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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

Form 10-Q

 


 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal quarter ended February 28, 2005

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 1-11869

 


 

FactSet Research Systems Inc.

(Exact name of registrant as specified in its charter)

 


 

Delaware   13-3362547

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

601 Merritt 7, Norwalk, Connecticut   06851
(Address of principal executive office)   (Zip Code)

 

Registrant’s telephone number, including area code: (203) 810-1000

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

 

The total number of shares of the registrant’s Common Stock, $.01 par value, outstanding on February 28, 2005, was 48,070,530.

 



Table of Contents

FactSet Research Systems Inc.

 

Form 10-Q

 

Table of Contents

 

          Page

Part I

   FINANCIAL INFORMATION     

Item 1

   Financial Statements     
     Consolidated Statements of Income for the three and six months ended February 28, 2005 and February 29, 2004    3
     Consolidated Statements of Comprehensive Income for the three and six months ended February 28, 2005 and February 29, 2004    4
     Consolidated Statements of Financial Condition as of February 28, 2005 and August 31, 2004    5
     Consolidated Statements of Cash Flows for the six months ended February 28, 2005 and February 29, 2004    6
     Notes to the Consolidated Financial Statements    7

Item 2

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    17

Item 3

   Quantitative and Qualitative Disclosures About Market Risk    25

Item 4

   Controls and Procedures    25

Part II

   OTHER INFORMATION     

Item 4

   Submission of Matters to a Vote of Security Holders    26

Item 6

   Exhibits    26

Signature

   27

Certifications

    

 

2


Table of Contents

PART I FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

FactSet Research Systems Inc.

CONSOLIDATED STATEMENTS OF INCOME–Unaudited

 

     Three Months Ended

   Six Months Ended

(In thousands, except per share data)    Feb 28,
2005


   Feb 29,
2004


   Feb 28,
2005


   Feb 29,
2004


Revenues

   $ 76,472    $ 61,371    $ 150,535    $ 120,628
    

  

  

  

Cost of services

     21,293      18,198      43,300      36,073

Selling, general and administrative

     28,147      21,671      54,358      42,014
    

  

  

  

Total operating expenses

     49,440      39,869      97,658      78,087
    

  

  

  

Income from operations

     27,032      21,502      52,877      42,541

Other income

     216      687      384      1,422
    

  

  

  

Income before income taxes

     27,248      22,189      53,261      43,963

Provision for income taxes

     10,078      7,452      19,694      15,318
    

  

  

  

Net income

   $ 17,170    $ 14,737    $ 33,567    $ 28,645
    

  

  

  

Basic earnings per common share

   $ 0.36    $ 0.30    $ 0.70    $ 0.57
    

  

  

  

Diluted earnings per common share

   $ 0.34    $ 0.29    $ 0.67    $ 0.55
    

  

  

  

Weighted average common shares (Basic)

     48,001      49,392      47,797      50,046
    

  

  

  

Weighted average common shares (Diluted)

     50,397      51,246      50,213      52,307
    

  

  

  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

FactSet Research Systems Inc.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME–Unaudited

 

     Three Months Ended

    Six Months Ended

 
(In thousands, except per share data)    Feb 28,
2005


   Feb 29,
2004


    Feb 28,
2005


   Feb 29,
2004


 

Net income

   $ 17,170    $ 14,737     $ 33,567    $ 28,645  

Change in unrealized gain (loss) on investments, net of taxes

     38      (94 )     19      (75 )

Foreign currency translation adjustment

     440      —         5,722      —    
    

  


 

  


Comprehensive income

   $ 17,648    $ 14,643     $ 39,308    $ 28,570  
    

  


 

  


 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

FactSet Research Systems Inc.

 

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 

(In thousands, except per share data)   

February 28,

2005


   

August 31,

2004


 
     (Unaudited)        

CURRENT ASSETS

                

Cash and cash equivalents

   $ 37,394     $ 78,580  

Investments

     26,014       19,524  

Receivables from clients and clearing brokers, net

     67,182       45,935  

Deferred taxes

     4,759       5,875  

Other current assets

     3,809       4,834  
    


 


Total current assets

     139,158       154,748  
    


 


LONG-TERM ASSETS

                

Property, equipment and leasehold improvements, at cost

     112,963       102,311  

Less accumulated depreciation and amortization

     (66,581 )     (58,402 )
    


 


Property, equipment and leasehold improvements, net

     46,382       43,909  
    


 


OTHER NON-CURRENT ASSETS

                

Goodwill

     77,243       19,937  

Intangible assets, net

     30,060       5,944  

Deferred taxes

     3,772       3,098  

Other assets

     2,715       2,291  
    


 


TOTAL ASSETS

   $ 299,330     $ 229,927  
    


 


    

February 28,

2005


    August 31,
2004


 

LIABILITIES AND STOCKHOLDERS’ EQUITY

                

CURRENT LIABILITIES

                

Accounts payable and accrued expenses

   $ 17,868     $ 21,123  

Accrued compensation

     9,334       17,328  

Deferred fees

     18,249       9,530  

Dividends payable

     2,404       2,182  

Current taxes payable

     1,360       7,624  
    


 


Total current liabilities

     49,215       57,787  
    


 


NON-CURRENT LIABILITIES

                

Deferred taxes

     7,506       —    

Deferred rent and other non-current liabilities

     8,876       7,594  
    


 


Total liabilities

     65,597       65,381  
    


 


Commitments and contingencies (See Note 5)

                

STOCKHOLDERS’ EQUITY

                

Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued

     —         —    

Common stock, $.01 par value

     541       352  

Capital in excess of par value

     85,658       60,420  

Retained earnings

     272,249       243,324  

Accumulated other comprehensive income (loss)

     5,695       (46 )

Treasury stock, at cost

     (130,410 )     (139,504 )
    


 


Total stockholders’ equity

     233,733       164,546  
    


 


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 299,330     $ 229,927  
    


 


 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

FactSet Research Systems Inc.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS–Unaudited

 

(In thousands)    Six Months
Ended
February 28,
2005


    Six Months
Ended
February 29,
2004


 

CASH FLOWS FROM OPERATING ACTIVITIES

                

Net income

   $ 33,567     $ 28,645  

Adjustments to reconcile net income to net cash provided by operating activities

                

Depreciation and amortization

     9,081       7,549  

Deferred tax provision (benefit)

     112       (1,637 )

Gain on sale of equipment

     —         (210 )

Accrued ESOP contribution

     —         1,320  
    


 


Net income adjusted for non-cash items

     42,760       35,667  

Changes in assets and liabilities, net of effects of acquisitions

                

Receivables from clients and clearing brokers, net

     (17,134 )     (3,075 )

Accounts payable and accrued expenses

     (5,643 )     (634 )

Accrued compensation

     (6,451 )     (5,603 )

Deferred fees

     1,048       (1,522 )

Current taxes payable

     (6,421 )     1,489  

Landlord contributions to leasehold improvements

     500       6,092  

Other working capital accounts, net

     4,432       (117 )

Income tax benefits from stock option exercises

     5,192       479  
    


 


Net cash provided by operating activities

     18,283       32,776  

CASH FLOWS FROM INVESTING ACTIVITIES

                

(Purchases) Sales of investments, net

     (6,452 )     31,553  

Acquisition of businesses, net of cash acquired

     (52,098 )     —    

Purchases of property, equipment and leasehold improvements

     (9,015 )     (6,405 )
    


 


Net cash (used in) provided by investing activities

     (67,565 )     25,148  

CASH FLOWS FROM FINANCING ACTIVITIES

                

Dividend payments

     (4,214 )     (3,856 )

Repurchase of common stock

     (280 )     (72,205 )

Proceeds from employee stock plans

     13,319       3,822  
    


 


Net cash provided by (used in) financing activities

     8,825       (72,239 )

Effect of exchange rate changes on cash and cash equivalents

     (729 )     —    
    


 


Net decrease in cash and cash equivalents

     (41,186 )     (14,315 )

Cash and cash equivalents at beginning of period

     78,580       51,126  
    


 


Cash and cash equivalents at end of period

   $ 37,394     $ 36,811  
    


 


 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

FactSet Research Systems Inc.

February 28, 2005

(Unaudited)

 

1. ORGANIZATION AND NATURE OF BUSINESS

 

FactSet Research Systems Inc. (the “Company” or “FactSet”) provides online integrated database services to the global investment community. The Company combines more than 200 databases and clients’ proprietary data into a single information system. FactSet’s revenues are derived from month-to-month subscriptions to services such as workstations, databases and financial portfolio applications.

