SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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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 December 31, 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
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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 February 9, 1998, was 13,648,300.
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TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION
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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 4. Submission of Matters to a Vote of Security Holders............................... 13
ITEM 6. Exhibits and Reports on Form 8-K.................................................. 13
SIGNATURES ................................................................................ 14
EXHIBIT INDEX.................................................................................. 15
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2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements.
<TABLE>
FAIR, ISAAC AND COMPANY, INCORPORATED
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and September 30, 1997
(dollars in thousands)
<CAPTION>
December 31 September 30
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,497 $ 13,209
Short-term investments 5,110 6,108
Accounts receivable, net 35,827 36,147
Unbilled work in progress 19,254 18,176
Prepaid expenses and other current assets 3,873 3,673
Deferred income taxes 4,506 4,517
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Total current assets 80,067 81,830
Long-term investments 12,591 13,261
Property and equipment, net 38,629 34,486
Intangibles, net 8,242 8,361
Deferred income taxes 3,369 3,369
Other assets 3,966 3,921
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$ 146,864 $ 145,228
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilities $ 11,721 $ 8,228
Accrued compensation and employee benefits 12,275 19,160
Billings in excess of earned revenues 7,097 6,346
Capitalized leases 396 369
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Total current liabilities 31,489 34,103
Other liabilities 6,258 6,753
Capitalized leases 1,102 1,183
Commitments and contingencies -- --
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Total liabilities 38,849 42,039
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Stockholders' equity:
Preferred stock -- --
Common stock 135 135
Paid in capital in excess of par value 27,088 26,025
Retained earnings 81,150 77,453
Less treasury stock (11,933 shares at cost at 12/31/97;
12,114 at 9/30/97) (426) (433)
Cumulative translation adjustments (264) (308)
Unrealized gains on investments 332 317
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Total stockholders' equity 108,015 103,189
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$ 146,864 $ 145,228
<FN>
See accompanying notes to the consolidated financial statements.
</FN>
</TABLE>
3
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FAIR, ISAAC AND COMPANY, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
For the three months ended December 31, 1997 and 1996
(dollars in thousands, except per share data)
Three Months Ended
December 31
--------------------------
1997 1996
---- ----
Revenues $ 53,511 $ 43,337
Costs and expenses:
Cost of revenues 20,008 16,372
Sales and marketing 8,604 6,005
Research and development 6,598 3,543
General and administrative 11,398 9,482
Amortization of intangibles 321 336
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Total costs and expenses 46,929 35,738
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Income from operations 6,582 7,599
Other income, net 29 107
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Income before income taxes 6,611 7,706
Provision for income taxes 2,644 3,008
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Net income $ 3,967 $ 4,698
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Earnings per share:
Diluted $ .28 $ .33
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Basic $ .29 $ .35
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Shares used in computing earnings per share:
Diluted 14,346,000 14,155,000
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Basic 13,489,000 13,291,000
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See accompanying notes to the consolidated financial statements.
4
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FAIR, ISAAC AND COMPANY, INCORPORATED
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended December 31, 1997 and 1996
(dollars in thousands)
<CAPTION>
Three Months Ended
December 31
-----------------------------
1997 1996
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Cash flows from operating activities:
Net income $ 3,967 $ 4,698
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 3,474 2,617
Deferred compensation 240 --
Equity loss in investment 170 461
Deferred income taxes 26 (92)
Change to reflect change in Risk Management
Technologies fiscal year -- (214)
Changes in operating assets and liabilities:
Decrease in accounts receivable 364 1,568
Increase in unbilled work in progress (1,078) (1,188)
Decrease (increase) in prepaid expenses and other assets (200) 657
Increase in other assets (45) (711)
Increase in accounts payable and other accrued liabilities 3,083 1,284
Decrease in accrued compensation and employee benefits (6,885) (6,724)
Increase in billings in excess of earned revenues 751 1,690
Increase (decrease) in other liabilities (1,119) 91
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Net cash provided by operating activities 2,748 4,137
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Cash flows from investing activities:
Purchases of property and equipment (6,008) (3,556)
Purchase of DynaMark, Printronic and CRMA (91) (78)
Purchases of investments (351) --
Proceeds from maturities of investments 2,019 3,459
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Net cash used by investing activities (4,431) (175)
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Cash flows from financing activities:
Principal payments of capital lease obligations (94) (125)
Issuance of common stock 335 98
Dividends paid (270) (252)
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Net cash used by financing activities (29) (279)
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Increase (decrease) in cash and cash equivalents (1,712) 3,683
Cash and cash equivalents, beginning of period 13,209 11,487
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Cash and cash equivalents, end of period $ 11,497 $ 15,170
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<FN>
See accompanying notes to the consolidated financial statements.
