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 March 31, 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 May 8, 2000, was 14,341,654.
<PAGE>
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements................................................. 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
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
<TABLE>
ITEM 1. Financial Statements.
FAIR, ISAAC AND COMPANY, INCORPORATED
CONSOLIDATED BALANCE SHEETS
March 31, 2000 and September 30, 1999
(dollars in thousands)
(Unaudited)
<CAPTION>
March 31, September 30,
2000 1999
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 15,447 $ 20,715
Short-term investments 22,277 5,216
Accounts receivable, net 42,552 36,007
Unbilled work in progress 20,972 26,859
Prepaid expenses and other current assets 10,059 6,509
Deferred income taxes 6,314 6,021
--------- ---------
Total current assets 117,621 101,327
Investments 36,241 43,934
Property and equipment, net 41,695 39,353
Intangibles, net 9,680 10,730
Deferred income taxes 5,932 5,932
Other assets 9,205 9,077
--------- ---------
$ 220,374 $ 210,353
========= =========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 2,498 $ 3,340
Accrued compensation and employee benefits 14,170 23,436
Other accrued liabilities 8,206 9,339
Billings in excess of earned revenues 14,316 8,898
Capital lease obligations 439 429
--------- ---------
Total current liabilities 39,629 45,442
Long-term liabilities:
Accrued compensation and employee benefits 4,290 6,104
Other liabilities 1,638 1,944
Capital lease obligations 163 364
--------- ---------
6,091 8,412
--------- ---------
Total liabilities 45,720 53,854
--------- ---------
Stockholders' equity:
Preferred stock -- --
Common stock 146 143
Paid in capital in excess of par value 43,782 38,287
Retained earnings 141,046 129,530
Less treasury stock (9,586) (11,290)
Accumulated other comprehensive loss (734) (171)
--------- ---------
Total stockholders' equity 174,654 156,499
--------- ---------
$ 220,374 $ 210,353
========= =========
<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 six month and three month periods ended March 31, 2000 and 1999
(in thousands, except per share data)
(Unaudited)
<CAPTION>
Six Months Ended March 31, Three Months Ended March 31,
------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 143,394 $ 136,851 $ 73,300 $ 68,874
Costs and expenses:
Cost of revenues 60,068 52,012 30,288 26,941
Research and development 16,930 15,560 7,318 7,816
Sales general and administrative 43,820 45,379 22,857 22,103
Amortization of intangibles 1,050 842 525 421
Restructuring charge 2,662 0 988 0
------------ ------------ ------------ ------------
Total costs and expenses 124,530 113,793 61,976 57,281
------------ ------------ ------------ ------------
Income from operations 18,864 23,058 11,324 11,593
Other income, net 1,716 1,962 850 1,276
------------ ------------ ------------ ------------
Income before income taxes 20,580 25,020 12,174 12,869
Provision for income taxes 8,499 10,508 5,027 5,405
------------ ------------ ------------ ------------
Net income $ 12,081 $ 14,512 $ 7,147 $ 7,464
============ ============ ============ ============
Net income $ 12,081 $ 14,512 $ 7,147 $ 7,464
Other comprehensive loss, net of tax:
Unrealized losses on investments (420) (266) (270) (381)
Foreign currency translation adjustments (143) (221) (76) (242)
------------ ------------ ------------ ------------
Other comprehensive loss (563) (487) (346) (623)
------------ ------------ ------------ ------------
Comprehensive income $ 11,518 $ 14,025 $ 6,801 $ 6,841
============ ============ ============ ============
Earnings per share:
Diluted $ .83 $ 1.00 $ .49 $ .51
============ ============ ============ ============
Basic $ .86 $ 1.03 $ .50 $ .53
============ ============ ============ ============
Shares used in computing earnings per share:
Diluted 14,530,000 14,515,000 14,680,000 14,578,000
============ ============ ============ ============
Basic 14,111,000 14,109,000 14,214,000 14,177,000
============ ============ ============ ============
<FN>
Due to minor reclassifications the expenses for the six months ended March 31, 2000 are slightly different than the combination of
the first two quarters.
