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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934 (Fee Required) For the fiscal year ended March
31, 1997.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from
_____ to _____.
Commission file number 0-19690
BARRA, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-2993326
(State of incorporation) (IRS Employer Identification Number)
2100 MILVIA STREET, BERKELEY, CALIFORNIA 94704-1113
(Address of principal executive offices and zip code)
(510) 548-5442
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
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, as
amended (the "Exchange Act"), during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of the Common Stock on June 2, 1997, as
reported on the Nasdaq National Market System, was approximately $114,000,000.
The number of shares of the registrant's Common Stock outstanding as of June 2,
1997 was 8,442,905.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following documents are incorporated by reference into Parts I, II,
III and IV and the Exhibit Index of this Form 10-K (the "Report"): (1) the
registrant's Form S-1 Registration Statement (No. 33-42951), filed on
September 30, 1991 (the "Registration Statement"), is incorporated by reference
into the Exhibit Index to and Part IV of this Report; (2) the registrant's
1997 Annual Report to Shareholders (the "1997 Annual Report") will be filed as
an exhibit to this Report and is incorporated by reference into Parts I, II and
IV of this Report; and (3) the Proxy Statement for the registrant's Annual
Meeting of Shareholders to be held July 31, 1997 (the "Proxy Statement") will be
filed at the same time as this Report and is incorporated by reference into
Part III of this Report.
TABLE OF CONTENTS
PART I PAGE
----
Item 1 Business 1
Item 2 Properties 9
Item 3 Legal Proceedings 9
Item 4 Submission of Matters to a Vote of Security Holders 9
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 9
Item 6 Selected Financial Data 9
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 8 Financial Statements and Supplementary Data 15
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 29
PART III
Item 10 Directors and Executive Officers of the Registrant 29
Item 11 Executive Compensation 31
Item 12 Security Ownership of Certain Beneficial Owners and Management 31
Item 13 Certain Relationships and Related Transactions 31
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 32
SIGNATURES 33
EXHIBIT INDEX 34
PART I
ITEM 1. BUSINESS
Certain information required by Item 1 to Part I is omitted from this Report and
incorporated by reference from pages 1 through 16 of the 1997 Annual Report.
Each statement contained in this Report containing any form of the words
"anticipate," "expect," "believe," "future" or "forward" is a forward looking
statement that may involve a number of risk factors and uncertainties. Part I
and other portions of the Report contain forward looking statements that involve
risks and uncertainties. Factors that may cause actual results to differ from
the results discussed in the forward looking statements include, but are not
limited to, those discussed in Item 7 to Part II of this Report.
GENERAL
BARRA, Inc. (the "Company" or "BARRA") develops, markets and supports
application software and information services used to analyze, manage and trade
portfolios of equity, fixed income, derivatives and other financial instruments.
To complement its analytics, the Company also provides services, through its
subsidiaries and other strategic relationships, in the areas of consulting,
electronic brokerage and information, and asset management. In all of these
areas, the Company offers a variety of products and services to investment
professionals in over 30 countries, including many of the world's largest
portfolio managers, fund sponsors, pension and investment consultants,
broker/dealers and master trustees.
The predecessor of BARRA was founded in 1975. The Company was acquired in 1981
by Ziff Communications Company. In 1986, twelve management employees acquired
the assets of the business and incorporated the Company in California under the
name Barr Rosenberg Associates, Inc. The Company has done business as BARRA
since 1975 and changed its corporate name to BARRA, Inc. in July 1991. In
October 1991, BARRA became a public company when it registered 1,725,000 shares
of its Common Stock under the Securities Act of 1933, as amended. Between
November 1992 and November 1995, the Company purchased an additional fifty
percent (50%) interest in BARRA International (Japan), Ltd. (formerly
N.B. Investment Technology Co., Ltd. ("BARRA Japan")) to obtain complete
ownership of that Japan corporation. On July 24, 1996, the Company acquired
Rogers, Casey & Associates, Inc. ("RogersCasey").
INSTITUTIONAL ANALYTICS
The Company's core institutional analytics products and services consist of
software applications that allow users to access the Company's risk, valuation
and other models and databases, and include related documentation and client
support. BARRA's application software utilizes information stored in the
Company's proprietary databases. The Company has derived these databases from
financial data from over 85 third-party sources, some of which may not be
generally available. In some cases, where insufficient data are available from
third parties, BARRA collects and inputs data directly. The Company applies
proprietary computer screening algorithms and cross-checks data received from
several independent sources to increase the accuracy of data. The resulting
derived databases, which are updated regularly by BARRA, fuel BARRA's models.
BARRA's software is available for use on a variety of computer platforms. Most
of the Company's software can be used on IBM and compatible personal computers,
and the majority of clients now use this platform. Some clients use BARRA
software on mini-computers and mainframe computers through time-sharing
arrangements with BARRA. Others have the software installed on their own
Digital Equipment Corporation VAX computers. The Company has also introduced
products and services that run on UNIX-based workstations. Clients can also
receive information and updates for BARRA's products and services via BARRALink
(the Company's electronic delivery system) and the Internet.
BARRA provides its core products and services to its clients on an annual
subscription basis. The annual subscription price for most of BARRA's
individual products and services is between $10,000 and $30,000, but a few
products and services have a significantly higher annual subscription price. An
individual product may consist of one or more combinations of BARRA's software
applications. The subscription price includes use of the relevant applications
software, which allows users to access BARRA's models and derived databases,
related documentation, periodic database updates and client support. Many of
the Company's clients subscribe to two or more products. BARRA also has a
number of strategic subscribers, who commit to specialized multi-year
subscriptions for packages of products and services.
RISK MODELS. The Company's proprietary mathematical risk models characterize
the relationship between risk and return in financial markets. BARRA introduced
its first equity risk product in 1975 for the United States equity market.
BARRA has since developed additional country-specific equity models, fixed
income models, global models, models covering multiple asset classes and models
covering hybrid securities such as convertible bonds and options. BARRA
continues to develop additional models as new markets open or as adequate data
on existing markets becomes available. Each risk model contains information on
a broad range of securities traded in the relevant market. The information is
based on a number of
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"descriptors" that describe each issuer of securities and capture important risk
characteristics. Descriptors are used to calculate a smaller number of "risk
indices," which summarize key characteristics and measure the exposure of each
security to risk factors common to all securities in the model.
EQUITY MODELS. Each of BARRA's equity models contains historical and current
data for a broad range of common stocks in the market covered by the model.
Data on approximately 8,000 stocks are included in the United States equity
model, and data on an aggregate of approximately 25,000 stocks are included in
the Company's global equity models. The Company estimates that its equity
models, taken together, currently cover approximately 95% of all publicly traded
equity securities worldwide, based on total market capitalization. For each
security, the equity models use BARRA's proprietary data to provide subscribers
with (1) an estimate of beta (a standardized measure of the response of an
individual stock to movement of the market as a whole), (2) allocation of the
issuer's business among one or more industries through BARRA's proprietary
industry allocation model, (3) three to thirteen risk indices, (4) historical
risk statistics, and (5) predictors of specific and total risk. Each equity
model functions similarly and contains similar data and risk indices, but is
customized to take into account the characteristics of the relevant market.
BARRA has developed individual risk models for the United States, Japanese,
United Kingdom, Australian, Canadian, French, Swedish, German, Korean, Dutch,
Swiss, South African, Thai, Malaysian, Hong Kong and Taiwanese equity markets.
BARRA has also developed a new risk model for the Japanese equity market that is
marketed by QUICK Corp. in Japan in tandem with real-time market data and is
forming consortiums for the development of risk models for the Indian, Mexican
and Brazilian equity markets. In addition, BARRA has developed risk models for
multiple and other types of equity markets. BARRA's Global Equity Model
contains data on equity securities of over 45 countries, taking into account the
interaction of country-specific characteristics, currency movements, industry
and other factors. The Short Term Risk Model ("STRM"), for the United States
equity market, was designed to predict volatility over the short horizons that
are typical in a trading environment to address the unique needs of the
broker/dealer community. STRM clients currently receive daily updates of United
States equity data and a real-time version of STRM. A daily horizon risk model
has also been released for the UK market.
FIXED-INCOME MODELS. In 1979, BARRA introduced its first risk model for the
United States fixed income (or bond) market. BARRA extended its local-market
multifactor model to include a currency dimension for global fixed income
managers in 1989 and introduced an enhanced United States bond model in 1991.
BARRA currently offers fixed income models for the United States, Japan and
Canada, and a Global Bond Model covering more than 20 countries. All
fixed-income models contain information on fixed income instruments and
derivatives in the relevant market. Fixed income models identify key dimensions
of value, such as cash flows, industry sectors, quality, option characteristics
and mortgage prepayments. The models further estimate the value of each bond
characteristic using proprietary algorithms.
ASSET ALLOCATION MODELS. BARRA's World Markets Model allows investors to
analyze portfolios consisting of a combination of asset classes in over 50
countries. The elements of the model are asset classes rather than individual
securities. Analyses can be performed relative to any of over 40 base
currencies, and the model also can be used for risk analysis, asset allocation
and currency hedging. Originally released in 1986, the World Markets Model now
features a performance analysis capability, risk analysis for both developed and
emerging markets, and a backtesting function, which allows investment strategies
to be implemented and tested in a full historical environment. In addition, a
tactical asset allocation (TAA) testing tool, the BARRA Altis System-TM-, was
released in fiscal year 1997 (see below).
DERIVATIVES MODELS. In 1994, BARRA obtained ownership of and rights to several
advanced derivatives analytics packages, including the Dynamic Asset Allocation
model and the Exotic Options models developed by Leland O'Brien Rubinstein
Associates Incorporated. The Dynamic Asset Allocation model is a PC-based
model, which is marketed under the name Contour and which allows investment
managers to implement a variety of portfolio hedging strategies. The Exotic
Options service consists of a set of proprietary option models for pricing
exotic (non-standard) options.
VALUATION MODELS. BARRA introduced its first valuation model for the United
States equity market in 1993. BARRA has since developed additional
country-specific valuation models for the United Kingdom, Japan, France and
Switzerland. For each country researched, a broad range of valuation techniques
is available. These include both fundamental and technical models such as
Dividend Discount, Estimate Revision, Return Reversal and Relative Strength. In
addition to these "bottom-up" modeling approaches, BARRA has researched and made
available Macroeconomic Models, which facilitate a "top-down" approach.
APPLICATION SOFTWARE, SYSTEMS AND PLATFORMS. BARRA offers application software
on a variety of platforms to integrate the Company's models and databases. The
various application programs may be used individually or in combination as
analytical tools for addressing a wide range of financial problems. BARRA's
principal software applications include:
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THE BARRA AEGIS SYSTEM-TM- ("AEGIS"). Aegis includes BARRA's
Microsoft-Registered Trademark- Windows-based equity risk characterization and
optimization tools. It is an integrated software system that combines BARRA's
core risk analysis technology with advanced "what if" tools to help money
managers focus on high impact risk/return decisions. Aegis has network
capability and is an open application, which enables users to switch easily
between BARRA's analytics and other applications, such as spreadsheets. It also
permits limited access to fundamental data supplied by BARRA and imported by the
user. Optimization capabilities help the financial manager select individual
securities for a portfolio, given the manager's criteria and portfolio
constraints.
THE ALPHABUILDER SYSTEM ("ALPHABUILDER"). Alphabuilder is an integrated
Microsoft-Registered Trademark- Windows-based package within Aegis that combines
advanced return forecasting and analytic tools with more than 40 valuation
models and descriptive variables covering an extensive universe of stocks.
BARRA has also introduced a custom performance module to Alphabuilder for the
United States, Japanese and United Kingdom markets. This module allows managers
to backtest potential investment strategies.
THE BARRA COSMOS SYSTEM-TM- ("COSMOS"). Cosmos is a Windows-based system that
allows global money managers to perform fixed income portfolio analysis. The
system, which provides extensive asset, derivative and global index coverage,
estimates daily term structures of interest rates in more than 20 markets and
uses advanced econometric techniques for modeling currency and local market risk
in a portfolio context. Cosmos is being expanded into an integrated group of
fixed income applications including global performance analysis, global
portfolio optimization and single country models. Valuation capabilities
estimate the term structure of interest rates together with sector and quality
spreads. Based on such estimates, Cosmos derives fitted prices for a wide
variety of fixed income securities, including illiquid and privately-placed
securities. This helps managers estimate values of fixed income securities for
which there are no current market prices. Optimization capabilities support
such management strategies as single and multiple liability immunization, cash
flow matching and horizon matching applications.
THE BARRA ALTIS SYSTEM-TM- ("ALTIS"). Altis is a Windows-based index-level
returns forecasting tool that allows money managers, pension fund professionals
and consultants to calculate the relationship between fundamental economic
variables and subsequent investment returns. Economic forecasts are used to
create returns forecasts or "alphas" to enhance portfolio decision-making. By
calculating the underlying relationship between BARRA risk factors and
fundamental economic variables, Altis allows the user to rebalance portfolios at
any time to capture anticipated out-performance driven by predicted changes in
the economy. The fundamental variables can be both local and international,
allowing tactical asset allocation among countries, industrial sectors and asset
classes for any diversified portfolio. Altis, when used in conjunction with
either Aegis or World Markets Model Systems, provides the key link between the
macro-economy and the investment decision.
RISKCASTER. Riskcaster is BARRA's UNIX-based, equity portfolio risk
characterization and optimization system that supports many BARRA models,
including STRM. It was designed specifically for broker/dealers and allows
traders to analyze the risk and liquidity characteristics of equity portfolios,
determine optimal hedges and construct efficient portfolios. Last year,
Riskcaster was enhanced to allow easy integration with in-house systems and
automated processing of a large number of portfolios. In addition, BARRA
developed an interface between Riskcaster and a Swiss exchange to deliver a
real-time analysis of proprietary positions, as well as client portfolios.
BARRA has also developed a real-time Riskcaster version of STRM that will enable
dealer/market makers to manage inventory risk intra-day.
GLOBAL STYLE ANALYZER. Global Style Analyzer is a Microsoft-Registered
Trademark- Windows-based tool, which characterizes and evaluates each manager's
performance against a given style and identifies aggregate style characteristics
across a set of portfolio managers. It can be used by plan sponsors and
consultants to search for managers with particular investment styles and/or risk
exposures, and to evaluate their historical performance relative to other
similar managers. This application is currently available for markets in the
United States, Canada and the United Kingdom.
