SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to ______________________
Commission File Number
0-16439
FAIR, ISAAC AND COMPANY, INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 94-1499887
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
120 North Redwood Drive, San Rafael, California 94903
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 472-2211
------------------
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 .
- -
The number of shares of Common Stock, $0.01 par value per share,
outstanding on August 8, 1997, was 13,441,472.
<PAGE>
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements............................................... 3
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 8
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K................................... 13
SIGNATURES ............................................................... 14
EXHIBIT INDEX............................................................... 15
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements.
FAIR, ISAAC AND COMPANY, INCORPORATED
CONSOLIDATED BALANCE SHEETS
June 30, 1997 and September 30, 1996
(dollars in thousands)
June 30 September 30
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 8,720 $ 8,247
Short-term investments 5,006 7,487
Accounts receivable, net 30,564 27,675
Unbilled work in progress 15,624 10,276
Prepaid expenses and other current assets 3,595 3,957
Deferred income taxes 2,802 2,759
Income tax prepayment 3,343 610
--------- ---------
Total current assets 69,654 61,011
Long-term investments 13,790 12,647
Property and equipment, net 31,358 23,219
Intangibles, net 8,629 9,557
Deferred income taxes 2,239 2,239
Other assets 4,940 4,381
--------- ---------
$ 130,610 $ 113,054
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilities $ 7,520 $ 7,466
Accrued compensation and employee benefits 14,344 16,648
Billings in excess of earned revenues 5,753 3,666
Capitalized leases 361 378
--------- ---------
Total current liabilities 27,978 28,158
Other liabilities 7,906 4,997
Capital leases 1,306 1,552
Commitments and contingencies -- --
--------- ---------
Total liabilities 37,190 34,707
--------- ---------
Stockholders' equity:
Preferred stock -- --
Common stock 127 126
Paid in capital in excess of par value 23,530 21,174
Retained earnings 70,137 57,163
Less treasury stock (8,222 shares at 6/30/97;
15,938 at 9/30/96) (238) (68)
Cumulative translation adjustments (226) (145)
Unrealized gain on investments 90 97
--------- ---------
Total stockholders' equity 93,420 78,347
--------- ---------
$ 130,610 $ 113,054
========= =========
See accompanying notes to the consolidated financial statements.
3
<PAGE>
<TABLE>
FAIR, ISAAC AND COMPANY, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
For the nine-month and three-month periods ended June 30, 1997 and 1996
(dollars in thousands, except per share data)
<CAPTION>
Nine-Months Ended Three-Months Ended
June 30 June 30
--------------------------------- ---------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 137,031 $ 105,023 $ 49,035 $ 37,119
Costs and expenses:
Cost of revenues 52,047 40,984 18,487 14,281
Sales and marketing 20,509 17,738 7,904 6,449
Research and development 11,137 5,168 4,202 2,179
General and administrative 28,139 20,254 10,160 6,949
Amortization of intangibles 961 759 306 183
------------ ------------ ------------ ------------
Total costs and expenses 112,793 84,903 41,059 30,041
------------ ------------ ------------ ------------
Income from operations 24,238 20,120 7,976 7,078
Other income (expense), net (1,146) 398 (778) 54
------------ ------------ ------------ ------------
Income before income taxes 23,092 20,518 7,198 7,132
Provision for income taxes 9,360 8,322 3,043 2,834
------------ ------------ ------------ ------------
Net income $ 13,732 $ 12,196 $ 4,155 $ 4,298
============ ============ ============ ============
Earnings per share $ 1.05 $ .96 $ .32 $ .34
============ ============ ============ ============
Shares used in computing
earnings per share 13,098,000 12,740,000 13,123,000 12,745,000
============ ============ ============ ============
<FN>
See accompanying notes to the consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
FAIR, ISAAC AND COMPANY, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine-month periods ended June 30, 1997 and 1996
(dollars in thousands)
<CAPTION>
Nine-Months Ended
June 30
----------------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 13,732 $ 12,196
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 8,641 6,939
Equity loss on investments 1,618 600
Gain on sale of property and equipment (225)
Deferred income taxes (42) (416)
Changes in operating assets and liabilities:
Increase in accounts receivable (2,969) (4,271)
Decrease (increase) in unbilled work in progress (5,348) 369
Decrease (increase) in prepaid expenses and other assets 362 (2,576)
Increase in income tax prepayment (2,733)
Decrease (increase) in other assets (560) 654
Increase in accounts payable and other accrued liabilities 934 1,529
Increase (decrease) in accrued compensation
and employee benefits (664) 379
Increase (decrease) in billings in excess of earned
revenues 2,086 (315)
Decrease in income taxes payable (325)
Increase (decrease) in other liabilities 2,910 (1,153)
-------- --------
Net cash provided by operating activities 17,742 13,610
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (15,934) (10,936)
Proceeds from sale of property and equipment 340
Purchase of DynaMark, Printronic and CRMA (78) (1,231)
Purchases of investments (8,615) (7,770)
Proceeds from maturities of investments 7,493 5,362
-------- --------
Net cash used by investing activities (16,794) (14,575)
-------- --------
Cash flows from financing activities:
Principal payments of capital lease obligations (263) (267)
Issuance of common stock 779 810
Dividends paid (759) (743)
Repurchase of company stock (232)
-------- --------
Net cash used by financing activities (475) (200)
-------- --------
Increase (decrease) in cash and cash equivalents 473 (1,165)
Cash and cash equivalents, beginning of period 8,247 8,321
-------- --------
Cash and cash equivalents, end of period $ 8,720 $ 7,156
======== ========
<FN>
See accompanying notes to the consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
FAIR, ISAAC AND COMPANY, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Income taxes paid
Cash payments for income taxes during the nine-month periods ended June 30,
1997 and 1996, were $12,093,000 and $8,879,000, respectively.
Note 2 Non-cash transactions
The Company contributed newly-issued and treasury stock having a market
value of $1,468,000 and $979,000 to the Company's Employee Stock Ownership Plan
during the first three fiscal quarters of 1997 and 1996, respectively.
Note 3 Reclassifications
Certain reclassifications were made to the September 30, 1996, balance
sheet to conform to the June 30, 1997, presentation.
Note 4 Accounting pronouncements
In February, 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
128). SFAS 128 establishes standards for computing and presenting earnings per
share (EPS) and applies to entities with publicly held common stock or potential
common stock. SFAS 128 simplifies the standards for computing earnings per share
previously found in APB Opinion No. 15, Earnings per Share, and replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
and requires reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
SFAS 128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods; earlier application is not
permitted. This statement requires restatement of all prior-period EPS data
presented. The adoption of this statement is not expected to have a material
impact on the EPS presented in the accompanying financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 established standards for reporting comprehensive income
and its components in financial statements. This statement requires that all
items which are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. Comprehensive
income is equal to net income plus the change in "other comprehensive income."
The only component of other comprehensive income currently applicable to the
Company, as defined by SFAS No. 130, is the net unrealized gain or loss on
available-for-sale investments. SFAS No. 130 requires that an entity: (a)
classify items of other comprehensive income by their nature in a financial
statement, and (b) report the accumulated balance of other comprehensive income
separately from common stock and retained earnings in the equity section of the
statement of financial position. This statement is effective for financial
statements issued for fiscal years beginning after December 15, 1997. Management
intends to conform its financial statements to such pronouncement.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement establishes standards for
publicly held entities to follow in reporting information about operating
segments in annual financial statements and requires that those entities report
selected information about operating segments in interim financial statements.
This statement also establishes standards for related disclosures about products
and services, geographic areas and major customers. This statement is effective
for financial statements issued for periods beginning after December 15, 1997.
Management intends to conform its financial statements to such pronouncement.