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 six months ended March 31, 2000 and 1999
(dollars in thousands)
(Unaudited)
<CAPTION>
Six Months Ended
March 31
-----------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income $ 12,081 $ 14,512
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 9,716 8,385
Deferred compensation 372 131
Gain on sale of investments -- (474)
Equity (gain) loss in investments 7 (47)
Other 133 86
Changes in operating assets and liabilities:
Increase in accounts receivable (6,610) (612)
Decrease (increase) in unbilled work in progress 5,886 (2,576)
Increase in prepaid expenses and other assets (3,548) (2,376)
Decrease (increase) in other assets (127) 19
Increase (decrease) in accounts payable 119 (581)
Decrease in accrued compensation and employee benefits (9,373) (671)
Increase (decrease) in other accrued liabilities (1,098) 2,031
Increase (decrease) in billings in excess of earned revenues 5,419 (483)
Decrease in other liabilities (1,497) (1,440)
-------- --------
Net cash provided by operating activities 11,480 15,904
-------- --------
Cash flows from investing activities
Purchases of property and equipment (10,005) (6,083)
Purchases of investments (12,836) (61,006)
Proceeds from sale of investments -- 35,634
Proceeds from maturities of investments 2,606 14,015
-------- --------
Net cash used in investing activities (20,235) (17,440)
-------- --------
Cash flows from financing activities
Principal payments of capital lease obligations (191) (203)
Proceeds from the exercise of stock options and
issuance of treasury stock 4,281 1,900
Dividends paid (565) (565)
Repurchase of company stock (38) (2,319)
-------- --------
Net cash provided by financing activities 3,487 (1,187)
-------- --------
Increase (decrease) in cash and cash equivalents (5,268) (2,723)
Cash and cash equivalents, beginning of period 20,715 14,242
-------- --------
Cash and cash equivalents, end of period $ 15,447 $ 11,519
======== ========
<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 six
months ended March 31, 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 consolidated financial statements do not contain all of the
information and notes required by generally accepted accounting principles for
complete financial statements. All such consolidated financial statements
presented herein are unaudited, however, the September 30 balance sheet has been
derived from audited consolidated financial statements. This report and the
accompanying 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 Earnings Per Share
<TABLE>
The following reconciles the numerators and denominators of diluted and
basic earnings per share (EPS):
<CAPTION>
Six months ended Three months ended
March 31 March 31
(in thousands, except per share data) 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator - Net income $ 12,081 $ 14,512 $ 7,147 $ 7,464
======== ======== ======== ========
Denominator - Shares:
Diluted weighted-average shares and assumed
conversions of stock options 14,530 14,515 14,680 14,578
Effect of dilutive securities - employee stock options (419) (406) (466) (401)
-------- -------- -------- --------
Basic weighted-average shares 14,111 14,109 14,214 14,177
======== ======== ======== ========
Earnings per share:
Diluted $ .83 $ 1.00 $ .49 $ .51
======== ======== ======== ========
Basic $ .86 $ 1.03 $ .50 $ .53
======== ======== ======== ========
</TABLE>
The computation of diluted EPS at March 31, 2000 and 1999 respectively,
excludes stock options to purchase 57,000 and 131,000 shares of common stock.
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:
Six months ended March 31,
(dollars in thousands) 2000 1999
- --------------------------------------------------------------------------------
Income tax payments $ 8,067 $14,786
Interest paid $ 40 $ 80
Non-cash investing and financing activities:
Tax benefit of exercised stock options $ 881 $ 1,080
Issuance of treasury stock to ESOP $ -- $ 1,455
Capital Lease Obligations $ -- $ 1,641
Note 4 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
statements to this pronouncement beginning July 1, 2000.
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 has not determined the impact that adoption of FIN No. 44 will have
on the Company's financial position or results of operations.
Note 5 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 March 31, 2000
no shares had been issued under the Purchase Plan.
