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, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
------ -----
Commission File Number
0-16439
FAIR, ISAAC AND COMPANY, INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 94-1499887
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
120 North Redwood Drive, San Rafael, California 94903
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 472-2211
----------------------
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 11, 1995, was 12,238,070.
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements............................... 3
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 7
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.................... 10
SIGNATURES .................................................... 11
EXHIBIT INDEX.................................................... 12
2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements.
FAIR, ISAAC AND COMPANY, INCORPORATED
CONSOLIDATED BALANCE SHEETS
June 30, 1995 and September 30, 1994
(dollars in thousands)
June 30 September 30
--------------------------------------------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents ............................. $7,603 $10,990
Short-term investments................................. 4,940 3,938
Accounts receivable, net............................... 11,785 14,242
Unbilled work in progress.............................. 11,116 6,590
Deferred income taxes.................................. 1,821 1,379
Prepaid expenses and other current assets.............. 4,914 1,188
------- -------
Total current assets................................. 42,179 38,327
Noncurrent assets:
Long-term investments.................................. 9,879 10,461
Note receivable........................................ 2,902 2,915
Property and equipment, net............................ 17,487 12,334
Intangibles, net....................................... 4,464 3,406
Deferred income taxes and other assets................. 2,734 3,492
------- -------
$79,645 $70,935
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilities......... $5,831 $6,006
Accrued compensation and employee benefits ............ 8,263 10,051
Billings in excess of earned revenues ................. 4,682 4,027
Income taxes payable .................................. 583 1,753
------- -------
Total current liabilities ........................... 19,359 21,837
Deferred income taxes and other liabilities............ 5,374 3,826
Capital leases......................................... 2,050 2,333
Commitments and contingencies.......................... - -
------- -------
Total liabilities.................................... 26,783 27,996
------- -------
Stockholders' equity:
Common stock........................................... 123 60
Paid-in capital in excess of par value................. 14,384 13,210
Retained earnings...................................... 38,404 30,010
Treasury stock (51,792 shares at 6/30/95; 101,822 shares
at 9/30/94).......................................... (182) (341)
Net realized gain on investments....................... 156 -
Cumulative translation adjustment...................... (23) -
------- -------
Total stockholders' equity................................ 52,862 42,939
------- -------
$79,645 $70,935
======= =======
See accompanying notes to the consolidated financial statements.
3
FAIR, ISAAC AND COMPANY, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
For the nine- and three-month periods ended June 30, 1995 and 1994
(in thousands except per share data)
Nine Months Ended Three Months Ended
June 30 June 30
--------------------------------- ---------------------------------
(Unaudited) (Unaudited)
----------- -----------
1995 1994 1995 1994
---- ---- ---- ----
Revenues................................. $ 80,690 $ 64,767 $ 28,675 $ 22,636
Costs and expenses:
Cost of revenues.................... 30,706 24,221 10,812 8,258
Sales and marketing................. 16,068 13,084 5,772 4,855
Research and development............ 3,138 3,025 995 996
General and administrative.......... 16,693 12,640 6,104 4,238
Amortization of intangibles......... 544 595 168 211
--------- --------- --------- ---------
Total costs and expenses........ 67,149 53,565 23,851 18,558
--------- --------- --------- ---------
Income from operations................... 13,541 11,202 4,824 4,078
Interest and other income (net).......... 1,281 465 347 155
--------- --------- --------- ---------
Income before income taxes............... 14,822 11,667 5,171 4,233
Income tax provision .................... 5,942 4,637 2,041 1,680
--------- --------- --------- ---------
Net income .............................. $ 8,880 $ 7,030 $ 3,130 $ 2,553
========= ========= ========= =========
Earnings per share....................... $ .70 $ .56 $ .25 $ .20
========= ========= ========= =========
Shares used in computing earnings per
share................................ 12,710 12,486 12,754 12,488
========= ========= ========= =========
See accompanying notes to the consolidated financial statements.
