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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended August 31, 1996
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ____ to ____
__________________
Commission File Number: 1-11869
FACTSET RESEARCH SYSTEMS INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3362547
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Greenwich Plaza,
Greenwich, Connecticut 06830
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (203) 863-1500
Securities registered pursuant to Section 12(b) of the Act: Common Stock
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The aggregate market value of the common stock held by non-affiliates of the
registrant as of November 15, 1996 was $128,332,979
The number of shares outstanding of the registrant's common stock as of
November 15, 1996 was 9,526,354.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement dated November 26, 1996 to be
delivered to shareholders in connection with the Annual Meeting of Shareholders
to be held January 9, 1997 are incorporated by reference into Part III.
FACTSET RESEARCH SYSTEMS INC.
FORM 10-K
For The Fiscal Year Ended August 31, 1996
INDEX
Page
PART I
Item 1. Business...................................................... 1
Item 2. Properties.................................................... 5
Item 3. Legal Proceedings............................................. 5
Item 4. Submission of Matters to a Vote of Security Holders........... 5
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters....................................................... 6
Item 6. Selected Financial Data....................................... 7
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 7
Item 8. Financial Statements and Supplementary Data................... 14
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures..................................... 14
PART III
Item 10. Directors and Executive Officers of the Registrant............ 30
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
PART I
ITEM 1. BUSINESS
Overview
FactSet Research Systems Inc. is a leading provider of online integrated
database services to the financial community. The Company, which markets its
services in the United States, Europe and the Pacific Rim, combines multiple
large-scale databases into a single, coherent mainframe computer information
system accessible from clients' personal computer terminals. The Company's
aggregated data library provides a broad variety of financial and economic
information, including fundamental data on more than 20,000 companies worldwide.
By allowing clients the ability to simultaneously access multiple databases as
if they were part of a single database and search for and download specific data
directly into their spreadsheets and other work products, FactSet provides
investment managers, investment banks and other financial institutions with a
comprehensive, "one-stop" source for financial information and analytics. The
Company's advanced, proprietary software tools enable clients to manipulate and
analyze the data provided by the Company and present it in a wide variety of
formats, including custom reports designed by the clients. At August 31, 1996,
439 clients with more than 6,000 authorized workstations subscribed to the
Company's services, including many leading investment managers and investment
banks.
The Company was formed in 1978 and has been profitable in each of the last 16
years. For the five fiscal years ended August 31, 1996, the Company sustained
compound annual growth rates of revenue, operating income and net income of
22.0%, 24.9% and 25.2%, respectively.
Industry Overview
The worldwide market for financial information is estimated to have grown 13% in
1995 to approximately $10.0 billion. The primary users of financial information
of the type provided by the Company are investment managers and investment
banks. In the United States alone, there are currently an estimated 900
investment managers with over $500 million under management and 151 investment
banks with over $20 million in capital. The market for financial information,
both in the United States and worldwide, is expected to continue to demonstrate
strong growth for the foreseeable future. Factors which the Company believes
contribute to this industry growth include (i) the underlying growth of the
investment management business with its requisite information needs; (ii)
improved technology providing end users with substantially increased analytic
capabilities and the ability to inexpensively and rapidly store, access and
transfer large amounts of data; (iii) the increasingly competitive investment
environment requiring immediate access to accurate information; (iv) the growth
of alternative investment institutions such as hedge funds and limited
partnerships; and (v) the development of complex financial instruments with
large associated information requirements.
The market for financial information services is undergoing significant change,
driven by rapid growth in the amount of available information and increasingly
competitive global capital markets. Financial services professionals depend on a
wide array of financial data including current and historical security prices,
historical and estimated future company financial information, benchmark data
and indices, general economic data and other financial data. In addition, the
Company believes that it is becoming increasingly important for these
professionals to integrate and analyze the historical relationships between
multiple types of financial information in forming their investment decisions.
Financial information is typically contained in databases maintained by a wide
variety of vendors and provided to clients in both CD-ROM and online formats.
In the absence of database integration, in order to utilize data from a variety
of sources, an individual user must access and retrieve data from multiple
separate databases, with data often in varied formats, and then must manually
integrate and tabulate the accumulated data to suit his or her particular task.
1
Since its inception, FactSet has experienced competition from a number of
financial information providers supplying data in a variety of formats. In the
1980's, the Company's primary competitors were "time-sharing" services, which
sold financial data based on clients' online time. Although many of these
competitors were established, well-capitalized companies, the Company believes
that it was able to compete successfully due to the financial services
industry's need for a comprehensive and efficient source of financial data.
Currently, the Company believes that it will continue to compete effectively in
the market for financial information based on the competitive advantages
described below.
FactSet's Competitive Advantages
The FactSet system integrates financial data from over 50 separate databases to
form an aggregated data library that allows users to search, download and
manipulate all available data as if from one source without having to make
adjustments for differing formats or presentations. Management believes that
this attribute of the FactSet system, as well as the Company's (i) internally
developed, proprietary software that allows extensive manipulation of data,
including downloading directly to custom spreadsheets developed by clients for
use on the FactSet system: (ii) sophisticated system architecture that allows
users to access the computing power of its mainframe computer platform through
its easy-to-use Window-based programs: (iii) advanced communications
infrastructure, including its wide area network ("WAN"), through which
approximately 25% of its clients and 50% of its authorized workstations are now
connected to the FactSet system; (iv) proprietary integrated database structure,
which facilitates speed and efficiency in data retrieval; (v) superior client
services, including its ability to work closely with clients to develop
customized data solutions; and (vi) ability to recruit, train and retain highly
talented engineering and marketing personnel, have been significant to the
Company's growth and profitability and provide competitive advantages over other
financial data providers.
Growth Strategy
The Company intends to continue to expand its operations while maintaining
attractive levels of profitability. The Company plans to introduce new service
enhancements, applications, and databases designed to increase penetration of
existing clients and attract new clients. Growth in the Company's client base is
expected to result both from an expansion of the market for financial
information and from increased market share achieved in competition with other
database providers. The Company has recently expanded its marketing efforts to
focus on specific industry segments, including investment banking and portfolio
management, and on geographic expansion to Europe and the Pacific Rim, each of
which the Company believes present significant opportunities for growth. The
Company will also explore strategic acquisitions and alliances as such
opportunities arise.
Applications
FactSet has developed advanced proprietary software tools to enable users to
create investment analyses using the Company's mainframe computer and integrated
data library. This software allows clients, utilizing easy-to-use Windows-based
programs, to access the power of the FactSet mainframe computer to manipulate
the data provided by the Company and to present that data in a wide variety of
formats, including standard FactSet reports, high-speed screening, stock price
reports and charts. Reports can be tailored to formats designed by or for
individual clients. While many of the Company's competitors offer similar
applications, the Company believes that none offer a package of applications as
comprehensive and user-friendly as those offered by the Company.
See "Competition."
2
Clients
The Company's client base consists of investment managers, investment banks and,
to a limited extent, corporations and accounting firms. As of August 31, 1996,
the Company had 439 clients, the substantial majority of which are located in
the United States. For fiscal 1996, average revenue per client was $107,000
compared with $96,000 in fiscal 1995.
Consultative Services
Providing superior consultative services is an integral part of the Company's
business philosophy and has contributed to a client retention rate (on a revenue
basis) which has consistently been over 95%. The goal of the Company's client
support consultants is to maximize the utility of the FactSet system to clients
and thereby promote lasting and mutually profitable client relationships. Client
support consultants work with clients, often at client sites, to develop custom
applications tailored to clients' information needs. The Company also conducts
several dozen training seminars across the nation annually and maintains a
client support hotline and a round-the-clock emergency beeper service.
Consulting and training services are provided to clients free of charge.
System Structure
The design of the FactSet information system is based on the Company's belief
that time sensitive information and complex searches and data manipulations can
be best managed and delivered from a mainframe hub out to client networks and
workstations. The linkage of the Company's mainframe computer power, speed and
storage capacity with client terminals and networks results in a highly capable
and efficient information delivery system.
Engineering and Product Development
The Company recognizes that its continued success depends upon its ability to
enhance the FactSet system and to introduce new services that adequately
anticipate and address technological and market developments and the needs of
the Company's clients. The Company maintains an extensive staff of engineers
focusing on both new and improved software applications and system structure and
operations.
