SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

                                  ------------

                                    FORM 10-Q

  (Mark One)

       [ X ]          QUARTERLY REPORT PURSUANT TO SECTION 13
                   OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended March 31, 1998

       [   ]         TRANSITION REPORT PURSUANT TO SECTION 13
                 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

             For the transition period from                          to

                             Commission File Number
                                     0-16439



                      FAIR, ISAAC AND COMPANY, INCORPORATED
             (Exact name of registrant as specified in its charter)


            DELAWARE                                             94-1499887
 (State or other jurisdiction of                              (I.R.S. Employer
 incorporation or organization)                              Identification No.)


              120 North Redwood Drive, San Rafael, California 94903
               (Address of principal executive offices) (Zip Code)

       Registrant's telephone number, including area code: (415) 472-2211

                                  ------------

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes x No ____.

     The  number  of  shares  of  Common  Stock,  $0.01  par  value  per  share,
outstanding on May 6, 1998, was 13,905,394.









                                                 TABLE OF CONTENTS
Page PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements.............................................................. 3 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................................. 8 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K.................................................. 14 SIGNATURES .................................................................................. 15 EXHIBIT INDEX.................................................................................. 16
PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements. FAIR, ISAAC AND COMPANY, INCORPORATED CONSOLIDATED BALANCE SHEETS March 31, 1998 and September 30, 1997 (dollars in thousands)
March 31 September 30 -------- ------------ ASSETS Current assets: Cash and cash equivalents $ 17,180 $ 13,209 Short-term investments 4,607 6,108 Accounts receivable, net 35,396 36,147 Unbilled work in progress 21,142 18,176 Prepaid expenses and other current assets 4,639 3,673 Deferred income taxes 4,449 4,517 --------- --------- Total current assets 87,413 81,830 Long-term investments 12,735 13,261 Property and equipment, net 40,363 34,486 Intangibles, net 11,037 8,361 Deferred income taxes 3,369 3,369 Other assets 3,772 3,921 --------- --------- $ 158,689 $ 145,228 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and other accrued liabilities $ 12,387 $ 8,228 Accrued compensation and employee benefits 15,541 19,160 Billings in excess of earned revenues 6,993 6,346 Capitalized leases 403 369 --------- --------- Total current liabilities 35,324 34,103 Other liabilities 6,832 6,753 Capitalized leases 999 1,183 Commitments and contingencies -- -- --------- --------- Total liabilities 43,155 42,039 --------- --------- Stockholders' equity: Preferred stock -- -- Common stock 139 135 Paid in capital in excess of par value 29,308 26,025 Retained earnings 86,363 77,453 Less treasury stock at cost (11,077 shares at 3/31/98; 12,114 at 9/30/97) (396) (433) Cumulative translation adjustments (278) (308) Unrealized gains on investments 398 317 --------- --------- Total stockholders' equity 115,534 103,189 --------- --------- $ 158,689 $ 145,228 ========= ========= See accompanying notes to the consolidated financial statements.
3 FAIR, ISAAC AND COMPANY, INCORPORATED CONSOLIDATED STATEMENTS OF INCOME For the six month and three month periods ended March 31, 1998 and 1997 (dollars in thousands, except per share data)
Six Months Ended Three Months Ended March 31 March 31 -------------------------- ------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Revenues $ 113,166 $ 91,703 $ 59,655 $ 48,366 Costs and expenses: Cost of revenues 41,632 34,197 21,624 17,825 Sales and marketing 17,329 13,204 8,725 7,199 Research and development 13,980 7,742 7,382 4,199 General and administrative 24,115 18,993 12,717 9,511 Amortization of intangibles 576 655 255 319 ------------ ------------ ------------ ------------ Total costs and expenses 97,632 74,791 50,703 39,053 ------------ ------------ ------------ ------------ Income from operations 15,534 16,912 8,952 9,313 Other income (expense), net 539 (333) 510 (440) ------------ ------------ ------------ ------------ Income before income taxes 16,073 16,579 9,462 8,873 Provision for income taxes 6,618 6,511 3,974 3,503 ------------ ------------ ------------ ------------ Net income $ 9,455 $ 10,068 $ 5,488 $ 5,370 ============ ============ ============ ============ Earnings per share: Diluted $ .66 $ .71 $ .38 $ .38 ============ ============ ============ ============ Basic $ .70 $ .76 $ .40 $ .40 ============ ============ ============ ============ Shares used in computing earnings per share: Diluted 14,310,000 14,189,000 14,304,000 14,228,000 ============ ============ ============ ============ Basic 13,596,000 13,326,000 13,707,000 13,361,000 ============ ============ ============ ============ See accompanying notes to the consolidated financial statements.
4 FAIR, ISAAC AND COMPANY, INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS For the six months ended March 31, 1998 and 1997 (dollars in thousands)
Six Months Ended March 31 ------------------- 1998 1997 ---- ---- Cash flows from operating activities: Net income $ 9,455 $ 10,068 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 7,191 5,618 Deferred compensation 324 -- Gain on sale of investment (165) -- Equity (gain) loss in investment (30) 1,051 Deferred income taxes 149 (82) Change to reflect change in Risk Management Technologies fiscal year -- (214) Changes in operating assets and liabilities: Decrease (increase) in accounts receivable 781 (3,646) Increase in unbilled work in progress (2,966) (2,429) Increase in prepaid expenses and other assets (966) (1,152) Decrease (increase) in other assets 149 (936) Increase in accounts payable and other accrued liabilities 4,009 718 Decrease in accrued compensation and employee benefits (2,212) (4,176) Increase in billings in excess of earned revenues 647 2,012 Increase (decrease) in other liabilities (545) 533 -------- -------- Net cash provided by operating activities 15,821 7,365 -------- -------- Cash flows from investing activities: Purchases of property and equipment (11,205) (8,428) Proceeds from sale of property and equipment -- 340 Payments for acquisitions (3,140) (78) Purchases of investments (788) (6,140) Proceeds from maturities of investments 3,010 5,000 -------- -------- Net cash used by investing activities (12,123) (9,306) -------- -------- Cash flows from financing activities: Principal payments of capital lease obligations (190) (207) Issuance of common stock 1,028 283 Dividends paid (545) (505) Repurchase of company stock (20) -- -------- -------- Net cash provided (used) by financing activities 273 (429) -------- -------- Increase (decrease) in cash and cash equivalents 3,971 (2,370) Cash and cash equivalents, beginning of period 13,209 11,487 -------- -------- Cash and cash equivalents, end of period $ 17,180 $ 9,117 ======== ======== See accompanying notes to the consolidated financial statements.
5 FAIR, ISAAC AND COMPANY, INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 Earnings Per Share The following reconciles the numerators and denominators of diluted and basic earnings per share (EPS):