 

At the option of each client, these charges may be paid either in commissions from securities transactions or in cash. To facilitate the payment for services in commissions, the Company’s wholly owned subsidiary, FactSet Data Systems, Inc. (“FDS”), is a member of the National Association of Securities Dealers, Inc. and is a registered broker-dealer under Section 15 of the Securities and Exchange Act of 1934. Services paid in commissions are derived from securities transactions introduced and cleared on a fully disclosed basis primarily through one clearing broker. That is, a client paying subscription charges on a commission basis directs the clearing broker, at the time the client executes a securities transaction, to credit the commission on the transaction to FDS.

 

FactSet Limited, FactSet France, Inc., FactSet Europe S.à.r.l, FactSet Europe Limited, FactSet France S.A.S., FactSet GmbH, JCF Group S.A.S., FactSet Italia S.r.l., JCF Partners Limited, FactSet Research Limited UK, JCF Development Limited, Decision Data System B.V., FactSet Pacific, Inc., JCF Information (Asia) Pte Limited, LionShares Europe S.A.S., FactSet Mergerstat, LLC (“Mergerstat”), CallStreet, LLC (“CallStreet”), TrueCourse, Inc. and JCF Group Inc. are wholly owned subsidiaries of the Company, with operations in London, Paris, Frankfurt, Tokyo, Hong Kong, Sydney, Avon (France), Boston and Santa Monica, California.

 

2. ACCOUNTING POLICIES

 

In the opinion of management, the accompanying statements of financial condition and related interim statements of income, comprehensive income and cash flows include all normal adjustments in order to present fairly the results of the Company’s operations for the interim periods presented in conformity with accounting principles generally accepted in the United States. The interim consolidated financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and footnotes to them included in the Company’s Annual Report of Form 10-K for the fiscal year ended August 31, 2004. The significant accounting policies of the Company and its subsidiaries are summarized below. Certain prior year amounts have been reclassified to conform to current year presentation.

 

Shares of common stock and related per share amounts give retroactive effect for stock splits. All shares of common stock and related per share amounts have been adjusted to reflect a three-for-two common stock split, effected as a stock dividend, which occurred on February 4, 2005.

 

Financial Statement Presentation

 

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany activity and balances have been eliminated from the consolidated financial statements.

 

Cost of services is composed of employee compensation and benefits for the software engineering and consulting groups, data costs, amortization of identifiable intangible assets, computer maintenance and depreciation expenses and client-related communication costs. Selling, general and administrative expenses include employee compensation and benefits for the sales, product development and various other support departments, travel and entertainment expenses, promotional costs, rent, amortization of leasehold improvements, depreciation of furniture and fixtures, office expenses, professional fees and other expenses.

 

Use of 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. Significant estimates have been made in areas that include income and other taxes, depreciable lives of fixed assets, accrued liabilities, accrued compensation, receivable reserves and allocation of purchase price to assets and liabilities acquired. Actual results could differ from those estimates.

 

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Table of Contents

Revenue Recognition

 

FactSet applies Staff Accounting Bulletin No. 104 (“SAB 104”), Revenue Recognition, to its business arrangements for revenue recognition. Primarily all clients are invoiced monthly, in arrears, to reflect the actual services rendered to them. Remaining clients are invoiced annually in advance. Subscription revenue is earned each month as the service is rendered to clients, according to the specific subscription and the number of workstations deployed for such month. A provision is made to allow for billing adjustments as a result of cancellation of service or reduction in number of workstations. Such provisions are accounted for as a reduction of subscription revenue, with a corresponding reduction to subscriptions receivable. FactSet recognizes revenue when all the following criteria are met:

 

    The client subscribes to our research services,

 

    the FactSet service has been rendered and earned during the month,

 

    the amount of the subscription is fixed and determinable based on established rates for each product offering, quoted on an annualized basis, and

 

    collectibility is reasonably assured.

 

Under the guidance in SAB 104, the Company’s subscriptions represent a single earnings process. Collection of subscription revenues through FDS’s external clearing broker does not represent a separate service or earnings process since FDS is not the principal party to the settlement of the securities transactions for which the clearing brokers charge clearing fees. Clearing fees are recorded in the period incurred, at the time that a client executes securities transactions through clearing brokers. The Company earns the right to recover the clearing fee from its clients at the time the securities transactions are executed, which is the period in which the clearing fees are incurred.

 

Amounts that have been earned but not yet paid through the receipt of commissions on securities transactions or through cash payments are reflected on the Consolidated Statements of Financial Condition as receivables from clients and clearing brokers, net. As of February 28, 2005, the amount of receivables from clients and clearing brokers, net that was unbilled totaled $25.2 million. Since the Company invoices its clients monthly in arrears, the $25.2 million unbilled as of February 28, 2005 was billed at the beginning of March 2005. Amounts that have been received through commissions on securities transactions or through cash payments that are in excess of earned subscription revenues are reflected on the Consolidated Statements of Financial Condition as deferred fees.

 

The Company calculates a receivable reserve through analyzing aged client receivables each month and reviewing historical company information, industry trends and general market conditions.

 

Cash and Cash Equivalents

 

Cash and cash equivalents consist of demand deposits and money market investments with maturities of 90 days or less and are reported at fair value.

 

Investments

 

Investments have maturities greater than 90 days from the date of acquisition, are classified as available-for-sale securities and are reported at fair value. Fair value is determined for most investments from readily available quoted market prices. Unrealized gains and losses on available-for-sale securities are included net of tax in accumulated other comprehensive income in stockholders’ equity.

 

Property, Equipment and Leasehold Improvements

 

Computers and related equipment are depreciated on a straight-line basis over estimated useful lives of three years or less. Depreciation of furniture and fixtures is recognized using the double declining balance method over estimated useful lives between five and seven years. Leasehold improvements are amortized on a straight-line basis over the terms of the related leases or estimated useful lives of the improvements, whichever period is shorter.

 

Goodwill

 

Goodwill has resulted from the acquisitions of the Insyte, LionShares, Mergerstat, CallStreet, JCF and TrueCourse businesses. The Company performed an annual goodwill impairment test during the fourth quarter of fiscal years 2004, 2003 and 2002 and determined that there had been no impairment. Depending on the structure of the acquisition, goodwill may or may not be income tax-deductible.

 

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Table of Contents

Intangible Assets

 

Intangible assets primarily consist of acquired technology and certain acquired content databases resulting from the acquisitions of the Insyte, LionShares, Mergerstat, CallStreet, JCF and TrueCourse businesses and are amortized on straight-line and accelerated bases using estimated useful lives ranging between two and twenty years.

 

Internal Use Software

 

The Company capitalizes only those direct costs incurred during the application development and implementation stages for developing, purchasing or otherwise acquiring software for internal use that management believes have a probable future application in the Company’s subscription-based service. These costs are amortized over the estimated useful lives of the underlying software, generally three years or less. All costs incurred during the preliminary planning project stage, including project scoping, identification and testing of alternatives, are expensed as incurred. Capitalized direct costs associated with developing, purchasing or otherwise acquiring software for internal use are reported in the Property, Equipment & Leasehold Improvements line item of the Company’s Consolidated Statements of Financial Condition. These costs are amortized on a straight-line basis over the expected useful life of the software, beginning when the software is implemented and ready for its intended use.

 

Landlord Contributions to Leasehold Improvements

 

In conjunction with entering into leases for office space, the Company receives contributions from landlords toward leasehold improvements which are included in the Deferred Rent and Other Non-Current Liabilities line item of the Company’s Consolidated Statements of Financial Condition. The current portion of deferred rent and other non-current liabilities is included in the accounts payable and accrued expenses line item of the Company’s Consolidated Statements of Financial Condition. Cash received from landlord contributions to leasehold improvements is classified as operating activities in the Company’s Consolidated Statements of Cash Flows. These contributions are amortized as a reduction to rent expense over the non-cancelable lease terms to which they pertain, primarily fifteen years.

 

Accrued Liabilities

 

Accrued liabilities include estimates relating to employee compensation, operating expenses and tax liabilities. Most of the Company’s employee incentive compensation programs are discretionary. A final review of departmental performance is conducted each year end, with senior management determining the ultimate amount of discretionary bonus pools, which is then approved by the Company’s Board of Directors.

 

Income and Deferred Taxes

 

Deferred taxes are determined by calculating the future tax consequences associated with differences between financial accounting and tax bases of assets and liabilities. A valuation allowance is established to the extent management considers it more likely than not that some portion or all of the deferred tax assets will not be realized. The effect on deferred taxes from income tax law changes is recognized immediately upon enactment. The deferred tax provision is derived from changes in deferred taxes on the balance sheet and reflected on the Consolidated Statements of Income as a component of income taxes. Income tax benefits derived from the exercise of non-qualified stock options or the disqualifying disposition of incentive stock options are recorded directly to capital in excess of par value.

