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, 1999
-------------
[ ] 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 6, 1999, was 14,021,163.
<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............................................. 9
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.......... 17
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.................................... 17
SIGNATURES ................................................................ 18
Exhibit Index................................................................ 19
2
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements.
FAIR, ISAAC AND COMPANY, INCORPORATED
CONSOLIDATED BALANCE SHEETS
June 30, 1999 and September 30, 1998
(dollars in thousands)
(Unaudited)
<CAPTION>
June 30, September 30,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 12,825 $ 14,242
Marketable securities 7,336 18,283
Accounts receivable, net 40,218 39,028
Unbilled work in progress 26,016 22,004
Prepaid expenses and other current assets 9,681 4,040
Deferred income taxes 5,399 5,016
--------- ---------
Total current assets 101,475 102,613
Marketable securities 35,782 24,368
Property and equipment, net 36,459 36,893
Intangibles, net 11,278 10,458
Deferred income taxes 6,398 6,398
Other assets 8,867 8,884
--------- ---------
$ 200,259 $ 189,614
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilities $ 14,037 $ 17,418
Accrued compensation and employee benefits 20,847 22,065
Billings in excess of earned revenues 7,721 7,862
Capital lease obligations 427 416
--------- ---------
Total current liabilities 43,032 47,761
Other liabilities 7,692 7,613
Capital lease obligations 472 789
--------- ---------
Total liabilities 51,196 56,163
--------- ---------
Stockholders' equity:
Preferred stock -- --
Common stock 143 140
Paid in capital in excess of par value 37,605 32,454
Retained earnings 121,316 100,678
Less treasury stock (274,888 shares at cost at 6/30/99; 9,787 at (9,695) (351)
9/30/98)
Accumulated other comprehensive income (loss) (306) 530
--------- ---------
Total stockholders' equity 149,063 133,451
--------- ---------
$ 200,259 $ 189,614
========= =========
<FN>
See accompanying notes to the consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
FAIR, ISAAC AND COMPANY, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the nine month and three month periods ended June 30, 1999 and 1998
(in thousands, except per share data)
(Unaudited)
<CAPTION>
Nine Months Ended June 30, Three Months Ended June 30,
--------------------------- ---------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 204,092 $ 177,808 $ 67,241 $ 64,642
Costs and expenses:
Cost of revenues 77,208 63,017 25,196 21,946
Sales and marketing 30,465 27,341 10,148 9,451
Research and development 22,961 20,925 7,401 6,945
General and administrative 38,002 38,822 12,940 14,707
Amortization of intangibles 1,287 982 445 406
--------- --------- --------- ---------
Total costs and expenses 169,923 151,087 56,130 53,455
--------- --------- --------- ---------
Income from operations 34,169 26,721 11,111 11,187
Other income (expense), net 2,557 518 595 (21)
--------- --------- --------- ---------
Income before income taxes 36,726 27,239 11,706 11,166
Provision for income taxes 15,241 11,385 4,733 4,767
--------- --------- --------- ---------
Net income $ 21,485 $ 15,854 $ 6,973 $ 6,399
========= ========= ========= =========
Net income $ 21,485 $ 15,854 $ 6,973 $ 6,399
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during period (269) 176 (284) 95
Less: reclassification adjustment (281) -- -- --
--------- --------- --------- ---------
Net unrealized gains (losses) (550) 176 (284) 95
Foreign currency translation adjustments (286) 24 (65) (6)
--------- --------- --------- ---------
Other comprehensive income (836) 200 (349) 89
--------- --------- --------- ---------
Comprehensive income $ 20,649 $ 16,054 $ 6,624 $ 6,488
========= ========= ========= =========
Earnings per share:
Diluted $ 1.49 $ 1.11 $ .49 $ .45
========= ========= ========= =========
Basic $ 1.52 $ 1.16 $ .50 $ .46
========= ========= ========= =========
Shares used in computing earnings per share:
Diluted 14,423 14,340 14,301 14,359
========= ========= ========= =========
Basic 14,090 13,696 14,081 13,894
========= ========= ========= =========
<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 months ended June 30, 1999 and 1998
(in thousands)
(Unaudited)
<CAPTION>
Nine Months Ended June 30,
--------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 21,485 $ 15,854