CONSULTING AND INFORMATION SERVICES
As an extension of its core software products, the Company offers a variety of
consulting services, information services, trading-related software and other
specialized software designed to assist investment professionals in creating,
evaluating and trading securities portfolios.
SPONSOR SERVICES. RogersCasey Sponsor Services, Inc.("Sponsor Services") is a
BARRA subsidiary dedicated to consulting for pension funds, endowments,
foundation and other plan sponsors. Based in Darien, Connecticut, Sponsor
Services also has a West Coast office in San Francisco, California.
STRATEGIC SERVICES. The BARRA Strategic Consulting Group, Inc. ("Strategic
Services") is another BARRA subsidiary. Strategic Services was formed by
combining an existing investment manager consulting subsidiary of RogersCasey
with
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BARRA's leading-edge analytical services and global distribution network.
Professional teams of consultants draw on the wide range of research, analytical
power and industry expertise in the combined organization to bring a unique set
of skills to bear on investment management problems.
SPECIALIZED CONSULTING SERVICES. The Company performs a variety of other
specialized consulting services, including historical testing of investment
strategies specified by the client, and building and maintaining "normal"
portfolios (customized benchmark portfolios against which a portfolio created by
the client can be measured) and indices. BARRA professionals use the Company's
proprietary databases and software in rendering these services. Since 1992, the
Company has jointly developed with Standard & Poor's Corporation the S&P
500/BARRA Growth Index, the S&P 500/BARRA Value Index, the S&P Midcap 400/BARRA
Growth Index, S&P Midcap 400/BARRA Value Index, the S&P SmallCap 600/BARRA
Growth Index and the S&P SmallCap 600/BARRA Value Index. In November 1995, the
Chicago Mercantile Exchange and the Chicago Board Options Exchange began trading
the S&P 500/BARRA Growth Index and the S&P 500/BARRA Value Index futures,
futures options and European-style options. In 1997, the Company also launched
Enterprise Risk Management services to address the needs of large-scale risk
management departments in major banks, brokers and insurance companies
worldwide.
INFORMATION SERVICES. BARRA licenses the information in its proprietary
databases, packaged in various forms. The information is generally delivered
electronically, both directly to clients and indirectly through third-party
vendors.
OTHER PRODUCTS AND SERVICES AVAILABLE THROUGH STRATEGIC RELATIONSHIPS
BARRA has developed certain new products and entered certain new markets with
strategic partners through joint ventures and other relationships. The Company
anticipates entering into additional strategic relationships in the future.
BARRA's strategic relationships include:
GLOBAL ADVANCED TECHNOLOGY CORPORATION ("GAT"). On May 23, 1997, the Company
entered into definitive agreements to exchange up to 470,000 shares of the
Company's stock and up to $3.2 million in cash for all of the outstanding shares
of GAT and a majority interest in Innosearch Corporation, an affiliate of GAT
("Innosearch"). GAT and Innosearch are fixed income analytics, consulting, and
research firms. The closing of the transaction is subject to certain conditions
contained in the agreements. Following the closing of the transactions, GAT and
Innosearch will become subsidiaries of BARRA.
SYMPHONY ASSET MANAGEMENT, LLC. ("SYMPHONY LLC"). Effective July 1 1996, the
Company's wholly owned subsidiary, Symphony Asset Management, Inc. ("Symphony
Inc." and collectively with Symphony LLC "Symphony"), contributed its assets,
liabilities and business to Symphony LLC, a newly formed entity, in exchange for
interests in Symphony LLC. The capitalization of Symphony LLC consists of four
defined Interest Classes (Class 1, Class 2, Class 3 and Class 4). Class 1,
Class 2, and Class 4 interests belong to Symphony Inc. (which continues to be
wholly-owned by the Company) while the Class 3 interest belongs to a newly
formed limited liability company, Maestro LLC ("Maestro"), whose owners are the
principals of Symphony LLC. Symphony LLC is located in San Francisco,
California and operates as an independent unit of BARRA. Symphony LLC offers
investment management services directly to institutions and individuals. The
July 1, 1996 arrangement provides for the principals, through Maestro, to have
approximately a 50% ownership interest of Symphony LLC and an increasing share
of Symphony LLC's profits starting with an initial 25% share (exclusive of
salaries) to as much as 50% (inclusive of salaries) after certain earnings
levels are attained. As of April 1, 1997, the assets of a former unit of
RogersCasey which managed approximately $600 million of private equity
(non-marketable investments) were purchased by Symphony LLC. (See Note 3 of
Notes to the BARRA, Inc. Consolidated Financial Statements.)
PORTFOLIO SYSTEM FOR INSTITUTIONAL TRADING ("POSIT"). POSIT is an equally owned
general partnership between BARRA and Investment Technology Group, Inc. ("ITG"),
a publicly traded subsidiary of Jefferies & Co., Inc. ("Jefferies"), a
securities brokerage firm specializing in off-exchange trading. POSIT operates
a computerized institutional trading system that allows institutional investors
to trade portfolios of United States securities directly with each other in a
confidential environment. Investors send their buy or sell orders to a POSIT
computer. Using technology jointly developed by BARRA and Jefferies, buy and
sell orders are then matched, or crossed, at the midpoint between the bid and
ask prices at selected times during the trading day. POSIT was introduced in
1987. Total POSIT trading volumes in calendar 1992, 1993, 1994, 1995 and 1996
were approximately 1.1 billion, 1.6 billion, 1.9 billion, 2.3 billion, and 3.3
billion shares, respectively. Currently, all trades of United States equities
executed through POSIT are cleared by, and all brokerage commissions are paid
to, ITG. BARRA receives a fee from the partnership based on commissions
received by ITG for trades of United States securities on POSIT. In an effort
to increase order flow on POSIT in the United States, ITG has entered into a
marketing and promotion agreement with Toronto-based Versus Technologies Inc.
The POSIT partnership has also licensed an Australia/New Zealand equity version
of POSIT to Burdette, Buckeridge & Young, an Australian brokerage firm, and is
exploring similar arrangements to expand POSIT worldwide. (See Note 8 of Notes
to the BARRA, Inc. Consolidated Financial Statements.)
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GLOBAL POSIT. Global POSIT is a crossing system for international equities,
similar to POSIT. Global POSIT was developed by BARRA and is operated by a
general partnership that is equally owned by BARRA's subsidiary, BARRA
International (U.K.), Ltd., and a subsidiary of ITG. Global POSIT was
introduced in London in late 1990. Trading on Global POSIT has not been
significant to date. (See Note 8 of Notes to the BARRA, Inc. Consolidated
Financial Statements.)
LIBERTY BROKERAGE INVESTMENT CORP. ("LIBERTY") AND BARRA ANALYTICS SECURITIES
("BAS"). Liberty and certain of its subsidiaries are brokers of U.S. Government
and mortgage-backed securities, corporate bonds and foreign sovereign and
corporate securities. Additionally, Liberty and certain of its subsidiaries
package and sell brokerage information from Liberty's brokerage operations. BAS
was initially formed as an equally owned general partnership between a BARRA
subsidiary and a Liberty subsidiary to serve as a fixed income broker dealer to
distribute trading analytics and other services. In April 1996, BARRA exchanged
its shares of Liberty Series A Convertible Exchangeable Preferred Stock,
representing a less than a ten percent (10%) interest in Liberty, for a
$7,219,474 Convertible Secured Promissory Note. On January 31, 1997, BARRA
purchased Liberty's interest in BAS and took over the operation of the business.
Up until that time, there had been no significant business operations of BAS.
(See Note 9 of Notes to the BARRA, Inc. Consolidated Financial Statements.)
BOND EXPRESS, L.P. ("BOND EXPRESS"). In August 1995, BARRA, through a
subsidiary, purchased a 1% limited partnership interest in Bond Express. Bond
Express is a distributor, on a subscription basis, of software and databases of
fixed income security offering information from dealers. At that time, the
BARRA subsidiary also entered into a Put/Call Agreement providing BARRA the
right to call the remaining equity interest in Bond Express, held by the general
partner (Bond Express, Inc. ("BEI")) and BEI the right to put that interest to
BARRA. In a related transaction, BARRA simultaneously agreed to make a
$2,100,000 long term loan to Bond Express. The funds for this loan, along with
additional loans of approximately $330,000, were disbursed in fiscal 1996 and
1997. These loans are convertible into a majority interest in Bond Express.
(See Note 3 of Notes to the BARRA, Inc. Consolidated Financial Statements.)
QUOTECOM, INC. ("QUOTECOM"). In March 1997, the Company purchased 68,037 shares
of Series C Convertible Preferred Stock in QuoteCom for $445,644. In April
1997, the Company purchased an additional 46,368 shares of the same securities
for $304,366. QuoteCom was founded in October 1993 to provide quality financial
market data and relevant business news to Internet users in a timely fashion.
(See Note 10 of Notes to the BARRA, Inc. Consolidated Financial Statements.)
DATA DOWNLINK CORPORATION ("DATA DOWNLINK"). In April 1997, the Company
purchased 272.7 shares of Series A Convertible Preferred Stock of Data Downlink
for $1,500,000. Data Downlink developed and supports an online service that
aggregates and indexes quantitative business information from multiple sources
and makes this information available in spreadsheet format on a pay-per-view
basis. (See Note 10 of Notes to the BARRA, Inc. Consolidated Financial
Statements.)
MARKETING
Products and services are marketed to a broad set of financial service
providers. The Company's strategy for marketing new products and services is to
focus first on the largest participants in the relevant segment of the
investment community, whose endorsement is important in generating market
acceptance. Once many of the larger participants have subscribed, the Company
targets the broader market, including participants in more diverse locations.
BARRA and its subsidiaries target clients in new markets as quantitative methods
gain acceptance. Current marketing efforts are designed to increase
geographical coverage, especially in Europe and in various emerging markets.
BARRA and its subsidiaries use many communication channels to stimulate demand
within target markets, including seminars, trade shows, trade journals, targeted
mailings and a quarterly newsletter. BARRA's employees also publish articles in
professional journals. The Forbes/BARRA Wall Street Review appears every two
weeks in Forbes Magazine and features BARRA indices and other market indicators.
In 1995, BARRA launched its World Wide Web site on the Internet as another
global communication channel. The Company's URL is http://www.barra.com.
Research, development, consulting, sales and support specialists regularly speak
at industry conferences, as well as at the Company's own seminars. BARRA and
its subsidiaries sponsor more than 60 seminars and workshops per year throughout
the world. These seminars and workshops bring researchers and industry
professionals together, expose those professionals to the latest developments in
investment theory and technology, and give researchers an opportunity to gain
insights from the Company's clients.
SALES AND CLIENT SUPPORT
BARRA and its subsidiaries primarily use a direct sales force to distribute
principal products and services in North America. In Japan, BARRA Japan
distributes, markets and supports the Company's products and services and QUICK
Corp. distributes,
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markets and supports the QUICK/BARRA Model. At the beginning of fiscal 1996,
BARRA's wholly-owned Delaware subsidiary, BARRA International, Ltd., began to
distribute, market and support BARRA's services and products in all other
jurisdictions outside of the United States. Because of the sophisticated nature
of BARRA's products and services, sales and client support personnel are
generally required to have strong academic and financial backgrounds and to
specialize in particular asset classes. Many of these professionals work out of
the Company's Berkeley, California headquarters. The remainder are located in
the Company's other U.S. offices and in its non-U.S. offices. Sales and client
support professionals focus their selling efforts on both existing clients and
institutions that are not currently subscribers for products and services. The
Company views sales and client support as an integrated process, and a
substantial portion of its sales are generated by its client support personnel.
The sales cycle for new clients of principal products and services is typically
six to nine months, and most sales require one or more face-to-face meetings
with the prospective client. Each new client is introduced to one or more
client support specialists. Sales and client support specialists install the
product and then work closely with clients to provide comprehensive ongoing
service and support. Client support professionals provide intensive on-site
training in the theories underlying each product and in the use of the product,
telephone support and routine consulting services needed in connection with the
use of certain products.
CLIENTS
BARRA and its subsidiaries currently serve over 1,100 clients in over 30
countries. Clients include active and passive equity managers, fixed income
managers, global managers, fund sponsors, pension and investment consultants,
broker/dealers and master trustees.
SIGNIFICANT SOURCES OF REVENUE
POSIT accounted for approximately $5,134,000, $6,826,000 and $8,960,000,or 8%,
9% and 9% of BARRA's total operating revenues for fiscal 1995, 1996 and 1997,
respectively, and Symphony accounted for approximately $1,541,000, $3,328,000
and $16,083,000 or 2%, 4% and 15% of BARRA's total operating revenues for fiscal
1995, 1996 and 1997, respectively. See "- Other Products and Services Available
Through Strategic Relationships." Other than Symphony (and POSIT prior to the
merger with RogersCasey), no entity accounted for more than 10% of BARRA's total
operating revenues in any of the last three fiscal years, and BARRA does not
believe that the loss of revenue from any single source other than Symphony or
POSIT would have a material adverse effect on BARRA.
RESEARCH AND PRODUCT DEVELOPMENT
The financial risk management and valuation software and information services
industries are characterized by rapid technological advances, changes in client
requirements, preferences and platforms, and frequent new product introductions
and enhancements. BARRA believes that its future growth and financial
performance will depend upon its ability to continue to develop and introduce
new products and enhance its existing products in response to advances in
economic theory and computer technology, and to changing customer requirements.
Any failure by BARRA to anticipate or respond adequately to technological
developments or client requirements, or any significant delays or excessive
costs in product development or introduction, could have a material adverse
effect on BARRA's business, operating results or financial condition.
Separate research, operations and software engineering groups support BARRA's
core business units in developing new models and products to address client
needs. Because BARRA offers products across many geographic areas and many
areas of specialization, if often must restrict its product development efforts
to a limited number of products and operating platforms. There can be no
assurance, however, that efforts selected by BARRA will be successful or will
achieve market acceptance. During fiscal 1995, fiscal 1996 and fiscal 1997,
BARRA's expenditures for BARRA-funded product development were approximately
$9,663,000, $11,955,000 and $17,200,000, representing 15%, 15% and 16% of total
operating revenues, respectively. The cost of research and development efforts
required to keep pace with technological changes may, at times, have an adverse
effect on BARRA's business, operating results or financial condition.
