower proportion of pre-tax income being derived from tax-exempt interest income than in the prior periods.
Income From Discontinued Operations
Income from Discontinued Operations represents the results of operations from Symphony, Barra RogersCasey, Barra Strategic Consulting Group and Bond Express, Inc. for the three and six months ended September 30, 2001, all of which were sold or terminated in fiscal 2002.(See Note 6 to the Condensed Consolidated Financial Statements.)
RISK FACTORS
This Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements give our current expectations or forecasts of future actions, events or results. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as anticipate, estimate, expect, intend, believe, designed, future, forecast, perceive, possible, potential, may, will, would, could, should, forward, assure and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. Our forward-looking statements include statements concerning our future financial results, market activities, product development and business model. From time to time we may also provide oral or written forward-looking statements in other materials that become publicly available.
Any or all of the forward-looking statements that we make in this Form 10-Q or any other public statements we issue may turn out to be wrong. They can be affected by inaccurate assumptions that we might make or by known or unknown risks and uncertainties. Many factors described in this Risk Factors section and elsewhere in this Form 10-Q may cause our actual results to vary materially from our historical or expected results. Other factors, besides those outlined herein could also adversely affect us or our business. Consequently, no forward-looking statement can be guaranteed.
We are under no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. We suggest, however, that you consult any future disclosures we make on related subjects in our subsequent Form 10-Q, 8-K and 10-K filings with the SEC.
Fluctuations in Quarterly Operating Results
Our revenues and results of operations are difficult to predict and may fluctuate substantially from quarter to quarter, as they have in the past. Factors specifically relating to our business segments are outlined below:
We also include enterprise risk management system implementation consulting fees in our Core Business revenues. These fees reflect non-recurring, project driven revenues that are implemented in phases as contractual milestones are met. Accordingly, they can be susceptible to a large degree of variability depending on our ability to source new projects and the unpredictable nature and significance of fees associated with specific transactions.
Our earnings can be affected in our second fiscal quarter because of annual salary adjustments for our employees in July. In addition, our compensation policy historically has involved significant reliance on discretionary bonuses. Because compensation expense is a significant percentage of our operating expenses, the amount of, timing of and accrual for salary adjustments and discretionary bonuses could have a material effect on the net income of our Core Business.
Our Operating expenses are based in part on our expectations regarding future revenue. Our consolidated operating results may be adversely affected if revenue does not develop in a quarter as anticipated. Since expenses are usually incurred before revenues are generated, and because only a small amount of expenses vary with revenue, our consolidated operating results may be impacted significantly by lower revenues. Various factors could cause these lower revenues and could affect quarter to quarter comparisons. Also, much of our revenues are earned under fixed price software subscriptions. Changes in our costs of providing those subscriptions could have a material adverse effect on our business, financial condition and results of operations.
Accounting standards and practices may require us to defer recognition of license revenue for a significant period after entering into a license agreement. Generally, the subscription fees for our Core Business products are initially deferred as unearned revenues when payment has been received, after which revenue is recognized ratably over the term of the subscription. Negotiated terms for some of our Core Business sales and consulting services, particularly enterprise risk management solutions, sometimes do not permit revenue recognition at the time of delivery or even as work on the project is completed.
Dependence on Availability of Data
We currently obtain data from over 120 third-party vendors that is used in our products and services. Any interruption of our supply of data from a principal data vendor or vendors, or an interruption of our own data operations or data update processes could have a material adverse effect on our business, financial condition or results of operations. These adverse effects include, for example, our products or services becoming inoperable or their performance being materially reduced.
If any of our data vendors change their product offerings, we may need to incur additional costs to ensure continued performance of our products and services. In addition, if the cost of licensing any of these third-party data products materially increases, our gross margin levels could materially decrease.
International Operations
In fiscal 2002 over 46% of our revenues came from customers outside the United States. We anticipate that revenues from customers outside the U.S. will continue to be a significant part of our total revenues for the foreseeable future. Sales and operations outside the U.S. are subject to unique risks, including:
· unexpected changes in regulatory requirements;
· unexpected changes in exchange rates, tariffs and other trade barriers;
· political or economic instability;
· seasonal factors, particularly in Europe;
· difficulties in staffing, managing and integrating foreign operations;
· longer payment cycles;
· difficulties or delays in translating products and related documentation into foreign languages;
· currency fluctuations and conversion risks; and
· potentially adverse tax consequences.
