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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------- ---------------
Commission File Number
0-16439
FAIR, ISAAC AND COMPANY, INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 94-1499887
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
120 North Redwood Drive, San Rafael, California 94903
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 472-2211
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No .
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The number of shares of Common Stock, $0.01 par value per share,
outstanding on February 9, 1996, was 12,401,510.
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...................... 7
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders........ 10
ITEM 6. Exhibits and Reports on Form 8-K........................... 11
SIGNATURES ........................................................... 12
EXHIBIT INDEX........................................................... 13
2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements.
FAIR, ISAAC AND COMPANY, INCORPORATED
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and September 30, 1995
(dollars in thousands)
December 31 September 30
----------- ------------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents ....................... $ 11,929 $ 8,321
Short-term investments .......................... 4,496 5,874
Accounts receivable, net ........................ 18,112 19,094
Unbilled work in progress ....................... 7,892 11,299
Deferred income taxes ........................... 1,397 1,399
Prepaid expenses and other current assets ....... 2,351 1,784
-------- --------
Total current assets ........................ 46,177 47,771
Noncurrent assets:
Long-term investments ........................... 11,351 10,923
Note receivable ................................. 2,890 2,895
Property and equipment, net ..................... 18,222 16,815
Intangibles, net ................................ 4,488 4,957
Deferred income taxes and other assets .......... 4,550 4,929
-------- --------
$ 87,678 $ 88,290
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilities .. $ 6,697 $ 5,830
Accrued compensation and employee benefits ...... 6,054 10,631
Billings in excess of earned revenues ........... 5,500 5,314
Income taxes payable ............................ 2,065 1,603
-------- --------
Total current liabilities ................... 20,316 23,378
Deferred income taxes and other liabilities ..... 4,948 6,854
Capital leases .................................. 1,799 1,930
Commitments and contingencies ................... -- --
-------- --------
Total liabilities ........................... 27,063 32,162
-------- --------
Stockholders' equity:
Common stock .................................... 125 123
Paid-in capital in excess of par value .......... 15,568 14,508
Retained earnings ............................... 45,163 41,975
Less treasury stock (18,161 shares at cost
at 12/31/95; 53,562 at 9/30/95) ............. (56) (228)
Less pension adjustment ......................... (406) (406)
Unrealized gain on investment ................... 221 156
-------- --------
Total stockholders' equity .................. 60,615 56,128
-------- --------
. .................................................. $ 87,678 $ 88,290
======== ========
See accompanying notes to the consolidated financial statements.
3
FAIR, ISAAC AND COMPANY, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
For the three months ended December 31, 1995 and 1994
(in thousands except per share data)
Three Months Ended
December 31
--------------------------------
(Unaudited)
1995 1994
---- ----
Revenues ............................. $ 32,628 $ 25,632
Costs and expenses:
Cost of revenues ................ 13,173 9,337
Sales and marketing ............. 5,396 5,350
Research and development ........ 760 1,213
General and administrative ...... 7,355 5,042
Amortization of intangibles ..... 288 330
----------- -----------
Total costs and expenses .... 26,972 21,272
----------- -----------
Income from operations ............... 5,656 4,360
Interest and other income (net) ...... 317 373
----------- -----------
Income before income taxes ........... 5,973 4,733
Income tax provision ................. 2,449 1,911
----------- -----------
Net income ........................... $ 3,524 $ 2,822
=========== ===========
Earnings per share ................... $ .28 $ .22
=========== ===========
Shares used in computing
earnings per share ................ 12,761,000 12,676,000
=========== ===========
See accompanying notes to the consolidated financial statements.
