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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, 1998.
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 8, 1998, as
reported on the Nasdaq National Market System, was approximately $204,000,000.
The number of shares of the registrant's Common Stock outstanding as of June 8,
1998 was 13,777,061.
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
1998 Annual Report to Shareholders (the "1998 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 August 5, 1998 (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 8
Item 3 Legal Proceedings 9
Item 4 Submission of Matters to a Vote of Security Holders 9
Executive Officers of Registrant 9
PART II
Item 5 Market for Registrant's Common Equity and Related
Shareholder Matters 11
Item 6 Selected Financial Data 11
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 7A Quantitative and Qualitative Disclosures About Market Risk 18
Item 8 Financial Statements and Supplementary Data 19
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 35
PART III
Item 10 Directors and Executive Officers of the Registrant 35
Item 11 Executive Compensation 35
Item 12 Security Ownership of Certain Beneficial Owners and Management 35
Item 13 Certain Relationships and Related Transactions 35
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K 36
SIGNATURES 37
EXHIBIT INDEX 38
PART I
ITEM 1. BUSINESS
Certain information required by Item 1 to Part I is omitted from this Report and
incorporated by reference from the 1998 Annual Report. See also Part II of this
Report. Each statement contained in this Report containing any form of the
words "anticipate," "expect," believe," "future," "intend," "commit,"
"estimate," or "forward" or any future verb tense 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 elsewhere in this Part I and in Item 7 to Part II of this
Report.
All share and per share amounts in this Report have been restated to reflect a
three-for-two stock split effective September 22, 1997.
GENERAL
BARRA, Inc. (the "Company" or "BARRA") and its subsidiaries are engaged in
integrated business activities that combine technology, data, software and
services to help clients make investment and trading decisions. Through its
subsidiaries and affiliates, the Company provides a variety of institutional
analytics products and related services. The Company and its affiliates also
provide services in the areas of consulting, electronic brokerage, investment
data distribution and asset management. The Company's integrated businesses
cover a variety of products and services, which are offered to investment
professionals in over 30 countries, including many of the world's largest
portfolio managers, fund sponsors, pension and investment consultants, insurance
companies, banks, 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 2,587,500 shares
of its Common Stock under the Securities Act of 1933, as amended. Between
November 1992 and November 1995, the Company increased from 50% to 100% its
equity interest in BARRA International (Japan), Ltd., a Japan corporation formed
by BARRA in 1986 under the name N.B. Investment Technology Co., Ltd. (("BARRA
Japan")). On July 24, 1996, the Company merged with Rogers, Casey & Associates,
Inc., a Delaware corporation ("RogersCasey"). In transactions on June 24, 1997
and February 27, 1998, the Company acquired all of the capital stock of Global
Advanced Technology Corporation ("GAT") and its affiliate Innosearch Corporation
("Innosearch"). On October 9, 1997, BARRA (U.K.), Ltd., a wholly-owned
subsidiary of the Company, completed the acquisition of the assets and certain
liabilities relating to two businesses from Edinburgh Financial Publishing
Limited ("EFP") and two of EFP's affiliates. On June 17, 1998, the Company
completed the acquisition of substantially all of the assets and assumption of
certain liabilities of Redpoint Software, Inc. ("Redpoint").
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 International Business Machine (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 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 institutional analytics 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
some products and services have a significantly higher annual subscription
price. An individual product may consist of one or more
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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 risk models characterize the
relationship between risk and return in financial markets. Since introducing
its first equity risk product in 1975 for the United States equity market, BARRA
has 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.
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.
This year the Company completed a major overhaul of its flagship U.S. Equity
Model, updating it to reflect changes in the stock market and economy. BARRA's
single country risk models cover 17 equity markets around the world. BARRA has
also developed risk models for multiple and other types of equity markets, such
as its Global Equity Model ("GEM") and Short Term Risk Model ("STRM").
FIXED-INCOME MODELS. BARRA introduced its first risk model for the United
States bond market in 1979 and currently offers fixed income models for three
countries and a Global Bond Model covering more than 20 countries. BARRA
extended its local-market multifactor model to include a currency dimension for
global fixed income managers in 1989. Following the June 1997 acquisition,
BARRA integrated GAT's models into its comprehensive fixed income product line.
ASSET ALLOCATION MODELS. BARRA's World Markets Model allows investors to
analyze portfolios consisting of a combination of asset classes in over 55
countries. The elements of the model are asset classes rather than individual
securities. In addition, a tactical asset allocation (TAA) testing tool was
released as part of the BARRA Altis System-TM- in fiscal year 1997.
DERIVATIVES MODELS. In 1994, BARRA obtained ownership of and rights to several
advanced derivatives analytics packages, including the Dynamic Asset Allocation
model (now marketed under the name Contour) and the Exotic Options models
developed by Leland O'Brien Rubinstein Associates Incorporated.
VALUATION MODELS. BARRA introduced its first valuation model for the United
States equity market in 1993 under the name Alphabuilder and has since developed
three additional country-specific valuation models. The Company's valuation
models employ a broad range of valuation techniques, including both "bottom up"
approaches (encompassing fundamental and technical models, such as Estimate
Revision and Dividend Discount) and macroeconomic models, which facilitate a
"top-down" approach.
THE BARRA SYSTEMS. 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:
THE BARRA AEGIS SYSTEM-TM- ("AEGIS"). The Aegis suite of products includes
BARRA's Microsoft-Registered Trademark- Windows-based equity risk
characterization, valuation and optimization tools. This is an integrated
software system that can be used by money managers with a variety of BARRA's
risk, valuation and performance models.
THE BARRA COSMOS SYSTEM-TM- ("COSMOS"). Cosmos is a suite of Windows-based
products that allows global money managers to perform fixed income portfolio
analysis. The products include both global and domestic models developed by the
Company and the models acquired in the GAT acquisition in fiscal 1998.
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. Altis can also be used in
conjunction with either Aegis or the World Markets Model to provide a key link
between macro-economy and the investment decision.
THE BARRA TOTAL PLAN RISK SYSTEM-TM- ("TOTAL PLAN RISK"). Total Plan Risk is a
Microsoft-Registered Trademark- Windows-based analytical tool that analyzes both
total risk relative to cash and active risk relative to any multi-asset class
benchmark from any currency perspective. Building upon BARRA's existing equity
and fixed income models, Total Plan Risk aggregates both security selection and
asset allocation risk for multi-asset class portfolios in either a domestic or
international context.
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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.
CONSULTING, INFORMATION AND OTHER 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.
CONSULTING. BARRA's consulting services are a companion offering to its core
institutional analytics business. Professional teams of consultants draw on the
wide range of research, analytical and industry expertise in the combined
organization to bring a unique set of skills to bear on each client problem.
The BARRA RogersCasey Sponsor Consulting Group ("Sponsor Services") provides a
full range of consulting services for pension funds, endowments, foundation and
other plan sponsors. The BARRA Strategic Consulting Group ("Strategic
Services") provides a wide range of strategic consulting services to money
management firms. The BARRA Research Group performs a variety of other
specialized consulting services and analytics research for institutions such as
banks and brokerage firms using the Company's proprietary models and databases.
ENTERPRISE-WIDE RISK MANAGEMENT SERVICES. BARRA's Enterprise-Wide Risk
Management Services unit focuses on the rapidly growing risk management needs of
global financial institutions. In December 1997, this unit launched the first
multi-asset class risk management system, Total Plan Risk, designed for pension
plans and investment managers. To further augment the resources available for
this business, on June 17, 1998, the Company completed the acquisition of
substantially all of the assets and certain of the liabilities of Redpoint.
Redpoint is a leading provider of integrated risk management solutions and
enterprise-wide data management systems.
INVESTMENT DATA PRODUCTS (IDP). In 1997, the Company launched its IDP unit to
develop and market a variety of proprietary databases along with electronic
screening and analysis products to be used with the data. The IDP business now
includes The Estimate Directory (TED), an earnings estimate product, and
Directus, an officer and director trading information product, which were
recently acquired from EFP. The IDP unit will focus on electronic delivery of
products, via the Internet, packaged software and third-party distributors.
INDEX 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.
ASSET MANAGEMENT SERVICES. The Company provides its asset management services
through its 50% owned subsidiary, Symphony Asset Management, LLC ("Symphony
LLC"), and the wholly-owned BARRA RogersCasey Asset Services group ("Asset
Services"). Symphony LLC's business was formed in 1994 out of the Company's
Active Strategies Group to provide a host of asset management services to
pension funds, university endowments and foundations, mutual fund distributors
and qualified individuals. Asset Services designs, implements and provides
ongoing management of multi-manager investment products.
OTHER PRODUCTS AND SERVICES AVAILABLE THROUGH STRATEGIC RELATIONSHIPS
BARRA has developed certain products and entered certain 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:
SYMPHONY ASSET MANAGEMENT. 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. 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
3
(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 ITG/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 1993, 1994, 1995, 1996 and
1997 were approximately 1.6 billion, 1.9 billion, 2.3 billion, 3.3 billion and
3.6 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
fiscal 1998, using technology licensed from POSIT, BARRA co-developed a crossing
network for Forward Rate Agreements ("FRA's") with Prebon Yamane (USA) 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 7 of Notes
to the BARRA, Inc. Consolidated Financial Statements.)
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 7 of Notes to the BARRA, Inc. Consolidated
Financial Statements.)
BOND EXPRESS, LP ("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 through 1998. 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 and April 1997, the Company purchased
114,405 shares of Series C Convertible Preferred Stock in QuoteCom for $750,010.
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 9
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 subscription or
pay-per-view basis. (See Note 9 of Notes to the BARRA, Inc. Consolidated
Financial Statements.) In May 1998, BARRA granted Data Downlink a non-exclusive
worldwide license to market certain of BARRA's proprietary databases via Data
Downlink's on-line service.
