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, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number
0-16439
FAIR, ISAAC AND COMPANY, INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 94-1499887
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
120 North Redwood Drive, San Rafael, California 94903
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 472-2211
------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No ____.
The number of shares of Common Stock, $0.01 par value per share,
outstanding on May 6, 1998, was 13,905,394.
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.................................................................. 8
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.................................................. 14
SIGNATURES .................................................................................. 15
EXHIBIT INDEX.................................................................................. 16
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements.
FAIR, ISAAC AND COMPANY, INCORPORATED
CONSOLIDATED BALANCE SHEETS
March 31, 1998 and September 30, 1997
(dollars in thousands)
March 31 September 30
-------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 17,180 $ 13,209
Short-term investments 4,607 6,108
Accounts receivable, net 35,396 36,147
Unbilled work in progress 21,142 18,176
Prepaid expenses and other current assets 4,639 3,673
Deferred income taxes 4,449 4,517
--------- ---------
Total current assets 87,413 81,830
Long-term investments 12,735 13,261
Property and equipment, net 40,363 34,486
Intangibles, net 11,037 8,361
Deferred income taxes 3,369 3,369
Other assets 3,772 3,921
--------- ---------
$ 158,689 $ 145,228
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilities $ 12,387 $ 8,228
Accrued compensation and employee benefits 15,541 19,160
Billings in excess of earned revenues 6,993 6,346
Capitalized leases 403 369
--------- ---------
Total current liabilities 35,324 34,103
Other liabilities 6,832 6,753
Capitalized leases 999 1,183
Commitments and contingencies -- --
--------- ---------
Total liabilities 43,155 42,039
--------- ---------
Stockholders' equity:
Preferred stock -- --
Common stock 139 135
Paid in capital in excess of par value 29,308 26,025
Retained earnings 86,363 77,453
Less treasury stock at cost (11,077 shares at 3/31/98;
12,114 at 9/30/97) (396) (433)
Cumulative translation adjustments (278) (308)
Unrealized gains on investments 398 317
--------- ---------
Total stockholders' equity 115,534 103,189
--------- ---------
$ 158,689 $ 145,228
========= =========
See accompanying notes to the consolidated financial statements.
3
FAIR, ISAAC AND COMPANY, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
For the six month and three month periods ended March 31, 1998 and 1997
(dollars in thousands, except per share data)
Six Months Ended Three Months Ended
March 31 March 31
-------------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues $ 113,166 $ 91,703 $ 59,655 $ 48,366
Costs and expenses:
Cost of revenues 41,632 34,197 21,624 17,825
Sales and marketing 17,329 13,204 8,725 7,199
Research and development 13,980 7,742 7,382 4,199
General and administrative 24,115 18,993 12,717 9,511
Amortization of intangibles 576 655 255 319
------------ ------------ ------------ ------------
Total costs and expenses 97,632 74,791 50,703 39,053
------------ ------------ ------------ ------------
Income from operations 15,534 16,912 8,952 9,313
Other income (expense), net 539 (333) 510 (440)
------------ ------------ ------------ ------------
Income before income taxes 16,073 16,579 9,462 8,873
Provision for income taxes 6,618 6,511 3,974 3,503
------------ ------------ ------------ ------------
Net income $ 9,455 $ 10,068 $ 5,488 $ 5,370
============ ============ ============ ============
Earnings per share:
Diluted $ .66 $ .71 $ .38 $ .38
============ ============ ============ ============
Basic $ .70 $ .76 $ .40 $ .40
============ ============ ============ ============
Shares used in computing
earnings per share:
Diluted 14,310,000 14,189,000 14,304,000 14,228,000
============ ============ ============ ============
Basic 13,596,000 13,326,000 13,707,000 13,361,000
============ ============ ============ ============
See accompanying notes to the consolidated financial statements.