Six months ended March 31, Three months ended March 31, (dollars in thousands, except per share data) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Numerator - Net income $ 9,455 $ 10,068 $ 5,488 $ 5,370 ======== ======== ======== ======== Denominator - Shares: Diluted weighted-average shares and assumed conversions 14,310 14,189 14,304 14,228 of stock options Effect of dilutive securities - employee stock options (714) (863) (597) (867) -------- -------- -------- -------- Basic weighted-average shares 13,596 13,326 13,707 13,361 ======== ======== ======== ======== Earnings per share: Diluted $ .66 $ .71 $ .38 $ .38 ======== ======== ======== ======== Basic $ .70 $ .76 $ .40 $ .40 ======== ======== ======== ========
Total options outstanding included 483,000 and 96,000 options to purchase shares of common stock at prices ranging from $38.25 to $45.63 and $38.25 to $41.88 at March 31, 1998 and 1997, respectively. These options were not included in the computation of diluted EPS because the option's exercise price was greater than the average market price of the common shares for the six and three months ended March 31, 1998 and 1997. Note 2 Cash Flow Statement Supplemental disclosure of cash flow information: Six months ended March 31, (dollars in thousands) 1998 1997 - ------------------------------------------------------------------------------ Income tax payments $7,282 $8,051 Interest paid $ 64 $ 173 Non-cash investing and financing activities: Issuance of common stock to ESOP $1,323 $ 969 Tax benefit of stock options $ 474 $ --- Purchase of CRMA with common stock $ 111 $ --- Vesting of restricted stock $ 84 $ --- Capital lease obligations $ 40 $ --- Contributions of treasury stock to ESOP $ --- $ 499 Note 3 Merger In July 1997, the Company issued 1,252,665 shares of its common stock (including 544,218 shares underlying options assumed by the Company) in connection with the merger with Risk Management Technologies (RMT). The acquisition has been accounted for under the pooling-of-interests method. Accordingly, the consolidated financial statements have been restated for all prior periods to include RMT. Further, all common share and per share data have been restated for prior periods. 6 RMT previously used the fiscal year ended December 31 for its financial reporting. RMT's operating results for the year ended December 31, 1996 are included in the accompanying consolidated balance sheet at September 30, 1997 in the line item retained earnings. The statement of income's comparative 1997 results reflect the operations of the Company and RMT for the six-month period ended March 31, 1997. Accordingly, the duplication of RMT's net income for the three months ended December 31, 1996, has been adjusted by a $214,000 charge to retained earnings in fiscal 1997. Note 4 Accounting Pronouncements In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130 established standards for reporting comprehensive income and its components in financial statements. This statement requires that all items which are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income is equal to net income plus the change in "other comprehensive income." SFAS No. 130 requires that an entity: (a) classify items of other comprehensive income by their nature in a financial statement, and (b) report the accumulated balance of other comprehensive income separately from common stock and retained earnings in the equity section of the statement of financial position. This statement is effective for financial statements issued for fiscal years beginning after December 15, 1997. Beginning with fiscal year 1999, management intends to conform its consolidated financial statements to this pronouncement. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement establishes standards for publicly held entities to follow in reporting information about operating segments in annual financial statements and requires that those entities report selected information about operating segments in interim financial statements. This statement also establishes standards for related disclosures about products and services, geographic areas and major customers. This statement is effective for financial statements issued for fiscal years beginning after December 15, 1997. Beginning with fiscal year 1999, management intends to conform its consolidated financial statements to this pronouncement. In October 1997, the American Institute of Certified Public Accountants issued Statement of Position No. 97-2, "Software Revenue Recognition." This statement establishes standards for when to recognize revenue on software transactions and in what amounts for licensing, selling, leasing or otherwise marketing computer software. This statement is effective for financial statements issued for fiscal years beginning after December 15, 1997. The Company is currently evaluating the impact of the statement in the accompanying consolidated financial statements. Beginning with fiscal year 1999, management intends to conform its consolidated financial statements to this pronouncement. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits." The statement standardizes the disclosure requirements for pension and other postretirement benefits. This statement is effective for financial statements issued for fiscal years beginning after December 15, 1997. The Company is currently evaluating the impact of the statement in the accompanying consolidated financial statements. Beginning with fiscal year 1999, management intends to conform its consolidated financial statements to this pronouncement. 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General Fair, Isaac and Company, Incorporated, provides products and services designed to help a variety of businesses use data to make better decisions on their customers, prospective customers and existing portfolios. The Company's products include statistically derived, rule-based analytical tools, software designed to implement those analytical tools and consulting services to help clients use and track the performance of those tools. The Company also provides a range of credit scoring and credit account management services in conjunction with credit bureaus and credit card processing agencies. Its DynaMark subsidiary provides data processing and database management services to businesses engaged in direct marketing activities, many of which are in the credit and insurance industries. On July 21, l997, the Company acquired Risk Management Technologies (RMT), a privately held company, which provides enterprise-wide risk management and performance measurement solutions to major financial institutions. The Company's historical statements for prior periods have been restated to account for the Company's merger with RMT on a pooling-of-interests basis. The Company is organized into business units that correspond to its principal markets: consumer credit, insurance, direct marketing (DynaMark), enterprise-wide financial risk management (RMT) and a new unit, healthcare information. Sales to the consumer credit industry have traditionally accounted for the bulk of the Company's revenues. Products developed specifically for a single user in this market are generally sold on a fixed-price basis. Such products include application and behavior scoring algorithms (also known as "analytic products" or "scorecards"), credit application processing systems (ASAP(TM) and CreditDesk(R)) and custom credit account management systems, including those marketed under the name TRIAD(TM). Software systems usually also have a component of ongoing maintenance revenue, and CreditDesk systems have also been sold under time- or volume-based price arrangements. Credit scoring and credit account management services sold through credit bureaus and third-party credit card processors are generally priced based on usage. Products sold to the insurance industry are generally priced based on the number of policies in force, subject to contract minimums. DynaMark and RMT employ a combination of fixed-fee and usage-based pricing, and the Healthcare Information unit intends to employ a combination of fixed-fee and usage-based pricing for its products. This discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and Notes. In addition to historical information, this report includes certain forward-looking statements regarding events and trends that may affect the Company's future results. Such statements are subject to risks and uncertainties that could cause the Company's actual results to differ materially. Such factors include, but are not limited to, those described in this discussion and analysis. 