COMPETITION
The markets for financial risk management and valuation software and information
services are intensely competitive and are fragmented into many areas of
specialization. BARRA presently competes across many geographic areas and many
areas of specialization. Although competition exists for each of BARRA's
individual product lines, BARRA believes that no single competitor is dominant
in any of its principal markets and that none of its competitors presently
competes across BARRA's entire range of products. Certain of BARRA's products
compete with other products that offer levels of functionality different from
those offered by BARRA's products or that are designed for a somewhat different
group of end users. In the market for
6
its core products, BARRA competes with other companies that have developed risk
models, applications and databases. To date, competition is greatest for
BARRA's United States fixed income models and applications.
BARRA believes that the principal competitive factors for its core products are
technical capability, product breadth and architecture, product features and
functions, quality of customer support and service, professional and product
reputation, ease of use and price. In order to maintain or improve its position
in this industry, BARRA must continue to enhance its current products and
develop new products in a timely fashion. Although BARRA believes that it
competes favorably with respect to these factors, there can be no assurance that
it will continue to succeed in its efforts.
BARRA believes that it has certain competitive advantages, including extensive
proprietary databases, skilled professional staff, a reputation for excellence
developed over years of operation, and an established series of seminars and
other training programs. The effort and cost required to develop and maintain
BARRA's risk models and related databases may present a significant barrier to
entry into the marketplace for certain of BARRA's products and services. BARRA
believes that its extensive experience in product maintenance, together with the
economies of scale available to BARRA because of its large client base, give
BARRA a competitive advantage in the market for its core products. There can be
no assurance, however, that competitors, some with financial resources
substantially greater than BARRA's, and some which may be clients of BARRA, will
not commit the financial resources needed to successfully compete with BARRA.
Symphony competes in the highly fragmented asset management industry.
Symphony's less than $2 billion in assets under management represent less than
0.1% of total assets in the U.S.-based asset management industry, and no one
firm dominates the industry. Barriers to entry are comparatively low in the
industry due to the ability of a few skilled individuals to start an asset
manager in a short period of time. BARRA believes that competitive factors at
work in the asset management industry include investment performance, client
service and retention of key employees.
Sponsor Services competes in a fragmented industry offering various consulting
services to pension funds, endowments, foundations and other fund sponsors. A
survey conducted in 1995 indicated that Sponsor Services advised sponsors
representing less than 3% of the total assets managed by institutional investors
in the U.S., and that no one firm dominated the industry. BARRA believes that
competitive factors at work in the sponsor consulting industry include client
service, industry reputation, research innovation and retention of key
employees.
POSIT competes with other crossing systems. BARRA believes that the principal
competitive factors for POSIT are transaction price and liquidity. Although
BARRA believes that POSIT competes favorably with respect to these factors,
there can be no assurance that POSIT will continue to succeed in its efforts.
VARIABILITY AND SEASONALITY OF OPERATING RESULTS
Clients of BARRA's core business have historically renewed their contracts at a
high rate, but there is no assurance that such renewals will continue. Despite
such renewals, BARRA has experienced variability of operating results from
quarter to quarter, depending upon such factors as the trading volume of POSIT,
the volume and timing of agreements with new clients, the timing of major
seminars, the completion of significant consulting engagements, annual salary
adjustments in July, the timing and market acceptance of new products and
technological advances by the Company or its competitors, foreign currency
fluctuations, price levels and unexpected expenses. This variability is
expected to continue for the foreseeable future. To the extent that Symphony
revenues depend on the performance and the timing of performance fees
determination dates for the funds it has under management, additional
variability may occur in the future.
Consulting fees from Strategic Services are usually non-recurring, project-type
engagements that are completed in phases. Also included in Strategic Services
revenues are fees related to consulting work done in connection with strategic
transactions involving clients. Accordingly, Strategic Services revenues are
susceptible to a large degree of variability depending on the ability to source
new projects and the unpredictable nature and significance of fees associated
with strategic transactions.
PROPRIETARY RIGHTS AND LICENSES
BARRA has copyrights in its products and related documentation, but does not
hold any patents and currently relies on a combination of trade secret and
contract protection to establish and protect its proprietary rights in its
products. Despite these precautions, it may be possible for unauthorized
parties to copy aspects of BARRA's products or to obtain and use information
that BARRA regards as proprietary. Moreover, the laws of some jurisdictions do
not protect BARRA's proprietary rights in its products to the same extent as the
laws of the United States. In addition, some aspects of BARRA's products are
not subject to intellectual property protection.
7
BARRA believes that, because use of most of its products requires access to
BARRA's proprietary databases, trade secret and copyright protection are less
significant factors in the protection of its proprietary rights than the
knowledge, ability and experience of its employees, timely product enhancements
and database updates, and availability and quality of its support services.
BARRA believes that its products, trademarks and other proprietary rights do not
infringe the property rights of third parties. There can be no assurance,
however, that third parties will not assert infringement claims in the future or
that others may not independently develop the same or similar technology or
otherwise obtain access to BARRA's proprietary technology. From time to time,
BARRA may be required to obtain licenses to the proprietary rights of others and
there can be no assurance that such licenses would be made on terms acceptable
to the Company, if at all.
GOVERNMENT REGULATION
The financial services industry is subject to extensive regulation at the
federal and state levels as well as by foreign governments. A change in or
failure to comply with any applicable laws, rules or regulations could result in
fines or penalties or suspensions or revocations of licenses or permits, any one
of which could have a material adverse effect on the Company.
BARRA and its affiliate Symphony are registered as investment advisers under the
Investment Advisers Act of 1940, as amended, as well as under the California
Corporate Securities Law of 1968, as amended. RogersCasey and certain of its
subsidiaries and GAT are also registered as investment advisers under the
Investment Advisers Act of 1940, as amended. As registered investment advisers
BARRA, Symphony, GAT and RogersCasey are required to meet certain financial
criteria, including the maintenance of minimum net capital. In addition, as a
result of such status, BARRA, Symphony, GAT and RogersCasey are subject to
certain obligations, fiduciary duties and prohibitions with respect to their
operations, including their dealings with clients, to which they would not
otherwise be subject. Such obligations, fiduciary duties and prohibitions
include certain required disclosures to clients, limitations on receipt of
performance-based compensation, and restrictions with respect to transactions
involving potential conflicts of interest. BARRA believes that it is in
compliance with all rules and regulations applicable to it as a registered
investment adviser. See "- Other Products and Services Available Through
Strategic Relationships." As Symphony expands its operations, it may become
subject to certain additional government regulatory requirements. See "- Other
Products and Services Available Through Strategic Relationships."
BAS is currently registered as a broker/dealer with the Securities and Exchange
Commission ("SEC") and is a member of the National Association of Securities
Dealers, Inc. ("NASD"). As a registered broker/dealer BAS is required to meet
certain financial criteria, including the maintenance of minimum net capital.
In addition, as a result of such status, BAS will be subject to certain
obligations, fiduciary duties and prohibitions with respect to its operations,
including its dealings with clients, to which it would not otherwise be subject.
Such obligations, fiduciary duties and prohibitions will include certain
required disclosures to clients and restrictions with respect to transactions
involving potential conflicts of interest.
BARRA estimates that approximately 12% of its total operating revenues are
received from United States brokers who direct BARRA to provide services to
designated money managers, fund sponsors and consultants using commissions
generated by their advised accounts to obtain investment research and brokerage
services. The funds used by United States brokers to pay for the services are
referred to in the securities industry as "soft dollars." This practice is
authorized by Section 28(e) of the Exchange Act, which provides a safe harbor,
under certain conditions, to money managers, fund sponsors and consultants who
use the commission dollars of their advised accounts to obtain investment
research and brokerage services. There is debate within the investment
community concerning the purchase of goods and services with soft dollars, and
this practice is regulated in the United States by the SEC pursuant to its
authority under the Exchange Act and by the Department of Labor pursuant to its
authority under the Employee Retirement Income Security Act of 1974, as amended.
There can be no assurance that changes in these or other applicable state,
federal or foreign laws or regulations will not restrict or prohibit BARRA from
providing services to its clients in exchange for soft dollars. Such changes
could have a material adverse effect on the Company.
POSIT is considered a crossing network and is not currently registered as a
stock exchange under Section 6 of the Exchange Act in reliance upon a "no
action" letter in which the Staff of the SEC advised Jefferies that it would not
recommend that the SEC take enforcement action to require such registration. As
a result POSIT has not been registered with the SEC as an exchange, but ITG, as
the licensee of POSIT, is required to register as a broker dealer and to provide
the SEC with certain data on a regular basis and with prior notice of material
changes to POSIT. In connection with a study by the staff of the SEC of the
structure of United States equity markets and of the regulatory environment in
which those markets operate, the SEC has adopted Rule 17a-23 which imposes
additional record keeping and reporting requirements on most operators of
automated trade execution systems, including ITG. In addition, certain of the
securities exchanges have actively sought more stringent regulatory requirements
imposed upon automated trade execution systems. There can be no insurance that
the SEC or the United States Congress will not in the future seek to impose more
stringent regulatory requirements on the operation of automated trade execution
systems such as POSIT.
8
EMPLOYEES
As of March 31, 1997, BARRA and its subsidiaries employed a total of 504
persons. Of these employees, 396 were located in BARRA's offices in the United
States and the remainder were located in BARRA's foreign offices on that date.
Additionally, BARRA conducts business through independent consultants in
Montreal and Mexico. BARRA has no long-term employment agreements with these
individuals. Except for BARRA's employees in France, who are members of a
state-sponsored labor union, none of BARRA's employees is represented by a labor
union. BARRA has experienced no work stoppage and believes that its employee
relations are good.
ITEM 2. PROPERTIES
BARRA's principal administrative, marketing and product development facility is
located in Berkeley, California. BARRA occupies this facility under a lease
that expires in June 1997, subject to a five-year renewal option which was not
exercised by BARRA. In May 1996, BARRA executed a build-to-suit Net Office
Lease for a new headquarters to be located near its current facility in
Berkeley, California. The Net Office Lease shall have a term of ten years,
subject to eight consecutive five-year renewal options. The renovation of the
new facility is scheduled to be completed before the expiration of the Company's
current lease. (See Note 6 of Notes to the BARRA, Inc. Consolidated Financial
Statements.) In addition, the Company and its subsidiaries lease space for
offices in San Francisco, New York, Darien, London, Yokohama, Paris, Frankfurt,
Sydney, Hong Kong and Cape Town.
ITEM 3. LEGAL PROCEEDINGS
BARRA is not involved in any legal proceedings which it believes could
materially and adversely affect its financial condition or results of
operations. (See Note 14 to Notes to the BARRA, Inc. Consolidated Financial
Statements.)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Company did not submit any matters to a vote of its shareholders during the
fourth quarter of the fiscal year ended March 31, 1997.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
BARRA's common stock is listed on the NASDAQ National Market System (the "NMS")
under the trading symbol "BARZ." This table displays the range of high and low
closing trade prices for BARRA's common stock as reported on the NMS.
FISCAL 1996 HIGH LOW FISCAL 1997 HIGH LOW FISCAL 1998 HIGH LOW
1st Quarter 11.125 9.250 1st Quarter 34.000 19.500 1st Quarter 29.750 24.500
2nd Quarter 15.750 9.250 2nd Quarter 27.000 19.000 (through June 2, 1997)
3rd Quarter 17.000 11.750 3rd Quarter 28.000 23.250
4th Quarter 22.500 15.500 4th Quarter 32.500 24.750
At June 2, 1997 there were approximately 1,600 holders of BARRA's common stock.
To date, BARRA has paid no cash dividends on its common stock. The payment of
dividends, if any, in the future is within the discretion of the Board of
Directors and will depend upon BARRA's capital requirements and financial
condition and other relevant factors. The Board of Directors of BARRA does not
intend to declare any dividends in the foreseeable future. On June 2, 1997 the
closing price for BARRA on the NMS, as reported by the NMS, was $29.75.
ITEM 6. SELECTED FINANCIAL DATA
The information regarding the Company's selected financial data required by this
Item 6 is incorporated by reference to the inside cover of the 1997 Annual
Report under the heading "Financial Highlights."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
BARRA, Inc. ("BARRA" or the "Company") consolidated financial statements and
related notes and with the selected financial data. The discussion of results,
causes or trends should not be construed to imply that such results, causes or
trends will necessarily continue in the future. Each
9
statement made in this discussion and analysis and elsewhere in this report
containing any form of the words "anticipate", "expect," "believe," "future" or
"forward" is a forward-looking statement that may involve a number of risk
factors and uncertainties. Among other factors that could cause actual results
to differ materially are the following: business conditions and other changes
in the Company's industry; competitive factors such as rival products and price
pressures both domestically and internationally; availability of adequate
third-party data on reasonable terms and at reasonable prices; significant
delays or excessive costs associated with product research, development and/or
introduction; the loss of a large single revenue source; the investment
performance and the timing of performance fee determination dates for the
Company's asset management subsidiary; significant changes in trading volumes in
the POSIT trading system; and fluctuations in U.S. dollar exchange rates for
non-U.S. currencies. Further information and potential risk factors that could
affect the Company's financial results are included in this Form 10-K for the
fiscal year ended March 31, 1997.
GENERAL
ROGERSCASEY. As further described in Note 3 to the financial statements, on
July 24, 1996, the Company merged with RogersCasey. All of the common stock and
outstanding options of RogersCasey were exchanged for 481,364 shares of the
Company's common stock and 30,257 options on BARRA's common stock. This merger
was accounted for as a pooling of interests. Under this method of accounting,
the financial condition and results of operations for the combined companies is
presented for all periods (both subsequent to, and prior to the merger) as if
the companies had always been combined. For this reason, financial information
for the Company for all periods prior to the July 24, 1996, merger date have
been retroactively restated to include the historical results of RogersCasey.
BOND EXPRESS. As discussed in Note 3 to the financial statements, the Company
consolidated Bond Express beginning June 1, 1996. Accordingly, the following
discussion of results of operations for the year ended March 31, 1997 includes
related amounts from Bond Express for the period beginning June 1, 1996 only.