The Company is continually refining the process by which new and disparate
databases are integrated into the FactSet system. The Company is developing a
generalized integration system that it believes will significantly reduce the
lead time and costs associated with the addition of new databases. The Company
is also developing sophisticated tools for monitoring and maintaining the
quality and integrity of data in the FactSet system as such data is routinely
updated via feeds from database providers.
The Company's software engineers are developing applications designed to enhance
and leverage the success of FactSet's windows interface. In connection with this
interface, the Company has developed sophisticated system architecture that
allows FactSet to centrally control the screen environment of and on-screen
special service options available to individual users, thereby eliminating the
need to continually upgrade FactSet software on clients' personal computers and
workstations. The Company's engineers are also focusing on the needs of the
Company's various client groups, and the product development cycle often
involves consultation with and feedback from clients.
Databases
As of August 31, 1996, the Company acquired data from over 30 information
providers supplying over 50 databases. The Company seeks to maintain, when
possible, at least two sources for each item of data. The Company contracts with
database vendors on either a fixed fee or royalty (per client) basis, with the
contract generally renewable annually and cancelable on one year's notice.
FactSet is a significant distributor for many of the databases provided by the
Company.
3
Currently, the databases offered by the Company as part of its basic
subscription package include fundamental corporate data, securities prices,
business news and economic data.
As of August 31, 1996, a majority of the Company's clients subscribed for
databases in addition to those offered with the Company's basic service. The
Company charges clients based on a fixed annual surcharge for each additional
database to which a client desires access. For most databases, the client must
also pay an annual fee directly to the database provider.
The integration of new databases, in addition to making the FactSet system more
useful to existing clients, enables the Company to tailor its services to the
specific needs of additional user categories and markets. In 1993, the Company
added a number of new databases to its library, including earnings estimates for
I/B/E/S International, international fundamental corporate data from GLOBAL
Vantage and portfolio data from BARRA and F.T. Actuaries. Additions in 1994
included data from Morgan Stanley Capital International and EDGAR SEC filings.
In 1995, the Company added International Finance Corporation ("IFC") benchmark
index data. The IFC, a subsidiary of the World Bank, is a provider of indices
covering emerging markets. The Company also recently introduced the Toyo Kezai
database, a source of fundamental corporate information on Japanese companies,
CDA Signal, and the Russell U.S. Equity Profile, a comprehensive report that
computes attribution characteristics of selected portfolios and benchmarks.
Competition
The financial information services industry is competitive and characterized by
rapid technological change and the entry into the field of large and
well-capitalized companies as well as smaller competitors. In a broad sense, the
Company competes or may compete directly and indirectly in the United States and
internationally with large, well-established news and information providers such
as Dialog, Disclosure, Dow Jones, Lexis/Nexis, Pearson, Reuters, and Thomson,
market data suppliers such as ADP, Bloomberg, and Telerate, as well as many of
the database providers from whom the Company obtains data for inclusion in the
FactSet system. The Company's most direct competitors include online and CD-ROM
database suppliers and integrators such as OneSource Inc., COMPUTSTAT PC Plus,
Baseline, DAIS Group, IDD Information Services, and Track Data Corp. primarily
in the United States and Datastream and Randall-Helms primarily in international
markets. Many of these competitors offer databases and applications that, in one
form or another, are similar to the databases and applications offered by the
Company, in some cases at lower prices. While many of the Company's competitors
offer similar applications, the Company believes that none offer a package of
applications as comprehensive and user-friendly as those offered by the Company.
Government Regulation
To facilitate the receipt of revenues on a commission basis, the Company's
wholly owned subsidiary, FDS, is a member of the National Association of
Securities Dealers, Inc. and is a registered broker-dealer under Section 15 of
the Securities and Exchange Act of 1934 (the "Exchange Act"). See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Overview". Rule 15c3-1 under the Exchange Act requires that FDS
maintain minimum net capital equal to the greater of $5,000 or 6.67% of
aggregate indebtedness and a ratio of aggregate indebtedness to net capital of
not more than 15 to 1. FDS may be prohibited from paying cash dividends to the
Company if such dividends would result in its net capital falling below the
minimum requirement to its ratio of aggregate indebtedness to net capital
exceeding 15 to 1. In addition, Rule 15c3-1 requires that FDS notify the
Securities and Exchange Commission ("SEC") and the appropriate self-regulatory
organization two business days before a withdrawal of excess net capital if the
withdrawal would exceed the greater of $500,000 or 30% of the FDS's net capital,
and two business days after a withdrawal that exceeds the greater of $500,000
and 20% of net capital. Finally, Rule 15c3-1 authorizes the SEC to order a
freeze on the transfer of capital if FDS plans a withdrawal of more than 30% of
its excess net capital and the SEC believes that such a withdrawal would be
detrimental to the financial integrity of FDS. Compliance with Rule 15c3-1 could
limit the Company's ability to undertake certain capital expenditures. At August
31,1996, FDS had net capital of $1,203,921 which was $817,087 in excess of its
minimum net capital requirement of $386,834, and a ratio of aggregate
indebtedness to net capital of 4.82 to 1.
4
ITEM 2. PROPERTIES
The Company's principal executive offices are located in Greenwich, Connecticut.
The Company maintains redundant mainframe computer centers at its Greenwich
facility and at a facility in New York City. The Greenwich facility consists of
approximately 37,000 square feet of office and computer center space. The
Company also maintains offices in San Mateo, California, London, England and
Tokyo, Japan. The Company has recently completed expansion of its San Mateo and
London facilities. The Company leases all of its facilities.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1996.
5
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on The New York Stock Exchange under the
symbol "FDS". On November 21, 1996, there were approximately 850 holders of the
Company's common stock. This number includes individual stockholders holding
stock under nominee security position listings. The Company has not paid cash
dividends on its common stock.
Quarterly Financial and Stock Price Information
(In thousands, except per share data)
Quarters
First Second Third Fourth *
1996
Revenue $10,137 $10,561 $11,436 $12,214
Operating income 2,323 2,534 2,809 2,967
Net income 1,464 1,558 1,675 1,773
- --------------------------------------------------------------------------------------------------------
Earnings per share $ 0.14 $ 0.14 $ 0.16 $ 0.16
- --------------------------------------------------------------------------------------------------------
Common stock price per share:*
High N/A N/A N/A 20 3/4
Low N/A N/A N/A 15 1/2
1995
Revenue $8,613 $8,984 $9,070 $9,521
Operating income 1,985 2,055 1,948 2,139
Net income 1,171 1,273 1,210 1,285
- --------------------------------------------------------------------------------------------------------
Earnings per share $ 0.12 $ 0.12 $ 0.11 $ 0.12
- --------------------------------------------------------------------------------------------------------
Common stock price per share:*
High N/A N/A N/A N/A
Low N/A N/A N/A N/A
* FactSet began trading on the New York Stock Exchange under the symbol "FDS" on
June 28, 1996. The IPO price was $17.00 per share.
6
ITEM 6. SELECTED FINANCIAL DATA
Financial Highlights
(In thousands, except earnings per share)
Year Ended August 31
--------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Revenue $44,348 $36,188 $29,019 $23,945 $19,279
Operating income 10,633 8,100 3,443* 4,952 3,938
Pretax income 11,384 8,670 3,694* 5,160 4,251
Net income 6,470 4,939 1,947* 2,879 2,335
- ------------------------------------------------------------------------------------------
Earnings per share 0.60 0.48 0.21* 0.31 0.25
Weighted average common shares 10,767 10,263 9,342 9,270 9,279
- ------------------------------------------------------------------------------------------
Total assets 36,510 28,663 22,345 20,435 13,708
Stockholders' equity 28,197 21,373 16,033 13,808 10,930
- ------------------------------------------------------------------------------------------
*Includes the effect of a special one-time executive bonus expense of $2,500,000
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis
Overview
FactSet Research Systems Inc. is a leading provider of online integrated
database services to the financial community. The Company's revenue is derived
from subscription charges. Solely at the option of each client, these charges
may be paid either in the form of commissions on securities transactions (in
which case subscription revenue is recorded as Commissions) or on a cash basis
(in which case subscription revenue is recorded as Fees).
