ITEM 1. BUSINESS
This Business Section and other parts of this Form 10-K, as well as portions of
our 2002 Annual Report to Shareholders, contain forward-looking statements that
involve risks and uncertainties. For further information regarding these
forward-looking statements and the factors that could cause actual results to
differ please look at the Risk Factors section of this Part I and the section
titled Management's Discussion and Analysis of Financial Condition and Results
of Operations in Part II of this Form 10-K.
Barra, Inc. (which may be referred to as Barra, the Company, we, us or our) is
an investment risk management company that provides innovative solutions to
financial professionals worldwide. We have two business units. Our Core Business
provides portfolio risk management and enterprise risk management systems to
investment professionals. Our Ventures Business develops new lines of business
by leveraging our core research and development, generally through strategic
partnerships.
Our fiscal year for financial reporting purposes is April 1 through March 31.
The fiscal years are referred to using the year in which the end of the fiscal
year falls. Unless otherwise noted, all references in this Form 10-K to 2002,
2001, 2000, 1999, or 1998 are to the fiscal year ending on March 31st in the
year named. This means that the fiscal year ending March 31, 2002 is referred to
as "2002."
Throughout this Form 10-K we "incorporate by reference" certain information from
parts of other documents that we have filed with the SEC. The SEC allows us to
avoid duplication and disclose important information by referring to it in that
manner. Please refer to this information.
All share and per share amounts in this Form 10-K have been restated to reflect
a three-for-two stock split effective December 18, 2000 and a three-for-two
stock split effective September 22, 1997.
Business Units and Segments
Our activities are organized into two business units, our Core Business and our
Ventures Business. As further described below, our Core Business consists of one
business segment: portfolio and enterprise risk management systems. For certain
periods during 2002, our Ventures Business consisted of three business segments:
Portfolio System for Institutional Trading (POSITฎ), Symphony Asset Management
(Symphony) and Other Ventures. As of April 1, 2002, the Ventures Business unit
consisted solely of the POSIT business segment and certain minority equity
investments in Other Ventures.
We sold or terminated four venture businesses during 2002 as part of our
strategy to focus on our Core Business. As a result of this process, in July
2001, Barra completed the sale of its ownership stake in Symphony Asset
Management LLC to The John Nuveen Company. In August of 2001, we sold our Bond
Express subsidiary to ValuBond, Inc. Finally, in the last quarter of 2002, we
divested both of our consulting ventures, Barra Strategic Consulting Group and
Barra RogersCasey. Barra Strategic Consulting Group ceased operations in
February 2002, and in March 2002, Barra RogersCasey was sold to a subsidiary of
Capital Resource Holdings, LLC. As a result of these divestitures, historical
results of operations from these businesses have been reclassified in the
accompanying consolidated statements of income to discontinued operations. (See
Note 4 in the accompanying Consolidated Financial Statements.)
While our two business units serve some common clients, they each require
different marketing and distribution strategies, and operate as separate
companies.
Core Business - Our Core Business is composed of our portfolio risk management
and enterprise risk management systems.
In our Core Business, we apply modern portfolio theory to practical investment
problems. We entered the portfolio risk management business in 1975 when we
introduced our first product for measuring the risk of U.S. equity portfolios.
Since then, we have developed additional products covering new countries,
asset classes and instruments. As part of that process, we have accumulated an
unrivaled database of proprietary risk information on markets and securities
worldwide. Our risk methodology is acknowledged as the industry standard for
institutional investing. We have developed and offer a broad range of software
applications to enable our clients to integrate our risk information into
their investment process.
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Our risk management systems are designed to help investment professionals
identify, measure and control risk in the context of their own investment
disciplines. These systems consist of three components: data, models and
software applications. We help each client structure the combination of these
components that best addresses their needs.
Data - To develop our data, we license data from more than 120 third party
sources. Using our own proprietary algorithms, we create proprietary data for
equity, fixed income, currency and other financial instruments for all major
global markets and asset classes.
Models - We have used our proprietary databases and methodology to develop
risk, return and transaction cost prediction models for most of the world's
publicly traded securities. Our risk predictions are frequently refreshed by
updated feeds of our proprietary data.
Software Applications - Our models and data are made available to investment
professionals through a broad range of software applications. We deliver
these applications to customers worldwide via a variety of platforms. We
primarily provide Microsoftฎ Windows standard software, which interfaces
with each customer's own office productivity system. We are presently engaged
in the process of completing development on a web-based product that is
scheduled to be released in 2003.
Our Core Business product suite is divided into portfolio risk management and
enterprise risk management systems, offering solutions to both portfolio and
business level decision-makers.
Portfolio Risk Management Systems - Our portfolio risk management products
are designed to help investment professionals construct optimal portfolios by
measuring and managing risk. Our proprietary risk factors help investment
managers identify and confirm the sources of risk within their portfolios, as
well as make decisions about any sources of risk they might want to
eliminate, in order to achieve a desired level of return.
Our portfolio risk management products are divided into three application
suites:
The Barra Aegis System - is a suite of equity risk management software
applications for managing equity securities and derivatives. It provides a
flexible, comprehensive framework for portfolio managers to develop return
forecasts, as well as control risk and costs.
The Barra Cosmos System - allows global fixed income portfolio managers to
manage risk and optimize return in a multi-currency, global bond portfolio.
This adaptable system integrates specific bond, derivative and currency
strategies to reflect each user's investment style, while monitoring the
overall risk exposure of the portfolio's positions.
BarraOne - is intended to meet the needs of small investment management
firms and offers portfolio level risk analysis accessible via a web browser.
This product is currently in beta testing and is scheduled for release during
the summer of 2003.
Enterprise Risk Management Systems - Our enterprise risk management product
combines our various models and analytics to provide senior business managers
at large asset management firms and corporations with the tools they need to
manage their investment risks firm-wide.
The Barra TotalRisk System - Barra's enterprise risk management product
integrates our models into a firm-wide risk platform that addresses both the
business and technology issues of delivering a consolidated view of financial
risk across a given enterprise. It offers the benefits of a flexible software
architecture that adapts to evolving business and technology requirements,
and is scalable across multiple user sites. TotalRisk is used by large
multi-product asset managers, pension funds and corporate treasuries to
monitor compliance against benchmarks and fund guidelines.
We generally provide our Core Business products to clients on an annual
subscription basis. The annual subscription price for most of our individual
portfolio management products starts at around $60,000. Comprehensive
subscriptions often consist of a combination of our products and have
significantly higher annual subscription prices. Our standard fees generally
include use of the relevant models and applications, periodic database
updates, and basic client support for one user.
The global and enterprise wide solutions that we offer often require system
integration, support and management. Many of our large and complex projects
(including most of our enterprise risk management systems) involve additional
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consulting services. These consulting services include on-site resources to
assist with the migration of our products and systems onto a client's existing
infrastructure. Our consultants also help with data gathering, integration and
aggregation across a client's complete enterprise. These consulting services
are typically provided to our clients for an additional fee.