GAT AND INNOSEARCH. Subsequent to its fiscal year end, the Company entered into
definitive agreements to exchange approximately 470,000 shares of the Company's
stock and up to $3.2 million in cash for all of the outstanding shares of GAT
and a majority interest in Innosearch, an affiliate of GAT. GAT and Innosearch
are fixed income analytics, consulting, and research firms. Both firms will
become subsidiaries of the Company at the closing of the transaction. The
closing of the transaction is subject to certain conditions contained in the
agreements. Because the transaction has not yet closed, the expected financial
impact of the acquisitions is not included in the discussion which follows. The
acquisition is expected to be accounted for using the purchase method of
accounting for business combinations.
FOREIGN CURRENCY. BARRA, as an international corporation, generates revenues
from clients throughout the world, maintains sales and representative offices
world-wide and holds certain deposits and accounts in foreign currencies.
BARRA's revenues are generated from both United States and foreign currencies.
BARRA's subscriptions in the United Kingdom and the European Community are
priced in British pounds sterling ("pounds") and European Currency Units
("ECUs"), respectively. Additionally, BARRA's consolidated subsidiary, BARRA
International (Japan), Ltd. ("BARRA Japan"), generates revenues, has expenses
and has assets and liabilities in Japanese yen. 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. The Company has considered its
exposures to foreign currency fluctuations and to this point has decided not to
engage in hedging or managing exposures to foreign currency fluctuations through
contracts for the purchase, sale or swapping of currencies.
For fiscal 1997 compared to fiscal 1996, there was a significant strengthening
of the U.S. dollar against the yen while average exchange rates for pounds and
ECU's remained relatively constant. The Company estimates that the impact of the
declining value of the yen versus the U.S. dollar during fiscal 1997 accounted
for a reduction of approximately $1,500,000 in consolidated revenues and
approximately $150,000 in consolidated net income for the fiscal year ended
March 31, 1997. For fiscal 1996 compared to fiscal 1995, there was no material
impact from foreign currency fluctuations on BARRA's consolidated statements of
income. Although the U.S. dollar strengthened significantly against the yen and
less significantly against the pound during fiscal 1996, the average of the
exchange rates during fiscal 1996 and 1995 did not change significantly and
therefore the impact on revenues and net income was not significant.
Because the functional currency of BARRA Japan is the yen, the translation gains
and losses associated with the consolidation of its balance sheets at points in
time are reported as part of shareholders' equity.
Under current operating arrangements in the countries in which BARRA does
business, there are no restrictions upon the flow of funds from BARRA's foreign
subsidiary to the parent company.
10
RESULTS OF OPERATIONS
The following table sets forth the percentage of total operating revenues
represented by items in BARRA's consolidated statements of income for the fiscal
years ended March 31:
1997 1996 1995
Operating Revenues:
Subscription and consulting fees 70.6% 81.6% 84.3%
Electronic brokerage and information 9.6 8.8 8.0
Asset management 19.8 9.6 7.7
- ------------------------------------------------------------------------------------------------------
Total operating revenues 100.0% 100.0% 100.0%
- ------------------------------------------------------------------------------------------------------
Operating Expenses:
Cost of subscription products 6.5% 7.9% 7.6%
Compensation and benefits 47.4 52.3 55.3
Rent expense 4.1 5.0 5.7
Other operating expenses 18.4 19.8 21.2
Merger costs and one-time charges 1.7 - -
- ------------------------------------------------------------------------------------------------------
Total operating expenses 78.1% 85.0% 89.8%
- ------------------------------------------------------------------------------------------------------
Interest Income and Other 2.0% 1.7% 1.5%
- ------------------------------------------------------------------------------------------------------
Income Before Equity in Net Income and Loss of Investees,
Minority Interest, and Income Taxes 23.9% 16.7% 11.7%
Equity in Net Income and Loss of Investees (0.1) (0.9) (0.6)
Minority Interest (1.4) (0.3) (0.3)
- ------------------------------------------------------------------------------------------------------
Income Before Income Taxes 22.4% 15.5% 10.8%
Income Taxes (9.5) (6.6) (4.8)
- ------------------------------------------------------------------------------------------------------
Net Income 12.9% 8.9% 6.0%
OPERATING REVENUES
SUBSCRIPTION AND CONSULTING FEES. Subscription and consulting fees consist of
subscription fees for BARRA's software products and revenues from other sources
related to the institutional analytics business (which include timesharing
revenues, seminar revenues and other recurring and one-time fees). In addition,
as a result of the merger with RogersCasey, these revenues also include annual
retainer and project fees for consulting services provided to pension plan
sponsors and investment managers. A summary of the components of this revenue
is as follows:
FISCAL 1997 FISCAL 1996 FISCAL 1995
% CHANGE FROM % CHANGE FROM
$(000) PRIOR FISCAL YEAR $(000) PRIOR FISCAL YEAR $(000)
------ ----------------- ------ ----------------- ------
Analytics subscriptions 51,106 22.0 41,889 19.4 35,095
Other analytics related 6,550 (22.1) 8,403 (1.5) 8,532
Consulting 16,319 25.8 12,975 22.6 10,580
------ ---- ------ ---- ------
Total 73,975 16.9 63,267 16.7 54,207
------ ---- ------ ---- ------
------ ---- ------ ---- ------
Analytics subscriptions are for BARRA's software products and related data
updates. The Company generally bills and collects fees on an annual basis, but
recognizes the income 1/12th per month over each year of the subscription
period. The growth in annual subscription fees continues to be generated from a
combination of both obtaining new clients as well as increasing revenues from
existing customers through the introduction of new products and services. For
fiscal 1997 compared to fiscal 1996, annual subscription fee revenue for the U.S
and non-U.S. markets increased approximately 25% and 20%, respectively. For
fiscal 1996 compared to fiscal 1995, annual subscription fee revenue for the U.S
and non-U.S. markets increased approximately 19% and 20%, respectively. For both
markets, revenue growth primarily came from equity models and related data
reflecting the continued success of Aegis. Various new single country and
global versions of this equity analytics system have been introduced
continuously since July 1995. Fixed income product sales also contributed,
primarily to the non-US increase, as a result of sales of the global version of
the BARRA COSMOS System-TM-, which was introduced in May 1996. Increases in
subscription revenues continue to come most significantly from net increases in
the number of subscriptions and less significantly from changes in the prices of
subscriptions.
Revenues from other sources related to the institutional analytics business
include timesharing revenues, seminar revenues and other recurring and one-time
fees. The decline in the relative and absolute amounts of this component of
revenue continues to
11
be from the conversion of clients from timesharing to in-house computers for
running BARRA's products and declines in analytics-related one-time fees as a
result of a de-emphasis on such revenue opportunities.
Consulting fees consist primarily of services to pension plan sponsors ("Sponsor
Services") which are usually recurring retainer-based fee arrangements, and
consulting to money managers ("Strategic Services"), which are usually
non-recurring, project-type engagements that are completed in phases. Also
included in Strategic Services revenues are fees related to consulting work done
in connection with strategic transactions involving clients. Accordingly,
Strategic Services revenues are susceptible to a large degree of variability
depending on the ability to source new projects and the unpredictable nature and
significance of fees associated with strategic transactions. The increase in
total consulting revenues over the past three years has been driven almost
equally between growth in retainer-based fee clients and one-time project
revenues including a strategic transaction fee in fiscal 1997 that accounted for
approximately 6% of the total consulting fees.
ELECTRONIC BROKERAGE AND INFORMATION. Electronic brokerage and information
revenues increased $3,198,437, or 46.9%, in fiscal 1997 compared to fiscal 1996
and $1,692,133 or 33.0% in fiscal 1996 over fiscal 1995. Electronic brokerage
and information revenues consists principally of license fees from POSIT.
BARRA's revenues from POSIT are derived from commissions generated by the
trading volume in the system. Shares traded in the system were 3.3 billion, 2.3
billion and 1.9 billion, for calendar years ended December 31, 1996, 1995, and
1994 respectively. POSIT revenue increases reflect higher trading volumes
attributed to increased numbers of users of the system as well as greater usage
of the system by its major participants.
The consolidation of Bond Express for the first time in fiscal 1997 accounted
for $1,064,294 of the increase in electronic brokerage and information revenues
from fiscal 1997 over fiscal 1996.
ASSET MANAGEMENT. Asset management revenues increased $13,288,308 or 177.8% in
fiscal 1997 compared to fiscal 1996 and $2,547,902 or 51.7% in fiscal 1996 over
fiscal 1995. Asset management revenues consist of business from both Symphony
and RogersCasey asset management services, which include management of
customized multi-manager programs and advisory services for private equity
(non-marketable) investment programs.
Symphony's revenues consist primarily of asset management fees which are a fixed
percentage of asset value and performance fees which are based on the
performance over a benchmark for each account. Symphony's total revenues were
$16,082,688 for fiscal 1997, $3,327,651 for fiscal 1996 and $1,540,682 for
fiscal 1995. Performance fees included in total revenues were $11,558,377,
$548,218 and none for the 1997, 1996, and 1995 fiscal years, respectively.
Performance fees are recognized only at the measurement date for determining
performance of an account, which typically is at the end of the first year of
the contract and on each subsequent annual anniversary date thereafter. The
increase in performance fee revenues for fiscal 1997 is the result not only of
investment performance in excess of benchmarks, but the fact that assets under
management that are subject to performance fees have grown significantly.
As of the beginning of fiscal 1998, Symphony had approximately $1.2 billion of
assets under direct management. In addition, as of April 1, 1997, the assets of
a former unit of RogersCasey, which managed approximately $600 million of
private equity (non-marketable investments) were purchased by Symphony LLC. Of
the funds under direct management, approximately $800 million are managed under
agreements that provide for performance fees in addition to a base management
fee.
Symphony's future revenues will depend, in some cases to a great extent, on the
performance of the funds it manages and the timing of anniversary fee
determination dates for performance based funds.
REVENUES FROM FOREIGN CUSTOMERS. The percentage of BARRA's total operating
revenues derived from foreign customers represented 31.9%, 38.9% and 40.0% in
fiscal years 1997, 1996 and 1995, respectively. The percentage of BARRA's
subscription and consulting revenues (total revenues excluding electronic
brokerage and asset management revenues) derived from foreign customers was
45.2%, 47.8% and 47.4% for the same periods, respectively. In fiscal 1995 the
weakening of the U.S. dollar compared to the currencies in BARRA's major
non-U.S. markets contributed to an increase in revenues from non-U.S. sources.
For fiscal 1996 currency fluctuations on average had no material impact on
revenues from non-U.S. sources and for fiscal 1997, the strengthening of the
U.S. dollar negatively impacted reported revenues.
OPERATING EXPENSES
COST OF SUBSCRIPTION PRODUCTS. Cost of subscription products consists of
computer access charges, data and software acquisition expenses, BARRA's
computer leasing expenses, and seminar expenses. This component of operating
expenses has increased $716,176, or 12%, in fiscal 1997 over fiscal 1996, and
$1,247,478, or 26%, in fiscal 1996 over fiscal 1995. Increases during the last
three years are primarily due to increased data, computer access and outside
computer service costs associated with new and existing BARRA services. The
Company anticipates that data costs will continue to increase into the
12
future as BARRA's demands for new and expanded data sources increase in order to
meet product development, enhancement and market needs. It is anticipated that
reductions in annual costs from outside computer services under a new contract
for these services will partially offset increased data costs.
COMPENSATION AND BENEFITS. Compensation and benefits increased $9,094,571 or
22.4% in fiscal 1997 over fiscal 1996, and $5,040,128 or 14.2% in fiscal 1996
over fiscal 1995.
These annual increases in compensation and benefits costs are in part
attributable to growth in the number of full-time employees, which increased
approximately 8% and 11% in fiscal 1997 over fiscal 1996 and in fiscal 1996 over
fiscal 1995, respectively. In fiscal 1997, the increase in expense also includes
approximately $1,500,000 of special incentive compensation earned by Symphony
principals for the first three quarters of the fiscal year. Starting with the
fourth quarter of the 1997 fiscal year, this compensation converted to a profits
interest that is included in "minority interest" in the statements of income.
Also, in fiscal 1997, the consolidation of Bond Express contributed $935,951 of
the increase from a year ago.
The Company's annual salary administration and performance evaluation process
results in annual reviews and salary adjustments that are effective as of July 1
of each year.
RENT EXPENSE. Rent expense increased $393,113 or 10.2% in fiscal 1997 over
fiscal 1996 and $222,245 or 6.1% in fiscal 1996 over fiscal 1995. During fiscal
1997 there were office moves to larger quarters in San Francisco (for Symphony),
Hong Kong, and New York, and a new office was opened in Cape Town. These
expansions, in combination with higher occupancy related expenses at the
Berkeley headquarters, resulted in the increase in rent expense for fiscal 1997
over fiscal 1996. The increase in rent expense for fiscal 1996 over fiscal 1995
is almost entirely due to the operation of Symphony, which entered into a new
office space lease in the latter stages of fiscal 1995. In addition to the
increased costs from the 1997 changes, it is anticipated that there will be
increased costs associated with the move to a new Berkeley headquarters
building, new offices in San Francisco for consulting units and two more new
offices to be opened in fiscal 1998.
OTHER OPERATING EXPENSES. Other operating expenses increased $3,871,287 or
25.2% in fiscal 1997 over fiscal 1996 and increased $1,763,582 or 13.0% in
fiscal 1996 over fiscal 1995. Other operating expenses include travel, office,
maintenance, depreciation, amortization, marketing, advertising, outside legal
and accounting services, data and other expenses related to the asset management
operations, and other corporate expenses.
The increase in fiscal 1997 over fiscal 1996 was predominantly the result of
higher external development costs associated with information systems upgrades
and higher data costs at Symphony related to their increase in revenues. Other
increases in travel, computer and office equipment, outside printing and
documentation and insurance related expenses were reflective of, and consistent
with, the general growth of BARRA's business and the costs of supporting a
larger client base. The consolidation of Bond Express also contributed
approximately $1,000,000 to the increase during fiscal 1997.