</FN>
</TABLE>
5
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FAIR, ISAAC AND COMPANY, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
Note 1 Earnings Per Share
The following reconciles the numerators and denominators of diluted and basic
earnings per share (EPS):
<CAPTION>
Three months ended December 31,
(in thousands, except per share data) 1997 1996
- -----------------------------------------------------------------------------------------------------
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Numerator - Net income $ 3,967 $ 4,698
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Denominator - Shares:
Diluted weighted-average shares and assumed conversions
of stock options 14,346 14,155
Effect of dilutive securities - employee stock options (857) (864)
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Basic weighted-average shares 13,489 13,291
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Earnings per share:
Diluted $ .28 $ .33
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Basic $ .29 $ .35
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</TABLE>
Options to purchase 132,000 and 59,000 shares of common stock at prices
ranging from $41.88 to $45.63 and $40.00 to $41.88 were outstanding at December
31, 1997 and 1996, respectively. The options were not included in the
computation of diluted EPS because the option's exercise price was greater than
the average market price of the common shares for the three-months ended
December 31, 1997 and 1996.
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Note 2 Cash Flow Statement
Supplemental disclosure of cash flow information:
<CAPTION>
Three months ended December 31,
(dollars in thousands) 1997 1996
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Income tax payments $ 1,058 $ 902
Interest paid $ 31 $ 85
Non-cash investing and financing activities:
Tax benefit of stock options $ 384 $ --
Purchase of CRMA with common stock $ 111 $ --
Capital lease obligations $ 40 $ --
Issuance of common stock to ESOP $ -- $ 969
Contributions of treasury stock to ESOP $ -- $ 499
</TABLE>
Note 3 Merger
In July 1997, the Company issued 1,252,665 shares of its common stock
(including 544,218 shares underlying options assumed by the Company) in
connection with the merger with Risk Management Technologies (RMT). The
acquisition has been accounted for under the pooling-of-interests method.
Accordingly, the financial statements have been restated for all prior periods
to include RMT. Further, all common share and per share data have been restated
for prior periods.
RMT previously used the fiscal year ended December 31 for its financial
reporting. RMT's operating results for the year ended December 31, 1996 are
included in the accompanying balance sheet in the line item retained earnings.
The statement of income's comparative 1997 results reflect the operations of the
Company and RMT for the three-month period ended December 31, 1996. Accordingly,
the duplication of RMT's net income, for the three months ended December 31,
1996, has been adjusted by a $214,000 charge to retained earnings in fiscal
1997. The balance sheet at September 30, 1996 has been derived from the
combination of the audited consolidated financial statements of the Company at
that date and the audited financial statements of RMT at December 31, 1996.
6
<PAGE>
Note 4 Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, iReporting Comprehensive Income.i
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 iother comprehensive income.i 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 consolidated financial
statements to this pronouncement.
In June 1997, the FASB issued SFAS No. 131, iDisclosures about Segments of
an Enterprise and Related Information.i 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 fiscal years beginning after December 15,
1997. Management intends to conform its consolidated financial statements to
this pronouncement.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position No. 97-2, "Software Revenue Recognition." This
statement establishes standards for when to recognize revenue on software
transactions and in what amounts for licensing, selling, leasing or otherwise
marketing computer software. This statement is effective for financial
statements issued for fiscal years beginning after December 15, 1997. Management
intends to conform its consolidated financial statements to this pronouncement.