MARKETING
Products and services are marketed to a broad set of financial service providers
and institutional and private investors throughout the world. The Company's
strategy for marketing new products and services is to focus first on large
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.
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.
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BARRA's 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 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 US offices and in its non-US
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 specialist. 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.
The sales of data products typically have shorter sales cycles and are made
through the Internet, direct mail and telemarketing, in addition to direct sales
force contacts and distribution via third parties.
CLIENTS
BARRA and its subsidiaries currently serve over 1,400 analytics and consulting
clients and over 5,000 data product clients in over 33 countries. Clients
include active and passive equity managers, fixed income managers, global
managers, fund sponsors, pension and investment consultants, banks, insurance
companies, broker/dealers, master trustees and private investors.
SIGNIFICANT SOURCES OF REVENUE
POSIT accounted for approximately $6,826,000, $8,960,000 and $10,553,000 or 9%
of BARRA's total operating revenues for each of the last three fiscal years and
Symphony accounted for approximately $3,328,000, $16,083,000 and $26,537,000 or
4%, 15% and 19% of BARRA's total operating revenues for fiscal 1996, 1997 and
1998, respectively. See "- Other Products and Services Available Through
Strategic Relationships." Other than Symphony (and POSIT prior to the merger
with RogersCasey), no entity or customer 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
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.
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There can be no assurance, however, that efforts selected by BARRA will be
successful or will achieve market acceptance. During fiscal 1996, fiscal 1997
and fiscal 1998, BARRA's expenditures for BARRA-funded product development were
approximately $11,955,000, $17,200,000 and $19,000,000 representing 15%, 16% and
14% of total operating revenues, respectively. The cost of research and
development efforts required to keep pace with technological changes may, at
times, have a material 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 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 and service 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 and services. 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 its analytics
products, BARRA competes with other companies that have developed risk models,
applications and databases. Currently, 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 and the Asset Services group compete in the highly fragmented asset
management industry. Symphony's 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 because a few skilled individuals could set-up an asset manager in a
relatively short period of time. BARRA believes that competitive factors at
work in the asset management industry include product design and implementation,
investment performance, client service and retention of key employees.
BARRA's consulting units compete in a fragmented industry offering various
consulting services to pension funds, endowments, foundations and other fund
sponsors. BARRA believes that competitive factors at work in the 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.
The investment data products business is also intensely competitive and
fragmented. For earnings estimate data, there are, however, only a few major
global providers, including TED. Competition is focused on content, delivery
medium, the ability to add value to data through integration and manipulation
tools, and price.
VARIABILITY AND SEASONALITY OF OPERATING RESULTS
BARRA's analytics subscription business is done primarily through annual
subscriptions that automatically renew unless cancelled. Annual subscription
fees are recorded as revenues over each subscription period at the rate of
1/12th per month, so sales of subscriptions in any one month impact reported
revenues evenly over the next twelve months. For this reason analytics
subscription revenues are not normally subject to significant variability during
a year. Clients have historically renewed their contracts at a high rate, but
there is no assurance that such renewals will continue. Despite such renewals
and the revenue recognition policies for subscriptions, 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,
6
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.
In fiscal 1997 and 1998, significant variability in revenues and operating
income has also come from the recording of performance-based fees from Symphony
asset management accounts. 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. (See a
further discussion of these fees under Part II, Item 7.)
Fees from BARRA's various consulting units are usually generated by
non-recurring, project-type engagements that are completed in phases. Also
included in these revenues are fees related to consulting work done in
connection with strategic transactions involving clients. Accordingly,
consulting 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.
These sources of variability are expected to continue for the foreseeable
future.
PROPRIETARY RIGHTS AND LICENSES
BARRA relies on a combination of trade secret, copyright, trademark and other
intellectual property laws, license agreements and technical measures to protect
its rights in its software and data products. BARRA holds no patents. BARRA
has registered "BARRA" as a trademark in the United States and in foreign
countries. The Company also has registered other trademarks in the United States
and in foreign countries for certain product and services names, and also has
registration applications pending for product and service names in the United
States and foreign countries.
BARRA's products generally are licensed to end users on a periodic subscription
basis pursuant to a nontransferable license. The licenses generally restrict
the use of the products to the client's investment-related operations at a
limited number of locations and for a maximum number of users or computer
terminals. BARRA's products are generally licensed pursuant to signed
subscription agreements. BARRA also permits access to certain of its products
through the Internet pursuant to on-line licenses that are acknowledged by the
licensee. The enforceability of such licenses has not yet been determined by the
courts.
Although BARRA's license agreements restrict clients' disclosure to others of
proprietary information contained in BARRA's products, 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 certain
foreign countries do not protect BARRA's proprietary rights in its products to
the same extent as do the laws of the United States. In addition, some aspects
of BARRA's products are not subject to intellectual property protection.
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 and consulting
services. BARRA believes that its products, processes and trademarks, including
those obtained in recent acquisitions, do not infringe the intellectual property
rights of third parties. However, there can be no assurance that the
intellectual property acquired by BARRA in recent acquisitions will meet the
warranties negotiated in such transactions or that third parties will not
otherwise assert infringement claims in the future. In addition, competitors of
BARRA may independently develop technology that is the same or similar to
BARRA's or may obtain access to BARRA's proprietary technology. BARRA is
frequently required to obtain licenses to the proprietary rights of data vendors
or others, and there can be no assurance that such licenses will be made
available 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 is currently registered as an investment adviser solely in the state of
California but is seeking an exemption from the Securities and Exchange
Commission ("SEC") to permit BARRA's federal registration under the Investment
Advisers Act of 1940, as amended. BARRA RogersCasey Asset Services Group, Inc.,
BARRA RogersCasey, Inc., Symphony LLC and Symphony Inc. are solely registered as
investment advisers under the Investment Advisers Act of 1940, as amended. As
registered investment advisers such entities are required to meet certain
financial criteria, including the maintenance of
7
minimum net capital. In addition, as a result of such status, they 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 and potential 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. As Symphony and the Asset Services Group
expand their operations, they may become subject to certain additional
government regulatory requirements.
BARRA Analytics Securities, Inc. ("BAS") is currently registered as a
broker/dealer with the 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 8% of its total operating revenues are
received from United States brokers who direct BARRA to provide institutional
analytics products and 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." In addition, BARRA has a contractual relationship with
Standard & Poor's Securities, Inc. ("SPSI") that provides for the exclusive use
of SPSI for soft dollar payment for BARRA products that make use of Compustat
data supplied by an affiliate of SPSI. 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 cause the
termination of the contract with SPSI and have other material adverse effects 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 assurance 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.
EMPLOYEES
As of March 31, 1998, BARRA and its subsidiaries employed a total of 696
persons. Of these employees, 505 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 Brazil. BARRA has no long-term employment agreements with any of
its employees. 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 2007, subject to eight consecutive five-year renewal
options. In addition, the Company and its subsidiaries lease space for offices
in San Francisco, New York, Darien, Edinburgh, London, Yokohama, Paris,
Frankfurt, Singapore, Sydney, Hong Kong, Mexico City and Cape Town. (See Note 5
of Notes to the BARRA, Inc. Consolidated Financial Statements.)
8
ITEM 3. LEGAL PROCEEDINGS
BARRA is subject to various legal proceedings and claims, either asserted or
unasserted, arising in the ordinary course of business. While the outcome of
these proceedings and claims cannot be predicted with certainty, BARRA does not
believe that the results of any such matters will materially and adversely
affect its financial condition or results of operations. (See Note 13 to Notes
to the BARRA, Inc. Consolidated Financial Statements.)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of its shareholders during the
fourth quarter of the fiscal year ended March 31, 1998.
EXECUTIVE OFFICERS OF THE COMPANY
The names and certain information about the executive officers of BARRA, as of
June 8, 1998, are as follows:
NAME AGE POSITION
Andrew Rudd 48 Chairman and Chief Executive Officer of BARRA
Kamal Duggirala 39 President of BARRA
C.E. Beckers 46 President of BARRA International, Ltd.,
President of Institutional Analytics Division
and Senior Vice President of BARRA
Robert L. Honeycutt 34 Chief Operating Officer of BARRA
James D. Kirsner 54 Chief Financial Officer of BARRA
Maria Louisa Hekker 36 General Counsel, Chief Legal Officer and
Secretary of BARRA
Andrew Huddart 37 President of Investment Data Products Division
and Senior Vice President of BARRA
Daniel Beck 44 Vice President of Business Development of BARRA
Ronald N. Kahn 41 Senior Managing Director of Research and Vice
President of BARRA
Claes Lekander 36 Senior Managing Director of Equity Product
Development and Vice President 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 served as Vice President - Operations from
April 1993 until April 1998, and as Vice President - Fixed Income from
August 1994 until April, 1998. In April 1998, Mr. Beck became Vice President of
Business Development. 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. In addition, Dr.
Beckers became President of BARRA's Institutional Analytics Division in 1998.
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.
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.
9
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.
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.
ANDREW HUDDART joined the Company as President of Investment Data Products and
Senior Vice President in August 1997. Prior to joining BARRA, Mr. Huddart
served in various capacities at Reuters America Inc. from 1993 until August
1997, most recently as Senior Vice President and head of Product Management.
From 1983 to 1993, Mr. Huddart held various other positions with Reuters,
including head of Marketing at Reuters, Italy and Product Group Manager in
Reuters' International Marketing Department. Mr. Huddart is a graduate of the
University of Leeds in Yorkshire, England where he received a B.A. in French and
Management Studies.
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. In April 1998, Dr. Kahn became Senior Managing Director of
Research of the Company.
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. In April 1998, Mr. Lekander became Senior
Managing Director of Equity Product Development.
