SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
---------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
[ ] 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 February 10, 1997, was 12,675,775.
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements......................................... 3
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 7
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.......... 11
ITEM 6. Exhibits and Reports on Form 8-K............................. 11
SIGNATURES ............................................................. 12
EXHIBIT INDEX............................................................. 13
2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements.
FAIR, ISAAC AND COMPANY, INCORPORATED
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and September 30, 1996
(dollars in thousands)
December 31 September 30
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 11,930 $ 8,247
Short-term investments 6,019 7,487
Accounts receivable, net 26,159 27,675
Unbilled work in progress 11,464 10,276
Prepaid expenses and other current assets 3,909 3,957
Deferred income taxes 2,851 2,759
Income taxes receivable -- 610
--------- ---------
Total current assets 62,332 61,011
Long-term investments 10,668 12,647
Property and equipment, net 24,494 23,219
Intangibles, net 9,298 9,557
Deferred income taxes 2,239 2,239
Other assets 5,091 4,381
--------- ---------
$ 114,122 $ 113,054
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilities $ 7,689 $ 7,466
Accrued compensation and employee benefits 8,435 16,648
Billings in excess of earned revenues 5,357 3,666
Income taxes payable 1,520 --
Capitalized leases 343 378
--------- ---------
Total current liabilities 23,344 28,158
Other liabilities 5,088 4,997
Capital leases 1,462 1,552
Commitments and contingencies -- --
--------- ---------
Total liabilities 29,894 34,707
--------- ---------
Stockholders' equity:
Preferred stock -- --
Common stock 126 126
Paid in capital in excess of par value 22,702 21,174
Retained earnings 61,396 57,163
Less treasury stock (2,546 shares at cost at 12/31/96;
15,938 at 9/30/96) (10) (68)
Cumulative translation adjustments (95) (145)
Unrealized gain on investments 109 97
--------- ---------
Total stockholders' equity 84,228 78,347
--------- ---------
$ 114,122 $ 113,054
========= =========
See accompanying notes to the consolidated financial statements.
3
FAIR, ISAAC AND COMPANY, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
For the three months ended December 31, 1996 and 1995
(dollars in thousands, except per share data)
Three Months Ended
December 31
---------------------------
1996 1995
---- ----
Revenues $41,532 $32,628
Costs and expenses:
Cost of revenues 16,042 13,173
Sales and marketing 5,705 5,396
Research and development 3,126 760
General and administrative 8,966 7,355
Amortization of intangibles 336 288
---------- ---------
Total costs and expenses 34,175 26,972
---------- ---------
Income from operations 7,357 5,656
Other income, net 85 317
---------- ---------
Income before income taxes 7,442 5,973
Provision for income taxes 2,958 2,449
---------- ---------
Net income $ 4,484 $ 3,524
---------- ---------
Earnings per share $ .35 $ .28
========== =========
Shares used in computing earnings per share 12,971,000 12,761,000
========== ==========
See accompanying notes to the consolidated financial statements.
4
FAIR, ISAAC AND COMPANY, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended December 31, 1996 and 1995
(dollars in thousands)
Three Months Ended
December 31
--------------------------
1996 1995
---- ----
Cash flows from operating activities:
Net income $ 4,484 $ 3,524
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 2,617 1,995
Equity loss in investment 461 --
Deferred income taxes (92) 48
Changes in operating assets and liabilities:
Decrease in accounts receivable 1,568 710
Decrease (increase) in unbilled work in progress (1,188) 3,407
Decrease (increase) in prepaid expenses and other assets 47 (295)
Decrease in income taxes receivable 610 --
Decrease (increase) in other assets (711) 339
Increase (decrease) in accounts payable and other
accrued liabilities (238) 867
Decrease in accrued compensation and employee benefits (6,724) (5,952)
Increase in billings in excess of earned revenues 1,690 186
Increase in income taxes payable 1,520 462
Increase in other liabilities 91 355
------- -------
Net cash provided by operating activities 4,137 5,646
------- -------
Cash flows from investing activities:
Purchases of property and equipment (3,556) (2,933)
Purchase of DynaMark, Printronic and CRMA (78) --
Purchases of investments -- (806)
Proceeds from maturities of investments 3,459 1,821
-------- --------
Net cash used by investing activities (175) (1,918)
-------- --------
Cash flows from financing activities:
Principal payments of capital lease obligations (125) (131)
Issuance of common stock 98 255
Dividends paid (252) (244)
-------- --------
Net cash used by financing activities (279) (120)
-------- --------
Increase in cash and cash equivalents 3,683 3,608
Cash and cash equivalents, beginning of period 8,247 8,321
------- -------
Cash and cash equivalents, end of period $11,930 $11,929
======= =======
See accompanying notes to the consolidated financial statements.