The Company is currently evaluating the impact of the statement in the
accompanying consolidated financial statements.
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, prospective customers and existing portfolios. 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.
On July 21, l997, the Company acquired Risk Management Technologies (RMT),
a privately held company, which provides enterprise-wide risk management and
performance measurement solutions to major financial institutions. The Company's
historical statements for prior periods have been restated to account for the
Company's merger with RMT on a pooling-of-interests basis.
The Company is organized into business units that correspond to its
principal markets: consumer credit, insurance, direct marketing (DynaMark),
enterprise-wide financial risk management (RMT) and a new unit, healthcare
information. 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 and RMT employ a
combination of fixed-fee and usage-based pricing, and the Healthcare Information
unit intends to employ a combination of fixed-fee and usage-based pricing for
its products.
Both internal and external factors accounted for the decrease in the
Company's operating margin during the quarter ended December 31, 1997 compared
with the same period in fiscal l997. The Company implemented hiring and
investment plans based on greater planned revenue growth than was achieved.
Reflecting heavy investment in future revenue streams, research and development
costs and sales and marketing costs for the quarter were significantly higher
than in the first three months of fiscal 1997. The Company's operating margin
during the quarter was also impacted by external factors such as financial
services industry consolidations and focus by Company's clients on Year 2000
compliance.
This discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and Notes. In addition to historical
information, this report includes certain forward-looking statements regarding
events and trends that 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.
8
<PAGE>
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, RMT, Insurance and Healthcare Information business units; and (b) the
percentage change in revenues within each category from the corresponding period
in the prior fiscal year. Credit fixed-price revenues include all revenues from
custom scorecard, software and consulting projects. Most credit usage revenues
are generated through third-party alliances such as those with credit bureaus
and third-party credit card processors. In addition, some credit scorecards and
software products are licensed under volume-based fee arrangements and these are
included in credit usage-priced revenues.
Period-to-Period
Percentage of Percentage Changes
Revenue Quarter Ended
Quarter Ended 12/31/97
December 31, Compared to
1997 1996 12/31/96
- --------------------------------------------------------------------------------
Credit
Fixed-price 23% 29% (1%)
Usage-priced 52% 50% 28%
DynaMark 17% 14% 57%
RMT 3% 4% (22%)
Insurance 4% 3% 77%
Healthcare Information 1% -- NM
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Total revenues 100% 100% 23%
======= ======
NM = Not meaningful
A decline in sales of credit application scorecards and credit application
processing primarily accounted for the decreases in fixed-price credit revenues
in the quarter ended December 31, 1997. Revenues from sales of credit
application scorecards and credit application processing software decreased by
approximately 16 percent in the quarter, compared with the same period of fiscal
1997 due primarily to a decline in revenues derived from markets outside the
United States. Revenues from end-user credit account management systems
("TRIAD") and behavior scoring projects in the three-month period ended December
31, 1997, were up 24 percent from the same period of fiscal 1997 due primarily
to the release of the next version of TRIAD software.
The increase in usage revenues from the Credit business unit in the quarter
ended December 31, 1997, compared with the same period 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 three-months ended December 31, 1997, were approximately 27
percent higher than in the first three months of fiscal 1997; approximately
one-third of this increase was due to the receipt of usage revenue pertaining to
prior years from audits of clients. Revenues from credit account management
services delivered through third-party processors in the most recent three
months were 25 percent higher than in the corresponding period of fiscal 1997.
Revenues from credit bureau-related services have increased rapidly in each
of the last three fiscal years and accounted for approximately 35 percent of
revenues in fiscal 1997. 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.
9
<PAGE>
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 fiscal 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 eight to ten percent of the Company's total revenues in fiscal
1996 and 1997.
On November 14, 1996, it was announced that Experian had been 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 acquisition has had no apparent
impact on the Company's revenues from Experian.
On September 30, 1997, amendments to the federal Fair Credit Reporting Act
became effective. 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
enacted or proposed state regulation of the insurance industry has had a
negative impact on its efforts to sell insurance risk scores through credit
reporting agencies.
