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, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------------- ----------------
Commission File Number
0-16439
FAIR, ISAAC AND COMPANY, INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 94-1499887
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Smith Ranch Road, San Rafael, California 94903
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 472-2211
---------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No .
--- ---
The number of shares of Common Stock, $0.01 par value per share,
outstanding on May 8, 2001, was 14,765,878.
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.............................................................. 3
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.................................................................. 10
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk........................ 20
PART II. OTHER INFORMATION
ITEM 5. Other Information................................................................. 21
ITEM 6. Exhibits and Reports on Form 8-K.................................................. 21
SIGNATURES..................................................................................... 22
EXHIBIT INDEX.................................................................................. 23
-2-
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
FAIR, ISAAC AND COMPANY, INCORPORATED
CONSOLIDATED BALANCE SHEETS
March 31, 2001 and September 30, 2000
(in thousands)
(Unaudited)
March 31, 2001 September 30, 2000
-------------- ------------------
Assets
Current assets:
Cash and cash equivalents $ 29,134 $ 39,506
Short-term investments 20,600 19,109
Accounts receivable, net 44,068 41,625
Unbilled work in progress 30,186 26,484
Prepaid expenses and other current assets 12,607 4,769
Deferred income taxes 5,724 5,719
--------- ---------
Total current assets 142,319 137,212
Investments 45,746 34,502
Property and equipment, net 48,214 48,565
Intangibles, net 7,580 8,630
Deferred income taxes 8,778 8,778
Other assets 4,449 3,601
--------- ---------
$ 257,086 $ 241,288
========= =========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 2,332 $ 1,606
Accrued compensation and employee benefits 15,075 15,581
Other accrued liabilities 8,262 8,863
Billings in excess of earned revenues 9,013 10,104
Capital lease obligations 140 364
--------- ---------
Total current liabilities 34,822 36,518
--------- ---------
Long-term liabilities:
Accrued compensation and employee benefits 4,401 4,886
Other liabilities 865 883
--------- ---------
Total long-term liabilities 5,266 5,769
--------- ---------
Total liabilities 40,088 42,287
--------- ---------
Stockholders' equity:
Preferred stock -- --
Common stock 152 148
Paid in capital in excess of par value 70,206 52,269
Retained earnings 174,919 156,021
Less treasury stock, at cost (27,541) (8,793)
Accumulated other comprehensive loss (738) (644)
--------- ---------
Total stockholders' equity 216,998 199,001
--------- ---------
$ 257,086 $ 241,288
========= =========
<FN>
See accompanying notes to the consolidated financial statements.
</FN>
-3-
FAIR, ISAAC AND COMPANY, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the six months and three months ended March 31, 2001 and 2000
(in thousands, except share and per share data)
(Unaudited)
Six Months Ended March 31, Three Months Ended March 31,
2001 2000 2001 2000
---- ---- ---- ----
Revenues $ 158,162 $ 143,394 $ 81,072 $ 73,300
Costs and expenses:
Cost of revenues 72,431 60,068 37,199 30,288
Research and development 14,678 16,930 7,363 7,318
Sales, general and administrative 39,059 43,820 18,913 22,857
Amortization of intangibles 1,050 1,050 525 525
Restructuring charge -- 2,662 -- 988
------------- ------------- ------------- ---------------
Total costs and expenses 127,218 124,530 64,000 61,976
------------- ------------- ------------- ---------------
Income from operations 30,944 18,864 17,072 11,324
Other income, net 2,236 1,716 1,088 850
------------- ------------- ------------- ---------------
Income before income taxes 33,180 20,580 18,160 12,174
Provision for income taxes 13,704 8,499 7,501 5,027
--------------- ------------- ------------- ---------------
Net income $ 19,476 $ 12,081 $ 10,659 $ 7,147
============== ============= ============= ===============
Net income $ 19,476 $ 12,081 $ 10,659 $ 7,147
Other comprehensive loss, net of tax:
Unrealized gains (losses) on investments (7) (420) 41 (270)
Foreign currency translation adjustments 87) (143) (211) (76)
------------- ------------- ------------- ---------------
Other comprehensive loss (94) (563) (170) (346)
------------- ------------- ------------- ---------------
Comprehensive income $ 19,382 $ 11,518 $ 10,489 $ 6,801
============= ============= ============= ===============
Earnings per share:
Diluted $ 1.31 $ 0.83 $ 0.71 $ 0.49
============= ============= ============= ===============
Basic $ 1.35 $ 0.86 $ 0.74 $ 0.50
============= ============= ============= ===============
Shares used in computing earnings per share:
Diluted 14,890,000 14,530,000 14,963,000 14,680,000
============= ============= ============= ===============
Basic 14,449,000 14,111,000 14,363,000 14,214,000
============= ============= ============= ===============
<FN>
See accompanying notes to the consolidated financial statements.