As a result of Barra's 25-year history in financial research, we have amassed
a unique library of research models and a large base of historical data. We
also offer annual subscriptions of proprietary data and models on a
stand-alone basis. A library of published research papers and archived
newsletter articles authored by Barra employees is also available on line.
Ventures Business - Our Ventures Business develops new lines of business by
leveraging our core research and development into new markets. During 2002 the
Ventures Business unit consisted of several distinct, generally autonomous
companies including POSIT, Symphony Asset Management, Bond Express, Inc.,
Barra RogersCasey and the Barra Strategic Consulting Group. During 2002, we
sold or terminated many venture businesses as part of our strategy to focus on
our Core Business. As a result of this process, in July 2001 we completed the
sale of our ownership stake in Symphony Asset Management LLC to The John
Nuveen Company. In August 2001, we sold our Bond Express subsidiary to
ValuBond, Inc. Finally, in the last quarter of 2002, we divested both of our
consulting ventures, Barra Strategic Consulting Group and Barra RogersCasey.
Barra Strategic Consulting Group ceased operations in February 2002, and in
March 2002, Barra RogersCasey was sold to a subsidiary of Capital Resource
Holdings, LLC. As a result of these divestitures, results of operations from
these businesses have been reclassified in the accompanying consolidated
statements of income to discontinued operations. (See Note 4 to the
accompanying Consolidated Financial Statements.)
POSIT - For years, our research into transactions has focused on cost
control. We believed that technology could empower institutional equity
investors to increase investment performance by reducing transaction costs.
In 1987, this focus resulted in the launch of POSIT, an electronic system for
low-cost, confidential trade matching during the market day. POSIT is a
computerized trading system through which clients enter buy and sell orders
to trade single stocks and portfolios of securities among themselves in a
confidential environment. The POSIT crossing network is designed to minimize
market impact and other trading costs. POSIT provides a substantial pool of
alternative liquidity with annual volume exceeding more than 9.3 billion
shares in calendar 2001.
The POSIT technology is owned by a 50-50 general partnership between Barra
and a subsidiary of Investment Technology Group, Inc. (ITG). We initially
developed the POSIT technology and have since jointly enhanced it with ITG.
Orders may be placed in the POSIT system directly via computer to computer
links or the QuantEX system, ITG Platform, ITG Web Access or other
computer-computer links, or indirectly through ITG's Electronic Trading Desk
personnel. In the U.S., ITG has also entered into arrangements with vendors
of other popular trading systems to allow users the flexibility to route
orders directly to POSIT from trading products distributed by Bridge
Information Systems, BRASS, Bloomberg and others. Clients can also access
POSIT through ITG's brokerage subsidiary, AlterNet.
U.S. POSIT - Through a license from the POSIT joint venture, a subsidiary of
ITG operates the U.S. equity version of the POSIT system. All trades of U.S.
equities executed through U.S. POSIT are cleared by, and all brokerage
commissions are paid to, ITG. We receive a share of the royalties paid to the
POSIT partnership by ITG. Our share of these royalties is equal to
approximately 13% of the commissions received by ITG for trades of securities
on U.S. POSIT. Total U.S. POSIT trading volumes for the past five calendar
years are shown below:
2001 2000 1999 1998 1997
Trading 9.3 billion 7.8 billion 6.5 billion 5.8 billion 3.6 billion
Volume shares shares shares shares shares
U.S. POSIT currently accepts orders for approximately 18,000 different equity
securities, but it can be modified, as the need arises, to include additional
equity securities. An algorithm is run at scheduled times during each trading
day to find the maximum possible number of any buy and sell orders that match
or "cross."
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EuroPOSIT - EuroPOSIT was developed using the original POSIT technology. It
was launched in November 1998. It is operated by Investment Technology Group
(Europe) Limited (ITGE), a Republic of Ireland venture that is owned by ITG.
EuroPOSIT runs six daily matches and currently covers equities in the U.K.,
France, Germany, Italy, Spain, Switzerland, Belgium and the Netherlands. ITGE
expects to cover equities from additional European nations over time. All
EuroPOSIT trades of equities are cleared by, and all brokerage commissions
are paid to, ITGE. A royalty is then paid to the POSIT joint venture based
upon the commissions received by ITGE for trades of European securities on
EuroPOSIT. We receive a share of that royalty after expenses.
Australia/New Zealand POSIT - Using the original POSIT technology, we
developed an Australia/New Zealand equity version of POSIT in 1997. All
trades of Australia and New Zealand equities executed through Australia/New
Zealand POSIT are cleared by, and all brokerage commissions are paid to, ITG
Australia Limited (ITGA), an Australian entity owned by ITG. A royalty is
paid to the POSIT joint venture based on commissions received by ITGA for
trades of Australia and New Zealand securities on Australia/New Zealand
POSIT. We receive a share of that royalty after expenses.
Canada POSIT - In June 2001, the POSIT joint venture entered into an
agreement to license the Canadian version of the POSIT system to the Toronto
Stock Exchange (TSE). This Canadian version of POSIT operates as a facility
of the TSE for TSE listed securities and was launched in April 2002. All
Canada POSIT trades of equities are cleared by, and all exchange fees are
paid to, the TSE. A royalty is then paid to the POSIT joint venture based
upon the commissions received by the TSE for trades of Canadian equities on
Canada POSIT. We receive a share of that royalty after expenses.
Symphony - In July 2001, Barra completed the sale of its 50% ownership stake
in Symphony Asset Management LLC (Symphony) to The John Nuveen Company.
Symphony, which was co-founded by Barra and the owners of Maestro LLC in 1994,
offers a host of asset management services through collective investment
vehicles and separate accounts. Maestro LLC, which is owned by the Symphony
principals who operate the business, also sold its equity stake to the John
Nuveen Company in the same transaction. (See Note 4 to the Consolidated
Financial Statements for a description of the terms of the sale.)
Other Ventures - Prior to their divestiture, several wholly-owned businesses
comprised the Other Ventures business segment, including Bond Express, Inc.,
Barra RogersCasey, Inc. and Barra Strategic Consulting Group. We also hold
certain minority equity interests in other businesses.
Bond Express - In September 2001, the company sold its Bond Express
subsidiary to ValuBond, Inc. Bond Express is an aggregator of bond offerings
in the United States. (See Note 4 to the Consolidated Financial Statements
for a description of the terms of the sale.)