8 Results of Operations Revenues The following table sets forth for the fiscal periods indicated (a) the percentage of revenues represented by fixed-price and usage-priced revenues from the Credit business unit, and the percentage of revenues contributed by the DynaMark, RMT, Insurance and Healthcare Information business units; and (b) the percentage change in revenues within each category from the corresponding period in the prior fiscal year. Credit fixed-price revenues include all revenues from custom scorecard, software and consulting projects. Most credit usage revenues are generated through third-party alliances such as those with credit bureaus and third-party credit card processors. In addition, some credit scorecards and software products are licensed under volume-based fee arrangements and these are included in credit usage-priced revenues.
Percentage of Percentage of Revenue Revenue Three Months Ended Percentage Six Months Ended Percentage March 31, Change March 31, Change --------- ------ --------- ------ 1998 1997 1998 1997 ---- ---- ---- ---- Credit Fixed-price 27% 29% 13% 25% 29% 6% Usage-priced 45% 49% 14% 49% 50% 21% DynaMark 20% 14% 77% 19% 14% 68% RMT 4% 4% 13% 3% 4% (4%) Insurance 3% 4% 22% 4% 3% 44% Healthcare Information 1% --- NM less than 1% --- NM ----- ------ ----- ----- Total revenues 100% 100% 23% 100% 100% 23% ==== ==== ==== ==== NM = Not meaningful
The increase in fixed-price credit revenues in the quarter ended March 31, 1998 was due primarily to increased revenues from CRMA, which was acquired in September 1996 as part of the Credit business unit; sales of credit application scorecards and credit application processing software; and its end-user credit account management systems ("TRIAD") and behavior scoring projects. The increase in fixed-price credit revenues in the six-months ended March 31, 1998 was due primarily to increased revenues from CRMA and the Company's end-user credit account management systems ("TRIAD") and behavior scoring projects. CRMA's revenues were up 97 percent in the quarter and 117 percent in the six months ended March 31, 1998, compared with the same periods of the prior fiscal year. Compared with the same periods of fiscal 1997, revenues from sales of credit application scorecards and credit application processing software increased by approximately 9 percent in the quarter, and declined by 3 percent in the six-months ended March 31, 1998 due principally to a decline in revenues outside the United States. Revenues from end-user credit account management systems ("TRIAD") and behavior scoring projects in the three- and six-month periods ended March 31, 1998, were up 20 percent and 22 percent, respectively, from the same periods of fiscal 1997 due primarily to the release of the next version of TRIAD software. The increase in usage revenues from the Credit business unit in the quarter and six-months ended March 31, 1998, compared with the same periods the prior year, was due to continuing growth in (a) usage of the Company's scoring services distributed through the three major credit bureaus in the United States and (b) the number of bankcard accounts being managed by the Company's account management services delivered through third-party processors. Revenues for the credit bureau scoring services in the six-months ended March 31, 1998, were approximately 20 percent higher than in the first six months of fiscal 1997; approximately one-sixth of this increase was due to the recognition of usage revenue pertaining to prior fiscal years from audits of clients. Revenues from credit account management services delivered through third-party processors in the most recent three months were 18 percent higher than in the corresponding period of fiscal 1997. Revenues from credit bureau-related services have increased rapidly in each of the last three fiscal years and accounted for approximately 35 percent of revenues in fiscal 1997. Revenues from services provided through 9 bankcard processors also increased in each of these years, due primarily to increases in the number of accounts at each of the major processors. Revenues derived from alliances with credit bureaus and credit card processors have accounted for much of the Company's revenue growth and improvement in operating margins over the last three fiscal years. While the Company has been very successful in extending or renewing such agreements in the past, and believes it will generally be able to do so in the future, the loss of one or more such alliances could have a significant impact on revenues and operating margin. Revenues generated through the Company's alliances with Equifax, Inc., Experian Information Solutions, Inc. (formerly TRW Information Systems & Services), and Trans Union Corporation each accounted for approximately eight to ten percent of the Company's total revenues in fiscal 1996 and 1997. On November 14, 1996, it was announced that Experian had been acquired by CCN Group Ltd., a subsidiary of Great Universal Stores, PLC. CCN is the Company's largest competitor, worldwide, in the area of credit scoring. TRW/Experian has offered scoring products developed by CCN in competition with those of the Company for several years. The acquisition has had no apparent impact on the Company's revenues from Experian. On September 30, 1997, amendments to the federal Fair Credit Reporting Act became effective. The Company believes these changes to the federal law regulating credit reporting will be favorable to the Company and its clients. Among other things, the new law expressly permits the use of credit bureau data to prescreen consumers for offers of credit and insurance and allows affiliated companies to share consumer information with each other subject to certain conditions. There is also a seven-year moratorium on new state legislation on certain issues. However, the states remain free to regulate the use of credit bureau data in connection with insurance underwriting. The Company believes enacted or proposed state regulation of the insurance industry has had a negative impact on its efforts to sell insurance risk scores through credit reporting agencies. Since its acquisition, DynaMark has taken on an increasing share of the mainframe batch processing requirements of the Company's other business units. During fiscal 1997, such intercompany revenue represented more than fourteen percent of DynaMark's total revenues. Accordingly, DynaMark's externally reported revenues tend to understate DynaMark's growth and contribution to the Company as a whole. The increase in DynaMark's revenues shown in the foregoing table, which excludes such intercompany revenues, was due primarily to increased revenues from customers in the financial