4
FAIR, ISAAC AND COMPANY, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended March 31, 1998 and 1997
(dollars in thousands)
Six Months Ended
March 31
-------------------
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 9,455 $ 10,068
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 7,191 5,618
Deferred compensation 324 --
Gain on sale of investment (165) --
Equity (gain) loss in investment (30) 1,051
Deferred income taxes 149 (82)
Change to reflect change in Risk Management
Technologies fiscal year -- (214)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 781 (3,646)
Increase in unbilled work in progress (2,966) (2,429)
Increase in prepaid expenses and other assets (966) (1,152)
Decrease (increase) in other assets 149 (936)
Increase in accounts payable and other accrued liabilities 4,009 718
Decrease in accrued compensation and employee benefits (2,212) (4,176)
Increase in billings in excess of earned revenues 647 2,012
Increase (decrease) in other liabilities (545) 533
-------- --------
Net cash provided by operating activities 15,821 7,365
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (11,205) (8,428)
Proceeds from sale of property and equipment -- 340
Payments for acquisitions (3,140) (78)
Purchases of investments (788) (6,140)
Proceeds from maturities of investments 3,010 5,000
-------- --------
Net cash used by investing activities (12,123) (9,306)
-------- --------
Cash flows from financing activities:
Principal payments of capital lease obligations (190) (207)
Issuance of common stock 1,028 283
Dividends paid (545) (505)
Repurchase of company stock (20) --
-------- --------
Net cash provided (used) by financing activities 273 (429)
-------- --------
Increase (decrease) in cash and cash equivalents 3,971 (2,370)
Cash and cash equivalents, beginning of period 13,209 11,487
-------- --------
Cash and cash equivalents, end of period $ 17,180 $ 9,117
======== ========
See accompanying notes to the consolidated financial statements.
5
FAIR, ISAAC AND COMPANY, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Earnings Per Share
The following reconciles the numerators and denominators of diluted and basic
earnings per share (EPS):
Six months ended March 31, Three months ended March 31,
(dollars in thousands, except per share data) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Numerator - Net income $ 9,455 $ 10,068 $ 5,488 $ 5,370
======== ======== ======== ========
Denominator - Shares:
Diluted weighted-average shares and assumed conversions 14,310 14,189 14,304 14,228
of stock options
Effect of dilutive securities - employee stock options (714) (863) (597) (867)
-------- -------- -------- --------
Basic weighted-average shares 13,596 13,326 13,707 13,361
======== ======== ======== ========
Earnings per share:
Diluted $ .66 $ .71 $ .38 $ .38
======== ======== ======== ========
Basic $ .70 $ .76 $ .40 $ .40
======== ======== ======== ========
Total options outstanding included 483,000 and 96,000 options to purchase
shares of common stock at prices ranging from $38.25 to $45.63 and $38.25 to
$41.88 at March 31, 1998 and 1997, respectively. These options were not included
in the computation of diluted EPS because the option's exercise price was
greater than the average market price of the common shares for the six and three
months ended March 31, 1998 and 1997.
Note 2 Cash Flow Statement
Supplemental disclosure of cash flow information:
Six months ended March 31,
(dollars in thousands) 1998 1997
- ------------------------------------------------------------------------------
Income tax payments $7,282 $8,051
Interest paid $ 64 $ 173
Non-cash investing and financing activities:
Issuance of common stock to ESOP $1,323 $ 969
Tax benefit of stock options $ 474 $ ---
Purchase of CRMA with common stock $ 111 $ ---
Vesting of restricted stock $ 84 $ ---
Capital lease obligations $ 40 $ ---
Contributions of treasury stock to ESOP $ --- $ 499
Note 3 Merger
In July 1997, the Company issued 1,252,665 shares of its common stock
(including 544,218 shares underlying options assumed by the Company) in
connection with the merger with Risk Management Technologies (RMT). The
acquisition has been accounted for under the pooling-of-interests method.
Accordingly, the consolidated financial statements have been restated for all
prior periods to include RMT. Further, all common share and per share data have
been restated for prior periods.
6
RMT previously used the fiscal year ended December 31 for its financial
reporting. RMT's operating results for the year ended December 31, 1996 are
included in the accompanying consolidated balance sheet at September 30, 1997 in
the line item retained earnings. The statement of income's comparative 1997
results reflect the operations of the Company and RMT for the six-month period
ended March 31, 1997. Accordingly, the duplication of RMT's net income for the
three months ended December 31, 1996, has been adjusted by a $214,000 charge to
retained earnings in fiscal 1997.
Note 4 Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 130, "Reporting
Comprehensive Income." SFAS No. 130 established standards for reporting
comprehensive income and its components in financial statements. This statement
requires that all items which are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Comprehensive income is equal to net income plus the change in
"other comprehensive income." SFAS No. 130 requires that an entity: (a) classify
items of other comprehensive income by their nature in a financial statement,
and (b) report the accumulated balance of other comprehensive income separately
from common stock and retained earnings in the equity section of the statement
of financial position. This statement is effective for financial statements
issued for fiscal years beginning after December 15, 1997. Beginning with fiscal
year 1999, management intends to conform its consolidated financial statements
to this pronouncement.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement establishes standards for
publicly held entities to follow in reporting information about operating
segments in annual financial statements and requires that those entities report
selected information about operating segments in interim financial statements.