Barra RogersCasey - In March 2002, Barra RogersCasey, Inc. was sold to a
subsidiary of Capital Resource Holdings LLC. Barra RogersCasey offers a full
range of investment consulting services, fund-of-funds and private equity
investment products and plans, and the InvestWorks system. Originally
founded in 1976, this business became one of the nation's first investment
consulting firms specializing in providing advisory services to institutional
investors. We acquired this business in 1996, and during 2002 Barra
RogersCasey served more than 100 clients representing a broad cross-section
of both public and private institutional investors with over $500 billion in
assets. (See Note 4 to the Consolidated Financial Statements for a
description of the terms of the sale.)
Strategic Consulting - Barra Strategic Consulting Group, which ceased
operations in February 2002, was a division of our parent company that
provides consulting services to asset management firms. This venture
consisted of approximately thirty professionals with expertise in management
consulting, investment management, investment consulting, investment research
and/or market research. (See Note 4 to the Consolidated Financial Statements
for a description of the closure.)
Other Ventures - Other Ventures also includes our minority investments in
Alacra, Inc. (Alacra) and ValuBond Inc. (ValuBond)
Alacra - We own approximately 17% of Alacra, Inc. on a fully diluted basis.
Alacra aggregates, cross-indexes, repackages and resells over 90 different
business databases, delivering quantitative information directly to Microsoft
Excel and textual information in HTML, Microsoft Word and as PDF documents.
In May 1998, we granted Alacra a non-exclusive worldwide license to market
certain of our proprietary databases. Alacra customers pay a monthly fee to
access their services and then purchase content on either a
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pay-per-view and/or subscription basis. In May 2001, Alacra launched Alacra
Book, which electronically builds comprehensive company profiles containing
content from multiple publishers.
ValuBond - As consideration for the sale of Bond Express to ValuBond, Barra
received 2,989,237 shares of convertible preferred stock in ValuBond
representing approximately 8% of its equity on a fully diluted basis.
ValuBond uses technology to offer financial services firms trading and
private label products that enable them to provide access to primary and
secondary inventory and infrastructure for trading and execution.
Marketing, Sales, Clients and Client Support
Core Business - We currently serve portfolio risk management and enterprise risk
management clients at approximately 650 institutions in over 30 countries. These
relationships translate into approximately 1100 separate client accounts. Our
clients for these systems include active and passive equity managers, fixed
income managers, global managers, fund sponsors, pension and investment
consultants, banks, insurance companies, broker/dealers and corporate
treasurers. The marketing, sales and client support activities are integrated
across all of the products offered by this segment. The large and complex nature
of our enterprise risk management projects require additional consulting and
support services to assist in the implementation, integration, support and
management of these systems.
We market our portfolio risk management and enterprise risk management systems
to a broad set of financial service providers and institutional investors
throughout the world. When marketing new Core Business products, we focus on
significant participants in the relevant market segments of the investment
community. Our marketing efforts are focused on defining new market segments and
geographies and educating them about portfolio and enterprise risk management.
This helps us extend Barra's market penetration across many markets and
geographies. In some instances, this brand extension involves new institutions.
In other instances, we focus on a different business group inside of some of our
existing clients where our products are not yet being used.
In addition, we use a variety of marketing and communication channels to achieve
market education and broader market penetration on a global scale. Through our
targeted advertising campaign, we are extending our brand recognition into new
and existing markets. Our advertising campaign focuses on business and trade
publications in relevant geographic markets. In addition to traditional print
advertising, we have also developed targeted on-line efforts that include a web
site, focused direct online marketing activities and online product training.
Our marketing efforts also include targeted direct mailings and several public
relations activities, including participation in more than 75 trade shows,
seminars, and conferences each year.
We use a direct sales force to distribute our portfolio risk management and
enterprise risk management systems throughout the world. In the U.S., products
are marketed directly by our parent company. Throughout the rest of the world,
they are primarily marketed by our wholly-owned subsidiaries: Barra
International (Japan), Ltd. (Barra Japan) in Japan, Barra Consult Ltda. (Barra
Brazil) in South America, and Barra International, Ltd. (Barra International)
elsewhere. For all of our Core Business products, we work closely with clients
to provide ongoing service and support. Our client support professionals provide
training in the methodologies underlying each product and in the use of the
product, telephone support, on-line support, and routine consulting services are
provided. Our sales and client support personnel are generally required to have
strong academic and financial backgrounds. We offer these services via a global
structure, with most of the relevant employees located outside our Berkeley,
California headquarters.
Due to the complexity of our products, the sales cycle for new clients of most
of our portfolio risk management systems is typically several months. The sales
cycle for our enterprise risk management systems can be even longer. Most sales
require one or more face-to-face meetings with the prospective client. Each new
client is introduced to one or more of our client support specialists. Sales and
client support specialists help install the product. Due to the complex nature
of TotalRisk and the amount of client system integration involved, installations
of this system are often subject to an acceptance testing phase.
Ventures Business - The marketing, sales and client support activities for POSIT
are controlled and managed by ITG, Inc.
POSIT - The institutional investors currently using POSIT include corporate and
government pension plans, insurance companies, bank trust departments,
investment advisors, broker dealers and mutual funds. All marketing, sales and
direct (first tier) client support for the various POSIT crossing networks is
conducted by the entity licensed to operate each network. Barra generally
provides second tier support to the various POSIT licensees on behalf of the
POSIT joint venture. ITG conducts the marketing and provides the sales and first
tier client support for U.S. POSIT primarily through the sales, support and
consulting activities of its research group. These activities include
introducing clients and prospects to the features, pricing and
technical/functional specifications of the system. ITGE conducts the marketing
and provides the sales and first
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tier client support for EuroPOSIT. ITGA conducts the marketing and provides the
sales and first tier client support for Australia/New Zealand POSIT. The Toronto
Stock Exchange conducts the marketing and provides the sales and first tier
client support for Canada POSIT.
POSIT Revenue Contributions
Other than revenue from POSIT, no entity not entirely owned by us and no
customer of any of our business segments accounted for more than 10% of our
total operating revenues in 2002. POSIT accounted for 16%, 16%, and 17% in years
2002, 2001 and 2000 respectively. We do not believe that the loss of revenue
from any single customer or any single entity not wholly-owned by us (other than
POSIT) would have a material adverse effect on our business, operating results
or financial condition.
Research and Product Development
Innovations by our research and development operations are critical to the
success of our Core Business and to the efforts of our Ventures Business. In
research and development activities, we approach investment problems from
various angles, starting with their theoretical underpinnings and continuing
through the practical implementation of solutions. Our goal is to develop and
bring to market innovative products and solutions to help our clients make
superior investment and trading decisions. This goal has been supported by our
substantial research and development investments. We spent approximately $21
million in 2002, $21 million in 2001 and $19 million in 2000 on Barra-sponsored
research and development, representing 14%, 16%, and 17%, respectively, of our
total operating revenues for those years.
We work closely with ITG on the research and development of POSIT enhancements.
We believe that this effort is necessary to remain competitive in a securities
industry with increasing demand for technology-based services. We expect to
continue this level of investment to improve existing services and continue the
development of new services.
