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 December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number
0-16439
FAIR, ISAAC AND COMPANY, INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 94-1499887
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 February 7, 2000, was 14,152,947.
<PAGE>
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.............................................. 3
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 10
ITEM 3. Qualitative and Quantitative Disclosures About Market Risk........ 17
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders............... 18
ITEM 6. Exhibits and Reports on Form 8-K.................................. 18
SIGNATURES.................................................................. 19
Exhibit Index............................................................... 20
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements.
FAIR, ISAAC AND COMPANY, INCORPORATED
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and September 30, 1999
(dollars in thousands)
(Unaudited)
December 31 September 30
--------- ---------
Assets
Current assets:
Cash and cash equivalents $ 11,630 $ 20,715
Short-term investments 18,677 5,216
Accounts receivable, net 36,547 36,007
Unbilled work in progress 24,956 26,859
Prepaid expenses and other current assets 4,411 6,509
Deferred income taxes 6,125 6,021
--------- ---------
Total current assets 102,346 101,327
Investments 39,763 43,934
Property and equipment, net 41,857 39,353
Intangibles, net 10,205 10,730
Deferred income taxes 5,932 5,932
Other assets 9,098 9,077
--------- ---------
$ 209,201 $ 210,353
========= =========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,912 $ 3,340
Accrued compensation and employee benefits 15,764 23,436
Other accrued liabilities 8,159 9,339
Billings in excess of earned revenues 10,809 8,898
Capital lease obligations 431 429
--------- ---------
Total current liabilities 37,075 45,442
Long-term liabilities:
Accrued compensation and employee benefits 3,894 6,104
Other liabilities 1,645 1,944
Capital lease obligations 253 364
--------- ---------
5,792 8,412
--------- ---------
Total liabilities 42,867 53,854
--------- ---------
Stockholders' equity:
Preferred stock -- --
Common stock 144 143
Paid in capital in excess of par value 41,968 38,287
Retained earnings 134,183 129,530
Less treasury stock (9,573) (11,290)
Accumulated other comprehensive loss (388) (171)
--------- ---------
Total stockholders' equity 166,334 156,499
--------- ---------
$ 209,201 $ 210,353
========= =========
See accompanying notes to the consolidated financial statements.
3
<PAGE>
FAIR, ISAAC AND COMPANY, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the three months ended December 31, 1999 and 1998
(dollars in thousands, except per share data)
(Unaudited)
Three Months Ended
December 31
----------------------------
1999 1998
------------ ------------
Revenues $ 70,094 $ 67,977
Costs and expenses:
Cost of revenues 29,117 25,071
Research and development 10,609 7,744
Sales general and administrative 20,629 23,276
Amortization of intangibles 525 421
Restructuring charge 1,674 --
------------ ------------
Total costs and expenses 62,554 56,512
------------ ------------
Income from operations 7,540 11,465
Other income, net 866 686
------------ ------------
Income before income taxes 8,406 12,151
Provision for income taxes 3,472 5,103
------------ ------------
Net income $ 4,934 $ 7,048
============ ============
Net Income $ 4,934 $ 7,048
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on investments (150) 115
Foreign currency translation adjustments (67) 21
------------ ------------
Other comprehensive income (loss) (217) 136
------------ ------------
Comprehensive income $ 4,717 $ 7,184
============ ============
Earnings per share:
Diluted $ .34 $ .49
============ ============
Basic $ .35 $ .50
============ ============
Shares used in computing earnings per share:
Diluted 14,392,000 14,354,000
============ ============
Basic 14,028,000 14,014,000
============ ============
See accompanying notes to the consolidated financial statements.