To facilitate the receipt of subscription revenue on a commission basis,
the Company's wholly owned subsidiary, FactSet Data Systems Inc. ("FDS"), is a
member of the National Association of Securities Dealers, Inc. and is a
registered broker-dealer under Section 15 of the Securities Exchange Act of
1934. FDS's only function is to facilitate the receipt of payments in respect to
subscription charges and it does not otherwise engage in the securities
business.
7
Subscription Revenue
Subscription revenue paid in commissions is based on securities
transactions introduced and cleared on a fully disclosed basis through two
clearing brokers, Bear, Stearns & Co. and Broadcort Capital Corp. (a subsidiary
of Merrill Lynch Pierce Fenner & Smith, Inc.). Clearance is performed by these
two brokers pursuant to annually renewable contracts at volume discounted rates.
A client paying subscription charges on a commission basis directs the clearing
broker, at the time the client executes a securities transaction, to credit the
commission on the transaction to FDS's account. Effective September 1, 1996,
cash payments for subscription fees are being paid directly to the parent
company, FactSet Research Systems, while commission fees are still paid to
FactSet Data Systems.
Each client has the choice of paying subscription charges through
commissions or cash. When a client elects to pay subscription charges in the
form of commissions, the dollar amount payable is higher than the fee that would
be payable for the same services on a cash basis because of the associated
clearing fee payable by the Company to the clearing broker on such transactions.
However, commissions net of related clearing fees are approximately equal to the
fees that would be paid by a client on a cash basis.
Over the last several years, there has been a trend by both existing and
new clients toward payment of subscription charges on a cash rather than
commission basis. As a percentage of total revenue, commissions represented
61.1%, 59.6%, and 53.3%, for the three fiscal years ended August 31, 1994, 1995,
and 1996, respectively.
Subscription charges are quoted to clients on an annual basis, but are
earned on a month-to-month basis, as services are used by the client.
Subscription revenue recorded as Commissions and subscription revenue recorded
as Fees are each recorded as earned each month, based on one-twelfth of the
annual subscription charge quoted to each client. Amounts that have been earned
but not yet paid through the receipt of commissions on securities transactions
or through cash payments are reflected on the consolidated statements of
financial condition as receivable from clients. Amounts that have been received
through commissions on securities transactions or through cash payments that are
in excess of a client's earned subscription revenue are reflected on the
consolidated statements of financial condition as deferred fees and commissions.
FactSet does not enter into formal contracts with clients. The Company
believes this practice enhances its marketing efforts by allowing clients to use
the FactSet system without the requirement of a long-term commitment. The
Company enjoys excellent client retention--FactSet's overall client retention
rate (on a revenue basis) has consistently been over 95%.
The basic FactSet subscription consists of several databases, including
fundamental corporate data, securities prices, business news, and economic data;
two authorized workstations and companion home passwords; a basic application
package; and technical support and training. Additional databases, workstations,
and computer services (including enhanced and specialized applications) are
available at additional cost. Consulting and training services are provided to
clients for no additional fee.
Unlike services that charge fees based on actual system usage time, the
Company charges fixed monthly amounts that vary among clients, based on the
number of sites and workstations from which the FactSet system is available and
the number of accessible databases and specialized services to which a client
subscribes. The Company believes that this pricing policy encourages clients to
use the FactSet system regularly and thus to integrate the system into their
decision-making processes.
Expenses
Operating expenses include employee compensation and benefits, clearing
fees, data costs, communication costs, computer equipment expenses, occupancy
expenses, promotional costs, and other expenses.
8
Employee compensation and benefits expenses include--in addition to
employee salaries and bonuses--payroll taxes, the Company's ESOP contributions,
health insurance costs, and costs associated with the Company's key-man life
insurance policies.
Clearing fees are directly related to commission revenue. Clearing fees for
executed transactions are recorded on a trade date basis as securities
transactions occur, with clearing fees related to commissions receivable
recorded simultaneously with the related receivable.
Data costs consist of fees and royalties paid by the Company to database
suppliers. Under agreements with certain suppliers, the Company collects
database fees from clients and pays the database supplier on the clients'
behalf. In many cases, however, clients pay database suppliers directly. Such
payments are not reflected on the Company's financial statements.
Communication costs are charges paid by the Company for clients'
communication with the FactSet system, including long-distance telephone
charges, charges associated with the Company's wide area network (WAN), and
Internet access charges.
Computer equipment expenses consist of noncapitalized equipment acquisition
costs and depreciation expense relating to the Company's mainframe computers and
other related equipment, including communications equipment. The cost of
communications equipment provided to clients for use at client sites is
classified as an expense.
Occupancy expense includes costs related to the Company's leased facilities
in Greenwich, Connecticut; New York, New York; San Mateo, California; London,
England; and Tokyo, Japan, as well as amortization expense relating to leasehold
improvements at those facilities.
Promotional expenses consist primarily of the cost of travel for the
Company's marketing personnel and consultants, costs associated with the
printing of user manuals, training materials, and promotional literature, and
expenses relating to Company participation at industry trade shows and
conventions.
Other expenses include professional fees, office expenses, and other
miscellaneous expenses.
Other
Other income consists primarily of interest income.
Several of the Company's European and Pacific Rim clients currently pay
subscription fees to the Company in foreign currency, principally British pounds
sterling and Japanese yen. In the event that revenue denominated in foreign
currency grows to represent a material percentage of the Company's total
revenue, the Company will consider appropriate strategies to manage risks
associated with foreign currency exchange fluctuations.
The Company's commitment to maintaining state-of-the-art technology has
required significant investment in its computer and communications systems.
Accordingly, the Company expects this level of investment to continue with the
growth and expansion of operations.
9
Results of Operations
The following table sets forth, for the periods indicated, certain items
derived from the Company's consolidated statements of income as a percentage of
revenue. Totals may not add up precisely due to rounding.
Percentage of Revenue Years Ended August 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------
Subscription revenue
Commissions 53.3 59.6 61.1
Fees 46.7 40.4 38.9
----- ----- -----
100.0 100.0 100.0
===== ===== =====
- ----------------------------------------------------------------------------------------
Expenses
Employee compensation and benefits 30.1 30.5 38.3
Clearing fees 9.9 11.8 11.8
Data costs 7.9 8.5 8.4
Communication costs 6.4 6.7 7.0
Computer equipment 6.5 6.1 7.9
Occupancy 5.6 5.7 6.5
Promotional costs 5.3 5.2 4.8
Other expenses 4.3 3.2 3.4
----- ----- -----
Total expenses 76.0 77.6 88.1
Operating income 24.0 22.4 11.9
Other income 1.7 1.6 0.9
----- ----- -----
Income before income taxes 25.7 24.0 12.7
Income taxes 11.1 10.3 6.0
----- ----- -----
Net income 14.6 13.6 6.7
===== ===== =====
- ----------------------------------------------------------------------------------------
Reflects the effect of special bonuses paid to certain executive officers of the
Company in 1994 in the aggregate amount of $2.5 million. Excluding the effects
of these special bonuses, the percentage of revenue represented by each of the
indicated items would be the amount specified: employee compensation and
benefits, 29.7%; total expenses, 79.5%; operating income, 20.5%; income before
income taxes, 21.3%; and net income, 11.2%.
10
Fiscal Year Ended August 31, 1996 Compared with
Fiscal Year Ended August 31, 1995
Subscription Revenue. With the addition of new applications, databases,
service offerings, and clients (439 as of August 31, 1996), as well as an
increase in the number of authorized workstations (over 6,000 at fiscal year end
1996), FactSet's subscription revenue rose 22.5% to $44.3 million for the fiscal
year ended August 31, 1996 from $36.2 million for the fiscal year ended August
31, 1995. Average revenue per client increased from $96,000 in fiscal 1995 to
$107,000 in fiscal 1996, while average commitment revenue per client grew
commensurately to $116,000 as of August 31, 1996, from $104,000 a year earlier.
These results were achieved while the Company maintained a client retention rate
in excess of 95% during the year. International operations contributed
significantly to the revenue growth experienced in 1996, with revenue from
international operations accounting for 6.5% of total revenue in fiscal 1996
compared to 3.8% in fiscal 1995.
Employee Compensation and Benefits. Employee compensation and benefits
increased from $11.0 million to $13.3 million, or 21.0%, from fiscal 1995 to
fiscal 1996. This increase was due to a net addition of 43 employees to support
FactSet's continued growth and expansion in new industry segments and geographic
regions, and to increases in compensation and benefits costs for existing
personnel. As a percentage of revenue, employee compensation and benefits
declined slightly from 30.5% in the 1995 period to 30.1% in the 1996 period. As
of August 31, 1996, the Company employed 145 people worldwide.