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.
10
PART II
ITEM 5. MARKET FOR REGSTRANT'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
trade prices for BARRA's common stock as reported on the NMS. All trade prices
reflect a three-for-two stock split effective September 22, 1997.
FISCAL 1997 HIGH LOW FISCAL 1998 HIGH LOW FISCAL 1999 HIGH LOW
1st Quarter 22.667 13.000 1st Quarter 22.000 16.333 1st Quarter 29.000 19.875
2nd Quarter 18.000 12.667 2nd Quarter 28.500 21.170 (through June 8, 1998)
3rd Quarter 18.667 15.500 3rd Quarter 29.625 23.250
4th Quarter 21.667 16.500 4th Quarter 28.500 22.000
At June 8, 1998 there were approximately 3,800 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 8, 1998 the
closing price for BARRA on the NMS, as reported by the NMS, was $23.188.
ITEM 6. SELECTED FINANCIAL DATA
The information on the inside cover of the 1998 Annual Report under the heading
"Financial Highlights" regarding the Company's selected financial data required
by this Item 6 is incorporated by reference. (See also Item 7 below in Part II
of this Report.)
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 statement made in this
discussion and analysis and elsewhere in this report containing any form of the
words "anticipate," "expect," "believe," "estimate," "future" or "forward" or
any future verb tense 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; fluctuations in U.S. dollar exchange rates
for non-U.S. currencies; changes in economic conditions in the countries where
the Company does business; the ability of software and data to accommodate
change dates after December 31, 1999; and the adoption of the euro currency.
Further information and potential risk factors that could affect the Company's
financial results are included through-out this Item 7 and in Item 1 of this
Report.
11
GENERAL
GAT AND INNOSEARCH. As further described in Note 3 to the financial statements,
on June 24, 1997, the Company completed the acquisition of a 100% equity
interest in GAT and a majority ownership interest in Innosearch, an affiliate of
GAT. GAT is a leading provider of fixed income analytics and related consulting
services. The total purchase price of approximately $20 million included 704,589
shares of unregistered BARRA common stock valued at approximately $10 million,
liabilities assumed of approximately $6 million, and cash and transaction costs
of approximately $4 million. In February 1998, an additional $1 million was
paid in connection with the acquisition of the remaining minority interest in
Innosearch, which resulted in additional goodwill of approximately $.4 million.
The acquisitions have been accounted for as a purchase, and the results of GAT
and Innosearch are included in the accompanying consolidated financial
statements from the date of acquisition only.
The cost of the acquisition has been allocated on the basis of the estimated
fair value of assets acquired and liabilities assumed. This allocation resulted
in tangible assets of approximately $3.8 million, capitalized software of
approximately $1.2 million, purchased in-process technology of approximately $10
million, deferred tax assets of approximately $1.1 million and goodwill of
approximately $3.9 million. The amount allocated to purchased in-process
technology was immediately expensed. Goodwill from the acquisition is being
amortized over 10 years.
THE ESTIMATE DIRECTORY ("TED") AND DIRECTUS. As further described in Note 3 to
the financial statements, on October 9, 1997, BARRA (U.K.), Ltd., a
wholly-owned subsidiary of the Company, completed the acquisition of the assets
and assumption of certain liabilities of two businesses from Edinburgh Financial
Publishing Limited ("EFP") and two of EFP's affiliates for a total purchase
price of approximately $17.5 million. The two acquired businesses are The
Estimate Directory, a database of analysts' earnings estimates, and Directus, a
corporate directors equity trading information service. The total purchase
consisted of approximately $12 million in cash, liabilities assumed of $5
million and transaction costs of $.5 million. The acquisition has been accounted
for as a purchase, and the results of BARRA (U.K.), Ltd. are included in the
accompanying consolidated financial statements from the date of acquisition
only.
The cost of the acquisition has been allocated on the basis of the estimated
fair value of assets acquired and liabilities assumed and resulted in goodwill
of approximately $15.5 million which is being amortized over 20 years.
REDPOINT. - On June 17, 1998 the Company completed the acquisition of
substantially all of the assets and assumption of certain liabilities of
Redpoint. Redpoint is a leading provider of integrated risk management
solutions and enterprise-wide data management systems. Terms of the purchase
required the Company to pay approximately $5.5 million in cash upon
completion of the acquisition and up to an additional $12.5 million over a
period of two years following the closing based upon the financial
performance of the acquired assets. The acquisition will be accounted for
using the purchase method of accounting. (See Note 14 of Notes to the
Financial Statements.)
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 in both United States and non-U.S. currencies.
BARRA's subscriptions in the United Kingdom and the European Community are
priced in 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 denominated 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.
Accordingly, a strengthening of the U.S. dollar versus other non-U.S. currencies
could have a material adverse affect on the Company's results of operations and
financial condition.
For fiscal 1998 compared to fiscal 1997, the U.S. dollar strengthened against
the yen and ECU and weakened against the pound. The resulting net effect of
these movements in average exchange rates on operating revenues and net income
was a decrease of approximately $1,400,000 and $200,000, respectively. 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.
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
subsidiaries to the parent company.
12
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:
1998 1997 1996
Operating Revenues:
Subscription and consulting fees 70.7% 70.6% 81.6%
Electronic brokerage and information 8.8 9.6 8.8
Asset management 20.5 19.8 9.6
- --------------------------------------------------------------------------------
Total operating revenues 100.0% 100.0% 100.0%
- --------------------------------------------------------------------------------
Operating Expenses:
Cost of subscription products 5.3% 6.5% 7.9%
Compensation and benefits 45.2 47.4 52.3
Rent expense 4.0 4.1 5.0
Other operating expenses 18.2 18.4 19.8
- --------------------------------------------------------------------------------
Total operating expenses before one-time charges 72.7 76.4 85.0
One-time acquisition charges 7.2 1.7 -
- --------------------------------------------------------------------------------
Total operating expenses 79.9% 78.1% 85.0%
- --------------------------------------------------------------------------------
Interest Income and Other 1.4% 2.0% 1.7%
- --------------------------------------------------------------------------------
Income Before Equity in Net Income and Loss of
Investees, Minority Interest, and Income Taxes 21.5% 23.9% 16.7%
Equity in Net Income and Loss of Investees (0.3) (0.1) (0.9)
Minority Interest (6.2) (1.4) (0.3)
- --------------------------------------------------------------------------------
Income Before Income Taxes 15.0% 22.4% 15.5%
Income Taxes (9.2) (9.5) (6.6)
- --------------------------------------------------------------------------------
Net Income 5.8% 12.9% 8.9%
OPERATING REVENUES
SUBSCRIPTION AND CONSULTING FEES. Subscription and consulting fees consist of
subscription fees for BARRA's software products, including subscriptions to
BARRA's earnings estimates and other investment data 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);
and annual retainer and project fees for consulting services provided to pension
plan sponsors, investment managers and others. A summary of the components of
this revenue is as follows:
FISCAL 1998 FISCAL 1997 FISCAL 1996
% CHANGE FROM % CHANGE FROM
$(000) PRIOR FISCAL YEAR $(000) PRIOR FISCAL YEAR $(000)
------ ----------------- ------ ----------------- ------
Analytics and data subscriptions 71,252 39.4 51,106 22.0 41,889
Other analytics related 6,136 (6.3) 6,550 (22.1) 8,403
Consulting 19,772 21.2 16,319 25.8 12,975
------ ---- ------ ---- ------
Total 97,160 31.3 73,975 16.9 63,267
------ ---- ------ ---- ------
------ ---- ------ ---- ------
Analytics subscriptions are for BARRA's software and investment data products,
including 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. Fiscal 1998 revenues shown above include subscription
and related fees of $7,702,571 from acquisitions completed during the year. In
addition to revenue from the acquisitions, 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 1998 compared to fiscal 1997, annual
subscription fees for the US and non-US markets increased approximately 46% and
32%, respectively. Excluding revenues from current year acquisitions,
subscription fees for the US and non-US markets increased 26% and 23%,
respectively. For fiscal 1997 compared to fiscal 1996, annual subscription fee
revenue for the US and non-U.S. markets increased approximately 25% and 20%,
respectively. For both markets, revenue growth primarily came from equity
models and related data reflecting the continued success of Aegis products.
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.
13
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 reflects lower timeshare revenues as a result of converting clients to
in-house computers for running BARRA's products as well as moving from variable
to fixed-fee subscription arrangements for such services on US fixed income
products. Declines in analytics-related one-time fees also contributed to the
decrease as a result of a de-emphasis on such revenue opportunities.
Consulting fees consist of services delivered by BARRA's Investment Analytics,
Sponsor Services and Strategic Services business groups. Investment Analytics
consulting services delivers research, valuation and risk management solutions
for clients principally involved with fixed income financial instruments.
Sponsor Services delivers services to pension plan sponsors which are usually
recurring retainer-based fee arrangements. Strategic Services delivers
consulting services to money managers, which are usually nonrecurring,
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 from fiscal 1998 over fiscal 1997 includes $1,354,182
of consulting revenues from Investment Analytics generated from businesses
acquired in the current year. Excluding consulting revenues from acquired
businesses, total consulting revenues increased approximately $2,099,000 or
12.9% reflecting growth in both retainer and one-time project fees offset in
part by a decline in the amount of fees from strategic transactions of
approximately $600,000. The increase in consulting revenues from fiscal 1997
compared to fiscal 1996 was 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 $2,119,051 or 21.0% in fiscal 1998 over fiscal 1997 and
$3,198,437 or 46.9% in fiscal 1997 compared to fiscal 1996. 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 3.6 billion,
3.3 billion and 2.3 billion, for calendar years ended December 31, 1997, 1996,
and 1995, 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.