 

Comprehensive Income (Loss)

 

The Company reports comprehensive income (loss) in accordance with SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for the reporting and display of comprehensive income (loss) in a set of financial statements. Comprehensive income (loss) is defined as the change in net assets of a business enterprise during a period from transactions generated from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.

 

Foreign Currency

 

The functional currency of the Company’s international JCF group subsidiaries is the local currency. The financial statements of these subsidiaries are translated to United States dollars using period-end rates of exchange for assets and liabilities, and average rates for the period for revenues and expenses. Translation gains (losses) are recorded in accumulated other comprehensive income (loss) as a component of stockholders’ equity.

 

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Earnings Per Share

 

The computation of basic earnings per share in each period is based on the weighted average number of common shares outstanding. Diluted earnings per share are based on the weighted average number of common shares and potentially dilutive common shares outstanding. Shares available pursuant to grants made under the Company’s stock option plans are included as common share equivalents using the treasury stock method.

 

Stock-Based Compensation

 

The Company follows the disclosure-only provisions of Financial Accounting Standards Board Statement No. 123 (“SFAS 123”), Accounting for Stock-Based Compensation. In December 2002, the Financial Accounting Standards Board issued Statement No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. This statement provides alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. The statement also amends the disclosure requirements of SFAS 123, to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. As permitted by SFAS 123, the Company accounts for its stock option and employee stock purchase plans under APB Opinion No. 25, under which no compensation cost has been recorded. Stock option exercise prices equal the fair market value of the Company’s stock price on the date of grant; thus no compensation costs are recorded. Had compensation cost for the Company’s stock option plans and employee stock purchase plan been determined pursuant to the measurement principles under SFAS 123, the Company’s net income and earnings per share would have been reduced to the following pro forma amounts for the three and six months ended February 28, 2005 and February 29, 2004:

 

     Three Months Ended

    Six Months Ended

 
(In thousands, except per share data)    February 28,
2005


    February 29,
2004


    February 28,
2005


    February 29,
2004


 

Net income, as reported

   $ 17,170     $ 14,737     $ 33,567     $ 28,645  

Deduct: Stock-based employee compensation expense determined under fair value based method for all awards, net of related income tax effects

     (1,783 )     (1,976 )     (3,666 )     (3,399 )

Pro forma net income

   $ 15,387     $ 12,761     $ 29,901     $ 25,246  
    


 


 


 


Basic - as reported

   $ 0.36     $ 0.30     $ 0.70     $ 0.57  
    


 


 


 


Basic - pro forma

   $ 0.32     $ 0.26     $ 0.63     $ 0.50  
    


 


 


 


Diluted - as reported

   $ 0.34     $ 0.29     $ 0.67     $ 0.55  
    


 


 


 


Diluted - pro forma

   $ 0.31     $ 0.25     $ 0.60     $ 0.48  
    


 


 


 


 

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The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model. The following weighted average assumptions were used for option grants in the first six months of fiscal 2005 and 2004:

 

STOCK OPTION PLANS

            

Six months ended


  

February 28,

2005


    February 29,
2004


 

Risk-free interest rate

   3.51 %   2.57 %

Expected life

   5.4 years     4.1 years  

Expected volatility

   46 %   50 %

Dividend yield

   0.5 %   0.7 %

EMPLOYEE STOCK PURCHASE PLAN

            

Six months ended


   February 28,
2005


    February 29,
2004


 

Risk-free interest rate

   2.52 %   0.97 %

Expected life

   3 months     3 months  

Expected volatility

   33 %   28 %

Dividend yield

   0.5 %   0.6 %

 

New Accounting Pronouncements

 

In December 2004, the Financial Accounting Standards Board issued its final standard on accounting for share-based payments (SBP), FASB Statement No. 123R (revised 2004) (“FAS 123R”), Share-Based Payment, that requires companies to expense the value of employee stock options and similar awards. The standard is effective for public companies for interim and annual periods beginning after June 15, 2005, and applies to all outstanding and unvested SBP awards at a company’s adoption date. Management is currently evaluating option valuation methodologies and assumptions in light of FAS 123R related to employee stock options.

 

In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”), Share-Based Payment, which provides interpretive guidance related to the interaction between SFAS 123R and certain SEC rules and regulations, as well as provides the SEC staff’s views regarding the valuation of share-based payment arrangements. FactSet is currently assessing the impact of SAB 107 on its implementation and adoption of SFAS 123R.

 

3. COMMON STOCK AND EARNINGS PER SHARE

 

Shares of common stock outstanding were as follows:

 

In thousands    Six Months Ended
February 28, 2005


    Six Months Ended
February 29, 2004


 

Balance at September 1,

   46,752     50,490  

Common stock issued for employee stock plans

   896     566  

Common stock issued for acquisition of business

   430     —    

Repurchase of common stock

   (8 )   (3,105 )
    

 

Balance at February 28, 2005 and February 29, 2004

   48,070     47,951  
    

 

 

Shares of common stock and related per share amounts give retroactive effect for stock splits. A three-for-two common stock split, effected as a stock dividend, occurred on February 4, 2005.

 

On July 16, 2002, the Board of Directors authorized a share repurchase program to acquire shares of the Company’s outstanding common stock in open market or negotiated transactions. This program authorized the repurchase of up to 1,500,000 shares of FactSet common stock. The program established no minimum number of shares for repurchase. During the first six months of fiscal 2005, the Company did not repurchase any shares under this program. Since the inception of the stock repurchase program, FactSet has purchased approximately 1,158,000 shares at an average cost of $17.76 per share. Effective August 31, 2004, the Company froze the assets of the Employee Stock Ownership Plan.

 

On September 1, 2004, the Company issued 385,601 common shares as part of the acquisition price of the JCF Group of Companies. On January 4, 2005, the Company issued 44,613 common shares as part of the acquisition price of TrueCourse.

 

In January 2004, the Company purchased 3,000,000 shares of its common stock from one of its two co-founders, Howard E. Wille, at a price per share of $23.05. During March 2004, the Company purchased an additional 1,500,000 shares of its

 

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Table of Contents

common stock from its other co-founder, Charles J. Snyder, at a price per share of $25.41. The Board of Directors approved both purchases of common stock from its co-founders prior to the execution of those purchases. The total cash expended for the two common stock purchases was $107.3 million.

 

A reconciliation between the weighted average shares outstanding used in the basic and diluted EPS computations is as follows:

 

In thousands, except per share data;    Net Income
(Numerator)


   Weighted Average
Common Shares
(Denominator)


   Per Share
Amount


For the Three Months Ended February 28, 2005

                  

Basic EPS

                  

Income available to common stockholders

   $ 17,170    48,001    $ 0.36

Diluted EPS

                  

Dilutive effect of stock options

     —      2,396       
    

  
      

Income available to common stockholders

   $ 17,170    50,397    $ 0.34
    

  
      

For the Three Months Ended February 29, 2004

                  

Basic EPS

                  

Income available to common stockholders

   $ 14,737    49,392    $ 0.30

Diluted EPS

                  

Dilutive effect of stock options

     —      1,854       
    

  
      

Income available to common stockholders

   $ 14,737    51,246    $ 0.29
    

  
      
In thousands, except per share data;   

Net Income

(Numerator)


  

Weighted Average
Common Shares

(Denominator)


   Per Share
Amount


For the Six Months Ended February 28, 2005

                  

Basic EPS

                  

Income available to common stockholders

   $ 33,567    47,797    $ 0.70

Diluted EPS

                  

Dilutive effect of stock options

     —      2,416       
    

  
      

Income available to common stockholders

   $ 33,567    50,213    $ 0.67
    

  
      

For the Six Months Ended February 29, 2004

                  

Basic EPS

                  

Income available to common stockholders

   $ 28,645    50,046    $ 0.57

Diluted EPS

                  

Dilutive effect of stock options

     —      2,261       
    

  
      

Income available to common stockholders

   $ 28,645    52,307    $ 0.55
    

  
      

 

4. SEGMENTS

 

The Company has three reportable segments based on geographic operations: the United States, Europe and Asia Pacific. Each segment markets online integrated database services to investment managers, investment banks and other financial

 

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services professionals. The U.S. segment services financial institutions throughout North America, while the European and Asia Pacific segments service investment professionals located in Europe and other regions.