Clearing Fees. Clearing fees associated with commission revenue increased
from $4.3 million for fiscal 1995 to $4.4 million for fiscal 1996, or 2.8%.
Clearing fees, as a percentage of revenue, decreased from 11.8% for fiscal 1995
to 9.9% for fiscal 1996. This decrease reflected improved clearance rates as a
result of higher commission volume as well as the shift in payment form by
clients from a commission basis to a cash basis.
Data Costs. Data costs increased from $3.1 million for fiscal 1995 to $3.5
million for fiscal 1996, or 14.5%. As a percentage of revenue, data costs
decreased from 8.5% in the 1995 period to 7.9% in the 1996 period. This decrease
reflects improved terms from certain database providers and economies of scale
achieved from a larger client base, partially offset by incremental costs
associated with the addition of databases.
Communication Costs. Communication costs increased from $2.4 million to
$2.8 million, or 17.0%, from fiscal 1995 to fiscal 1996. Communication costs, as
a percentage of revenue, declined from 6.7% in the 1995 period to 6.4% in the
1996 period. This decline reflects the continued cost savings associated with
the implementation of the Company's new communications network, partially offset
by higher communication costs associated with increased usage of the FactSet
system and a greater proportion of international clients.
Computer Equipment. Computer equipment expenses increased from $2.2 million
to $2.9 million, or 31.0%, from fiscal 1995 to fiscal 1996. Computer equipment
expenses, as a percentage of revenue, increased from 6.1% in the 1995 period to
6.5% in the 1996 period. The increase was due to higher depreciation expense
associated with increased capital expenditures for continued upgrading of
computer equipment as well as a greater proportion of computer assets with
shorter depreciable lives.
Occupancy. Occupancy costs increased from $2.1 million for the fiscal year
ended August 31, 1995 to $2.5 million for the fiscal year ended August 31, 1996,
representing an increase of 20.4%. This increase reflected costs associated with
the expansion of the Company's Greenwich, Connecticut facilities to accommodate
growth in its business and personnel. As a percentage of revenue, occupancy
costs declined slightly from 5.7% in fiscal 1995 to 5.6% in fiscal 1996.
11
Promotional Costs. Promotional costs increased from $1.9 million to $2.4
million, or 26.5%, from fiscal 1995 to fiscal 1996. Promotional costs, as a
percentage of revenue, increased from 5.2% in the 1995 period to 5.3% in the
1996 period due primarily to increased expenses associated with marketing to new
industry segments and geographic regions.
Other Expenses. Other expenses increased from $1.2 million in fiscal 1995
to $1.9 million in fiscal 1996, or 62.6%. As a percentage of revenue, other
expenses increased from 3.2% in the 1995 period to 4.3% in the 1996 period. The
increase was due to increases in miscellaneous taxes, professional fees, and
other miscellaneous expenses.
Operating Income. Operating income increased from $8.1 million for the
fiscal year ended August 31, 1995 to $10.6 million for the fiscal year ended
August 31, 1996, or 31.3%. As a percentage of revenue, operating income
increased from 22.4% in fiscal 1995 to 24.0% in fiscal 1996.
Other Income. Other income increased from $0.6 million to $0.8 million, or
31.8%, from fiscal 1995 to fiscal 1996 due to higher levels of cash, cash
equivalents, and investments.
Income Taxes. Income taxes increased from $3.7 million to $4.9 million, or
31.7%, from fiscal 1995 to fiscal 1996 due to higher income before income taxes
and an increase in the effective tax rate from 43.0% in the 1995 period to 43.2%
in the 1996 period.
Net Income. Net income increased from $4.9 million for the fiscal year
ended August 31, 1995 to $6.5 million for the fiscal year ended August 31, 1996,
or 31.0%. As a percentage of revenue, net income increased from 13.6% in fiscal
1995 to 14.6% in fiscal 1996.
Fiscal Year Ended August 31, 1995 Compared with
Fiscal Year Ended August 31, 1994
Subscription Revenue. Subscription revenue increased from $29.0 million for
the fiscal year ended August 31, 1994 to $36.2 million for the fiscal year ended
August 31, 1995, or 24.7%. FactSet's revenue growth resulted from an increase in
the number of new clients as well as increased penetration among existing
clients. New clients consisted of new international clients as well as United
States investment managers and United States investment banks. Average revenue
per client increased 12.9% from $85,000 in fiscal 1994 to $96,000 in fiscal
1995. Revenue growth from existing clients was attributable to an increase in
the number of authorized workstations and the addition of new applications,
databases, and service offerings.
Employee Compensation and Benefits. Employee compensation and benefits
decreased slightly from $11.1 million to $11.0 million, or 0.8%, from fiscal
1994 to fiscal 1995. Excluding the one-time special executive bonus of $2.5
million granted in 1994, employee compensation and benefits increased from $8.6
million to $11.0 million, an increase of 28.0%. Excluding such bonus, as a
percentage of revenue, employee compensation and benefits increased from 29.7%
in the 1994 period to 30.5% in the 1995 period. This increase was due primarily
to an increase in the number of employees and increases in compensation and
benefit costs of existing personnel in fiscal 1995.
Clearing Fees. Clearing fees increased from $3.4 million for fiscal 1994 to
$4.3 million for fiscal 1995, or 24.8%. This increase was due to the
corresponding increase in commission revenue. Clearing fees, as a percentage of
revenue, remained relatively constant at 11.8% for fiscal years 1994 and 1995.
Data Costs. Data costs increased from $2.4 million for fiscal 1994 to $3.1
million for fiscal 1995, or 25.7%. As a percentage of revenue, data costs
increased slightly from 8.4% in the 1994 period to 8.5% in the 1995 period. This
increase was due to the addition of databases and slightly higher rates charged
by data suppliers.
12
Communication Costs. Communication costs increased from $2.0 million to
$2.4 million, or 19.8% from fiscal 1994 to fiscal 1995. Communication costs, as
a percentage of revenue, declined from 7.0% in the 1994 period to 6.7% in the
1995 period. This decline reflects the cost savings associated with the
implementation of the Company's new communications network, partially offset by
higher communication costs associated with increased usage of the FactSet
system.
Computer Equipment. Computer equipment expenses decreased from $2.3 million
to $2.2 million, or 4.4%, from fiscal 1994 to fiscal 1995. Computer equipment
expenses, as a percentage of revenue, decreased from 7.9% in the 1994 period to
6.1% in the 1995 period. This decrease primarily reflects economies of scale
resulting from the Company's larger client base.
Occupancy. Occupancy costs increased from $1.9 million for the fiscal year
ended August 31, 1994 to $2.1 million for the fiscal year ended August 31, 1995,
representing an increase of 8.1%. As a percentage of revenue, occupancy costs
decreased from 6.5% to 5.7% from fiscal 1994 to fiscal 1995. This decrease
reflects improved operating leverage from the Company's revenue growth,
partially offset by the costs associated with expansion and opening a new office
in Tokyo.
Promotional Costs. Promotional costs increased from $1.4 million to $1.9
million, or 35.1%, from fiscal 1994 to fiscal 1995. Promotional costs, as a
percentage of revenue, increased from 4.8% in fiscal 1994 to 5.2% in fiscal 1995
due primarily to increased travel expenses associated with marketing to new
industry segments and geographic regions.
Other Expenses. Other expenses increased from $1.0 million in fiscal 1994
to $1.2 million in fiscal 1995, or 18.7%. As a percentage of revenue, other
expenses decreased from 3.4% in the 1994 period to 3.2% in the 1995 period. The
decrease was due to improved operating leverage from the Company's revenue
growth, partially offset by increases in miscellaneous taxes and other
miscellaneous expenses.
Operating Income. Operating income increased from $3.4 million for the
fiscal year ended August 31, 1994 to $8.1 million for the fiscal year ended
August 31, 1995, or 135.2%. Excluding the one-time special executive bonus of
$2.5 million, operating income for fiscal 1994 was $5.9 million, and the growth
rate from fiscal 1994 to fiscal 1995 was 36.3%. Excluding the one-time bonus, as
a percentage of revenue, operating income increased from 20.5% in fiscal 1994 to
22.4% in fiscal 1995.