6
<PAGE>
Note 5 Subsequent events
On June 23, 1997, a transaction for the acquisition by the Company of Risk
Management Technologies, Inc. (RMT), a privately-held company which provides
enterprise-wide risk management and performance measurement solutions to major
financial institutions, was closed as between the parties, subject to the merger
being declared effective by the State of California. The merger became effective
on July 21, 1997. Accordingly, the financial results of RMT are not included in
the consolidated financial statements. Under the terms of agreement and plan of
reorganization, each outstanding share of RMT common stock, and options to
purchase RMT common stock (after adjustment for the exercise price), were
exchanged for .33 shares of Company common stock or option equivalents. The
total number of shares and option equivalents issuable by the Company in
connection with this merger is approximately 1,256,000. This transaction will be
accounted for as a pooling of interests.
If RMT had been consolidated, net income for the quarter ended June 30,
1997, would have been approximately $4.29 million ($.30 per share) on revenues
of $51.1 million, compared with net income of $4.50 million ($.32 per share) on
revenues of $38.8 million for the quarter ended June 30, 1996. For the first
nine months of fiscal 1997, combined net income would have been about $14.36
million ($1.00 per share) on revenues of $142.8 million, compared with net
income of $12.57 million ($.90 per share) on revenues of $109.5 million for the
corresponding period of 1996.
7
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Fair, Isaac and Company, Incorporated, provides products and services
designed to help a variety of businesses use data to make better decisions on
their customers and prospective customers. The Company's products include
statistically derived, rule-based analytical tools, software designed to
implement those analytical tools, and consulting services to help clients use
and track the performance of those tools. The Company also provides a range of
credit scoring and credit account management services in conjunction with credit
bureaus and credit card processing agencies. Its DynaMark subsidiary provides
data processing and database management services to businesses engaged in direct
marketing activities, many of which are in the credit and insurance industries.
This discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and Notes presented in the Company's
report on Form 10-K for the year ended September 30, 1996. In addition to
historical information, this report includes certain forward-looking statements
regarding events and trends which may affect the Company's future results. Such
statements are subject to risks and uncertainties that could cause the Company's
actual results to differ materially. Such factors include, but are not limited
to, those described in this discussion and analysis.
The Company is organized into business units which correspond to its
principal markets: consumer credit, insurance and direct marketing (DynaMark).
Sales to the consumer credit industry have traditionally accounted for the bulk
of the Company's revenues. Products developed specifically for a single user in
this market are generally sold on a fixed-price basis. Such products include
application and behavior scoring algorithms (also known as "analytic products"
or "scorecards"), credit application processing systems (ASAP(TM) and
CreditDesk(R)) and custom credit account management systems including those
marketed under the name TRIAD(TM). Software systems usually also have a
component of ongoing maintenance revenue, and CreditDesk systems have also been
sold under time-or volume-based price arrangements. Credit scoring and credit
account management services sold through credit bureaus and third-party credit
card processors are generally priced based on usage. Products sold to the
insurance industry are generally priced based on the number of policies in
force, subject to contract minimums. DynaMark employs a combination of fixed-fee
and usage-based pricing.
Results of Operations
Revenues
The following table sets forth for the fiscal periods indicated (a) the
percentage of revenues represented by fixed-price and usage-priced revenues from
the Credit business unit and the percentage of revenues contributed by the
DynaMark, Insurance and other business units; and (b) the percentage change in
revenues within each category in the fiscal 1997 period from the corresponding
period in fiscal 1996. Fixed-price revenues include all revenues from
application processing software, custom scorecard development and consulting
projects for credit. Virtually all usage revenues are generated through
third-party alliances such as those with credit bureaus and third-party credit
card processors.
Three-Months Nine-Months
Ended Percentage Ended Percentage
June 30, Change June 30, Change
-------- ------ -------- ------
1997 1996 1997 1996
---- ---- ---- ----
Credit
Fixed-price 29% 30% 29% 30% 29% 32%
Usage-priced 49% 52% 23% 51% 54% 23%
DynaMark 18% 15% 59% 15% 14% 46%
Insurance 3% 3% 27% 3% 3% 47%
Other 1% -- NM 1% -- NM
--- --- --- ---
Total revenues 100% 100% 32% 100% 100% 30%
=== === === ===
NM = Not meaningful
8
<PAGE>
Since its acquisition, DynaMark has taken on an increasing share of the
mainframe batch processing requirements of the Company's other business units.
