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, 2000
[ ] 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.)
200 Smith Ranch Road, 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 9, 2000, was 14,435,343.
<PAGE>
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited) ............ 3
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 11
ITEM 3. Qualitative and Quantitative Disclosures About Market Risk ......... 18
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K ................................... 19
SIGNATURES ................................................................. 20
Exhibit Index .............................................................. 21
2
<PAGE>
PART I - FINANCIAL INFORMATION
<TABLE>
ITEM 1. Financial Statements.
FAIR, ISAAC AND COMPANY, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2000 and September 30, 1999
(dollars in thousands)
(Unaudited)
<CAPTION>
June 30, September 30,
2000 1999
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 21,938 $ 20,715
Short-term investments 20,301 5,216
Accounts receivable, net 37,666 36,007
Unbilled work in progress 26,659 26,859
Prepaid expenses and other current assets 10,856 6,509
Deferred income taxes 6,312 6,021
--------- ---------
Total current assets 123,732 101,327
Investments 35,419 43,934
Property and equipment, net 42,496 39,353
Intangibles, net 9,169 10,730
Deferred income taxes 5,932 5,932
Other assets 9,200 9,077
--------- ---------
$ 225,948 $ 210,353
========= =========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,978 $ 3,340
Accrued compensation and employee benefits 14,464 23,436
Other accrued liabilities 6,427 9,339
Billings in excess of earned revenues 11,864 8,898
Capital lease obligations 447 429
--------- ---------
Total current liabilities 35,180 45,442
Long-term liabilities:
Accrued compensation and employee benefits 4,553 6,104
Other liabilities 1,634 1,944
Capital lease obligations 26 364
--------- ---------
6,213 8,412
--------- ---------
Total liabilities 41,393 53,854
--------- ---------
Stockholders' equity:
Preferred stock -- --
Common stock 147 143
Paid in capital in excess of par value 46,359 38,287
Retained earnings 148,472 129,530
Less treasury stock (9,573) (11,290)
Accumulated other comprehensive loss (850) (171)
--------- ---------
Total stockholders' equity 184,555 156,499
--------- ---------
$ 225,948 $ 210,353
========= =========
<FN>
See accompanying notes to the condensed consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
FAIR, ISAAC AND COMPANY, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the nine months and three months ended June 30, 2000 and 1999
(in thousands, except per share data)
(Unaudited)
<CAPTION>
Nine Months Ended June 30, Three Months Ended June 30,
------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 219,297 $ 204,092 $ 75,903 $ 67,241
Costs and expenses:
Cost of revenues 93,935 77,208 33,867 25,196
Research and development 23,273 22,961 6,343 7,401
Sales, general and administrative 66,601 68,467 22,781 23,088
Amortization of intangibles 1,560 1,287 510 445
Restructuring charge 2,878 -- 216 --
------------ ------------ ------------ ------------
Total costs and expenses 188,247 169,923 63,717 56,130
------------ ------------ ------------ ------------
Income from operations 31,050 34,169 12,186 11,111
Other income, net 2,669 2,557 953 595
------------ ------------ ------------ ------------
Income before income taxes 33,719 36,726 13,139 11,706
Provision for income taxes 13,926 15,241 5,427 4,733
------------ ------------ ------------ ------------
Net income $ 19,793 $ 21,485 $ 7,712 $ 6,973
============ ============ ============ ============
Net income $ 19,793 $ 21,485 $ 7,712 $ 6,973
Other comprehensive loss, net of tax:
Unrealized loss (gain) on investments (418) (550) 3 (284)
Foreign currency translation adjustments (261) (286) (118) (65)
------------ ------------ ------------ ------------
Other comprehensive loss (679) (836) (115) (349)
------------ ------------ ------------ ------------
Comprehensive income $ 19,114 $ 20,649 $ 7,597 $ 6,624
============ ============ ============ ============
Earnings per share:
Diluted $ 1.36 $ 1.49 $ .53 $ .49
============ ============ ============ ============
Basic $ 1.40 $ 1.52 $ .54 $ .50
============ ============ ============ ============
Shares used in computing earnings per share:
Diluted 14,543,000 14,423,000 14,601,000 14,301,000
============ ============ ============ ============
Basic 14,172,000 14,090,000 14,338,000 14,081,000
============ ============ ============ ============
<FN>
See accompanying notes to the condensed consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
FAIR, ISAAC AND COMPANY, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended June 30, 2000 and 1999
(dollars in thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
June 30
-----------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income $ 19,793 $ 21,485
Adjustments to reconcile net income to cash provided by
Operating activities:
Depreciation and amortization 14,971 12,637
Deferred compensation 621 200
Tax benefit from employee stock plans 1,003 1,306
Gain on sale of investments -- (483)