5
FAIR, ISAAC AND COMPANY, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Income taxes paid
Cash payments for income taxes during the three-month periods ended December
31, 1996 and 1995, were $829,000 and $1,964,000, respectively.
Note 2 Non-cash transactions
The Company contributed newly-issued and treasury stock having a market value
of $1,468,000 and $979,000 to the Company's Employee Stock Ownership Plan during
the first fiscal quarters of 1997 and 1996, respectively.
Note 3 Reclassifications
Certain reclassifications were made to the September 30, 1996, balance sheet
to conform to the December 31, 1996, presentation.
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 and database management services to businesses engaged in direct
marketing.
This discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and Notes. In addition to historical
information, this report includes certain forward-looking statements regarding
events and trends which may affect the Company's future results. Such statements
are subject to risks and uncertainties that could cause the Company's actual
results to differ materially. Such factors include, but are not limited to,
those described in this discussion and analysis.
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(TM) and
CreditDesk(R)) and custom credit account management systems including those
marketed under the name TRIAD(TM). Software systems usually also have a
component of ongoing maintenance revenue, and CreditDesk systems have also been
sold under time-or volume-based price arrangements. Credit scoring and credit
account management services sold through credit bureaus and third-party credit
card processors are generally priced based on usage. Products sold to the
insurance industry are generally priced based on the number of policies in
force, subject to contract minimums. DynaMark 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 represented by fixed-price and usage-priced revenues from
the Credit business unit and the percentage of revenues contributed by the
DynaMark and Insurance business units; and (b) the percentage change in revenues
within each category from the corresponding period in the prior fiscal year.
Fixed-price revenues include all revenues from application processing software,
custom scorecard development and consulting projects for credit. Virtually all
usage revenues are generated through third-party alliances such as those with
credit bureaus and third-party credit card processors.
Period-to-Period
Percentage of Percentage Changes
Revenue Quarter Ended
Quarter Ended 12/31/96
December 31, Compared to
1996 1995 12/31/95
- --------------------------------------------------------------------------------
Credit:
Fixed-price 31% 27% 43%
Usage-priced 52 55 21
DynaMark 14 15 24
Insurance 3 3 23
----- -----
Total revenues 100% 100% 27
===== =====
Since its acquisition, DynaMark has taken on an increasing share of the
mainframe batch processing requirements of the Company's other business units.
During fiscal 1996, such intercompany revenue has represented more than fifteen
percent of DynaMark's total revenues. Accordingly, DynaMark's externally
reported revenues tend to understate DynaMark's growth and contribution to the
Company as a whole. The increase in DynaMark's
7
revenues shown in the foregoing table, which excludes such intercompany
revenues, was due primarily to increased revenues from customers in the
financial services industry.
Revenues from sales of credit application scoring systems and credit
application processing software, including products for small-business lenders,
were up significantly in the quarter ended December 31, 1996, compared with the
quarter ended December 31, 1995, accounting for most of the growth in
fixed-price credit revenues. The increase in usage revenues in the quarter ended
December 31, 1996, compared with the same period the prior year, was due
primarily to continuing growth in usage of the Company's scoring services
distributed through the three major credit bureaus in the United States,
including the ScoreNet(R) service, and growth in the number of credit accounts
managed under the services delivered through third-party processors. Insurance
revenues increased by 23 percent due primarily to growth in the acceptance of
the insurance scoring services distributed through consumer reporting agencies.
