SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER
0-16439
FAIR, ISAAC AND COMPANY, INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-1499887
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
200 Smith Ranch Road, San Rafael, California 94903
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 472-2211
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of Common Stock, $0.01 par value per share,
outstanding on August 8, 2001, was 22,387,270.
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. Quantitative and Qualitative Disclosures About Market Risk....... 20
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds........................ 21
ITEM 6. Exhibits and Reports on Form 8-K................................. 21
SIGNATURES................................................................. 22
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FAIR, ISAAC AND COMPANY, INCORPORATED
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND SEPTEMBER 30, 2000
(IN THOUSANDS)
(UNAUDITED)
June 30, 2001 September 30, 2000
------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 24,609 $ 39,506
Short-term investments 11,987 19,109
Accounts receivable, net 45,054 41,625
Unbilled work in progress 31,746 26,484
Prepaid expenses and other current assets 10,374 4,769
Deferred income taxes 5,845 5,719
--------- ---------
Total current assets 129,615 137,212
Investments 89,947 34,502
Property and equipment, net 48,987 48,565
Intangibles, net 7,055 8,630
Deferred income taxes 8,778 8,778
Other assets 2,045 3,601
--------- ---------
$ 286,427 $ 241,288
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 270 $ 1,606
Accrued compensation and employee benefits 15,274 15,581
Other accrued liabilities 9,466 8,863
Billings in excess of earned revenues 10,993 10,104
Capital lease obligations 26 364
--------- ---------
Total current liabilities 36,029 36,518
--------- ---------
Long-term liabilities:
Accrued compensation and employee benefits 4,475 4,886
Other liabilities 853 883
--------- ---------
Total long-term liabilities 5,328 5,769
--------- ---------
Total liabilities 41,357 42,287
--------- ---------
Stockholders' equity:
Preferred stock -- --
Common stock 229 148
Paid in capital in excess of par value 85,363 52,269
Retained earnings 186,901 156,021
Less treasury stock, at cost (26,424) (8,793)
Accumulated other comprehensive loss (999) (644)
--------- ---------
Total stockholders' equity 245,070 199,001
--------- ---------
$ 286,427 $ 241,288
========= =========
See accompanying notes to the consolidated financial statements.
-3-
FAIR, ISAAC AND COMPANY, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE NINE MONTHS AND THREE MONTHS ENDED JUNE 30, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
NINE MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenues $ 242,687 $ 219,784 $ 84,233 $ 76,140
Costs and expenses:
Cost of revenues 110,714 94,422 37,991 34,104
Research and development 21,659 23,273 6,981 6,343
Sales, general and administrative 58,338 66,601 19,279 22,781
Amortization of intangibles 1,575 1,560 525 510
Restructuring charge -- 2,878 -- 216
------------ ------------ ------------ ------------
Total costs and expenses 192,286 188,734 64,776 63,954
------------ ------------ ------------ ------------
Income from operations 50,401 31,050 19,457 12,186
Other income, net 3,362 2,669 1,126 953
------------ ------------ ------------ ------------
Income before income taxes 53,763 33,719 20,583 13,139
Provision for income taxes 21,935 13,926 8,231 5,427
------------ ------------ ------------ ------------
Net income $ 31,828 $ 19,793 $ 12,352 $ 7,712
============ ============ ============ ============
Net income $ 31,828 $ 19,793 $ 12,352 $ 7,712
Other comprehensive loss, net of tax:
Unrealized gains (losses) on investments (179) (418) (172) 3
Foreign currency translation adjustments (176) (261) (89) (118)
------------ ------------ ------------
Other comprehensive loss (355) (679) (261) (115)
------------ ------------ ------------
Comprehensive income $ 31,473 $ 19,114 $ 12,091 $ 7,597
============ ============ ============ ============
Earnings per share:
Diluted $ 1.40 $ 0.91 $ 0.53 $ 0.35
============ ============ ============ ============
Basic $ 1.46 $ 0.93 $ 0.56 $ 0.36
============ ============ ============ ============
Shares used in computing earnings per share:
Diluted 22,723,000 21,813,000 23,304,000 21,902,000
============ ============ ============ ============
Basic 21,824,000 21,258,000 22,128,000 21,507,000
============ ============ ============ ============
Due to certain reclassifications, the revenue and expense for the nine months
ended June 30, 2001 are different than the combination of the first three
quarters.
See accompanying notes to the consolidated financial statements.
-4-
FAIR, ISAAC AND COMPANY, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2001 AND 2000
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
JUNE 30,
-----------------------
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 31,828 $ 19,793
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 18,555 14,971
Deferred compensation 748 621
Tax benefit from exercise of stock options 6,673 1,003
Other 839 221
Changes in operating assets and liabilities:
Accounts receivable (3,537) (1,797)
Unbilled work in progress (5,262) 200
Prepaid expenses and other assets (3,812) (4,466)
Accounts payable (1,199) (1,289)
Accrued compensation and employee benefits 1,426 (8,815)
Other accrued liabilities and other liabilities 251 (4,095)
Billings in excess of earned revenues 888 2,966
-------- --------
Net cash provided by operating activities 47,398 19,313
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (17,680) (15,887)
Purchases of investments (97,170) (13,099)
Proceeds from maturities of investments 47,862 5,606
-------- --------
Net cash used in investing activities (66,988) (23,380)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments of capital lease obligations (338) (320)
Proceeds from the exercise of stock options and
issuance of treasury stock 25,794 6,500
Dividends paid (873) (851)
Repurchase of company stock (19,890) (39)
-------- --------
Net cash provided by financing activities 4,693 5,290
-------- --------
Increase (decrease) in cash and cash equivalents (14,897) 1,223
Cash and cash equivalents, beginning of period 39,506 20,715
-------- --------
Cash and cash equivalents, end of period $ 24,609 $ 21,938
======== ========
See accompanying notes to the consolidated financial statements.
-5-
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 and Company, Incorporated (the "Company") for the
three months and nine months ended June 30, 2001 and 2000 have been prepared in
accordance with generally accepted accounting principles for interim financial
statements and include all adjustments (consisting only of normal recurring
accruals unless otherwise stated) 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, 2000. Notes that
would substantially duplicate the disclosures in the Company's audited financial
statements for the fiscal year ended September 30, 2000, contained in the 2000
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, 2001.