4
FAIR, ISAAC AND COMPANY, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine-month periods ended June 30, 1995 and 1994
(dollars in thousands)
(UNAUDITED)
1995 1994
---- ----
Cash flows from operating activities:
Net income...................................................... $ 8,880 $ 7,030
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization............................... 4,324 3,614
Non-current liabilities..................................... 1,548 2,601
(Increase) decrease in accounts receivable and unbilled
work in progress....................................... (2,069) 791
Decrease in prepaid expenses and other assets............... (720) (62)
Increase (decrease) in accrued compensation and employee
benefits.................................................. (932) 435
Decrease in accounts payable and other
liabilities............................................... (1,756) (2,357)
Decrease in income taxes payable............................ (4,109) (1,585)
Increase in billings in excess of earned revenues........... 655 1,747
----------- -----------
Net cash provided by operating activities.............. 5,821 12,214
----------- -----------
Cash flows from investing activities:
Additions to property and equipment............................. (8,463) (3,635)
Additions to other assets....................................... (349) (63)
Purchases of investments........................................ (6,775) (5,407)
Proceeds from maturities/sales of investments................... 6,614 5,484
----- -----
Net cash used in investing activities....................... (8,973) (3,621)
----------- -----------
Cash flows from financing activities:
Reduction of capital lease obligations.......................... (302) (363)
Issuance of stock............................................... 489 428
Payment on note receivable...................................... 13 14
Dividends paid.................................................. (425) (411)
Repurchase of company stock..................................... (10) -
----------- -----------
Net cash used in financing activities....................... (235) (332)
----------- -----------
Increase (decrease) in cash and cash equivalents..................... (3,387) 8,261
Cash and cash equivalents, beginning of period....................... 10,990 5,240
----------- -----------
Cash and cash equivalents, end of period............................. $ 7,603 $ 13,501
=========== ===========
See accompanying notes to the consolidated financial statements.
5
FAIR, ISAAC AND COMPANY, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Investments available for sale
Effective October 1, 1994, the Company adopted Statement of Financial
Accounting Standards #115, Accounting for Certain Investments in Debt and Equity
Securities. Accordingly, the Company's investments are recorded at fair market
value at June 30, 1995.
Note 2 Income taxes paid
Cash payments for income taxes during the nine-month periods ended June 30,
1995, and 1994 were $9,985,000 and $4,450,000 respectively.
Note 3 Non-cash transactions
The Company contributed treasury stock having a market value of $856,000
and $661,000 to the Company's Employee Stock Ownership Plan during the second
fiscal quarters of 1995 and 1994, respectively.
Note 4 Stock split
In June 1995, the Company effected a two-for-one split in the form of a
100% common stock dividend. All previously reported per share and share data
have been restated.
6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Fair, Isaac and Company, Incorporated, provides products and services
designed to help a variety of businesses use data to make better decisions on
their customers and prospective customers. The Company's products include
statistically derived, rule-based analytical tools, software designed to
implement those analytical tools, and consulting services to help clients use
and track the performance of those tools. The Company also provides a range of
credit scoring and credit account management services in conjunction with credit
bureaus and credit card processing agencies. Its DynaMark subsidiary provides
data processing, database management and personalized printing services to
businesses engaged in direct marketing.
The Company is organized into business units which correspond to its
principal markets: consumer credit, insurance and direct marketing (DynaMark).
Sales to the consumer credit industry have traditionally accounted for the bulk
of the Company's revenues. Products developed specifically for a single user in
this market are generally sold on a fixed-price basis. Such products include
application and behavior scoring algorithms (also known as "analytic products"
or "scorecards"), credit application processing systems (ASAP and CreditDesk)
and custom credit account management systems including those marketed under the
name TRIAD. Software systems usually also have a component of ongoing
maintenance revenue, and CreditDesk systems have been sold under time- or
volume-based price arrangements. Credit scoring and credit account management
services sold through credit bureaus and third-party credit card processors are
generally priced based on usage. Products sold to the insurance industry are
generally priced based on the number of policies in force, subject to contract
minimums. DynaMark employs a combination of fixed-fee and usage-based pricing.
Results of Operations
Revenues
The following table sets forth for the fiscal periods indicated (a) the
percentage of revenues contributed by DynaMark, and the percentage of revenues
represented by fixed-price and usage-priced revenues other than from DynaMark;
and (b) the percentage change in revenues within each category from the
corresponding period in the prior fiscal year. Fixed-price revenues include all
revenues from application processing software, custom scorecard development and
consulting projects for credit and insurance. Virtually all usage revenues are
generated through third-party alliances such as those with credit bureaus and
third-party credit card processors.