This statement also establishes standards for related disclosures about products
and services, geographic areas and major customers. This statement is effective
for financial statements issued for fiscal years beginning after December 15,
1997. Beginning with fiscal year 1999, management intends to conform its
consolidated financial statements to this pronouncement.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position No. 97-2, "Software Revenue Recognition." This
statement establishes standards for when to recognize revenue on software
transactions and in what amounts for licensing, selling, leasing or otherwise
marketing computer software. This statement is effective for financial
statements issued for fiscal years beginning after December 15, 1997. The
Company is currently evaluating the impact of the statement in the accompanying
consolidated financial statements. Beginning with fiscal year 1999, management
intends to conform its consolidated financial statements to this pronouncement.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure
about Pensions and Other Postretirement Benefits." The statement standardizes
the disclosure requirements for pension and other postretirement benefits. This
statement is effective for financial statements issued for fiscal years
beginning after December 15, 1997. The Company is currently evaluating the
impact of the statement in the accompanying consolidated financial statements.
Beginning with fiscal year 1999, management intends to conform its consolidated
financial statements to this pronouncement.
7
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Fair, Isaac and Company, Incorporated, provides products and services
designed to help a variety of businesses use data to make better decisions on
their customers, prospective customers and existing portfolios. The Company's
products include statistically derived, rule-based analytical tools, software
designed to implement those analytical tools and consulting services to help
clients use and track the performance of those tools. The Company also provides
a range of credit scoring and credit account management services in conjunction
with credit bureaus and credit card processing agencies. Its DynaMark subsidiary
provides data processing and database management services to businesses engaged
in direct marketing activities, many of which are in the credit and insurance
industries.
On July 21, l997, the Company acquired Risk Management Technologies (RMT),
a privately held company, which provides enterprise-wide risk management and
performance measurement solutions to major financial institutions. The Company's
historical statements for prior periods have been restated to account for the
Company's merger with RMT on a pooling-of-interests basis.
The Company is organized into business units that correspond to its
principal markets: consumer credit, insurance, direct marketing (DynaMark),
enterprise-wide financial risk management (RMT) and a new unit, healthcare
information. Sales to the consumer credit industry have traditionally accounted
for the bulk of the Company's revenues. Products developed specifically for a
single user in this market are generally sold on a fixed-price basis. Such
products include application and behavior scoring algorithms (also known as
"analytic products" or "scorecards"), credit application processing systems
(ASAP(TM) and CreditDesk(R)) and custom credit account management systems,
including those marketed under the name TRIAD(TM). Software systems usually also
have a component of ongoing maintenance revenue, and CreditDesk systems have
also been sold under time- or volume-based price arrangements. Credit scoring
and credit account management services sold through credit bureaus and
third-party credit card processors are generally priced based on usage. Products
sold to the insurance industry are generally priced based on the number of
policies in force, subject to contract minimums. DynaMark and RMT employ a
combination of fixed-fee and usage-based pricing, and the Healthcare Information
unit intends to employ a combination of fixed-fee and usage-based pricing for
its products.
This discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and Notes. In addition to historical
information, this report includes certain forward-looking statements regarding
events and trends that may affect the Company's future results. Such statements
are subject to risks and uncertainties that could cause the Company's actual
results to differ materially. Such factors include, but are not limited to,
those described in this discussion and analysis.
8
Results of Operations
Revenues
The following table sets forth for the fiscal periods indicated (a) the
percentage of revenues represented by fixed-price and usage-priced revenues from
the Credit business unit, and the percentage of revenues contributed by the
DynaMark, RMT, Insurance and Healthcare Information business units; and (b) the
percentage change in revenues within each category from the corresponding period
in the prior fiscal year. Credit fixed-price revenues include all revenues from
custom scorecard, software and consulting projects. Most credit usage revenues
are generated through third-party alliances such as those with credit bureaus
and third-party credit card processors. In addition, some credit scorecards and
software products are licensed under volume-based fee arrangements and these are
included in credit usage-priced revenues.