 

The European segment is headquartered in London, England and maintains office locations in France, Germany, Italy, Luxembourg and the Netherlands. The Asia Pacific segment is headquartered in Japan with office locations in Hong Kong, Australia and Singapore. Segment revenues reflect direct sales of products and services to clients based in their respective geographic locations. Each segment records compensation, travel, office and other direct expenses related to its employees. Expenditures related to the Company’s computing centers, data costs and corporate headquarters charges are recorded by the U.S. segment and are not allocated to the European and Asia Pacific segments. Goodwill of $77.2 million at February 28, 2005, which reflects six prior acquisitions, is included within the U.S. and European segments. The accounting policies of the segments are the same as those described in Note 2, “Accounting Policies.”

 

Segment Information

 

Segment Information
In thousands and unaudited


   U.S.

   Europe

   Asia Pacific

   Total

For The Three Months Ended February 28, 2005

                           

Revenues from clients

   $ 55,885    $ 16,912    $ 3,675    $ 76,472

Segment operating profit *

     21,030      4,113      1,889      27,032

Total assets at February 28, 2005

     186,196      108,573      4,561      299,330

Capital expenditures

     4,330      146      —        4,476

For The Three Months Ended February 29, 2004

                           

Revenues from clients

   $ 48,959    $ 9,606    $ 2,806    $ 61,371

Segment operating profit *

     16,221      4,002      1,279      21,502

Total assets at February 29, 2004

     201,929      9,307      3,644      214,880

Capital expenditures

     2,171      32      30      2,233

For The Six Months Ended February 28, 2005

                           

Revenues from clients

   $ 110,581    $ 32,719    $ 7,235    $ 150,535

Segment operating profit *

     38,992      10,048      3,837      52,877

Capital expenditures

     8,436      574      5      9,015

For The Six Months Ended February 29, 2004

                           

Revenues from clients

   $ 96,255    $ 18,865    $ 5,508    $ 120,628

Segment operating profit *

     31,763      8,085      2,693      42,541

Capital expenditures

     6,203      79      123      6,405

* Expenses are not allocated or charged between segments. Expenditures associated with the Company’s computer centers, data fees and corporate headquarters charges are recorded by the U.S. segment.

 

5. COMMITMENTS AND CONTINGENCIES

 

Lease Commitments

 

The Company leases office space domestically in Norwalk, Connecticut; Newark, New Jersey; Boston and Newton, Massachusetts; New York, New York; Chicago, Illinois; Manchester, New Hampshire; Reston, Virginia; Tuscaloosa, Alabama; San Mateo and Santa Monica, California; and internationally in London; Tokyo; Hong Kong; Sydney; Frankfurt; Milan; and Paris and Avon, France. The leases expire on various dates through December 2019. Total minimum rental payments associated with the leases are recorded as rent (a component of selling, general and administrative expenses) on a straight-line basis over the periods of the respective non-cancelable lease terms.

 

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At February 28, 2005, the Company’s lease commitments for office space provide for the following future minimum rental payments under non-cancelable operating leases:

 

In thousands     

Years Ended August 31,

      

2005 (Remainder)

   $ 4,668

2006

     9,084

2007

     6,317

2008

     6,047

2009

     6,194

Thereafter

     39,957
    

Minimum lease payments

   $ 72,267
    

 

Revolving Credit Facilities

 

In fiscal 2005, the Company renewed its three-year credit facility and continued to maintain its existing 364-day revolving credit facility. The credit facilities (the “facilities”) are available in an aggregate principal amount of up to $25.0 million for working capital and general corporate purposes, with the facilities split into two equal tranches and maturing in March 2006 and March 2008. Approximately $3.1 million in aggregate of these credit facilities has been utilized for letters of credit issued during the ordinary course of business as of February 28, 2005. The Company is obligated to pay a commitment fee on the unused portion of the facilities at a weighted average annual rate of 0.125%. The facilities also contain covenants that, among other things, require the Company to maintain minimum levels of consolidated net worth and certain leverage and fixed charge ratios.

 

Taxes

 

In the normal course of business, the Company’s tax filings are subject to audit by federal, state and foreign tax authorities. Audits by four tax authorities are currently ongoing. There is inherent uncertainty in the audit process. The Company makes its best estimate of probable liabilities that may exist and records an estimate. The Company has no reason to believe that such audits will result in the payment of additional taxes or penalties or both that would have a material adverse effect on its results of operations or financial position.

 

6. INTANGIBLE ASSETS AND GOODWILL

 

The Company’s acquired intangible assets result from the acquisitions of the Insyte, LionShares, Mergerstat, CallStreet, JCF and TrueCourse businesses in August 2000, April 2001, January 2003, May 2004, September 2004 and January 2005, respectively. The weighted average useful life of the acquired intangible assets is 12.8 years. These intangible assets have no assigned residual values. The gross carrying amounts and accumulated amortization totals related to the Company’s acquired intangible assets were approximately $34,308,000 and $4,248,000 at February 28, 2005 and $8,254,000 and $2,310,000 at August 31, 2004, respectively. Intangible assets are composed of the following:

 

     February 28, 2005

   August 31, 2004

(in thousands)    Gross
Carrying
Amount


   Accumulated
Amortization


   Gross
Carrying
Amount


  

Accumulated

Amortization


Customer relationships

   $ 6,133    $ 377    $ 199    $ 33

Software technology

     5,610      1,800      2,413      1,372

Data content

     20,571      1,690      5,235      838

Trade names

     1,335      208      52      9

Non-compete agreements

     659      173      355      58
    

  

  

  

Total

   $ 34,308    $ 4,248    $ 8,254    $ 2,310
    

  

  

  

 

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Amortization expense for intangible assets for the three months ended February 28, 2005 and February 29, 2004 was $990,000 and $191,000, respectively. Also, amortization expense for intangible assets for the six months ended February 28, 2005 and February 29, 2004 was $1,907,000 and $382,000, respectively. Estimated intangible asset amortization expense for fiscal 2005 and the five succeeding years is as follows:

 

In thousands    Estimated
Amortization
Expense


Fiscal Year


  

2005 (Remainder)

   $ 2,076

2006

     4,211

2007

     3,441

2008

     2,664

2009

     2,520

Thereafter

     15,148
    

Total

     30,060
    

 

Intangible assets acquired during the six months ended February 28, 2005 are as follows:

 

(in thousands)    Amortization
Period


  

Acquisition

Cost


Customer relationships

   9.3 years    $ 5,536

Software technology

   7.0 years      2,998

Data content

   19.2 years      14,118

Trade names

   3.6 years      1,192

Non-compete agreements

   2.8 years      292
    
  

Weighted average/total

   14.4 years    $ 24,136
         

 

Changes in the carrying amount of goodwill by segment for the six months ended February 28, 2005 are as follows:

 

(in thousands)    United States

   Europe

   Total

Balance at August 31, 2004

   $ 19,937    $ —      $ 19,937

Goodwill acquired during the period

     5,348      47,859      53,207

Other

     —        4,099      4,099
    

  

  

Balance at February 28, 2005

   $ 25,285    $ 51,958    $ 77,243
    

  

  

 

“Other” primarily includes the impact of foreign currency translation adjustments.

 

7. BUSINESS COMBINATION

 

On January 4, 2005, the Company acquired TrueCourse, Inc., a provider of corporate takeover defense intelligence, for $7.7 million. The purchase price includes a payment of $6.0 million and 44,613 shares of FactSet common stock valued at $1.7 million. The number of shares of common stock was determined based on the five day average of the market closing price of common stock prior the acquisition date, including January 4, 2005. TrueCourse provides a proprietary database of corporate takeover defense profiles to investment banks, institutional money managers and law firms. This acquisition is consistent with the Company’s strategy of controlling access to critical content used by its clients. This factor contributed to a purchase price in excess of fair value of the TrueCourse net tangible and intangible assets. As a result, the Company has recorded goodwill in connection with this transaction. The weighted average life of the intangible assets is 6.1 years. Goodwill generated from the TrueCourse acquisition is deductible for income tax purposes.

 

The preliminary purchase price allocation is as follows (in thousands):

 

Tangible assets

   $ 430  

Amortizable intangible assets:

        

Customer relationships

     736  

Software technology

     298  

Data content

     919  

Trade name

     191  

Non-compete agreements

     132  

Goodwill

     5,348  
    


Total assets acquired

     8,054  

Liabilities assumed

     (338 )
    


Net assets acquired

   $ 7,716  
    


 

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Operating results of TrueCourse have been included in the Company’s financial statements from the date of acquisition. Pro forma statements of income have not been presented because the effect of this acquisition was not material on the Company’s consolidated financial results.