</FN>
-4-
FAIR, ISAAC AND COMPANY, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended March 31, 2001 and 2000
(in thousands)
(Unaudited)
Six Months Ended
March 31,
---------------------------
2001 2000
---- ----
Cash flows from operating activities
Net income $19,476 $12,081
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 11,982 9,716
Deferred compensation 499 372
Tax benefit from exercise of stock options 3,036 881
Other 557 140
Changes in operating assets and liabilities:
Accounts receivable (2,496) (6,610)
Unbilled work in progress (3,702) 5,886
Prepaid expenses and other assets (8,448) (3,675)
Accounts payable 543 (762)
Accrued compensation and employee benefits 50 (9,373)
Other accrued liabilities and other liabilities (637) (2,595)
Billings in excess of earned revenues (1,091) 5,419
------- -------
Net cash provided by operating activities 19,769 11,480
------- -------
Cash flows from investing activities
Purchases of property and equipment (10,690) (10,005)
Purchases of investments (51,544) (12,836)
Proceeds from maturities of investments 38,277 2,606
------- -------
Net cash used in investing activities (23,957) (20,235)
------- -------
Cash flows from financing activities
Principal payments of capital lease obligations (223) (191)
Proceeds from the exercise of stock options and
issuance of treasury stock 14,454 4,281
Dividends paid (578) (565)
Repurchase of company stock (19,837) (38)
------- -------
Net cash (used in) provided by financing activities (6,184) 3,487
------- -------
Decrease in cash and cash equivalents (10,372) (5,268)
Cash and cash equivalents, beginning of period 39,506 20,715
------- -------
Cash and cash equivalents, end of period $29,134 $15,447
======= =======
<FN>
See accompanying notes to the consolidated financial statements.
</FN>
-5-
FAIR, ISAAC AND COMPANY, INCORPORATED
Notes to Consolidated Financial Statements
Note 1 General
In management's opinion, the accompanying unaudited consolidated financial
statements for Fair, Isaac & Company, Incorporated (the "Company") for the three
months and six months ended March 31, 2001 and 2000 have been prepared in
accordance with generally accepted accounting principles for interim financial
statements and include all adjustments (consisting only of normal recurring
accruals unless otherwise stated) that the Company considers necessary for a
fair presentation of its financial position, results of operations, and cash
flows for such periods. However, the accompanying financial statements do not
contain all of the information and notes required by generally accepted
accounting principles for complete financial statements. All such financial
statements presented herein are unaudited, however, the September 30 balance
sheet has been derived from audited financial statements. This report and the
accompanying financial statements should be read in connection with the
Company's audited financial statements and notes thereto presented in its Annual
Report on Form 10-K for the fiscal year ended September 30, 2000. Notes that
would substantially duplicate the disclosures in the Company's audited financial
statements for the fiscal year ended September 30, 2000, contained in the 2000
Form 10-K have been omitted. The interim financial information contained in this
Report is not necessarily indicative of the results to be expected for any other
interim period or for the full fiscal year ending September 30, 2001.
Certain amounts in the financial statements and notes thereto have been
reclassified to conform to 2001 classifications. Due to certain
reclassifications, the expenses in the consolidated income statement for the six
months ended March 31, 2001 are different than the combination of the first two
quarters.