Certain amounts in the financial statements and notes thereto have been
reclassified to conform to the 2001 classifications.
NOTE 2 EARNINGS PER SHARE
The following reconciles the numerators and denominators of diluted and
basic earnings per share (EPS):
Nine months ended Three months ended
June 30, June 30,
-------------------- --------------------
(in thousands, except per share data) 2001 2000 2001 2000
-------- -------- -------- --------
Numerator - Net income $ 31,828 $ 19,793 $ 12,352 $ 7,712
======== ======== ======== ========
Denominator - Shares:
Diluted weighted-average shares 22,723 21,813 23,304 21,902
Effect of dilutive securities -
employee stock options (899) (555) (1,176) (395)
-------- -------- -------- --------
Basic weighted-average shares 21,824 21,258 22,128 21,507
======== ======== ======== ========
Earnings per share:
Diluted $ 1.40 $ 0.91 $ 0.53 $ 0.35
======== ======== ======== ========
Basic $ 1.46 $ 0.93 $ 0.56 $ 0.36
======== ======== ======== ========
The computation of diluted EPS for the three months ended June 30, 2001 and
2000, excludes stock options to purchase 22,000 and 444,000 shares of common
stock, respectively. The computation of diluted EPS for the nine months ended
June 30, 2001 and 2000, excludes stock options to purchase 276,000 and 260,000
shares of common stock, respectively. The shares were excluded because the
exercise prices for the options were greater than the respective average market
price of the common shares and their inclusion would be antidilutive.
-6-
NOTE 3 CASH FLOW STATEMENT
Supplemental disclosure of cash flow information:
Nine months ended
June 30,
-----------------
(in thousands) 2001 2000
------- -------
Income tax payments $15,588 $15,115
Interest paid 118 54
Non-cash investing and financing activities:
Issuance of treasury stock to ESOP and ESPP $ 2,145 $ 1,706
Issuance of common stock 74 --
Assets acquired through capital lease financing -- 953
Cancellation of restricted stock -- 353
NOTE 4 NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement of Financial Account Standards
(SFAS) No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 141 requires that all business combinations be
accounted for under the purchase method for business combinations initiated
after June 30, 2001 for which the date of acquisition is July 1, 2001 or later.
Use of the pooling-of-interest method is no longer permitted. SFAS No. 142
requires that goodwill and intangible assets with indefinite useful lives will
no longer be amortized to earnings, but instead be periodically reviewed for
impairment. SFAS No. 142 must be adopted starting with fiscal years beginning
after December 15, 2001. The impact of adopting SFAS No. 141 and SFAS No. 142
has not been determined.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101 regarding recognition, presentation and
disclosure of revenue. SAB 101 is required to be implemented no later than the
fourth quarter of fiscal year 2001. Management believes that the adoption of SAB
No. 101 will not have a material impact on the Company's consolidated financial
position, results of operations or cash flows.
NOTE 5 SEGMENT INFORMATION
Effective October 1, 2000, the Company reorganized its reportable segments
based on a combination of two factors: industry and product. The reportable
segments include Global Data Repositories & Processors (Alliance products and
services which previously were included in the North American Financial Services
and in Other International segments), Global Financial Services (bank and
insurance industries excluding Analytic and LiquidCredit products, which was
previously included in NetSourced Services and Other International segments),
and Other (an aggregation of Analytic products, LiquidCredit products, the
retail industry and telecommunications industry), each of which represented less
than 10% and in aggregate represents 20% and 19%, respectively, of the Company's
total revenue for the three months and the nine months ended June 30, 2001.
Analytic and LiquidCredit products, now included in the "Other" segment, were
previously included in the North American Financial Services, and Other
International segments; and the retail industry and telecommunications industry,
also now included in "Other", were previously included in the NetSourced
Services and Other International segments. Each of these segments are managed
and reported on separately within the organization.
Significant changes include classifying all related international revenues
and expenses within each reportable segment, separating Alliance products from
Analytic products and classifying segments by major industries or products. The
segment information for the three months and the nine months ended June 30, 2000
has been restated to conform to the fiscal year 2001 presentation.
-7-
The Company's Chief Executive and Operating Officers evaluate segment
financial performance based on segment revenues and operating income. Operating
income is calculated as revenue less expenses such as personnel, facilities,
consulting and travel. Unallocated other income consists mainly of interest
income and net gain on sales of investments. The Company does not evaluate the
financial performance of each segment based on its assets or capital
expenditures.
(in thousands)
Global Data Global
Repositories Financial
& Processors Services Other Total
------------ -------- ----- -----
Nine months ended June 30, 2001
- -------------------------------
Revenue $120,155 $ 74,365 $ 48,167 $242,687
======== ======== ======== ========
Operating income $ 37,634 $ 8,065 $ 4,702 $ 50,401
Unallocated other income, net 3,362
--------
Income before income taxes $ 53,763
========
Depreciation and Amortization $ 12,131 $ 3,034 $ 3,390 $ 18,555
======== ======== ======== ========
Nine months ended June 30, 2000
- -------------------------------
Revenue $111,984 $ 71,973 $ 35,827 $219,784
======== ======== ======== ========
Operating income $ 23,421 $ 5,446 $ 2,183 $ 31,050
Unallocated other income, net 2,669
--------
Income before income taxes $ 33,719
========
Depreciation and Amortization $ 10,713 $ 2,902 $ 1,356 $ 14,971
======== ======== ======== ========
Three months ended June 30, 2001
- --------------------------------
Revenue $ 43,206 $ 23,622 $ 17,405 $ 84,233
======== ======== ======== ========
Operating income $ 13,954 $ 2,995 $ 2,508 $ 19,457
Unallocated other income, net 1,126
--------
Income before income taxes $ 20,583
========
Depreciation and Amortization $ 4,197 $ 1,010 $ 1,366 $ 6,573
======== ======== ======== ========
Three months ended June 30, 2000
- --------------------------------
Revenue $ 36,865 $ 25,125 $ 14,150 $ 76,140
======== ======== ======== ========
Operating income $ 9,934 $ 1,550 $ 702 $ 12,186
Unallocated other income, net 953
--------
Income before income taxes $ 13,139
========
Depreciation and Amortization $ 4,117 $ 754 $ 384 $ 5,255
======== ======== ======== ========
Due to certain reclassifications, the revenue for the nine months ended June 30,
2001 is slightly different than the combination of the first three quarters.