 

On September 1, 2004, pursuant to a stock purchase agreement dated as of June 29, 2004, the Company acquired from Decision Data Luxembourg S.A., all the outstanding stock of Decision Data System B.V. (“DDS”), the Netherlands holding company that owns all the stock of the JCF Group of Companies (“JCF”), in exchange for 385,601 shares of Common Stock of FactSet Research Systems Inc. and €40,000,000 in cash. The number of shares of common stock was determined based on the five day average closing market price of common stock surrounding the announcement date. In addition, up to €5,000,000 of contingent consideration will be payable if certain subscription targets are met by August 31, 2006. JCF is a supplier of global broker estimates to institutional investors. JCF provides investment professionals with customizable tools for accessing global broker estimates, analyzing detailed financial information and managing the automatic generation of research reports. This acquisition is consistent with the Company’s strategy of controlling access to critical content used by its clients. This factor contributed to a purchase price in excess of fair value of the JCF net tangible and intangible assets, and as a result, the Company has recorded goodwill in connection with this transaction.

 

The total purchase price of the acquisition is as follows (in thousands):

 

Cash paid

   $ 51,353

Fair value of FactSet common stock issued

     12,093

Direct acquisition costs

     2,043
    

Total purchase price

   $ 65,489
    

 

Under the purchase method of accounting, the total estimated purchase price is allocated to the net tangible and intangible assets based upon their estimated fair value as of the date of the acquisition. Allocation of the purchase price to the assets acquired and liabilities assumed has not been finalized for this acquisition. Final determination of fair values to be assigned may result in adjustments to the preliminary estimated values assigned at the date of acquisition. The preliminary purchase price allocation is as follows (in thousands):

 

Tangible assets acquired

   $ 12,700  

Amortizable intangible assets:

        

Customer relationships

     4,800  

Software technology

     2,700  

Data content

     13,200  

Trade name

     1,000  

Non-compete agreements

     160  

Goodwill

     47,859  
    


Total assets acquired

     82,419  

Liabilities assumed

     (16,930 )
    


Net assets acquired

   $ 65,489  
    


 

Intangible assets of $21.9 million have been allocated to amortizable intangible assets consisting of customer relationships, amortized over ten years using an accelerated amortization method; software technology, amortized over seven years using a straight-line amortization method; data content, amortized over twenty years using a straight-line amortization method; trade name, amortized over three years using a straight-line amortization method; and non-competition agreements, amortized between two and six years using a straight-line amortization method.

 

Goodwill totaling $47.9 million, included in the European segment, represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, goodwill will not be amortized and will be tested for impairment at least annually. Goodwill generated from the JCF acquisition is not deductible for income tax purposes.

 

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The results of operations of the JCF Group of Companies have been included in the Company’s consolidated statement of operations since the completion of the acquisition on September 1, 2004. The following unaudited pro forma information presents a summary of the results of operations of the Company assuming the acquisition of the JCF Group of Companies occurred at the beginning of the period presented (in thousands, except for per share amounts):

 

    

Three Months Ended

February 29, 2004


  

Six Months Ended

February 29, 2004


Revenues

   $ 65,882    $ 128,567

Net income

   $ 14,949    $ 28,484

Basic earnings per common share

   $ 0.30    $ 0.56

Diluted earnings per common share

   $ 0.29    $ 0.54

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

RESULTS OF OPERATIONS – Unaudited

 

     Three Months Ended

    Six Months Ended

 
In thousands, except per share data    Feb 28,
2005


   Feb 29,
2004


   Change

    Feb 28,
2005


   Feb 29,
2004


   Change

 

Revenues

   $ 76,472    $ 61,371    24.6 %   $ 150,535    $ 120,628    24.8 %

Cost of services

     21,293      18,198    17.0       43,300      36,073    20.0  

Selling, general and administrative

     28,147      21,671    29.9       54,358      42,014    29.4  

Operating income

     27,032      21,502    25.7       52,877      42,541    24.3  

Net income

     17,170      14,737    16.5       33,567      28,645    17.2  

Diluted earnings per common share

   $ 0.34    $ 0.29    17.2 %   $ 0.67    $ 0.55    21.8 %

 

REVENUES

 

Revenues for the second quarter of fiscal 2005 grew 24.6% to $76.5 million from $61.4 million for the quarter ended February 28, 2004. Excluding acquisitions since March 2004, revenues grew 14% for the second quarter of fiscal 2005 compared to the prior year period. For the first six months of fiscal 2005, revenues advanced 24.8% to $150.5 million from $120.6 million in the prior year period. The increase in revenues was driven by the inclusion of revenues from the operations of the JCF Group of Companies which was acquired on September 1, 2004, as well as continued demand for our value-added applications and databases.

 

For the second quarter of fiscal 2005, international revenues were $20.6 million, an increase of 66% from $12.4 million in the comparable prior year period. Excluding companies acquired, organic revenues grew 19% from non-US sources for the quarter ended February 28, 2005 compared to a year ago. European revenues increased 76%, largely due to the inclusion of revenues derived from the JCF acquisition. Revenues in Asia Pacific grew 31% from the same period a year ago. Revenues from international operations accounted for 26.9% and 20.2% of consolidated revenues for the second quarter of fiscal 2005 and 2004, respectively. Over 80% of our revenues are received in U.S. dollars.

 

Demand for our Portfolio Analytics applications rose during the second quarter of fiscal 2005. Our Portfolio Analytics applications serviced over 405 clients consisting of approximately 3,100 subscribers at February 28, 2005 compared to approximately 360 clients and 2,700 subscribers at February 29, 2004.

 

At the end of the second quarter of fiscal 2005, there were 1,437 clients who subscribed to FactSet services, an increase of 445 clients or 44.9% over the prior 12 months. Included in this rise was the net addition of 329 clients from the acquisition of the JCF Group of Companies. Passwords, a measure of users of our services, increased to 23,200 users as of February 28, 2005, up from 19,400 at the end of the second quarter of fiscal 2004. Approximately 2,000 of these passwords related to the acquisition of JCF. Approximately one quarter of our revenue is generated from our investment banking clients, with most of the remaining revenue derived from our investment management clients.

 

Total client subscriptions at February 28, 2005 rose to $307.6 million resulting in a year-over-year increase of 23.4% from the second quarter of fiscal 2004. Subscriptions at a given point in time represent the forward-looking revenues for the next twelve months from all services currently being supplied to our clients. At quarter end, the average subscription per client was $214,000, a decrease of 14.7% from an average of $251,000 a year ago. This decline was caused by the inclusion in the first quarter of fiscal 2005 of JCF’s clients, whose average subscription levels have been significantly lower than FactSet’s historical client base. International subscriptions were $82.2 million, representing over 27% of total client subscriptions.

 

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JCF’s overseas clients are billed in local currencies such as the British pound sterling and the Euro in the respective foreign jurisdictions, primarily the United Kingdom and France. Volatility in these and other currency may have either positive or negative effects on our total reported revenues. Presently, we do not engage in any currency hedging to mitigate any foreign currency volatility. The effect of currency movements on the second quarter’s revenue was immaterial.

 

No individual client accounted for more than 5% of total subscriptions. Subscriptions from the ten largest clients did not surpass 25% of total client subscriptions. At February 28, 2005, client retention, as measured in terms of client subscriptions, remained at a rate in excess of 95%.

 

OPERATING EXPENSES

 

Cost of Services

 

During the second quarter of fiscal 2005, cost of services grew 17.0% to $21.3 million from $18.2 million in the prior year period. For the six months ended February 28, 2005, cost of services advanced 20.0% to $43.3 million from $36.1 million in the first half of fiscal 2004. The increase in cost of services for the three months and six months ended February 28, 2005 was caused primarily by the inclusion of expenses from JCF’s operations as well as increases in employee compensation and benefits, data costs and amortization of intangible assets. These increases were partially offset by a reduction in computer-related expenses and communication costs.

 

Expenses related to employee compensation and benefits for our software engineering and consulting groups rose $1.4 million and $3.7 million for the three and six months ended February 28, 2005 compared to the prior year periods. Employee additions, merit increases, a shift in employees performing activities considered selling, general and administrative and the integration of JCF personnel with existing personnel were the primary drivers of the increase in employee compensation and benefits. Data costs grew $1.5 million and $3.4 million during the three and six months ended February 28, 2005 versus the prior year periods. The rise in data expenses was largely due to new costs from acquisitions included for the first time in second quarter expenses and incremental content costs associated with additional database subscriptions by clients. Amortization of intangibles assets increased in both the second quarter of fiscal 2005 and first half of fiscal 2005 compared to the same periods in fiscal 2004 due to increased amortization expense resulting from our recent acquisitions, principally JCF. Partially offsetting these component increases of cost of services was a decrease in computer-related expenses and communication costs resulting from favorable pricing trends from industry suppliers.