Note 2 Earnings Per Share
The following reconciles the numerators and denominators of diluted and basic earnings per share (EPS):
Six months ended Three months ended
March 31, March 31,
(in thousands, except per share data) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
Numerator - Net income $19,476 $12,081 $ 10,659 $ 7,147
======= ======= ======== =======
Denominator - Shares:
Diluted weighted-average shares 14,890 14,530 14,963 14,680
Effect of dilutive securities -
employee stock options (441) (419) (600) (466)
------- ------- -------- -------
Basic weighted-average shares 14,449 14,111 14,363 14,214
======= ======= ======== =======
Earnings per share:
Diluted $ 1.31 $ 0.83 $ .71 $ .49
======= ======= ======== =======
Basic $ 1.35 $ 0.86 $ .74 $ .50
======= ======= ======== =======
The computation of diluted EPS for the three months ended March 31, 2001
and 2000, excludes stock options to purchase 70,000 and 57,000 shares of common
stock, respectively. The computation of diluted EPS for the six months ended
March 31, 2001 and 2000, excludes stock options to purchase 76,000 and 144,000
shares of common stock, respectively. The shares were excluded because the
exercise prices for the options were greater than the respective average market
price of the common shares and their inclusion would be antidilutive.
-6-
Note 3 Cash Flow Statement
Supplemental disclosure of cash flow information:
Six months ended March 31,
(in thousands) 2001 2000
- --------------------------------------------------------------------------------
Income tax payments $ 10,846 $ 8,932
Interest paid 115 40
Non-cash investing and financing activities:
Issuance of treasury stock to ESOP and ESPP $ 1,040 $ --
Note 4 New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101 regarding recognition, presentation and
disclosure of revenue. SAB 101 is required to be implemented no later than the
fourth quarter of fiscal year 2001. Management believes that the adoption of SAB
No. 101 will not have a material impact on the Company's consolidated financial
position, results of operations or cash flows.
Note 5 Segment Information
Effective October 1, 2000, the Company reorganized its reportable
segments based on a combination of two factors: industry and product. The new
reportable segments include Global Data Repositories & Processors (Alliance
products and services which previously were included in the North American
Financial Services and in Other International segments), Global Financial
Services (Bank and Insurance industries excluding Analytic and LiquidCredit
products, which were previously included in NetSourced Services and Other
International segments) and Other (an aggregation of Analytic products,
LiquidCredit(TM) products, Retail industry and Telecommunications industry, each
of which represents less than 10% and in aggregate represents 19% of the
Company's total revenue both for the three months and the six months ended March
31, 2001. The first two of the products, included in "Other", were previously
included in North American Financial Services and Other International segments
and the latter two industries, included in "Other", were previously included in
the NetSourced Services and Other International segments). Each of these
segments is managed and reported on separately within the organization.
Significant changes include classifying all related international
revenues and expenses within each reportable segment, separating Alliance
products from Analytic products and classifying segments by major industries or
products. The segment information for the three months and the six months ended
March 31, 2000 has been restated to conform to the fiscal year 2001
presentation.
The Company's Chief Executive and Operating Officers evaluate each
segment's financial performance based on segment revenues and operating income.
Operating income is calculated as revenue less expenses such as personnel,
facilities, consulting and travel. Unallocated other income consists mainly of
interest income and net gain on sales of investments. The Company does not
evaluate the financial performance of each segment based on its assets or
capital expenditures.
-7-
Global Data Global
Repositories Financial
(in thousands) & Processors Services Other Total
- ------------------------------------------------------------------------------------------------------------
Six months ended March 31, 2001
Revenue $ 76,912 $ 50,572 $ 30,678 $ 158,162
=========== =========== =========== ==========
Operating income 23,681 5,070 2,193 30,944
Unallocated other income, net 2,236
----------
Income before income taxes $ 33,180
==========
Six months ended March 31, 2000
Revenue $ 75,091 $ 46,753 $ 21,550 $ 143,394
=========== =========== =========== ==========
Operating income $ 13,487 $ 3,896 $ 1,481 $ 18,864
Unallocated other income, net $ 1,716
----------
Income before income taxes $ 20,580
==========
Three months ended March 31, 2001
Revenue $ 39,599 $ 25,777 $ 15,696 $ 81,072
=========== =========== =========== ==========
Operating income $ 12,983 $ 2,837 $ 1,252 $ 17,072
Unallocated other income, net 1,088
----------
Income before income taxes $ 18,160
==========
Three months ended March 31, 2000
Revenue $ 39,189 $ 23,016 $ 11,095 $ 73,300
=========== =========== =========== ==========
Operating income $ 8,334 $ 1,975 $ 1,015 $ 11,324
Unallocated other income, net 850
----------
Income before income taxes $ 12,174
==========
Due to certain reclassifications, the operating income for the six months ended
March 31, for both 2001 and 2000 is different than the combination of the first
two quarters.