Percentage of Percentage of
Revenue Revenue
Three Months Ended Percentage Six Months Ended Percentage
March 31, Change March 31, Change
--------- ------ --------- ------
1998 1997 1998 1997
---- ---- ---- ----
Credit
Fixed-price 27% 29% 13% 25% 29% 6%
Usage-priced 45% 49% 14% 49% 50% 21%
DynaMark 20% 14% 77% 19% 14% 68%
RMT 4% 4% 13% 3% 4% (4%)
Insurance 3% 4% 22% 4% 3% 44%
Healthcare Information 1% --- NM less than 1% --- NM
----- ------ ----- -----
Total revenues 100% 100% 23% 100% 100% 23%
==== ==== ==== ====
NM = Not meaningful
The increase in fixed-price credit revenues in the quarter ended March 31,
1998 was due primarily to increased revenues from CRMA, which was acquired in
September 1996 as part of the Credit business unit; sales of credit application
scorecards and credit application processing software; and its end-user credit
account management systems ("TRIAD") and behavior scoring projects. The increase
in fixed-price credit revenues in the six-months ended March 31, 1998 was due
primarily to increased revenues from CRMA and the Company's end-user credit
account management systems ("TRIAD") and behavior scoring projects. CRMA's
revenues were up 97 percent in the quarter and 117 percent in the six months
ended March 31, 1998, compared with the same periods of the prior fiscal year.
Compared with the same periods of fiscal 1997, revenues from sales of credit
application scorecards and credit application processing software increased by
approximately 9 percent in the quarter, and declined by 3 percent in the
six-months ended March 31, 1998 due principally to a decline in revenues outside
the United States. Revenues from end-user credit account management systems
("TRIAD") and behavior scoring projects in the three- and six-month periods
ended March 31, 1998, were up 20 percent and 22 percent, respectively, from the
same periods of fiscal 1997 due primarily to the release of the next version of
TRIAD software.
The increase in usage revenues from the Credit business unit in the quarter
and six-months ended March 31, 1998, compared with the same periods the prior
year, was due to continuing growth in (a) usage of the Company's scoring
services distributed through the three major credit bureaus in the United States
and (b) the number of bankcard accounts being managed by the Company's account
management services delivered through third-party processors. Revenues for the
credit bureau scoring services in the six-months ended March 31, 1998, were
approximately 20 percent higher than in the first six months of fiscal 1997;
approximately one-sixth of this increase was due to the recognition of usage
revenue pertaining to prior fiscal years from audits of clients. Revenues from
credit account management services delivered through third-party processors in
the most recent three months were 18 percent higher than in the corresponding
period of fiscal 1997.
Revenues from credit bureau-related services have increased rapidly in each
of the last three fiscal years and accounted for approximately 35 percent of
revenues in fiscal 1997. Revenues from services provided through
9
bankcard processors also increased in each of these years, due primarily to
increases in the number of accounts at each of the major processors.
Revenues derived from alliances with credit bureaus and credit card
processors have accounted for much of the Company's revenue growth and
improvement in operating margins over the last three fiscal years. While the
Company has been very successful in extending or renewing such agreements in the
past, and believes it will generally be able to do so in the future, the loss of
one or more such alliances 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 eight to ten percent of the Company's total revenues in fiscal
1996 and 1997.
On November 14, 1996, it was announced that Experian had been acquired by
CCN Group Ltd., a subsidiary of Great Universal Stores, PLC. CCN is the
Company's largest competitor, worldwide, in the area of credit scoring.
TRW/Experian has offered scoring products developed by CCN in competition with
those of the Company for several years. The acquisition has had no apparent
impact on the Company's revenues from Experian.
On September 30, 1997, amendments to the federal Fair Credit Reporting Act
became effective. The Company believes these changes to the federal law
regulating credit reporting will be favorable to the Company and its clients.
Among other things, the new law expressly permits the use of credit bureau data
to prescreen consumers for offers of credit and insurance and allows affiliated
companies to share consumer information with each other subject to certain
conditions. There is also a seven-year moratorium on new state legislation on
certain issues. However, the states remain free to regulate the use of credit
bureau data in connection with insurance underwriting. The Company believes
enacted or proposed state regulation of the insurance industry has had a
negative impact on its efforts to sell insurance risk scores through credit
reporting agencies.
Since its acquisition, DynaMark has taken on an increasing share of the
mainframe batch processing requirements of the Company's other business units.