Competition
Core Business - The markets for our portfolio risk management and enterprise
risk management systems are competitive but fragmented into many areas of
specialization. We presently compete in many geographic areas and across many
areas of specialization. There are competitive product sets for all Barra
products. In some cases, we only experience this competition in a specific
region and in other cases these competitors are on a global scale. No single
competitor, however, currently competes across our entire range of products,
services and geographic markets for this business segment.
Portfolio Risk Management Systems - We compete with several other companies
that have developed financial models, applications and databases. Few of these
competitors, however, target clients in our major portfolio risk management
market, which primarily consists of portfolio managers with an excess of $2
billion under management. In addition, no single competitor offers a suite of
products that competes with our entire Aegis System or Cosmos System of
products. For example Wilshire Associates and Northfield each offer products
that compete with some components of our Aegis System. These products and
other competitive products, however, often offer levels of functionality
different from those offered by our products, and may be based on a different
type of risk modeling.
Enterprise Risk Management Systems - Algorithmics Incorporated and Askari (a
business unit of State Street Corporation) offer products and services that
compete with our enterprise risk management business. These competing products
are mostly sold to banks, brokerage firms and insurance companies. To date we
have focused our TotalRisk sales, support and marketing efforts on the buy
side, specifically targeting asset managers, pension fund managers and
corporate treasuries, which is where we believe we possess significant
competitive advantage in terms of features and functionality.
BarraOne - BarraOne is expected to compete in two categories of products-
those that use ASP technology and those that have similar analytics. None of
the competitors in this space provide a web-based, interactive technology and
multi-asset class coverage. The most significant competitors in this category
are Factset, Riskmetrics and Wilshire.
We believe that the principal competitive factors facing our Core Business are:
research and technical capabilities;
product breadth and architecture;
product features and functions;
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quality of customer support and service;
professional and product reputation;
asset coverage;
ease of use; and
price.
We believe that we have certain competitive advantages in each of these areas,
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 our risk models and related databases may present a
significant barrier to entry into the marketplaces for certain of our Core
Business products. We believe that our extensive experience in product
maintenance, together with the economies of scale available to us because of our
large client base, give us a competitive advantage in the markets for our Core
Business products.
Ventures Business - POSIT
POSIT - POSIT competes with services offered by leading brokerage firms and
transaction processing firms, with providers of electronic trading and trade
order management systems and with financial information services. POSIT also
competes with various national and regional and securities exchanges and
exchange facilities, such as Nasdaq, electronic communications networks (ECNs),
such as Instinet and Archipelago, and alternative trading systems (ATSs) for
trade execution services. Many of POSIT's competitors have substantially greater
financial, research and development and other resources. We believe that POSIT
competes on the basis of:
access to liquidity;
transaction costs;
confidentiality;
market impact cost reduction;
timeliness of execution; and
probability of trade execution.
Although we believe that POSIT competes favorably with respect to these factors
and has established certain competitive advantages, its ability to maintain
these advantages will require continued investment in the development of POSIT.
Proprietary Rights and Licenses
Core Business - We rely on a combination of trade secret, copyright, trademark
and other intellectual property laws, license agreements and technical measures
to protect our rights in our intellectual property. We currently hold no utility
patents, but are applying for one design and two utility patents on certain of
our proprietary technologies.
We seek to protect our proprietary assets through non-disclosure undertakings
with our employees, clients and partners. In addition, we rely on the following
factors to protect the intellectual property of our Core Business products:
Access to the knowledge, ability and experience of our employees is necessary
for many of our clients to obtain the support necessary to operate our
products.
A quarter century of data collection and derivation have created an unrivaled
historical database, which is used to fuel and update our models.
To achieve full functionality, our products are dependent on timely product
enhancements and database updates.
Initial and continuing access to our proprietary databases is often required
for our Core Business products to function.
Ventures Business - POSIT
POSIT - The technology used to operate each of the POSIT systems is owned by the
POSIT joint venture. The joint venture in turn licenses the technology to ITG,
ITGE and ITGA. Under the terms of our joint venture agreement, we and ITG are
prohibited from competing, directly or indirectly, with POSIT. The licensee
operators of POSIT are also subject to restrictions on competition with POSIT.
Related agreements also require that we provide certain support services to the
POSIT partnership, including the availability of experienced personnel and
support for the development and maintenance of the POSIT system. The POSIT joint
venture may also earn a royalty from licensing POSIT to other businesses in
other
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markets. Under the terms of the joint venture agreement, ITG generally has the
right to approve any sale, transfer, assignment or encumbrance of our interest
in the POSIT joint venture.
The intellectual property issues for end users of POSIT mirror those discussed
above for the Core Business. Since we do not actively operate any of the POSIT
systems, these issues are primarily addressed by the licensee-operators of each
crossing system. We do, however, seek to protect our rights through
confidentiality and non-disclosure undertakings, non-competition provisions and
limitations on use in each POSIT license agreement.
Other Ventures - Our Other Ventures are subject to the same intellectual
property factors as described for the Core Business above.
For a further discussion of Proprietary Rights and Licenses, see the subsection
of the same name under Risk Factors below.
Government Regulation
The financial services industry is subject to extensive regulation at the
federal and state levels, as well as by foreign governments. In the U.S., the
main governmental authority regulating us is the SEC. The SEC has oversight over
our activities due to our status as a publicly traded company and due to the
investment advisory nature of some of our businesses. It also regulates the
businesses of many of our clients and joint venture partners.
Advisers Act
Our parent company, Barra, Inc., is currently registered as an investment
adviser solely in the state of California but is seeking an exemption from the
SEC to permit federal registration under the Advisers Act. As a registered
investment adviser we are required to meet certain financial criteria, including
the maintenance of minimum net capital levels. We are also are subject to
certain obligations, fiduciary duties and prohibitions with respect to our
operations, including our dealings with clients. These 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.
The development of certain other one-off consulting arrangements performed by
one unit of our Core Business may constitute providing investment advice under
the Advisers Act and we are currently registered as an investment adviser in the
State of California with respect to such activities. We believe and have adopted
the position that the products of our Core Business do not otherwise provide
investment advice for purposes of the Advisers Act.
Data Privacy Legislation
More than 40 countries have adopted some form of data privacy legislation. In
the U.S., much privacy legislation has been introduced in Congress and in most
of the 50 states. Currently, with the exception of certain types of data (such
as financial and medical data), most personal data on the Internet is protected
only by voluntary self-regulation in the form of the privacy policies
implemented by each website. The Federal Trade Commission does, however, have
the authority to force companies to live up to their stated privacy policies. In
addition, the SEC has adopted the Regulation S-P (Reg. S-P) privacy rules
promulgated under the Gramm-Leach-Bliley Act (GLB Act). Under Reg. S-P and the
GLB Act a financial institution must provide its customers with notice of its
privacy policies and practices, and must not disclose nonpublic personal
information about a consumer to nonaffiliated third parties unless the
institution provides certain information to the consumer and the consumer has
not elected to opt out of the disclosure. The GLB Act also requires the SEC to
establish appropriate standards for the protection of customer information by
financial institutions. In the European Union, the Data Protection Act of 1998
(DPA) governs the collection and distribution of personal data. The London
branch of Barra International is registered under the DPA. We are in the process
of conforming our privacy policy to the requirements of Reg. S-P, the GLB Act,
the DPA and other relevant data privacy legislation.