Bond Express, a provider of subscription-based bond offering information, was
consolidated with BARRA's results of operations beginning in June 1997. Revenues
from Bond Express included in electronic brokerage and information revenues were
$1,588,342 and $1,064,294 for fiscal 1998 and 1997, respectively.
ASSET MANAGEMENT. Asset management revenues increased $7,311,381 or 35.2% in
fiscal 1998 over fiscal 1997 and $13,288,308 or 177.8% in fiscal 1997 compared
to fiscal 1996. Asset management revenues consist of business from both Symphony
and the Asset Services group (which provides customized multi-manager 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
$26,536,612 for fiscal 1998, $16,082,688 for fiscal 1997 and $3,327,651 for
fiscal 1996. Performance fees included in total revenues were $14,703,293,
$11,558,377 and $548,218 for the 1998, 1997 and 1996 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 fees over the last three fiscal years 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 1999, Symphony had approximately $2.2 billion of
assets under direct management (an increase of 83% over the beginning of fiscal
1998) of which $1.4 billion are managed under agreements that provide for
performance fees in addition to a base management fee (an increase of 75% over
the beginning of fiscal 1998). Symphony also managed approximately $.8 billion
in assets under sub-advisory and other non-discretionary accounts as of the
beginning of fiscal 1999.
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 NON-U.S. CUSTOMERS. The percentage of BARRA's total operating
revenues derived from non-US customers represented 32.7%, 31.9% and 38.9% in
fiscal years 1998, 1997 and 1996, respectively. The percentage of BARRA's
subscription and consulting revenues (total revenues excluding electronic
brokerage and asset management revenues) derived from non-US customers was
46.3%, 45.2% and 47.8% for the same periods, respectively. Increases in the
percentage of
14
revenue from foreign customers in fiscal 1998 compared to fiscal 1997
reflects growth in non-US revenues including the impact of revenues from the
acquisition of TED (which are primarily from non-US customers). Decreases in
the percentage of revenue from foreign customers in fiscal 1997 compared to
fiscal 1996 reflect increases in US consulting revenues combined with the
impact of a stronger U.S. dollar versus the Japanese yen.
OPERATING EXPENSES
COST OF SUBSCRIPTION PRODUCTS. Cost of subscription products consists of
computer access charges, data costs, BARRA's computer leasing expenses, and
seminar expenses. This component of operating expenses has increased $392,323 or
6% in fiscal 1998 over fiscal 1997 and $716,176 or 12% in fiscal 1997 over
fiscal 1996. Excluding the impact of businesses acquired in fiscal 1998, costs
of subscription products decreased $443,826 from fiscal 1997. The decrease in
fiscal 1998 compared to fiscal 1997 reflects higher data costs offset by lower
outside computer costs as a result of lower contract costs for such services.
Increases in fiscal 1997 over fiscal 1996 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 and computer access
costs will continue to increase into the future as BARRA's demands for new and
expanded data sources and delivery channels increase in order to meet product
development, enhancement and market needs.
COMPENSATION AND BENEFITS. Compensation and benefits increased $12,478,072 or
25.1% in fiscal 1998 over fiscal 1997 and $9,094,571 or 22.4% in fiscal 1997
over fiscal 1996. Excluding compensation and benefits from business acquired
during fiscal 1998, compensation and benefits increased $6,408,642 or 12.9% from
fiscal 1997.
Excluding compensation and benefits from businesses acquired during fiscal 1998,
these annual increases are in part attributable to growth in the number of
full-time employees, which increased approximately 8% in fiscal 1998 over fiscal
1997 and 8% in fiscal 1997 over fiscal 1996. Increases in group insurance costs
and other related employee benefits have also contributed to increases in each
of the past three years.
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 $1,198,663 or 28.1% in fiscal 1998 over
fiscal 1997 and $393,113 or 10.2% in fiscal 1997 over fiscal 1996. Excluding
rent expense from businesses acquired during fiscal 1998, rent expense increased
$736,153 or 17%. Excluding the impact of acquired business on rent expense in
fiscal 1998, the increase in rent expense for fiscal 1998 over fiscal 1997 is
the result of additional rental costs and related leasehold improvements for
office expansions completed in Berkeley, San Francisco, New York and Connecticut
during the fiscal year. In addition to the increased costs from the 1998
changes, it is anticipated that there will be increased costs associated with
the relocation of the Company's offices in London in April 1998 as well as
further expansion planned in September 1998 for the Company's Berkeley
headquarters.
OTHER OPERATING EXPENSES. Other operating expenses increased $5,740,442 or
29.8% in fiscal 1998 over fiscal 1997 and $3,871,287 or 25.2% in fiscal 1997
over fiscal 1996. Excluding other operating expenses from business acquired
during fiscal 1998, other operating expenses increased $2,681,006 or 13.9%.
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.
Excluding the impact of acquired businesses on other operating costs for fiscal
1998, the increase in other operating expenses compared to fiscal 1997 resulted
from increases in data costs related to the asset management business (which are
in part a function of certain asset management revenues); increases in foreign
exchange losses associated with strengthening of the U.S. dollar versus certain
foreign currencies; and other general increases in travel and entertainment,
advertising and marketing, insurance and taxes and licenses associated with
office expansions and increases in sales.
The increase in other operating expenses from 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. 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.
15
ONE-TIME ACQUISITION CHARGES. One-time acquisition charges of $9,914,000
represent purchased in-process research and development in connection with the
acquisition of GAT and Innosearch on June 24, 1997. The portion of the purchase
price allocated to purchased in-process technology was determined based on a
valuation study completed shortly after the closing of the acquisition. The
portion of the purchase price allocated to purchased technology was immediately
expensed.
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 decreased $244,956 or
11.5% in fiscal 1998 over fiscal 1997 and increased $808,769 or 61.6% in fiscal
1997 over fiscal 1996. The decrease in fiscal 1998 compared to fiscal 1997 is
the result of lower dividend income and interest earnings on notes receivable.
The increase in fiscal 1997 over fiscal 1996 is the result of 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 and higher
recorded gains on marketable securities.
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 Downlink Corporation. The losses decreased in fiscal 1997 from fiscal 1996
primarily as a result of non-recurring losses incurred by the Company in prior
years in connection with interests in certain joint ventures that have since
been terminated.
MINORITY INTEREST. Minority interest represents the net sum of the Company's
share of Bond Express LP's net loss and, beginning with the fourth quarter of
fiscal 1997, the profit interest of the Symphony principals. (See above
"Operating Expenses - Compensation and Benefits.") The increases in fiscal 1998
and 1997 are the result of profits from the Symphony business.
NEW ACCOUNTING STANDARDS.
In fiscal 1997, the FASB issued SFAS No. 130, "Comprehensive Income," which will
be adopted by the Company in the first quarter of fiscal 1999. SFAS No. 130
requires companies to report a new, additional measure of income on the income
statement or to create a new financial statement that has the new measure of
income on it. "Comprehensive Income" is to include foreign currency translation
gains and losses and other unrealized gains and losses that have been previously
excluded from net income and reflected instead in equity. The Company
anticipates that SFAS No. 130 will not have a material impact on its
consolidated results of operations or financial position.
In fiscal 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which will be adopted by the Company in the
first quarter of fiscal 1999. SFAS No. 131 requires companies to report
financial and descriptive information about its reportable operating segments,
including segment profit or loss, certain specific revenue and expense items,
and segment assets, as well as information about the revenues derived from the
Company's products and services, the countries in which the Company earns
revenues and holds assets, and major customers.
In fiscal 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position (SOP)
97-2, "Software Revenue Recognition," which will be adopted by the Company in
the first quarter of fiscal 1999. SOP 97-2 provides guidance on applying
generally accepted accounting principles in recognizing revenue on software
transactions. The Company anticipates that SOP 97-2 will not have a material
impact on its consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES. Cash and cash equivalents, short-term
investments and investments in municipal debt securities available-for-sale
totaled $48,232,912 at March 31, 1998, representing an increase of $6,656,494
from March 31, 1997. 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 8, 1998, the Company's principal
financial commitments consisted of obligations under operating leases and
contracts for the use of computer and office facilities and the initial cash
consideration
16
related to the acquisition of Redpoint. The Board of Directors has also
authorized the repurchase of up to $2,000,000 of the Company's common stock
and has authorized up to $10,000,000 in funds as "seed" investments for new
asset management products developed by Symphony or the Asset Services group.
YEAR 2000
It is widely anticipated that potential problems could occur after December 31,
1999 with computer systems or any equipment with computer chips which use year
dates that have been stored as just two digits. On January 1, 2000, any clock
or date recording mechanism, including date-sensitive software, which uses only
two digits to represent a year, may recognize a two digit date (e.g., "00") as
referring to the twentieth century (e.g., "1900") rather than the twenty-first
century (e.g., "2000"), which could in turn result in system failure or
miscalculations.
To address the Year 2000 issue in the Company's products and internal systems,
the Company has assembled a team of internal and external information technology
professionals to review each of its applications and programs to identify those
that contain two-digit year codes. The Company has also begun coordination with
other entities, including vendors that provide data for the Company's investment
anayltics software, to assess their Year 2000 compliance efforts and the
Company's exposure to any non-compliance by such vendors. The Company is
assessing the amount of programming required to upgrade or replace each of the
affected applications or programs with the goal of completing all relevant
software remediation and testing by the end of the calendar year 1998. The
Company anticipates continuing its general Year 2000 compliance efforts through
1999.
Based upon current information, the Company believes that its expenditures
for outside services relating to its Year 2000 compliance efforts, excluding
hardware, in fiscal 1998 and through the project's completion will be
approximately $1.5 million. Costs incurred relating to this project are
being expensed by the Company during the period in which they are incurred.