During fiscal 1997, such intercompany revenue represented more than fourteen
percent of DynaMark's total revenues. Accordingly, DynaMark's externally
reported revenues tend to understate DynaMark's growth and contribution to the
Company as a whole. The increase in DynaMark's revenues shown in the foregoing
table, which excludes such intercompany revenues, was due primarily to increased
revenues from customers in the financial services industry. RMT's revenues
slightly decreased in the six-month period ended March 31, l998 compared to the
same period in fiscal 1997 due to the impact of bank consolidations, but
increased by 13 percent in the quarter ended March 31, 1998 over the
corresponding period in fiscal 1997.
The increases in Insurance revenues for the three- and six-months ended
March 31, 1998, compared with the same periods in fiscal 1997, were due
primarily to continuing strong growth in insurance scoring services offered
through consumer reporting agencies. In the quarter and six-months ended March
31, 1998, the Company's newest business unit, Healthcare Information, derived
revenues from providing analytical marketing services to a large pharmaceuticals
manufacturer to help improve customer relationships and management of
prescription compliance (i.e., patient's fulfillment of prescriptions and taking
them to completion). This unit had no recorded revenues in the corresponding
periods in fiscal 1997.
Revenues derived from outside of the United States represented
approximately 18 percent of total revenues in the quarter and six-months ended
March 31, 1998, compared with 15 percent and 16 percent, respectively, of total
revenues in the quarter and six-months ended March 31, 1997.
Revenues from software maintenance and consulting services each accounted
for less than 10 percent of revenues in each of the three years in the period
ended September 30, 1997, and in the six-months ended March 31, 1998. The
Company does not expect revenues from either of these sources to exceed 10
percent of revenues in the foreseeable future.
During the period since 1990, while the rate of account growth in the U.S.
bankcard industry has been slowing and many of the Company's largest
institutional clients have merged and consolidated, the Company has generated
above-average growth in revenues--even after adjusting for the effect of
acquisitions--from its bankcard-related scoring and account management business
by deepening its penetration of large banks and other credit issuers. The
Company believes much of its future growth prospects will rest on its ability
to: (1) develop new, high-value products, (2) increase its penetration of
established or emerging credit markets outside the U.S. and Canada and (3)
expand--either directly or through further acquisitions--into relatively
undeveloped or underdeveloped markets for its
10
products and services, such as direct marketing, insurance, small business
lending and healthcare 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. 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 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.
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
periods in the prior fiscal year.
Six Months Three Months
Ended Percentage Ended Percentage
March 31, Change March 31, Change
--------- ------ --------- ------
1998 1997 1998 1997
---- ---- ---- ----
Revenues 100% 100% 23% 100% 100% 23%
Costs and expenses:
Cost of revenues 37 37 22% 36 36 21%
Sales and marketing 15 14 31% 15 15 21%
Research and development 12 8 81% 12 9 76%
General and administrative 21 22 27% 21 20 34%
Amortization of intangibles 1 1 (12)% 1 1 (20)%
----- ----- ----- -----
Total costs and expenses 86 82 31% 85 81 30%
----- ----- ----- -----
Income from operations 14 18 (8)% 15 19 (4)%
Other income and expense -- -- NM 1 (1) NM
----- ----- ----- -----
Income before income taxes 14 18 (3)% 16 18 7%
Provision for income taxes 6 7 2% 7 7 13%
----- ----- ----- -----
Net income 8% 11% (6)% 9% 11% 2%
===== ===== ===== =====
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. The cost of revenues, as a percentage of revenues, was
essentially unchanged in the three- and six-months ended March 31, 1998, as
compared with the same periods a year earlier.
Sales and Marketing
Sales and marketing expenses consist principally of personnel, travel,
overhead, advertising and other promotional expenses. As a percentage of
revenues, these expenses increased in the six-month period ended March 31, 1998,
compared with the same period in fiscal 1997, primarily due to increases in
media advertising for introduction of new products and increased visibility of
the Company's brand, and the costs of researching market opportunities outside
the United States. These expenses, as a percentage of revenues, were essentially
unchanged, for the quarter ended March 31, 1998, as compared with the same
period a year earlier.