7
<PAGE>
Note 6 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 six months ended March 31, 1999 has been restated to conform with 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 revenues 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>
Six months ended March 31, 2000
-----------------------------------------------------------------
North
American
Financial Other Netsourced
(dollars in thousands) Services International Services Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Segment $ 76,035 $ 17,140 $ 50,146 $143,321
Healthcare receivables management -- -- 73 73
-------- -------- -------- --------
$ 76,035 $ 17,140 $ 50,219 $143,394
======== ======== ======== ========
Segment income from operations $ 15,040 $ 1,787 $ 2,037 $ 18,864
======== ======== ========
Unallocated other income, net 1,716
--------
$ 20,580
========
Six months ended March 31, 1999
-----------------------------------------------------------------
North
American
Financial Other Netsourced
(dollars in thousands) Services International Services Total
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues:
Segment $ 67,904 $ 14,109 $ 53,647 $135,660
Healthcare receivables management -- -- 1,191 1,191
-------- -------- -------- --------
$ 67,904 $ 14,109 $ 54,838 $136,851
======== ======== ======== ========
Segment income for operations $ 15,393 $ 1,437 $ 6,228 $ 23,058
======== ======== ========
Unallocated other income, net 1,962
--------
$ 25,020
========
8
<PAGE>
Three months ended March 31, 2000
-----------------------------------------------------------------
North
American
Financial Other Netsourced
(dollars in thousands) Services International Services Total
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues:
Segment $39,958 $ 9,302 $24,027 $73,287
Healthcare receivables management -- -- 13 13
------- ------- ------- -------
$39,958 $ 9,302 $24,040 $73,300
======= ======= ======= =======
Segment income from operations $ 9,775 $ 1,210 $ 339 $11,324
======= ======= =======
Unallocated other income, net 850
-------
$12,174
=======
Three months ended March 31, 1999
-----------------------------------------------------------------
North
American
Financial Other Netsourced
(dollars in thousands) Services International Services Total
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues:
Segment $34,134 $ 7,184 $27,452 $68,770
Healthcare receivables management -- -- 104 104
------- ------- ------- -------
$34,134 $ 7,184 $27,556 $68,874
======= ======= ======= =======
Segment income for operations $ 7,592 $ 695 $ 3,306 $11,593
======= ======= =======
Unallocated other income, net 1,276
-------
$12,869
=======
</TABLE>
Due to minor reclassifications the revenues and income for the six months ended
March 31, 2000 are slightly different than the combination of the first two
quarters.
9
<PAGE>
Note 7 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 most recent 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 are expected to be completed under the plan by June 30,
2000, which could potentially result in additional charges for payments on
canceled contracts to HRMS product line customers.
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.
The combined restructuring actions have resulted in cash expenditures of
$1,615,000 and noncash asset write-down of $36,000 through March 31, 2000.
<TABLE>
The following table depicts the restructuring activity through March 31, 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
====== ===== ===== =======
<FN>
(A): Cash; (B): Noncash
</FN>
</TABLE>
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. 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,
NetSourced Services and Other International business units. Additional
information about these segments appears in Note 6 to the Consolidated Financial
Statements.
The majority of the Company's revenues are derived from its North American
Financial Services 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 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. The Other International business unit covers all of the
Company's operations outside of the United States and Canadian markets.
<TABLE>
The following table displays (a) the percentage of total revenue by
products and (b) the percentage change in revenues within each products category
from the corresponding period in the prior fiscal year.
<CAPTION>
Percentage of Percentage of
Revenue Revenue
Three Months Ended Percentage Six Months Ended Percentage
March 31, Change March 31, Change
--------- ------ --------- ------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Alliance Products and Services 53% 48% 19% 52% 48% 14%
Targeting and Prospecting 24% 23% 10% 25% 22% 19%
Analytic Products & Services 8% 8% 0% 7% 8% (11%)
Origination and Underwriting 7% 9% (17%) 7% 9% (23%)
Account & Customer
Management 5% 6% (6%) 5% 6% (7%)
Standalone Consulting 2% 4% (41%) 3% 4% (24%)
Other 1% 2% (61%) 1% 3% (65%)
------ ------ ----- -------
Total revenues 100% 100% 6% 100% 100% 5%
====== ====== ====== ======
</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
six-months ended March 31, 2000, the growth in Alliance Products and Services
revenues was primarily due to a strong demand for risk 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 at 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
12
<PAGE>
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.; 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 Targeting and Prospecting products'
revenues in the three and six months ended March 31, 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 were steady in the
most recent quarter compared with the same period in fiscal 1999. The decrease
in revenues in the six months ended March 31, 2000 primarily reflects the impact
of bank consolidations and external marketing forces related to the Year 2000
issue.