-8-
In addition, the Company's revenue and percentage of revenue by significant
specific product groups within each segment are as follows:
Nine Months Ended Nine Months Ended
June 30, 2001 June 30, 2000
---------------- ---------------
Global Data Repository & Processors
Scoring Products $ 90,561 37% $ 84,726 39%
Processor Products 26,128 11% 23,952 11%
Other 3,466 1% 3,306 1%
-------- ---- -------- ----
120,155 50% 111,984 51%
Global Financial Services
Marketing Products 43,231 18% 42,702 20%
Other 31,134 13% 29,271 13%
-------- ---- -------- ----
74,365 31% 71,973 33%
Other
Marketing Products 11,125 4% 10,724 5%
Credit Products 12,858 5% 4,400 2%
Other 24,184 10% 20,703 9%
-------- ---- -------- ----
48,167 19% 35,827 16%
-------- ---- -------- ----
$242,687 100% $219,784 100%
======== ==== ======== ====
Three Months Ended Nine Months Ended
June 30, 2001 June 30, 2000
---------------- ---------------
Global Data Repository & Processors
Scoring Products $ 33,382 40% $ 26,943 35%
Processor Products 8,529 10% 8,713 11%
Other 1,295 1% 1,209 2%
-------- ---- -------- ----
43,206 51% 36,865 48%
Global Financial Services
Marketing Products 14,943 18% 14,232 19%
Other 8,679 10% 10,893 14%
-------- ---- -------- ----
23,622 28% 25,125 33%
Other
Marketing Products 3,408 4% 3,675 5%
Credit Products 5,237 6% 3,848 5%
Other 8,760 11% 6,627 9%
-------- ---- -------- ----
17,405 21% 14,150 19%
-------- ---- -------- ----
$ 84,233 100% $ 76,140 100%
======== ==== ======== ====
NOTE 6 COMMON STOCK SPLIT
On May 1, 2001 the Company's Board of Directors authorized a three-for-two
stock split effected in the form of a 50% stock dividend with cash payment in
lieu of fractional shares, payable on June 4, 2001 to holders of common stock of
the Company who were of record on May 14, 2001 at the close of business. The par
value of the Company's common stock remains unchanged after the stock split. As
a result of the stock split, the accompanying consolidated financial statements
reflect an increase of 7,408,000 and 328,000 issued shares of common stock to
the existing stockholders and the treasury stock, respectively and the transfer
of the par value of the additional shares issued to existing stockholders of
$74,000 from retained earnings, as well as cash payments totaling $49,517 in
lieu of 1,004 fractional shares from the paid-in capital. All share and per
share amounts have been restated to reflect the retroactive effect of the stock
split.
-9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
Certain statements contained in this Report which are not statements of
historical fact constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act (the "Act"). In addition, certain
statements in our future filings with the Securities and Exchange Commission, in
press releases, and in oral and written statements made by us or with our
approval which are not statements of historical fact constitute forward-looking
statements within the meaning of the Act. Examples of forward-looking statements
include, but are not limited to: (i) projections of revenue, income or loss,
earnings or loss per share, the payment or nonpayment of dividends, capital
structure and other financial items; (ii) statements of our plans and objectives
by our management or Board of Directors, including those relating to products or
services; (iii) statements of future economic performance; and (iv) statements
of assumptions underlying such statements. Words such as "believes,"
"anticipates," "expects," "intends," "targeted," and similar expressions are
intended to identify forward-looking statements but are not the exclusive means
of identifying such statements. Forward-looking statements involve risks and
uncertainties which may cause actual results to differ from those in such
statements. Factors that could cause actual results to differ from those
discussed in the forward-looking statements include, but are not limited to,
those described in the "Risk Factors" section of this discussion and analysis.
Such forward-looking statements speak only as of the date on which statements
are made, and we undertake no obligation to update any forward-looking statement
to reflect events or circumstances after the date on which such statement is
made to reflect the occurrence of unanticipated events or circumstances.
BUSINESS OVERVIEW
Fair, Isaac and Company, Incorporated is a global provider of customer
analytics and decision technology. In this Report, Fair, Isaac and Company,
Incorporated is referred to as "we," "our," and "the Company". We provide
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. In fiscal 2000, we powered more than 12 billion decisions. Widely
recognized for our pioneering work in predictive technology, we develop,
produce, market and distribute advanced decision-making solutions to the
financial services, retail, telecommunications, insurance and other industries.
Our 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. We
provide a range of credit scoring and credit account management services to
credit bureaus and credit card processing agencies, as well as data processing
and database management services to businesses engaged in direct marketing
activities, many of which are in the financial services and insurance
industries.
-10-
RESULTS OF OPERATIONS
REVENUES
As of October 1, 2000, we reorganized the operating structure of our
business segments into three reportable segments on a worldwide basis: Global
Data Repositories and Processors, Global Financial Services and Other, which are
described below:
* Global Data Repositories and Processors. This worldwide segment
consists of our credit scoring services and insurance bureau scores
distributed through major credit bureaus, including the three major
credit bureaus in the United States--Trans Union Corporation, Experian
Information Solutions, Inc. and Equifax Inc., our credit account
management services which are distributed through third-party bankcard
processors worldwide, our ScoreNet(R) services sold directly to credit
grantors, our PreScore(R) services and insurance bureau scores sold
through credit bureaus, the ScorePower(TM) online FICO(R) score
delivery service sold jointly with Equifax directly to consumers, and
other related products. The majority of these services generate
revenues based on usage.
* Global Financial Services. This segment is comprised of data
processing, database management services and Internet delivery
services provided directly for companies and organizations involved in
direct marketing on a global basis, together with our Fair, Isaac
MarketSmart Decision System(TM)("MarketSmart"), ClickPremium(TM),
StrategyWare(R), and TRIAD(TM)products. In the third quarter we
introduced a new product, our Credit Line Strategy Optimization (CLSO)
product, developed for the financial services industry to help credit
card issuers improve account profitability through optimal credit line
assignments. MarketSmart and ClickPremium are sold on a usage basis
and the TRIAD and StrategyWare products are generally sold to single
users on a fixed-price basis. CLSO may be sold on a usage or fixed
priced basis, or a combination of these. Global Financial Services
products are sold under a combination of fixed-fee and usage-based
pricing.