4
<PAGE>
FAIR, ISAAC AND COMPANY, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended December 31, 1999 and 1998
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31
--------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income $ 4,934 $ 7,048
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 4,624 4,150
Deferred compensation 122 61
Deferred income taxes -- 99
Other 135 100
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (565) 4,021
Decrease (increase) in unbilled work in progress 1,903 (761)
Decrease (increase) in prepaid expenses and other assets 2,097 (319)
Increase in other assets (19) (7)
Decrease in accounts payable (784) (1,448)
Decrease in accrued compensation and employee benefits (8,173) (4,204)
Increase (decrease) in other accrued liabilities (1,182) 2,074
Increase in billings in excess of earned revenues 1,911 766
Decrease in other liabilities (1,393) (1,839)
-------- --------
Net cash provided by operating activities 3,610 9,741
-------- --------
Cash flows from investing activities
Purchases of property and equipment (5,591) (3,053)
Purchases of investments (12,240) (18,002)
Proceeds from sale of investments -- 502
Proceeds from maturities of investments 2,606 14,015
-------- --------
Net cash used in investing activities (15,225) (6,538)
-------- --------
Cash flows from financing activities
Principal payments of capital lease obligations (108) (100)
Proceeds from the exercise of stock options and
issuance of treasury stock 2,919 666
Dividends paid (281) (281)
Repurchase of company stock -- (43)
-------- --------
Net cash provided by financing activities 2,530 242
-------- --------
Increase (decrease) in cash and cash equivalents (9,085) 3,445
Cash and cash equivalents, beginning of period 20,715 14,242
-------- --------
Cash and cash equivalents, end of period $ 11,630 $ 17,687
======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
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 three
months ended December 31, 1999 and 1998 have been prepared in accordance with
generally accepted accounting principles for interim financial statements and
include all adjustments (consisting only of normal recurring accruals) that the
Company considers necessary for a fair presentation of its financial position,
results of operations, and cash flows for such periods. However, the
accompanying financial statements do not contain all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. All such financial statements presented herein are
unaudited, however, the September 30 balance sheet has been derived from audited
financial statements. This report and the accompanying financial statements
should be read in connection with the Company's audited financial statements and
notes thereto presented in its Annual Report on Form 10-K for the fiscal year
ended September 30, 1999. Footnotes that would substantially duplicate the
disclosures in the Company's audited 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
The following reconciles the numerators and denominators of diluted and
basic earnings per share (EPS):
Three months ended
December 31,
--------------------
(in thousands, except per share data) 1999 1998
- ------------------------------------- -------- --------
Numerator - Net income $ 4,934 $ 7,048
======== ========
Denominator - Shares:
Diluted weighted-average shares and assumed
conversions of stock options 14,392 14,354
Effect of dilutive securities - employee stock options (364) (340)
-------- --------
Basic weighted-average shares 14,028 14,014
======== ========
Earnings per share:
Diluted $ .34 $ .49
======== ========
Basic $ .35 $ .50
======== ========
The computation of diluted EPS at December 31, 1999 and 1998 respectively,
excludes stock options to purchase 139,000 and 170,000 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:
Three months ended
December 31,
-------------------
(dollars in thousands) 1999 1998
- ---------------------- ------ ------
Income tax payments $6,748 $4,752
Interest paid $ 14 $ 28
Non-cash investing and financing activities:
Tax benefit of exercised stock options $ 648 $ 388
Issuance of treasury stock to ESOP $ -- $1,455
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 does not
engage in hedging activities, management expects that the adoption of SFAS No.
133 will have no material impact on our financial position, results of
operations or cash flows. Management intends to conform its consolidated
statements to this pronouncement beginning July 1, 2000.
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 December 31,
1999 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 business
formerly included in the Credit segment. The segment information for the three
months ended December 31, 1998 has been restated to conform with the fiscal year
2000 presentation.
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.