Equity loss in investments 13 --
Other 208 162
Changes in operating assets and liabilities:
Accounts receivable (1,797) (1,285)
Unbilled work in progress 200 (4,012)
Prepaid expenses and other assets (4,345) (5,642)
Other assets (121) 19
Accounts payable (1,289) (2,215)
Accrued compensation and employee benefits (8,815) 246
Other accrued liabilities (2,832) (1,166)
Billings in excess of earned revenues 2,966 (141)
Other liabilities (1,263) (1,563)
-------- --------
Net cash provided by operating activities 19,313 19,548
-------- --------
Cash flows from investing activities
Purchases of property and equipment (15,887) (9,428)
Payment for acquisition of subsidiary -- (1,455)
Purchases of investments (13,099) (69,472)
Proceeds from sale of investments -- 46,647
Proceeds from maturities of investments 5,606 21,710
-------- --------
Net cash used in investing activities (23,380) (11,998)
-------- --------
Cash flows from financing activities
Principal payments of capital lease obligations (320) (306)
Proceeds from the exercise of stock options and
issuance of treasury stock 6,500 2,475
Dividends paid (851) (847)
Repurchase of company stock (39) (10,289)
-------- --------
Net cash provided by (used in) financing activities 5,290 (8,967)
-------- --------
Increase (decrease) in cash and cash equivalents 1,223 (1,417)
Cash and cash equivalents, beginning of period 20,715 14,242
-------- --------
Cash and cash equivalents, end of period $ 21,938 $ 12,825
======== ========
<FN>
See accompanying notes to the condensed consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
FAIR, ISAAC AND COMPANY, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS AND THREE MONTHS ENDED JUNE 30, 2000 AND 1999
Note 1 General
In management's opinion, the accompanying unaudited condensed
consolidated financial statements for Fair, Isaac & Company, Incorporated (the
"Company") for the nine months ended June 30, 2000 and 1999 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 condensed consolidated financial statements
do not contain all of the information and notes required by generally accepted
accounting principles for complete financial statements. This report and the
accompanying condensed consolidated financial statements should be read in
connection with the Company's audited consolidated financial statements and
notes thereto presented in its Annual Report on Form 10-K for the fiscal year
ended September 30, 1999. Notes that would substantially duplicate the
disclosures in the Company's audited consolidated financial statements for the
fiscal year ended September 30, 1999, contained in the 1999 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, 2000.
Note 2 Reclassification
Certain amounts in the accompanying condensed consolidated financial
statements have been reclassified in order to conform the presentation.
<TABLE>
Note 3 Earnings Per Share
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) 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator - Net income $ 19,793 $ 21,485 $ 7,712 $ 6,973
======== ======== ======== ========
Denominator - Shares:
Diluted weighted-average shares and assumed
conversions of stock options 14,543 14,423 14,601 14,301
Effect of dilutive securities - employee stock options (371) (333) (263) (220)
-------- -------- -------- --------
Basic weighted-average shares 14,172 14,090 14,338 14,081
======== ======== ======== ========
Earnings per share:
Diluted $ 1.36 $ 1.49 $ .53 $ .49
======== ======== ======== ========
Basic $ 1.40 $ 1.52 $ .54 $ .50
======== ======== ======== ========
</TABLE>
The computation of diluted EPS for the nine months ended June 30, 2000
and 1999, excludes stock options to purchase 173,000 and 177,000 shares of
common stock, respectively. The computation of diluted EPS for the three-months
ended June 30, 2000 and 1999 excludes stock options to purchase 296,000 and
1,462,000 shares of common stock, 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 4 Cash Flow Statement
Supplemental disclosure of cash flow information:
Nine months ended June 30,
(dollars in thousands) 2000 1999
--------------------------------------------------------------------------------
Income tax payments $19,884 $20,781
Interest paid $ 54 $ 98
Non-cash investing and financing activities:
Issuance of treasury stock to ESOP $ 1,706 $ 1,455
Assets acquired through capital lease financing $ 953 $ 1,641
Purchase of CRMA with Common Stock $ -- $ 654
Cancellation of restricted stock $ 353 $ --
Note 5 New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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 its hedging
activities are immaterial, management expects that the adoption of SFAS No. 133
will have no material impact on the Company's financial position, results of
operations or cash flows. Management intends to conform its consolidated
financial statements to this pronouncement beginning July 1, 2000.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101 regarding recognition, presentation and
disclosure of revenue. Interpretative guidance for the SAB is expected to be
issued soon. Management has not determined the impact that adoption of SAB No.