Dealers and Alternative Trading Systems (ATS)
Upon POSIT's inception, the POSIT joint venture obtained a "no-action" letter
from the SEC. In that letter, the SEC advised POSIT that it would not recommend
enforcement action to require registration as a stock exchange. Pursuant to the
conditions of the "no-action" letter and under Rule 17a-23 of the Securities
Exchange Act of 1934, as amended (Rule17a-23), the operators of POSIT in the
U.S. were required to maintain certain records and to provide the SEC with
certain reports and data. On April 21, 1999, SEC Regulation ATS became
effective. Regulation ATS repealed Rule 17a-23 and established a
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new regulatory framework for ATSs such as POSIT. Regulation ATS allows ATSs to
choose to register as exchanges or as broker/dealers and requires compliance and
reporting requirements that are similar to those in Rule 17a-23. Since the
effectiveness of SEC Regulation ATS, ITG has operated U.S. POSIT as part of its
own broker/dealer operations. Accordingly, POSIT is no longer subject to the
restrictions of the "no-action" letter and has not been registered with the SEC
as an exchange.
Our wholly owned subsidiary Barra International (AUS) Pty Ltd. is registered as
a dealer under Section 784 of the Companies Act in Australia, and as such, is
subject to regulations administered by the Australian Securities and Investment
Commission (ASIC).
Soft Dollars
We estimate that approximately 16% of our total operating revenues are received
from U.S. brokers who direct us to provide Core Business products to designated
clients in the United States. These clients are money managers, fund sponsors
and consultants using commissions generated by their advised accounts with the
broker to obtain investment research and brokerage services. The funds used by
these U.S. brokers to pay for the services are referred to in the securities
industry as "soft dollars." We also have a data contract with Standard & Poor's
Securities, Inc. (SPSI). Under that contract, SPSI and its affiliates provide us
with certain U.S. equity data. In return, the contract requires that only SPSI
accounts be used for soft dollar payment for the portions of our products that
use SPSI data.
Brazilian Central Bank Registration
Barra Brazil is required to register its exchange agreements with the Brazilian
Central Bank (BCB).
International Operations
In 2002, 2001 and 2000 we derived approximately 46% , 47% and 47% of our total
operating revenues, respectively, from customers outside the U.S. We also have
significant operations for our Core Business outside the U.S., which are
conducted primarily through our subsidiaries. During 2000, we used an
independent contractor to conduct our Core Business in Canada. Please refer to
the Geographic Data table in Note 11 of the Notes to our Consolidated Financial
Statements for a breakdown of revenues by major geographic areas and business
segments.
In 2002, no single country, outside the U.S., Japan and the U.K., had revenues
approaching 10% of our total revenues. In addition, our aggregate sales to
European Community countries were about 25% of our revenues.
Certain of our activities outside the U.S. are also subject to
government-imposed constraints that affect our businesses. See Government
Regulation above.
Employees
As of June 3, 2002 our Core Business and Ventures Businesses employed 528
persons through our parent company. Geographically, this total breaks down
approximately as follows:
North America - 382;
Europe and Africa - 83;
Asia and Australia - 57; and
South America - 6.
None of our employees were represented by labor unions in 2002. We have
experienced no work stoppages and generally believe that our employee relations
are good.
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Risk Factors
This Form 10-K and our 2002 Annual Report contain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements give our current expectations or forecasts of
future actions, events or results. You can identify these statements by the fact
that they do not relate strictly to historical or current facts. They use words
such as anticipate, estimate, expect, project, intend, plan, believe, designed,
future, forecast, perceive, possible, potential, targeted, may, scheduled, will,
would, could, should, forward, assure and other words and terms of similar
meaning in connection with any discussion of future operating or financial
performance. Our forward-looking statements include statements concerning our
future financial results, market activities, product development and business
model. From time to time we may also provide oral or written forward-looking
statements in other materials that become publicly available.
Any or all of the forward-looking statements that we make in this Form 10-K, our
2002 Annual Report or any other public statements we issue may turn out to be
wrong. They can be affected by inaccurate assumptions that we might make or by
known or unknown risks and uncertainties. Many factors described in this Risk
Factors section and elsewhere in this Form 10-K and in our 2002 Annual Report
may cause our actual results to vary materially from our historical or expected
results. Other factors, besides those outlined herein or in our 2002 Annual
Report could also adversely affect us or our business. Consequently, no
forward-looking statement can be guaranteed.
We are under no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise. We suggest,
however, that you consult any future disclosures we make on related subjects in
our subsequent Form 10-Q, 8-K and 10-K filings with the SEC.
This section should be read in conjunction with the general description of our
business in this Part I and in our 2002 Annual Report and the audited
consolidated financial statements and related notes, the selected financial data
and Management's Discussion and Analysis of Financial Condition and Results of
Operations contained elsewhere in this Form 10-K.
Fluctuations in Quarterly Operating Results
Our revenues and results of operations are difficult to predict and may
fluctuate substantially from quarter to quarter, as they have in the past.
Factors specifically relating to our business segments are outlined below:
Core Business - Our Core Business revenues in any quarter depend substantially
upon our total contracting activity (including renewals of existing contracts)
and the related timing of when new subscriptions begin. We derive revenue from
our Core Business primarily through annual subscriptions that automatically
renew unless canceled. There is no assurance that these renewals will
continue. Annual subscription fees are recorded as revenues over each
subscription period at the rate of 1/12th per month. Consequently, sales of
subscriptions in any one month impact reported revenues evenly over the next
twelve months. For this reason, our Core Business subscription revenues are
not normally subject to significant variability during a year.
We also include enterprise risk management system implementation consulting
fees in our Core Business revenues. These fees reflect non-recurring, project
driven revenues that are implemented in phases as contractual milestones are
met. Accordingly, they can be susceptible to a large degree of variability
depending on our ability to source new projects and the unpredictable nature
and significance of fees associated with specific transactions.
Our earnings can be affected in our second fiscal quarter because of annual
salary adjustments for our employees in July. Our compensation policy
historically has involved significant reliance on discretionary bonuses.
Because compensation expense is a significant percentage of our operating
expenses, the amount of, timing of and accrual for discretionary bonuses could
have a material effect on the net income of our Core Business.
Ventures Business - Diverse factors cause variability of operating results in
our POSIT Venture Business.