Any of these factors could have a material adverse effect on our business, financial condition or results of operation.
Risks Associated with Business Combinations and Divestitures
As part of our overall strategy, we may continue to divest ourselves of certain businesses and assets, to acquire or invest in complementary companies, products, and technologies and to enter into joint ventures and strategic alliances with other businesses.
Some common risks associated with acquisitions and joint ventures include:
Some common risks associated with divestitures include:
We may not be successful in overcoming these risks or any other problems encountered in these transactions.
Limited Protection of Intellectual Property and Proprietary Rights and Potential Infringement of Third Party Intellectual Property Rights
We consider certain aspects of our products, related internal data update processes and services to be proprietary. We currently hold no patents. We rely primarily on a combination of trade secret, copyright, trademark and other intellectual property laws, license agreements and technical measures to protect our rights in our intellectual property. Despite our efforts, a third party may still try to challenge, invalidate or circumvent the protective mechanisms that we select. We cannot assure that any of the rights granted under any copyright, trademark or patent that we may obtain will protect our competitive advantages. Our competitors may also independently develop and patent technology that is the same or similar to ours or may obtain access to our proprietary technology. In addition, the laws of certain foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. Also, some elements of our products and services are not subject to intellectual property protection.
We believe that our products, processes and trademarks do not infringe the intellectual property rights of third parties. There can be no assurance, however, that the intellectual property which we have acquired or developed will not be challenged by infringement claims in the future. Such claims could require us to enter into royalty arrangements or could result in costly litigation.
Competition
Each of the markets in which our Core and POSIT Businesses operate has become increasingly competitive in recent years. These markets may become more competitive in the future as a result of the activities of existing competitors and the entrance of new competitors into our markets. In some of these markets, our competitors have substantially greater name recognition, installed bases, or financial, research, development or other resources. There can be no assurance that:
Web-Based Product Model
It is intended that future Barra products, such as BarraOne, will make use of a web browser as the user interface in place of traditional desktop access through networked personal computers. Web browser access via the internet or an intranet involves numerous risks inherent in using the internet, including security, availability and reliability. In addition, there is a risk that customers will not be willing or able to implement internet-based applications. Barra may wish to offer its applications on future or existing user interfaces that achieve popularity within the financial application marketplace. These future or existing user interfaces may or may not be architecturally compatible with Barra's current software product design. Barra may not be able to support new user interfaces and achieve market acceptance of new user interfaces that it does support.
Security Risks and Concerns May Deter the Use of the Internet for Conduct of Business.
A significant barrier to commerce and communications over public networks is the secure transmission of confidential information. Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments could result in compromises or breaches of our security systems or those of other web sites to protect proprietary information. If any well-publicized compromises of security were to occur, they could have the effect of substantially reducing the use of the internet for commerce and communications. Anyone who circumvents our security measures could misappropriate proprietary information or cause interruptions in our services or operations. The internet is a public network, and data is sent over this network from many sources. In the past, computer viruses, software programs that disable or impair computers, have been distributed and have rapidly spread over the internet. Computer viruses could be introduced into our systems or those of our clients or other third parties, which could disrupt or make it inaccessible to clients. We may be required to expend significant capital and other resources to protect against the threat of security breaches or to alleviate problems caused by breaches. To the extent that our activities may involve the storage and transmission of proprietary information, security breaches could expose us to a risk of loss or litigation and possible liability. Our security measures may be inadequate to prevent security breaches, and our business could be harmed if we do not prevent them.
Volatility of Stock Price; Risk of Litigation
The trading price of Barra common stock has in past and may in the future be subject to significant fluctuations in response to factors such as:
Further, the stock market has experienced and may continue in the future to experience extreme price and volume fluctuations that particularly affect the market prices of equity securities of high technology and financial services companies. These fluctuations often are not related, or are disproportionate, to the operating performance of those companies. These broad market fluctuations, as well as general economic, political and market conditions, have and may continue to have a material adverse effect on the trading price of Barra common stock. Fluctuations in the price of our common stock may expose us to the risk of securities class action lawsuits or claims. Any such suit or claim, even if the outcome were to be ultimately favorable to us, would involve a significant commitment of our management, personnel, financial and other resources. In addition, these sorts of claims and lawsuits could have a material adverse effect on our business, financial condition, or results of operations.