Origination and Underwriting products automate the processing of credit
applications and are primarily comprised of products which were formerly
referred to as ASAP products. Revenues from Origination and Underwriting
products decreased in the quarter and six months ended March 31, 2000, compared
to the same periods in the prior fiscal year, primarily due to reduced sales of
CreditDesk and sales of StrategyWare(R) decision engine systems, and the impact
of adoption of SOP 98-9. In May 2000 the Company plans to release a new line of
products, LiquidCredit(TM), which provides internet real-time credit
decisioning. 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 decrease in revenues in the three- and
six-month periods ending March 31, 2000, compared to the same periods in the
prior fiscal year, was primarily due to customers' deferral of software
purchases due to external marketing forces related to the Year 2000 issue and
the pending 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 six-month
period ended March 31, 2000 due to diversion of personnel to implement the
reorganization plan adopted October 1999.
Total revenues derived from outside of the United States represented
approximately 15% and 20% of total revenues in the quarters ended March 31,1999
and March 31, 2000, respectively. Gains or losses due to fluctuations in
currency exchange rates have not been significant 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.
Other products include the Company's smaller, discrete product lines and
revenues of RMT. The revenues of RMT were down significantly in the quarter and
six months ended March 31, 2000 compared
13
<PAGE>
with the same periods in the prior fiscal year. The decline in RMT's revenues
were due principally to the impact of bank consolidations and the delays in
releases of new 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.
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, healthcare
information management, 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 and March 31, 2000, this backlog increased by
$2.7 million and $17.5, respectively. In the most recent quarter the backlog was
$76.2 million which represents a 35% increase compared with the same period in
the prior fiscal year. This improvement was across all business areas with
particular strength in Alliance Products and Services and Account and Customer
Management products. 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.
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 of 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>
Six Months Three Months
Ended Percentage Ended Percentage
March 31, Change March 31, Change
----------- ------ ------------ ------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues 100% 100% 5% 100% 100% 6%
Costs and expenses:
Cost of revenues 42 38 15% 41 39 12%
Research and development 12 11 9% 10 11 (6%)
Sales, general and administrative 30 33 (3%) 32 32 3%
Amortization of intangibles 1 1 25% 1 1 25%
Restructuring Charge 2 -- NM 1 -- NM
---- ---- ---- -----
Total costs and expenses 87 83 9% 85 83 8%
---- ---- ---- -----
Income from operations 13 17 (18%) 15 17 (2%)
Other income and expense 1 1 (13%) 2 2 (33%)
---- ---- ---- -----
Income before income taxes 14 18 (18%) 17 19 (5%)
Provision for income taxes 6 7 (19%) 7 8 (7%)
---- ---- ---- -----
Net income 8% 11% (17%) 10% 11% (4%)
==== ==== ==== =====
<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 six-months ended March 31, 2000 compared with the corresponding
period in fiscal 1999. The increase was primarily due to costs related to the
HRMS line of business and the increasing percentage of revenues coming from
Targeting and Prospecting products and services, all of which generally have a
lower gross margin than the Company's other products and services. As compared
with the same quarter of fiscal 1999, the cost of revenues, as a percentage of
revenues, increased in the quarter ended March 31, 2000 principally due to the
increasing percentage of revenues coming from Targeting and Prospecting products
and an increase in personnel costs because of a change in accounting for accrued
vacation and sick leave.
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 increased slightly in the six-months
ended March 31, 2000 over the corresponding six month period of fiscal 1999, as
the Company continued to emphasize development of new technologies and new
products. Research and development expenditures in the six-month period ending
March 31, 2000 were primarily related to charges for a software development
license and new products, and in the three-month period ended March 31, 2000,
primarily related to new products and product extensions. Though down slightly
in the quarter ended March 31, 2000 as compared with the corresponding period of
fiscal 1999, the Company expects that research and development expenses will
continue to constitute a significant percentage of revenue in future periods for
development of new
15
<PAGE>
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 for the
six-month period ended March 31, 2000, were lower than in the corresponding
period of fiscal 1999, due primarily to a reduction in media advertising.