Revenue
Three Months Nine Months
Ended Percentage Ended Percentage
June 30, Change June 30, Change
------------ ---------- ----------- ----------
1995 1994 1995 1994
---- ---- ---- ----
DynaMark 16% 15% 29% 16% 16% 26%
Fixed-price 31% 32% 23% 30% 35% 10%
Usage-priced 53% 53% 28% 54% 49% 35%
--- --- --- ---
Total revenues 100% 100% 27% 100% 100% 25%
Products and services sold to the insurance industry accounted for less
than three percent of revenues in each of the three- and nine-month periods
ended June 30, 1995, and June 30, 1994.
The increase in usage revenues in the quarter and nine months ended June
30, 1995, compared with the same periods in 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 including the
PreScore (R) and ScoreNet (SM) services, 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
nine months ended June 30, 1995, were approximately 32 percent higher than in
the first nine months of fiscal 1994. Revenues from credit account management
services delivered through third-party processors in the most recent nine months
were 41% higher than in the corresponding period of fiscal 1994.
7
Revenues from credit bureau-related services have increased rapidly in each
of the last three fiscal years and accounted for approximately 38 percent of
revenues in fiscal 1994. Revenues from services provided through bankcard
processors also increased in each of these years, due primarily to increases in
the number of accounts at each of the major processors. While the Company has
been very successful in extending or renewing its agreements with credit bureaus
and bankcard processors in the past, and believes it will generally be able to
do so in the future, the loss of one or more such alliances could have a
significant impact on revenues and operating margin. Revenues generated through
the Company's alliances with Equifax, Inc., TRW, Inc. and Trans Union
Corporation each accounted for approximately ten to twelve percent of the
Company's total revenues in fiscal 1994.
Potential new government regulation of the use of credit bureau data could
have an impact on the use of any of the Company's credit bureau scoring services
including PreScore and ScoreNet. Bills which would substantially amend the Fair
Credit Reporting Act were introduced in each of the last three Congresses and at
least two such bills have been introduced in the new Congress. These bills would
impose new restrictions on the use of credit bureau data to prescreen
solicitation lists. Bills and regulations have also been introduced, and, in
some cases enacted, at the state level that affect the use of credit bureau data
in various ways, including restricting the use of such data in making insurance
underwriting decisions. State regulation of credit bureau data, particularly
regulations imposing requirements on the credit bureaus or users of credit
bureau information which differ from those existing under federal law, may also
have an adverse impact on bureau scoring services. The Company believes certain
enacted or pending state legislation and regulation of credit bureau data in
connection with insurance underwriting has had a negative impact on its efforts
to sell insurance risk scores through credit reporting agencies. However, the
Company cannot predict whether any other particular federal or state legislation
affecting credit bureau information or credit scoring is likely to be enacted in
the foreseeable future, or the extent to which the passage of such legislation
might affect the Company's business.
Sales of credit application scorecards, credit application processing
software, and credit account management systems all contributed to the increase
in fixed-price revenues in the quarter and nine months ended June 30, 1995.
Revenues from sales of credit application scorecards and credit application
processing software increased by approximately 23 percent in the quarter and
nine percent in the nine months ended June 30, 1995, compared with the same
periods of fiscal 1994. Revenues from end-user credit account management systems
(OTRIADO) in the three and nine month periods ended June 30, 1995 were 17
percent and eight percent higher respectively than in the same periods of 1994.
Revenues derived from outside of the United States represented
approximately 14 and 12 percent, respectively, of total revenues in the quarter
and nine months ended June 30, 1995, compared with 14 and 13 percent,
respectively, of total revenues in the same periods a year earlier. Fluctuations
in foreign currency exchange rates have not had a material impact on the results
of operations.
Over the past six years, while the rate of account growth in the U.S.
bankcard industry was slowing and many of the Company's largest institutional
clients were merging and consolidating, the Company has generated above-average
growth in revenues - even after correcting for the effect of the DynaMark
acquisition - from its bankcard-related scoring and account management business
by deepening its penetration of large banks and other credit issuers. Since the
bottoming out of the industry recession in 1992, there has been a sharp
resurgence in bankcard marketing and account activity, which has further
benefited this core segment of our business. However, in view of the CompanyOs
dominant market share and the likelihood that the current rate of industry
growth cannot be sustained indefinitely, the Company expects revenue growth to
slow from the rates experienced in fiscal 1993 and 1994, and it believes much of
its future growth prospects will rest on its ability (1) to develop new, high
value products and services for its present client base of major U.S. consumer
credit issuers; (2) to increase its penetration of established or emerging
credit markets outside the U.S. and Canada; and (3) to expand - either directly
or through further acquisitions - into relatively undeveloped or underdeveloped
markets for its products and services such as direct marketing, insurance, and
small business lending.