4
FAIR, ISAAC AND COMPANY, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended December 31, 1995 and 1994
(dollars in thousands)
(UNAUDITED)
1995 1994
---- ----
Cash flows from operating activities:
Net income ........................................... $ 3,524 $ 2,822
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization .................... 1,995 1,387
Decrease in accounts receivable and unbilled
work in progress ............................... 4,394 2,195
(Increase)/Decrease in prepaid expenses and other 183 (293)
Decrease in accrued compensation and employee
benefits ....................................... (5,504) (4,384)
Increase in accounts payable and other
liabilities .................................... 500 461
(Increase)/Decrease in income taxes payable ...... 462 (106)
Increase in billings in excess of contract costs . 186 30
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Net cash provided by operating activities ... 5,740 2,112
------- -------
Cash flows from investing activities:
Purchases of property, equipment and computer software (3,068) (1,866)
Purchases of investments ............................. (806) (3,202)
Proceeds from maturities of investments .............. 1,862 2,000
------- -------
Net cash used by investing activities ............ (2,012) (3,068)
------- -------
Cash flows from financing activities:
Reduction of capital lease obligations ............... (131) (82)
Issuance of common stock ............................. 255 312
Dividends paid ....................................... (244) --
------- -------
Net cash used by financing activities ............ (120) 230
------- -------
Increase/(Decrease) in cash and cash equivalents ........ 3,608 (726)
Cash and cash equivalents, beginning of period .......... 8,321 10,990
------- -------
Cash and cash equivalents, end of period ................ $11,929 $10,264
======= =======
See accompanying notes to the consolidated financial statements.
5
FAIR, ISAAC AND COMPANY, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Income taxes paid
Cash payments for income taxes during the three-month periods ended December
31, 1995, and 1994 were $1,964,000 and $1,556,000 respectively.
Note 2 Non-cash transactions
The Company contributed treasury stock having a market value of $979,000 and
$848,000 to the Company's Employee Stock Ownership Plan during the first fiscal
quarters of 1996 and 1995, respectively.
6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Fair, Isaac and Company, Incorporated, provides products and services
designed to help a variety of businesses use data to make better decisions on
their customers and prospective customers. The Company's products include
statistically derived, rule-based analytical tools, software designed to
implement those analytical tools, and consulting services to help clients use
and track the performance of those tools. The Company also provides a range of
credit scoring and credit account management services in conjunction with credit
bureaus and credit card processing agencies. Its DynaMark subsidiary provides
data processing, database management and personalized printing services to
businesses engaged in direct marketing.
The Company is organized into business units which correspond to its
principal markets: consumer credit, insurance and direct marketing (DynaMark).
Sales to the consumer credit industry have traditionally accounted for the bulk
of the Company's revenues. Products developed specifically for a single user in
this market are generally sold on a fixed-price basis. Such products include
application and behavior scoring algorithms (also known as "analytic products"
or "scorecards"), credit application processing systems (ASAP and CreditDesk)
and custom credit account management systems including those marketed under the
name TRIAD. Software systems usually also have a component of ongoing
maintenance revenue, and CreditDesk systems have also been sold under time- or
volume-based price arrangements. Credit scoring and credit account management
services sold through credit bureaus and third-party credit card processors are
generally priced based on usage. Products sold to the insurance industry are
generally priced based on the number of policies in force, subject to contract
minimums. DynaMark employs a combination of fixed-fee and usage-based pricing.
Results of Operations
Revenues
The following table sets forth for the fiscal periods indicated (a) the
percentage of revenues contributed by the DynaMark and Insurance business units,
and the percentage of revenues represented by fixed-price and usage-priced
revenues from the Credit business unit; and (b) the percentage change in
revenues within each category from the corresponding period in the prior fiscal
year. Fixed-price revenues include all revenues from application processing
software, custom scorecard development and consulting projects for credit.
Virtually all usage revenues are generated through third-party alliances such as
those with credit bureaus and third-party credit card processors.