During fiscal 1996, such intercompany revenue represented almost fifteen percent
of DynaMark's total revenues. Accordingly, DynaMark's externally reported
revenues tend to understate DynaMark's growth and contribution to the Company as
a whole. The increase in DynaMark's revenues shown in the foregoing table, which
excludes such intercompany revenues, was due primarily to increased revenues
from customers in the financial services industry.
The increase in usage revenues from the Credit business unit in the quarter
and nine-months ended June 30, 1997, compared with the same periods the prior
year, was due to continuing growth in (a) usage of the Company's scoring
services distributed through the three major credit bureaus in the United States
and (b) the number of bankcard accounts being managed by the Company's account
management services delivered through third-party processors. Revenues for the
credit bureau scoring services in the nine-months ended June 30, 1997, were
approximately 24 percent higher than in the first nine months of fiscal 1996.
Revenues from credit account management services delivered through third-party
processors in the most recent nine months were 19 percent higher than in the
corresponding period of fiscal 1996.
Sales of credit application scorecards and credit application processing
software, especially for small business lending, primarily accounted for the
increase in fixed-price credit revenues in the quarter and nine-months ended
June 30, 1997. Revenues from sales of credit application scorecards and credit
application processing software increased by approximately 40 percent in the
quarter and 41 percent in the nine-months ended June 30, 1997, compared with the
same periods of fiscal 1996. Revenues from end-user credit account management
systems ("TRIAD") and behavior scoring projects in the three- and nine-month
periods ended June 30, 1997, were down slightly from the same periods of 1996
due primarily to delays in the release of the next version of TRIAD software.
Revenues from credit bureau-related services have increased rapidly in each
of the last three fiscal years and accounted for approximately 39 percent of
revenues in fiscal 1996. Revenues from services provided through bankcard
processors also increased in each of these years, due primarily to increases in
the number of accounts at each of the major processors.
Revenues derived from alliances with credit bureaus and credit card
processors have accounted for much of the Company's revenue growth and
improvement in operating margins over the last three years. While the Company
has been very successful in extending or renewing such agreements in the past,
and believes it will generally be able to do so in the future, the loss of one
or more such alliances could have a significant impact on revenues and operating
margin. Revenues generated through the Company's alliances with Equifax, Inc.,
Experian Information Solutions, Inc. (formerly TRW Information Systems &
Services), and Trans Union Corporation each accounted for approximately nine to
eleven percent of the Company's total revenues in fiscal 1995 and 1996.
On November 14, 1996, it was announced that Experian was being acquired by
CCN Group Ltd., a subsidiary of Great Universal Stores, PLC. CCN is the
Company's largest competitor, worldwide, in the area of credit scoring.
TRW/Experian has offered scoring products developed by CCN in competition with
those of the Company for several years. The Company is not presently able to
determine what effect, if any, the acquisition of Experian by CCN will have on
its future revenues.
On September 30, 1996, amendments to the Fair Credit Reporting Act were
enacted and signed into law. The Company believes these changes to the federal
law regulating credit reporting will be favorable to the Company and its
clients. Among other things, the new law expressly permits the use of credit
bureau data to prescreen consumers for offers of credit and insurance and allows
affiliated companies to share consumer information with each other subject to
certain conditions. There is also a seven-year moratorium on new state
legislation on certain issues. However, the states remain free to regulate the
use of credit bureau data in connection with insurance underwriting. The Company
believes such enacted or proposed state regulation has had a negative impact on
its efforts to sell insurance risk scores through credit reporting agencies.
The increases in Insurance revenues for the three- and nine-month periods
ended June 30, 1997, compared with the same periods in fiscal 1996, were due
primarily to strong growth in insurance scoring services offered through
consumer reporting agencies.
9
<PAGE>
Revenues derived from outside of the United States represented
approximately 14 percent of total revenues in both the quarter and nine-months
ended June 30, 1997, compared with 15 percent of total revenues in the same
periods a year earlier.
Revenues from software maintenance and consulting services each accounted
for less than 10 percent of revenues in each of the three years in the period
ended September 30, 1996, and in the nine-months ended June 30, 1997. The
Company does not expect revenues from either of these sources to exceed 10
percent of revenues in the foreseeable future.