services industry. RMT's revenues slightly decreased in the six-month period ended March 31, l998 compared to the same period in fiscal 1997 due to the impact of bank consolidations, but increased by 13 percent in the quarter ended March 31, 1998 over the corresponding period in fiscal 1997. The increases in Insurance revenues for the three- and six-months ended March 31, 1998, compared with the same periods in fiscal 1997, were due primarily to continuing strong growth in insurance scoring services offered through consumer reporting agencies. In the quarter and six-months ended March 31, 1998, the Company's newest business unit, Healthcare Information, derived revenues from providing analytical marketing services to a large pharmaceuticals manufacturer to help improve customer relationships and management of prescription compliance (i.e., patient's fulfillment of prescriptions and taking them to completion). This unit had no recorded revenues in the corresponding periods in fiscal 1997. Revenues derived from outside of the United States represented approximately 18 percent of total revenues in the quarter and six-months ended March 31, 1998, compared with 15 percent and 16 percent, respectively, of total revenues in the quarter and six-months ended March 31, 1997. Revenues from software maintenance and consulting services each accounted for less than 10 percent of revenues in each of the three years in the period ended September 30, 1997, and in the six-months ended March 31, 1998. The Company does not expect revenues from either of these sources to exceed 10 percent of revenues in the foreseeable future. During the period since 1990, while the rate of account growth in the U.S. bankcard industry has been slowing and many of the Company's largest institutional clients have merged and consolidated, the Company has generated above-average growth in revenues--even after adjusting for the effect of acquisitions--from its bankcard-related scoring and account management business by deepening its penetration of large banks and other credit issuers. The Company believes much of its future growth prospects will rest on its ability to: (1) develop new, high-value products, (2) increase its penetration of established or emerging credit markets outside the U.S. and Canada and (3) expand--either directly or through further acquisitions--into relatively undeveloped or underdeveloped markets for its 10 products and services, such as direct marketing, insurance, small business lending and healthcare information management. Over the long term, in addition to the factors discussed above, the Company's rate of revenue growth--excluding growth due to acquisitions--is limited by the rate at which it can recruit and absorb additional professional staff. Management believes this constraint will continue to exist indefinitely. On the other hand, despite the high penetration the Company has already achieved in certain markets, the opportunities for application of its core competencies are much greater than it can pursue. Thus, the Company believes it can continue to grow revenues, within the personnel constraint, for the foreseeable future. At times management may forego short-term revenue growth in order to devote limited resources to opportunities that it believes have exceptional long-term potential. This occurred in the period from 1988 through 1990 when the Company devoted significant resources to developing the usage-priced services distributed through credit bureaus and third-party processors. Expenses The following table sets forth for the periods indicated (a) the percentage of revenues represented by certain line items in the Company's consolidated statements of income and (b) the percentage change in such items from the same periods in the prior fiscal year.
Six Months Three Months Ended Percentage Ended Percentage March 31, Change March 31, Change --------- ------ --------- ------ 1998 1997 1998 1997 ---- ---- ---- ---- Revenues 100% 100% 23% 100% 100% 23% Costs and expenses: Cost of revenues 37 37 22% 36 36 21% Sales and marketing 15 14 31% 15 15 21% Research and development 12 8 81% 12 9 76% General and administrative 21 22 27% 21 20 34% Amortization of intangibles 1 1 (12)% 1 1 (20)% ----- ----- ----- ----- Total costs and expenses 86 82 31% 85 81 30% ----- ----- ----- ----- Income from operations 14 18 (8)% 15 19 (4)% Other income and expense -- -- NM 1 (1) NM ----- ----- ----- ----- Income before income taxes 14 18 (3)% 16 18 7% Provision for income taxes 6 7 2% 7 7 13% ----- ----- ----- ----- Net income 8% 11% (6)% 9% 11% 2% ===== ===== ===== ===== NM = Not meaningful
Cost of Revenues Cost of revenues consists primarily of personnel, travel, and related overhead costs; costs of computer service bureaus; and the amounts paid by the Company to credit bureaus for scores and related information in connection with the ScoreNet(R) service. The cost of revenues, as a percentage of revenues, was essentially unchanged in the three- and six-months ended March 31, 1998, as compared with the same periods a year earlier. Sales and Marketing Sales and marketing expenses consist principally of personnel, travel, overhead, advertising and other promotional expenses. As a percentage of revenues, these expenses increased in the six-month period ended March 31, 1998, compared with the same period in fiscal 1997, primarily due to increases in media advertising for introduction of new products and increased visibility of the Company's brand, and the costs of researching market opportunities outside the United States. These expenses, as a percentage of revenues, were essentially unchanged, for the quarter ended March 31, 1998, as compared with the same period a year earlier. 11 Research and Development Research and development expenses include the personnel and related overhead costs incurred in developing products, researching mathematical and statistical algorithms, and developing software tools that are aimed at improving productivity and management control. Research and development expenses for fiscal 1998 increased significantly over the corresponding three- and six-month periods of fiscal 1997. After several years of concentrating on developing new markets--either geographical or by industry--for its existing technologies, the Company has increased emphasis on developing new technologies, especially in the area of software development. Research and development expenditures in the three- and six-months ended March 31, l998 were primarily related to new bankruptcy scoring products for Visa (Integrated Solutions Concept) and Trans Union, new fraud detection software products, joint product development projects with Deluxe Financial Services, Inc. and Year 2000 conversion work. General and Administrative General and administrative expenses consist mainly of compensation expenses for certain senior management, corporate facilities expenses, the costs of administering certain benefit plans, legal expenses, expenses associated with the exploration of new business opportunities and the costs of operating administrative functions such as finance and computer information systems. As a percentage of revenues, these expenses decreased in the six-month period ended March 31, 1998, compared with the same period in fiscal 1997, principally because stock-based performance incentives were lower this period than in the corresponding six-month period of the prior fiscal year. These expenses, as a percentage of revenues, were slightly higher in the quarter ended March 31, 1998, as compared with the same quarter a year earlier, due primarily to expenses related to office expansions that occurred after the quarter ended March 31, 1997. Amortization