11
Research and Development
Research and development expenses include the personnel and related
overhead costs incurred in developing products, researching mathematical and
statistical algorithms, and developing software tools that are aimed at
improving productivity and management control. Research and development expenses
for fiscal 1998 increased significantly over the corresponding three- and
six-month periods of fiscal 1997. After several years of concentrating on
developing new markets--either geographical or by industry--for its existing
technologies, the Company has increased emphasis on developing new technologies,
especially in the area of software development. Research and development
expenditures in the three- and six-months ended March 31, l998 were primarily
related to new bankruptcy scoring products for Visa (Integrated Solutions
Concept) and Trans Union, new fraud detection software products, joint product
development projects with Deluxe Financial Services, Inc. and Year 2000
conversion work.
General and Administrative
General and administrative expenses consist mainly of compensation expenses
for certain senior management, corporate facilities expenses, the costs of
administering certain benefit plans, legal expenses, expenses associated with
the exploration of new business opportunities and the costs of operating
administrative functions such as finance and computer information systems. As a
percentage of revenues, these expenses decreased in the six-month period ended
March 31, 1998, compared with the same period in fiscal 1997, principally
because stock-based performance incentives were lower this period than in the
corresponding six-month period of the prior fiscal year. These expenses, as a
percentage of revenues, were slightly higher in the quarter ended March 31,
1998, as compared with the same quarter a year earlier, due primarily to
expenses related to office expansions that occurred after the quarter ended
March 31, 1997.
Amortization of intangibles
The Company is amortizing the intangible assets arising from various
acquisitions over periods ranging from two to fifteen years. The level of
amortization expense in future years will depend, in part, on the amount of
additional payments (earnouts) to the former shareholders of Credit & Risk
Management Associates, Inc., a privately held company acquired in 1996.
Other Income and expense
Interest income, derived from the investment of funds surplus to the
Company's immediate operating requirements, was essentially the same as in the
three- and six-month periods a year earlier. During this quarter, the Company
sold its equity interest in one early stage development company which had
experienced losses in prior fiscal periods and whose sale resulted in a capital
gain for the Company. The Company expects that any operating losses from its
remaining equity investments will not be material in the foreseeable future.
Provision for income taxes
The Company's effective tax rate increased to 42% and 41%, respectively, in
the three- and six-month periods ended March 31, 1998, from 39% in the
corresponding periods of fiscal 1997, primarily because net operating losses
carryforward deductions were exhausted in fiscal l997.
Financial Condition
Working capital increased from $47,727,000 at September 30, 1997 to
$52,089,000 at March 31, 1998. Cash and marketable investments increased from
$27,941,000 at September 30, 1997, to $30,911,000 at March 31, 1998. The
Company's long-term obligations are mainly due to lease and employee incentive
and benefit obligations.
On December 1, 1997, the Company exercised an option to purchase
undeveloped land in San Rafael, California, with the intention of constructing
an office complex to accommodate future growth. Development is expected to
commence in fiscal 1998 and the Company intends to fund the acquisition and
development of this land through a synthetic lease arrangement, which will
materially increase the Company's future operating lease expenses. Excepting
external financing of this capital commitment, the Company believes that the
cash and
12
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.
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- and six-month periods ended March 31, 1998 and 1997, 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 1997 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
revenues; thus short-term fluctuations in revenues may have a significant impact
on operating results. However, in recent years, these fluctuations were
generally offset by the strong growth in revenues from services delivered
through credit bureaus and third-party bankcard processors. Management believes
that neither the quarterly variation in revenues and net income, nor the results
of operations for any particular quarter, are necessarily indicative of results
of operations for full fiscal years. Accordingly, management believes that the
Company's results should be evaluated on an annual basis.
YEAR 2000
The Company is performing Year 2000 conversion work on its software
products marketed to customers. The updated versions of its software products
currently being shipped to customers are Year 2000 compliant. The Year 2000
conversion work for earlier versions of the Company's software installed at
customer sites will be performed as part of the Company's normal upgrade and
maintenance process. Additionally, the Company has completed its Year 2000 audit
of internal systems applications and determined that approximately 95 percent of
its internally developed systems are Year 2000 compliant. Applications supplied
by third parties are either Year 2000 compliant or have patches currently
available to bring them into compliance. The Company plans to be fully compliant
by the end of fiscal l998. The Company has completed its assessments of Year
2000 conversion work and estimates that anticipated costs of Year 2000
compliance will not have a material effect on the Company's business, results of
operations or financial condition. The Company has also initiated communications
with third parties with whom it has major computer interfaces to determine how
they are addressing Year 2000 issues and to evaluate any impact on the Company's
systems. Although the Company intends to work with these third parties to
resolve Year 2000 issues, the lack of resolution of Year 2000 issues by these
parties may negatively impact the Company's future business operations,
financial condition and results of operations. At this time the Company cannot
quantify the potential impact of the third-party Year 2000 issues.