Product Development and Technological Change
The markets in which we compete are characterized by rapidly changing technologies, extensive research, and new product introductions. Our future growth and financial performance will depend on our ability to continue to quickly develop and introduce new products and enhance our existing products in response to advances in finance theory and computer technology, changing market conditions and increasingly sophisticated customer requirements. We may not be able to enhance existing products or develop and introduce new products that receive market acceptance in a timely manner. Our failure to anticipate or respond adequately to changing market conditions could have a material adverse effect on our business, financial condition, or results of operations. Because we offer products across many geographic areas and many areas of specialization, we often must restrict our product development efforts to a limited number of products and operating platforms. There can be no assurance, however, that efforts we select will be successful or will achieve market acceptance. In addition, the cost of research and development efforts required to keep pace with technological changes may, at times, have a significant effect on our business, financial condition, or results of operations.
Dependence on Key Personnel
Our future success will depend in large part on our ability to attract, train and retain highly skilled managerial, research, development, sales, marketing, support, technical and services personnel. Competition for people in the software and financial services industries is intense. At times, we have experienced difficulty in locating candidates with appropriate qualifications and expertise. We also frequently compete with financial institutions and financial services organizations for personnel. These organizations generally have greater resources than we do and therefore may be able to offer significantly higher compensation packages to potential employees. None of our executive officers has entered into a long-term employment agreement with Barra. Our inability to attract, train and retain key personnel could have a material adverse effect on our business, financial condition, or results of operations.
Management of Growth and Changes in Staffing
We have experienced an extended period of
These changes have resulted in new and increased responsibilities for our management and have placed a significant strain on our operating and financial controls and other resources. To accommodate recent growth, compete effectively, and manage potential future growth, we must continue to implement and improve the speed and quality of our products and services, management decisions, reporting systems, procedures, and controls. Our personnel, procedures, systems, and controls may not be adequate to support our future operations.
Potential Liability Based on Use of Products and Services
Our products and services support the investment and/or risk management processes of clients that collectively manage trillions of dollars in assets. Our license and consulting agreements have provisions designed to limit our exposure to potential liability claims brought by our clients or other third parties based on their use of our products and services. However, these provisions could be invalidated by unfavorable judicial decisions or by federal, state, foreign or local laws. Use of our Core Business and Ventures Businesses products and services for the investment and/or risk management processes creates the risk that clients, or the parties whose funds are managed by our clients, may pursue a claim against us for massive dollar amounts. Any such claim, even if the outcome were to be ultimately favorable to us, would involve a significant commitment of our management, personnel, financial and other resources.
Government Regulation
The financial services industry is subject to extensive regulation at the federal and state levels, as well as by foreign governments. It is very difficult to predict the future impact of the broad and expanding legislative and regulatory requirements affecting our businesses. If we fail to comply with any applicable laws, rules or regulations, we could be subject to fines, penalties, suspensions or revocations of licenses or permits. We believe that our existing products and services comply with all applicable laws, rules and regulations. However, there can be no assurance that these laws, rules or regulations will not change in the future, or that such changes will not materially adversely affect our business, financial condition or results of operations.
Catastrophic Events
Our operations depend on our ability to protect our equipment and the information stored in our databases against fires, earthquakes and other natural disasters, as well as power losses, telecommunications failures, unauthorized intrusions, terrorist attacks on financial centers where we or our clients are located, and other catastrophic events. There is no assurance that the measures we have taken to reduce the risk of interruption in our operations caused by these events are sufficient. Such events could have a material adverse effect on our business, financial condition or results of operations. For example, we are vulnerable to interruption caused by political and terrorist incidents. Our office in New York was temporarily closed due to the September 11, 2001 terrorist attacks. Immediately after the terrorist attacks, our clients who were located in the World Trade Center area were concentrating on disaster recovery rather than licensing additional risk management products. Delivery of some of the data we receive from New York-based vendors was delayed. The grounding of transportation impaired our ability to conduct sales visits and deliver professional services at client sites. In addition, during the temporary closure of the U.S. stock markets, POSIT clients were unable to trade over the system and some of the data updates supporting our Core Business were interrupted. These types of interruptions could affect our ability to sell and deliver products and services and could seriously harm our business.
Changes in General Economic Conditions
The U.S. and certain other economies in which we operate have experienced slower growth after an extended period of growth in previous years. As a result, assets under management have generally decreased, thereby decreasing the revenues to asset managers. Such reduced asset management revenues could place pressure on our clients to cut their cost of services, which in turn could adversely impact our sales, renewal rates and ability to increase prices.