Revenues from credit bureau-related services have increased rapidly in each
of the last three fiscal years and accounted for approximately 39 percent of
revenues in fiscal 1996. 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.
Revenues derived from alliances with credit bureaus and credit card
processors have accounted for much of the Company's revenue growth and
improvement in operating margins over the last three years. While the Company
has been very successful in extending or renewing such agreements in the past,
and believes it will generally be able to do so in the future, the loss of one
or more such alliances or an adverse change in terms could have a significant
impact on revenues and operating margin. Revenues generated through the
Company's alliances with Equifax, Inc., Experian Information Solutions, Inc.
(formerly TRW Information Systems & Services), and Trans Union Corporation each
accounted for approximately nine to eleven percent of the Company's total
revenues in fiscal 1995 and 1996.
On November 14, 1996, it was announced that Experian was being acquired by
CCN Group Ltd., a subsidiary of Great Universal Stores, PLC. CCN is the
Company's largest competitor, worldwide, in the area of credit scoring.
TRW/Experian has offered scoring products developed by CCN in competition with
those of the Company for several years. The Company is not presently able to
determine what effect, if any, the acquisition of Experian by CCN will have on
its future revenues.
On September 30, 1996, amendments to the Fair Credit Reporting Act were
enacted and signed into law. The Company believes these changes to the federal
law regulating credit reporting will be favorable to the Company and its
clients. Among other things, the new law expressly permits the use of credit
bureau data to prescreen consumers for offers of credit and insurance and allows
affiliated companies to share consumer information with each other subject to
certain conditions. There is also a seven-year moratorium on new state
legislation on certain issues. However, the states remain free to regulate the
use of credit bureau data in connection with insurance underwriting. The Company
believes such enacted or proposed state regulation has had a negative impact on
its efforts to sell insurance risk scores through credit reporting agencies.
Revenues derived from outside of the United States represented
approximately 15 percent of total revenues in the quarter ended December 31,
1996, compared with 14 percent of total revenues in the same period a year
earlier.
Revenues from software maintenance and consulting services each accounted
for less than 10 percent of revenues in each of the three years in the period
ended September 30, 1996, and in the quarter ended December 31, 1996. The
Company does not expect revenues from either of these sources to exceed 10
percent of revenues in the foreseeable future.
During the period since 1990, while the rate of account growth in the U.S.
bankcard industry has been slowing and many of the Company's largest
institutional clients have merged and consolidated, the Company has generated
above-average growth in revenues--even after correcting for the effect of the
DynaMark acquisition--from its bankcard-related scoring and account management
business by deepening its penetration of large banks and other credit issuers.
The Company 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, small business lending and healthcare
information management.
8
Over the long term, in addition to the factors discussed above, the
Company's rate of revenue growth--excluding growth due to acquisitions--is
limited by the rate at which it can recruit and absorb additional professional
staff. While the increased percentage of usage revenues may loosen this
constraint to some extent, management believes it will continue to exist
indefinitely. On the other hand, despite the high penetration the Company has
already achieved in certain markets, the opportunities for application of its
core competencies are much greater than it can pursue. Thus, the Company
believes it can continue to grow revenues, within the personnel constraint, for
the foreseeable future. At times management may forego short-term revenue growth
in order to devote limited resources to opportunities which it believes have
exceptional long-term potential. This occurred in the period from 1988 through
1990 when the Company devoted significant resources to developing the
usage-priced services distributed through credit bureaus and third-party
processors. Cumulative revenue since 1987, net of the DynaMark acquisition, is
slightly above the Company's 20-year historical average revenue growth of about
22 percent.
Expenses
The following table sets forth for the periods indicated (a) the percentage
of revenues represented by certain line items in the Company's consolidated
statements of income and (b) the percentage change in such items from the same
quarter in the prior fiscal year.