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 12,637 11,125
Deferred compensation 200 408
Gain on sale of marketable securities (483) (165)
Deferred income taxes -- 311
Other 162 8
Changes in operating assets and liabilities:
Increase in accounts receivable (1,285) (1,660)
Increase in unbilled work in progress (4,012) (2,392)
Increase in prepaid expenses and other assets (5,642) (4,064)
Decrease in other assets 19 343
Increase (decrease) in accounts payable and other accrued liabilities (2,075) 4,835
Increase in accrued compensation and employee benefits 246 2,149
Increase (decrease) in billings in excess of earned revenues (141) 2,092
Decrease in other liabilities (1,563) (47)
-------- --------
Net cash provided by operating activities 19,548 28,797
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (9,428) (11,447)
Payments for acquisition of subsidiary (1,455) (3,146)
Purchases of marketable securities (69,472) (16,708)
Proceeds from sale of marketable securities 46,647 --
Proceeds from maturities of marketable securities 21,710 5,010
-------- --------
Net cash used in investing activities (11,998) (26,291)
-------- --------
Cash flows from financing activities:
Principal payments of capital lease obligations (306) (288)
Proceeds from the exercise of stock options and issuance of stock 2,475 2,181
Dividends paid (847) (823)
Repurchase of company stock (10,289) (28)
-------- --------
Net cash provided by (used in) financing activities (8,967) 1,042
-------- --------
Increase (decrease) in cash and cash equivalents (1,417) 3,548
Cash and cash equivalents, beginning of period 14,242 13,209
-------- --------
Cash and cash equivalents, end of period $ 12,825 $ 16,757
======== ========
<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 General
In management's opinion, the accompanying unaudited consolidated
financial statements for Fair, Isaac & Company, Incorporated (the "Company") for
the nine and three months ended June 30, 1999 and 1998 have been prepared in
accordance with generally accepted accounting principles for interim financial
statements and include all adjustments (consisting only of normal recurring
accruals) that the Company considers necessary for a fair presentation of its
financial position, results of operations, and cash flows for such periods.
However, the accompanying financial statements do not contain all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. All such financial statements presented
herein are unaudited. The September 30, 1998 balance sheet, however, has been
derived from audited financial statements. This report and the accompanying
financial statements should be read in connection with the Company's audited
financial statements and notes thereto presented in its Annual Report on Form
10-K for the fiscal year ended September 30, 1998. Footnotes that would
substantially duplicate the disclosures in the Company's audited financial
statements for the fiscal year ended September 30, 1998, contained in the 1998
Form 10-K, have been omitted. The interim financial information contained in
this report is not necessarily indicative of the results to be expected for any
other interim period or for the full fiscal year ending September 30, 1999.
Note 2 Earnings Per Share
<TABLE>
The following reconciles the numerators and denominators of diluted and
basic earnings per share (EPS):
<CAPTION>
Nine months ended Three months ended
June 30, June 30,
(in thousands, except per share data) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator - Net income $ 21,485 $ 15,854 $ 6,973 $ 6,399
======== ======== ======== ========
Denominator - Shares:
Diluted weighted-average shares and assumed
conversions of stock options 14,423 14,340 14,301 14,359
Effect of dilutive securities - employee stock options (333) (644) (220) (465)
-------- -------- -------- --------
Basic weighted-average shares 14,090 13,696 14,081 13,894
======== ======== ======== ========
Earnings per share:
Diluted $ 1.49 $ 1.11 $ .49 $ .45
======== ======== ======== ========
Basic $ 1.52 $ 1.16 $ .50 $ .46
======== ======== ======== ========
</TABLE>
The computation of diluted EPS for the nine months ended June 30, 1999
and 1998 excludes stock options to purchase 177,000 and 959,000 shares of common
stock, respectively, and the computation for quarterly EPS excludes stock
options to purchase 1,462,000 and 969,000 shares, respectively. The shares were
excluded because the exercise prices for the options were greater than the
respective average market price of the common shares and their inclusion would
be antidilutive.