The increase in fiscal 1996 over fiscal 1995 was primarily the result of
development and initial marketing costs for Aegis and RogersCasey's InvestWorks
product, both of which were launched in fiscal 1996. Symphony also contributed
to the increase in expenses as its operations grew. These increases were
partially offset by general improvements in BARRA's cost control measures and
reductions in computer-related costs and professional services fees associated
with various non-recurring consulting projects and other studies conducted in
fiscal 1995.
MERGER COSTS AND ONE-TIME CHARGES. In fiscal 1997, in connection with the
RogersCasey merger, the Company recorded related costs of approximately
$1,308,000 consisting of the following: (i) $821,000 in legal, accounting and
other outside professional services; (ii) $420,000 in severance, relocation and
other costs associated with integrating the combined operations of the two
firms; and (iii) $67,000 in incremental travel and related expenditures. The
Company also recorded a one-time charge of approximately $448,000 for the
write-off of capitalized software related to a product under development in
which the costs were not recoverable based on revenue estimates and whose value
was therefore impaired.
INTEREST INCOME AND OTHER. Interest income and other increased $808,769 or
61.6% in fiscal 1997 over fiscal 1996 and $338,864 or 34.8% in fiscal 1996 over
fiscal 1995. These increases year-over-year are in large part due to increases
in cash and cash equivalents generated from operations that are available for
investment as well as a reduction in interest expense due to the repayment of
all outstanding RogersCasey indebtedness subsequent to the merger. The increases
were also the result of $455,832 and $320,000 of gains recorded in fiscal 1997
and 1996, respectively, on investments in a limited partnership managed by
Symphony.
EQUITY IN NET INCOME AND LOSS OF INVESTEES. Net losses from BARRA's joint
ventures and other strategic relationships now represent primarily BARRA's share
of losses from its Global POSIT joint venture and, beginning in fiscal 1998,
Data
13
Downlink Corporation. The losses decreased in fiscal 1997 from fiscal 1996 and
1995 primarily as a result of non-recurring losses incurred by the Company in
prior years in connection with interests in Metaxis S.A. and Metaxis Placements
S.A.
MINORITY INTEREST. Minority interest represents the net of a 45% share of Bond
Express LPs net loss and, beginning with the fourth quarter of fiscal 1997, the
profits interest of the Symphony principals. (See the discussion of compensation
above.) The increase in fiscal 1997 is the result of profits from the Symphony
business.
NEW ACCOUNTING STANDARDS.
Stock-Based Compensation - The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation". Accordingly, no compensation cost has been
recognized in the consolidated statements of income for the Company's fixed
award Employee Stock Option Plan. Had compensation cost for the Company's
Employee Stock Option Plan been determined based on fair value at the grant date
for awards in fiscal 1996 and 1997 consistent with the provisions of SFAS
No.123, the Company's net income and earnings per share would have been reduced
to the pro-forma amounts indicated below for fiscal years ended March 31 (see
also Note 12 to the Notes to the BARRA, Inc. Consolidated Financial Statements):
1997 1996
----------- ----------
Net income - as reported $13,545,453 $6,869,256
Net income - pro-forma $12,347,913 $6,581,757
Earnings per share - as reported $1.45 $0.78
Earnings per share - pro-forma $1.37 $0.75
Earnings Per share - In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS 128). The Company is required to adopt SFAS 128 in the first quarter of
fiscal 1998 and will restate at that time earnings per share (EPS) data for
prior periods to conform with SFAS 128. Earlier application is not permitted.
SFAS 128 replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. If SFAS 128 had been in effect during
the fiscal years ended March 31, 1997, 1996 and 1995, basic EPS would have been
$1.62, $0.83 and $0.46, respectively. Diluted EPS under SFAS 128 would not have
been significantly different than primary EPS currently reported for those
periods.
LIQUIDITY AND CAPITAL RESOURCES. Cash and cash equivalents, short-term
investments and investments in municipal debt securities available-for-sale
totaled $41,576,418 at March 31, 1997, representing an increase of $15,571,537
from March 31, 1996. In addition, the Company has a commitment from a bank for
an unsecured short-term line of credit of up to $5 million - of which, no
amounts have been, or are presently anticipated to be, drawn down.
BARRA believes that its cash flow from operations (including prepaid
subscription fees), together with existing cash balances, will be sufficient to
meet its cash requirements for capital expenditures and other cash needs for
ongoing business operations.
PRINCIPAL FINANCIAL COMMITMENTS. As of June 1, 1997, the Company's principal
financial commitments consisted of obligations under operating leases and
contracts for the use of computer and office facilities, the cash commitment
that is part of the GAT and Innosearch acquisitions, and a commitment to
disburse approximately $2 million for new office equipment and furniture, and
approximately $3 million for leasehold improvements associated with the move to
a new headquarters building in June of 1997. (See Note 6 to the Notes to the
BARRA, Inc. Consolidated Financial Statements.)
14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
BARRA, Inc.
Berkeley, California
We have audited the accompanying consolidated balance sheets of BARRA, Inc. (the
"Company") and subsidiaries as of March 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended March 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of BARRA, Inc. and subsidiaries as of
March 31, 1997 and 1996 and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended March 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
- -------------------------
May 9, 1997
15
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1997 AND 1996 1997 1996
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 25,831,118 $ 22,493,363
Short-term investments 5,421,841 3,511,518
Investment in municipal debt securities- available for sale 10,323,459 -
Accounts receivable:
Trade (Less allowance for doubtful accounts of $135,732 and $129,237) 15,522,575 10,558,150
Related parties 3,017,164 2,676,661
Notes receivable 5,419,474 -
Prepaid expenses 400,187 649,424
- ------------------------------------------------------------------------------------------------------------------------
Total current assets 65,935,818 39,889,116
- ------------------------------------------------------------------------------------------------------------------------
NOTES RECEIVABLE - 1,658,960
INVESTMENTS IN UNCONSOLIDATED COMPANIES 445,644 7,300,347
FURNITURE AND EQUIPMENT:
Computer equipment 11,749,343 8,716,136
Office equipment 672,325 729,248
Furniture and fixtures 4,346,206 3,335,342
- ------------------------------------------------------------------------------------------------------------------------
Total furniture and equipment 16,767,874 12,780,726
Less accumulated depreciation and amortization (9,739,519) (7,742,149)
- ------------------------------------------------------------------------------------------------------------------------
7,028,355 5,038,577
DEFERRED TAX ASSETS 1,038,374 1,685,898
COMPUTER SOFTWARE
(Less accumulated amortization of $548,263 and $422,953) 336,414 971,077
INTANGIBLES AND OTHER ASSETS
(Less accumulated amortization of $1,585,124 and $492,482) 9,416,496 7,796,401
- ------------------------------------------------------------------------------------------------------------------------
TOTAL $ 84,201,101 $ 64,340,376
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,748,572 $ 1,368,466
Due to related party 707,266 567,201
Accrued expenses payable:
Accrued compensation 7,186,875 4,850,817
Accrued corporate income taxes 3,533,677 2,178,539
Other accrued expenses 5,761,211 4,135,159
Shareholder notes payable and bank borrowings 239,611 2,132,544
Unearned revenues 12,427,274 12,246,527
- ------------------------------------------------------------------------------------------------------------------------
Total current liabilities 32,604,486 27,479,253
- ------------------------------------------------------------------------------------------------------------------------
Other Long-Term Liabilities:
Deferred tax liabilities 768,352 1,217,817
Shareholder notes payable and bank borrowings 473,411 718,772
- ------------------------------------------------------------------------------------------------------------------------
Total other long-term liabilities 1,241,763 1,936,589
- ------------------------------------------------------------------------------------------------------------------------
MINORITY INTEREST IN EQUITY OF SUBSIDIARY 1,981,002 -
SHAREHOLDERS' EQUITY:
Preferred stock, no par; 10,000,000 shares authorized; none issued and outstanding
Common stock, no par; 40,000,000 shares authorized; 8,417,314 and 8,300,484
shares issued and outstanding 12,878,186 12,530,173
Retained earnings 35,967,057 22,421,604
Foreign currency translation adjustment (471,393) 15,746
Unamortized deferred compensation - (42,989)
- ------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 48,373,850 34,924,534
- ------------------------------------------------------------------------------------------------------------------------
TOTAL $ 84,201,101 $ 64,340,376
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the BARRA, Inc.
Consolidated Financial Statements
16
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
1997 1996 1995
---- ---- ----
OPERATING REVENUES:
Subscription and consulting fees $73,974,590 $63,267,499 $54,206,652
Electronic brokerage and information 10,024,091 6,825,654 5,133,521
Asset management 20,763,231 7,474,923 4,927,021
- ----------------------------------------------------------------------------------------------------------
Total operating revenues 104,761,912 77,568,076 64,267,194
- ----------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Cost of subscription products 6,873,860 6,157,684 4,886,206
Compensation and benefits 49,665,261 40,570,690 35,530,562
Rent expense 4,263,055 3,869,942 3,647,697
Other operating expenses 19,253,106 15,381,819 13,618,237
Merger costs and one-time charges 1,756,189 - -
- ----------------------------------------------------------------------------------------------------------
Total operating expenses 81,811,471 65,980,135 57,682,702
- ----------------------------------------------------------------------------------------------------------
INTEREST INCOME AND OTHER 2,121,871 1,313,102 974,238
- ----------------------------------------------------------------------------------------------------------
INCOME BEFORE EQUITY IN NET INCOME AND LOSS OF INVESTEES,
MINORITY INTEREST, AND INCOME TAXES 25,072,312 12,901,043 7,558,730
EQUITY IN NET INCOME AND LOSS OF INVESTEES (106,013) (674,035) (410,111)
MINORITY INTEREST (1,419,125) (211,525) (193,343)
- ----------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 23,547,174 12,015,483 6,955,276
INCOME TAXES (10,001,721) (5,146,227) (3,102,309)
- ----------------------------------------------------------------------------------------------------------
NET INCOME $13,545,453 $ 6,869,256 $ 3,852,967
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Primary Net Income Per Share $1.45 $0.78 $0.46
Weighted Average Common and Common Equivalent Shares 9,334,903 8,817,648 8,297,357
The accompanying notes are an integral part of the BARRA, Inc.
Consolidated Financial Statements
17
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,545,453 $ 6,869,256 $ 3,852,967
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in net income and loss of investees 106,013 674,035 410,111
Minority interest 1,419,125 211,525 193,343
Depreciation and amortization 3,229,319 1,706,741 1,750,242
Amortization of computer software 386,265 281,065 162,571
Dividends received from investee (226,583) (207,920) (345,653)
Gains on marketable securities (455,832) (330,763) 12,288
One-time charges - Capitalized software 448,426 - -
Other (153,065) (846,469) 588,143
Changes In:
Trade accounts receivable (4,836,605) (1,161,102) 415,029
Related parties receivable (340,503) 314,448 174,871
Prepaid expenses 281,639 440,434 229,880
Other assets (719,984) (571,982) (505,890)
Accounts payable, due to related party and accrued expenses 6,460,594 3,668,027 2,920,751
Unearned revenues 86,162 1,840,555 3,265,790
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 19,230,424 12,887,850 13,124,443
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,671,299) (2,112,568) (3,344,279)
Short-term investments - net (1,454,491) 2,759,418 (5,374,084)
Investments in municipal debt securities - available for sale (10,323,459) - -
Exercise of BARRA Japan options - 156,969 44,849
Purchase of Japanese model rights - (4,447,280) -
Investments in unconsolidated companies:
Investments (874,746) 73,002 (1,718,906)
Dividends received 226,583 207,920 345,653
Notes receivable (issued) repaid 1,804,869 (1,600,000) -
Consolidation of Bond Express L.P. - cash acquired 190,155 - -
- --------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (14,102,388) (4,962,539) (10,046,767)
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable and lines of credit (2,138,294) - -
Proceeds from bank borrowings - 1,038,480 868,145
Proceeds from sale of common stock 1,164,973 1,045,113 615,160
Common stock repurchased (816,960) (3,558,473) (1,545,815)
- --------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (1,790,281) (1,474,880) (62,510)
- --------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,337,755 6,450,431 3,015,166
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 22,493,363 16,042,932 13,027,766
- --------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 25,831,118 $ 22,493,363 $ 16,042,932
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
OTHER CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 95,133 $ 177,167 $ 51,936
Income taxes 7,830,285 4,371,168 1,782,681
Non-cash investing transactions during the year for:
Exchange of equity interest in LBIC for debt (Note 9) $ 7,219,458 - -
Consolidation of Bond Express (Note 3):
Note receivable (2,100,000) - -
Net assets acquired 1,139,726 - -
Minority Interest 512,877 - -
Goodwill $ 1,473,151 - -
The accompanying notes are an integral part of the BARRA, Inc.
Consolidated Financial Statements
18
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
FOREIGN
COMMON STOCK UNAMORTIZED CURRENCY TOTAL
--------------------------- DEFERRED TRANSLATION RETAINED SHAREHOLDERS'
SHARES AMOUNT COMPENSATION ADJUSTMENT EARNINGS EQUITY
--------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1994 8,343,764 $13,548,688 $(151,240) $ 160,421 $11,699,381 $25,257,250
Repurchase of Stock (214,500) (1,545,815) (1,545,815)
Stock Issued 79,200 615,160 615,160
Foreign Currency Translation Adjustment 237,394 237,394
Deferred Compensation 56,714 56,714
Net Income 3,852,967 3,852,967
--------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1995 8,208,464 12,618,033 (94,526) 397,815 15,552,348 28,473,670
Repurchase of Stock (240,000) (3,558,473) (3,558,473)
Stock Issued 332,020 3,470,613 3,470,613
Foreign Currency Translation Adjustment (382,069) (382,069)
Deferred Compensation 51,537 51,537
Net Income 6,869,256 6,869,256
--------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1996 8,300,484 12,530,173 (42,989) 15,746 22,421,604 34,924,534
Contractual Share Repurchases-
RogersCasey - (800,691) (800,691)
Repurchase of Stock (2,276) (16,269) (16,269)
Stock Issued 119,106 1,164,973 1,164,973
Foreign Currency Translation
Adjustment (487,139) (487,139)
Deferred Compensation 42,989 42,989
Net Income 13,545,453 13,545,453
--------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1997 8,417,314 $12,878,186 $ - ($471,393) $35,967,057 $48,373,850
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
The accompanying notes are an integral part of the BARRA, Inc.