 

Selling, General and Administrative

 

For the three months ended February 28, 2005, selling, general, and administrative (SG&A) expenses advanced 29.9% to $28.1 million from $21.7 million in the second quarter of fiscal 2004. For the first half of fiscal 2005, selling, general, and administrative expenses rose 29.4% to $54.4 million from $42.0 million in the six months ended February 29, 2004. In addition to the inclusion of SG&A expenses associated with JCF’s operations, higher employee compensation and benefits costs related to our employees other than our software engineers and consultants, increased travel and promotion, higher rent expense and amortization of leasehold improvements related to our various office facilities, offset by a reduction in miscellaneous expenses, were the main causes for the increase during the three and six months ended February 28, 2005.

 

Employee compensation and benefits expense expanded $4.8 million and $8.3 million during the second quarter and first half of fiscal 2005 compared to the prior year periods. The increase can be primarily attributed to more employees classified as SG&A over the past twelve months and the integration of JCF personnel as of the beginning of this most recent quarter. Travel and promotional expenses grew $1.2 million and $2.3 million during the three and six months ended February 28, 2005 as compared to the prior year periods. Travel and promotional expenses rose from new costs arising from the JCF acquisition and from our global sales conference held during the second quarter of fiscal 2005. Rent expense and amortization of leasehold improvements grew $1.1 million and $2.4 million in the three and six months ended February 28, 2005 versus the same period a year ago. These expenses increased primarily as a result of the consolidation of our three Connecticut offices into our new headquarters facility in Norwalk, Connecticut in late August 2004. Miscellaneous expenses declined in the second quarter and first half of fiscal 2005 compared to the prior year periods due to the reduction of certain non-income tax accruals after formal discussions with state tax authorities during the first six months of fiscal 2005.

 

Operating Margin

 

Second quarter 2005 operating margin was 35.3% compared to 35.0% for the same period in 2004. The operating margin for the first six months of fiscal 2005 was 35.1% compared to 35.3% in the first half of fiscal 2004. The increase in the operating margin during the second fiscal quarter of 2005 is largely due to decreases in computer-related costs, communication costs and miscellaneous expenses, partially offset by increases in employee compensation and benefits, data costs and amortization of intangible assets as a percentage of total revenues. The decrease in the operating margin during the

 

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first six months of fiscal 2005 was the result of increases in employee compensation and benefits, data costs, travel and promotional expenses and amortization of intangible assets, partially offset by decreases in computer-related costs, communication costs and miscellaneous expenses as a percentage of total revenues.

 

Income Taxes

 

For the three and six months ended February 28, 2005, income tax expense grew to $10.1 and $19.7 million from $7.5 and $15.3 million in the comparable prior year periods. The effective tax rate for the second quarter of fiscal 2005 was 37.0% versus 33.6% in the prior year period. The effective tax rate for the first six months of fiscal 2005 was 37.0% versus 34.8% in the prior year period. The increase in the effective tax rate is due to changes in federal tax legislation as well as an increase in the number of states in which the Company is considered to be conducting business. Included in the effective tax rate in the three and six months ended February 29, 2004 was a tax benefit of $776,000 recognized in the quarter ended February 29, 2004, which related primarily to the settlement of prior year tax returns for certain state credits.

 

In December 2004, the FASB issued FSP No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004.” The FSP provides guidance under FAS No. 109, “Accounting for Income Taxes,” with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the “Jobs Act”) on enterprises’ income tax expense and deferred tax liability. The Jobs Act was enacted on October 22, 2004. FSP No 109-2 states that companies are allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying FAS No. 109. We are currently evaluating the effects of the repatriation provision; however, we do not expect to complete this evaluation until after Congress or the Treasury Department provides clarification on key elements of the repatriation provision. We do not expect the adoption of these provisions to have a material impact on our financial position, results of operations or cash flows.

 

Business Combinations

 

On January 4, 2005, we acquired TrueCourse, Inc., a provider of corporate takeover defense intelligence, for $7.7 million. The purchase price includes a payment of $6.0 million and 44,613 shares of our common stock valued at $1.7 million. The number of shares of common stock was determined based on the five day average of the market closing price of our common stock prior to the acquisition date, including January 4, 2005. TrueCourse provides a proprietary database of corporate takeover defense profiles to investment banks, institutional money managers and law firms. This acquisition is consistent with our strategy of controlling access to critical content used by our clients. This factor contributed to a purchase price in excess of fair value of the TrueCourse net tangible and intangible assets. As a result, we have recorded goodwill in connection with this transaction. The weighted average life of the intangible assets is 6.1 years. Goodwill generated from the TrueCourse acquisition is deductible for income tax purposes.

 

The preliminary purchase price allocation is as follows (in thousands):

 

THOUSANDS


   January 4, 2005

 

Tangible assets

   $ 430  

Amortizable intangible assets:

        

Customer relationships

     736  

Software technology

     298  

Data content

     919  

Trade name

     191  

Non-compete agreements

     132  

Goodwill

     5,348  
    


Total assets acquired

     8,054  

Liabilities assumed

     (338 )
    


Net assets acquired

   $ 7,716  
    


 

Operating results of TrueCourse have been included in our financial statements from the date of acquisition. Pro forma statements of income have not been presented because the effect of this acquisition was not material on our consolidated financial results.

 

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On September 1, 2004, pursuant to a stock purchase agreement dated as of June 29, 2004, we acquired from Decision Data Luxembourg S.A., all the outstanding stock of Decision Data System B.V. (“DDS”), the Netherlands holding company that owns all the stock of the JCF Group of Companies (“JCF”), in exchange for 385,601 shares of Common Stock of FactSet Research Systems Inc. and €40,000,000 in cash. The number of shares of common stock was determined based on the five day average closing market price of our common stock surrounding the announcement date. In addition, up to €5,000,000 of contingent consideration will be payable if certain subscription targets are met by August 31, 2006. JCF is a supplier of global broker estimates to institutional investors. JCF provides investment professionals with customizable tools for accessing global broker estimates, analyzing detailed financial information and managing the automatic generation of research reports. This acquisition is consistent with our strategy of controlling access to critical content used by our clients. This factor contributed to a purchase price in excess of fair value of the JCF net tangible and intangible assets, and as a result, we have recorded goodwill in connection with this transaction.

 

The total purchase price of the acquisition is as follows (in thousands):

 

Cash paid

   $ 51,353

Fair value of FactSet common stock issued

     12,093

Direct acquisition costs

     2,043
    

Total purchase price

   $ 65,489
    

 

Under the purchase method of accounting, the total estimated purchase price is allocated to the net tangible and intangible assets based upon their estimated fair value as of the date of the acquisition. Allocation of the purchase price to the assets acquired and liabilities assumed has not yet been finalized for this acquisition. Final determination of fair values to be assigned may result in adjustments to the preliminary estimated values assigned at the date of acquisition. The preliminary purchase price allocation is as follows (in thousands):

 

Tangible assets acquired

   $ 12,700  

Amortizable intangible assets:

        

Customer relationships

     4,800  

Software technology

     2,700  

Data content

     13,200  

Trade name

     1,000  

Non-compete agreements

     160  

Goodwill

     47,859  
    


Total assets acquired

     82,419  

Liabilities assumed

     (16,930 )
    


Net assets acquired

   $ 65,489  
    


 

Intangible assets of $21.9 million have been allocated to amortizable intangible assets consisting of customer relationships, amortized over ten years using an accelerated amortization method; software technology, amortized over seven years using a straight-line amortization method; data content, amortized over twenty years using a straight-line amortization method; trade name, amortized over three years using a straight-line amortization method; and non-competition agreements, amortized between two and six years using a straight-line amortization method.

 

Goodwill totaling $47.9 million represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, goodwill will not be amortized and will be tested for impairment at least annually. Goodwill generated by the JCF acquisition is not deductible for income tax purposes.

 

The results of operations of the JCF Group of Companies have been included in our consolidated statement of operations since the completion of the acquisition on September 1, 2004. The following unaudited pro forma information presents a summary of our results of operations assuming the acquisition of the JCF Group of Companies occurred at the beginning of the period presented (in thousands, except for per share amounts):

 

    

Three Months Ended

February 29, 2004


  

Six Months Ended

February 29, 2004


Revenues

   $ 65,882    $ 128,567

Net income

   $ 14,949    $ 28,484

Basic earnings per common share

   $ 0.30    $ 0.56

Diluted earnings per common share

   $ 0.29    $ 0.54

 

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Liquidity

 

Cash generated by operating activities in the first six months of fiscal 2005 was $18.3 million, a decrease of $14.5 million over the comparable period in last fiscal year. The decrease in cash flow from operating activities was mainly due to growth in accounts receivable, reduced landlord contributions, decreases in accounts payable and lower current taxes payable partially offset by higher levels of net income as adjusted for non-cash items, increased deferred fees and greater income tax benefits derived from employee exercises of stock options.