Other Income. Other income increased from $0.3 million to $0.6 million, or
127.0%, in fiscal 1994 to fiscal 1995. This increase was due to higher levels of
cash, cash equivalents and investments, higher rates of return, and the impact
of losses on investments in fiscal 1994.
Income Taxes. Income taxes increased from $1.7 million to $3.7 million, or
113.5%, from fiscal 1994 to fiscal 1995. The effective tax rate decreased from
47.3% in the 1994 period to 43.0% in the 1995 period, reflecting a decrease in
non-deductible expenses, primarily premiums on executive officers' life
insurance policies.
Net Income. Net income increased from $1.9 million for the fiscal year
ended August 31, 1994 to $4.9 million for the fiscal year ended August 31, 1995,
or 153.7%. Excluding the one-time special executive bonus of $2.5 million, net
income for fiscal 1994 was approximately $3.3 million, and the growth rate of
net income from fiscal 1994 to fiscal 1995 was 51.3%. Excluding the one-time
bonus, as a percentage of revenue, net income increased from 11.2% in fiscal
1994 to 13.6% in fiscal 1995.
Liquidity and Capital Resources
FactSet historically has met its liquidity and capital investment needs
with cash generated from operations. At August 31, 1996, the Company had cash,
cash equivalents, and short-term investments of $17.0 million. The Company
invests primarily in short-term investments such as money market funds and has
an investment in a limited investment partnership that invests primarily in
convertible bonds and preferred stocks.
The Company's net cash provided by operating activities was $10.4 million,
$7.3 million, and $4.0 million in fiscal 1996, 1995, and 1994, respectively. In
1996, the increase in cash generated from operations was due to an increase in
profitability along with the repayment of loans made by the Company to certain
employees. The increase in positive net cash generated from operations in 1995
was primarily due to increased profitability.
13
The Company's net cash used in investing activities was $6.0 million, $1.0
million, and $3.8 million in fiscal 1996, 1995, and 1994, respectively. The
principal uses have been for capital expenditures, primarily computer and office
equipment.
Management believes existing cash and short-term investments together with
funds generated from operations will be sufficient to meet operating
requirements in 1997. In the event the Company were to pursue strategic
acquisitions or alliances, additional sources of debt or equity financing may be
necessary.
In June 1996, the Internal Revenue Service initiated an audit of the
Company's 1993 and 1994 fiscal years.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Consolidated Statements of Income................................... 15
Consolidated Statements of Financial Condition ..................... 16
Consolidated Statements of Changes in Stockholders' Equity.......... 18
Consolidated Statements of Cash Flows............................... 19
Notes to Financial Statements....................................... 20
Report of Independent Accountants................................... 29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
None.
14
Consolidated Statements of Income
FactSet Research Systems Inc.
Thousands, except per share data
Years Ended August 31, 1996 1995 1994
Subscription Revenue
Commissions $23,659 $21,559 $17,745
Fees 20,689 14,629 11,274
------- ------- -------
Total subscription revenue 44,348 36,188 29,019
------- ------- -------
Expenses
Employee compensation and benefits 13,345 11,027 11,115
Clearing fees 4,389 4,270 3,422
Data costs 3,517 3,071 2,443
Communication costs 2,845 2,431 2,030
Computer equipment 2,876 2,195 2,297
Occupancy 2,471 2,052 1,898
Promotional costs 2,366 1,870 1,384
Other expenses 1,906 1,172 987
------- ------- -------
Total expenses 33,715 28,088 25,576
------- ------- -------
Operating Income 10,633 8,100 3,443
Other Income 751 570 251
------- ------- -------
Income Before Income Taxes 11,384 8,670 3,694
Income Taxes 4,914 3,731 1,747
Net Income $6,470 $4,939 $1,947
======= ======= =======
Weighted Average Common Shares 10,767 10,263 9,342
======= ======= =======
Earnings Per Common Share $0.60 $0.48 $0.21
The accompanying notes are an integral part of these consolidated financial
statements.
15
Consolidated Statements of Financial Condition
FactSet Research Systems Inc.
Assets
Thousands At August 31, 1996 1995
Current Assets
Cash and cash equivalents $15,700 $11,588
Investments 1,338 1,137
Receivable from clients and clearing brokers 6,181 4,102
Receivable from employees 946 4,182
Deferred taxes 2,214 1,600
Other current assets 465 132
-------- --------
Total current assets 26,844 22,741
-------- --------
Property, Equipment, and Leasehold Improvements
Property, equipment, and leasehold improvements, at cost 21,070 15,151
Less accumulated depreciation (12,921) (10,205)
Property, equipment, and leasehold improvements, net -------- --------
8,149 4,946
Other Non-Current Assets -------- --------
Deferred taxes 624 379
Other assets 893 597
-------- --------
Total Assets $36,510 $28,663
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
16
Liabilities and Stockholders' Equity
Thousands At August 31, 1996 1995
Current Liabilities
Accounts payable and accrued expenses $1,156 $1,629
Accrued compensation 1,980 1,460
Deferred fees and commissions 3,798 2,851
Current taxes payable 793 768
Deferred rent 114 118
-------- --------
Total current liabilities 7,840 6,826
-------- --------
Non-Current Liabilities
Deferred taxes 133 -
Deferred rent 339 464
-------- --------
Total liabilities 8,313 7,290
-------- --------
Commitments (See Note 10)
Stockholders' EquityPreferred stock, $.01 par value,
10,000,000 shares authorized, none issued - -
Common stock, $.01 par value,
40,000,000 shares authorized, 9,578,088 and 9,479,788
shares issued; 9,526,354 and 9,428,552 shares outstanding
at August 31, 1996 and 1995, respectively 96 95
Capital in excess of par value 1,431 1,235
Retained earnings 26,658 20,188
Unrealized gain on investments, net of taxes 176 17
-------- --------
28,361 21,535
Less treasury stock - 51,788 and 51,236 shares at
August 31, 1996 and 1995, respectively, at cost 164 162
-------- --------
Total stockholders' equity 28,197 21,373
-------- --------
Total Liabilities and Stockholders' Equity $36,510 $28,663
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
17
Consolidated Statements of Changes in Stockholders' Equity
FactSet Research Systems Inc.
Years Ended August 31, 1996 1995 1994
Common Stock
Balance, beginning of year $94,798 $93,850 $93,000
Additional stock issued for ESOP 923 948 850
Exercise of stock options 60 - -
------------------------------------------
Balance, end of year 95,781 94,798 93,850
------------------------------------------
Capital in Excess of Par
Balance, beginning of year 1,235,202 836,150 497,000
Additional stock issued for ESOP 479,077 399,052 339,150
Exercise of stock options 16,140 - -
Initial public offering costs incurred by
the Company (299,059) - -
------------------------------------------
Balance, end of year 1,431,360 1,235,202 836,150
------------------------------------------
Unrealized Gain on Investments
Balance, beginning of year 16,538 - -
Unrealized gain on investments - 16,538 -
Change in net unrealized gain on investments 159,423 - -
------------------------------------------
Balance, end of year 175,961 16,538 -
------------------------------------------
Retained Earnings
Balance, beginning of year 20,187,802 15,249,036 13,302,084
Net income 6,470,485 4,938,766 1,946,952
------------------------------------------
Balance, end of year 26,658,287 20,187,802 15,249,036
------------------------------------------
Treasury Stock
Balance, beginning of year (161,580) (145,969) (83,879)
Repurchase of common stock (2,321) (15,611) (62,090)
------------------------------------------
Balance, end of year (163,901) (161,580) (145,969)
------------------------------------------
Total Equity
Balance, beginning of year 21,372,760 16,033,067 13,808,205
Additional stock issued for ESOP 480,000 400,000 340,000
Repurchase of common stock (2,321) (15,611) (62,090)
Exercise of stock options 16,200 - -
Unrealized gain on investments - 16,538 -
Change in net unrealized gain on investments 159,423 - -
Initial public offering costs incurred by
the Company (299,059) - -
Net income 6,470,485 4,938,766 1,946,952
------------------------------------------
Balance, end of year $28,197,488 $21,372,760 $16,033,067
The accompanying notes are an integral part of these consolidated financial
statements.
18
Consolidated Statements of Cash Flows
FactSet Research Systems Inc.