8
Costs and Expenses
The Company has entered into an agreement to lease approximately 30,000
square feet of additional office space near its headquarters in San Rafael,
California, which commenced late in calendar 1994. It has also opened additional
branch offices and expanded existing branches during 1995. In addition, it has
significantly increased the number of employees during fiscal 1995. The costs of
these facilities and personnel are, for the most part, allocated to the
functions which they service. Late in June 1995, the Company conducted a major
customer conference in Paris. Expenses associated with this Conference are being
charged to several expense line items during the quarters ended June 30 and
September 30, 1995. Accordingly, total operating expenses, as a percentage of
revenues, were slightly higher in the quarter ended June 30, 1995, than in
immediately prior periods and are expected to be higher for the remainder of the
current fiscal year than in the final quarter of fiscal 1994.
The following table sets forth for the periods indicated (a) the percentage
of revenues represented by certain line items in the Company's consolidated
statement of income and (b) the percentage change in such items from the same
quarter in the prior fiscal year.
Three Months Nine Months
Ended Percentage Ended Percentage
June 30, Change June 30, Change
------------ ---------- ----------- ----------
1995 1994 1995 1994
Revenues 100% 100% 27% 100% 100% 25%
Costs and expenses:
Cost of revenues 38 36 31% 38 37 27%
Sales and marketing 20 21 19% 20 20 23%
Research and development 3 4 -- 4 5 4%
General and administrative 21 19 44% 20 20 32%
Amortization of intangibles 1 1 (20%) 1 1 (9%)
--- --- --- ---
Total costs and expenses 83 82 28% 83 83 25%
--- --- --- ---
Income from operations 17 18 18% 17 17 21%
Interest and other income 1 1 124% 1 1 175%
--- --- --- ---
Income before income taxes 18 19 22% 18 18 27%
Provision for income taxes 7 8 21% 7 7 28%
--- --- --- ---
Net income 11% 11% 23% 11% 11% 26%
--- --- --- ---
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 Service. The cost of revenues, as a percentage of revenues,
increased slightly in the quarter and nine months ended June 30, 1995, as
compared with the same periods a year earlier, due primarily to expansion of
production facilities in the Company's office in the United Kingdom and also to
increased personnel costs.
Sales and Marketing
Sales and marketing expenses consist principally of personnel, travel,
overhead, advertising and other promotional expenses. For the quarter ended June
30, 1995, these expenses, as a percentage of revenues, decreased slightly from
the same quarter in the previous year. For the nine months ended June 30, 1995,
these expenses, as a percentage of revenues, were essentially the same as in the
corresponding period of fiscal 1994.
Research and Development
Research and development expenses include the personnel and related
overhead costs incurred in product development, researching mathematical and
statistical algorithms, and developing software tools that are aimed at
improving productivity and management control. Research and development
expenses, in absolute dollars, were essentially unchanged for the three and nine
month periods ended June 30, 1995 compared with the same periods of fiscal 1994.
However, during the quarter and nine months ended June 30, 1994 there were
significant expenses associated with the development of a marketing segmentation
product. There were no corresponding research and development expenses in fiscal
1995 since development work on this product was essentially completed in fiscal
1994. Research and development expenses have remained relatively constant during
the past three years.
9
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, and the costs of operating
administrative functions such as finance and computer information systems. As a
percentage of revenues these expenses were essentially unchanged for the nine
months ended June 30, 1995, but were significantly higher for the three months
ended June 30, 1995, compared with the same periods in fiscal 1994. The increase
in the most recent quarter was due to the increase in office space noted above,
expenditures made to improve the CompanyOs information systems and technology
infrastructure, and increases in human resources staffing associated with higher
recruiting levels.