13
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
24.1 Power of Attorney (see page 15 of this Form 10-Q).
27.1 Financial Data Schedule
Revised Exhibits 27 (i) to restate financial statements covering the
periods from September 30, 1995 through June 30, 1997 to account for the
Company's merger with RMT on a pooling-of-interests basis and (ii) to restate
EPS under FAS No. 128 for the periods from September 30, 1995 through September
30, 1997 are attached as indicated below.
27.2 Revised Financial Data Schedule
27.3 Revised Financial Data Schedule
27.4 Revised Financial Data Schedule
27.5 Revised Financial Data Schedule
27.6 Revised Financial Data Schedule
27.7 Revised Financial Data Schedule
27.8 Revised Financial Data Schedule
27.9 Revised Financial Data Schedule
27.10 Revised Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended March 31,
1998.
14
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, 1998
By PETER L. MCCORKELL
--------------------------------------------
Peter L. McCorkell
Senior Vice President and Secretary
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints PETER L. McCORKELL his attorney-in-fact, with
full power of substitution, for him in any and all capacities, to sign any
amendments to this Report on Form 10-Q and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorney-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following person on behalf of the registrant
and in the capacities and on the date indicated.
DATE: May 12, 1998
By PATRICIA COLE
----------------------------------------------------------
Patricia Cole
Senior Vice President and Chief Financial Officer
15
EXHIBIT INDEX
TO FAIR, ISAAC AND COMPANY, INCORPORATED
REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998
Sequentially
Exhibit No. Exhibit Numbered Page
- ----------- ------- -------------
24.1 Power of Attorney 15
27.1 Financial Data Schedule 17
27.2 Revised Financial Data Schedule 18
27.3 Revised Financial Data Schedule 19
27.4 Revised Financial Data Schedule 20
27.5 Revised Financial Data Schedule 21
27.6 Revised Financial Data Schedule 22
27.7 Revised Financial Data Schedule 23
27.8 Revised Financial Data Schedule 24
27.9 Revised Financial Data Schedule 25
27.10 Revised Financial Data Schedule 26
5
1,000
6-MOS
SEP-30-1998
OCT-01-1997
MAR-31-1998
17,180
4,607
36,285
889
0
87,413
75,488
35,125
158,689
35,324
999
139
0
0
115,395
158,689
0
113,166
0
41,632
17,329
220
364
16,073
6,618
9,455
0
0
0
9,455
.70
.66
5
1,000
YEAR
SEP-30-1995
OCT-01-1994
SEP-30-1995
9,167
5,874
19,806
332
0
50,185
30,145
13,083
91,009
26,737
1,930
130
0
0
56,045
91,009
0
117,089
0
43,652
23,236
16
243
21,390
8,637
12,753
0
0
0
12,753
.99
.93
The financial data for the fiscal year ended September 30, 1995 has been
restated to reflect the merger, effective July 1997, between Fair, Isaac and
Company, Incorporated and Risk Management Technologies which has been accounted
for under the pooling-of-interests method. Also the financial data schedule has
been restated for the effects of Financial Accounting Standard No. 128 Earnings
per Share.
5
1,000
YEAR
SEP-30-1996
OCT-01-1995
DEC-31-1995
13,207
4,496
19,803
386
0
49,568
32,295
13,809
91,392
22,204
1,799
132
0
0
60,791
91,392
0
34,218
0
13,531
5,683
0
56
6,287
2,502
3,785
0
0
0
3,785
.29
.27
The financial data for the fiscal year ended September 30, 1996 has been
restated to reflect the merger, effective July 1997, between Fair, Isaac and
Company, Incorporated and Risk Management Technologies which has been accounted
for under the pooling-of-interests method. Also the financial data schedule has
been restated for the effects of Financial Accounting Standard No. 128 Earnings
per Share.