101 will have on the Company's financial position or results of operations.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 (FIN No. 44), "Accounting for Certain Transactions
Involving Stock Compensation, an Interpretation of APB Opinion No. 25." FIN No.
44 will be effective July 1, 2000. This interpretation provides guidance for
applying APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Management believes that FIN No. 44 will not have any material impact on the
Company's financial position, results of operations or cash flows.
Note 6 Employee Stock Purchase Plan
In November 1999, the Board of Directors adopted the 1999 Employee
Stock Purchase Plan (the "Purchase Plan"), which was approved by the Company's
shareholders on February 1, 2000. Under the Purchase Plan employees can purchase
shares of the Company's common stock based on a percentage of their
compensation. The purchase price per share must be equal to at least 85% of the
market value on the date offered or the date purchased. A maximum of 1,500,000
shares of common stock can be sold under the Purchase Plan. As of June 30, 2000,
a total of 22,283 shares had been issued under the Purchase Plan.
7
<PAGE>
Note 7 Segment Information
Effective October 1, 1999, the Company reorganized the operating
structure of the business segments. As a result, the Company changed its segment
reporting structure to more closely match management's internal reporting of
business operations. Significant changes included moving end-user software for
clients in the U. S. and Canada from the former Credit and other segments and
combining this business with the former DynaMark business to form the Netsourced
Services segment, and establishing two new segments named North American
Financial Services and Other International, which are comprised primarily of
businesses formerly included in the Credit segment. The segment information for
the three and nine months ended June 30, 1999 has been restated to conform to
the fiscal year 2000 presentation.
<TABLE>
The Company's Chief Executive and Operating Officers evaluate financial
performance based on measures of business segment revenues and operating profit
or loss. Unallocated other income consists mainly of interest income and an
equity loss in an investment. The Company does not evaluate the financial
performance of each segment based on its assets or capital expenditures.
<CAPTION>
Nine months ended June 30, 2000
--------------------------------------------------------------------
North
American
Financial Other Netsourced
(dollars in thousands) Services International Services Total
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Segment $ 117,237 $ 28,533 $ 74,076 $ 219,846
Healthcare receivables management -- -- (549) (549)
--------- --------- --------- ---------
$ 117,237 $ 28,533 $ 73,527 $ 219,297
========= ========= ========= =========
Segment income from operations $ 27,825 $ 3,485 $ (10) $ 31,300
========= ========= =========
Unallocated other income, net 2,669
---------
Income before Income Taxes $ 33,969
=========
Nine months ended June 30, 1999
--------------------------------------------------------------------
North
American
Financial Other Netsourced
(dollars in thousands) Services International Services Total
------------------------------------------------------------------------------------------------------------------------------------
Revenues:
Segment $ 117,237 $ 28,533 $ 74,076 $ 219,846
Revenues:
Segment $ 101,001 $ 21,841 $ 79,947 $ 202,789
Healthcare receivables management -- -- 1,303 1,303
--------- --------- --------- ---------
$ 101,001 $ 21,841 $ 81,250 $ 204,092
========= ========= ========= =========
Segment income for operations $ 32,159 $ 2,106 $ (96) $ 34,169
========= ========= =========
Unallocated other income, net 2,557
---------
Income before Income Taxes $ 36,726
=========
8
<PAGE>
Three months ended June 30, 2000
--------------------------------------------------------------------
North
American
Financial Other Netsourced
(dollars in thousands) Services International Services Total
------------------------------------------------------------------------------------------------------------------------------------
Revenues:
Segment $ 41,202 $ 11,394 $ 23,929 $ 76,525
Healthcare receivables management -- -- (622) (622)
--------- --------- --------- ---------