Thousands Years Ended August 31, 1996 1995 1994
Cash Flows from Operating Activities
Net income $6,470 $4,939 $1,947
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,049 2,421 2,196
Deferred tax expense (859) (223) (204)
(Gain) Loss on investments - (18) 98
(Gain) Loss on disposal of equipment (120) 42 145
-------- -------- --------
Net income adjusted for non-cash items 8,540 7,161 4,182
-------- -------- --------
(Increase) Decrease in assets
Receivable from clients and clearing brokers (2,079) (443) (226)
Receivable from employees 3,236 (411) 279
Prepaid taxes - 131 (131)
Other current assets (629) (505) (151)
Increase (Decrease) in liabilities
Accounts payable and accrued expenses 27 556 867
Accrued compensation payable 500 555 331
Deferred fees and commissions 947 (482) 333
Current taxes payable 25 768 (1,481)
Deferred rent (129) (19) (24)
-------- -------- --------
Net cash provided by operating activities 10,438 7,311 3,979
-------- ------- -------
Cash Flows from Investing Activities
Purchases of investments (192) (871) (2,118)
Proceeds from sales or maturities of investments 283 2,043 779
Purchases of property, equipment, and leasehold
improvements (6,389) (2,314) (2,524)
Proceeds from disposal of equipment 257 170 72
-------- -------- --------
Net cash provided by (used in) investing activities (6,041) (972) (3,791)
-------- -------- --------
Cash Flows from Financing Activities
Repurchase of common stock from employees (2) (16) (62)
Proceeds from exercise of stock options 16 - -
Initial public offering costs incurred by the Company (299) - -
-------- -------- --------
Net cash provided by (used in) financing activities (285) (16) (62)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 4,112 6,323 126
Cash and cash equivalents at beginning of year 11,588 5,265 5,139
-------- -------- --------
Cash and cash equivalents at end of year $15,700 $11,588 $5,265
======== ======== ========
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for income taxes $ 5,749 $ 3,067 $ 3,563
======== ======== ========
Supplemental Disclosures of Non-Cash Flow Information
Issuance of stock for purchase of shares for ESOP $480 $400 $340
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
19
Notes to Consolidated Financial Statements
FactSet Research Systems Inc.
August 31, 1996 and 1995
1. Organization and Nature of Business
FactSet Research Systems Inc. (the "Company") provides online integrated
database services to the financial community. The Company's revenue is derived
from subscription charges. Solely at the option of each client, these charges
may be paid either in commissions on securities transactions (in which case
subscription revenue is recorded as Commissions) or on a cash basis (in which
case subscription revenue is recorded as Fees).
To facilitate the receipt of subscription revenue on a commission basis,
the Company's wholly owned subsidiary, FactSet Data Systems Inc. ("FDS"), is a
member of the National Association of Securities Dealers, Inc. and is a
registered broker-dealer under Section 15 of the Securities Exchange Act of
1934. FDS's only function is to facilitate the receipt of payments in respect of
subscription charges and it does not otherwise engage in the securities
business.
Subscription revenue paid in commissions is based on securities
transactions introduced and cleared on a fully disclosed basis through two
clearing brokers. That is, a client paying subscription charges on a commission
basis directs the clearing broker, at the time the client executes a securities
transaction, to credit the commission on the transaction to FDS's account.
As stated above, each client has the option to pay subscription charges
either in the form of commissions on securities transactions or on a cash basis,
regardless of the nature or amount of the services provided by FactSet to such
client. When a client elects to pay subscription charges in the form of
commissions, the dollar amount payable is higher than the fee that would be
payable for the same services on a cash basis because of the associated clearing
fees payable by the Company to the clearing broker on such transactions.
However, commissions net of related clearing fees are approximately equal to the
fees that would be paid by a client on a cash basis.
FactSet Pacific Inc. and FactSet Limited are wholly owned subsidiaries of the
Company and are U.S. corporations with branches in Tokyo and London,
respectively.
Effective June 12, 1995, the Company changed its name from FactSet Research
Corporation to FactSet Research Systems Inc.
2. Accounting Policies
The significant accounting policies of the Company and subsidiaries are
summarized below.
Financial Statement Presentation. The accompanying consolidated financial
statements include the accounts of the Company and its subsidiaries. All
significant intercompany activity and balances have been eliminated from the
consolidated financial statements.
During fiscal 1995, the Company increased the number of shares of common
stock authorized from one million to five million, and on December 21, 1994,
effected a twenty-five-for-one-stock split. Furthermore, on June 4, 1996, the
Company increased the number of shares of common stock authorized from five
million to forty million, authorized 10,000,000 shares of Preferred Stock
issuable in series, and effected a four-for-one stock split with respect to the
Common Stock. In connection with the stock splits, the par value of the common
stock was reduced from $1.00 to $.01 per share. For purposes of these financial
statements, all common stock and per share amounts have been restated to reflect
the stock splits.
20
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Revenue Recognition. Subscription charges are quoted to clients on an
annual basis, but are earned as services are provided on a month-to-month basis.
Subscription revenue recorded as commissions and subscription revenue recorded
as fees are each recorded as earned each month, based on one-twelfth of the
annual subscription charge quoted to each client. Amounts that have been earned
but not yet paid through the receipt of commissions on securities transactions
or through cash payments are reflected on the consolidated statements of
financial condition as receivable from clients. Amounts that have been received
through commissions on securities transactions or through cash payments that are
in excess of a client's earned subscription revenue are reflected on the
consolidated statements of financial condition as deferred fees and commissions.
Clearing Fees. When subscription charges are paid on a commission basis,
the Company incurs clearing fees, which are the charges imposed by the clearing
brokers used to execute and settle trades. Clearing fees for executed
transactions are recorded on a trade date basis as securities transactions
occur. Clearing fees related to accounts receivable- commissions (a component of
receivable from clients) are recorded simultaneously with the related
receivable.
Cash and Cash Equivalents. Cash and cash equivalents consists of cash,
money-market investments, and certificates of deposit with original maturities
of three months or less.
Investments. Effective September 1, 1994, the Company adopted Statement of
Financial Accounting Standards No. 115 ("SFAS 115"), Accounting for Certain
Investments in Debt and Equity Securities.
Investment securities are classified as available-for-sale securities in
accordance with SFAS 115 and are reported at market value or fair value as
determined by management. Unrealized gains and losses on available-for-sale
securities are recognized as a separate component of stockholders' equity. Prior
to the adoption of SFAS 115, investment securities were recorded at lower of
cost or market.
Fair Value of Financial Instruments. The carrying value of financial
instruments on the consolidated statements of financial condition approximates
fair value as determined by management of the Company.
Property, Equipment, and Leasehold Improvements. Depreciation of computers
and related equipment acquired before September 1, 1994 is computed using the
double declining balance method over estimated useful lives of five years.
Computers and related equipment acquired after September 1, 1994 is provided on
a straight-line basis over estimated useful lives of three years. Depreciation
of furniture and fixtures is computed using the double declining balance method
over estimated useful lives of five years. Leasehold improvements are amortized
on a straight-line basis over the terms of the related leases or estimated
useful lives of the improvements, whichever period is shorter.
Earnings Per Share. The computation of earnings per share in each year is
based on the weighted average number of shares outstanding. The weighted average
number of shares outstanding includes shares issued to the ESOP at the date
authorized by the Board of Directors. Stock options are included as share
equivalents using the treasury stock method.
21
3. Receivable from Clients and Clearing Brokers
Receivable from clients and clearing brokers consists of the following:
At August 31, 1996 1995
- ----------------------------------------------------------------------------------------
Accounts receivable-fees $ 3,122,509 $ 1,207,240
Accounts receivable-commissions 2,407,546 2,364,529
Receivable from clearing brokers 650,465 530,176
----------- -----------
$ 6,180,520 $ 4,101,945
=========== ===========
- ----------------------------------------------------------------------------------------
Accounts receivable-fees and accounts receivable-commissions are reflected net
of aggregate allowances for doubtful accounts of $250,000 at August 31, 1996 and
1995.