Possible Adverse Effects of Option Exercises
If holders of options to purchase our common stock exercise any significant number of these options and resell the underlying shares, the market price of Barra common stock could decline. At September 30, 2002, there were outstanding exercisable (i.e. vested) options to purchase approximately 1.3 million shares of Barra common stock issued under various Barra stock option plans. As of that date, options (vested and unvested) to purchase about 1.7 million shares of Barra Common Stock had exercise prices below our closing common stock price on the last trading date of the fiscal quarter, September 30, 2002 ($27.32).
Effect of Certain Charter and Bylaw Provisions and Anti-Takeover Provisions; Possible Issuance of Preferred Stock
Our Certificate of Incorporation, Bylaws, and certain Delaware laws contain provisions that may discourage a third party from acquiring Barra. This may deprive stockholders of certain opportunities to receive a premium for their shares as part of an acquisition of Barra.
In addition, in August 2001 we adopted a stockholder rights plan and declared a dividend distribution of one right for each outstanding share of common stock to stockholders of record as of September 7, 2001. Each right, when exercisable, entitles the holder to purchase one unit consisting of one one-thousandth of a share of our Series A Junior Participating Preferred Stock for $200 per unit. Under certain circumstances, if a person or group acquires 15% or more of our outstanding common stock, holders of the rights (other than the person or group triggering their exercise) will be able to purchase, in exchange for the $200 exercise price, shares of our common stock or of any company into which we are merged having a value of $400. The rights expire on September 7, 2011 unless extended by our board of directors. Because the rights may substantially dilute the stock ownership of a person or group attempting to take us over without the approval of our board of directors, our rights plan could make it more difficult for a third party to acquire us (or a significant percentage of our outstanding capital stock) without first negotiating with our board of directors.
Impact of Legal and Regulatory Proceedings
Elsewhere in this Form 10-Q, as well as in our Form 10-K, we have made various disclosures regarding litigation proceedings, as well as the possibility of certain other legal and regulatory proceedings. Many factors may affect the outcome of such proceedings. Accordingly, until such proceedings are finally resolved, it is difficult to determine the likelihood of a favorable outcome, the direct and indirect costs associated with the proceeding, or, in the event of an unfavorable outcome, the amount of any loss. Any proceeding, even if the outcome were to be ultimately favorable to us, would likely involve a significant commitment of our management, personnel, financial and other resources. This alone could have a material adverse effect on our business, financial condition, or results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to the interest bearing portions of our direct investment portfolio. We place our direct investments with high quality credit issuers and, by policy, limit the amount of credit exposure to any one issuer. Our first priority is to reduce the risk of principal loss. Consequently, we seek to preserve our invested funds by limiting default risk, market risk, and re-investment risk. We attempt to mitigate default risk by investing only in high quality credit securities that we believe to be low risk and by positioning our portfolio to respond appropriately to a significant reduction in credit rating of any investment issuer or guarantor. The direct investment portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. We do not use derivative financial instruments in our investment portfolio.
Our direct interest bearing investment portfolio primarily consists of investments in short-term, high-credit quality money market funds and U.S. Treasury Securities. These investments totaled approximately $21.1 million at September 30, 2002 with an average interest rate of 1.8%. At September 30, 2002, the portfolio also had approximately $192.8 million of short-term, U.S.-backed debt securities with an average taxable equivalent interest rate of 2.01%. The significant increase in the balance of this segment of the portfolio resulted from the consideration received from the sale of Symphony. The short-term money market funds and the U.S.-backed debt securities are not insured and, because of the short-term nature of the investments, are subject to credit risk, but are not likely to fluctuate significantly in market value.
Equity Market Risk
We had approximately $14.6 million at September 30, 2002 invested in investment products managed by our former Symphony venture. These investments are in primarily market-neutral programs, are non-interest bearing and consist principally of long and short positions placed directly through other fund managers in U.S and non-U.S. equity securities of both public and private issuers. Although the intent of the managers of these funds is to structure portfolios that are hedged against general market movements, these investments can be subject to significant changes in market value and are not insured. All investment decisions with respect to these market neutral programs are made by professional investment advisers and the performance of the funds is reviewed periodically by our management.