* Other. This segment covers Analytics, LiquidCredit, Retail, and
Telecommunications on a worldwide basis. Analytics products include
our custom models, custom software and related consulting projects
which are sold directly to credit grantors and other businesses and
are used for screening lists of prospective customers, evaluating
applicants for credit or insurance and managing existing credit
accounts. Our LiquidCredit products are web-based products sold
directly to credit grantors which automate the processing of credit
applications including the implementation of our credit application
scoring models. Retail products include MarketSmart for retail which
are provided directly to companies and organizations in the retail
market. Our Telecommunication products provided directly to companies
in the telecommunications industry include Teleadaptive(TM)and
MarketSmart for telecommunications. Products in the Other segment are
priced in various ways. Other products developed specifically for a
single user such as our application and behavior scoring models (also
known as "Analytic Products," "scorecards" or "models") are generally
sold on a fixed-price basis. Software systems usually also have a
component of ongoing maintenance revenue, and LiquidCredit systems are
sold under time or volume-based pricing arrangements.
Comparative segment revenues, operating income, and related financial
information in the three- and nine- months ended June 30, 2001 and the
corresponding periods in fiscal 2000 are set forth in Note 5 to the Consolidated
Financial Statements.
-11-
The following table displays (a) the percentage of revenues by segment and
(b) the percentage change in revenues from the prior fiscal year for the fiscal
periods indicated.
PERCENTAGE OF PERCENTAGE OF
REVENUE REVENUE
NINE MONTHS ENDED PERCENTAGE THREE MONTHS ENDED PERCENTAGE
JUNE 30, CHANGE JUNE 30, CHANGE
------------- ------ ------------- ------
2001 2000 2001 2000
---- ---- ---- ----
Global Data Repositories
And Processors 50% 51% 7% 51% 48% 17%
Global Financial Services 31% 33% 3% 28% 33% (6%)
Other 19% 16% 34% 21% 19% 23%
--- --- --- ---
Total Revenues 100% 100% 10% 100% 100% 11%
=== === === ===
The growth in Global Data Repositories and Processors revenues in the nine-
and three- month periods ended June 30, 2001, compared to the same periods in
the prior fiscal year, was primarily due to increased revenues from the PreScore
service and sales of new products, slightly offset by decreased revenues derived
from the ScoreNet services.
Revenues derived from alliances with credit bureaus and credit card
processors have accounted for most of our revenue growth in the last three
years. For the nine-month period ended June 30, 2001, revenues produced through
credit bureaus increased approximately 7% compared to the same period in fiscal
2000 and accounted for approximately 37% of revenues. Revenues from services
produced through credit bureaus increased 13% in fiscal 2000 and 14% in fiscal
1999, and accounted for approximately 37% of revenues in fiscal 2000 and 36% in
fiscal 1999. Revenues from services provided through bankcard processors also
increased in each of these years, primarily due to increases in the number of
accounts at each of the major processors.
While we have been successful in extending or renewing our agreements with
credit bureaus and credit card processors in the past, and believe we will
likely be able to do so in the future, the loss of one or more such alliances or
an adverse change in terms could have a material adverse effect on revenues and
operating margin. For the nine- month period ended June 30, 2001, revenues
generated from our alliances with TransUnion Corporation, Equifax, Inc. and
Experian Information Solutions, Inc. accounted for approximately 9%, 11% and 7%,
of revenues, respectively. In fiscal 2000, TransUnion accounted for
approximately 12% of our revenues; Equifax, approximately 10%; and Experian,
approximately 7%. Revenues generated through our alliances with TransUnion,
Equifax, and Experian accounted for approximately 10%, 9% and 7%, respectively
in fiscal 1999.
The increases in revenues in the nine-month period ended June 30, 2001
derived from the Global Financial Services segment compared with the same period
in fiscal 2000 were due primarily to increased sales of StrategyWare products
and sales of the new products, primarily MarketSmart and ClickPremium products
and Fair, Isaac Decision System products. The decrease in revenues in the
three-months ended June 30, 2001 compared to the corresponding period in fiscal
2000 primarily reflects a decline in sales of StrategyWare and other software
products.
The increase in Other segment revenues in the nine- and three- month
periods ended June 30, 2001 compared to the same periods in the prior fiscal
year are primarily due to increases in sales of the LiquidCredit product.
Total revenues derived from outside the United States represented
approximately 19% of total revenues in the first nine-months of fiscal 2001 and
in fiscal 2000. Revenues from software maintenance and consulting services each
accounted for less than 10% of revenues in the first three quarters of 2001.
-12-
EXPENSES
The following table sets forth for the fiscal periods indicated (a) the
percentage of revenues represented by certain line items in our Consolidated
Statements of Income and Comprehensive Income and (b) the percentage change in
expenses for each such line item from the prior fiscal year's.
NINE MONTHS THREE MONTHS
ENDED PERCENTAGE ENDED PERCENTAGE
JUNE 30, CHANGE JUNE 30, CHANGE
---------------- ------ --------------- ------
2001 2000 2001 2000
---- ---- ---- ----
Revenues 100% 100% N/A 100% 100% N/A
Costs and expenses:
Cost of revenues 45 43 6% 45 45 1%
Research and development 9 11 (16%) 8 8 (1%)
Sales, general and administrative 24 30 (21%) 23 30 (24%)
Amortization of intangibles 1 1 (9%) 1 1 (7%)
Restructuring Charge -- 1 N/A -- -- N/A
--- --- --- ---
Total costs and expenses 79 86 (8%) 77 84 (8%)
--- --- --- ---
Income from operations 21 14 47% 23 16 44%
Other income, net 1 1 14% 1 1 7%
--- --- --- ---
Income before income taxes 22 15 44% 24 17 42%
Provision for income taxes 9 6 43% 10 7 37%
--- --- --- ---
Net income 13% 9% 46% 14% 10% 45%
=== === === ===
COST OF REVENUES
Cost of revenues consists primarily of personnel directly involved in
creating revenue, travel and related overhead costs; costs of computer services;
and the amounts paid to credit bureaus for scores and related information in
connection with the ScoreNet Service. As compared with the same periods a year
earlier, the cost of revenues, as a percentage of revenues, increased in the
nine-month period ended June 30, 2001 primarily due to a more complete
allocation of costs related to revenue generation that were not separately
identified in the prior year. As a percentage of revenues, these expenses for
the three-month period ended June 30, 2001, were substantially unchanged
compared to the corresponding period of fiscal 2000.