4. Investments
Investments, classified as available-for-sale securities, consists of the
following:
Gross
Unrealized
Cost Basis Fair Value Gains
- ----------------------------------------------------------------------------------------
At August 31, 1996
Time deposits with bank, due 12/7/96 $ 116,527 $ 116,527 $ -
Investment limited partnership 912,767 1,221,471 308,704
----------- ----------- -----------
$ 1,029,294 $ 1,337,998 $ 308,704
=========== =========== ===========
At August 31, 1995
Time deposits with bank, due 12/7/95 $ 110,869 $ 110,869 $ -
Investment limited partnership 912,767 941,781 29,014
Investment in treasury bills, due 12/14/96 84,073 84,073 -
----------- ----------- -----------
$ 1,107,709 $ 1,136,723 $ 29,014
=========== =========== ===========
- ----------------------------------------------------------------------------------------
The investment limited partnership invests primarily in convertible bonds
and preferred stocks. At August 31, 1996 and 1995, there were net unrealized
gains of $175,961 and $16,538 after related deferred income taxes of $132,743
and $12,476, respectively, which are included as a separate valuation component
of stockholders' equity.
22
5. Receivable from Employees
Receivable from employees consists of the following interest-bearing and
non-interest-bearing promissory notes and advances to employees of the Company:
At August 31, 1996 1995
- ----------------------------------------------------------------------------------------
5.8% promissory note from principal stockholder $ - $ 3,250,000
Non-interest-bearing advances to principal stockholder - 626,703
Non-interest-bearing promissory demand notes and
advances to employees 880,917 305,413
6% demand notes from employees 65,000 -
----------- -----------
$ 945,917 $ 4,182,116
=========== ===========
- ----------------------------------------------------------------------------------------
6. Property, Equipment, and Leasehold Improvements
Property, equipment, and leasehold improvements consists of the following:
At August 31, 1996 1995
- ----------------------------------------------------------------------------------------
Computers and related equipment $ 14,281,199 $ 9,877,855
Leasehold improvements 3,077,249 2,499,217
Furniture, fixtures, and other 3,711,847 2,773,740
------------ ------------
Total 21,070,295 15,150,812
Less accumulated depreciation and amortization (12,921,360) (10,204,865)
------------ ------------
$ 8,148,935 $ 4,945,947
============ ============
- ----------------------------------------------------------------------------------------
7. Deferred Fees and Commissions
Deferred fees and commissions consists of the following:
At August 31, 1996 1995
- ----------------------------------------------------------------------------------------
Deferred fees $ 432,702 $ 568,129
Deferred commissions 3,365,622 2,282,718
----------- -----------
$ 3,798,324 $ 2,850,847
=========== ===========
- ----------------------------------------------------------------------------------------
23
8. Income Taxes
The provision for income taxes was as follows:
Years Ended August 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------
Current tax expense
U.S. federal $ 4,179,054 $ 2,788,446 $ 1,330,515
State and local 1,593,454 1,178,701 621,499
----------- ----------- ------------
Total current 5,772,508 3,967,147 1,952,014
----------- ----------- ------------
Deferred tax expense (benefit)
U.S. federal (618,146) (173,007) (147,877)
State and local (240,484) (62,818) (56,654)
----------- ----------- ------------
Total deferred (858,630) (235,825) (204,531)
----------- ----------- ------------
Total provision $ 4,913,878 $ 3,731,322 $ 1,747,483
=========== =========== ============
- -----------------------------------------------------------------------------------------
Deferred tax assets (liabilities) are composed of the following:
At August 31, 1996 1995
- ----------------------------------------------------------------------------------------
Deferred tax assets
Current
Deferred commission income $ 1,412,333 $ 953,341
Deferred fee income 181,577 237,270
Accrued bonuses 620,060 409,281
----------- ----------
Total current deferred taxes 2,213,970 1,599,892
----------- ----------
Non-current
Depreciation and amortization 300,329 236,837
Deferred rent 85,811 113,495
Partnership income 152,759 -
Capital loss carryforwards 75,701 -
Other 9,394 29,110
----------- ----------
Total non-current deferred taxes 623,994 379,442
----------- ----------
Gross deferred tax assets 2,837,964 1,979,334
Deferred tax liabilities - other (132,743) -
Deferred tax assets valuation allowance - -
----------- ----------
$ 2,705,221 $1,979,334
=========== ==========
- ----------------------------------------------------------------------------------------
24
The provisions for income taxes differ from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate to
pretax income as a result of the following differences:
Years Ended August 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------
Tax at statutory U.S. tax rates $ 3,884,527 $ 2,947,830 $ 1,256,108
Increase (Decrease) in taxes resulting from
State and local taxes, net 891,315 736,483 372,798
Other 138,036 47,009 118,577
----------- ----------- -----------
Tax at effective tax rates $ 4,913,878 $ 3,731,322 $ 1,747,483
=========== =========== ===========
- ----------------------------------------------------------------------------------------
9. Net Capital
As a registered broker-dealer, FDS is subject to Rule 15c3-1 under the
Securities Exchange Act of 1934, which requires that FDS maintain minimum net
capital equal to the greater of $5,000 or 6.67% of aggregate indebtedness and a
ratio of aggregate indebtedness to net capital of not more than 15 to 1. FDS may
be prohibited from paying cash dividends to the Company if such dividends would
result in its net capital falling below the minimum requirement or its ratio of
aggregate indebtedness to net capital exceeding 15 to 1.
At all times during the years presented, FDS had net capital in excess of
its minimum net capital requirements. At August 31, 1996, FDS had net capital of
$1,203,921, which was $817,087 in excess of its minimum net capital requirement
of $386,834. The ratio of aggregate indebtedness to net capital was 4.82 to 1.
10. Commitments
The Company leases office space in Greenwich, Connecticut under a lease
agreement which expires in August 2000 and which contains certain escalation
clauses. The Company is required to pay minimum annual rental of $1,186,866
through the end of the lease. The total minimum rental payments associated with
the lease are being recorded as occupancy costs on a straight-line basis over
the period commencing with the occupancy of the premises in August 1990 through
the end of the lease. Deferred rent at August 31, 1996 and 1995 includes
$204,490 and $271,756, respectively, for recorded occupancy expenses which will
be paid in future years.
The cost of certain leasehold improvements, above and beyond normal
improvements, was reimbursed to the Company by the lessor. These leasehold
improvements are included in deferred rent and are being amortized to occupancy
costs on a straight-line basis over the term of the lease. The unamortized
balance of such leasehold improvements was $248,532 and $310,665 at August 31,
1996 and 1995, respectively.
The Company, through its subsidiaries, has lease agreements for other
office space which expire at various dates through the period ending December
2003.
25
At August 31, 1996, the Company's lease commitments for office space, with
noncancelable lease terms in excess of one year, provide for the following
minimum annual rentals:
Years Ending August 31,
- --------------------------------------------------------------------------------
1997 $ 1,652,252
1998 1,586,070
1999 1,558,211
2000 1,500,285
2001 184,590
Thereafter 13,510
------------
Minimum lease payments $ 6,494,918
============
- --------------------------------------------------------------------------------
At August 31, 1996, the Company has standby letters of credit aggregating
approximately $245,865 serving as security deposits for leased premises.
11. Employee Stock Ownership Plan
The Company sponsors an Employee Stock Ownership Plan (the "Plan" or
"ESOP"). The Company may make optional annual contributions for the benefit of
participating employees in such amount or amounts as designated by the Board of
Directors. The Company made contributions in the amounts of $500,000, $480,000,
and $400,000 for the years ended August 31, 1996, 1995, and 1994, respectively.
Such contributions are recorded in compensation expense and accrued liabilities
at the time they are authorized; issuance of the related shares occurs shortly
thereafter, generally in the following fiscal year. The principal stockholders
of the Company are the Trustees of the Plan.
Employees of the Company and its subsidiaries who have performed at least
1,000 hours of service during the year are generally able to participate in the
Plan. The Company contribution allocated to an individual account begins to vest
upon completion of the employee's third year of service at the rate of 20% each
successive year of service. Forfeited non-vested interests in the Plan are
allocated to the other participants' accounts.
The Plan owned 787,824, 696,024, and 607,000 shares of the Company's common
stock at August 31, 1996, August 31, 1995, and August 31, 1994, respectively.
The consolidated statements of financial condition at August 31, 1996
includes an accrual of $500,000 for the estimate of a contribution for the
current fiscal year. Any such contribution is subject to approval of the Board
of Directors.