$ 41,202 $ 11,394 $ 23,307 $ 75,903
========= ========= ========= =========
Segment income from operations $ 10,283 $ 1,882 $ 271 $ 12,436
========= ========= =========
Unallocated other income, net 953
---------
Income before Income Taxes $ 13,389
=========
Three months ended June 30, 1999
--------------------------------------------------------------------
North
American
Financial Other Netsourced
(dollars in thousands) Services International Services Total
------------------------------------------------------------------------------------------------------------------------------------
Revenues:
Segment $ 33,097 $ 7,731 $ 26,301 $ 67,129
Healthcare receivables management -- -- 112 112
--------- --------- --------- ---------
$ 33,097 $ 7,731 $ 26,413 $ 67,241
========= ========= ========= =========
Segment income for operations $ 10,742 $ 789 $ (420) $ 11,111
========= ========= =========
Unallocated other income, net 595
---------
Income before Income Taxes $ 11,706
=========
</TABLE>
Due to minor reclassifications, the revenues and income for the nine months
ended June 30, 2000 are slightly different than the combination of the first
three quarters.
Note 8 Restructuring Charge
In October 1999, the Company announced a restructuring plan to
discontinue its Healthcare Receivables Management System ("HRMS") product line
beginning December 1999. The restructuring plan was necessitated by
disappointing market acceptance and the prospect of continuing losses in fiscal
2000, and the Company's adoption of a new strategic direction. These actions
resulted in a net charge during the first quarter of $1,674,000. The
restructuring actions consist of terminating approximately 30 full-time
employees who were terminated before the end of January 2000; canceling certain
facility leases and other operating leases supporting the HRMS product line; and
writing down computer hardware and leasehold improvements due to the abandonment
of the HRMS facility. Restructuring actions were completed under the plan by
June 30, 2000. An additional charge of $174,000 for payments on canceled
contracts related to the HRMS product line was recorded in the three months
ended June 30, 2000.
During the second quarter the Company announced and began to implement
supplemental restructuring actions aimed at reducing costs. The Company
recognized a $988,000 charge for the estimated costs of those actions. The
restructuring action consisted of terminating approximately 40 full-time
employees, of whom approximately 25 were terminated during the second quarter.
Restructuring actions were completed under the plan by June 30, 2000. Additional
charges of $42,000 for payments to terminated employees was recorded in the
three months ended June 30, 2000.
The combined restructuring actions have resulted in cash expenditures
of $2,167,000 and a non-cash asset write-down of $70,000 through June 30, 2000.
9
<PAGE>
<TABLE>
The following table depicts the restructuring activity through June 30,
2000.
<CAPTION>
Payments to
Employees Write-Down of Payments on
Involuntarily Operating Assets Canceled
(dollars in thousands) Terminated (A) To Be Sold (B) Contracts (A) Total
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Additions $ 823 $ 263 $ 588 $ 1,674
Expenditures (217) -- (50) (267)
------- ------- ------- -------
Balance as of December 31,1999 606 263 538 1,407
------- ------- ------- -------
Net Additions 962 -- 26 988
Expenditures and decreases (1,145) (36) (203) (1,384)
------- ------- ------- -------
Balance as of March 31, 2000 423 227 361 1,011
======= ======= ======= =======
Net Additions 42 -- 174 216
Expenditures and decreases (308) (34) (244) (586)
------- ------- ------- -------
Balance as of June 30, 2000 $ 157 $ 193 $ 291 $ 641
======= ======= ======= =======
<FN>
(A): Cash; (B): Noncash
</FN>
</TABLE>
Note 9 Commitments and Contingencies
In fiscal 1998, the Company entered into a synthetic lease arrangement
to construct an office complex intended to accommodate future growth. On May 15,
2000 the Company announced its intention to sell the office complex project to a
real estate development firm and has decided not to occupy any part of the
project. The Company expects that the sale will close in the fourth quarter of
fiscal 2000 and estimates that it will result in a loss of approximately $2
million.