RESEARCH AND DEVELOPMENT
Research and development expenses include the personnel and related
overhead costs incurred in new and existing product development, researching
mathematical and statistical models and developing software aimed at improving
productivity, profitability and management control. Research and development
expenditures in the nine- and three- month periods ended June 30, 2001, as a
percentage of revenues, were down as compared with the corresponding quarters of
fiscal 2000, due primarily to redeployment of research and development personnel
to support roles for our new products.
SALES, GENERAL AND ADMINISTRATIVE
Sales, general and administrative expenses consist principally of employee
salaries and benefits, sales commissions, travel, overhead, advertising and
other promotional expenses, corporate facilities expenses, the costs of
administering certain benefit plans, legal expenses, business development, the
costs of operating administrative functions, such as finance and computer
information systems and compensation expenses for certain senior management. As
a percentage of revenues, these expenses for the nine- and three- month periods
ended June 30, 2001 decreased compared to the corresponding periods of fiscal
2000, due primarily to reductions in personnel costs, consulting costs, and
travel expenses as a result of the Company's cost containment efforts.
-13-
AMORTIZATION OF INTANGIBLES
We are amortizing the intangible assets arising from various acquisitions
over periods ranging from four to fifteen years.
OTHER INCOME, NET
Other income, net consists mainly of interest income from investments,
interest expense, exchange rate gains/losses from holding foreign currencies in
bank accounts, and other non-operating items. Other income, net increased in the
nine- and three- month periods ended June 30, 2001, compared with the
corresponding periods a year earlier, primarily due to an increase in interest
income from higher investment balances, partially offset by our share of
operating losses in an early stage development company accounted for using the
equity method.
PROVISION FOR INCOME TAXES
The Company's effective tax rate decreased from 41.3% to 40.8% in the
nine-month period ended June 30, 2001, and from 41.3% to 40.0% in the
three-month period ended June 30, 2001, compared to the same periods in fiscal
2000. The decrease was due primarily to revision of state tax rates to reflect
increased activities in states with lower tax rates than anticipated.
FINANCIAL CONDITION
Working capital decreased to $93,586,000 at June 30, 2001 from $100,694,000
at September 30, 2000 due principally to the purchase of long-term investments
and increase in cash provided by operating activities. Cash and marketable
investments (short-term and long-term) increased to $126,543,000 at June 30,
2001 from $93,117,000 at September 30, 2000 as a result of stock option
exercises and associated tax benefits. The Company's long-term obligations are
mainly related to employee incentive and benefit obligations.
We initiated a stock repurchase program to purchase up to one million
shares of our common stock, to be funded by cash on hand in fiscal 1999. During
the first half of fiscal 2001, we repurchased approximately 425,000 shares at a
cost of $19.8 million. No shares were purchased in the third quarter of fiscal
200l. Since the program was initiated we have purchased a total of 785,000
shares at an aggregate cost of $32.1 million. We will continue to evaluate
opportunities to repurchase shares under the program.
We believe that our current cash and cash equivalents, short-term cash
investments and cash expected to be generated from operations will be sufficient
to meet our working capital, capital expenditure, and investment needs for both
the current fiscal year and the foreseeable future.
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. Greece was added as a
participating country on January 1, 2001. 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. We believe that our computer systems and programs are
euro-compliant and have experienced no material disruptions to date. We also
believe the conversion to the euro will not have a material impact on our
consolidated financial results.
RISK FACTORS
OUR REVENUES ARE DEPENDENT, TO A GREAT EXTENT, UPON GENERAL ECONOMIC CONDITIONS
AND MORE PARTICULARLY, UPON CONDITIONS IN THE CONSUMER CREDIT AND THE FINANCIAL
SERVICES INDUSTRIES.
The majority of our revenues are derived from sales to the consumer credit
industry. In addition, during the third quarter, approximately 31% of our
revenues were derived from products in our financial services segment. A
downturn in the consumer credit industry or the financial services industry
caused by increases in interest rates or a tightening of credit, among other
-14-
factors could harm our results of operations. The revenue growth and
profitability of our business depends on the overall demand for our existing and
new products. A softening of demand for our decisioning solutions caused by a
weakening of the economy generally may result in decreased revenues or lower
growth rates. In particular, one of the challenges we face in promoting future
growth in revenues is the successful refocusing of our marketing and sales
efforts to our new initiatives. There can be no assurance that we will be able
to effectively promote future revenue growth in our business. Since 1990, while
the rate of account growth in the US bankcard industry has been slowing and many
of our largest institutional clients have merged and consolidated, we have
generated most of our revenue growth from our bankcard-related scoring and
account management business by cross-selling our products and services to large
banks and other credit issuers. As this industry continues to consolidate, we
may have fewer opportunities for revenue growth.
QUARTERLY OPERATING RESULTS HAVE VARIED SIGNIFICANTLY IN THE PAST AND THIS
UNPREDICTABILITY WILL LIKELY CONTINUE IN THE FUTURE.
Our revenues and operating results have varied significantly in the past.
We expect fluctuations in our operating results to continue for the foreseeable
future. Consequently, we believe that period-to-period comparisons of our
financial results should not be relied upon as an indication of future
performance. It is possible that in some future periods our operating results
may fall below the expectations of market analysts and investors, and in this
event the market price of our common stock would likely fall. Factors that
affect our revenues and operating results include the following:
* A decrease in demand from our existing customers, particularly within
our Global Data Repositories and Processor segment
* The lengthy sales cycle of many of our products
* Failure of our target markets and customers to accept our new products
* Our ability to successfully and timely develop, introduce and market
new products and product enhancements
* The timing of our new product announcements and introductions in
comparison with our competitors
* Changes in the level of our operating expenses
* Competitive conditions in the consumer credit industry
* Competitive conditions in the financial services industry
* Domestic and international economic conditions
* Changes in prevailing technologies
* Acquisition-related expenses and charges
* Timing of orders for and deliveries of certain software systems
* Increased operating expenses related to the development of products
for the Internet and
* Other factors unique to our product lines
With the exception of the cost of ScoreNet service data purchased by us,
most of our 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.