During the period since 1990, while the rate of account growth in the U.S.
bankcard industry has been slowing and many of the Company's largest
institutional clients have merged and consolidated, the Company has generated
above-average growth in revenues--even after correcting for the effect of
acquisitions--from its bankcard-related scoring and account management business
by deepening its penetration of large banks and other credit issuers. The
Company believes much of its future growth prospects will rest on its ability
(1) to develop new, high-value products and services for its present client base
of major U.S. consumer credit issuers; (2) to increase its penetration of
established or emerging credit markets outside the U.S. and Canada; and (3) to
expand--either directly or through further acquisitions--into relatively
undeveloped or underdeveloped markets for its products and services, such as
direct marketing, insurance, small business lending and healthcare information
management.
Over the long term, in addition to the factors discussed above, the
Company's rate of revenue growth--excluding growth due to acquisitions--is
limited by the rate at which it can recruit and absorb additional professional
staff. While the increased percentage of usage revenues may loosen this
constraint to some extent, management believes it will continue to exist
indefinitely. On the other hand, despite the high penetration the Company has
already achieved in certain markets, the opportunities for application of its
core competencies are much greater than it can pursue. Thus, the Company
believes it can continue to grow revenues, within the personnel constraint, for
the foreseeable future. At times management may forego short-term revenue growth
in order to devote limited resources to opportunities which it believes have
exceptional long-term potential. This occurred in the period from 1988 through
1990 when the Company devoted significant resources to developing the
usage-priced services distributed through credit bureaus and third-party
processors. Cumulative revenue since 1987, net of acquisitions, is slightly
above the Company's 20-year historical average revenue growth of about 22
percent.
Expenses
<TABLE>
The following table sets forth for the periods indicated (a) the percentage
of revenues represented by certain line items in the Company's consolidated
statements of income and (b) the percentage change in such items from the same
periods in the prior fiscal year.
<CAPTION>
Nine-Months Three-Months
Ended Percentage Ended Percentage
June 30, Change June 30, Change
-------- ------ -------- ------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues 100% 100% 30% 100% 100% 32%
Costs and expenses:
Cost of revenues 38 39 27% 38 38 29%
Sales and marketing 15 17 16% 16 17 23%
Research and development 8 5 115% 9 6 73%
General and administrative 20 19 39% 20 19 46%
Amortization of intangibles 1 1 27% 1 1 67%
--- --- --- ---
Total costs and expenses 82 81 33% 84 81 37%
--- --- --- ---
Income from operations 18 19 20% 16 19 13%
Other income and expense (1) 1 NM (1) -- NM
--- --- --- ---
Income before income taxes 17 20 19% 15 19 1%
Provision for income taxes 7 8 15% 7 7 7%
--- --- --- ---
Net income 10% 12% 21% 8% 12% (3)%
=== === === === === ===
NM = Not meaningful
</TABLE>
10
<PAGE>
There were two factors primarily responsible for the decrease in the
Company's operating margin during the quarter ended June 30, 1997. In order to
keep up with current demand but still proceed with the development of new
products and upgrading of internal information systems and facilities to
accommodate continued growth, the Company had to rely on expensive contract
labor. The Company's reliance on expensive contract labor impacts primarily cost
of revenues and general and administrative expenses. While the Company is
stepping up its recruiting and training efforts to reduce dependence on
consultants and thus reduce operating costs, the market for many of the
technical specialists needed remains very tight. In addition, the areas that
produced above-average growth in the most recent quarter are ones which have
traditionally had lower margins.
Cost of Revenues
Cost of revenues consists primarily of personnel, travel, and related
overhead costs; costs of computer service bureaus; and the amounts paid by the
Company to credit bureaus for scores and related information in connection with
the ScoreNet(R) service. The cost of revenues, as a percentage of revenues, was
essentially unchanged in the quarter ended June 30, 1997, as compared with the
same quarter a year earlier. Costs of ScoreNet data, as a percentage of
revenues, declined from the June 1996 quarter, but this was offset by increased
production costs due to above-average growth at DynaMark and in the fixed-price
segments of the Company's credit business. During the nine-month period ended
June 30, 1997, cost of revenues, as a percentage of revenues, declined slightly
from the same period a year earlier primarily because certain personnel whose
primary assignment had been production and delivery have been reassigned to
research and development activities.