Consolidated Financial Statements
19
BARRA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 1997,
1996 AND 1995:
NOTE 1 - THE COMPANY.
BARRA, Inc. ("BARRA") and its subsidiaries (collectively, the "Company") are
engaged in integrated business activities that combine technology, data,
software and services to help clients make investment and trading decisions.
Subscription and consulting services consist of developing, marketing and
supporting investment analytics and related consulting. Electronic brokerage
and information services consist of the development and support of electronic
trading and information systems. Asset management services consist of money
management and investment strategy consulting. The Company's clients and target
markets include investment managers, plan sponsors and consultants, brokers and
dealers, and other sophisticated institutional and private investors throughout
the world.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
BASIS OF PRESENTATION - The accompanying consolidated financial statements
include the accounts of BARRA and its wholly-owned subsidiaries. The financial
statements have been restated for all prior periods to reflect the acquisition
of Rogers, Casey & Associates, Inc. ("RogersCasey")and its subsidiaries
consistent with the pooling-of-interests method of accounting for business
combinations. (See Note 3.) Also included in the accompanying consolidated
financial statements are the accounts of Bond Express L.P. ("Bond Express") and
Symphony Asset Management, LLC ("Symphony LLC"). (See Note 3.) All significant
intercompany transactions and balances have been eliminated. Certain amounts
previously reported have been reclassified to conform with the 1997
presentation.
ACCOUNTING ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS include money market funds and certificates of deposit
with original maturities of three months or less.
SHORT-TERM INVESTMENTS include $2,534,100 at March 31, 1997 and $2,320,000 at
March 31, 1996 invested in a limited partnership managed by Symphony, the
Company's registered investment adviser subsidiary. The limited partnership
holds both long and short positions in equity securities and at times buys and
sells short-term market index instruments which the manager uses to hedge
general market risk. The investment is recorded at its fair value and any
unrealized gains or losses are included in interest income and other. Also
included in short-term investments is a U.S. dollar equivalent of $2,887,741 at
March 31, 1997, and $1,191,518 at March 31, 1996, invested in a Japanese
yen-denominated mutual fund which is invested primarily in government and other
bonds and certificates of deposit in Japan. The investment is recorded at cost
which approximates its fair value.
INVESTMENTS IN MUNICIPAL DEBT SECURITIES - Available for Sale are recorded at
fair value which approximates cost at March 31, 1997. Interest on the
securities is tax exempt and adjusts to market rates during designated interest
reset periods which occur at least every month. While the securities have
stated maturity dates ranging from August, 1997 to June, 2030, each security
grants the investor the option to put the security back to the issuer during
exercise periods which generally coincide with interest reset dates.
INVESTMENTS IN UNCONSOLIDATED COMPANIES are accounted for on the cost or equity
method depending on the Company's ownership interest in the voting stock and
upon its ability to exert significant influence over the investee's operations
(see Note 10).
FURNITURE AND EQUIPMENT are stated at cost. Computer and office equipment have
economic useful lives of five to seven years and are depreciated using
accelerated methods. Furniture and fixtures have economic useful lives of five
years and are depreciated and/or amortized using both straight-line and
accelerated methods.
COMPUTER SOFTWARE that has been purchased is stated at cost less accumulated
amortization. Amortization is calculated using the straight-line method over
three to five years depending on the estimated useful life of the software.
Under the criteria set
20
forth in Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
capitalization of software development costs begins upon the establishment of
technological feasibility of the product. The establishment of technological
feasibility and the ongoing assessment of the recoverability of costs require
considerable judgment by management with respect to certain external factors,
including, but not limited to, anticipated future gross product revenues,
estimated economic life and changes in software and hardware technology. Amounts
that could have been capitalized under this statement after consideration of the
above factors were immaterial and, therefore, no software development costs have
been capitalized by the Company to date.
INTANGIBLES AND OTHER ASSETS includes purchased goodwill and purchased model
rights of $6,764,619 at March 31, 1997, which is net of accumulated amortization
of $1,585,124. (See Notes 3 and 7.) Included in intangibles and other assets
is goodwill of $270,182 (net of accumulated amortization of $110,406), which is
related to the RogersCasey acquisition and which occurred in prior years. The
Company evaluates impairment by comparing book value against the estimated
undiscounted future operating cash flows of the underlying asset.
REVENUE RECOGNITION - Subscription fees are initially deferred as unearned
revenues when payment has been received and revenue is recognized ratably over
the subscription term. Timesharing revenues, which are included in subscription
and consulting fees, are recognized as the Company's computer resources are
utilized. Consulting fees for recurring, retainer-based services are recognized
ratably over the term of the services contract. Consulting fees for
non-recurring projects are recognized on a percentage of completion basis.
Asset management revenues are recognized ratably over the period that assets are
under management except that portions of fees that are performance-based are
recognized only at the performance measurement dates contained in the management
agreements.
Electronic brokerage and information revenues, which consist primarily of
royalties from the POSIT joint venture based on trading volume of U.S. equities
in Portfolio System for Institutional Trading ("POSIT"), are recognized as
trades are executed.
INCOME TAXES are provided at current rates. Deferred income taxes are computed
based on the difference between the financial statement and tax basis of assets
and liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
FOREIGN CURRENCY TRANSLATION - The functional currency of all non-U.S.
operations except BARRA International (Japan), Ltd., the company's wholly-owned
Japan subsidiary ("BARRA Japan"), is deemed to be the U.S. dollar. For these
operations, assets and liabilities are translated into U.S. dollars using
current exchange rates, and the translation adjustment effects are included in
net income. The functional currency of BARRA Japan is the Japanese yen and,
therefore, the effects of currency translation adjustments on its assets and
liabilities are included as a component of shareholders' equity.
STOCK-BASED AWARDS to employees are accounted for using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees.
NET INCOME PER SHARE is computed based on the primary weighted average number of
common shares outstanding and dilutive common stock equivalents from the
presumed exercise of stock options using the treasury stock method. For all
periods presented, fully diluted income per share was not significantly
different than primary income per share. In February 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" (SFAS 128). The Company is required to adopt SFAS
128 in the first quarter of fiscal 1998 and will restate at that time earnings
per share (EPS) data for prior periods to conform with SFAS 128. Earlier
application is not permitted.
SFAS 128 replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock.
If SFAS 128 had been in effect during the years ended March 31, 1997, 1996 and
1995, basic EPS would have been $1.62 and $.83 and $.46, respectively. Diluted
EPS under SFAS 128 would not have been significantly different from primary EPS
currently reported for those periods.
21
CONCENTRATION OF CREDIT RISK - The Company licenses its products and services to
investment managers primarily in the United States, Europe and Asia (primarily
Hong Kong and Japan). The Company evaluates the credit of its customers and does
not require collateral. The Company maintains reserves for potential credit
losses and such losses have been within management's expectations.
NOTE 3 - BUSINESS COMBINATIONS AND OTHER CHANGES IN REPORTING ENTITIES.
ROGERSCASEY - On July 24, 1996, BARRA merged with RogersCasey, a firm
specializing in investment consulting to money managers and pension plan
sponsors. All of the common stock and outstanding options of RogersCasey were
exchanged for 481,364 shares of BARRA's common stock and 30,257 options on BARRA
common stock. This merger was accounted for as a pooling-of-interests.
All fees and expenses related to the merger have been expensed as required under
the pooling-of-interests method of accounting. These fees and expenses were
$1,307,763 for the year ended March 31, 1997 and consisted primarily of fees for
legal and accounting services, investment banking fees and costs associated with
integrating the operations of the combined companies. The Company also recorded
a one-time charge of $448,426 related to the write-off of capitalized software
on the books of RogersCasey at the time of the merger.
Revenue and net income from the combining companies included in the consolidated
results of operations were as follows:
BARRA ROGERSCASEY COMBINED
For the period April 1, 1996 to July 24, 1996:
(prior to the effective date of the merger)
Revenue $22,466,912 $6,573,636 $29,040,548
Net income $3,056,025 $489,870 $3,545,895
For the year ended March 31, 1996:
Revenue $61,031,944 $16,536,132 $77,568,076
Net income(Loss) $7,510,489 ($641,233) $6,869,256
For the year ended March 31, 1995:
Revenue $51,803,029 $12,464,165 $64,267,194
Net income(Loss) $3,982,724 ($129,754) $3,852,967
There were no significant intercompany transactions between BARRA and
RogersCasey during any period presented.
SYMPHONY - Effective July 1, 1996, the Company's wholly-owned subsidiary,
Symphony Asset Management, Inc. ("Symphony Inc." and collectively with Symphony
LLC "Symphony"), contributed its assets, liabilities and business to Symphony
LLC, a newly formed entity, in exchange for interests in Symphony LLC pursuant
to an Operating Agreement of Symphony Asset Management LLC (the "Operating
Agreement"). The capitalization of Symphony LLC consists of four Interest
Classes (Class 1, Class 2, Class 3 and Class 4, as defined in the Operating
Agreement). Class 1, Class 2 and Class 4 interests belong to Symphony Inc.
(which continues to be wholly-owned by the Company) while Class 3 interests
belong to a newly formed limited liability company, Maestro LLC, whose owners
are principals of Symphony LLC.
The Operating Agreement provided for a bonus to be paid to the principals of
Symphony LLC equal to 25% of Symphony LLC profits (as defined in the Operating
Agreement). This bonus was only in effect until the Class 2 interests were
redeemed. In the quarter ended December 31, 1996, the Class 2 interests were
redeemed and the bonus was replaced by a profits interest (the Class 3 interest)
that started at 25% and could grow to a maximum of 50% depending upon future
levels of Symphony LLC operating income (as defined in the Operating Agreement).
The Company had previously consolidated Symphony, Inc. and has consolidated the
financial position and results of operations of Symphony LLC and separately
recorded the Class 3 interest share of net assets and net income as a minority
interest. The Class 3 interests share of profits was $1,787,073 for the year
ended March 31, 1997.
BOND EXPRESS - In August 1995, the Company committed to make a long-term loan of
$2,100,000 to Bond Express at prime rate plus 1% (9.5% at March 31, 1997), due
in annual installments from August 2001 to May 2002. Bond Express is a
22
distributor, on a subscription basis, of software and databases of fixed income
security offering information from bond dealers. The loan agreement permits the
Company, at its option, to convert the loan (when fully disbursed) into a
controlling equity interest in Bond Express. In a related transaction, the
Company purchased a 1% limited partnership interest in Bond Express for $1,000.
Pursuant to a Put/Call Agreement, under certain conditions, between August 1,
2000 and October 31, 2000 the Company has the right to call and the other owners
have the right to put the remaining equity interest to the Company. At March
31, 1996, the Company had disbursed $1,600,000 under the loan agreement.
During the quarter ended June 30, 1996, the Company fully disbursed its
remaining commitment on the loan which activated the Company's option to convert
its' interest in Bond Express from debt to a 55% controlling equity interest.
While this option has not been exercised, the Company believes that it has
operational and financial control over Bond Express. Accordingly, since June
1, 1996, the Company has consolidated the financial position and results of
operations of Bond Express using the purchase method of accounting. The
difference between the Company's investment (principally its note receivable)
and the net assets of Bond Express at June 1, 1996 of approximately $1.5 million
has been recorded as goodwill and is being amortized over a period of 10 years.
Bond Express had operating revenues of $161,624 and $963,055 and operating
expenses of $421,870 and $1,498,892 for the two month period ended May 31, 1996
and year ended March 31, 1996, respectively. Goodwill arising from the
consolidation, and including amounts carried over in the financial position of
Bond Express related to a prior transaction, was $1,658,371 at March 31, 1997
(net of accumulated amortization of $483,140) and is included in intangibles and
other assets.
During the year ended March 31, 1997, but after the date of consolidation, the
Company has disbursed an additional $329,563 to Bond Express on terms similar to
the existing note receivable. The minority interest's share (45%) of net assets
and net losses is included in minority interest in the consolidated financial
statements.
NOTE 4 - INCOME TAXES.
The provision for income taxes for the years ended March 31, 1997, 1996 and 1995
consists of the following:
1997 1996 1995
---- ---- ----
CURRENT:
Federal $ 6,024,179 $3,646,627 $759,807
State 1,280,149 836,587 408,062
Foreign 2,499,334 1,466,755 1,238,148
----------- ---------- ----------
Total current 9,803,662 5,949,969 2,406,017
----------- ---------- ----------
DEFERRED:
Federal 217,405 (686,120) 68,314
State (19,346) (117,622) 627,978
----------- ---------- ----------
Total deferred 198,059 (803,742) 696,292
----------- ---------- ----------
TOTAL TAX PROVISION: $10,001,721 $5,146,227 $3,102,309
----------- ---------- ----------
----------- ---------- ----------
Deferred taxes are determined based on the estimated future tax effects of
differences between the financial statement and tax basis of assets and
liabilities given the provisions of the enacted tax laws. No valuation
allowances for deferred tax assets were deemed to be necessary at the balance
sheet dates presented. The tax effect of significant temporary differences
representing deferred tax assets and liabilities as of March 31 is as follows:
23
1997 1996
---- ----
DEFERRED TAX ASSETS:
Accrued vacation pay not currently deductible $368,052 $348,840
Other accrued expenses not deductible 200,624 496,540
State income taxes 228,274 425,859
Differing tax years of equity investee 192,298 262,056
Other 49,126 152,603
---------- ----------
Total $1,038,374 $1,685,898
---------- ----------
DEFERRED TAX LIABILITIES:
Differing tax years of equity investee $6,407 $660,177
Prepaid expenses currently deductible -- 251,462
Depreciation 420,757 175,519
Other 341,188 130,659
---------- ----------
Total $768,352 $1,217,817
---------- ----------
NET DEFERRED TAX ASSET: $270,022 468,081
---------- ----------
---------- ----------
The reconciliation between the amount computed by applying the United States
federal statutory tax rate of 35% (34% in 1996 and 1995) to income before income
taxes and the actual tax expense is as follows:
1997 1996 1995
---- ---- ----
Income tax expense at statutory rate $8,241,511 $4,085,264 $2,364,794
State income tax expense, net of federal income tax effect 819,522 552,147 407,683
Foreign taxes higher than federal rate 344,435 304,944 242,221
Non-taxable portion of dividends and interest (175,513) (220,871) (82,265)
Effect of foreign sales corporation earnings (185,609) (49,485) (57,460)
Equity in net (income) loss of foreign investees not taxable -- 179,717 (73,086)
Non-deductible merger costs 525,000 -- --
Other 432,375 294,511 300,422
----------- ---------- ----------
Income tax expense $10,001,721 $5,146,227 $3,102,309
----------- ---------- ----------
----------- ---------- ----------
NOTE 5 - SHAREHOLDER NOTES PAYABLE AND BANK BORROWINGS.