12. Stock Option Plan
The Company's 1994 Stock Option Plan (the "1994 Plan") was adopted by the
Board of Directors on December 21, 1994 and approved by the Company's
stockholders on December 22, 1994. Under the 1994 Plan, effective January 3,
1995, incentive stock options ("ISOs") and non-qualified stock options to
purchase up to 1,481,000 shares of common stock at prices which range from $2.50
to $2.70 per share have been granted to employees of the Company. Options
granted under the 1994 Plan expire not more than ten years from the date of
grant and, in most cases, vest at a rate of 20% per year beginning one year
after the grant date.
26
The 1994 Plan is administered by the Compensation Committee of the Board of
Directors. Options granted under the plan are not transferable or assignable
other than by will or the laws of descent and distribution and may be exercised,
during the grantee's lifetime, only by the grantee.
As of August 31, 1995, no options had been exercised under the 1994 Plan.
During the year ended August 31, 1996, options representing 6,000 shares of
common stock were exercised, at which time unvested options representing 24,000
shares of common stock were forfeited.
The Company's 1996 Stock Option Plan (the "1996 Plan") was adopted by the
Board of Directors on April 29, 1996, and approved by the Company's stockholders
on May 1, 1996. The 1996 Plan, effective May 1, 1996, makes available incentive
stock options ("ISOs") and non-qualified stock options to purchase up to 950,000
shares of common stock. The price of such options, when granted, will be the
market price of the shares as of the date such options are granted. Options
granted under the 1996 Plan expire not more than ten years from the date of
issuance and, in most cases, vest at a rate of 20% per year beginning one year
after the grant date.
In June 1996, options to purchase 40,000 shares of common stock at $17.00
per share were issued under the 1996 Plan. At August 31, 1996, options to
purchase up to 1,491,000 shares remained outstanding under the 1994 and
1996 plans.
13. Off-Balance Sheet Risk and Concentrations of Credit Risk
In the normal course of business, securities transactions of clients of FDS
are introduced and cleared through correspondent brokers. Pursuant to agreements
between FDS and its correspondent brokers, the correspondents have the right to
charge FDS for unsecured losses that result from a client's failure to complete
such transactions. The Company seeks to control the credit risk of
nonperformance by its clients by evaluating the creditworthiness of its clients
and by reviewing their trading activity on a periodic basis.
Receivable from clearing brokers represents a concentration of credit risk
and relates to securities transactions cleared through two correspondent
brokers.
27
Quarterly Financial Data (Unaudited)
Quarterly results of operations and earnings per common share for fiscal years
1996 and 1995 are as follows:
Thousands, except per share data First Second Third Fourth
- ----------------------------------------------------------------------------------------
1996
Revenue $ 10,137 $ 10,561 $ 11,436 $12,214
Operating income 2,323 2,534 2,809 2,967
Net income 1,464 1,558 1,675 1,773
Weighted shares outstanding 10,776 10,776 10,750 10,776
Earnings per share $ 0.14 $ 0.14 $ 0.16 $ 0.16
- ----------------------------------------------------------------------------------------
1995
Revenue $ 8,613 $ 8,984 $ 9,070 $ 9,521
Operating income 1,958 2,055 1,948 2,139
Net income 1,171 1,273 1,210 1,285
Weighted shares outstanding 9,432 10,264 10,679 10,678
Earnings per share $ $0.12 $ 0.12 $ 0.11 $ 0.12
- ----------------------------------------------------------------------------------------
Common Stock
The principal stock exchange on which the Company's common stock (par value
$0.01 per share) is listed is the New York Stock Exchange. At August 31, 1996,
there were approximately 1,200 shareholders of the Company's common stock.
28
Report of Independent Accountants
To the Board of Directors and Shareholders of FactSet Research Systems Inc.
In our opinion, the accompanying consolidated statements of financial
condition and the related consolidated statements of income, changes in
stockholders' equity, and cash flows present fairly, in all material respects,
the financial position of FactSet Research Systems Inc. and its subsidiaries at
August 31, 1996 and 1995, and the results of their operations and their cash
flows for each of the three years ended August 31, 1996 in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
New York, New York
October 4, 1996
29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Directors and Executive Officers of FactSet Research Systems Inc. as of
November 15, 1996 were as follows:
Name Age Position with the Company
Howard E. Wille 68 Chairman of the Board of Directors; Chief Executive
Officer and Director
Charles J. Snyder 54 President; Chief Technology Officer and Director
Ernest S. Wong 42 Senior Vice President and Chief Financial Officer
Joseph E. Laird, Jr. 50 Director
Howard E. Wille, Chairman of the Board of Directors, Chief Executive Officer and
Director. Mr. Wille was a founder of the Company in 1978 and has held his
current positions with the Company since that time. From 1966 to 1977, Mr. Wille
was a partner and Director of Research at Faulkner Dawkins & Sullivan, a Wall
Street investment firm, and held a managerial position with Shearson Hayden
Stone after its acquisition of Faulkner Dawkins & Sullivan in 1977. He was
President and Chief Investment Officer of Piedmont Advisory Corporation from
1961 to 1966 and, prior to that time served as a securities analyst, investment
manager and investment counselor for several firms. Mr. Wille received a B.A.
in Philosophy from the City College of New York. Mr. Wille has been a director
of the Company since its formation.
Charles J. Snyder, President, Chief Technology Officer and Director. Mr. Synder
was a founder of the Company in 1978 and has held his current positions with the
Company since that time. From 1964 to 1977, Mr. Snyder worked for Faulkner
Dawkins & Sullivan, eventually becoming Director of Computer Research, a
position he retained with Shearson Hayden Stone after its acquisition of
Faulkner Dawkins & Sullivan in 1977. Mr. Snyder received a B.S.E. in Electrical
Engineering from Princeton University and an M.S. in Mathematics from New York
University. Mr. Snyder has been a director of the Company since its formation.
Ernest S. Wong, Senior Vice President and Chief Financial Officer. Mr. Wong
joined the Company in his current position in June 1996. Between 1991 and 1996,
he held several positions with Montedison SpA including Vice President, Finance
and Treasurer of Montedison USA, Inc. and Director of Corporate Finance of
Montedison Corporation of America. From 1988 to 1991, he was Vice President in
the North American Banking Group of The First National Bank of Chicago, and
prior to that time served as Manager of Domestic Finance at PepsiCo, Inc. and
Second Vice President in the Corporate Bank of The Chase Manhattan Bank. Mr.
Wong received a B.A. in Psychology from Cornell University and an M.B.A. in
Finance from Columbia University Graduate School of Business.
Joseph E. Laird, Jr., Director. Mr. Laird has been a Managing Director of
Veronis, Suhler & Associates, the leading specialty investment bank exclusively
serving the media and information industries, since 1989. From 1982 to 1989, he
was an institutional equity salesman and a senior securities analyst of database
information services for Hambrecht & Quist. From 1975 to 1982, Mr. Laird was an
institutional equity salesman and then investment strategist for Paine Webber
Mitchell Hutchins. Mr. Laird has been a director of the Company since 1993.
30
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the captions "Information Regarding Executive
Officer Compensation" on page 3 through 5 of the Proxy Statement is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Information Regarding Beneficial
Ownership of Principal Shareholders, Directors, and Management on page 2 of the
Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Transactions" on page 6 of
the Proxy Statement is incorporated herein by reference.
31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
The financial statements of FactSet as set forth under Item 8 are filed
as part of this report.
Financial statement schedules have been omitted since they are either
not required, not applicable, or the information is otherwise included.
The independent accountants report with respect to the above-listed
financial statements appears on page 29 of this report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of fiscal
1996.
(c) Exhibit Listing
Exhibit
Number Description
27. Financial Data Schedule
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Greenwich,
State of Connecticut, on November 20, 1996.
FACTSET RESEARCH SYSTEMS INC.
By /s/ ERNEST S. WONG
--------------------
Ernest S. Wong,
Senior Vice President;
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Registrant and in
the capacities indicated on November 20, 1996.
Signature Title
/s/ HOWARD E. WILLE
-------------------------
Howard E. Wille Chairman of the Board of Directors
and Chief Executive Officer and Director
/s/ CHARLES J. SNYDER
-------------------------
Charles J. Snyder President, Chief Technology Officer
and Director
/s/ JOSEPH E. LAIRD, JR.
-------------------------
Joseph E. Laird, Jr. Director
/s/ ERNEST S. WONG
-------------------------
Ernest S. Wong Senior Vice President and
Chief Financial Officer