Note 6 Restructuring Charge
In October 1999, the Company announced the discontinuance of its Healthcare
Receivables Management System ("HRMS") product line, and as a result of exiting
this business, recorded a restructuring charge totaling $1,674,000 for the three
months ended December 31, 1999. The Company recorded a restructuring charge
totaling $988,000 related to a reduction in staff for the three months ended
March 31, 2000. The combined restructuring events totaled $2,662,000 for the six
months ended March 31, 2000. The Company's restructuring actions were completed
under the plan by June 30, 2000. At the fiscal year end of September 30, 2000,
the Company had an outstanding provision of $385,000 for restructuring charges
included under other accrued liabilities. Through the first six months ended
March 31, 2001, the Company made cash payments of $221,000 and wrote off
operating assets of $42,000, resulting in an outstanding provision of $122,000
included under other accrued liabilities at March 31, 2001.
-8-
The following table depicts the restructuring activity:
Payments to
Employees Write-Down of Payments on
Involuntarily Operating Assets Canceled
(in thousands) Terminated To Be Sold Contracts Total
- -----------------------------------------------------------------------------------------------------------------
Fiscal year 2000 provisions $ 1,827 $ 263 $ 833 $ 2,923
Cash payments (1,806) --- (633) (2,439)
Write-down of operating assets --- (99) --- (99)
----------- ---------- -------- ---------
Balance at September 30, 2000 21 164 200 385
Cash payments (21) --- (200) (221)
Write-down of operating assets --- (42) --- (42)
----------- ---------- -------- ---------
Balance at March 31, 2001 $ --- $ 122 $ --- $ 122
=========== ========== ======== =========
Note 7 Subsequent Event
On May 2, 2001, the Company announced a three-for-two stock split of its
outstanding shares of common stock. As a result of the stock split, shareholders
of record at the close of business on May 14, 2001 will receive an additional
share of common stock for every two shares owned. Additional shares resulting
from the split will be distributed on June 4, 2001, and cash will be paid in
lieu of fractional shares. The stock split will increase the number of shares
outstanding to approximately 22.2 million from 14.8 million.
-9-
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
Certain statements contained in this Report which are not statements of
historical fact constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act (the "Act"). In addition, certain
statements in our future filings with the Securities and Exchange Commission, in
press releases, and in oral and written statements made by or with our approval
which are not statements of historical fact constitute forward-looking
statements within the meaning of the Act. Examples of forward-looking statements
include, but are not limited to: (i) projections of revenue, income or loss,
earnings or loss per share, the payment or nonpayment of dividends, capital
structure and other financial items; (ii) statements of our plans and objectives
by our management or Board of Directors, including those relating to products or
services; (iii) statements of future economic performance; and (iv) statements
of assumptions underlying such statements. Words such as "believes,"
"anticipates," "expects," "intends," "targeted," and similar expressions are
intended to identify forward-looking statements but are not the exclusive means
of identifying such statements. Forward-looking statements involve risks and
uncertainties which may cause actual results to differ from those in such
statements. Factors that could cause actual results to differ from those
discussed in the forward-looking statements include, but are not limited to,
those described in the "Risk Factors" section of this discussion and analysis.
Such forward-looking statements speak only as of the date on which statements
are made, and we undertake no obligation to update any forward-looking statement
to reflect events or circumstances after the date on which such statement is
made to reflect the occurrence of unanticipated events or circumstances.
Business Overview
Fair, Isaac and Company, Incorporated is a global provider of analytics and
decision technology. In this Report, Fair, Isaac and Company, Incorporated is
referred to as "we," "our," and "the Company". We provide products and services
designed to help a variety of businesses use data to make faster, more
profitable decisions on their marketing, customers, operations and portfolios.
In fiscal 2000, we powered more than 12 billion decisions. Widely recognized for
our pioneering work in predictive technology, we develop, produce, market and
distribute advanced decision-making solutions to the financial services, retail,
telecommunications, e-business, insurance and other industries.
Our products include statistically derived, rule-based analytical tools;
software that automates strategy design and implementation; and consulting
services to help clients use and track the performance of those tools. We
provide a range of credit scoring and credit account management services to
credit bureaus and credit card processing agencies, as well as data processing
and database management services to businesses engaged in direct marketing
activities, many of which are in the financial services and insurance
industries.