Expenses for the three-month period ended March 31, 2000, as a percentage of
revenues, were essentially unchanged as compared with the same period of fiscal
1999.
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 most recent 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 most recent
quarter. The combined restructuring actions have resulted in cash expenditures
of $1,615,000 and a noncash asset write-down of $36,000 through March 31, 2000.
See Note 7 to the Consolidated Financial Statements for additional information.
Other income and expense
Interest income, derived from the investment of funds surplus to the
Company's immediate operating requirements, increased in the six- and
three-month periods ended March 31, 2000, compared with the corresponding
periods a year earlier due to higher balances invested in interest bearing
instruments. In the corresponding periods in 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 42% to 41.3 % in the six-
and three-month periods ended March 31, 2000, compared to March 31, 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
$77,992,000 at March 31, 2000. Cash and marketable investments increased from
$69,865,000 at September 30, 1999, to $73,966,000 at March 31, 2000. The
Company's long-term obligations are mainly due to lease and 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. The Company
intends to sell the office complex project to a developer in the third quarter
of fiscal 2000 and has decided not to occupy any part of the project. The
Company estimates that the transaction will result in a loss but the actual
amount will depend on the price at which it actually sells the property and the
amount of the selling expenses.
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.
16
<PAGE>
Through March 31, 2000, the Company had repurchased 360,004 shares at a cost of
approximately $12.2 million.
Year 2000
The most recent quarter was impacted by the effects of purchasing patterns
of customers in prior periods when they slowed down computer software purchases
to devote more time to preparing and testing their systems for Year 2000
readiness. The Company experienced no other significant disruption of its
revenues or operations from Year 2000 issues. Cumulative costs expended for Year
2000 remediation (including readiness testing) of products and internal systems
and contingency planning to date are approximately $4.9 million and the Company
expects to incur no additional significant costs. These costs principally
consist of both internal staff costs and expenses for external consultants,
software and hardware, which are expensed by the Company during the period they
are incurred.
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 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 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.
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
March 31,2000:
Carrying Average
Amounts Yield
Cash and cash equivalents:
Commercial paper $ 317,000 6.2%
U.S. government obligations 2,989,000 5.8%
Money market funds 6,870,000 5.6%
-----------
10,176,000 5.7%
-----------
Short-term investments:
U.S. government obligations 19,288,000 6.5%
Long-term investments:
U.S. government obligations 30,793,000 6.9%
-----------
Total $60,257,000
===========
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
24.1 Power of Attorney (see page 20 of this Form 10-Q).
27 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended March 31, 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: May 12, 2000
By PETER L. MCCORKELL
--------------------------------------
Peter L. McCorkell
Executive 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: May 12, 2000
By 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 MARCH 31, 2000
Exhibit No. Exhibit
- ----------- -------
24.1 Power of Attorney
27 Financial Data Schedule
21
<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> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 15,447
<SECURITIES> 22,277
<RECEIVABLES> 43,688
<ALLOWANCES> 1,136
<INVENTORY> 0
<CURRENT-ASSETS> 117,621
<PP&E> 97,269
<DEPRECIATION> 55,574
<TOTAL-ASSETS> 220,374
<CURRENT-LIABILITIES> 39,629
<BONDS> 163
0
0
<COMMON> 146
<OTHER-SE> 174,508
<TOTAL-LIABILITY-AND-EQUITY> 220,374
<SALES> 0
<TOTAL-REVENUES> 143,394
<CGS> 0
<TOTAL-COSTS> 60,068
<OTHER-EXPENSES> 43,820
<LOSS-PROVISION> (100)
<INTEREST-EXPENSE> 40
<INCOME-PRETAX> 20,580
<INCOME-TAX> 8,499
<INCOME-CONTINUING> 12,081
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,081
<EPS-BASIC> .86
<EPS-DILUTED> .83
</TABLE>