OUR ABILITY TO INCREASE OUR REVENUES IS HIGHLY DEPENDENT UPON THE INTRODUCTION
OF NEW PRODUCTS AND SERVICES AND IF OUR PRODUCTS AND SERVICES ARE NOT ACCEPTED
BY THE MARKETPLACE, OUR BUSINESS MAY BE HARMED.
We have a significant share of the available market for our traditional
products and services, such as the products and services included in our Global
Data Repositories and Processors segment. To increase our revenues, we must
enhance and improve existing products and continue to introduce new products and
new versions of existing products that keep pace with technological
developments, satisfy increasingly sophisticated customer requirements and
achieve market acceptance. We believe much of our future growth prospects will
rest on our ability to expand into newer markets for our products and services,
such as direct marketing, insurance, small business lending, retail and
telecommunications. If our current or potential customers are not willing to
switch to or adopt our electronic commerce solutions, our growth and revenues
will be limited. The failure to generate a large customer base for our new
-15-
products would harm our ability to grow and increase revenues. This failure
could occur for several reasons. Some of our business-to-business electronic
commerce competitors charge their customers large fees upon the execution of
customer agreements. Businesses that have made substantial up-front payments to
our competitors for electronic commerce solutions may be reluctant to replace
their current solution and adopt our solution. As a result, our efforts to
create a larger customer base may be more difficult than expected even if we are
deemed to offer products and services superior to those of our competitors.
Further, because the business-to-business electronic commerce market is new and
underdeveloped, potential customers in this market may be confused or uncertain
about the relative merits of each electronic commerce solution or which
electronic commerce solution to adopt, if any. Confusion and uncertainty in the
marketplace may inhibit current or potential customers from adopting our
solution, which could harm our business, operating results and financial
condition.
THERE ARE SIGNIFICANT RISKS ASSOCIATED WITH THE INTRODUCTION OF NEW PRODUCTS.
Significant undetected errors or delays in new products or new versions of
a product, especially in the area of customer relationship management, may
affect market acceptance of our products and could harm our business, results of
operations or financial position. If we were to experience delays in the
commercialization and introduction of new or enhanced products, if customers
were to experience significant problems with the implementation and installation
of products, or if customers were dissatisfied with product functionality or
performance, our business, results of operations or financial position could be
harmed.
There can be no assurance that our new products will achieve significant
market acceptance or will generate significant revenue. Additional products that
we plan to directly or indirectly market in the future are in various stages of
development. We are expanding our technology into a number of new business areas
to foster long-term growth, including Internet/electronic commerce, online
business services and Internet computing. These areas are relatively new to our
product development and sales and marketing personnel. There is no assurance
that we will compete effectively or will generate significant revenues in these
new areas. The success of Internet computing and, in particular, our current
Internet computing software products is difficult to predict because Internet
computing represents a method of computing that is relatively new to the
computer industry. The successful introduction of Internet computing to the
market will depend in large measure on (i) the lower cost of ownership of
Internet computing relative to client/server architecture, (ii) the ease of use
and administration relative to client/server architecture, and (iii) the means
by which hardware and software vendors choose to compete in this market. There
can be no assurance that sufficient numbers of vendors will undertake this
commitment, that the market will accept Internet computing or that Internet
computing will generate significant revenues for us.
FAILURE TO OBTAIN DATA FROM OUR CLIENTS TO UPDATE AND RE-DEVELOP OR TO CREATE
NEW MODELS COULD HARM OUR BUSINESS.
Updates of models and development of new and enhanced models depend to a
significant extent on availability of statistically relevant data. Such data is
usually obtained under agreements with our clients. Refusals by clients to
provide such data or to obtain permission of their customers to provide such
data, and privacy and data protection restrictions, could result in loss of
access to required data.
OUR BUSINESS AND THE BUSINESS OF OUR CLIENTS IS SUBJECT TO GOVERNMENT REGULATION
AND CHANGES IN REGULATION.
Our current and prospective clients, which primarily consist of credit
bureaus, credit card processors, state and federally chartered banks, savings
and loan associations, credit unions, consumer finance companies, other consumer
lenders and insurers, as well as customers in the industries that we may target
in the future, operate in markets that are subject to extensive and complex
federal and state regulations. While we may not be directly subject to such
regulations, our products and services must be designed to work within the
extensive and evolving regulatory constraints in which our clients operate and
to meet our client expectations with respect to handling data in conformity with
applicable data protection laws. These constraints include federal and state
truth-in-lending disclosure rules, state usury laws, the Equal Credit
Opportunity Act, the Fair Credit Reporting Act, the Community Reinvestment Act
and the Financial Services Modernization Act of 1999.
In September 1997, amendments to the federal Fair Credit Reporting Act
became law that 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. These
amendments impose a seven-year moratorium on new state legislation on certain
-16-
issues; however, score disclosure regulation by states is not pre-empted under
this legislation and the states remain free to regulate the use of credit bureau
data in connection with insurance underwriting.
On September 30, 2000, the Score Disclosure Statute was signed into law in
California and is the first legislation to require the disclosure of credit risk
scores. The Score Disclosure Statute became effective July 1, 2001, and imposes
significant new requirements on credit reporting agencies and residential
mortgage creditors and brokers to disclose credit risk scores. In addition,
there is a federal score disclosure bill pending, and other states may follow
California's lead and pass score disclosure legislation. In March 2001, we
launched, with Equifax, ScorePower(TM), an online score delivery service to
consumers that delivers our FICO(R) credit risk score, with an explanation of
the score, how it is derived, and steps consumers can take to actively maintain
or improve their score over time.