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 1997, such intercompany revenue represented more than fourteen
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. RMT's revenues
decreased in the quarter ended December 31, l997 due to the impact of bank
consolidations.
The increases in Insurance revenues for the three-month period ended
December 31, 1997, compared with the same period in fiscal 1997, were due
primarily to strong growth in insurance scoring services offered through
consumer reporting agencies. In the quarter ended December 31, l997, the
Company's new business unit, Healthcare Information, introduced a receivables
management system for hospitals and healthcare providers and derived revenues
from providing analytical marketing services to a large pharmaceuticals
manufacturer to help improve customer relationships and management of
prescription compliance (i.e., patient's fulfillment of prescriptions and taking
them to completion). This unit had no recorded revenues in the corresponding
quarter in fiscal 1997.
Revenues derived from outside of the United States represented
approximately 17 percent of total revenues in the quarter ended December 31,
1997, compared with 16 percent of total revenues in the same period 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, 1997, and in the three-months ended December 31, 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 adjusting 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
to: (1) develop new, high-value products, (2) increase its penetration of
established or emerging credit markets outside the U.S. and Canada and (3)
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.
10
<PAGE>
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. Management believes this constraint 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 that 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.
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
quarter in the prior fiscal year.
<CAPTION>
Period-to-Period
Percentage of Revenue Percentage Changes
--------------------- ------------------
Quarter Ended
Quarter Ended 12/31/97
December 31, Compared
---------------------- to Quarter Ended
1997 1996 12/31/96
---- ---- ------------------
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Revenues............................... 100% 100% 23%
Costs and expenses:
Cost of revenues.................... 38 38 22
Sales and marketing................. 16 14 43
Research and development............ 12 8 86
General and administrative.......... 21 22 20
Amortization of intangibles......... 1 1 (4)
---- ----
Total costs and expenses............ 88 83 31
---- ----
Income from operations................. 12 17 (13)
Other income, net...................... <1 <1 (73)
---- ----
Income before income taxes............. 12 17 (14)
Provision for income taxes............. 5 7 (12)
---- ----
Net income............................. 7% 10% (16)
==== ====
</TABLE>
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 December 31, 1997, as compared with
the same quarter a year earlier. Costs of ScoreNet data, as a percentage of
revenues, declined from the December 1996 quarter, but this was offset by
increased production costs due to above-average growth at DynaMark.
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, increased in the three-month period ended December 31,
1997, compared with the same period in fiscal 1997, primarily due to increases
in media advertising for introduction of new products and increased visibility
of the Company's brand, and the costs of researching market opportunities
outside the United States.
11
<PAGE>
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 three-month period of fiscal
1997. After several years of concentrating on developing new markets--either
geographical or by industry--for its existing technologies, the Company has
increased emphasis on developing new technologies, especially in the area of
software development. Research and development expenditures in the three month
period ending December 31, l998 were primarily related to new bankruptcy scoring
products for Visa (Integrated Solutions Concepts) and Trans Union, and joint
product development with Deluxe Financial Services, Inc.
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 three-month period ended December
31, 1997, were sightly lower than in the corresponding period of fiscal 1997 due
primarily to decreased expenditures for facilities expansion.
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.
Other Income and expense
Interest income, derived from the investment of funds surplus to the
Company's immediate operating requirements, was essentially the same as in the
three-month period a year earlier. However, interest income was offset by the
increase in the Company's share of operating losses from equity investments in
certain early stage development companies and foreign currency losses. The
Company expects that operating losses from equity investments will not be
material in the foreseeable future.
Provision for income taxes
The Company's effective tax rate increased from 39% to 40% for the three
months ended December 31, 1997 compared to December 31, 1996, primarily because
net operating losses carryforward deductions were exhausted in fiscal l997.
Financial Condition
Working capital increased from $47,727,000 at September 30, 1997 to
$48,578,000 at December 31, 1997. Cash and marketable investments decreased from
$27,941,000 at September 30, 1997, to $26,219,000 at December 31, 1997, due
primarily to expenditures for officer and employee incentive plans payouts,
computer hardware and software, and leasehold improvements and furniture and
equipment for additional office space. The Company's long-term debt is mainly
due to lease and employee incentive and benefit obligations.