<TABLE>
<CAPTION>
Three months ended December 31, 1999
------------------------------------------------
North
American
Financial Other Netsourced
(dollars in thousands) Services International Services Total
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Segment $ 35,980 $ 7,984 $ 26,070 $ 70,034
Healthcare receivables management -- -- 60 60
-------- -------- -------- --------
$ 35,980 $ 7,984 $ 26,130 $ 70,094
======== ======== ======== ========
Segment income (loss) from operations $ 14,876 $ (265) $ (7,071) $ 7,540
======== ======== ========
Unallocated other income, net 866
--------
$ 8,406
</TABLE>
<TABLE>
<CAPTION>
Three months ended December 31, 1998
------------------------------------------------
North
American
Financial Other Netsourced
(dollars in thousands) Services International Services Total
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Segment $ 33,992 $ 8,191 $ 24,707 $ 66,890
Healthcare receivables management -- -- 1,087 1,087
-------- -------- -------- --------
$ 33,992 $ 8,191 $ 25,794 $ 67,977
======== ======== ======== ========
Segment income (loss) for operations $ 14,694 $ (146) $ (3,083) $ 11,465
======== ======== ========
Unallocated other income, net 686
--------
$ 12,151
</TABLE>
8
<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 current 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. The restructuring actions
under the plan have resulted in cash expenditures of $267,000 and non-cash
write-downs or accruals of $1,407,000 during the first quarter of 2000.
The following table depicts the restructuring activity:
Three months ended December 31, 1999
--------------------------------------------------------
Payments to
Employees Write-Down of Payments on
Involuntarily Operating Assets Canceled
(dollars in thousands) Terminated (A) To Be Sold (B) Contracts (A) Total
- --------------------------------------------------------------------------------
Net Additions $ 823 $ 263 $ 588 $ 1,674
Expenditures (217) -- (50) (267)
------- ------- ------- -------
Ending Balance $ 606 $ 263 $ 538 $ 1,407
======= ======= ======= =======
(A): Cash; (B): Noncash
9
<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.
In October 1999 the Company formally adopted new organizational structure
and business models to focus on growth opportunities in the retail and
telecommunications markets and to implement its new initiatives. These
initiatives include focusing on 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.
The Company's Risk Management Technologies ("RMT") subsidiary marketed
enterprise-wide risk management and performance measurement solutions to major
financial institutions. In January 2000 the Company announced that RMT will no
longer sell its RADAR RiskManager products. The RADAR RiskManager products
comprise almost all of RMT's existing products. RMT will continue to support the
current version of its RADAR RiskManager software products for the approximately
20 remaining clients until these clients migrate to different vendors.
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.
10
<PAGE>
RESULTS OF OPERATIONS
Revenues
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. The new segments 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 Analytics 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.
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.
Period-to-Period
Percentage of Percentage Changes
Revenue Quarter Ended
Quarter Ended 12/31/99
December 31, Compared to
1999 1998 12/31/98
- --------------------------------------------------------------------------------
Alliance Products and Services 49% 47% 9%
Targeting and Prospecting 26% 21% 29%
Analytic Products & Services 7% 9% (22%)
Origination and Underwriting 6% 9% (29%)
Account & Customer
Management 5% 6% (9%)
Standalone Consulting 3% 4% (7%)
Adaptive Control Processor 2% 2% 17%
All Other 2% 2% (60%)
----- -----
Total revenues 100% 100% 3%
===== =====
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 current quarter the growth in
Alliance Products and Services revenues was primarily due to a strong demand for
risk scoring services at the credit bureaus, and to a lesser extent from
increased revenues generated by the Company's insurance bureau scores at the
credit bureaus. These increases were partially offset by decreased revenues
derived from the ScoreNet(R) and PreScore(R) services, and services provided
through bankcard processors. The declines in ScoreNet(R) and PreScore(R)
services revenues reflect shifts in the purchasing patterns of customers from
these products to credit scoring services at the credit bureaus. Revenues from
services provided through bankcard processors declined due to a decrease in
sales volumes during the quarter.