of intangibles The Company is amortizing the intangible assets arising from various acquisitions over periods ranging from two to fifteen years. The level of amortization expense in future years will depend, in part, on the amount of additional payments (earnouts) to the former shareholders of Credit & Risk Management Associates, Inc., a privately held company acquired in 1996. Other Income and expense Interest income, derived from the investment of funds surplus to the Company's immediate operating requirements, was essentially the same as in the three- and six-month periods a year earlier. During this quarter, the Company sold its equity interest in one early stage development company which had experienced losses in prior fiscal periods and whose sale resulted in a capital gain for the Company. The Company expects that any operating losses from its remaining equity investments will not be material in the foreseeable future. Provision for income taxes The Company's effective tax rate increased to 42% and 41%, respectively, in the three- and six-month periods ended March 31, 1998, from 39% in the corresponding periods of fiscal 1997, primarily because net operating losses carryforward deductions were exhausted in fiscal l997. Financial Condition Working capital increased from $47,727,000 at September 30, 1997 to $52,089,000 at March 31, 1998. Cash and marketable investments increased from $27,941,000 at September 30, 1997, to $30,911,000 at March 31, 1998. The Company's long-term obligations are mainly due to lease and employee incentive and benefit obligations. On December 1, 1997, the Company exercised an option to purchase undeveloped land in San Rafael, California, with the intention of constructing an office complex to accommodate future growth. Development is expected to commence in fiscal 1998 and the Company intends to fund the acquisition and development of this land through a synthetic lease arrangement, which will materially increase the Company's future operating lease expenses. Excepting external financing of this capital commitment, the Company believes that the cash and 12 marketable securities on hand, along with cash expected to be generated by operations, will be adequate to meet its capital and liquidity needs for both the current year and the foreseeable future. Interim Periods The Company believes that all the necessary adjustments have been included in the amounts shown in the consolidated financial statements contained in Item 1 above for the three- and six-month periods ended March 31, 1998 and 1997, to state fairly the results for such interim periods. This includes all normal recurring adjustments that the Company considers necessary for a fair statement thereof, in accordance with generally accepted accounting principles. This report should be read in conjunction with the Company's 1997 Form 10-K. Quarterly results may be affected by fluctuations in revenues associated with credit card solicitations, by the timing of orders for and deliveries of certain ASAP and TRIAD systems, and by the seasonality of ScoreNet purchases. With the exception of the cost of ScoreNet data purchased by the Company, most of its operating expenses are not affected by short-term fluctuations in revenues; thus short-term fluctuations in revenues may have a significant impact on operating results. However, in recent years, these fluctuations were generally offset by the strong growth in revenues from services delivered through credit bureaus and third-party bankcard processors. Management believes that neither the quarterly variation in revenues and net income, nor the results of operations for any particular quarter, are necessarily indicative of results of operations for full fiscal years. Accordingly, management believes that the Company's results should be evaluated on an annual basis. YEAR 2000 The Company is performing Year 2000 conversion work on its software products marketed to customers. The updated versions of its software products currently being shipped to customers are Year 2000 compliant. The Year 2000 conversion work for earlier versions of the Company's software installed at customer sites will be performed as part of the Company's normal upgrade and maintenance process. Additionally, the Company has completed its Year 2000 audit of internal systems applications and determined that approximately 95 percent of its internally developed systems are Year 2000 compliant. Applications supplied by third parties are either Year 2000 compliant or have patches currently available to bring them into compliance. The Company plans to be fully compliant by the end of fiscal l998. The Company has completed its assessments of Year 2000 conversion work and estimates that anticipated costs of Year 2000 compliance will not have a material effect on the Company's business, results of operations or financial condition. The Company has also initiated communications with third parties with whom it has major computer interfaces to determine how they are addressing Year 2000 issues and to evaluate any impact on the Company's systems. Although the Company intends to work with these third parties to resolve Year 2000 issues, the lack of resolution of Year 2000 issues by these parties may negatively impact the Company's future business operations, financial condition and results of operations. At this time the Company cannot quantify the potential impact of the third-party Year 2000 issues. 13 PART II - OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K. (a) Exhibits: 24.1 Power of Attorney (see page 15 of this Form 10-Q). 27.1 Financial Data Schedule Revised Exhibits 27 (i) to restate financial statements covering the periods from September 30, 1995 through June 30, 1997 to account for the Company's merger with RMT on a pooling-of-interests basis and (ii) to restate EPS under FAS No. 128 for the periods from September 30, 1995 through September 30, 1997 are attached as indicated below. 27.2 Revised Financial Data Schedule 27.3 Revised Financial Data Schedule 27.4 Revised Financial Data Schedule 27.5 Revised Financial Data Schedule 27.6 Revised Financial Data Schedule 27.7 Revised Financial Data Schedule 27.8 Revised Financial Data Schedule 27.9 Revised Financial Data Schedule 27.10 Revised Financial Data Schedule (b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter ended March 31, 1998. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FAIR, ISAAC AND COMPANY, INCORPORATED DATE: May 12, 1998 By PETER L. MCCORKELL -------------------------------------------- Peter L. McCorkell Senior Vice President and Secretary POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears below constitutes and appoints PETER L. McCORKELL his attorney-in-fact, with full power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-Q and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the registrant and in the capacities and on the date indicated. DATE: May 12, 1998 By PATRICIA COLE ---------------------------------------------------------- Patricia Cole Senior Vice President and Chief Financial Officer 15 EXHIBIT INDEX TO FAIR, ISAAC AND COMPANY, INCORPORATED REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998 Sequentially Exhibit No. Exhibit Numbered Page - ----------- ------- ------------- 24.1 Power of Attorney 15 27.1 Financial Data Schedule 17 27.2 Revised Financial Data Schedule 18 27.3 Revised Financial Data Schedule 19 27.4 Revised Financial Data Schedule 20 27.5 Revised Financial Data Schedule 21 27.6 Revised Financial Data Schedule 22 27.7 Revised Financial Data Schedule 23 27.8 Revised Financial Data Schedule 24 27.9 Revised Financial Data Schedule 25 27.10 Revised Financial Data Schedule 26
 