 

The increase in accounts receivable was driven by our transition to Goldman Sachs & Co. as our sole clearing broker effective January 1, 2005, additional time necessary to implement a new subscription order entry system and JCF’s practice to invoice clients in advance of services.

 

FactSet Data Systems, our broker dealer subsidiary, has employed Goldman Sachs & Co. (“Goldman”) to clear our client’s trades as of January 1, 2005. The levels of trading activity was below our historical norms during January and February of 2005 as some clients were still opening new accounts and establishing new trading relationship contacts within Goldman. Client payments through Goldman were $4.0 million below our historical average for a two month period ending February 28th.

 

During the 2nd quarter of fiscal 2005, a new subscription order entry system was put into service. Additional time was required to verify subscriptions orders were properly recorded. This important step delayed mailing of client invoices dated January 31st by 14 days. The Company chose to replace our ten year old order entry system as part of the plan for compliance with Section 404 of the Sarbanes Oxley Act of 2002.

 

As previously reported, FactSet acquired JCF Group of Companies on September 1, 2004. JCF invoices its clients annually in advance and, at the time of invoicing, a receivable is recorded. Forty-two percent of JCF’s clients were invoiced in advance during the second quarter of fiscal 2005. We expect receivables from JCF clients to decline as this peak of advanced billings is cycled through the normal payment process.

 

In comparing our account receivable aging between November 30, 2004 and February 28 2005, 30% percent of the accounts receivable increase during the quarter is less than thirty days old and 77% is less than sixty days old. Our actual bad debt write offs has and continues to be extremely low.

 

Capital Expenditures

 

Capital expenditures for the six months ended February 28, 2005 totaled $9.0 million. Approximately one-quarter of the capital expenditures related to the purchase of technology assets while the remainder was directed toward the acquisition of leasehold improvements and furniture and fixtures, primarily for our new headquarters facility in Norwalk, Connecticut.

 

Financing Operations and Capital Needs

 

Cash, cash equivalents and investments totaled $63.4 million or 21.2% of the Company’s total assets at February 28, 2005. Our cash, cash equivalents and investments declined year over year as a result of the acquisitions of TrueCourse, JCF and CallStreet, coupled with the expenditures required to build out our new headquarters facility as well as our repurchase of 1,500,000 shares of our common stock from one of our co-founders at an aggregate cost of $38.1 million during the third quarter of fiscal 2004. All our operating and capital expense requirements were financed entirely from cash generated from our operations. We have no outstanding indebtedness.

 

Revolving Credit Facilities

 

In fiscal 2005, we renewed our three-year credit facility and continued to maintain our existing 364-day revolving credit facility. The credit facilities are available in an aggregate principal amount of up to $25.0 million for working capital and general corporate purposes, with the facilities split into two equal tranches and maturing in March 2006 and March 2008. Approximately $3.1 million in aggregate of these credit facilities has been utilized for letters of credit issued during the ordinary course of business as of February 28, 2005. We are obligated to pay a commitment fee on the unused portion of the facilities at a weighted average annual rate of 0.125%. The facilities also contain covenants that, among other things, require us to maintain minimum levels of consolidated net worth and certain leverage and fixed charge ratios.

 

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Share Repurchase Program

 

On July 16, 2002, the Board of Directors authorized a share repurchase program to acquire shares of our outstanding common stock in open market or negotiated transactions. This program authorized the repurchase of up to 1,500,000 shares of our common stock. The program established no minimum number of shares for repurchase. During the first half of fiscal 2005, we did not repurchase any shares. Since the inception of the stock repurchase program, we have purchased approximately 1,158,000 shares at an average cost of $17.76 per share under this program.

 

Shares of common stock and related per share amounts give retroactive effect for stock splits. A three-for-two common stock split, effected as a stock dividend, occurred on February 4, 2005.

 

Stock-Based Compensation

 

We follow the disclosure-only provisions of Financial Accounting Standards Board Statement No. 123 (“SFAS 123”), Accounting for Stock-Based Compensation. In December 2002, the Financial Accounting Standards Board issued Statement No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. This statement provides alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. The statement also amends the disclosure requirements of SFAS 123, to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock based employee compensation and the effect of the method used on reported results. As permitted by SFAS 123, we account for our stock option and employee stock purchase plans under APB Opinion No. 25, under which no compensation cost has been recorded. Stock option exercise prices equal the fair market value of our stock price on the date of grant; thus no compensation costs are recorded. Had compensation cost for our stock option plans and employee stock purchase plan been determined pursuant to the measurement principles under SFAS 123, our net income and earnings per share would have been reduced to the following pro forma amounts for the three and six months ended February 28, 2005 and February 29, 2004:

 

     Three Months Ended

    Six Months Ended

 
(In Thousands, except per share data)    February 28,
2005


    February 29,
2004


    February 28,
2005


    February 29,
2004


 

Net income, as reported

   $ 17,170     $ 14,737     $ 33,567     $ 28,645  

Deduct: Stock-based employee
compensation expense determined under fair value based method for all awards, net of related tax effects

     (1,783 )     (1,976 )     (3,666 )     (3,399 )

Pro forma net income

   $ 15,387     $ 12,761     $ 29,901     $ 25,246  
    


 


 


 


Basic - as reported

   $ 0.36     $ 0.30     $ 0.70     $ 0.57  
    


 


 


 


Basic - pro forma

   $ 0.32     $ 0.26     $ 0.63     $ 0.50  
    


 


 


 


Diluted - as reported

   $ 0.34     $ 0.29     $ 0.67     $ 0.55  
    


 


 


 


Diluted - pro forma

   $ 0.31     $ 0.25     $ 0.60     $ 0.48  
    


 


 


 


 

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The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model. The following weighted average assumptions were used for the grant in the first six months of fiscal 2005 and 2004:

 

STOCK OPTION PLANS             

Six months ended


   February 28,
2005


    February 29,
2004


 

Risk-free interest rate

   3.51 %   2.57 %

Expected life

   5.4 years     4.1 years  

Expected volatility

   46 %   50 %

Dividend yield

   0.5 %   0.7 %
EMPLOYEE STOCK PURCHASE PLAN             

Six months ended


   February 28,
2005


    February 29,
2004


 

Risk-free interest rate

   2.52 %   0.97 %

Expected life

   3 months     3 months  

Expected volatility

   33 %   28 %

Dividend yield

   0.5 %   0.6 %

 

New Accounting Pronouncements

 

In December 2004, the Financial Accounting Standards Board issued its final standard on accounting for share-based payments (SBP), FASB Statement No. 123R (revised 2004) (“FAS 123R”), Share-Based Payment, that requires companies to expense the value of employee stock options and similar awards. The standard is effective for public companies for interim and annual periods beginning after June 15, 2005, and applies to all outstanding and unvested SBP awards at a company’s adoption date. We are currently evaluating option valuation methodologies and assumptions in light of FAS 123R related to employee stock options.

 

In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”), Share-Based Payment, which provides interpretive guidance related to the interaction between SFAS 123R and certain SEC rules and regulations, as well as provides the SEC staff’s views regarding the valuation of share-based payment arrangements. We are currently assessing the impact of SAB 107 on our implementation and adoption of SFAS 123R.

 

Critical Accounting Policies

 

Our accounting policies, which are in compliance with accounting principles generally accepted in the United States, require us to apply methodologies, estimates and judgments that have a significant impact on the results we report in our financial statements. In our annual report on Form 10-K, we have discussed those policies that we believe are critical and require the use of judgment in their application. Since the date of that Form 10-K, there have been no material changes to our critical accounting policies or the methodologies or assumptions applied under them.

 

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Table of Contents

Forward-Looking Factors

 

Business Outlook

 

The following forward-looking statements reflect our expectations as of April 11, 2005. Given the number of risk factors, uncertainties and assumptions discussed below, actual results may differ materially. We do not intend to update our forward-looking statements until our next quarterly results announcement, other than in publicly available statements.

 

Third Quarter Fiscal 2005 Expectations

 

    Revenues are expected to range between $77.0 million and $80.0 million

 

    Operating margins are expected to range between 34.0% and 35.0%.

 

    The effective tax rate is expected to range between 36.8% and 37.4%.

 

Full Year Fiscal 2005

 

    Capital expenditures should total approximately $22.0 million.