Period-to-Period
Percentage of Revenue Percentage Changes
--------------------- ------------------
Quarter Ended
Quarter Ended 12/31/96
December 31, Compared
--------------------- to Quarter Ended
1996 1995 12/31/95
---- ---- ------------------
Revenues............................. 100% 100% 27%
Costs and expenses:
Cost of revenues.................. 39 40 22
Sales and marketing............... 14 17 6
Research and development.......... 7 2 311
General and administrative........ 21 23 22
Amortization of intangibles....... 1 1 17
---- ----
Total costs and expenses.......... 82 83 27
---- ----
Income from operations............... 18 17 30
Other income, net.................(less than)1 1 (73)
---- ----
Income before income taxes........... 18 18 25
Provision for income taxes........... 7 7 21
---- ----
Net income........................... 11% 11% 27
==== ====
Costs of revenues
Cost of revenues consists primarily of personnel, travel, and related
overhead costs; costs of computer service bureaus; and the amounts paid by the
Company to credit bureaus for scores and related information in connection with
the ScoreNet(R) service. The cost of revenues, as a percentage of net revenues,
decreased slightly in the quarter ended December 31, 1996, as compared with the
same quarter a year earlier, primarily because of an increase in the number of
staff dedicated to research and development activities.
Sales and marketing
Sales and marketing expenses consist principally of personnel, travel,
overhead, advertising and other promotional expenses. These expenses, as a
percentage of revenues, decreased primarily due to reductions in media
advertising.
9
Research and development
Research and development expenses include the personnel and related
overhead costs incurred in developing products, researching mathematical and
statistical algorithms, and developing software tools that are aimed at
improving productivity and management control. Research and development expenses
increased significantly over the same period of fiscal 1996. After several years
of concentrating on developing new markets--either geographical or by
industry--for its existing technologies, the Company has recently increased
emphasis on developing new technologies, especially in the area of software
development.
General and Administrative
General and administrative expenses consist mainly of compensation expenses
for certain senior management, corporate facilities expenses, the costs of
administering certain benefit plans, legal expenses, expenses associated with
the exploration of new business opportunities and the costs of operating
administrative functions such as finance and computer information systems. As a
percentage of revenues these expenses decreased slightly compared with the same
quarter of fiscal 1996 primarily due to the Company's shift in emphasis from
exploration of new market opportunities toward technical research and
development.
Amortization of intangibles
The Company is amortizing the intangible assets arising from various
acquisitions over periods ranging from two to fifteen years. The level of
amortization expense in future years will depend, in part, on the amount of
additional payments to the former shareholders of Credit & Risk Management
Associates, Inc., a privately held company acquired in 1996.
Other income, net
Interest income, derived from the investment of funds surplus to the
Company's immediate operating requirements, increased over the period a year
earlier due to higher balances and slightly higher interest rates. However, this
increase in interest income was more than offset by the increase in the
Company's share of operating losses in certain early stage development companies
that are accounted for using the equity method.
Provision for income taxes
The Company's effective tax rate in the quarter decreased from
approximately 41 percent in the quarter ended December 31, 1995, to 39.7 percent
in the quarter ended December 31, 1996, primarily due to a changing mix of
applicable state and foreign taxes.
Financial Condition
Working capital increased from $33,319,000 at September 30, 1996 to
$38,988,000 at December 31, 1996; and cash and marketable investments increased
from $26,788,000 at September 30, 1996, to $27,023,000 at December 31, 1996. The
Company has no long-term debt other than lease and employee incentive
obligations. The Company believes that cash and marketable securities on hand
are adequate to meet its capital and liquidity needs for the foreseeable future.
Interim Periods
The Company believes that all the necessary adjustments have been included
in the amounts shown in the consolidated financial statements contained in Item
1 above for the three-month periods ended December 31, 1996 and 1995 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 1996 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
10
purchases. With the exception of the cost of ScoreNet data purchased by the
Company, most of its operating expenses are not affected by short-term
fluctuations in revenues; thus short-term fluctuations in revenues may have a
significant impact on operating results. However, in recent years, these
fluctuations were generally offset by the strong growth in revenues from
services delivered through credit bureaus and third-party bankcard processors.