5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND INCOME STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 6-MOS SEP-30-1998 OCT-01-1997 MAR-31-1998 17,180 4,607 36,285 889 0 87,413 75,488 35,125 158,689 35,324 999 139 0 0 115,395 158,689 0 113,166 0 41,632 17,329 220 364 16,073 6,618 9,455 0 0 0 9,455 .70 .66
 

5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS IN THE COMPANY'S 1997 ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR SEP-30-1995 OCT-01-1994 SEP-30-1995 9,167 5,874 19,806 332 0 50,185 30,145 13,083 91,009 26,737 1,930 130 0 0 56,045 91,009 0 117,089 0 43,652 23,236 16 243 21,390 8,637 12,753 0 0 0 12,753 .99 .93 The financial data for the fiscal year ended September 30, 1995 has been restated to reflect the merger, effective July 1997, between Fair, Isaac and Company, Incorporated and Risk Management Technologies which has been accounted for under the pooling-of-interests method. Also the financial data schedule has been restated for the effects of Financial Accounting Standard No. 128 Earnings per Share.
 

5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS IN THE COMPANY'S 1997 ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR SEP-30-1996 OCT-01-1995 DEC-31-1995 13,207 4,496 19,803 386 0 49,568 32,295 13,809 91,392 22,204 1,799 132 0 0 60,791 91,392 0 34,218 0 13,531 5,683 0 56 6,287 2,502 3,785 0 0 0 3,785 .29 .27 The financial data for the fiscal year ended September 30, 1996 has been restated to reflect the merger, effective July 1997, between Fair, Isaac and Company, Incorporated and Risk Management Technologies which has been accounted for under the pooling-of-interests method. Also the financial data schedule has been restated for the effects of Financial Accounting Standard No. 128 Earnings per Share.
 