 

Recent Developments

 

Ernest S. Wong, on March 1, 2005, stepped down from his position as Senior Vice President, Chief Financial Officer, Secretary and Treasurer of FactSet. On March 1, 2005, Peter G. Walsh was appointed Chief Financial Officer and Treasurer of the Company.

 

On March 1, FactSet entered into a resignation, separation of employment and general release agreement with Ernest S. Wong, the Company’s former Chief Financial Officer, pursuant to that agreement, Mr. Wong will continue to be an employee of the Company until December 30, 2005. During that period he will provide advisory and consultative services to the finance department. Under the terms of the agreement, Mr. Wong received: (i) a payment of $112,500 on or before March 4, 2005; and will receive (ii) periodic payments totaling approximately $134,000 on or before December 30, 2005; and (iii) approximately $5,500 on December 30, 2005. In addition, the agreement provides for a release of claims by Mr. Wong and the Company and other terms and conditions customary for agreements of this nature.

 

On March 1, an oral agreement between the Company and Peter G. Walsh, the Company’s Chief Financial Officer, became effective that amended an existing letter agreement with the Company dated September 20, 1999 (the “Letter Agreement”). Under the terms of the amendment, Mr. Walsh’s annual salary will increase to $225,000, his bonus opportunity will range from $250,000 to $300,000 for fiscal year 2005 and he is expected to be the fourth ranked officer of the Company. In addition, Mr. Walsh will be granted options for FactSet common stock with a grant value of approximately $2 million, such grant to be issued at the time of regular option grants for fiscal year 2005, after approval by the Company’s board of directors. The amendment reaffirmed the Letter Agreement, which remains in effect and which can be superseded by a written agreement only if all other officers of the Company ranked more highly than Mr. Walsh also enter into written employment agreements with the Company. The Letter Agreement grants to Mr. Walsh: (i) a payment equal to his compensation in the prior twelve months if his employment is terminated without cause; and (ii) a payment equal to twice his compensation in the prior twelve months and benefits for 24 months in the event of a change of control of the Company.

 

Recent Market Trends

 

We are exposed to various economic and financial risks associated with equity and foreign currency markets as well as risks related to interest rate fluctuations during the normal course of business. The major equity indices (for example S&P 500, Russell 2000®, Nasdaq Composite®, and MSCI European Index) have experienced significant volatility during the past five years. Continued volatility in general economic and market conditions is still possible in the near future. External factors such as the threat of terrorist activities or rising energy prices could undermine any potential continued economic recovery. A decline in the worldwide markets could adversely impact a significant number of our clients (primarily investment management firms and investment banks) and increase the likelihood of personnel and spending reductions among our existing and potential clients. Continued investigations into the investment management industry by various regulatory bodies could have an adverse effect on our business. A policy of persistent interest rate increases adopted by the Federal Reserve Bank and/or continued inflationary pressures could derail the current economic recovery and adversely affect the operations of our clients. In addition, changes to regulations regarding soft dollar payments could have a negative impact on our operations.

 

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Table of Contents

The fair market value of our investment portfolio at the February 28, 2005 was $26.0 million. It is anticipated that the fair market value of our portfolio will continue to be immaterially affected by fluctuations in interest rates. Preservation of principal is the primary goal of our investment portfolio. Pursuant to our established investment guidelines, third-party managers construct portfolios to achieve high levels of credit quality, liquidity and diversification. Our investment policy dictates that the weighted-average duration of short-term investments may not exceed two years. Our investment guidelines do not permit us to invest in puts, calls, strips, short sales, straddles, options or futures, nor are we permitted to invest on margin. Because we have no outstanding long-term indebtedness and we have a restrictive investment policy, our financial exposure to fluctuations in interest rates is expected to remain low.

 

Taxes

 

In the normal course of business, our tax filings are subject to audit by federal, state and foreign tax authorities. Audits by four tax authorities are currently ongoing. There is inherent uncertainty in the audit process. We make our best estimate of probable liabilities that may exist and record an estimate. We have no reason to believe that such audits will result in the payment of additional taxes or penalties or both that would have a material adverse effect on our results of operations or financial position, beyond current estimates.

 

Forward-Looking Statements

 

This Management’s Discussion and Analysis contains forward-looking statements that are based on management’s current expectations, estimates and projections. All statements that address expectations or projections about the future, including statements about our strategy for growth, product development, market position, subscriptions and expected expenditures and financial results are forward-looking statements. Forward-looking statements may be identified by words like “expected,” “anticipates,” “plans,” “intends,” “projects,” “should,” “indicates,” “continues,” “subscriptions,” “commitments” and similar expressions. These statements are not guarantees of future performance and involve a number of risks, uncertainties and assumptions (“future factors”). Therefore, actual results may differ materially from what is expressed or forecasted in such forward-looking statements. We will publicly update forward-looking statements as a result of new information or future events in accordance with applicable Securities and Exchange Commission regulations.

 

Future factors include, but are not limited to, our ability to hire and retain qualified personnel; the maintenance of our leading technological position; the impact of global market trends on our revenue growth rate and future results of operations; the negotiation of contract terms supporting new and existing databases or products; retention of key clients and their current service levels; increased competition in our industry; the successful resolution of ongoing and other probable audits by tax authorities; the continued employment of key personnel; the integration of acquired businesses; the absence of U.S. or foreign governmental regulation restricting international business; and the sustainability of historical levels of profitability and growth rates in cash flow generation.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to interest rate risk primarily through our portfolio of cash, cash equivalents and investments. Cash and cash equivalents consist of demand deposits and money market investments with maturities of 90 days or less. Our investment portfolio, which is designed for the preservation of principal, consists of U.S. Treasury notes and bonds, corporate bonds and municipal bonds. The investment portfolio is subject to interest rate risk as investments are sold or mature and are reinvested at current market rates. Derivative financial instruments are not permitted by our investment guidelines.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Within 90 days prior to the filing date of this report, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls, subsequent to the date of such evaluation.

 

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Table of Contents

Part II OTHER INFORMATION

 

Item 4. Submission of Matters to a Vote of Security Holders

 

The Annual Meeting of Shareholders of FactSet Research Systems Inc. was held on December 21, 2004.

 

  1. Three nominees to the Board of Directors were elected:

 

Director


   Term

   For

   Withhold
Authority


Joseph E. Laird

   3 yrs.    28,664,242    1,554,557

James J. McGonigle

   3 yrs.    28,921,303    1,297,496

Charles J. Snyder

   3 yrs.    29,070,684    1,148,115

 

  2. To approve the 2004 Stock Option and Award Plan

 

For

   21,680,553

Not for

   4,262,747

Abstain

   890,333

No Vote

   3,385,166

 

  3. The appointment of PricewaterhouseCoopers LLP as the registered public accounting firm for the Company was ratified:

 

For

   29,492,788

Not for

   705,403

Abstain

   20,608

 

Item 6. Exhibits

 

(a) Exhibits:

 

EXHIBIT
NUMBER


  

DESCRIPTION


10.1    Resignation, Separation of Employment and General Release Agreement dated as of March 1, 2005, between FactSet Research Systems Inc. and Ernest S. Wong
10.2    Severance Agreement dated as of September 20, 1999 between FactSet Research Systems Inc. and Peter G. Walsh
10.3    Second Amendment to Three Year Credit Agreement, dated November 30, 2004
10.4    Fifth Amendment to 364-Day Credit Agreement, dated November 30, 2004
10.5    Amendment to 364-Day Credit Agreement, dated March 23, 2005
31.1    Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
31.2    Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
32.1    Section 1350 Certification of Principal Executive Officer
32.2    Section 1350 Certification of Principal Financial Officer

 

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Table of Contents

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

       

FACTSET RESEARCH SYSTEMS INC.

Registrant

Date: April 11, 2005

      /s/    PETER G. WALSH        
       

Peter G. Walsh

Senior Vice President, Chief Financial Officer

and Treasurer

 

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Table of Contents

 

EXHIBIT INDEX

 

EXHIBIT

NUMBER


    
10.1    Resignation, Separation of Employment and General Release Agreement dated as of March 1, 2005, between FactSet Research Systems Inc. and Ernest S. Wong
10.2    Severance Agreement dated as of September 20, 1999 between FactSet Research Systems Inc. and Peter G. Walsh
10.3    Second Amendment to Three Year Credit Agreement, dated November 30, 2004
10.4    Fifth Amendment to 364-Day Credit Agreement, dated November 30, 2004
10.5    Amendment to 364-Day Credit Agreement, dated March 23, 2005
31.1    Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
31.2    Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
32.1    Section 1350 Certification of Principal Executive Officer
32.2    Section 1350 Certification of Principal Financial Officer

 

28