-10-
RESULTS OF OPERATIONS
Revenues
Effective October 1, 2000, we reorganized the operating structure of our
business segments. As a result, we changed to a global segment reporting
structure to align closely with our internal management reporting of our
business operations. There are three reportable segments: Global Data
Repositories and Processors, Global Financial Services and Other, which are
described below:
o Global Data Repositories and Processors. This segment consists of our
former Alliance Products and Services products, expanded beyond the
United States and Canadian markets to include these products worldwide.
This segment includes our credit scoring services distributed through
major credit bureaus, including the three major credit bureaus in the
United States--Trans Union Corporation, Experian Information Solutions,
Inc. and Equifax Inc., our credit account management services which are
distributed through third-party bankcard processors worldwide, our
ScoreNet(R)services sold directly to credit grantors, our
PreScore(R)services and insurance bureau scores sold through credit
bureaus, and other related products. The majority of these services
generate revenues based on usage.
o Global Financial Services. This segment is comprised principally of the
former Targeting and Prospecting products (data processing, database
management services and Internet delivery services provided directly
for companies and organizations involved in direct marketing) on a
global basis, together with our Fair, Isaac MarketSmart Decision
System(TM), ClickPremium(TM), StrategyWare(R) and TRIAD(TM) products.
Our Fair, Isaac MarketSmart Decision System and ClickPremium products
are sold on a usage basis and the TRIAD and StrategyWare products are
generally sold to single users on a fixed-price basis. Other Global
Financial Services products are sold under a combination of fixed-fee
and usage-based pricing.
o Other. This segment covers Analytics, LiquidCredit Retail, and
Telecommunications on a worldwide basis. Analytics products include our
custom models, custom software and related consulting projects which
are sold directly to credit grantors and other businesses and are used
for screening lists of prospective customers, evaluating applicants for
credit or insurance and managing existing credit accounts. Our
LiquidCredit products are web-based products sold directly to credit
grantors which automate the processing of credit applications including
the implementation of our credit application scoring models. Retail
products include the Fair, Isaac MarketSmart Decision System provided
directly to companies and organizations in the retail market. Products
in the Other segment are priced in various ways. Other products
developed specifically for a single user such as our application and
behavior scoring models (also known as "Analytic Products,"
"scorecards" or "models") are generally sold on a fixed-price basis.
Software systems usually also have a component of ongoing maintenance
revenue, and LiquidCredit systems are sold under time or volume-based
pricing arrangements.
Comparative segment revenues, operating income, and related financial
information for the first half of fiscal 2001 and this quarter and the
corresponding periods in fiscal 2000 are set forth in Note 5 to the Consolidated
Financial Statements.
-11-
The following table displays (a) the percentage of revenues by segment and
(b) the percentage change in revenues from the prior fiscal year for the fiscal
periods indicated.
Percentage of Percentage of
Revenue Revenue
Six Months Ended Percentage Three Months Ended Percentage
March 31, Change March 31, Change
--------- ------ --------- ------
2001 2000 2001 2000
---- ---- ---- ----
Global Data Repositories
and Processors 49% 52% 2% 49% 54% 1%
Global Financial Services 32% 33% 8% 32% 31% 12%
Other 19% 15% 42% 19% 15% 41%
------ ------ ----- -----
Total Revenues 100% 100% 10% 100% 100% 11%
====== ====== ===== =====
The growth in Global Data Repositories and Processors revenues in the first
half of fiscal 2001 and the second quarter, compared to the same periods in the
prior fiscal year, was primarily due to increased revenues from services
provided through bankcard processors and the PreScore service, partially offset
by decreased revenues derived from the ScoreNet services. Revenues from services
provided through bankcard processors increased by approximately 15% in the first
half of the fiscal year and 7% in the second quarter compared to the same
periods in the prior fiscal year. We believe this increase in revenues is due to
increases in the number of accounts at these processors attributable to
increased outsourcing of processing services by banks. These increases were
partially offset by decreased revenues derived from risk scoring services at the
credit bureaus. The slight decline in revenues for risk scoring services at the
credit bureaus primarily reflects the inclusion in the first quarter of the
prior fiscal year of certain revenues on a one-time basis that related to past
periods.