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
11
<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 such
agreements in the past, and believes it will generally be able to do so in the
future, the loss of one or more such alliances or an adverse change in terms
could have a significant impact on revenues and operating margin. Revenues
generated through the Company's alliances with Equifax, Inc.; Experian
Information Solutions, Inc. (formerly TRW Information Systems & Services); and
Trans Union Corporation each accounted for approximately 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 to
companies and organizations 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 quarter compared with the same period 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 in screening
lists of prospective customers, evaluating applicants for credit or insurance
and managing existing credit accounts. The decrease in revenues in the quarter
ending December 31, 1999 reflects the impact of bank consolidations and external
marketing forces related to Year 2000.
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, compared to the same period in the prior
fiscal year, primarily due to reduced sales of PC-based Origination and
Underwriting products (CreditDesk) and sales of StrategyWare(R) decision engine
systems, and the impact of adoption of SOP 98-9. Under SOP 98-9, Origination and
Underwriting revenues in the amount of $2.9 million were deferred in the current
quarter, offset by $1.3 million of reported Origination and Underwriting
revenues from the quarter ended September 30, 1999.
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, compared to the
same period in the prior fiscal year, was due primarily to customers' deferral
of software purchases due to external marketing forces related to year 2000 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 period in fiscal 1999, revenues declined slightly in the current
quarter due to diversion of personnel to implement the reorganization.
Adaptive Control Processor products are part of the Other International
unit of the Company. The Company's revenues for Adaptive Control Processor
products are derived from clients outside the United States and Canada. Total
revenues derived from outside of the United States represented approximately 16
percent of total revenues in the quarters ended December 31, 1998 and December
31, 1999. 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.
All Other Products include the Company's smaller, discrete product lines
and revenues of RMT and the discontinued Healthcare Receivables Management
("HRMS") business. The revenues of RMT and the discontinued HRMS business were
down significantly in the quarter compared with the same period 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.
12
<PAGE>
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.
During the quarters ended September 30, 1999, and December 31, 1999 this backlog
increased by $2.0 million and $2.7 million, respectively. The increase in
backlog for the current quarter represents a 1% increase compared with the same
period in the prior fiscal year. Management believes that 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
distributed 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.
13
<PAGE>
Expenses
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.
Period-to-Period
Percentage of Revenue Percentage Changes
--------------------- ------------------
Quarter Ended
12/31/99
Quarter Ended Compared
December 31, to Quarter Ended
1999 1998 12/31/98
---- ---- --------
Revenues 100% 100% 3
Costs and expenses:
Cost of revenues 42 37 16
Research and development 15 11 37
Sales, general and administrative 29 34 (11)
Amortization of intangibles 1 1 25
Restructuring charge 2 0 NM
---- ----
Total costs and expenses 89 83 11
---- ----
Income from operations 11 17 (34)
Other income, net 1 1 26
---- ----
Income before income taxes 12 18 (31)
Provision for income taxes 5 8 (32)
---- ----
Net income 7% 10% (30)
==== ====
NM = Not Meaningful
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. As compared with the same quarter a year earlier, the
cost of revenues, as a percentage of revenues, increased in the quarter ended
December 31, 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's products and services, all of which generally have a lower
gross margin than the Company's other products and services.
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 significantly in the quarter
over the corresponding three-month period of fiscal 1999, as the Company
continued to emphasize development of new technologies and new products.
Research and development expenditures in the three month period ending December
31, l999 were primarily related to charges for a software development license
and new products. The Company expects that research and development expenses
will continue to constitute a significant percentage of revenue 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.
14
<PAGE>
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
three-month period ended December 31, 1999, were lower than in the corresponding
period of fiscal 1999, due primarily to reduction of $1.1 million in sales
incentive expenses, decreases in reorganization expenses and reduction in
expenses resulting from the discontinuance of the HRMS line of business. These
decreases more than offset the $1.3 million price adjustment for phantom stock
units for officers recorded to reflect changes in the market price of the
Company's stock. Due to the early payoff of phantom stock units, if the market
price of the Company's stock increases above $48.78, such early payoff will have
the effect of avoiding future expenses related to phantom stock units.