The Company's expectations about future costs associated with the Year 2000
issue and about the target date for completion of software remediation and
testing are subject to uncertainties that could cause actual results to
differ materially from what has been discussed above. Factors that could
influence the amount and timing of future costs include: the success and
timeliness of the Company in identifying products, applications and internal
software that contain two-digit year codes, the nature and amount of
programming required to upgrade or replace each of the affected applications
or programs, the rate and magnitude of related labor and consulting costs,
and the success and timeliness of the Company's external counterparties and
suppliers in addressing the Year 2000 issue.
EUROPEAN MONETARY UNION ("EMU")
It is also anticipated that potential problems could arise when the EMU replaces
certain European currencies with the "Euro". That replacement is expected to
occur by January 1, 1999. To address the Euro issue, the Company has assembled
a team of technology and finance professionals to review its applications and
programs that use European currency data. This team has also begun coordinating
with external vendors and service providers to assess their Euro compliance
efforts.
Based upon current information, the Company believes that it's expenditures for
outside services relating to its Euro compliance will be approximately $.5
million for fiscal 1998. Costs associated with modifications necessary to
prepare for the EMU are being expensed by the Company during the period in which
they are incurred. The Company's expectations for future costs associated with
and timely resolution of all Euro issues are subject to uncertainties that could
cause actual results to differ materially from the projections set forth above.
Factors that could influence the amount and timing of such costs include: the
success and timeliness of the Company in identifying products, applications and
internal software containing European currency data, the nature and amount of
programming and research required to upgrade or replace each of the affected
products and programs, the rate and magnitude of related labor and consulting
costs, and the success of the Company's external vendors and service providers
in addressing the Euro issue.
OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS
Because of rapid technology changes in the computer and software industry, the
Company's future revenues will depend on its ability to develop or acquire new
products and enhance its existing products on a timely basis to keep pace with
innovations in technology and support a range of changing computer software,
hardware platforms and customer preferences. Lack of market acceptance or
significant delays in product development could result in a loss of
competitiveness of the Company's products, with a resulting loss of revenues.
The Company has been involved in merger and acquisition transactions. These
transactions have been motivated by many factors including the desire to obtain
new technologies, the desire to expand and enhance the Company's product and
service lines, and the desire to attract personnel. Growth through acquisition
has several identifiable risks, including risks related to integration of the
previously distinct businesses into a single unit, the substantial management
time devoted to such activities,
17
undisclosed liabilities, the failure to realize anticipated benefits (such as
cost savings and synergies), and issues related to product transition.
The Company's operating expenses are partially based on its expectations
regarding future revenue. The Company's consolidated results of operations may
be adversely affected if revenue does not materialize in a quarter as
anticipated. Since expenses are usually committed in advance of revenues, and
because only a small portion of expenses vary with revenue, the company's
consolidated results of operations may be impacted significantly by lower
revenues which could be attributable to various factors and could affect quarter
to quarter comparisons. In addition, a substantial portion of the Company's
revenues are earned pursuant to fixed price software subscription licenses.
Variances in costs associated with those licenses could have a material adverse
affect on the Company's business, financial condition, and results of
operations.
The Company is dependent on the efforts of its senior management, its research
and development staff, and a number of other key management, sales, support,
technical and services personnel. To the extent the Company is not able to
retain, attract, train, and motivate highly skilled employees, directly or
through acquisition, who are able to provide services that satisfy customer
expectations, the Company's business and consolidated results of operations
would be adversely affected.
The Company expects that international revenues will continue to account for a
significant portion of its total revenues. The Company's operations involve a
number of risks normally associated with such operations including, among other
things, adoption and expansion of government trade restrictions, volatile
foreign exchange rates, currency conversion risks, limitations on repatriations
of earnings, reduced protection of intellectual property rights, the impact of
possible recessionary environments in economies outside the US, difficulties in
managing foreign operations, political and economic instability, unexpected
changes in regulatory requirements and tariffs, and other trade barriers.
Currency exchange fluctuations in countries in which the Company does business
could also materially adversely affect the Company's business, consolidated
financial condition, and consolidated results of operations.
The Company's operations are dependant on its ability to protect its
equipment and the information stored in its databases against damage by fire,
earthquake, or other natural disaster, power loss, telecommunications
failures, unauthorized intrusion, and other catastrophic events. The Company
believes it has taken measures to reduce the risk of interruption in its
operations. However, there can be no assurance that these measures are
sufficient. Any damage or failure that causes interruptions in the Company's
operations could have a material adverse affect on its business, consolidated
financial condition, and consolidated results of operations.
Due to the foregoing, as well as other factors, past financial performance
should not be considered an indicator of future performance. In addition, the
Company's participation in a highly dynamic industry often results in
significant volatility of the Company's common stock price. Any change in
revenues or operating results below levels expected by securities analysts for
the Company, and the timing of the announcement of such shortfalls, could have
an immediate and significant adverse effect on the trading price of the
Company's common stock in any given period.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
18
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, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended March 31, 1998. 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 audit 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, 1998 and 1997 and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended March 31, 1998 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
- -------------------------
April 24, 1998 (June 17, 1998 as to Note 14)
19
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1998 AND 1997 1998 1997
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 33,673,314 $ 25,831,118
Short-term investments 8,294,394 5,421,841
Investment in municipal debt securities-
available for sale 6,265,204 10,323,459
Accounts receivable:
Subscription and other (Less allowance
for doubtful accounts of $169,183 and
135,732) 18,152,071 13,414,937
Asset management 2,449,324 2,107,638
Related parties 3,855,057 3,017,164
Notes receivable - 5,419,474
Prepaid expenses 1,965,819 400,187
- --------------------------------------------------------------------------------
Total current assets 74,655,183 65,935,818
- --------------------------------------------------------------------------------
INVESTMENTS IN UNCONSOLIDATED COMPANIES 2,128,532 445,644
PREMISES AND EQUIPMENT:
Computer and office equipment 16,447,653 12,432,023
Furniture and fixtures 5,006,947 3,064,574
Leasehold improvements 6,677,300 2,503,776
- --------------------------------------------------------------------------------
Total premises and equipment 28,131,900 18,000,373
Less accumulated depreciation and
amortization (13,513,701) (9,739,519)
- --------------------------------------------------------------------------------
14,618,199 8,260,854
DEFERRED TAX ASSETS 2,282,522 1,038,374
COMPUTER SOFTWARE
(Less accumulated amortization of
$1,051,275 and $548,263) 1,544,704 536,442
OTHER ASSETS 1,463,824 1,219,350
GOODWILL AND OTHER INTANGIBLES
(Less accumulated amortization of
$3,215,801 and $1,585,124) 24,767,142 6,764,619
- --------------------------------------------------------------------------------
TOTAL $ 121,460,106 $ 84,201,101
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,223,129 $ 2,748,572
Due to related party 1,079,199 707,266
Accrued expenses payable:
Accrued compensation 9,663,688 7,186,875
Accrued corporate income taxes 4,884,113 3,533,677
Other accrued expenses 7,211,705 5,761,211
Shareholder notes payable - 239,611
Unearned revenues 22,160,710 12,427,274
- --------------------------------------------------------------------------------
Total current liabilities 47,222,544 32,604,486
- --------------------------------------------------------------------------------
Long-Term Liabilities:
Deferred tax liabilities 1,486,362 768,352
Shareholder notes payable - 473,411
- --------------------------------------------------------------------------------
Total long-term liabilities 1,486,362 1,241,763
- --------------------------------------------------------------------------------
MINORITY INTEREST IN EQUITY OF SUBSIDIARY 2,000,217 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; 13,675,388 and 12,625,971
shares issued and outstanding 27,831,335 12,878,186
Retained earnings 43,875,659 35,967,057
Foreign currency translation adjustment (956,011) (471,393)
- --------------------------------------------------------------------------------
Total shareholders' equity 70,750,983 48,373,850
- --------------------------------------------------------------------------------
TOTAL $ 121,460,106 $ 84,201,101
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the
BARRA, Inc. Consolidated Financial Statements.
20
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
1998 1997 1996
---- ---- ----
OPERATING REVENUES:
Subscription and consulting fees $ 97,159,573 $ 73,974,590 $ 63,267,499
Electronic brokerage and information 12,143,142 10,024,091 6,825,654
Asset management 28,074,612 20,763,231 7,474,923
- -----------------------------------------------------------------------------------------------
Total operating revenues 137,377,327 104,761,912 77,568,076
- -----------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Cost of subscription products 7,266,183 6,873,860 6,157,684
Compensation and benefits 62,143,333 49,665,261 40,570,690
Rent expense 5,461,718 4,263,055 3,869,942
Other operating expenses 24,993,548 19,253,106 15,381,819
One-time acquisition charges 9,914,000 1,756,189 -
- -----------------------------------------------------------------------------------------------
Total operating expenses 109,778,782 81,811,471 65,980,135
- -----------------------------------------------------------------------------------------------
INTEREST INCOME AND OTHER 1,876,915 2,121,871 1,313,102
- -----------------------------------------------------------------------------------------------
INCOME BEFORE EQUITY IN NET INCOME AND LOSS
OF INVESTEES, MINORITY INTEREST, AND INCOME
TAXES 29,475,460 25,072,312 12,901,043
EQUITY IN NET INCOME AND LOSS OF INVESTEES (376,725) (106,013) (674,035)
MINORITY INTEREST (8,438,143) (1,419,125) (211,525)
- -----------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 20,660,592 23,547,174 12,015,483
INCOME TAXES (12,751,990) (10,001,721) (5,146,227)
- -----------------------------------------------------------------------------------------------
NET INCOME $ 7,908,602 $ 13,545,453 $ 6,869,256
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Net Income Per Share:
Basic $.59 $1.08 $.56
Diluted $.55 $.97 $.52
Weighted Average Common and Common
Equivalent Shares:
Basic 13,300,198 12,524,678 12,350,849
Diluted 14,264,565 14,002,355 13,226,472
The accompanying notes are an integral part of the
BARRA, Inc. Consolidated Financial Statements.