Revenues derived from alliances with credit bureaus and credit card
processors have accounted for most of our revenue growth in the last three
years. For the first half of fiscal 2001, revenues produced through credit
bureaus decreased approximately 2% compared to the same period in fiscal 2000
and accounted for approximately 27% of revenues. Revenues from services produced
through credit bureaus increased 13% in fiscal 2000 and 14% in fiscal 1999, and
accounted for approximately 37% of revenues in fiscal 2000 and 36% in fiscal
1999. Revenues from services provided through bankcard processors also increased
in each of these years, primarily due to increases in the number of accounts at
each of the major processors.
While we have been successful in extending or renewing our agreements with
credit bureaus and credit card processors in the past, and believe we will
likely be able to do so in the future, the loss of one or more such alliances or
an adverse change in terms could have a material adverse effect on revenues and
operating margin. For the first half of fiscal 2001, revenues generated from our
alliances with Trans Union Corporation, Equifax, Inc. and Experian Information
Solutions, Inc. each accounted for approximately 8% to 9% of total revenues. In
fiscal 2000, Trans Union Corporation accounted for approximately 12% of our
revenues and Equifax, Inc., approximately 10%. Revenues generated through our
alliances with Equifax, Experian and Trans Union each accounted for
approximately 8% to 10% in fiscal 1999.
The increases in revenues in the first half of fiscal 2001 and the second
quarter derived from the Global Financial Services segment compared with the
same periods in fiscal 2000 were due primarily to increased sales of
StrategyWare products and sales of the new products, primarily MarketSmart and
ClickPremium products and Fair Isaac Decision System products, the decision
engine component of MarketSmart and ClickPremium products.
The Other segment includes Analytics and LiquidCredit products and products
sold to the Retail and Telecommunications industries. Increases in revenues for
the Other segment in the first half of fiscal 2001 and the second quarter
compared to the same periods in the prior fiscal year are primarily due to
increases in sales of the LiquidCredit product.
Total revenues derived from outside of the United States represented
approximately 19% of total revenues in the first half of fiscal 2001. Gains or
losses due to fluctuations in currency exchange rates have not been significant
-12-
to date but may become more important if, as expected, the proportion of our
revenues denominated in foreign currencies increases in the future.
Revenues from software maintenance and consulting services each accounted
for less than 10% of revenues in the first half of fiscal 2001 and the recent
quarter.
Expenses
The following table sets forth for the fiscal periods indicated (a) the
percentage of revenues represented by certain line items in our Consolidated
Statements of Income and Comprehensive Income and (b) the percentage change in
the percentage of revenues for each such line item from the prior fiscal year's.
Six Months Three Months
Ended Percentage Ended Percentage
March 31, Change March 31, Change
2001 2000 2001 2000
---- ---- ---- ----
Revenues 100% 100% N/A 100% 100% N/A
Costs and expenses:
Cost of revenues 46 42 9% 46 41 11%
Research and development 9 12 (21%) 9 10 (9%)
Sales, general and administrative 24 30 (19%) 23 31 (25%)
Amortization of intangibles 1 1 (9%) 1 1 (10%)
Restructuring Charge -- 2 N/A -- 1 N/A
---- ---- ---- -----
Total costs and expenses 80 87 (7%) 79 84 (7%)
---- ---- ---- -----
Income from operations 20 13 49% 21 16 36%
Other income and expense 1 1 18% 1 1 16%
---- ---- ---- -----
Income before income taxes 21 14 46% 22 17 35%
Provision for income taxes 9 6 46% 9 7 35%
---- ---- ---- -----
Net income 12% 8% 46% 13% 10% 35%
==== ==== ==== =====
Cost of revenues
Cost of revenues consists primarily of personnel directly involved in
creating revenue, travel and related overhead costs; costs of computer services;
and the amounts paid to credit bureaus for scores and related information in
connection with the ScoreNet Service. As compared with the same periods a year
earlier, the cost of revenues, as a percentage of revenues, increased in the
first half of fiscal 2001 and the second quarter primarily due to a more
complete allocation of costs related to revenue generation that were not
separately identified in the prior year.
Research and development
Research and development expenses include the personnel and related
overhead costs incurred in new and existing product development, researching
mathematical and statistical models and developing software aimed at improving
productivity, profitability and management control. Research and development
expenditures in the first half of fiscal 2001 and the second quarter, as a
percentage of revenues, were down as compared with the corresponding quarters of
fiscal 2000, due primarily to redeployment of research and development personnel
to support roles for our new products.