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 October 1999, the Company announced discontinuance of its (HRMS) line.
As a result of exiting the HRMS line of business, the Company recorded
restructuring charges totaling $1,674,000 in the quarter ended December 31,
1999. See Note 7 to the Consolidated Financial Statements for additional
information.
Other income and expense
Other income and expense consist mainly of interest income from
investments, interest expense, exchange rate gains/losses from holding foreign
currencies in bank accounts, and other non-operating items. Interest income,
derived from the investment of funds surplus to the Company's immediate
operating requirements, was steady in the three-months ended December 31, 1999,
compared with the corresponding period a year earlier. In the corresponding
period in the prior year the Company recorded higher offsetting losses than in
the current quarter.
Provision for income taxes
The Company's effective tax rate decreased from 42% to 41.3% for the three
months ended December 31, 1999 compared to December 31, 1998. The decrease was
due primarily to the use of a higher estimated state tax rate in the
three-months ended December 31, 1998 than used in the current quarter.
Financial Condition
Working capital increased from $55,885,000 at September 30, 1999 to
$65,271,000 at December 31, 1999. Cash and marketable investments increased
slightly from $69,865,000 at September 30, 1999, to $70,070,000 at December 31,
1999. The Company's long-term obligations are mainly due to lease and employee
incentive and benefit obligations.
In May 1998, the Company entered into a synthetic lease arrangement to
construct an office complex intended to accommodate future growth, which will
materially increase the Company's future operating lease expenses. Rental
payments will commence upon completion of construction, which is expected to
occur in fiscal 2001. With this external financing, the Company believes that
the cash and marketable securities on hand, along with cash expected to be
generated by operations, will be adequate to meet its capital and liquidity
needs for both the current year and the foreseeable future.
In March 1999, the Company initiated a stock repurchase program under which
the Company was authorized to purchase up to one million shares of its common
stock, to be funded by cash on hand. Through December 31, 1999, the Company had
repurchased 360,004 shares at a cost of approximately $12.2 million. In the
current quarter the decrease of treasury stock was largely due to the Company's
contribution of treasury shares to the Employee's Stock Ownership Plan.
15
<PAGE>
Year 2000 Readiness
Year 2000 issues caused customers to slow down computer software purchases
in the current quarter, as they devoted 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. Purchasing
patterns of customers are expected to be impacted by Year 2000 issues through
the first quarter of calendar 2000.
The Company's assessment of year 2000 issues is continuing and the Company
has in place contingency plans to address Year 2000 issues. As part of the
implementation of its contingency plans the Company has established processes to
address expected increases in requests by customers for greater customer support
in late 1999 and early 2000 and has notified customers of this customer support
availability.
Cumulative costs expended for Year 2000 remediation (including readiness
testing) of products and internal systems and contingency planning were
approximately $4.9 million at December 31, 1999, and the Company currently does
not expect such aggregate costs to exceed $5 million. These costs principally
consist of both internal staff costs and expenses for external consultants,
software and hardware, which have been or will be expensed by the Company during
the period they are incurred.
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.
16
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Disclosures. The following discussion about the Company's
market risk disclosures involves forward-looking statements. Actual results
could differ materially from those projected in the forward-looking statements.
The Company is exposed to market risk related to changes in interest rates,
foreign currency exchange rates and equity security price risk. The Company does
not use derivative financial instruments for speculative or trading purposes.
Interest Rate Sensitivity. The Company maintains an investment portfolio
consisting mainly of income securities with an average maturity of less than
five years. These available-for-sale securities are subject to interest rate
risk and will fall in value if market interest rates increase. 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
December 31, 1999:
Carrying Average
Amounts Yield
------- -----
Cash and cash equivalents:
Commercial paper $ 3,021,000 5.5%
Money market funds 2,034,000 5.1%
-----------
5,055,000 5.4%
-----------
Short-term investments:
U.S. government obligations 18,677,000 5.4%
Long-term investments:
U.S. government obligations 35,401,000 5.5%
-----------
Total $59,133,000
===========
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.