5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS IN THE COMPANY'S 1997 ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR SEP-30-1996 OCT-01-1995 MAR-31-1996 14,177 4,018 23,055 376 0 53,057 35,669 15,303 98,008 26,321 1,724 132 0 0 65,222 98,008 0 71,169 0 27,370 11,863 110 115 13,939 5,581 8,358 0 0 0 8,358 .65 .60 The financial data for the fiscal year ended September 30, 1996 has been restated to reflect the merger, effective July 1997, between Fair, Isaac and Company, Incorporated and Risk Management Technologies which has been accounted for under the pooling-of-interests method. Also the financial data schedule has been restated for the effects of Financial Accounting Standard No. 128 Earnings per Share.
 

5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS IN THE COMPANY'S 1997 ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR SEP-30-1996 OCT-01-1995 JUN-30-1996 10,084 6,000 24,100 374 0 57,408 40,430 18,271 104,974 28,261 1,663 133 0 0 70,104 104,974 0 110,382 0 41,991 18,577 120 159 21,758 8,532 13,226 0 0 0 13,226 1.02 .96 The financial data for the fiscal year ended September 30, 1996 has been restated to reflect the merger, effective July 1997, between Fair, Isaac and Company, Incorporated and Risk Management Technologies which has been accounted for under the pooling-of-interests method. Also the financial data schedule has been restated for the effects of Financial Accounting Standard No. 128 Earnings per Share.
 