Sales and Marketing
Sales and marketing expenses consist principally of personnel, travel,
overhead, advertising and other promotional expenses. These expenses, as a
percentage of revenues, decreased in the nine- and three-month periods ended
June 30, 1997, compared with the same periods in fiscal 1996, primarily due to
reductions in media advertising.
Research and Development
Research and development expenses include the personnel and related
overhead costs incurred in developing products, researching mathematical and
statistical algorithms, and developing software tools that are aimed at
improving productivity and management control. Research and development expenses
increased significantly over the corresponding nine- and three-month periods of
fiscal 1996. After several years of concentrating on developing new
markets--either geographical or by industry--for its existing technologies, the
Company has recently increased emphasis on developing new technologies,
especially in the area of software development.
General and Administrative
General and administrative expenses consist mainly of compensation expenses
for certain senior management, corporate facilities expenses, the costs of
administering certain benefit plans, legal expenses, expenses associated with
the exploration of new business opportunities and the costs of operating
administrative functions such as finance and computer information systems. As a
percentage of revenues, these expenses for the nine- and three-months periods
ended June 30, 1997, were higher than in the corresponding periods of fiscal
1996 due primarily to expansion of facilities to meet staff growth.
Amortization of intangibles
The Company is amortizing the intangible assets arising from various
acquisitions over periods ranging from two to fifteen years. The level of
amortization expense in future years will depend, in part, on the amount of
additional payments (earnouts) to the former shareholders of Credit & Risk
Management Associates, Inc., a privately held company acquired in 1996.
11
<PAGE>
Other Income and expense
Interest income, derived from the investment of funds surplus to the
Company's immediate operating requirements, increased over the nine- and
three-month periods a year earlier due to higher balances and slightly higher
interest rates. However, this increase in interest income was more than offset
by acquisition costs associated with the purchase of Risk Management
Technologies, Inc., and the increase in the Company's share of operating losses
in certain early stage development companies that are accounted for using the
equity method.
Provision for income taxes
The Company's effective tax rate was unchanged for the nine months ended
June 30, 1997 compared to June 30, 1996. The increase in the tax rate for the
three months ended June 30, 1997 compared to June 30, 1996 is due to the
non-deductible nature of the costs associated with the acquisition of RMT.
Financial Condition
Working capital increased from $32,853,000 at September 30, 1996 to
$41,676,000 at June 30, 1997. Cash and marketable investments decreased from
$26,482,000 at September 30, 1996, to $24,987,000 at June 30, 1997, due
primarily to expenditures for computing facilities, and leasehold improvements
and furniture and equipment for additional office space. The Company has no
long-term debt other than lease and employee incentive and benefit obligations.
The Company believes that cash and marketable securities on hand are adequate to
meet its capital and liquidity needs for the foreseeable future.
Interim Periods
The Company believes that all the necessary adjustments have been included
in the amounts shown in the consolidated financial statements contained in Item
1 above for the nine- and three-month periods ended June 30, 1997 and 1996, to
state fairly the results for such interim periods. This includes all normal
recurring adjustments that the Company considers necessary for a fair statement
thereof, in accordance with generally accepted accounting principles. This
report should be read in conjunction with the Company's 1996 Form 10-K.
Quarterly results may be affected by fluctuations in revenues associated
with credit card solicitations, by the timing of orders for and deliveries of
certain ASAP and TRIAD systems, and by the seasonality of ScoreNet purchases.
With the exception of the cost of ScoreNet data purchased by the Company, most
of its operating expenses are not affected by short-term fluctuations in
revenues; thus short-term fluctuations in revenues may have a significant impact
on operating results. However, in recent years, these fluctuations were
generally offset by the strong growth in revenues from services delivered
through credit bureaus and third-party bankcard processors.
Management believes that neither the quarterly variation in revenues and
net income, nor the results of operations for any particular quarter, are
necessarily indicative of results of operations for full fiscal years.