10
<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 faster, more
profitable decisions on their marketing, customers, operations and portfolios.
Widely recognized for its pioneering work in predictive technology, the Company
provides advanced decision-making solutions to the financial services, retail,
telecommunications, healthcare, eBusiness and other industries.
The Company's products include statistically derived, rule-based
analytical tools; software that automates strategy design and implementation;
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, and data processing and database management services to
businesses engaged in direct marketing activities, many of which are in the
financial services and insurance industries.
The Company is implementing its initiatives targeting growth
opportunities in the retail and telecommunications markets, becoming a Web-based
"analytic application service provider" or "ASP" and the business-to-business
e-credit marketplace. The Company already delivers certain of its capabilities
through secure Web sites and it will adopt this delivery mode whenever feasible
in the future. Although not Web-based, certain other services--such as credit
scores delivered through credit reporting agencies and account management
services delivered through credit card processors--fall within the broader
definition of an ASP. The Company is actively looking for more opportunities to
deliver its Web-based capabilities in service bureau mode rather than as
discrete component deliverables.
This discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and Notes which was previously filed
with the Securities Exchange Commission. 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.
11
<PAGE>
RESULTS OF OPERATIONS
Revenues
The business segments of the Company are North American Financial
Services, Other International and NetSourced Services business units. Additional
information about these segments appears in Note 6 to the Condensed Consolidated
Financial Statements.
The majority of the Company's revenues are derived from its North
American Financial Services business unit. This unit primarily markets Alliance
Products and Services and Analytic Products and Services in the United States
and Canadian markets. The majority of these products generate usage revenues
through third-party alliances with credit bureaus and third-party credit card
processors. The NetSourced Services business unit principally markets Targeting
and Prospecting products, together with Origination and Underwriting, Account
and Customer Management products and Standalone Consulting services in the North
American market.
<TABLE>
The following table displays (a) the percentage of total revenue by
products and (b) the percentage change in revenues within each category of
products from the corresponding period in the prior fiscal year.
<CAPTION>
Percentage of Percentage of
Revenue Revenue
Three Months Ended Percentage Nine Months Ended Percentage
June 30, Change June 30, Change
-------- ------ -------- ------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Alliance Products and Services 48% 48% 11% 51% 48% 13%
Targeting and Prospecting 24% 26% 6% 25% 23% 14%
Analytic Products & Services 8% 8% 4% 7% 8% (6%)
Origination and Underwriting 10% 8% 48% 8% 9% (2%)
Account & Customer
Management 8% 5% 90% 6% 5% 19%
Standalone Consulting 2% 3% (19%) 2% 4% (23%)
Other -- 2% (80%) 1% 3% (69%)
------ ------ ------ ------
Total revenues 100% 100% 13% 100% 100% 7%
====== ====== ====== ======
</TABLE>
The revenues of Alliance Products and Services are generated primarily
by usage-priced credit scoring services distributed through major credit bureaus
and credit account management services distributed through third-party bankcard
processors in the United States and Canada. Alliance Products and Services also
include the Company's ScoreNet(R) and PreScore(R) services, insurance bureau
scores, and other related products. In the most recent quarter and the
nine-months ended June 30, 2000, the growth in Alliance Products and Services
revenues was primarily due to a strong demand for scoring services at the credit
bureaus and increased revenues from services provided through bankcard
processors and from the Company's insurance bureau scores at the credit bureaus.
These increases were partially offset by decreased revenues derived from the
ScoreNet(R) services. The Company believes that the decline in ScoreNet(R)
services revenues primarily reflects a shift in the purchasing patterns of
customers from these products to credit scoring services obtained directly from
the credit bureaus.
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. Revenues from credit bureau-related services increased 14% in
fiscal 1999 compared with fiscal 1998, and accounted for approximately 35% and
36% of revenues in fiscal 1998 and 1999, respectively. 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.