Period-to-Period
Percentage of Percentage Changes
Revenue Quarter Ended
Quarter Ended 12/31/95
December 31, compared to
1995 1994 12/31/94
- --------------------------------------------------------------------------------
Credit:
Fixed-price 27% 26% 31%
Usage-priced 55 55 28
DynaMark 15 17 10
Insurance 3 2 79
------ ------
Total revenues 100% 100% 27
====== ======
The increase in usage revenues in the quarter ended December 31, 1995,
compared with the same period the prior year, was due to continuing growth in
usage of the Company's scoring services distributed through the three major
credit bureaus in the United States, including the PreScore(R) and ScoreNet(R)
services, and growth in the number of credit accounts managed under the services
delivered through third-party processors. Revenues from sales of credit
application scoring systems, credit application processing software, and credit
account management systems were all up significantly in the quarter ended
December 31, 1995, compared with the quarter ended December 31, 1994, accounting
for the growth in fixed-price credit revenues. Insurance revenues increased by
79 percent due to growth in the acceptance of both end-user custom products and
the insurance scoring services distributed through consumer reporting agencies.
DynaMark's revenue growth was well below the Company average, primarily because
of the loss of one large project to a competitor.
7
Revenues from credit bureau-related services have increased rapidly in each
of the last three fiscal years and accounted for approximately 39 percent of
revenues in fiscal 1995. Revenues from services provided through bankcard
processors also increased in each of these years, due primarily to increases in
the number of accounts at each of the major processors. While the Company has
been very successful in extending or renewing its agreements with credit bureaus
and bankcard 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 could have a
significant impact on revenues and operating margin. Revenues generated through
the Company's alliances with Equifax, Inc., TRW, Inc. and Trans Union
Corporation each accounted for approximately nine to eleven percent of the
Company's total revenues in fiscal 1995.
Potential new government regulation of the use of credit bureau data could
have an impact on the use of any of the Company's credit bureau scoring services
including PreScore(R) and ScoreNet(R). Bills which would substantially amend the
Fair Credit Reporting Act were introduced in each of the last three Congresses
and at least two such bills were introduced in 1995. These bills would impose
new restrictions on the use of credit bureau data to prescreen solicitation
lists. Bills and regulations have also been introduced, and, in some cases
enacted, at the state level that affect the use of credit bureau data in various
ways, including restricting the use of such data in making insurance
underwriting decisions. State regulation of credit bureau data, particularly
regulations imposing requirements on the credit bureaus or users of credit
bureau information which differ from those existing under federal law, may also
have an adverse impact on bureau scoring services. The Company believes certain
enacted or pending state legislation and regulation of credit bureau data in
connection with insurance underwriting has had a negative impact on its efforts
to sell insurance risk scores through credit reporting agencies. However, the
Company cannot predict whether any other particular federal or state legislation
affecting credit bureau information or credit scoring is likely to be enacted in
the foreseeable future, or the extent to which the passage of such legislation
might affect the Company's business.
Revenues derived from outside of the United States represented
approximately 14 percent of total revenues in the quarter ended December 31,
1995, compared with 11 percent of total revenues in the same period a year
earlier.
During the period from 1990 through 1994, while the rate of account growth
in the U.S. bankcard industry was slowing and many of the Company's largest
institutional clients were merging and consolidating, the Company generated
above-average growth in revenues--even after correcting for the effect of the
DynaMark acquisition--from its bankcard-related scoring and account management
business by deepening its penetration of large banks and other credit issuers.
The Company's revenues grew by 26 percent in fiscal 1995 which is closer to what
the Company believes is a sustainable, long-term growth rate than the growth
rates in 1990 through 1994. The Company believes much of its future growth
prospects will depend on several important factors, including those discussed
above and its ability (1) to develop new, high value products and services for
its present client base of major U.S. consumer credit issuers; (2) to increase
its penetration of established or emerging credit markets outside the U.S. and
Canada; and (3) to expand--either directly or through further acquisitions--into
relatively undeveloped or underdeveloped markets for its products and services
such as direct marketing, insurance, small business lending, and health care
information management.
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. While the increasing percentage of usage revenues may loosen this
constraint to some extent, management believes it 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 which it believes have
exceptional long-term potential. This occurred in the period from 1988 through
1990 when the Company devoted significant resources to developing the usage
priced services distributed through credit bureaus and third-party processors.
Cumulative revenue since 1987, net of the DynaMark acquisition, is very close to
the Company's twenty-year historical average revenue growth of 21 percent.