Shareholder notes payable and bank borrowings as of March 31, 1997 and 1996
consisted of the following:
1997 1996
---- ----
RogersCasey shareholder notes payable $713,022 $280,186
Term loan - RogersCasey -- 444,173
Revolving line of credit - RogersCasey -- 1,847,765
Bank borrowings - BARRA Japan -- 279,192
--------- -----------
Total $713,022 $2,851,316
less current portion (239,611) (2,132,544)
--------- -----------
Long-term portion $473,411 $718,772
--------- -----------
--------- -----------
Prior to the merger, RogersCasey had repurchased 4,587 shares of its stock from
former officers of RogersCasey. The shares of stock were purchased at fair
market value for a combination of cash and notes payable, in accordance with
RogersCasey's Shareholder Agreement. The notes bear interest at prime (8.5% at
March 31, 1997 and 1996). Interest expense related to the notes was $51,472,
$28,227 and $31,982 in fiscal years 1997, 1996 and 1995, respectively. The
long-term portion of shareholder notes payable at March 31, 1997 is due in
annual fiscal year installments of $120,842 in 1999, $117,523 in 2000, and
$117,523 in 2001 and $117,523 in 2002.
24
RogersCasey had a term loan bearing interest at the lender's prime rate that was
repaid during fiscal 1997. Interest expense on the term loan for fiscal years
1997, 1996 and 1995 was $3,827, $52,659, and $34,857, respectively.
RogersCasey had a revolving line of credit that bore interest at .50% above the
bank's prime rate. Interest expense on the credit line for fiscal years 1997,
1996 and 1995 was $64,030, $107,275 and $10,764, respectively. All outstanding
balances under the credit line were repaid during fiscal 1997.
On January 4, 1994, BARRA Japan borrowed 33,685,000 yen under the terms of an
unsecured ten-year 3% loan from a Japanese bank. The U.S. dollar equivalent
balance of the note was $279,192 at March 31, 1996. This indebtedness was
repaid during fiscal 1997.
NOTE 6 - LEASES, FACILITIES AND CONTRACTS FOR COMPUTER FACILITIES.
The aggregate minimum future annual lease payments under operating leases are as
follows:
AGGREGATE ANNUAL
YEAR ENDING MARCH 31: LEASE PAYMENTS
-------------------- ----------------
1998 $4,799,762
1999 4,263,824
2000 4,179,621
2001 3,978,271
2002 3,800,174
Thereafter 8,531,599
-----------
Total $29,553,251
-----------
-----------
Net rental expense was $4,263,055, $3,869,942 and $3,647,697 for the years ended
March 31, 1997, 1996 and 1995, respectively.
The Company has signed a lease for a new headquarters facility which it expects
to occupy in June 1997, when its present facility lease expires. Minimum lease
payments under the current and future facility leases are included in the table
above. In connection with the move to the new facility, the Company is committed
to disburse approximately $2 million for new office equipment and furniture, and
approximately $3 million for leasehold improvements.
Effective April 1, 1997, the Company entered into an agreement with an outside
computer service provider, to replace its existing service, for computer
facilities through May 31, 2002. Under the agreement the Company is committed
to pay minimum fees of approximately $870,600 per year, plus additional amounts
based on usage and/or services provided. The Company's expense for outside
computer usage was $2,922,655, $2,700,313 and $2,756,964 for the years ended
March 31, 1997, 1996 and 1995, respectively.
NOTE 7 - NIKKO CONTRACTUAL AGREEMENTS.
In 1986, the Company and The Nikko Securities Co., Ltd. and certain of its
affiliates (collectively, "Nikko") entered into a Joint Venture Agreement, which
established BARRA Japan. The Company originally invested $65,800 for a 50%
voting interest in the Japanese corporation; the remaining 50% was held by
Nikko. Upon creation, BARRA Japan sublicensed Nikko's right to market certain
models for the Japanese market developed by the Company pursuant to Development
Agreements with Nikko (the "Japanese Models").
Between November 1992 and November 1995, the Company purchased the entire Nikko
interest in BARRA Japan by issuing a total of 400,000 shares of the Company's
stock. In connection with the Company obtaining 100% ownership of BARRA Japan
in November 1995, BARRA Japan purchased all of Nikko's marketing and other
rights to the Japanese Models and related products and services. As a result of
these transactions, as of March 31, 1997, there was $1,422,157 of goodwill (net
of accumulated amortization of $428,177) and $3,413,549 of purchased model
rights (net of accumulated amortization of $563,401) included in intangible and
other assets.
25
NOTE 8 - POSIT AND GLOBAL POSIT.
POSIT is a computerized institutional trading system that is owned by a general
partnership between the Company and Investment Technology Group, Inc. ("ITG").
The partnership has licensed the U.S. equity version of POSIT to ITG, which
operates the POSIT system for U.S. equities. The Company's revenues represent
its share of license royalties paid by ITG to the partnership.
Global POSIT was established as a joint venture in the United Kingdom on May 31,
1990. It operates a computerized trading network of the same name that is
designed to facilitate trading in international equities. Profit and loss is
allocated 50% to the Company and 50% to ITG, the other joint venture partner.
The Company's share of losses is included in equity in net loss of investees and
was $63,100, $497,756, and $210,294 in the years ended March 31, 1997, 1996 and
1995, respectively.
NOTE 9 - INVESTMENT IN LIBERTY BROKERAGE INVESTMENT CORP.
On February 9, 1993, the Company entered into a Preferred Stock Purchase
Agreement with Liberty Brokerage Investment Corp. (formerly Liberty Brokerage,
Inc.), a Delaware corporation ("LBIC"). Pursuant to that agreement, the Company
purchased eight shares of LBIC's Series A Convertible Exchangeable Preferred
Stock (the "LBIC Preferred Stock") for an aggregate purchase price of
$5,500,552. On December 16, 1994, the Company purchased an additional 2.5
shares of the LBIC Preferred Stock for $1,718,906. On April 16, 1996, the
Company exchanged its LBIC Preferred Stock for a $7,219,474 convertible secured
7.84% promissory note. At March 31, 1997 the remaining amount due under the
note receivable was $5,419,474. A principal payment of $1,804,869 is due on
September 30, 1997 with the remaining balance due on March 31, 1998. Prior to
the exchange described above, the Company's investment in LBIC was accounted for
under the cost method.
In February 1993, the Company and LBIC also entered into a related Partnership
and Joint Venture Agreement to create BARRA Analytics Securities, an
equally-owned New York general partnership ("BAS"). From 1993 through March 31,
1996, there was no significant business activity in BAS other than the Company's
initial investment of $100,000. As of January 31, 1997, the Company purchased
LBIC's interest in BAS for $133,510. During the period from April 1, 1996
through January 31, 1997, the Company recorded equity in joint venture losses of
$240,054 and made additional investments of approximately $300,000.
NOTE 10 - INVESTMENTS IN UNCONSOLIDATED COMPANIES.
In March 1997, the Company purchased 68,037 shares of Series C Convertible
Preferred Stock in QuoteCom, Inc. ("QuoteCom") for $445,644. In April 1997,
the Company purchased an additional 46,368 shares of the same securities for
$304,366. QuoteCom was founded in October 1993 to provide quality financial
market data and relevant business news to Internet users in a timely fashion.
The Company will account for its investment in QuoteCom using the cost method.
In April 1997, the Company purchased 272.7 shares of Series A Convertible
Preferred Stock of Data Downlink Corporation for $1,500,000. Data Downlink
Corporation developed and supports an online service that aggregates and indexes
quantitative business information from multiple sources and makes this
information available in spreadsheet format on a pay-per-view basis. The
Company will account for its investment in Data Downlink Corporation using the
equity method.
NOTE 11 - RETIREMENT PLANS.
At March 31, 1997, the Company sponsored two tax-qualified employee savings and
retirement plans ("the Plans") for all eligible U.S. employees, each of which
was sponsored by the predecessor companies prior to the merger between BARRA and
RogersCasey. Under both Plans, the Company matches certain employee
contributions. Contribution expense was $331,194, $237,165 and $238,160 for the
years ended March 31, 1997, 1996 and 1995, respectively.
RogersCasey also sponsors a profit sharing and savings plan covering
substantially all of its full time employees. Contributions to the profit
sharing plan are approved annually by the plan trustees and are distributed to
participants in accordance with the terms of the plan. Contribution expense for
the profit sharing plan for fiscal years 1997, 1996 and 1995 was approximately
$300,000 per year.
26
NOTE 12 -STOCK-BASED AWARDS.
STOCK OPTION PLAN.
On July 29, 1991, the Company adopted a Stock Option Plan (the "Plan") for the
granting of stock options to employees (including officers and employee
directors) and non-employee directors or consultants engaged by the Company, up
to a maximum of 1,200,000 shares of the Company's common stock. On July 28,
1994, the Plan was modified to increase the maximum number of shares of the
Company's common stock to 2,200,000. With the Plan, incentive stock options may
be granted to employees only, and are to be granted at not less than fair market
value on the date of grant; and non-statutory stock options may be granted to
employees, consultants and non-employee directors, and are to be granted at not
less than 85% of such fair market value. The Board of Directors, or a committee
thereof, determines vesting period, payment form and exercise date of the
options granted under the Plan, provided that no incentive stock option may be
exercised later than ten years after its date of grant and no non-statutory
option may be exercised later than ten years and one day after its date of
grant. For options issued under the Plan through March 31, 1997, the vesting
period has been set at 20% per year over five years.
There were also 30,257 options granted, outstanding and exercisable under the
RogersCasey Stock Option Plan (the "RCA Plan") as of March 31, 1995 and 1996.
During 1997, there were 4,842 options exercised under the RCA Plan at prices
ranging between $15.45 and $17.78. Activity in the RCA Plan has been combined
with the Plan for all periods presented. The RCA Plan is expected to terminate
once all outstanding options are exercised and/or canceled.
Changes in options, shares reserved for issuance and options available for
future grants under this plan were as follows:
SHARES SUBJECT TO WEIGHTED AVERAGE SHARES AVAILABLE FOR
OUTSTANDING OPTIONS EXERCISE PRICE FUTURE GRANTS
-----------------------------------------------------------------
Outstanding, Balance at March 31, 1995 1,282,057 7.68 941,000
Granted 422,700 12.97 (422,700)
Canceled (85,460) 7.82 85,460
Exercised (80,020) 7.93 --
-----------------------------------------------------------------
Outstanding, Balance at March 31, 1996 1,539,277 9.11 603,760
Granted 346,000 23.91 (346,000)
Canceled (60,140) 14.94 60,140
Exercised (108,182) 8.50 --
-----------------------------------------------------------------
Outstanding, Balance at March 31, 1997 1,716,955 11.93 317,900
Exercisable at March 31, 1997 661,345 -- --
Weighted average fair value of options
granted during the year -- $11.61 --
Additional information regarding options outstanding as of March 31, 1997 is as
follows:
Stock Options Outstanding Options Exercisable
--------------------------------------------------------------------------------------------
Weighted Average Weighted
Range of Exercise Number Remaining Weighted Average Number Average Exercise
Prices Outstanding Contractual Life (yrs) Exercise Price Exercisable Price
- ------------------------------------------------------------------------------------------------------------------
$ 6.00 to $10.00 938,230 6.7 $ 7.25 489,030 $ 7.39
$ 10.01 to $15.00 253,000 7.0 $10.70 112,680 $10.59
$ 15.01 to $20.00 207,475 8.9 $15.71 59,635 $15.62
$ 20.01 to 25.00 127,250 9.3 $20.38 -- --
$ 25 and over 191,000 9.8 $26.78 -- --
--------- -------
1,716,955 7.5 $11.93 661,345 $ 8.68
--------- -------
--------- -------
27
EMPLOYEE STOCK PURCHASE PLAN
Under the 1996 Employee Stock Purchase Plan, (the "Purchase Plan"), eligible
employees may elect to have salary withheld to purchase shares of common stock
at a price equal to 85% of the lower of the market value of the stock as of the
beginning or end of each three-month offer period, subject to an annual
limitation. Stock issued under the Purchase Plan was 11,522 shares in fiscal
1997 at a weighted average price of $21.25. At March 31, 1997 there were
738,478 shares of common stock reserved for future issuance under the Purchase
Plan.
ADDITIONAL STOCK-BASED AWARD INFORMATION
As discussed in Note 2 above, the Company continues to account for its
stock-based awards using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and its related interpretations. Accordingly no compensation expense
has been recognized in the financial statements for employee stock arrangements.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), requires the disclosure of pro forma net income and
earnings per share had the Company adopted the fair value method as of the
beginning of fiscal 1995. Under SFAS 123, the fair value of stock based awards
to employees is calculated through the use of option pricing models, even though
such models were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require subjective
assumptions, including future stock volatility and expected time to exercise,
which greatly affect the calculated values. The Company's calculations were
made using the Black Scholes option pricing model with the following weighted
average assumptions: weighted average expected life, 60 months for 1997 and
1996; stock volatility,45% in 1997 and 41% in 1996; risk free interest rates,
6.27% in 1997 and 5.88% in 1996; and no dividends during the expected term. If
the computed fair values of the 1997 and 1996 awards under the Plan had been
amortized to expense over the vesting period of the awards, pro forma net income
would have been $12,347,913 ($1.37 per share) in fiscal 1997 and $6,581,757
($.75 per share) in fiscal 1996. However, the impact of outstanding stock
options granted prior to 1996 has been excluded from the pro forma calculation;
accordingly, the fiscal year 1997 and 1996 pro forma adjustments are not
indicative of future pro forma adjustments, when the calculation will apply to
all applicable stock options.
NOTE 13 - EXPORT REVENUES.