5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS IN THE COMPANY'S 1997 ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR SEP-30-1996 OCT-01-1995 SEP-30-1996 11,487 7,487 28,691 485 0 65,427 44,397 20,745 118,023 30,728 1,552 133 0 0 79,521 118,023 0 155,913 0 57,732 25,722 600 223 28,704 11,281 17,423 0 0 0 17,423 1.32 1.25 The financial data for the fiscal year ended September 30, 1996 has been restated to reflect the merger, effective July 1997, between Fair, Isaac and Company, Incorporated and Risk Management Technologies which has been accounted for under the pooling-of-interests method. Also the financial data schedule has been restated for the effects of Financial Accounting Standard No. 128 Earnings per Share.
 

5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS IN THE COMPANY'S 1997 ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR SEP-30-1997 OCT-01-1996 DEC-31-1996 15,170 6,019 27,175 485 0 66,748 46,983 22,056 119,091 25,914 1,462 133 0 0 85,402 119,091 0 43,337 0 16,372 6,005 0 94 7,706 3,008 4,698 0 0 0 4,698 .35 .33 The financial data for the fiscal year ended September 30, 1997 has been restated to reflect the merger, effective July 1997, between Fair, Isaac and Company, Incorporated and Risk Management Technologies which has been accounted for under the pooling-of-interests method. Also the financial data schedule has been restated for the effects of Financial Accounting Standard No. 128 Earnings per Share.
 

5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS IN THE COMPANY'S 1997 ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR SEP-30-1997 OCT-01-1996 MAR-31-1997 9,117 5,506 32,365 595 0 68,303 53,896 27,120 125,481 26,742 1,371 134 0 0 90,612 125,481 0 91,703 0 34,197 13,204 0 181 16,579 6,511 10,068 0 0 0 10,068 .76 .71 The financial data for the fiscal year ended September 30, 1997 has been restated to reflect the merger, effective July 1997, between Fair, Isaac and Company, Incorporated and Risk Management Technologies which has been accounted for under the pooling-of-interests method. Also the financial data schedule has been restated for the effects of Financial Accounting Standard No. 128 Earnings per Share.
 

5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS IN THE COMPANY'S 1997 ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR SEP-30-1997 OCT-01-1996 JUN-30-1997 10,813 5,006 32,146 605 0 73,134 61,526 29,636 134,734 29,809 1,306 134 0 0 95,084 134,734 0 142,777 0 52,912 21,265 0 255 23,923 9,561 14,362 0 0 0 14,362 1.08 1.01 The financial data for the fiscal year ended September 30, 1997 has been restated to reflect the merger, effective July 1997, between Fair, Isaac and Company, Incorporated and Risk Management Technologies which has been accounted for under the pooling-of-interests method. Also the financial data schedule has been restated for the effects of Financial Accounting Standard No. 128 Earnings per Share.
 


5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS IN THE COMPANY'S 1997 ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR SEP-30-1997 OCT-01-1996 SEP-30-1997 13,209 6,108 36,905 758 0 81,830 63,475 28,989 145,228 34,103 1,183 135 0 0 103,054 145,228 0 199,009 0 72,566 29,162 438 336 35,546 14,860 20,686 0 0 0 20,686 1.55 1.46 The financial data for fiscal year ended September 30, 1997 has been restated for the effects of Financial Accounting Standard No. 128 Earnings per Share.