On December 1, 1997, the Company exercised an option to purchase
undeveloped land in San Rafael, California, with the intention of constructing
an office complex to accommodate future growth. Development is expected to
commence in fiscal 1998 and will involve a material capital commitment by the
Company. The Company intends to fund the acquisition and development of this
land using long-term debt, equity or other financing. Excepting external
financing of this capital commitment, the Company believes that the cash and
12
<PAGE>
marketable securities on hand, along with cash expected to be generated by
operations, will be adequate to meet its capital and liquidity needs for both
the current year and 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 three-month periods ended December 31, 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 1997 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.
PART II - OTHER INFORMATION
<TABLE>
ITEM 4. Submission of Matters to a Vote of Security Holders.
At the Annual Meeting of Stockholders of the Company held on February 3,
1998, the Company's stockholders voted in favor of: (i) the election of nine
directors to the Company's Board of Directors, (ii) amendments to the Company's
Long-term Incentive Plan and (iii) the ratification of KPMG Peat Marwick LLP as
the Company's independent auditors. The number of votes for, withheld and
against, as well as the number of abstentions and broker non-votes as to each
matter approved at the Annual Meeting of Stockholders were as follows:
<CAPTION>
Broker
Matter For Withheld Against Abstain Non-votes
- ------ --- -------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Election of Directors
A. George Battle 11,654,345 37,559 N/A N/A 0
Bryant J. Brooks, Jr. 11,633,550 58,354 N/A N/A 0
H. Robert Heller 11,633,432 58,472 N/A N/A 0
Guy R. Henshaw 11,654,995 36,909 N/A N/A 0
David S.P. Hopkins 11,654,965 36,939 N/A N/A 0
Robert M. Oliver 11,627,222 64,682 N/A N/A 0
Larry E. Rosenberger 11,627,695 64,209 N/A N/A 0
Robert D. Sanderson 11,610,375 81,529 N/A N/A 0
John D. Woldrich 11,626,630 65,274 N/A N/A 0
Approval of Amendments to Company's Long-term Incentive Plan
7,901,474 N/A 2,097,058 249,162 1,444,210
Ratification of Auditors
11,481,843 N/A 137,999 72,062 0
</TABLE>
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
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 December
31, 1997. On December 11, 1997, the Company filed a report announcing that it
had exercised an option to purchase undeveloped land in San Rafael, with the
intention of constructing an office complex to accommodate future growth. The
Company filed a report on
13
<PAGE>
December 16, l997 covering a press release issued December 16, l997 announcing
that it expected healthy revenue growth but lower operating margin in the
quarter ending December 31, 1997.
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: February 12, 1998
By /s/ 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: February 12, 1998
By /s/ 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 DECEMBER 31, 1997
Sequentially
Exhibit No. Exhibit Numbered Page
- ----------- ------- -------------
24.1 Power of Attorney 14
27 Financial Data Schedule 16
15
<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> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 11,497
<SECURITIES> 5,110
<RECEIVABLES> 36,597
<ALLOWANCES> 770
<INVENTORY> 0
<CURRENT-ASSETS> 80,067
<PP&E> 71,136
<DEPRECIATION> 32,507
<TOTAL-ASSETS> 146,864
<CURRENT-LIABILITIES> 31,489
<BONDS> 1,102
0
0
<COMMON> 135
<OTHER-SE> 107,700
<TOTAL-LIABILITY-AND-EQUITY> 146,864
<SALES> 0
<TOTAL-REVENUES> 53,511
<CGS> 0
<TOTAL-COSTS> 20,008
<OTHER-EXPENSES> 8,604
<LOSS-PROVISION> 100
<INTEREST-EXPENSE> 131
<INCOME-PRETAX> 6,611
<INCOME-TAX> 2,644
<INCOME-CONTINUING> 3,967
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,967
<EPS-PRIMARY> .29
<EPS-DILUTED> .28
</TABLE>