6
<PAGE>
Note 3 Cash Flow Statement
Supplemental disclosure of cash flow information:
Nine months ended June 30,
(in thousands) 1999 1998
- --------------------------------------------------------------------------------
Income taxes paid $20,781 $12,489
Interest paid $ 98 $ 89
Non-cash investing and financing activities:
Issuance of common stock to ESOP $ 1,455 $ 1,323
Assets acquired through financing $ 1,641 $ --
Tax benefit of stock options $ 1,306 $ 1,171
Purchase of CRMA with common stock $ 654 $ 111
Vesting of restricted stock $ 8 $ 84
Capital lease obligations $ -- $ 40
Note 4 Reclassifications
Certain prior period balances have been reclassified to conform to the
current period presentation.
Note 5 New Accounting Pronouncements
During the first quarter of fiscal year 1999, the Company adopted
Statement of Position No. 97-2 ("SOP 97-2"), "Software Revenue Recognition," as
amended by Statement of Position No. 98-4 "Deferral of the Effective Date of a
Provision of SOP 97-2, Software Revenue Recognition." SOP 97-2 provides guidance
for software revenue recognition. The adoption of SOP 97-2 did not have a
significant impact on the Company's financial position or results of operations.
In December 1998, the AICPA issued Statement of Position No. 98-9 ("SOP
98-9"), "Modifications of SOP 97-2, Software Revenue Recognition, with Respect
to Certain Transactions." SOP 98-9 requires recognition of revenue using the
"residual method" in a multiple-element software arrangement when fair value
does not exist for one or more of the delivered elements in the arrangement.
Under the "residual method," the total fair value of the undelivered elements is
deferred and recognized in accordance with SOP 97-2. SOP 98-9 also extends the
deferral of the application of SOP 97-2 to certain other multiple-element
software arrangements to the Company's fiscal year ending September 30, 2000.
Had the Company implemented SOP 98-9 as of October 1, 1998, there would have
been approximately $6.0 million less in revenue for the nine months ended June
30, 1999 that would have been recognized in future periods. Beginning with
fiscal year 2000, management intends to conform its consolidated financial
statements to this 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 annual financial statements issued for fiscal years beginning after December
15, 1997. Beginning with fiscal year 1999, management intends to conform its
annual consolidated financial statements to this pronouncement.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure
about Pensions and Other Postretirement Benefits." The statement standardizes
the disclosure requirements for pension and other
7
<PAGE>
postretirement benefits. This statement is effective for financial statements
issued for fiscal years beginning after December 15, 1997. Beginning with fiscal
year 1999, management intends to conform its annual consolidated financial
statements to this pronouncement.
In March 1998, the AICPA issued SOP No. 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." The SOP requires
that certain costs related to the development or purchase of internal-use
software be capitalized and amortized over the estimated useful life of the
software. The SOP also requires that costs related to the preliminary project
stage and the post-implementation/operations stage of an internal-use computer
software development project be expensed as incurred. This statement is
effective for financial statements issued for fiscal years beginning after
December 15, 1998. The Company's management believes that the adoption of SOP
98-1 will not have a material impact on the Company's results of operations.
Beginning with fiscal year 2000, management intends to conform its consolidated
financial statements to this pronouncement.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 is effective for all quarters of fiscal years beginning after June 15, 1999.
SFAS No. 133 requires the recognition of all derivatives on the balance sheet at
fair value. In July 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133, An Amendment of FASB Statement No.133." SFAS No. 137
defers the effective date of SFAS No. 133 by one year. SFAS No. 133 is now
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. Because the Company currently holds no derivative instruments and does not
engage in hedging activities, management expects that the adoption of SFAS No.