Accordingly, management believes that the Company's results should be evaluated
on an annual basis.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
11.1 Computation of Earnings per Share.
24.1 Power of Attorney (see page 14 of this Form 10-Q).
27 Financial Data Schedule.
(b) Reports on Form 8-K:
Two reports on Form 8-K were filed during the quarter ended June 30, 1997.
On April 23, 1997, the Company filed a report announcing that it had entered
into a preliminary agreement for the acquisition of Risk Management
Technologies, Inc. The Company filed a report on June 30, l997 announcing that
it had closed the acquisition of Risk Management Technologies, Inc. on June 23,
1997. See Note 5 to the Consolidated Financial Statements.
13
<PAGE>
SIGNATURES
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.
FAIR, ISAAC AND COMPANY, INCORPORATED
DATE: August 14, 1997
By PETER L. MCCORKELL
-----------------------------------
Peter L. McCorkell
Senior Vice President and Secretary
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints PETER L. McCORKELL his attorney-in-fact, with
full power of substitution, for him in any and all capacities, to sign any
amendments to this Report on Form 10-Q and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorney-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following person on behalf of the registrant
and in the capacities and on the date indicated.
DATE: August 14, 1997
By PATRICIA COLE
-----------------------------------
Patricia Cole
Senior Vice President and Chief
Financial Officer
14
<PAGE>
EXHIBIT INDEX
TO FAIR, ISAAC AND COMPANY, INCORPORATED
REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997
Sequentially
Exhibit No. Exhibit Numbered Page
- ----------- ------- -------------
11.1 Computation of earnings per share 16
24.1 Power of Attorney 14
27 Financial Data Schedule 17
15
<TABLE>
Exhibit 11.1
FAIR, ISAAC AND COMPANY, INCORPORATED
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS EXCEPT PER SHARE DATA)
<CAPTION>
Nine-Months Ended Three-Months Ended
June 30 June 30
------------------------- -------------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Primary Earnings Per Share:
Weighted Average Common Shares
Outstanding 12,659 12,380 12,703 12,392
Dilutive effect of outstanding options
(as determined by the
treasury stock method) 439 360 420 353
------- ------- ------- -------
Weighted Average Common Shares,
as Adjusted 13,098 12,740 13,123 12,745
======= ======= ======= =======
Net Income $13,732 $12,196 $ 4,155 $ 4,298
======= ======= ======= =======
Primary Earnings per Share $ 1.05 $ 0.96 $ 0.32 $ 0.34
======= ======= ======= =======
Fully Diluted Earnings Per Share:
Weighted Average Common Shares
Outstanding 12,659 12,380 12,703 12,392
Dilutive effect of outstanding options
(as determined by the
treasury stock method) 640 467 538 379
------- ------- ------- -------
Weighted Average Common Shares,
as Adjusted 13,299 12,847 13,241 12,771
======= ======= ======= =======
Net Income $13,732 $12,196 $ 4,155 $ 4,298
======= ======= ======= =======
Fully Diluted Earnings Per Share $ 1.03 $ 0.95 $ 0.31 $ 0.34
======= ======= ======= =======
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND INCOME STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 8,720
<SECURITIES> 5,006
<RECEIVABLES> 31,129
<ALLOWANCES> 565
<INVENTORY> 0
<CURRENT-ASSETS> 69,654
<PP&E> 60,562
<DEPRECIATION> 29,204
<TOTAL-ASSETS> 130,610
<CURRENT-LIABILITIES> 27,978
<BONDS> 1,306
<COMMON> 127
0
0
<OTHER-SE> 93,293
<TOTAL-LIABILITY-AND-EQUITY> 130,610
<SALES> 0
<TOTAL-REVENUES> 137,031
<CGS> 0
<TOTAL-COSTS> 52,047
<OTHER-EXPENSES> 20,509
<LOSS-PROVISION> 120
<INTEREST-EXPENSE> 102
<INCOME-PRETAX> 23,092
<INCOME-TAX> 9,360
<INCOME-CONTINUING> 13,732
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,732
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.03
</TABLE>