At the Annual Meeting of Stockholders of the Company held on February 1,
2000, the Company's stockholders voted in favor of: (i) the election of ten
directors to the Company's Board of Directors, (ii) the adoption of the Employee
Stock Purchase Plan, (iii) the adoption of the amendments to the Company's 1992
Long Term Incentive Plan, and (iv) the ratification of KPMG LLP as the Company's
independent auditors for the current fiscal year. The number of votes for,
withheld and against, as well as the number of abstentions and broker non-votes
as to each matter approved at the Annual Meeting of Stockholders were as
follows:
Broker
Matter For Withheld Against Abstain Non-votes
- ------ --- -------- ------- ------- ---------
Election of Directors
A. George Battle 12,126,785 287,976 N/A N/A 0
H. Robert Heller 11,972,099 442,662 N/A N/A 0
Guy R. Henshaw 12,180,004 234,757 N/A N/A 0
David S.P. Hopkins 12,163,934 250,827 N/A N/A 0
Robert M. Oliver 12,109,162 305,599 N/A N/A 0
Robert D. Sanderson 12,156,871 257,890 N/A N/A 0
Tony J. Christianson 12,116,906 297,855 N/A N/A 0
Margaret L. Taylor 12,122,892 291,869 N/A N/A 0
Thomas G. Grudnowski 12,061,857 352,904 N/A N/A 0
John D. Woldrich 12,178,470 236,291 N/A N/A 0
Adoption of Employee Stock Purchase Plan
9,081,234 N/A 1,220,780 440,183 1,672,636
Adoption of Amendments to Company's 1992 Long Term Incentive Plan
8,174,245 N/A 2,116,670 451,209 1,672,637
Ratification of Auditors
12,276,258 N/A 104,530 33,974 0
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
24.1 Power of Attorney (see page 19 of this Form 10-Q).
27 Financial Data Schedule
(b) Reports on Form 8-K:
One report on Form 8-K was filed during the quarter ended December 31,
1999. The report on Form 8-K was filed November 1, 1999 that the Company was
discontinuing its Healthcare Receivables Management System ("HRMS") business
line.
18
<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: February 14, 2000
By /s/ 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: February 14, 2000
By /s/ HENK J. EVENHUIS
--------------------------------------
Henk J. Evenhuis
Executive Vice President, Finance and
Chief Financial Officer
19
<PAGE>
EXHIBIT INDEX
TO FAIR, ISAAC AND COMPANY, INCORPORATED
REPORT ON FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1999
Exhibit No. Exhibit
- ----------- -------
24.1 Power of Attorney
27 Financial Data Schedule
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND INCOME STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 11,630
<SECURITIES> 18,677
<RECEIVABLES> 37,721
<ALLOWANCES> 1,174
<INVENTORY> 0
<CURRENT-ASSETS> 102,346
<PP&E> 95,744
<DEPRECIATION> 53,887
<TOTAL-ASSETS> 209,201
<CURRENT-LIABILITIES> 37,075
<BONDS> 253
0
0
<COMMON> 144
<OTHER-SE> 166,190
<TOTAL-LIABILITY-AND-EQUITY> 209,201
<SALES> 0
<TOTAL-REVENUES> 70,094
<CGS> 0
<TOTAL-COSTS> 29,117
<OTHER-EXPENSES> 20,629
<LOSS-PROVISION> 33
<INTEREST-EXPENSE> 14
<INCOME-PRETAX> 8,406
<INCOME-TAX> 3,472
<INCOME-CONTINUING> 4,934
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,934
<EPS-BASIC> 0.34
<EPS-DILUTED> 0.34
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