133 will have no material impact on our financial position, results of
operations or cash flows. Management intends to conform its consolidated
statements to this pronouncement.
8
<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.
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, RMT and the
healthcare information unit employ a combination of fixed-fee and usage-based
pricing for their products.
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.
9
<PAGE>
Results of Operations
Revenues
<TABLE>
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.
<CAPTION>
Percentage of Percentage of
Revenue Revenue
Three Months Ended Percentage Nine Months Ended Percentage
June 30, Change June 30, Change
-------- ------ -------- ------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Credit
Fixed-price 23% 25% (5%) 25% 25% 10%
Usage-priced 47% 48% 2% 47% 48% 12%
DynaMark 25% 21% 28% 23% 20% 37%
RMT 1% 2% (58%) 1% 3% (51%)
Insurance 3% 4% (10%) 3% 4% 3%
Healthcare Information 1% less than 1% 56% 1% less than 1% 173%
--- ---- ----- ---
Total revenues 100% 100% 4% 100% 100% 15%
==== ==== ==== ====
<FN>
NM = Not meaningful
</FN>
</TABLE>
The decrease in fixed-price credit revenues in the three months ended
June 30, 1999 was attributable principally to a decline in sales of the
Company's scoring and application processing software products primarily due to
external market forces relating to Year 2000. Compared with the same period of
fiscal 1998, revenues from sales of credit application scorecards and credit
application processing software decreased by 11 percent in the quarter, and
revenues from end-user credit account management systems ("TRIAD") and behavior
scoring projects in the three-month period ended June 30, 1999 were down 2
percent from the same period of fiscal 1998. These decreases were offset
slightly by a 13 percent increase in revenues from Credit & Risk Management
Associates, Inc. ("CRMA") in the three months ended June 30, 1999 from the same
period in 1998.
The increase in fixed-price credit revenues in the nine-months ended
June 30, 1999 was due primarily to increased revenues from sales of credit
application scorecards and credit application processing software, sales of
end-user credit account management systems ("TRIAD") and behavior scoring
projects and CRMA. Revenues from sales of credit application scorecards and
credit application processing software increased by 6 percent in the nine-months
ended June 30,1999 and revenues from end-user credit account management systems
("TRIAD") and behavior scoring projects were up 12 percent in the nine-month
period ended June 30, 1999, compared with the same period of fiscal 1998.
Revenues from CRMA were up 34 percent in the nine months ended June 30, 1999,
compared with the same period in the prior fiscal year.
The increases in usage revenues from the Credit business unit in the
quarter and nine months ended June 30, 1999, compared with the same periods of
the prior year, were 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
10
<PAGE>
number of bankcard accounts being managed by the Company's account management
services delivered through third-party processors. However, the slower growth in
revenues experienced in the quarter ended June 30, 1999 compared with the same
period of the prior year, was due to the ongoing impact of bank consolidations.
Revenues for the credit bureau scoring services were approximately 4 percent
higher in the three months ended June 30, 1999 than in fiscal 1998, offset in
part by a 2 percent decrease in revenues from credit account management services
delivered through third-party higher processors. Revenues for the credit bureau
scoring services in the nine months ended June 30, l999 were approximately 13
percent higher than in the same period in fiscal 1998. In the most recent nine
months, revenues from credit account management services delivered through
third-party processors were 7 percent higher than in the corresponding period of
fiscal 1998.
Revenues from credit bureau-related services increased 22 percent in
both fiscal l997 and fiscal 1998 and accounted for approximately 35 percent of
revenues in fiscal 1997 and 1998. During the nine months ended June 30, 1999,
revenues from credit bureau-related services increased 13 percent as compared to
the nine months ended June 30, 1998. Revenues from services provided through
bankcard processors also increased in each of these years, primarily due 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 in 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 or an adverse change in terms
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 7 to 10 percent of the
Company's total revenues in fiscal 1998.
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 1998, such intercompany revenue represented more than 8 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
three- and nine-month periods ended June 30, l999, principally due to the impact
of bank consolidations and delays in releases of new products.