POSIT - The several POSIT systems can experience and have experienced
significant fluctuations in trading volume. Since approximately 16% of our
operating revenue and a significant portion of our income by segment came from
this venture in 2002, these fluctuations can have and have had a significant
impact on our revenue and operating income.
Our operating expenses are based in part on our expectations regarding future
revenue. Our consolidated operating results may be adversely affected if revenue
does not develop in a quarter as anticipated. Since expenses are usually
incurred before revenues are generated, and because only a small amount of
expenses vary with revenue, our consolidated operating results may be impacted
significantly by lower revenues. Various factors could cause these lower
revenues and could affect quarter
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to quarter comparisons. Also, much of our revenues are earned under fixed price
software subscriptions. Changes in our costs of those subscriptions could have a
material adverse effect on our business, financial condition and results of
operations.
Accounting standards and practices may require us to defer recognition of
license revenue for a significant period after entering into a license
agreement. Generally, the subscription fees for our Core Business products are
initially deferred as unearned revenues when payment has been received, after
which revenue is recognized ratably over the term of the subscription.
Negotiated terms for some of our Core Business sales and consulting services,
particularly enterprise risk management solutions, sometimes do not permit
revenue recognition at the time of delivery or even as work on the project is
completed.
Dependence on Availability of Data
We currently obtain data from over 120 third-party vendors that is used in our
products and services. Any interruption of our supply of data from a principal
data vendor or vendors, or an interruption of our own data operations or data
update processes could have a material adverse effect on our business, financial
condition or results of operations. These adverse effects include, for example,
our products or services becoming inoperable or their performance being
materially reduced.
If any of our data vendors change their product offerings, we may need to incur
additional costs to ensure continued performance of our products and services.
In addition, if the cost of licensing any of these third-party data products
materially increases, our gross margin levels could materially decrease.
International Operations
In 2002 over 46% of our revenues came from customers outside the United States.
We anticipate that revenues from customers outside the U.S. will continue to be
a significant part of our total revenues for the foreseeable future. Sales and
operations outside the U.S. are subject to unique risks, including:
unexpected changes in regulatory requirements;
unexpected changes in exchange rates, tariffs and other trade barriers;
political or economic instability;
seasonal factors, particularly in Europe;
difficulties in staffing, managing and integrating foreign operations;
longer payment cycles;
difficulties or delays in translating products and related documentation into
foreign languages;
currency fluctuations and conversion risks; and
potentially adverse tax consequences.
Any of these factors could have a material adverse effect on our business,
financial condition or results of operation.
Risks Associated with Business Combinations and Divestitures
As part of our overall strategy, we may continue to divest ourselves of certain
businesses and assets, to acquire or invest in complementary companies,
products, and technologies and to enter into joint ventures and strategic
alliances with other businesses. We may not be successful in overcoming these
risks or any other problems encountered in these transactions.
Some common risks associated with acquisitions and joint ventures include:
the difficulty of assimilating the operations and personnel of the combined
companies;
the risk that we may not be able to integrate the acquired technologies or
products with our own;
the substantial management time devoted to such activities;
undisclosed liabilities;
the inability of management to maximize our financial and strategic position
through the successful integration of acquired businesses;
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the risk that the acquired business will not achieve anticipated earnings and
revenues;
the failure to realize anticipated benefits (such as cost savings and
synergies);
customer dissatisfaction with, or problems caused by, the performance of any
acquired technologies; and
geographic dispersion of operations and the complexities of international
operations.
Some common risks associated with divestitures include:
the inability to fulfill representations and warranties made to a buyer;
the risk that the divested business will not meet the revenues or earnings
requirements necessary to achieve subsequent earn-out goals;
the failure to remain within the scope of the non-competition undertakings
requested by a buyer;
the transitioning of the divested business to a stand-alone operation that is
separate from the research, development and support services previously
offered by Barra; and
costly litigation stemming from post-closing disputes.
We may not be successful in overcoming these risks or any other problems
encountered in these transactions.
Limited Protection of Intellectual Property and Proprietary Rights and Potential
Infringement of Third Party Intellectual Property Rights
We consider certain aspects of our products, related internal data update
processes and services to be proprietary. We currently hold no patents. We rely
primarily on a combination of trade secret, copyright, trademark and other
intellectual property laws, license agreements and technical measures to protect
our rights in our intellectual property. Despite our efforts, a third party may
still try to challenge, invalidate or circumvent the protective mechanisms that
we select. We cannot assure that any of the rights granted under any copyright
or trademark that we may obtain will protect our competitive advantages. Our
competitors may also independently develop and patent technology that is the
same or similar to ours or may obtain access to our proprietary technology. In
addition, the laws of certain foreign countries do not protect our proprietary
rights to the same extent as do the laws of the United States. Also, some
elements of our products and services are not subject to intellectual property
protection.
We believe that our products, processes and trademarks do not infringe the
intellectual property rights of third parties. There can be no assurance,
however, that the intellectual property which we have acquired will not be
challenged by infringement claims in the future. Such claims could require us to
enter into royalty arrangements or could result in costly litigation.
Trademarks - We have registered "Barra" as a trademark in the U.S. and in
certain foreign countries. We have also registered other product trademarks
and certain service marks in the U.S. and in certain foreign countries. When
we enter a new geographic market or introduce a new product brand, there can
be no assurance that our existing trademark or mark of choice will be
available.
Patents - Businesses operating in the financial services sector, including our
competitors and potential competitors, have in recent years increasingly
pursued patent protection for their technologies and business methods. We
currently hold no patents. We are, however, currently applying for two utility
patents and one design patent on certain of our proprietary technologies.
Patent applications can be extremely costly to process and defend and we
cannot assure that any of the rights granted under any patent that we may
obtain will protect our competitive advantages. Under current law, we do not
believe it is feasible to determine in advance whether any of our existing
products or any of their components or a service or method infringes on the
patent rights of others. From time to time we will receive notices from others
containing claims or potential claims of intellectual property infringement.
We may also be called upon to defend a joint venture partner, customer, vendor
or licensee against such third party claims. Responding to these types of
claims, regardless of merit, could consume valuable time, result in costly
litigation or cause delays, all of which could have a material adverse effect
on our business, operating results or financial condition. Responding to these
claims could also require us to enter into royalty or licensing agreements
with third parties claiming infringement. There can be no assurance that these
licenses will be made on terms that are commercially acceptable to us, if at
all.
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License Agreements - The software and data products of our Core Business and
Ventures Businesses are generally licensed to end users on a periodic
subscription basis in a nontransferable license signed by the client. We also
permit access to some products through the Internet under on-line licenses
that are acknowledged by the licensee. The enforceability of these on-line
licenses has not been conclusively determined by the courts. We are frequently
required to obtain licenses to the proprietary rights of data vendors or
others. There can be no assurance that these licenses will be made available
on terms acceptable to us, if at all.