We believe enacted or proposed state regulation of the insurance industry
has had some detrimental impact on our efforts to sell insurance risk scores
through credit reporting agencies. For example, in California there is a draft
of proposed regulation which would, if adopted, prohibit use of any credit
information in the issuance, renewal, and cancellation of policies covering
private passenger automobiles. An example of proposed legislation includes a
Connecticut bill that will not allow use of bankruptcies, foreclosures, and
liens in a model used in insurance underwriting.
Providing an individual with control over what personal information a
business collects and uses is a growing, global trend. The recent Financial
Services Modernization Act of 1999 (Gramm-Leach-Bliley Act) includes several
privacy provisions and introduces new controls over the transfer and use of
individual data by financial institutions. Additional federal legislation is
proposed. In addition over 400 state privacy bills are pending. On the
International front, in the European Union (EU), the Data Protection Directive
(the "EU Directive") became effective October 1998 and places strict controls on
the collection, use and transfer of personal data. We have registered under the
EU Directive in the UK, pledging to meet the EU level of adequate protection for
personal data. We have another registration pending in Spain, and we are
evaluating the desirability of registering in other countries. We expect
increased costs of compliance with these regulations but such costs are not
expected to have a material impact on our results of operations or financial
condition.
Furthermore, some consumer groups have expressed concern regarding the
privacy and security of automated credit processing, the use of automated credit
scoring tools in credit underwriting and whether electronic lending is a
desirable technological development in light of the current level of consumer
debt.
The failure of our products and services to support customers' compliance
with current regulations and to address changes in customers' regulatory
environment, or our failure to comply with current regulations or adapt to
changes in regulatory environment, in an efficient and cost-effective manner,
could harm our business, results of operations and financial condition.
OUR OPERATIONS OUTSIDE THE UNITED STATES SUBJECT US TO UNIQUE RISKS THAT MAY
HARM OUR RESULTS OF OPERATIONS.
A growing portion of our revenues is derived from international sales.
During the last fiscal year and the first nine months of fiscal 2001, we
received approximately 19% of our revenues from business outside the United
States. As part of our growth strategy, we plan to continue to pursue
opportunities outside the United States. Accordingly, our future operating
results could be negatively affected by a variety of factors, some of which are
beyond our control. These factors include:
* The general economic conditions in each country
* Incongruent tax structures
* Difficulty in managing an organization spread over various countries
* Compliance with a variety of foreign laws and regulations
* Import and export licensing requirements
* Trade restrictions and tariffs
* Longer payment cycles and
* Volatile exchange rates for foreign currencies
-17-
There can be no assurance that we will be able to successfully address each
of these challenges in the near term. Some of our business is conducted in
currencies other than the US dollar. Foreign currency translation gains and
losses are not currently material to our financial position, results of
operations or cash flows. An increase in our foreign revenues could subject us
to increased foreign currency translation risks in the future. We have found it
to be impractical to hedge all foreign currencies in which we conduct business.
IF WE DO NOT RECRUIT AND RETAIN QUALIFIED PERSONNEL, OUR BUSINESS COULD BE
HARMED.
Our continued growth and success depend, to a significant extent, on the
continued service of our senior management and other highly qualified key
research, development, sales and marketing personnel and the hiring of new
qualified personnel. Competition for highly skilled business, product
development, technical and other personnel is intense. There can be no assurance
that we will be successful in continually recruiting new personnel and in
retaining existing personnel. In general, we do not have long-term employment or
non-competition agreements with our employees. The loss of one or more key
employees or our inability to attract additional qualified employees or retain
other employees could harm our continued growth.
WE RELY UPON OUR PROPRIETARY TECHNOLOGY RIGHTS AND IF WE ARE UNABLE TO PROTECT
THEM, OUR BUSINESS COULD BE HARMED.
Because the protection of our proprietary technology is limited, our
proprietary technology could be used by others without our consent. Our success
depends, in part, upon our proprietary technology and other intellectual
property rights. To date, we have relied primarily on a combination of
copyright, patent, trade secret, and trademark laws, and nondisclosure and other
contractual restrictions on copying and distribution to protect our proprietary
technology. We have approximately eighteen (18) patent applications filed and no
issued patents to date. We cannot assure you that our means of protecting our
intellectual property rights in the United States or abroad will be adequate or
that others, including our competitors, will not use our proprietary technology
without our consent. Furthermore, litigation may be necessary to enforce our
intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others, or to defend against
claims of infringement or invalidity. Such litigation could result in
substantial costs and diversion of resources and could harm our business,
operating results and financial condition.
WE MAY BE SUBJECT TO POSSIBLE INFRINGEMENT CLAIMS THAT COULD HARM OUR BUSINESS.
With recent developments in the law that permit patenting of business
methods, we expect that products in the industry segments in which we compete
will increasingly be subject to claims of patent infringement as the number of
products and competitors in our industry segments grow and the functionality of
products overlaps. In addition, we expect to receive more patent infringement
claims as companies increasingly seek to patent their software, also in light of
recent developments in the law that extend the ability to patent software.
Regardless of the merits, responding to any such claim could be time-consuming,
result in costly litigation and require us to enter into royalty and licensing
agreements which may not be offered or available on terms acceptable to us. If a
successful claim is made against us and we fail to develop or license a
substitute technology, our business, results of operations or financial position
could be harmed.
SECURITY IS IMPORTANT TO OUR BUSINESS, AND BREACHES OF SECURITY, OR THE
PERCEPTION THAT E-COMMERCE IS NOT SECURE COULD HARM OUR BUSINESS.
Internet-based, business-to-business electronic commerce requires the
secure transmission of confidential information over public networks. Security
breaches of networks on which netsourced products are used or well- publicized
security breaches affecting the Internet in general, could significantly harm
our business, operating results and financial condition. We cannot be certain
that advances in computer capabilities, new discoveries in the field of
cryptography, or other developments will not result in a compromise or breach of
the technology we use to protect content and transactions on the networks on
which the netsourced products and the proprietary information in our databases
are accessed. Anyone who is able to circumvent our security measures could
misappropriate proprietary, confidential customer information or cause
interruptions in our operations. We may be required to incur significant costs
-18-
to protect against security breaches or to alleviate problems caused by such
breaches. Further, a well-publicized compromise of security could deter people
from using the Internet to conduct transactions that involve transmitting
confidential information.
WE ARE DEPENDENT UPON MAJOR CONTRACTS WITH CREDIT BUREAUS.