The decrease in Insurance revenues for the three-month period ended
June 30, 1999, compared with the same period in fiscal 1998, were due primarily
to lower sales of custom analytic underwriting products. Insurance revenues
increased for the nine-month period ended June 30, l999, compared with the same
period in fiscal 1998, due primarily to growth in insurance scoring services
offered through consumer reporting agencies. In the three-and nine month periods
ended June 30, l999, the Company's Healthcare Information business unit 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). In the quarter ended December 31, 1998, the Company signed
its first revenue-generating contract for its receivables management system for
hospitals and healthcare providers (introduced in December 1997) and in the
three and nine months ended June 30, l999, derived revenues from this new
product.
Revenues derived from outside of the United States represented
approximately 15% of total revenues in both the quarter and nine months ended
June 30, l999, compared with approximately 18% of total revenues in the quarter
and nine months ended June 30, l998.
11
<PAGE>
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, 1998, and in the nine-months ended June 30, 1999. 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: (a) develop new, high-value products, (b) increase its penetration of
established or emerging credit markets outside the U.S. and Canada and (c)
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, healthcare information
management, telecommunications and e-business. During fiscal 1998, the Company's
backlog of orders for fixed-priced products declined slightly, and during the
nine months ended June 30, l999, this backlog declined an additional $10.8
million. This indicates that revenue growth in the remainder of fiscal 1999 and
later years may depend to a large extent on sales of newly developed products,
and that revenue growth during the remainder of fiscal 1999 may be slower than
during the nine months ended June 30, l999.
In March 1999, the Company announced a new strategic focus and several
growth initiatives. While continuing to focus on its traditional core business,
financial services, the Company will pursue additional opportunities in the
healthcare market. The Company has also formed two new business units to pursue
opportunities in the telecommunications and e-business industries and is
realigning existing business and service units to support these new initiatives.
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 is the basis for the Company's new strategic focus on
opportunities in the telecommunications and electronic commerce markets. A
similar longer range strategic initiative occurred during 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.
12
<PAGE>
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
-------- ------ -------- ------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues 100% 100% 15% 100% 100% 4%
Costs and expenses:
Cost of revenues 38 35 23% 37 34 15%
Sales and marketing 15 15 11% 15 14 7%
Research and development 11 12 10% 11 11 7%
General and administrative 18 22 (2%) 19 23 (12%)
Amortization of intangibles 1 1 31% 1 1 10%
--- --- --- ---
Total costs and expenses 83 85 12% 83 83 5%
--- --- --- ---
Income from operations 17 15 28% 17 17 (1%)
Other income and expense 1 less than 1 NM less than 1 less than 1 NM
--- --- --- ---
Income before income taxes 18 15 35% 17 17 5%
Provision for income taxes 7 6 34% 7 7 (1%)
--- --- --- ---
Net income 11% 9% 36% 10% 10% 9%
=== === === ===
<FN>
NM = Not meaningful
</FN>
</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,
increased in the three-and nine-month periods ended June 30, 1999 primarily due
to shifts in the mix of sales of the Company's products resulting in a greater
percentage of sales of lower margin products.
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, were essentially unchanged for the nine months ended
June 30, 1999, as compared with the same period a year earlier. As a percentage
of revenues, these expenses increased slightly in the three months ended June
30, 1999, compared with the same period in fiscal 1998, primarily due to an
increase in expenses generated by the Company's InterAct "99" conference for
clients in Rome, Italy.
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. After several years of
concentrating on developing new markets--either geographical or by industry--for
its existing technologies, the Company has increased emphasis on
13
<PAGE>
developing new technologies, especially in the area of software
development. Research and development expenditures in the nine-month period
ending June 30, l999 were primarily related to new fraud-detection software
products, a new release of TRIAD software, Year 2000 readiness work, development
of a new automated strategic application processing system for high-end users
and healthcare receivables management. Research and development expenditures in
the quarter ended June 30, 1999 were primarily related to a new release of TRIAD
software, fraud-detection software products and development of a new automated
strategic application processing system for high-end users. Research and
development expenses, as a percentage of revenues, declined slightly in the
nine-month period ended June 30, 1999 and were essentially unchanged in the
three-month period ending June 30, 1999, compared with the corresponding periods
of fiscal 1998. The Company expects that research and development expenses will
increase in future periods for development of new products targeted for the
telecommunications and e-commerce markets.