The Company primarily operates in one industry segment, the development and
marketing of knowledge-based software applications for investment analytics and
related consulting and money management services. Products and services are
marketed internationally through the Company and its foreign affiliates. The
table below presents a summary of export revenues for the fiscal years ended
March 31:
1997 1996 1995
---- ---- ----
United States and Canada $73,062,391 $48,832,702 $40,215,717
Europe 18,527,989 14,738,456 12,602,769
Asia and Australia 13,171,532 13,996,918 11,448,708
------------ ----------- -----------
Total $104,761,912 $77,568,076 $64,267,194
------------ ----------- -----------
------------ ----------- -----------
NOTE 14 - CONTINGENCY.
BARRA's sales and use tax filings in the State of California for periods prior
to June 30, 1996 are currently under review by the State of California Board of
Equalization (the "Board"). The examination involves issues relating to the
taxable nature of certain of BARRA's services. BARRA believes that the result of
this review will not have a material adverse effect on the financial condition
or results of operations of the Company.
The Company is also subject to pending or threatened lawsuits arising in the
normal course of business. It is management's opinion that the results of any
such pending or threatened litigation will not be material to the Company's
consolidated financial position.
28
NOTE 15 - SUBSEQUENT EVENT.
On May 23, 1997 the Company entered into definitive agreements to exchange
approximately 470,000 shares of the Company's stock and up to $3.2 million in
cash for all of the outstanding shares of Global Advanced Technology Corporation
("GAT") and a majority interest in Innosearch Corporation ("Innosearch"), an
affiliate of GAT. GAT and Innosearch are fixed income analytics, consulting,
and research firms. The closing of the transaction is subject to certain
conditions contained in the agreements. The acquisition is expected to be
accounted for using the purchase method of accounting for business combinations.
NOTE 16 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED).
FISCAL YEAR ENDED MARCH 31, 1997 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER
Total operating revenues $29,476,948 $27,884,375 $24,473,840 $22,926,749
Total operating revenues net of operating expenses $8,836,691 $6,982,987 $3,035,176 $4,095,587
Net income $4,626,885 $4,214,108 $1,936,258 $2,768,202
Primary net income per share $0.49 $0.45 $0.21 $0.30
FISCAL YEAR ENDED MARCH 31, 1996 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER
Total operating revenues $20,717,238 $20,569,774 $18,271,034 $18,010,030
Total operating revenues net of operating expenses $3,603,505 $2,442,963 $2,849,437 $2,692,036
Net income $2,421,174 $1,231,038 $1,747,987 $1,469,057
Primary net income per share $0.26 $0.14 $0.20 $0.17
Income per share calculations for each of the quarters is based on the primary
weighted average common and common equivalent shares outstanding for each
period, and the sum of the quarters may not necessarily be equal to the full
year income per share amount. There was no significant difference between
primary and fully diluted income per share. Quarterly financial data reflect
the combined operations of BARRA and RogersCasey for all periods presented and
include one-time charges of $1,756,189 ($0.11 per share) associated with the
merger in the second quarter of fiscal 1997.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
Certain information required by Part III is omitted from this Report in that the
Company intends to file its definitive Proxy Statement pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this Report, and certain information therein is incorporated herein by
reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
DIRECTORS
The information regarding the Company's directors required by this Item 10 is
incorporated by reference to pages 2 through 4 of the Proxy Statement under the
headings "Proposal No. 1 - Election of Directors - Nominees, Business Experience
of the Directors and Board Meetings and Committees."
29
EXECUTIVE OFFICERS OF THE COMPANY
The names and certain information about the executive officers of BARRA, as of
June 2, 1997, are as follows:
NAME AGE POSITION
Andrew Rudd 47 Chairman and Chief Executive Officer of BARRA
Kamal Duggirala 38 President of BARRA
C.E. Beckers 45 President of BARRA International, Ltd. and Senior Vice President of BARRA
John F. Casey 54 President and Chief Executive Officer of RogersCasey and Director of BARRA
James D. Kirsner 53 Chief Financial Officer of BARRA
Robert L. Honeycutt 33 Chief Operating Officer of BARRA
Maria Louisa Hekker 35 Chief Legal Officer, Secretary and General Counsel of BARRA
Daniel Beck 43 Vice President - Fixed Income of BARRA
Ronald N. Kahn 40 Vice President - Research of BARRA
Claes Lekander 35 Vice President - Equity Manager Services of BARRA
Executive officers of the Company are elected annually by the Board of Directors
and serve at the Board's discretion. There are no family relationships among any
directors or executive officers of the Company.
DANIEL BECK joined the Company's predecessor in 1978 as a Consultant. He became
manager of BARRA's Fixed-Income Products in August 1983 and Director of Product
Development in April 1985. Mr. Beck was elected to the office of Vice
President-Operations in April 1993 and to the office of Vice President-Fixed
Income in August 1994. Mr. Beck is a graduate of Ecole Nationale Superieure des
Telecommunications and holds an M.B.A. in finance from the University of
California, Berkeley.
C.E. BECKERS joined the Company's predecessor in 1981. Dr. Beckers was elected
to the office of Senior Vice President of the Company in April 1993 and to the
office of President of the Company's wholly-owned subsidiary, BARRA
International, Ltd. (BARRA International), in February 1993. Dr. Beckers has
been a member of the Board of Directors of BARRA International since April 1994.
Dr. Beckers also served as Senior Vice President of BARRA International from
January 1990 to February 1993 and he was in charge of the Company's
International Division from 1981 to 1990. Dr. Beckers has served on the faculty
of K.U. Leuven (Belgium) since 1989. Dr. Beckers holds a Ph.D. in Finance from
the University of California, Berkeley.
JOHN F. CASEY became a director of the Company following its acquisition of
RogersCasey in July 1996. Mr. Casey has been associated with RogersCasey, an
investment consulting and special assets advisory firm, since its inception in
1976. Mr. Casey has also served as President and Chief Executive Officer of
RogersCasey since 1989. Prior to founding RogersCasey, he worked at Dreher,
Rogers & Associates, was founder of investment manager research at Paine,
Webber, Jackson & Curtis and served as Director and head manager of research at
Callan Associates. Mr. Casey holds a B.A. from Milton College.
KAMAL DUGGIRALA was elected to the office of President on October 27, 1994. He
joined the Company's predecessor in 1984 as a Junior Consultant and became
Manager of Broker Products in 1985, Director of Broker/Dealer Services in 1988,
and Vice President-Advanced Technology in 1993. Mr. Duggirala holds an M.S.
in Operations Research and an M.B.A. in Finance from the University of
California, Berkeley.
MARIA LOUISA HEKKER joined the Company as its General Counsel in August 1992.
Ms. Hekker was elected to the position of Chief Legal Officer of the Company in
April 1993. Prior to that she worked in the San Francisco (December 1988 to
July 1992) and Milan (September 1988 to December 1988) offices of the law firm
of Graham & James, where she specialized in international corporate and
securities matters. Ms. Hekker is a graduate of Dartmouth College and holds a
J.D. from the University of California, Hastings College of the Law.
30
ROBERT L. HONEYCUTT was elected to the position of Chief Operating Officer of
the Company in October 1992. He joined the Company in January 1992 as Director
of Operations. Prior to that Mr. Honeycutt was Vice President-Corporate Finance
for Hambrecht & Quist Incorporated (May 1987 to January 1992), a financial
analyst for a start-up insurance subsidiary of Berkshire Hathaway (June 1986 to
May 1987) and a business and public policy consultant for SRI International
(January 1985 to June 1986). Mr. Honeycutt graduated from Stanford University
where he specialized in Mathematical and Computational Science.
RONALD N. KAHN joined the Company full-time as a Senior Consultant in the
Research Group in September 1987. He was named Manager of Special Projects for
the Research Group in March 1989 and Director of Research in July 1991.
Dr. Kahn was elected to the office of Vice President-Research by the Board of
Directors of the Company in April 1993. Dr. Kahn holds a Ph.D. in Physics from
Harvard University.
JAMES D. KIRSNER joined the Company as its Vice President - Finance in
August 1993. He became the Chief Financial Officer in November 1993. Prior to
joining the Company he was with Arthur Andersen & Co. from May 1966 to
August 1993, where he was a partner specializing in serving investment managers,
securities firms, banks and other financial services businesses. Mr. Kirsner
holds graduate and undergraduate degrees from the Wharton School of the
University of Pennsylvania and was a general course student at the London School
of Economics.
CLAES LEKANDER joined BARRA in 1986 as manager for equity client servicing,
where he served for several years. He became Director of Equity Services in
1992, and was named Vice President, Equity Manager Services in January 1997.
Mr. Lekander holds a degree in Economics and Business Administration from the
Stockholm School of Economics. He received his M.B.A. from the University of
California, Berkeley, in 1985.
ANDREW RUDD has been associated with the Company and its predecessors since
1975. Dr. Rudd has served as the Chief Executive Officer of the Company and its
predecessors since 1984, as a member of the Board of Directors of the Company
since 1986 and as its Chairman since 1992. He served on the Company's
Compensation Committee from July 1992 to January 1994 and has served on the
Company's Nominating Committee since April 1993. Dr. Rudd also served as
President of the Company and its predecessors from 1984 to 1992. Between 1977
and 1982, Dr. Rudd was a professor of finance and operations research at Cornell
University in Ithaca, New York. He holds a Ph.D. in Operations Research from
the University of California, Berkeley.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
The information regarding compliance with Section 16(a) of the Exchange Act
required by this Item 10 is incorporated by reference to page 6 of the Proxy
Statement under the heading "Compliance with Section 16(a) of the Securities
Exchange Act of 1934."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference to pages 7
through 11 of the Proxy Statement under the headings "Executive Compensation"
and "Report of the Compensation Committee and of the Board of Directors on
Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated by reference to pages 4
through 6 of the Proxy Statement under the heading "Principal Shareholders and
Share Ownership by Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated by reference to pages 6
through 10 of the Proxy Statement under the heading "Executive Compensation -
Compensation Committee Interlocks, Insider Participation and Other
Transactions."
31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
(1) Financial Statements.
The following financial statements of the Company are included in
Item 8 of Part II of this Report:
Reference Page
Independent Auditors' Report 15
Consolidated Financial Statements
Consolidated Balance Sheets 16
Consolidated Statements of Income 17
Consolidated Statements of Cash Flows 18
Consolidated Statements of Shareholders' Equity 19
Notes to Consolidated Financial Statements 20
(2) Financial Statement Schedules.
All Financial Statement Schedules of the Company are omitted because
they are not applicable or not required, or because the required
information is incorporated by reference into Part II, Items 7 and/or
8 of this Report.
(3) Exhibits.
3.1 Amended and Restated Articles of Incorporation of BARRA, Inc.
(incorporated by reference to Exhibit 3.1 of the Company's
Form S-1 Registration Statement (No. 33-42951), as filed with
the SEC (the "SEC") on August 20, 1991 (the "Registration
Statement")).
3.2 Amended Bylaws of BARRA, Inc. (incorporated by reference to
Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1995, as filed with the SEC on
February 14, 1996).
4.1 Specimen stock certificate (incorporated by reference to
Exhibit 4.3 to the Registration Statement).
11.1 Statement regarding the Computation of Per Share Earnings.
13.1 1997 Annual Report to Shareholders of BARRA, Inc.
21.1 List of Subsidiaries of BARRA, Inc.
23.1 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule.
THE EXHIBITS LISTED ABOVE ARE FILED AS PART OF, OR ARE INCORPORATED BY
REFERENCE INTO, THIS REPORT. COPIES OF THE EXHIBITS LISTED ABOVE WILL
BE FURNISHED AT REASONABLE COST TO ANY SHAREHOLDER OF THE COMPANY UPON
RECEIPT OF A WRITTEN REQUEST THEREFOR. SUCH REQUEST SHOULD BE SENT TO
BARRA, INC., 2100 MILVIA STREET, BERKELEY, CALIFORNIA 94704,
ATTENTION: MARIA HEKKER, GENERAL COUNSEL.
(b) Reports on Form 8-K:
None.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act the
Company has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BARRA, Inc. (the "Company")
By: James D. Kirsner
--------------------------------------------
Name: James D. Kirsner
------------------------------------------
Title: Chief Financial Officer
-----------------------------------------
Date: June 20, 1997
------------------------------------------
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act this
Report has been signed by the following persons, on behalf of the Company, in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ A. George Battle Director June 20, 1997
- --------------------------
A. George Battle
/s/ John F. Casey Director and Chief Executive Officer and President June 20, 1997
- -------------------------- of Rogers, Casey & Associates, Inc.
John F. Casey
/s/ M. Blair Hull Director June 20, 1997
- --------------------------
M. Blair Hull
/s/ James D. Kirsner Chief Financial Officer (Principal Financial and June 20, 1997
- -------------------------- Accounting Officer)
James D. Kirsner
/s/ Norman J. Laboe Director June 20, 1997
- --------------------------
Norman J. Laboe
/s/ Ronald J. Lanstein Director and Vice Chairman June 20, 1997
- --------------------------
Ronald J. Lanstein
/s/ Andrew Rudd Director, Chairman and Chief Executive Officer June 20, 1997
- -------------------------- (Principal Executive Officer)
Andrew Rudd
33
EXHIBITS
EXHIBIT DOCUMENT PAGE
3.1 Amended and Restated Articles of Incorporation of BARRA, Inc. (incorporated by reference to N/A
Exhibit 3.1 of the Company's Form S-1 Registration Statement (No. 33-42951), as filed with the
SEC (the "SEC") on August 20, 1991 (the "Registration Statement")).
3.2 Amended Bylaws of BARRA, Inc. (incorporated by reference to Exhibit 3.1 of the Company's N/A
Quarterly Report on Form 10-Q for the quarter ended December 31, 1995, as filed with the SEC
on February 14, 1996).
4.1 Specimen Stock Certificate (incorporated by reference to Exhibit 4.3 to the Registration Statement). N/A
11.1 Statement Regarding Computation of Earnings Per Share. 35
13.1 1997 Annual Report to the Shareholders of BARRA, Inc. 36
21.1 List of Subsidiaries of BARRA, Inc. 63
23.1 Consent of Deloitte & Touche LLP. 64
27 Financial Data Schedule 65
34