21
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,908,602 $ 13,545,453 $ 6,869,256
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in net income and loss of investees 376,725 106,013 674,035
Minority interest 8,438,143 1,419,125 211,525
Depreciation and amortization 5,106,295 3,229,319 1,706,741
Amortization of computer software 541,193 386,265 281,065
Dividends received from investee - (226,583) (207,920)
Gains on marketable securities (573,000) (455,832) (330,763)
One-time acquisition charges 9,914,000 448,426 -
Other (28,531) (153,065) (846,469)
Changes In:
Accounts receivable - Subscription and other (3,308,280) (3,630,374) (1,161,102)
Accounts receivable - Asset management (341,686) (1,206,231) -
Accounts receivable - Related parties (837,893) (340,503) 314,448
Prepaid expenses (469,044) 281,639 440,434
Other assets (178,755) (719,984) (571,982)
Accounts payable, due to related party
and accrued expenses 4,149,545 6,460,594 3,668,027
Unearned revenues 2,359,051 86,162 1,840,555
- -----------------------------------------------------------------------------------------------
Net cash provided by operating activities 33,056,365 19,230,424 12,887,850
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (8,857,657) (3,671,299) (2,112,568)
Short-term investments sold (purchased) - net (2,299,553) (1,454,491) 2,759,418
Sale (purchase) of municipal debt
securities - available for sale, net 4,058,255 (10,323,459) -
Exercise of BARRA Japan options - - 156,969
Purchase of Japanese model rights - - (4,447,280)
Acquisitions - cash paid (14,491,154) - -
Investments in unconsolidated companies (1,852,888) (874,746) -
Dividends received - 226,583 207,920
Notes receivable (issued) repaid 5,419,474 1,804,869 (1,600,000)
Other investing activities, net - 190,155 73,002
- -----------------------------------------------------------------------------------------------
Net cash used in investing activities (18,023,523) (14,102,388) (4,962,539)
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash payments to minority shareholders (8,403,446) - -
Repayments of notes payable and lines of credit (713,022) (2,138,294) -
Proceeds from bank borrowings - - 1,038,480
Proceeds from sale of common stock 2,739,878 1,164,973 1,045,113
Common stock repurchased (814,056) (816,960) (3,558,473)
- -----------------------------------------------------------------------------------------------
Net cash used in financing activities (7,190,646) (1,790,281) (1,474,880)
- -----------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 7,842,196 3,337,755 6,450,431
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 25,831,118 22,493,363 16,042,932
- -----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 33,673,314 $ 25,831,118 $ 22,493,363
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
OTHER CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 64,209 $ 95,133 $ 177,167
Income taxes 6,947,963 7,830,285 4,371,168
Non-cash investing transactions - See Notes 3 and 8.
The accompanying notes are an integral part of the
BARRA, Inc. Consolidated Financial Statements.
22
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
FOREIGN
COMMON STOCK UNAMORTIZED CURRENCY TOTAL
---------------------- DEFERRED TRANSLATION RETAINED SHAREHOLDERS'
SHARES AMOUNT COMPENSATION ADJUSTMENT EARNINGS EQUITY
------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1995 12,312,696 12,618,033 (94,526) 397,815 15,552,348 28,473,670
Repurchase of Stock (360,000) (3,558,473) (3,558,473)
Stock Issued 498,030 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 12,450,726 12,530,173 (42,989) 15,746 22,421,604 34,924,534
Contractual Share Repurchases-
RogersCasey - (800,691) (800,691)
Repurchase of Stock (3,414) (16,269) (16,269)
Stock Issued 178,659 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 12,625,971 $12,878,186 $ - ($471,393) $ 35,967,057 $ 48,373,850
Repurchase of Stock (28,194) (814,056) (814,056)
Stock issued 1,077,611 12,605,745 12,605,745
Tax benefit from Option Exercises 3,161,460 3,161,460
Foreign Currency Translation Adjustment (484,618) (484,618)
Net Income 7,908,602 7,908,602
------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1998 13,675,388 $27,831,335 $ - ($956,011) $ 43,875,659 $ 70,750,983
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
The accompanying notes are an integral part of the
BARRA, Inc. Consolidated Financial Statements.
23
BARRA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 1998,
1997 AND 1996:
NOTE 1 - THE COMPANY.
BARRA, Inc. ("BARRA" or the "Company") and its subsidiaries 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, insurance companies, banks, 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. Also included
in the accompanying consolidated financial statements are the accounts of Bond
Express LP ("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 to the 1998 presentation.
STOCK SPLIT - In August 1997, the Company's Board of Directors declared a
three-for-two stock split, payable in the form of a dividend of one share of the
Company's common stock for every two shares owned by the stockholders. The
stock split, which was effective September 22, 1997, resulted in the issuance
of approximately 4.5 million additional shares of common stock from authorized
but unissued shares. Accordingly, all share and per share data in the financial
statements and related notes thereto have been adjusted to retroactively reflect
the stock split.
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 $5,939,584 at March 31, 1998 and $2,534,100 at
March 31, 1997 invested in limited partnerships managed by Symphony LLC, the
Company's registered investment adviser subsidiary. The limited partnerships
hold both long and short positions in equity securities and at times buy and
sell 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 $2,354,810 at March 31,
1998, and $2,887,741 at March 31, 1997, 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. 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 December 1998 to November 2025, 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 9).
PREMISES AND EQUIPMENT are stated at cost. Computer and office equipment and
furniture and fixtures have economic useful lives of five years and are
depreciated using straight-line methods. Leasehold improvements are amortized
using the straight-line method over the periods of the corresponding leases
which range from five to ten years.
24
COMPUTER SOFTWARE that has been purchased is stated at cost less accumulated
amortization. Amortization is calculated using the straight-line method over
three years depending on the estimated useful life of the software. Under the
criteria set 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 a 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.
GOODWILL AND OTHER INTANGIBLES includes purchased goodwill and purchased model
rights which are amortized over periods ranging from 10 to 20 years. (See Notes
3 and 6.) 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 individual
account management agreements.
Electronic brokerage and information revenues, which consist primarily of
royalties based on trading volume of U.S. equities from the Portfolio System for
Institutional Trading ("POSIT") joint venture, 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-US operations
except BARRA International (Japan), Ltd., the company's wholly-owned Japan
subsidiary ("BARRA Japan"), is deemed to be the US 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. (See Note 11.)
NET INCOME PER SHARE - In fiscal 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share." SFAS No. 128
requires companies to compute net income per share under two different methods,
basic and diluted. Net income per share for each period is calculated by
dividing net income by the weighted average shares of common stock outstanding
during the period, and assuming dilution, net income is divided by the weighted
average shares of common stock outstanding and potential common shares during
the period. As a result, the 1997 and 1996 net income per share amounts have
been restated to conform to the new standard. Potential common shares included
in the diluted calculation consist of dilutive shares issuable upon the exercise
of outstanding common stock options computed using the treasury stock method.
For all periods presented, the only difference between basic and diluted income
per share is the inclusion of dilutive stock options in the denominator for
purposes of calculating diluted income per share.
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. Financial
instruments which may potentially subject the Company to concentrations of
credit risk consist principally of cash investments and short-term investments.
The Company's investment policy limits investments to short-term, low-risk
instruments.
25
NEW ACCOUNTING STANDARDS
In fiscal 1997, the FASB issued SFAS No. 130, "Comprehensive Income," which will
be adopted by the Company in the first quarter of fiscal 1999. SFAS No. 130
requires companies to report a new, additional measure of income on the income
statement or to create a new financial statement that has the new measure of
income on it. "Comprehensive Income" is to include foreign currency translation
gains and losses and other unrealized gains and losses that have been previously
excluded from net income and reflected instead in equity. The Company
anticipates that SFAS No. 130 will not have a material impact on its
consolidated results of operations or financial position.
In fiscal 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which will be adopted by the Company in the
first quarter of fiscal 1999. SFAS No. 131 requires companies to report
financial and descriptive information about its reportable operating segments,
including segment profit or loss, certain specific revenue and expense items,
and segment assets, as well as information about the revenues derived from the
Company's products and services, the countries in which the Company earns
revenues and holds assets, and major customers.
In fiscal 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position (SOP)
97-2, "Software Revenue Recognition," which will be adopted by the Company in
the first quarter of fiscal 1999. SOP 97-2 provides guidance on applying
generally accepted accounting principles in recognizing revenue on software
transactions. The Company anticipates that SOP 97-2 will not have a material
impact on its consolidated financial statements.
NOTE 3 - BUSINESS COMBINATIONS AND OTHER CHANGES IN REPORTING ENTITIES.
YEAR ENDED MARCH 31, 1998:
GLOBAL ADVANCED TECHNOLOGY ("GAT") AND INNOSEARCH CORPORATION ("INNOSEARCH"): On
June 24, 1997, the Company completed the acquisition of a 100% equity interest
in GAT and a majority ownership interest in Innosearch, an affiliate of GAT. GAT
is a leading provider of fixed income analytics and related consulting services.
The total purchase price of approximately $19,904,000 included 704,589 shares of
unregistered BARRA common stock valued at $9,866,000, liabilities assumed of
$6,058,000, and cash and transaction costs of $3,980,000. In February 1998, an
additional $1,000,000 was paid in connection with the acquisition of the
remaining minority interest in Innosearch, which resulted in additional goodwill
of $469,500. The acquisitions have been accounted for as a purchase, and the
results of GAT and Innosearch are included in the accompanying consolidated
financial statements from the date of acquisition only.