5
1,000
YEAR
SEP-30-1996
OCT-01-1995
MAR-31-1996
14,177
4,018
23,055
376
0
53,057
35,669
15,303
98,008
26,321
1,724
132
0
0
65,222
98,008
0
71,169
0
27,370
11,863
110
115
13,939
5,581
8,358
0
0
0
8,358
.65
.60
The financial data for the fiscal year ended September 30, 1996 has been
restated to reflect the merger, effective July 1997, between Fair, Isaac and
Company, Incorporated and Risk Management Technologies which has been accounted
for under the pooling-of-interests method. Also the financial data schedule has
been restated for the effects of Financial Accounting Standard No. 128 Earnings
per Share.
5
1,000
YEAR
SEP-30-1996
OCT-01-1995
JUN-30-1996
10,084
6,000
24,100
374
0
57,408
40,430
18,271
104,974
28,261
1,663
133
0
0
70,104
104,974
0
110,382
0
41,991
18,577
120
159
21,758
8,532
13,226
0
0
0
13,226
1.02
.96
The financial data for the fiscal year ended September 30, 1996 has been
restated to reflect the merger, effective July 1997, between Fair, Isaac and
Company, Incorporated and Risk Management Technologies which has been accounted
for under the pooling-of-interests method. Also the financial data schedule has
been restated for the effects of Financial Accounting Standard No. 128 Earnings
per Share.
5
1,000
YEAR
SEP-30-1996
OCT-01-1995
SEP-30-1996
11,487
7,487
28,691
485
0
65,427
44,397
20,745
118,023
30,728
1,552
133
0
0
79,521
118,023
0
155,913
0
57,732
25,722
600
223
28,704
11,281
17,423
0
0
0
17,423
1.32
1.25
The financial data for the fiscal year ended September 30, 1996 has been
restated to reflect the merger, effective July 1997, between Fair, Isaac and
Company, Incorporated and Risk Management Technologies which has been accounted
for under the pooling-of-interests method. Also the financial data schedule has
been restated for the effects of Financial Accounting Standard No. 128 Earnings
per Share.
5
1,000
YEAR
SEP-30-1997
OCT-01-1996
DEC-31-1996
15,170
6,019
27,175
485
0
66,748
46,983
22,056
119,091
25,914
1,462
133
0
0
85,402
119,091
0
43,337
0
16,372
6,005
0
94
7,706
3,008
4,698
0
0
0
4,698
.35
.33
The financial data for the fiscal year ended September 30, 1997 has been
restated to reflect the merger, effective July 1997, between Fair, Isaac and
Company, Incorporated and Risk Management Technologies which has been accounted
for under the pooling-of-interests method. Also the financial data schedule has
been restated for the effects of Financial Accounting Standard No. 128 Earnings
per Share.
5
1,000
YEAR
SEP-30-1997
OCT-01-1996
MAR-31-1997
9,117
5,506
32,365
595
0
68,303
53,896
27,120
125,481
26,742
1,371
134
0
0
90,612
125,481
0
91,703
0
34,197
13,204
0
181
16,579
6,511
10,068
0
0
0
10,068
.76
.71
The financial data for the fiscal year ended September 30, 1997 has been
restated to reflect the merger, effective July 1997, between Fair, Isaac and
Company, Incorporated and Risk Management Technologies which has been accounted
for under the pooling-of-interests method. Also the financial data schedule has
been restated for the effects of Financial Accounting Standard No. 128 Earnings
per Share.
5
1,000
YEAR
SEP-30-1997
OCT-01-1996
JUN-30-1997
10,813
5,006
32,146
605
0
73,134
61,526
29,636
134,734
29,809
1,306
134
0
0
95,084
134,734
0
142,777
0
52,912
21,265
0
255
23,923
9,561
14,362
0
0
0
14,362
1.08
1.01
The financial data for the fiscal year ended September 30, 1997 has been
restated to reflect the merger, effective July 1997, between Fair, Isaac and
Company, Incorporated and Risk Management Technologies which has been accounted
for under the pooling-of-interests method. Also the financial data schedule has
been restated for the effects of Financial Accounting Standard No. 128 Earnings
per Share.
5
1,000
YEAR
SEP-30-1997
OCT-01-1996
SEP-30-1997
13,209
6,108
36,905
758
0
81,830
63,475
28,989
145,228
34,103
1,183
135
0
0
103,054
145,228
0
199,009
0
72,566
29,162
438
336
35,546
14,860
20,686
0
0
0
20,686
1.55
1.46
The financial data for fiscal year ended September 30, 1997 has been
restated for the effects of Financial Accounting Standard No. 128 Earnings per
Share.