A substantial portion of our revenues is derived from contracts with the
three major credit bureaus with usual terms of five years or less. In the first
nine months of fiscal 2001, these contracts accounted for approximately 37% of
our revenues and in the first nine months of fiscal 2000, accounted for
approximately 38% of our revenues. If we are unable to renew any of these
contracts on the same or similar terms with one or more of these credit bureaus,
our revenues and results of operations may be harmed.
WE MAY INCUR RISKS RELATED TO ACQUISITIONS OR SIGNIFICANT INVESTMENT IN
BUSINESSES.
As part of our business strategy, we have made in the past and may make in
the future acquisitions of, or significant investments in, businesses that offer
complementary products, services and technologies. Although we do not currently
have plans to do so, any acquisitions or investments will be accompanied by the
risks commonly encountered in acquisitions of businesses. Such risks include,
among other things, the possibility that we will pay much more than the acquired
company or assets are worth, the difficulty of assimilating the operations and
personnel of the acquired businesses, the potential product liability associated
with the sale of the acquired company's products, the potential disruption of
our ongoing business, the distraction of management from our business, the
inability of management to maximize our financial and strategic position, the
maintenance of uniform standards, controls, procedures and policies and the
impairment of relationships with employees and clients as a result of any
integration of new management personnel. These factors could harm our business,
results of operations or financial position, particularly in the case of a
larger acquisition. Consideration paid for future acquisitions, if any, could be
in the form of cash, stock, rights to purchase stock or a combination thereof.
Dilution to existing stockholders and to earnings per share may result in
connection with any such future acquisitions.
BACKLOG ORDERS MAY BE CANCELLED OR DELAYED.
There is no assurance that backlog will result in revenues. We believe that
increased revenue growth in fiscal 2001 and later years will depend to a
significant extent on sales of newly developed products.
BOOKINGS INCLUDE REVENUES EXPECTED TO BE DERIVED OVER THE LIFE OF THE CONTRACTS
IN EXCESS OF CONTRACTUAL MINIMUMS.
In our press release dated July 26, 2001 announcing financial results for
the third fiscal quarter ended June 30, 2001, bookings of $132.0 million were
reported by the Company. We define bookings as revenue recorded in the current
quarter which has not been recognized as a booking in a previous period, plus
the aggregate amount of future revenues expected to be derived by the Company
over the life of contracts entered into during the reported quarter. Bookings
are not limited to contractual minimums.
-19-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Disclosures. The following discussion about our market risk
disclosures involves forward-looking statements. Actual results could differ
materially from those projected in the forward-looking statements. We are
exposed to market risk related to changes in interest rates, foreign currency
exchange rates and equity security price risk. We do not use derivative
financial instruments for speculative or trading purposes.
Interest Rate Sensitivity. We maintain 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. We have the ability to hold our
fixed income investments until maturity, and therefore we would not expect our
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.
We believe foreign currency and equity risks are not material.
The following table presents the principal amounts and related
weighted-average yields for our fixed rate investment portfolio at June 30,
2001:
Cost Carrying Average
Basis Amounts Yield
-------- -------- ----
Cash and cash equivalents:
Money market funds $ 9,494 $ 9,494 4.20%
Short-term investments:
US government obligations 11,925 11,987 4.10%
Long-term investments:
US government obligations 84,025 84,032 5.18%
-------- -------- ----
Total $105,444 $105,513
======== ========
-20-
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On August 7, 2001, the Company's Board of Directors adopted a stockholder
rights plan, pursuant to which one preferred stock purchase right (a "Right")
was distributed for each share of Common Stock held as of August 21, 2001. Each
Right, when exercisable, will entitle the holder to purchase from the Company
one one-thousandth of a share of the Company's Series A Participating Preferred
Stock at a price of $240.00 (the "Purchase Price"), subject to antidilution
adjustments.
In general, if a person or group (an "Acquiring Person") acquires
beneficial ownership of 15% or more of the outstanding shares of Common Stock,
then each Right (other than those held by an Acquiring Person) will entitle the
holder to receive, upon exercise, shares of Common Stock (or, under certain
circumstances, a combination of securities or other assets) having a value of
twice the Purchase Price. In addition, if following the announcement of the
existence of an Acquiring Person the Company is involved in a business
combination or sale of 50% or more of its assets or earning power, each Right
(other than those held by an Acquiring Person) will entitle the holder to
receive, upon exercise, shares of common stock of the acquiring entity having a
value of twice the Purchase Price. When the foregoing rights arise, any Rights
owned by an Acquiring Person will immediately become void. The Board of
Directors will also have the right, after there is an Acquiring Person, to cause
each Right (except those that have become void) to be exchanged for Common Stock
or substitute consideration.
The Company may redeem the Rights at a price of $0.001 per Right before the
existence of an Acquiring Person is announced. The Rights expire on August 9,
2011.
This summary description of the Rights does not purport to be complete and
is qualified in its entirety by reference to the Rights Agreement, which was
filed as an exhibit to the Company's Registration Statement on Form 8-A filed on
August 10, 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
Not Applicable.
(b) REPORTS ON FORM 8-K:
A Form 8-K was filed during the quarter ended June 30, 2001. The report on
Form 8-K was filed to report receipt of a letter dated April 23, 2001 from
Robert D. Sanderson, one of the Company's directors, in which he resigned
from the Company's Board of Directors effective April 23, 2001 and stated
his disagreement with a proposal that the Company's Board of Directors
grant Thomas G. Grudnowski, the Company's Chief Executive Officer, the
option to purchase 50,000 shares of Company's common stock outside of
Company's 1992 Long-term Incentive Plan.
A second report on Form 8-K was filed after the quarter ended June 30, 2001
to report that the Company's Board of Directors has adopted a Stockholder
Rights Plan as a means to guard against abusive takeover tactics. Under the
Rights Plan, rights will be distributed as a dividend at the rate of one
right for each share of Fair, Isaac common stock, held by stockholders of
record as of the close of business on August 21, 2001.
-21-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FAIR, ISAAC AND COMPANY, INCORPORATED
DATE: August 13, 2001
By /s/ Henk J. Evenhuis
-------------------------------------
Henk J. Evenhuis
Vice President, Finance and Chief
Financial Officer
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