Foreign Currency Risk
We invoice customers in Europe in both pounds and euros. In Japan, we bill our customers in yen. Excluding customers in these locations, we generally bill for our services in U.S. dollars. To the extent we invoice our customers in local currency (yen, pound and euro), our international revenues are subject to currency exchange fluctuation risk. To the extent that international revenues that are invoiced in local currencies increase in the future, our exposure to fluctuations in currency exchange rates will correspondingly increase. Currency fluctuations may also effectively increase the cost of our products and services in countries in which customers are invoiced in U.S. dollars.
We have a hedging program in place which is designed to reduce our exposure to fluctuations in certain foreign currency translation rates from holding net assets denominated in foreign currencies. The program utilizes forward contracts for the sale of foreign currencies to hedge our net asset exposure, consisting principally of cash and receivables denominated in pounds, euros and yen. At September 30, 2002, we had one contract to sell 500 million yen at 122.70, maturing on November 5, 2002, with an unrealized loss of $3,989. Also at September 30, 2002, we had one contract to sell 5 million euro at 0.97656, maturing on November 4, 2002, with an unrealized loss of $23,500. Additionally, at September 30, 2002, we had one contract to sell 5 million pounds at 1.5529, maturing on November 4, 2002, with an unrealized loss of $42,500. We enter into forward currency contracts only with approved counter-parties and all hedging activities are reviewed by our Foreign Exchange Committee, which consists of our Chief Financial Officer and Corporate Controller. Our hedging program is currently designed only to reduce our exposure to gains and losses that result from translating our foreign assets and liabilities into U.S dollars. It does not currently limit or reduce the exposure we have from fluctuations in currency exchange rates on our reported revenues that are billed in non-U.S. currencies.
We have no foreign debt and our non-U.S. dollar cash balances held overseas are generally kept at levels necessary to meet current operating and capitalization needs.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We also have investments in certain unconsolidated entities. As we do not control or manage these entities, our disclosure controls and procedures with respect to these entities are necessarily substantially more limited than those we maintain with respect to our consolidated subsidiaries.
Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.
There have been no significant changes in our internal controls or in other factors that could significantly affect our internal controls subsequent to the date that we completed our evaluation.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
All information that is required by this item was reported under the heading "Legal Proceedings" in our Form 10-K for the fiscal year ended March 31, 2002. There have been no other material legal proceedings initiated since the date of our Form 10-K. From time to time, we may be involved in litigation incidental to the conduct of our business. Except as otherwise disclosed in our periodic filings, we are not currently a party to any legal proceedings that are material to our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
All information that is required by this item was reported under the heading "Submission of Matters to a Vote of Security Holders" in our Form 10-Q for the quarter ended June 30, 2002.
ITEM 5. OTHER INFORMATION.
During the quarter ended September 30, 2002, we repurchased 823,800 shares of our common stock on the open market at a total cost of $26,946,000, or an average price of $32.71 per share, pursuant to our stock repurchase plan. On November 7, 2002, our Board of Directors authorized Barra to repurchase up to 1,500,000 shares of our Common Stock pursuant to our stock repurchase plan (inclusive of all previously authorized amounts that had not been repurchased).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
None.(b) Reports on Form 8-K:
On August 13, 2002 we filed a Current Report on Form 8-K with the SEC. The Form 8-K reported the submission to the SEC by Kamal Duggirala, our Chief Executive Officer, and Gregory V. Stockett, our Chief Financial Officer, of the certifications required by Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, BARRA has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| BARRA, Inc. |
| (Registrant) |
Dated: November 13, 2002
| By: | /s/ Kamal Duggirala |
|
| |
| Kamal Duggirala | |
| Chief Executive Officer |
Dated: November 13, 2002
| By: | /s/ Gregory V. Stockett |
|
| |
| Gregory V. Stockett | |
| Chief Financial Officer |
CERTIFICATIONS
Barra, Inc.
CEO Certification
I, Kamal Duggirala, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Barra, 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.
Date: November 13, 2002
__/s/ Kamal Duggiala___
Kamal Duggirala
Chief Executive Officer
Barra, Inc.
CFO Certification
I, Gregory V. Stockett, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Barra, 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.
Date: November 13, 2002
__/s/ Gregory V. Stockett__
Gregory V. Stockett
Chief Financial Officer
EXHIBIT INDEX
| Exhibit Number | Exhibit Description |
| None. |