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-month and three-month
periods ended June 30, 1999, were lower than in the corresponding periods of
fiscal 1998, due primarily to reassignment of personnel and related costs. The
Company expects increased facilities costs in the fourth quarter of fiscal 1999
due to office expansions currently in progress.
Amortization of intangibles
The Company is amortizing the intangible assets arising from various
acquisitions over periods ranging from two to fifteen years. During the quarter
ended June 30, 1999, the Company made the final additional payment (earnout) to
the former shareholders of CRMA, which was acquired in 1996. The amount of the
payment was approximately $2.1 million in the quarter ending June 30, 1999,
resulting in increased amortization expense in the quarter and in future
periods.
Other income and expense
Other income and expense consist mainly of interest income from
investments, interest expense, exchange rate gains/losses from holding foreign
currencies in bank accounts, and other non-operating items. Interest income,
derived from the investment of funds surplus to the Company's immediate
operating requirements, increased in the nine-and three-month periods ended June
30, 1999, compared with the corresponding periods a year earlier due to higher
balances invested in interest bearing instruments. In the nine-month period
ended June 30, 1999, the Company recorded a gain of approximately $484,000 on
the sale of investment securities. In the corresponding periods in the prior
fiscal year, the Company recorded interest expense resulting from tax audits.
Provision for income taxes
The Company's effective tax rate was 41.5 percent and 41.8 percent in
the nine-month periods ended June 30, 1999 and 1998, respectively. In the
three-month period ended June 30, 1999, the Company's effective tax rate
decreased to 40.5 percent from 42.7 percent in the corresponding period of
fiscal 1998, principally due to a change in the Company's estimate of its
effective state tax rate for fiscal 1999. The Company's effective tax rate for
fiscal 1999 is expected to be 41.5 percent.
Financial Condition
Working capital increased from $54,852,000 at September 30, 1998 to
$58,443,000 at June 30, 1999. Cash and marketable investments decreased from
$53,487,000 at September 30, 1998, to $50,822,000 at June 30, 1999 due primarily
to utilization of cash for the repurchase of outstanding common stock. The
Company's long-term obligations are mainly due to lease and employee incentive
and benefit obligations.
14
<PAGE>
In May 1998, the Company entered into a synthetic lease arrangement to
construct an office complex intended to accommodate future growth, which will
materially increase the Company's future operating lease expenses. Rental
payments will commence upon completion of construction, which is expected to
occur in the second quarter of fiscal 2001. With this external financing, the
Company believes that the cash and 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.
In March 1999, the Company initiated a stock repurchase program under
which the Company was authorized to purchase up to one million shares of its
common stock, to be funded by cash on hand. Through August 6, 1999, the Company
had repurchased 290,204 shares at a cost of approximately $10.2 million.
Interim Periods
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.
Year 2000
The Company has substantially completed Year 2000 remediation work and
readiness testing on its software products marketed to customers. New products
and updated versions of its software products currently being shipped to
customers are Year 2000 compliant. Year 2000 remediation work, including
readiness testing, for most earlier versions of the Company's software installed
at customer sites is performed as part of the Company's normal upgrade and
maintenance process. Prior to the end of calendar 1999, the Company will
discontinue support for some software products that have been replaced by other
products, and Year 2000 upgrades for these products will not be available.
Revenues from such products are not significant. There are no assurances that
the Company's current products do not contain undetected errors or defects
associated with Year 2000 date functions that may result in material costs to
the Company.
In addition, Year 2000 issues has caused customers to slow down
computer software purchases as they devote more time to preparing and testing
their systems for Year 2000 readiness. Purchasing patterns of customers are
expected to be impacted by Year 2000 issues through January 1, 2000 and beyond.