Financial Condition
Working capital increased from $16,490,000 at September 30, 1994 to
$22,820,000 at June 30, 1995; and cash and interest bearing investments
decreased from $25,389,000 at September 30, 1994, to $21,603,000 at June 30,
1995. The Company has no long-term debt other than capital lease and employee
incentive obligations. The Company expended approximately $8.5 million in
additions to property and equipment and $10.0 million in income tax payments in
the nine months ended June 30, 1995. The Company believes that cash and
marketable securities on hand or cash generated by operations will be adequate
to meet its capital and liquidity needs for the foreseeable future.
Interim Periods
The Company believes that all the necessary adjustments have been included
in the amounts shown in the consolidated financial statements contained in Item
1 above for the three and nine month periods ended June 30, 1995 and 1994 to
state fairly the results for such interim periods. This includes all normal
recurring adjustments that the Company considers necessary for a fair statement
thereof, in accordance with generally accepted accounting principles. This
report should be read in conjunction with the Company's 1994 Form 10-K.
Quarterly results may be affected by fluctuations in revenues associated
with credit card solicitations, by the timing of orders for and deliveries of
certain ASAP and TRIAD systems, and by the seasonality of ScoreNet purchases.
With the exception of the cost of ScoreNet data purchased by the Company, most
of its operating expenses are not affected by short-term fluctuations in
revenue, and thus such revenue fluctuations may have a significant impact on
operating results. However, in recent years, these fluctuations were generally
offset by the strong growth in revenues from services delivered through credit
bureaus and third-party bankcard processors.
Management believes that neither the quarterly variation in revenues and
net income, nor the results of operations for any particular quarter, are
necessarily indicative of results of operations for full fiscal years.
Accordingly, management believes that the CompanyOs results should be evaluated
on an annual basis.
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
11.1 Computation of Earnings per Share.
24.1 Power of Attorney (see page 11 of this Form 10-Q).
(b) Reports on Form 8-K:
A Report on Form 8-K dated June 16, 1995, was filed during the quarter
which reported the appointment of a new Chief Operation Officer effective August
1, 1995.
10
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 11, 1995
By PETER L. MC CORKELL
-----------------------------------
Peter L. McCorkell
Vice President, Secretary and General Counsel
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: August 11, 1995
By GERALD DE KERCHOVE
-----------------------------------
Gerald de Kerchove
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
11
EXHIBIT INDEX
TO FAIR, ISAAC AND COMPANY, INCORPORATED
REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1995
Sequentially
Exhibit No. Exhibit Numbered Page
- ---------- ------- -------------
11.1 Computation of earnings per share. 13
27 Financial Data Schedule 14
12
Exhibit 11.1
FAIR, ISAAC AND COMPANY, INCORPORATED
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS EXCEPT PER SHARE DATA)
9 months 3 months
-------- --------
6/30/95 6/30/94 6/30/95 6/30/94
Primary Earnings Per Share:
Weighted Average Common Shares Outstanding 12,205 11,792 12,237 11,880
Shares Issuable Upon Exercise of Stock 760 920 793 922
Options
Less Shares Assumed to be Repurchased (255) (226) (276) (314)
--------------- --------------- --------------- ---------------
Weighted Average Common Shares, as Adjusted 12,710 12,486 12,754 12,488
--------------- --------------- --------------- ---------------
Net Income $ 8,880 $ 7,030 $ 3,130 $ 2,553
=============== =============== =============== ===============
Primary Earnings per Share $ .70 $ .56 $ .25 $ .20
--------------- --------------- --------------- ---------------
Fully Diluted Earnings Per Share:
Weighted Average Common Shares Outstanding 12,205 11,792 12,237 11,880
Shares Issuable Upon Exercise of Stock 760 976 793 922
Options
Less Shares Assumed to be Repurchased (207) (292) (250) (292)
--------------- --------------- --------------- ---------------
Weighted Average Common Shares, as Adjusted 12,758 12,476 12,780 12,510
=============== =============== =============== ===============
Net Income $ 8,880 $ 7,030 $ 3,130 $ 2,553
--------------- --------------- --------------- ---------------
Fully Diluted Earnings Per Share $ .70 $ .56 $ .25 $ .20
=============== =============== =============== ===============
13
5
1,000
9-MOS
SEP-30-1994
JUN-30-1995
7,603
4,940
12,061
276
0
42,179
30,333
12,846
79,645
19,359
0
123
0
0
52,739
79,645
80,690
80,690
30,859
67,149
0
0
152
14,825
5,945
8,880
0
0
0
8,880
.70
.70