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
statement of income and (b) the percentage change in such items from the same
quarter in the prior fiscal year.
8
Period-to-Period
Percentage of Revenue Percentage Changes
--------------------- ------------------
Quarter Ended
Quarter Ended 12/31/95
December 31, Compared
------------- to Quarter Ended
1995 1994 12/31/94
---- ---- ------------------
Revenues .......................... 100% 100% 27%
Costs and expenses:
Cost of revenues ............... 40 36 41
Sales and marketing ............ 17 21 1
Research and development ....... 2 5 (37)
General and administrative ..... 23 20 46
Amortization of intangibles..... 1 1 (13)
---- ----
Total costs and expenses ....... 83 83 27
---- ----
Income from operations ............ 17 17 30
Interest and other income, net..... 1 1 (15)
---- ----
Income before income taxes ........ 18 18 26
Income tax provision .............. 7 7 28
---- ----
Net income ........................ 11% 11% 25%
==== ====
Costs of Revenues
Cost of revenues consists primarily of personnel, travel, and related
overhead costs; costs of computer service bureaus; the amounts paid by the
Company to credit bureaus for scores and related information in connection with
the ScoreNet Service, and depreciation. The cost of revenues, as a percentage of
net revenues, increased in the quarter ended December 31, 1995, as compared with
the same quarter a year earlier, primarily because DynaMark's revenues were
below planned levels while corresponding expenses could not be reduced on a
short-term basis.
Sales and Marketing
Sales and marketing expenses consist principally of personnel, travel,
overhead, advertising and other promotional expenses. These expenses, as a
percentage of revenues, decreased primarily due to reductions in advertising
expenses.
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 and management control. Research and development
expenses, as a percentage of revenues, decreased from the same period of fiscal
1995 because of lower research and development efforts with respect to credit
bureau products.
General and Administrative
General and administrative expenses consist mainly of compensation expenses
for certain senior management, corporate facilities expenses, the costs of
administering benefit plans, legal expenses, and the costs of operating
administrative functions such as finance and computer information systems. As a
percentage of revenues these expenses increased significantly compared with the
same quarter of fiscal 1995 primarily due to increases in office space,
expenditures made to improve the Company's information systems and technology
infrastructure, and the research associated with exploring new business
opportunities, particularly in the area of health care information management.
Significant increases in the levels of such expenses occurred during the later
part of fiscal 1995. General and administrative expenses for the quarter ended
December 31, 1995, were five percent higher than in the immediately preceding
quarter.
9
Financial Condition
Working capital increased from $24,393,000 at September 30, 1995 to
$25,861,000 at December 31, 1995; and cash and investments increased from
$25,118,000 at September 30, 1995, to $27,776,000 at December 31, 1995. The
Company has no long-term debt other than capital lease and employee incentive
obligations. The Company believes that cash and marketable securities on hand
are adequate to meet its capital and liquidity needs for the foreseeable future.
Interim Periods
The Company believes that all the necessary adjustments have been included
in the amounts shown in the consolidated financial statements contained in Item
1 above for the three-month periods ended December 31, 1995 and 1994 to state
fairly the results for such interim periods. This includes all normal recurring
adjustments that the Company considers necessary for a fair statement thereof,
in accordance with generally accepted accounting principles. This report should
be read in conjunction with the Company's 1995 Form 10-K.
Quarterly results may be affected by fluctuations in revenues associated
with credit card solicitations, by the timing of orders for and deliveries of
certain ASAP and TRIAD systems, and by the seasonality of ScoreNet purchases.
With the exception of the cost of ScoreNet data purchased by the Company, most
of its operating expenses are not affected by short-term fluctuations in
revenue, and thus such revenue fluctuations may have a significant impact on
operating results. However, in recent years, these fluctuations were generally
offset by the strong growth in revenues from services delivered through credit
bureaus and third-party bankcard processors.
Management believes that neither the quarterly variation in revenues and
net income, nor the results of operations for any particular quarter, are
necessarily indicative of results of operations for full fiscal years.