Trade Secret and Copyright - Existing trade secret and copyright laws only
offer us limited protection for our proprietary assets. We believe that the
rapid pace of technological change in the software and investment solution
industries and the recent explosion of business method patents in these
industries will only make trade secret and copyright protection less
significant over time. Consequently, our competitors may independently develop
and patent technologies that are substantially equivalent to or superior to
our technology. To protect the proprietary assets of our Core Business, we are
considering, and in some cases applying for, patents for certain of our
products and we rely on the following unique aspects of our business:
The development, maintenance, support and use of our products is dependent
upon the knowledge, experience and ability of our highly skilled, educated
and trained employees; and
Most of the software in our products is dependent upon (and of little utility
without) continuing access to the historical and current data in our
proprietary databases.
Confidentiality Undertakings - Our license agreements restrict clients'
disclosure of proprietary information contained in our products. Our joint
venture and development agreements contain similar restrictions. It may be
possible, however, for unauthorized parties to copy aspects of our products or
to obtain and use information that we regard as proprietary. We also seek to
protect our knowledge bases through non-disclosure agreements with our
employees. However, the enforceability of these agreements varies due to the
many different jurisdictions in which our employees, joint venture or
development partners and clients are located.
Competition
Each of the markets in which our Core and POSIT Businesses operate has become
increasingly competitive in recent years. These markets may become more
competitive in the future as a result of the activities of existing competitors
and the entrance of new competitors into our markets. In some of these markets,
our competitors have substantially greater name recognition, installed bases, or
financial, research, development or other resources. There can be no assurance
that:
we and/or our business partners will continue to have sufficient resources to
succeed in our efforts and be successful in maintaining our competitive
advantages;
our competitors will not devote significantly more resources to competing
activities;
our competitors will not develop products or services that are perceived as
being superior to ours, or
increased competition will not lead to loss of market share or increased
pricing pressure.
Web-Based Product Model
It is intended that future Barra products, such as BarraOne, will make use of a
web browser as the user interface in place of traditional desktop access through
networked personal computers. Web browser access via the internet or an intranet
involves numerous risks inherent in using the internet, including security,
availability and reliability. In addition, there is a risk that customers will
not be willing or able to implement internet-based applications. Barra may wish
to offer its applications on future or existing user interfaces that achieve
popularity within the financial application marketplace. These future or
existing user interfaces may or may not be architecturally compatible with
Barra's current software product design. Barra may not be able to support new
user interfaces and achieve market acceptance of new user interfaces that it
does support.
Security Risks and Concerns May Deter the Use of the Internet for Conduct of
Business.
A significant barrier to commerce and communications over public networks is the
secure transmission of confidential information. Advances in computer
capabilities, new discoveries in the field of cryptography or other events or
developments could result in compromises or breaches of our security systems or
those of other web sites to protect proprietary information. If any
well-publicized compromises of security were to occur, they could have the
effect of substantially reducing the use of the internet for commerce and
communications. Anyone who circumvents our security measures could
misappropriate
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proprietary information or cause interruptions in our services or operations.
The internet is a public network, and data is sent over this network from many
sources. In the past, computer viruses, software programs that disable or impair
computers, have been distributed and have rapidly spread over the internet.
Computer viruses could be introduced into our systems or those of our clients or
other third parties, which could disrupt or make it inaccessible to clients. We
may be required to expend significant capital and other resources to protect
against the threat of security breaches or to alleviate problems caused by
breaches. To the extent that our activities may involve the storage and
transmission of proprietary information, security breaches could expose us to a
risk of loss or litigation and possible liability. Our security measures may be
inadequate to prevent security breaches, and our business could be harmed if we
do not prevent them.
Volatility of Stock Price; Risk of Litigation
The trading price of Barra common stock has in past and may in the future be
subject to significant fluctuations in response to factors such as:
revenue or results of operations in any quarter failing to meet the
expectations (published or otherwise) of the investment community, and the
timing of the announcements of such shortfalls;
changes in recommendations or financial estimates by securities analysts;
acquisitions or sales of significant businesses;
new product announcements;
conditions and trends generally in the industries in which we operate;
adoption of new accounting standards affecting the software or financial
services industries; and
general market conditions.
Further, the stock market has experienced and may continue in the future to
experience extreme price and volume fluctuations that particularly affect the
market prices of equity securities of high technology and financial services
companies. These fluctuations often are not related, or are disproportionate, to
the operating performance of those companies. These broad market fluctuations,
as well as general economic, political and market conditions have and may
continue to have a material adverse effect on the trading price of Barra common
stock. Fluctuations in the price of our common stock may expose us to the risk
of securities class action lawsuits or claims. Any such suit or claim, even if
the outcome were to be ultimately favorable to us, would involve a significant
commitment of our management, personnel, financial and other resources. In
addition, these sorts of claims and lawsuits could have a material adverse
effect on our business, financial condition, or results of operations.
Product Development and Technological Change
The markets in which we compete are characterized by rapidly changing
technologies, extensive research, and new product introductions. Our future
growth and financial performance will depend on our ability to continue to
quickly develop and introduce new products and enhance our existing products in
response to advances in finance theory and computer technology, changing market
conditions and increasingly sophisticated customer requirements. We may not be
able to enhance existing products or develop and introduce new products that
receive market acceptance in a timely manner. Our failure to anticipate or
respond adequately to changing market conditions could have a material adverse
effect on our business, financial condition, or results of operations. Because
we offer products across many geographic areas and many areas of specialization,
we often must restrict our product development efforts to a limited number of
products and operating platforms. There can be no assurance, however, that
efforts we select will be successful or will achieve market acceptance. In
addition, the cost of research and development efforts required to keep pace
with technological changes may, at times, have a significant effect on our
business, financial condition, or results of operations.
Dependence on Key Personnel
Our future success will depend in large part on our ability to attract, train
and retain highly skilled managerial, research, development, sales, marketing,
support, technical and services personnel. Competition for people in the
software and financial services industries is intense. At times, we have
experienced difficulty in locating candidates with appropriate qualifications
and expertise. None of our executive officers has entered into a long-term
employment agreement with Barra. Our inability to attract, train and retain key
personnel could have a material adverse effect on our business, financial
condition, or results of operations.
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Management of Growth and Changes in Staffing
We have experienced an extended period of
revenue growth;
growth into new foreign markets;
expansion of our Core Business and POSIT; and
substantial fluctuations in the number of our employees.
These changes have resulted in new and increased responsibilities for our
management and have placed a significant strain on our operating and financial
controls and other resources. To accommodate recent growth, compete effectively,
and manage potential future growth, we must continue to implement and improve
the speed and quality of our products and services, management decisions,
reporting systems, procedures, and controls. Our personnel, procedures, systems,
and controls may not be adequate to support our future operations.