The cost of the acquisition has been allocated on the basis of the estimated
fair value of assets acquired and liabilities assumed. This allocation resulted
in tangible assets of $3,762,700 consisting principally of accounts receivable
and premises and equipment, capitalized software of $1,217,000, purchased
in-process technology of $9,914,000, deferred tax assets of $1,100,000 and
goodwill of $3,910,300. The amount allocated to purchased in-process technology
was immediately expensed. Goodwill from the acquisition will be amortized over
10 years.
THE ESTIMATE DIRECTORY ("TED") AND DIRECTUS: On October 9, 1997, BARRA (U.K.),
Ltd., a wholly-owned subsidiary of the Company, completed the acquisition of the
assets and assumption of certain liabilities of two businesses from Edinburgh
Financial Publishing Limited ("EFP") and two of EFP's affiliates for a total
purchase price of $17,411,727. The two businesses are TED, a database of
analysts' earnings estimates, and Directus, a corporate directors equity trading
information service. The total purchase consisted of $11,777,625 in cash,
liabilities assumed of $4,896,652 and transaction costs of $737,450. The
acquisition has been accounted for as a purchase, and the results of BARRA
(U.K.), Ltd. are included in the accompanying consolidated financial statements
from the date of acquisition only.
The cost of the acquisition has been allocated on the basis of the estimated
fair value of assets acquired and liabilities assumed and resulted in goodwill
of $15,536,065 which will be amortized over 20 years.
The following unaudited pro-forma information shows the results of operations
for the years ended March 31, 1998, 1997 and 1996 as if these acquisitions had
occurred at the beginning of each period presented and at the purchase prices
established on the actual dates of acquisition. One-time acquisition charges of
approximately $10 million were assumed to have been incurred on April 1, 1995
and are, therefore, included in the 1996 fiscal year for purposes of the
pro-forma presentation.
26
YEAR ENDED MARCH 31,
--------------------
1998 1997 1996
---- ---- ----
Operating revenues $142,479,154 $119,061,121 $90,511,376
Net income $16,980,657 $11,957,089 ($4,124,687)
Net income per share - diluted $1.18 $.81 ($.32)
The pro-forma financial information is presented for informational purposes only
and is not necessarily indicative of the operating results that would have
occurred had these acquisitions been acquired as of the above dates. In
addition, the pro-forma results are not intended to be a projection of future
results and do not necessarily reflect the financial impact of combining these
acquired operations with BARRA's.
YEAR ENDED MARCH 31, 1997:
ROGERS, CASEY & ASSOCIATES, INC. ("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 722,046 shares of BARRA's common stock
and 45,386 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.
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 grew to a maximum of 50% based on future levels of
Symphony LLC operating income (as defined in the Operating Agreement). The Class
3 interest attained the maximum 50% profits interest in the quarter ended March
31, 1998.
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. The Operating Agreement was amended to provide for
the issuance of Class 5 and 6 interests to the Company in exchange for the
assets sold. The Class 5 interest was issued at an amount equal to the book
value of the assets purchased. The Class 6 interest provides a preferred
distribution of the first $1 million in profits in the event the business is
sold or otherwise liquidated.
The Company 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 $8,422,661 and $1,787,073 for the years ended March 31, 1998 and 1997,
respectively.
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, 1998 and
1997), due in annual installments from August 2001 to May 2002. Bond Express is
a 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
27
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 $1,347,930 and $1,658,371 at
March 31, 1998 and 1997 (net of accumulated amortization of $793,582 and
$483,140 at March 31, 1998 and 1997, respectively). The minority interest's
share 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, 1998, 1997 and 1996
consists of the following:
1998 1997 1996
---- ---- ----
CURRENT:
Federal $10,581,887 $ 6,024,179 $3,646,627
State 106,887 1,280,149 836,587
Foreign 1,489,354 2,499,334 1,466,755
----------- ----------- ----------
Total current 12,178,128 9,803,662 5,949,969
----------- ----------- ----------
DEFERRED:
Federal 346,232 217,405 (686,120)
State 38,470 -- --
Foreign 189,160 (19,346) (117,622)
----------- ----------- ----------
Total deferred 573,862 198,059 (803,742)
----------- ----------- ----------
TOTAL TAX PROVISION $12,751,990 $10,001,721 $5,146,227
----------- ----------- ----------
----------- ----------- ----------
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:
28
1998 1997
---- ----
DEFERRED TAX ASSETS:
Accrued vacation pay not currently deductible $432,061 $368,052
Other accrued expenses not deductible 346,805 200,624
State income taxes -- 228,274
Differing tax years of equity investee -- 192,298
Deferred rent 149,339 --
Basis difference in fixed assets 196,407 --
Capitalized software 1,099,882 --
Other 58,028 49,126
---------- ----------
Total $2,282,522 $1,038,374
---------- ----------
DEFERRED TAX LIABILITIES:
Differing tax years of equity investee $ 784,679 $ 6,407
Prepaid expenses currently deductible 196,407 --
Basis difference in fixed assets -- 420,757
Other 505,276 341,188
---------- ----------
Total $1,486,362 $ 768,352
---------- ----------
NET DEFERRED TAX ASSET: $ 796,160 $ 270,022
---------- ----------
---------- ----------
The change in net deferred tax assets from 1997 to 1998 includes approximately
$1,100,000 of deferred tax assets recorded in connection with the acquisition of
GAT and Innosearch.
The reconciliation between the amount computed by applying the United States
federal statutory tax rate of 35% (34% in 1996) to income before income taxes
and the actual tax expense is as follows:
1998 1997 1996
---- ---- ----
Income tax expense at statutory rate $ 7,231,207 $ 8,241,511 $4,085,264
State income tax expense, net of federal income tax effect 825,982 819,522 552,147
Foreign taxes higher than federal rate 766,547 344,435 304,944
Non-taxable portion of dividends and interest (132,911) (175,513) (220,871)
Effect of foreign sales corporation earnings (299,022) (185,609) (49,485)
Equity in net loss of foreign investees not taxable -- -- 179,717
One-time acquisition charges not deductible 3,469,900 525,000 --
Other 890,287 432,375 294,511
----------- ----------- ----------
Income tax expense $12,751,990 $10,000,721 $5,146,227
----------- ----------- ----------
----------- ----------- ----------
29
NOTE 5 - 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
-------------------- --------------
1999 $ 3,513,765
2000 4,593,970
2001 4,271,225
2002 4,197,657
2003 4,143,785
Thereafter 16,829,784
-----------
Total $37,550,186
-----------
-----------
Net rental expense was $4,225,131, $4,263,055 and $3,869,942 for the years ended
March 31, 1998, 1997 and 1996, respectively.
The Company has an agreement with an outside computer service provider for
computer facilities through May 31, 2002. Under the agreement the Company is
committed to pay minimum fees of approximately $900,000 per year, plus
additional amounts based on usage and/or services provided. The Company's
expense for outside computer usage was $2,705,816, $2,922,655 and $2,700,313 for
the years ended March 31, 1998, 1997 and 1996, respectively.
NOTE 6 - 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 certain
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 600,000 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, 1998 and 1997, there was $1,205,317 and
$1,422,157 of goodwill (net of accumulated amortization of $645,377 and
$428,177) and $2,801,262 and $3,413,549 of purchased model rights (net of
accumulated amortization of $892,711 and $563,401).
NOTE 7 - 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 US 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 $287,348, $63,100 and $497,756 in the years ended March 31, 1998, 1997 and
1996, respectively.
NOTE 8 - 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. Prior to the exchange described above, the Company's
investment in
30
LBIC was accounted for under the cost method. At March 31, 1997 the remaining
amount due under the note receivable was $5,419,474 including accrued interest.
All amounts due under the promissory note were repaid according to its terms in
fiscal 1998.
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 and converted BAS from a partnership into a
corporation. 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 9 - 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 accounts 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 or subscription
basis. The Company accounts for its investment in Data Downlink Corporation
using the equity method which resulted in equity in losses of $170,000 for the
year ended March 31, 1998.
NOTE 10 - RETIREMENT PLANS.
The Company sponsors a tax-qualified employee savings and retirement plan ("the
Savings Plan") for all eligible U.S. employees. Eligible employees may
contribute up to 15% of their earnings, subject to annual limitations. The
Company matches employee contributions dollar for dollar up to an annual maximum
of $2,000 and employees vest in the Company match over the first five years of
their employment. Contribution expense was $781,568, $631,194 and $537,165 for
the years ended March 31, 1998, 1997 and 1996, respectively.
NOTE 11 -STOCK-BASED PLANS.
Fixed Stock Option Plans
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 1,800,000 shares of the Company's common stock. The Plan was
modified in 1994 and 1997 to increase the maximum number of shares of the
Company's common stock to 4,350,000. Under the Plan, incentive stock options
("ISO") 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 ("NSO")
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 ISO may be
exercised later than ten years after its date of grant and no NSO may be
exercised later than ten years and one day after its date of grant. For options
issued under the Plan through March 31, 1998, the vesting period has been set at
20% per year over five years and all options issues have been NSO's.
There were also 45,386 options granted, outstanding and exercisable under the
RogersCasey Stock Option Plan (the "RCA Plan") as of March 31, 1996. 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.
31
DIRECTORS STOCK OPTION PLAN.
On July 31, 1997, the Company adopted a Directors Option Plan (the "Directors
Plan") for the granting of stock options to non-employee directors and employee
directors for up to a maximum of 150,000 shares of the Company's common stock.