While the Company has been very successful in extending or renewing its
agreements with credit bureaus and credit card processors 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 material adverse
effect on revenues and operating margin. Revenues generated through the
Company's alliances with Equifax, Inc.;
12
<PAGE>
Experian Information Solutions, Inc. (formerly TRW Information Systems &
Services); and Trans Union Corporation each accounted for approximately 8% to
10% of the Company's total revenues in fiscal 1997, approximately 7% to 10% in
fiscal 1998 and approximately 8% to 10% in fiscal 1999.
Targeting and Prospecting Services, formerly the DynaMark business
unit, include a variety of data processing and database management services
provided to companies and organizations involved in direct marketing. Revenues
from Targeting and Prospecting products are generated from a combination of
fixed fee and usage-based pricing. The increases in revenues from Targeting and
Prospecting products in the three and nine months ended June 30, 2000, compared
with the same periods in the prior fiscal year, were due primarily to increased
demand for services from customers in the financial services industry.
Analytic Products and Services include all revenues from the Company's
custom models, custom software and related consulting projects used for
screening lists of prospective customers, evaluating applicants for credit or
insurance and managing existing credit accounts. Revenues increased slightly in
the most recent quarter compared with the same period in fiscal 1999. The
Company believes that this increase in purchases by customers was due to a shift
in focus away from Year 2000 issues. The decrease in revenues in the nine months
ended June 30, 2000 primarily reflects the impact of bank consolidations and
customers' focus on the Year 2000 issue in the first half of fiscal 2000.
Origination and Underwriting products automate the processing of credit
applications and are primarily comprised of products which were formerly
referred to as ASAP (Automated Strategic Application Processing) products.
Revenues from Origination and Underwriting products increased in the quarter due
primarily to increased sales of CreditDesk and sales of StrategyWare(R) decision
engine systems resulting from increases in purchases by customers due to a shift
in focus away from Year 2000 issues, compared to the same period in the prior
fiscal year. Revenues decreased slightly in the nine months ended June 30, 2000,
compared to the same period in the prior fiscal year, primarily due to reduced
sales of CreditDesk and StrategyWare(R) decision engine systems, and the impact
of adoption of SOP 98-9. In May 2000, the Company released a new line of
products, LiquidCredit(TM), which provides real-time credit decisions over the
Internet. Management intends that the LiquidCredit line of products will, over
time, replace its CreditDesk product offerings.
Account and Customer Management products include the Company's revenues
from sales of credit account management systems (TRIAD) sold to end-users, and
its fraud control systems products. The increase in revenues in the three- and
nine-month periods ended June 30, 2000, compared to the same periods in the
prior fiscal year, was primarily due to the release of the new version of TRIAD
(6.0). With respect to TRIAD, the Company's high degree of success in
penetrating the U.S. bankcard industry with these products has limited, and may
continue to limit, the revenue growth in that market. However, the Company has
added functionality for the existing base of TRIAD users and is actively
marketing TRIAD for other types of credit products and in overseas markets.
Standalone Consulting Services, comprised principally of the services
offered by the Company's former Credit and Risk Management Associates
subsidiary, consist of credit risk management consulting services. Compared to
the same periods in fiscal 1999, revenues declined in the three- and nine-month
periods ended June 30, 2000 due to redeployment of personnel to implement the
Company's new focus and initiatives.
Other products include the Company's smaller, discrete product lines,
the discontinued HRMS division and revenues of Risk Management Technologies,
Inc. (RMT). The revenues of RMT were down significantly in the quarter and nine
months ended June 30, 2000, compared with the same periods in the prior fiscal
year. The decline in RMT's revenues was due principally to the cessation of
sales of RADAR RiskManager products announced in January, 2000. In the current
quarter RMT revenues were primarily derived from maintenance fees for existing
installations of such RMT products.
Revenues from software maintenance and consulting services each
accounted for less than 10% of revenues in each of the three years in the period
ended September 30, 1999, and the Company does not expect revenues from either
of these sources to exceed 10% of revenues in the foreseeable future.