The Company is also aware of a growing number of lawsuits against other software
vendors arising out of Year 2000 readiness issues. Because of the unprecedented
nature of such litigation, it is uncertain to what extent the Company may be
affected by it. Based on its ongoing assessment of the impact of Year 2000
issues, the Company currently does not expect significant disruption of its
revenues or operations from the Year 2000 issues associated with its products.
This assessment process is continuing and the Company is developing contingency
plans to address Year 2000 issues.
The Company has determined that all of its business-critical internal
information technology ("IT") systems have been thoroughly tested and are Year
2000 ready. For all IT applications supplied to the Company by third parties,
appropriate available "patches" have been applied and the Company believes they
are Year 2000 ready. For both IT and non-IT systems, readiness testing is
ongoing and will continue through December 1999, with priority given to
business-critical non-IT systems and applications. The most reasonably likely
worst-case scenarios would include: (a) corruption of data contained in the
Company's internal information systems, and (b) hardware/operating system
failure. The Company is in the process of completing its contingency plans for
business-critical IT and non-IT internal systems as an extension of its existing
disaster recovery plan and expects to have completed development of such plan by
September 30, 1999.
15
<PAGE>
Through June 30, 1999, costs expended for Year 2000 remediation
(including readiness testing) of products and internal systems and contingency
planning are approximately $4.7 million, and the Company currently does not
expect such costs to exceed $5 million. The Company anticipates that additional
expenses incurred for Year 2000 work will relate primarily to testing and
contingency planning. These costs principally consist of both internal staff
costs and expenses for external consultants, software and hardware, which have
been or will be expensed by the Company during the period they are incurred.
Expected costs for the Year 2000 remediation work (including readiness testing)
and projected completion dates are based on management's estimates and
assumptions and actual results may vary materially from those anticipated.
The Company is working directly with parties on which it is dependent
for essential services and for the distribution of its significant services to
address Year 2000 issues, including in some cases, jointly developing
contingency plans. Information received to date indicates that these parties are
in the process of implementing and/or testing remediation strategies to ensure
Year 2000 readiness of systems, services and/or products. However, the lack of
resolution of Year 2000 issues by these parties--especially the credit bureaus
and credit card processors through which the Company distributes credit scoring
and account management services--could have a material adverse impact on the
Company's future business operations, financial condition and results of
operations.
The Company anticipates that the most reasonably likely worst-case
scenarios involving third-party Year 2000 issues would include: (a) failure of
infrastructure services provided by government agencies and third parties (e.g.,
transportation, electricity, telephone, Internet services, etc.) and (b) failure
of one or more of the credit bureaus or credit card processors through which the
Company distributes its credit scoring and account management services to
achieve timely and successful Year 2000 readiness. Contingency plans to address
these most reasonably likely worst-case scenarios are still in development and
are now expected to be completed by September 30, 1999. At this time the Company
cannot quantify the potential impact of third party Year 2000 issues.
The Company believes it is taking reasonable steps consistent with
standard industry practices to prevent major interruptions in business due to
Year 2000 issues. Its Year 2000 program is monitored by, and reported to, the
Audit Committee of the Board of Directors.
The foregoing information and statements regarding the Company's Year
2000 capabilities and readiness are "Year 2000 Information and Readiness
Disclosures" in conformance with the Year 2000 Information and Readiness
Disclosure Act of 1998 enacted on October 19, 1998.
European Economic and Monetary Union (EMU)
Under the European Union's plan for Economic and Monetary Union (EMU),
the euro becomes the sole accounting currency of EMU countries on January 1,
2002. Its initial phase became effective on January 1, 1999 in 11 participating
countries: Austria, Belgium, Finland, France, Germany, Ireland, Italy,
Luxembourg, the Netherlands, Portugal and Spain. In this initial phase EMU
mandates that key financial systems be able to triangulate conversion rates so
that any amount booked will be logged and processed simultaneously in both the
local currency and euros. The Company believes that its computer systems and
programs are euro-compliant. Costs associated with compliance were not material
and were expensed by the Company as they were incurred.