The Directors Plan permits the Company to grant NSO's in accordance with a fixed
formula to non-employee directors of the Company. In addition, the Directors
Plan allows discretionary grants of ISO's to employee directors and NSO's to all
directors. NSO grants will be made automatically to non-employee directors under
the Directors Plan in accordance with a nondiscretionary formula. Following the
adoption of the Directors Plan, each current eligible director received NSO
grants for 7,500 shares and each person who subsequently becomes a non-employee
director will receive a grant of 10,000 shares (the "Initial" grants). In
addition, on each anniversary of an initial grant, the optionee will receive NSO
grants for an additional 2,000 shares (the " Succeeding" grants). The exercise
price for all NSO's and ISO's will not be less than the fair market value of the
common stock at the date of grant. NSO's granted pursuant to initial grants will
vest over a period of five years at a rate of 20% per year. NSO's granted
pursuant to Succeeding grants will be immediately vested. ISO's will vest over
discretionary periods not to exceed to five years.
A summary of the status of all the Company's fixed stock option plans as of and
during the years ended March 31, 1997 and 1998 follows:
SHARES SUBJECT TO WEIGHTED AVERAGE SHARES AVAILABLE FOR
OUTSTANDING OPTIONS EXERCISE PRICE FUTURE GRANTS
------------------------------------------------------------
Outstanding, Balance at March 31, 1996 2,308,915 6.07 905,640
Granted 519,000 15.94 (519,000)
Canceled (92,760) 10.13 92,760
Exercised (162,273) 5.64 --
------------------------------------------------------------
Outstanding, Balance at March 31, 1997 2,572,882 7.94 479,400
Additional shares authorized 1,200,000
Granted 585,550 23.72 (585,550)
Canceled (150,480) 12.92 150,480
Exercised (339,875) 6.21 --
------------------------------------------------------------
Outstanding, Balance at March 31, 1998 2,668,077 11.35 1,244,330
Exercisable at March 31, 1998 1,129,052 $6.50 --
Weighted average fair value of options granted
during the year -- $13.10 --
Additional information regarding options outstanding as of March 31, 1998 is as
follows:
Stock Options Outstanding Options Exercisable
----------------------------------------------------------------------------------------
Weighted Average Weighted
Range of Exercise Number Remaining Weighted Average Number Average
Prices Outstanding Contractual Life (yrs) Exercise Price Exercisable Exercise Price
- ------------------------------------------------------------------------------------------------------------------
$ 4.00 to $4.53 549,320 5.9 $ 4.35 297,440 $4.34
$ 4.58 to $6.08 540,125 5.0 5.24 448,670 5.23
$ 6.33 to $10.50 638,107 6.4 8.40 314,167 8.12
$ 13.58 to 22.67 614,025 8.6 18.17 68,775 16.73
$ 25 and over 326,500 9.8 26.17 -- --
--------- ---------
2,668,077 6.9 $11.35 1,129,052 $ 6.50
--------- ---------
--------- ---------
32
EMPLOYEE STOCK PURCHASE PLAN.
Under the 1996 Employee Stock Purchase Plan, (the "Purchase Plan"), the Company
is authorized to issue up to 1,125,000 shares of common stock to its employees.
Under the terms of the Purchase Plan, employees can choose to have up to 15% of
their annual base earnings withheld, subject to an annual limitation, to
purchase the Company's common stock. The purchase price of the stock is 85% of
the lesser of the fair market value as of the beginning or end of each
three-month offer period, subject to an annual limitation. Under the Purchase
Plan, the Company issued 35,248 and 17,283 shares in 1998 and 1997. The weighted
average purchase price and the weighted average fair value of shares issued in
1998 was $18.38 and $24.00, respectively. At March 31, 1998 there were 1,072,469
shares of common stock reserved for future issuance under the Purchase Plan.
ADDITIONAL STOCK-BASED AWARD INFORMATION
As discussed in Note 2, 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, 84 months in 1998, 60
months for 1997 and 1996; stock volatility, 45% in 1998 and 1997 and 41% in
1996; risk free interest rates, 6.00% in 1998, 6.27% in 1997 and 5.88% in 1996;
and no dividends during the expected term for all years. If the computed fair
values of the 1998, 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 $6,931,350 ($.49 per share) in fiscal 1998, $12,347,913 ($.88 per share) in
fiscal 1997 and $6,581,757 ($.50 per share) in fiscal 1996. The effects of
applying SFAS No. 123 on pro forma disclosures of net income and net income per
share for 1998, 1997 and 1996 are not likely to be representative of the pro
forma effects on net income and net income per share in future years.
NOTE 12 - GEOGRAPHIC DATA.
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
following table below presents a summary of revenues by geographic location for
the fiscal years ended March 31:
1998 1997 1996
---- ---- ----
North America $ 95,095,227 $ 73,062,391 $48,832,717
Europe 24,911,534 18,527,989 14,738,456
Asia and Australia 17,370,566 13,171,532 13,996,918
------------ ------------ -----------
Total $137,377,327 $104,761,912 $77,568,076
------------ ------------ -----------
------------ ------------ -----------
NOTE 13 - CONTINGENCY.
The Company is subject to various legal proceedings and claims either asserted
or unasserted arising in the normal course of business. While the outcome of
these proceedings and claims cannot be predicted with certainty, it is
management's opinion that the results of any such legal matters will not be
material to the Company's consolidated financial statements.
33
Note 14 - Subsequent Event
On June 17, 1998, the Company completed the acquisition of substantially all of
the assets and certain liabilities of Redpoint Software, Inc ("Redpoint").
Redpoint is a leading provider of integrated risk management solutions and
enterprise-wide data management systems. Terms of the purchase required the
Company to pay approximately $5.5 million in cash upon completion of the
acquisition and up to an additional $12.5 million over a period of two years
following the closing based upon the financial performance of the acquired
assets. The acquisition will be accounted for using the purchase method of
accounting.
NOTE 15 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED).
FISCAL YEAR ENDED MARCH 31, 1998 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER
Total operating revenues $36,276,808 $42,759,864 $31,234,193 $27,106,462
Total operating revenues net of operating expenses $9,485,782 $14,521,913 $6,956,504 ($3,365,654)
Net income (loss) $4,839,558 $5,657,600 $3,673,451 ($6,262,007)
Net income (loss) per share - diluted $0.33 $0.39 $0.25 ($0.49)
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
Net income per share - diluted $0.33 $0.30 $0.14 $0.20
Income per share calculations for each of the quarters is based on the 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. Loss per share is calculated based on the weighted average common
shares outstanding for the period, excluding all common equivalent shares.
Quarterly financial data reflects one-time acquisition charges of $9,914,000
($.74 per share) in the first quarter of 1998 and $1,756,189 ($.07 per share) in
the second quarter of fiscal 1997. All per share amounts reflect a three-for-two
stock split effective September 22, 1997.
34
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 REGISTRANT
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."
EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding the Company's Executive Officers is included at the
end of Part I of this Report.
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 9
through 10 of the Proxy Statement under the heading "Executive Compensation -
Compensation Committee Interlocks, Insider Participation and Other
Transactions."
35
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 19
Consolidated Financial Statements
Consolidated Balance Sheets 20
Consolidated Statements of Income 21
Consolidated Statements of Cash Flows 22
Consolidated Statements of Shareholders' Equity 23
Notes to Consolidated Financial Statements 24
(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, 1997, as filed with the
SEC on February 10, 1998).
4.1 Specimen stock certificate (incorporated by reference to
Exhibit 4.3 to the Registration Statement).
13.1 1998 Annual Report to Shareholders of BARRA, Inc.
21.1 List of Subsidiaries of BARRA, Inc.
23.1 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedule - Year ended March 31, 1998
(electronic filing only).
27.2 Financial Data Schedule - Years ended March 31, 1996 and
1997 and fiscal quarters ended June 30, 1996, September 30,
1996 and December 31, 1996 - Restated (electronic filing
only).
27.3 Financial Data Schedule - Fiscal quarters ended June 30,
1997 and September 30, 1997 - Restated (electronic filing
only).
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.
36
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: /s/ James D. Kirsner
--------------------------------
Name: James D. Kirsner
------------------------------
Title: Chief Financial Officer
-----------------------------
Date: June 25, 1998
------------------------------
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 25, 1998
- -------------------------
A. George Battle
/s/ John F. Casey Director June 25, 1998
- -------------------------
John F. Casey
/s/ M. Blair Hull Director June 25, 1998
- -------------------------
M. Blair Hull
/s/ James D. Kirsner Chief Financial Officer June 25, 1998
- ------------------------- (Principal Financial and
James D. Kirsner Accounting Officer)
/s/ Norman J. Laboe Director June 25, 1998
- -------------------------
Norman J. Laboe
/s/ Ronald J. Lanstein Director and Vice Chairman June 25, 1998
- -------------------------
Ronald J. Lanstein
/s/ Andrew Rudd Director, Chairman and Chief June 25, 1998
- ------------------------- Executive Officer
Andrew Rudd (Principal Executive Officer)
37
EXHIBITS
EXHIBIT DOCUMENT PAGE
3.1 Amended and Restated Articles of Incorporation of N/A
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 N/A
Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1997, as filed with the
SEC on February 10, 1998).
4.1 Specimen Stock Certificate (incorporated by reference to N/A
Exhibit 4.3 to the Registration Statement).
13.1 1998 Annual Report to the Shareholders of BARRA, Inc. 39
21.1 List of Subsidiaries of BARRA, Inc. 67
23.1 Consent of Deloitte & Touche LLP. 69
27.1 Financial Data Schedule - Year ended March 31, 1998 N/A
(electronic filing only).
27.2 Financial Data Schedule - Years ended March 31, 1996 N/A
and 1997 and fiscal quarters ended June 30, 1996,
September 30, 1996 and December 31, 1996 - Restated
(electronic filing only).
27.3 Financial Data Schedule - Fiscal quarters ended N/A
June 30, 1997 and September 30, 1997 - Restated
(electronic filing only).
38