Potential Liability Based on Use of Products and Services
Our license and consulting agreements have provisions designed to limit our
exposure to potential liability claims brought by our clients or other third
parties. However, these provisions could be invalidated by unfavorable judicial
decisions or by federal, state, foreign or local laws. Use of our Core Business
and Ventures Businesses products and services for investment decision-making
creates the risk that clients, or the parties whose funds are managed by our
clients, may pursue a claim against us. Any such claim, even if the outcome were
to be ultimately favorable to us, would involve a significant commitment of our
management, personnel, financial and other resources.
Government Regulation
The financial services industry is subject to extensive regulation at the
federal and state levels, as well as by foreign governments. It is very
difficult to predict the future impact of the broad and expanding legislative
and regulatory requirements affecting our businesses. If we fail to comply with
any applicable laws, rules or regulations, we could be subject to fines,
penalties, suspensions or revocations of licenses or permits. We believe that
our existing products and services comply with all applicable laws, rules and
regulations. However, there can be no assurance that these laws, rules or
regulations will not change in the future, or that such changes will not
materially adversely affect our business, financial condition or results of
operations.
Advisers Act - We believe and have adopted the position that our Core Business
products do not provide investment advice for purposes of the Advisers Act.
Future developments in our product line or in the regulatory environment could
cause this status to change. If that happens, we may have to broaden our
disclosures to the SEC and to adopt the strict compliance procedures mandated
by the Advisers Act for a much broader segment of our business. These changes
could also trigger obligations to comply with investment advisory regulations
in foreign jurisdictions where we market our products. These heightened
obligations would entail significant additional costs to us.
Data Privacy Legislation - Changes in legislative, regulatory or consumer
environments relating to consumer privacy or information collection and use
may affect our ability to collect and use data. There could be a material
adverse impact on our direct marketing, data sales and business due to the
enactment of legislation or industry regulations, or simply a change in
customs, arising from public concern over consumer privacy issues.
Restrictions could be placed upon the collection, management, aggregation and
use of information that is currently legally available, in which case our cost
of collecting some kinds of data could materially increase. It is also
possible that we could be prohibited from collecting or disseminating certain
types of data, which could in turn materially affect our ability to meet our
clients' requirements.
ATS - Certain of the securities exchanges have actively sought to have more
stringent regulatory requirements imposed on ATSs. There can be no assurance
that the SEC or Congress will not in the future seek to impose more stringent
regulatory requirements on the operation of ATSs such as POSIT. If POSIT were
to become subject to regulation as a stock exchange, it is possible that they
could not operate effectively. Loss of POSIT revenues would materially
adversely affect our financial condition and results of operations.
Soft Dollars - For several years the investment community has debated the
purchase of goods and services with soft dollars, and the practice is
regulated in the U.S. by the SEC and the DOL. Legal or regulatory changes may
restrict or
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prohibit us from providing services to money managers in exchange for soft
dollars. Such changes could have a material adverse effect on our business,
financial condition, or results of operations.
Catastrophic Events
Our operations depend on our ability to protect our equipment and the
information stored in our databases against fires, earthquakes and other natural
disasters, as well as power losses, telecommunications failures, unauthorized
intrusions, terrorist attacks on financial centers where we or our clients are
located, and other catastrophic events. There is no assurance that the measures
we have taken to reduce the risk of interruption in our operations caused by
these events are sufficient. Such events could have a material adverse effect on
our business, financial condition or results of operations. For example, we are
vulnerable to interruption caused by political and terrorist incidents. Our
office in New York was temporarily closed due to the September 11, 2001
terrorist attacks. Immediately after the terrorist attacks, our clients who were
located in the World Trade Center area were concentrating on disaster recovery
rather than licensing additional risk management products. Delivery of some of
the data we receive from New York-based vendors was delayed. The grounding of
transportation impaired our ability to conduct sales visits and deliver
professional services at client sites. In addition, during the temporary closure
of the U.S. stock markets, POSIT clients were unable to trade over the system
and some of the data updates supporting our Core Business were interrupted.
These types of interruptions could affect our ability to sell and deliver
products and services and could seriously harm our business.
Changes in General Economic Conditions
The U.S. and certain other economies in which we operate have experienced slower
growth after an extended period of growth in previous years. As a result, assets
under management may decrease, thereby decreasing the revenues to asset
managers. Such reduced asset management revenues could place pressure on our
clients to cut their cost of services, which in turn could adversely impact our
sales, renewal rates and ability to increase prices.
Possible Adverse Effects of Option Exercises
If holders of options to purchase our common stock exercise any significant
number of these options and resell the underlying shares, the market price of
Barra common stock could decline. At March 31, 2002, there were outstanding
exercisable options to purchase approximately 1.3 million shares of Barra common
stock issued under various Barra stock option plans. As of that date, options to
purchase about 3.6 million shares of Barra Common Stock had exercise prices
below our closing common stock price on the last trading date of the fiscal
year, March 28, 2002 ($60.57).
Effect of Certain Charter and Bylaw Provisions and Anti-Takeover Provisions;
Possible Issuance of Preferred Stock
Our certificate of Incorporation, Bylaws, and certain Delaware laws contain
provisions that may discourage a third party from acquiring Barra. This may
deprive stockholders of certain opportunities to receive a premium for their
shares as part of an acquisition of Barra.
In addition, in August 2001 we adopted a stockholder rights plan and declared a
dividend distribution of one right for each outstanding share of common stock to
stockholders of record as of September 7, 2001. Each right entitles the holder
to purchase one unit consisting of one one-thousandth of a share of our Series A
Junior Participating Preferred Stock for $200 per unit. Under certain
circumstances, if a person or group acquires 15% or more of our outstanding
common stock, holders of the rights (other than the person or group triggering
their exercise) will be able to purchase, in exchange for the $200 exercise
price, shares of our common stock or of any company into which we are merged
having a value of $400. The rights expire on September 7, 2011 unless extended
by our board of directors. Because the rights may substantially dilute the stock
ownership of a person or group attempting to take us over without the approval
of our board of directors, our rights plan could make it more difficult for a
third party to acquire us (or a significant percentage of our outstanding
capital stock) without first negotiating with our board of directors.
Impact of Legal and Regulatory Proceedings
Throughout this Form 10-K we have made various disclosures regarding litigation
proceedings, as well as the possibility of certain other legal and regulatory
proceedings. Many factors may affect the outcome of such proceedings.
Accordingly, until such proceedings are finally resolved, it is difficult to
determine the likelihood of a favorable outcome, the direct and indirect
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costs associated with the proceeding, or, in the event of an unfavorable
outcome, the amount of any loss. Any proceeding, even if the outcome were to be
ultimately favorable to us, would likely involve a significant commitment of our
management, personnel, financial and other resources. This alone could have a
material adverse effect on our business, financial condition, or results of
operations.