The Other International business unit covers all of the Company's
operations outside of the United States and Canadian markets. Total revenues
derived from outside of the United States including Canada represented
approximately 15% and 20% of total revenues in the quarters ended June 30, 1999
and June 30, 2000, respectively. Gains or losses due to fluctuations in currency
exchange rates have not been significant
13
<PAGE>
to date, but may become more important if, as expected, the proportion of the
Company's revenues denominated in foreign currencies increases in the 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
most of its revenue growth 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, retail,
telecommunications and eBusiness. During fiscal 1998, the Company's backlog of
orders for fixed-priced products declined slightly, and in fiscal 1999 this
backlog declined an additional $7.3 million. Most usage based revenues do not
appear as part of the backlog. During the quarters ended December 31, 1999,
March 31, 2000 and June 30, 2000, this backlog increased by $2.7 million, $17.5
million and $2.6 million, respectively. At June 30, 2000, the backlog was $78.8
million which represents a 37% increase compared with the same period in the
prior fiscal year. Backlog orders may be cancelled or delayed. There is no
assurance that backlog will result in revenues. Management believes that
increased revenue growth in fiscal 2000 and later years will depend to a large
extent on sales of newly developed products. The Company's efforts to develop
new products is expected to result in increased expenses. There can be no
assurance that the Company will be successful in developing new products or that
any new products will generate additional revenue necessary to justify the
additional expenses the Company will incur.
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 becoming
an eBusiness company and implementing new growth initiatives targeted at the
retail and telecommunications 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 that it
distributes through credit bureaus and third-party processors.
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 have been 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.
The Financial Services Modernization Act of 1999 was enacted and signed
into law on November 12, 1999. The statute contains several privacy provisions.
The legislation also allows banks, securities firms, and insurance companies to
affiliate and enter new business activities. The Company believes that this
legislation will not have a material impact on its operations or revenues.
14
<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 quarter in the prior fiscal year.
<CAPTION>
Nine Months Three Months
Ended Percentage Ended Percentage
June 30, Change June 30, Change
-------- ------ -------- ------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues 100% 100% 7% 100% 100% 13%
Costs and expenses:
Cost of revenues 43 38 22% 45 37 34%
Research and development 11 11 1% 8 11 (14%)
Sales, general and administrative 30 33 3% 30 34 (1%)
Amortization of intangibles 1 1 21% 1 1 15%
Restructuring Charge 1 -- NM -- -- NM
---- ---- ---- -----
Total costs and expenses 86 83 11% 84 83 14%
---- ---- ---- -----
Income from operations 14 17 (9%) 16 17 10%
Other income and expense 1 1 4% 1 -- 60%
---- ---- ---- -----
Income before income taxes 15 18 (8%) 17 17 12%
Provision for income taxes 6 7 (9%) 7 7 15%
---- ---- ---- -----
Net income 9% 11% (8%) 10% 10% 11%
==== ==== ==== =====
<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 nine-and three-months ended June 30, 2000, compared with the
corresponding periods in fiscal 1999, primarily due to increases in personnel
and computing costs related to building ASP delivery capacity for new products.
Research and development
Research and development expenses include the personnel and related
overhead costs incurred in product development, researching mathematical and
statistical algorithms and developing software tools that are aimed at improving
productivity, profitability and management control.
Research and development expenses as a percentage of revenues were
essentially unchanged in the nine-months ended June 30, 2000 over the
corresponding nine month period of fiscal 1999. Research and development
expenditures in the three-month period ending June 30, 2000, as a percentage of
revenues, were down as compared with the corresponding period of fiscal 1999,
due primarily to redeployment of personnel to focus on increasing ASP delivery
capacity for new products. The Company is continuing to emphasize development of
new technologies and new products and expects that research and development
expenses will increase as a percentage of revenues in future periods for
development of new products targeted for the telecommunications and retail
markets and to implement its strategic focus on becoming an eBusiness company.
Sales, general and administrative
Sales, general and administrative expenses consist principally of
personnel, travel, overhead, advertising and other promotional expenses,
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
15
<PAGE>
for the nine-month and three-month periods ended June 30, 2000, were lower than
in the corresponding period of fiscal 1999, due primarily to a reduction in
consulting expenses. In the nine-month and three-month periods in the prior
fiscal year, the Company incurred consulting fees related to its reorganization
and changes in its employee benefit plans, and incurred significantly less such
fees in the corresponding periods of the current fiscal year.