Management believes that neither the quarterly variation in revenues and
net income, nor the results of operations for any particular quarter, are
necessarily indicative of results of operations for full fiscal years.
Accordingly, management believes that the Company's results should be evaluated
on an annual basis.
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.
At the Annual Meeting of Stockholders of the Company held on February 4,
1997, the Company's stockholders voted in favor of: (i) the election of nine
directors to the Company's Board of Directors and (ii) the ratification of KPMG
Peat Marwick LLP as the Company's independent auditors. The number of votes for,
withheld and against, as well as the number of abstentions and broker non-votes
as to each matter approved at the Annual Meeting of Stockholders were as
follows:
Broker
Matter For Withheld Against Abstain Non-votes
- ------ --- -------- ------- ------- ---------
Election of Directors
A. George Battle 11,449,757 64,630 N/A N/A 0
Bryant J. Brooks, Jr. 11,451,867 62,520 N/A N/A 0
H. Robert Heller 11,237,009 277,378 N/A N/A 0
Guy R. Henshaw 11,451,601 62,786 N/A N/A 0
David S.P. Hopkins 11,451,837 62,550 N/A N/A 0
Robert M. Oliver 11,375,667 138,720 N/A N/A 0
Larry E. Rosenberger 11,454,567 59,820 N/A N/A 0
Robert D. Sanderson 11,093,732 420,655 N/A N/A 0
John D. Woldrich 11,240,059 274,328 N/A N/A 0
Ratification of Auditors 11,474,094 N/A 22,202 18,091 0
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
11.1 Computation of Earnings per Share.
24.1 Power of Attorney (see page 12 of this Form 10-Q).
27 Financial Data Schedule.
(b) Reports on Form 8-K:
None.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FAIR, ISAAC AND COMPANY, INCORPORATED
DATE: February 13, 1997
By /s/ PETER L. MCCORKELL
-------------------------------------------------
Peter L. McCorkell
Senior Vice President and Secretary
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints PETER L. McCORKELL his attorney-in-fact, with
full power of substitution, for him in any and all capacities, to sign any
amendments to this Report on Form 10-Q and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorney-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following person on behalf of the registrant
and in the capacities and on the date indicated.
DATE: February 13, 1997
By /s/ PATRICIA COLE
-------------------------------------------------
Patricia Cole
Senior Vice President and Chief Financial Officer
12
EXHIBIT INDEX
TO FAIR, ISAAC AND COMPANY, INCORPORATED
REPORT ON FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1996
Sequentially
Exhibit No. Exhibit Numbered Page
- ----------- ------- -------------
11.1 Computation of earnings per share. 14
24.1 Power of Attorney 12
27 Financial Data Schedule 15
13
Exhibit 11.1
FAIR, ISAAC AND COMPANY, INCORPORATED
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS EXCEPT PER SHARE DATA)
Three months ended December 31,
-------------------------------
(unaudited)
1996 1995
--------- ---------
Primary Earnings Per Share:
Weighted Average Common Shares Outstanding 12,592 12,282
Dilutive effect of outstanding options (as
determined by the treasury stock method) 379 479
--------- ---------
Weighted Average Common Shares, as Adjusted 12,971 12,761
--------- ---------
Net Income $ 4,484 $ 3,524
--------- ---------
Primary Earnings per Share $ 0.35 $ 0.28
--------- ---------
Fully Diluted Earnings Per Share:
Weighted Average Common Shares Outstanding 12,592 12,282
Dilutive effect of outstanding options (as
determined by the treasury stock method) 401 479
--------- ---------
Weighted Average Common Shares, as Adjusted 12,993 12,761
--------- ---------
Net Income $ 4,484 $ 3,524
========= =========
Fully Diluted Earnings Per Share $ 0.35 $ 0.28
========= =========
14
5
3-MOS
SEP-30-1997
DEC-31-1996
11,930
6,019
26,604
445
0
62,332
46,214
21,720
114,122
23,344
1,462
126
0
0
84,102
114,122
0
41,532
0
16,042
5,705
0
37
7,442
2,958
4,484
0
0
0
4,484
.35
.35