16
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Disclosures. The following discussion about the Company's
market risk disclosures involves forward-looking statements. Actual results
could differ materially from those projected in the forward-looking statements.
The Company is exposed to market risk related to changes in interest rates,
foreign currency exchange rates and equity security price risk. The Company does
not use derivative financial instruments for speculative or trading purposes.
Interest Rate Sensitivity. The Company maintains an investment
portfolio consisting mainly of income securities with an average maturity of
less than five years. These available-for-sale securities are subject to
interest rate risk and will fall in value if market interest rates increase. If
market interest rates were to increase immediately and uniformly by 10 percent
from levels at June 30, 1999, the fair value of the portfolio would decline by
an immaterial amount. The Company has the ability to hold its fixed income
investments until maturity, and therefore the Company would not expect its
operating results or cash flows to be affected to any significant degree by the
effect of a sudden change in market interest rates on its securities portfolio.
The Company believes foreign currency and equity risk is not material.
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
24.1 Power of Attorney (see page 18 of this Form 10-Q).
27.1 Financial Data Schedule
27.2 Revised Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended June 30,
1999.
17
<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 12, 1999
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 12, 1999
By LENNOX L. VERNON
--------------------------------------
Lennox L. Vernon
Vice President, Acting Chief Financial
Officer and Treasurer
18
<PAGE>
EXHIBIT INDEX
TO FAIR, ISAAC AND COMPANY, INCORPORATED
REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1999
Sequentially
Exhibit No. Exhibit Numbered Page
- ----------- ------- -------------
24.1 Power of Attorney 18
27.1 Financial Data Schedule 20
27.2 Revised Financial Data Schedule 21
19
<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-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 12,825
<SECURITIES> 7,336
<RECEIVABLES> 41,431
<ALLOWANCES> 1,213
<INVENTORY> 0
<CURRENT-ASSETS> 101,475
<PP&E> 84,009
<DEPRECIATION> 47,550
<TOTAL-ASSETS> 200,259
<CURRENT-LIABILITIES> 43,032
<BONDS> 472
<COMMON> 143
0
0
<OTHER-SE> 148,920
<TOTAL-LIABILITY-AND-EQUITY> 200,259
<SALES> 0
<TOTAL-REVENUES> 204,092
<CGS> 0
<TOTAL-COSTS> 77,208
<OTHER-EXPENSES> 30,465
<LOSS-PROVISION> 54
<INTEREST-EXPENSE> 98
<INCOME-PRETAX> 36,726
<INCOME-TAX> 15,241
<INCOME-CONTINUING> 21,485
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,485
<EPS-BASIC> 1.52
<EPS-DILUTED> 1.49
</TABLE>
<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-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 16,757
<SECURITIES> 13,742
<RECEIVABLES> 38,930
<ALLOWANCES> 1,099
<INVENTORY> 0
<CURRENT-ASSETS> 101,018
<PP&E> 75,298
<DEPRECIATION> 38,220
<TOTAL-ASSETS> 173,161
<CURRENT-LIABILITIES> 41,265
<BONDS> 895
<COMMON> 139
0
0
<OTHER-SE> 123,532
<TOTAL-LIABILITY-AND-EQUITY> 173,161
<SALES> 0
<TOTAL-REVENUES> 177,808
<CGS> 0
<TOTAL-COSTS> 63,017
<OTHER-EXPENSES> 27,341
<LOSS-PROVISION> 430
<INTEREST-EXPENSE> 938
<INCOME-PRETAX> 27,239
<INCOME-TAX> 11,385
<INCOME-CONTINUING> 15,854
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,854
<EPS-BASIC> 1.16
<EPS-DILUTED> 1.11<F1>
<FN>
<F1>
The Financial data has been restated to reflect reclassifications to conform to
the fiscal year 1999 presentation.
</FN>
</TABLE>