Accordingly, management believes that the Company's results should be evaluated
on an annual basis.
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.
At the Annual Meeting of Stockholders of the Company held on February
6, 1996, the Company's stockholders voted in favor of: (i) the election of eight
directors to the Company's Board of Directors, (ii) an amendment of the
Company's Restated Certificate of Incorporation increasing the number of
authorized shares of Common Stock from 15,000,000 to 35,000,000 shares; (iii)
amendments to the Company's 1992 Long-term Incentive Plan; and (iv) the
ratification of KPMG Peat Marwick LLP as the Company's independent auditors. The
number of votes for, withheld and against, as well as the number of abstentions
and broker non-votes as to each matter approved at the Annual Meeting of
Stockholders were as follows:
Broker
Matter For Withheld Against Abstain Non-votes
- ------ --- -------- ------- ------- ---------
Election of Directors
Bryant J. Brooks, Jr. 11,017,187 125,305 N/A N/A 0
H. Robert Heller 11,017,008 125,484 N/A N/A 0
Guy R. Henshaw 11,016,006 126,486 N/A N/A 0
David S.P. Hopkins 11,017,987 124,505 N/A N/A 0
Robert M. Oliver 11,017,787 124,705 N/A N/A 0
Larry E. Rosenberger 11,018,787 123,705 N/A N/A 0
Robert D. Sanderson 10,925,564 216,928 N/A N/A 0
John D. Woldrich 11,018,787 123,705 N/A N/A 0
Increase in Authorized Shares of Common Stock
9,054,262 N/A 2,046,888 41,342 0
Amendments to 1992 Long-term Incentive Plan
8,902,611 N/A 967,261 19,904 1,252,716
Ratification of Auditors
11,121,453 N/A 13,390 7,649 0
10
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
11.1 Computation of Earnings per Share.
24.1 Power of Attorney (see page 12 of this Form 10-Q).
27 Financial Data Schedule.
(b) Reports on Form 8-K:
None.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FAIR, ISAAC AND COMPANY, INCORPORATED
DATE: February 12, 1996
By GERALD DE KERCHOVE
-----------------------------------
Gerald de Kerchove
Executive Vice President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints PETER L. McCORKELL his attorney-in-fact, with
full power of substitution, for him in any and all capacities, to sign any
amendments to this Report on Form 10-Q and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorney-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following person on behalf of the registrant
and in the capacities and on the date indicated.
DATE: February 12, 1996
By PATRICIA COLE
-----------------------------------
Patricia Cole
Controller
(Chief Accounting Officer)
12
EXHIBIT INDEX
TO FAIR, ISAAC AND COMPANY, INCORPORATED
REPORT ON FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1995
Sequentially
Exhibit No. Exhibit Numbered Page
- ----------- ------- -------------
11.1 Computation of net income per common share. 14
24.1 Power of Attorney 12
27 Financial Data Schedule 15
13
Exhibit 11.1
FAIR, ISAAC AND COMPANY, INCORPORATED
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS EXCEPT PER SHARE DATA)
Three months ended December 31,
1995 1994
Primary Earnings Per Share:
Weighted Average Common Shares
Outstanding 12,282 12,124
Shares Issuable Upon Exercise of Stock
Options 759 760
Less Shares Assumed to be Repurchased (280) (208)
------------ -----------
Weighted Average Common Shares,
as Adjusted 12,761 12,676
=========== ===========
Net Income $ 3,524 $ 2,882
=========== ===========
Primary Earnings per Share $ 0.28 $ 0.22
=========== ===========
Fully Diluted Earnings Per Share:
Weighted Average Common Shares
Outstanding 12,282 12,124
Shares Issuable Upon Exercise of Stock
Options 755 760
Less Shares Assumed to be Repurchased (303) (156)
------------ -----------
Weighted Average Common Shares,
as Adjusted 12,734 12,728
=========== ===========
Net Income $ 3,524 $ 2,882
=========== ===========
Fully Diluted Earnings Per Share $ 0.28 $ 0.22
=========== ===========