Amortization of intangibles
The Company is amortizing the intangible assets arising from various
acquisitions over periods ranging from four to fifteen years.
Restructuring charge
In the quarter ended December 31, 1999, the Company announced
discontinuance of its HRMS line and recorded restructuring charges totaling
$1,674,000. During the second quarter the Company announced and began to
implement supplemental restructuring actions aimed at reducing costs. The
Company recognized a $988,000 charge for the estimated costs of those actions.
The restructuring action consisted of terminating approximately 40 full-time
employees, of whom approximately 25 were terminated during the second quarter.
Restructuring actions were completed under the plan by June 30, 2000. Additional
charges of $42,000 for payments to terminated employees and $174,000 for
payments on canceled contracts related to the HRMS product line were recorded in
the three months ended June 30, 2000. The combined restructuring actions have
resulted in cash expenditures of $2,167,000 and a non-cash asset write-down of
$70,000 through June 30, 2000.
Other income and expense
Interest income, derived from the investment of funds surplus to the
Company's immediate operating requirements, increased in the nine- and
three-months periods ended June 30, 2000, compared with the corresponding
periods a year earlier due to higher balances invested in interest bearing
instruments and improved interest rates. In the second quarter of the prior
fiscal year, the Company recorded a one-time gain of approximately $484,000 on
the sale of investment securities.
Provision for income taxes
The Company's effective tax rate decreased from 41.5% to 41.3% in the
nine- and three- month periods ended June 30, 2000, compared to June 30, 1999.
The decrease was due primarily to the use of a higher estimated state tax rate
in fiscal 1999 than used in the current fiscal year.
Financial Condition
Working capital increased from $55,885,000 at September 30, 1999 to
$88,552,000 at June 30, 2000. Cash and marketable investments increased from
$69,865,000 at September 30, 1999, to $77,658,000 at June 30, 2000. The
Company's long-term obligations are mainly due to employee incentive and benefit
obligations. 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 fiscal 1998, the Company entered into a synthetic lease arrangement
to construct an office complex intended to accommodate future growth. On May 15,
2000, the Company announced its intention to sell the office complex project to
a real estate development firm and has decided not to occupy any part of the
project. The Company expects that the sale will close in the fourth quarter of
fiscal 2000 and estimates that it will result in a loss in the approximate
amount of $2 million.
In fiscal 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 June 30, 2000, the Company
had repurchased 360,004 shares at a cost of approximately $12.2 million.
Year 2000
In the current quarter the Company has experienced no significant
disruption of its revenues or operations from Year 2000 issues. Cumulative costs
expended to date for Year 2000 remediation (including readiness testing) of
products and internal systems and contingency planning to date remain at
16
<PAGE>
approximately $4.9 million and the Company expects to incur no additional
significant costs. These costs were expensed by the Company during the period
they were incurred.
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 went into effect 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 the EMU
mandated 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. The Company also
believes the conversion to the euro will not have a material impact on the
Company's consolidated financial results.
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 Origination and Underwriting products 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.
17
<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. 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.
The following table presents the principal amounts and related
weighted-average yields for the Company's fixed rate investment portfolio at
June 30, 2000:
Carrying Average
Amounts Yield
Cash and cash equivalents:
Commercial paper $17,336,000 6.8%
Money market funds 3,120,000 6.2%
-----------
20,456,000 6.7%
-----------
Short-term investments:
U.S. government obligations 20,301,000 6.6%
Long-term investments:
U.S. government obligations 30,430,000 7.2%
-----------
Total $71,187,000
===========
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended June 30, 2000.
19
<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 11, 2000
By /s/ Henk J. Evenhuis
------------------------------------
Henk J. Evenhuis
Executive Vice President,
Finance and Chief Financial Officer
20
<PAGE>
EXHIBIT INDEX
TO FAIR, ISAAC AND COMPANY, INCORPORATED
REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2000
Exhibit No. Exhibit
----------- -------
27 Financial Data Schedule
21