Sales, general and administrative
Sales, general and administrative expenses consist principally of employee
salaries and benefits, sales commissions, travel, overhead, advertising and
other promotional expenses, corporate facilities expenses, the costs
-13-
of administering certain benefit plans, legal expenses, business development,
the costs of operating administrative functions, such as finance and computer
information systems and compensation expenses for certain senior management. As
a percentage of revenues, these expenses for the first half of fiscal 2001 and
the current quarter decreased compared to the corresponding periods of fiscal
2000, due primarily to a more complete allocation of costs related to revenue
generation that were not separately identified in the prior year.
Amortization of intangibles
We are amortizing the intangible assets arising from various acquisitions
over periods ranging from four to fifteen years.
Restructuring charge
In October 1999, the Company announced the discontinuance of its Healthcare
Receivables Management System ("HRMS") product line, and as a result of exiting
this business, recorded a restructuring charge totaling $1,674,000 for the three
months ended December 31, 1999. The Company recorded a restructuring charge
totaling $988,000 related to a reduction in staff for the three months ended
March 31, 2000. The combined restructuring events totaled $2,662,000 for the six
months ended March 31, 2000. The Company's restructuring actions were completed
under the plan by June 30, 2000. At the fiscal year end of September 30, 2000,
the Company had an outstanding provision of $385,000 for restructuring charges
included under other accrued liabilities. Through the first six months ended
March 31, 2001, the Company made cash payments of $221,000 and wrote off
operating assets of $42,000, resulting in an outstanding provision of $122,000
included under other accrued liabilities at March 31, 2001.
Other income and expense
Other income and expense consists mainly of interest income from
investments, interest expense, exchange rate gains/losses from holding foreign
currencies in bank accounts, and other non-operating items. Other income, net
increased in the first half of fiscal 2001 and the second quarter compared with
the corresponding periods a year earlier, primarily due to an increase in
interest income from higher investment balances, partially offset by our share
of operating losses in an early stage development company accounted for using
the equity method.
Provision for income taxes
The Company's effective tax rate in the second quarter and the first half
of 2001 was 41.3%, unchanged as compared to the same periods in fiscal 2000.
Financial Condition
Working capital increased to $107,497,000 at March 31, 2001 from
$100,694,000 at September 30, 2000. Cash and marketable investments increased to
$95,480,000 at March 31, 2001 from $93,117,000 at September 30, 2000. The
Company's long-term obligations are mainly related to employee incentive and
benefit obligations.
In fiscal 1999, we initiated a stock repurchase program to purchase up to
one million shares of our common stock, to be funded by cash on hand. During the
first half of fiscal 2001, we repurchased approximately 425,000 shares at a cost
of $19.8 million. Since the program was initiated we have purchased a total of
785,000 shares at an aggregate cost of $32.1 million. We will continue to
evaluate opportunities to repurchase shares under the program.
We believe that our current cash and cash equivalents, short-term cash
investments and cash expected to be generated from operations will be sufficient
to meet our working capital, capital expenditure, and investment needs for both
the current fiscal year and the foreseeable future.
-14-
European Economic and Monetary Union (EMU)
Under the European Union's plan for Economic and Monetary Union (EMU), the
euro becomes the sole accounting currency of EMU countries on January 1, 2002.
Its initial phase went into effect on January 1, 1999, in 11 participating
countries: Austria, Belgium, Finland, France, Germany, Ireland, Italy,
Luxembourg, the Netherlands, Portugal and Spain. Greece was added as a
participating country on January 1, 2001. In this initial phase the EMU mandated
that key financial systems be able to triangulate conversion rates so that any
amount booked will be logged and processed simultaneously in both the local
currency and euros. We believe that our computer systems and programs are
euro-compliant and have experienced no material disruptions to date. We also
believe the conversion to the euro will not have a material impact on our
consolidated financial results.
Risk Factors
Our revenues are dependent, to a great extent, upon general economic conditions
and more particularly, upon conditions in the consumer credit and the financial
services industries.
The majority of our revenues are derived from sales to the consumer credit
industry. In addition, during the second quarter, approximately 32% of our
revenues were derived from financial services related products. A downturn in
the consumer credit industry or the financial services industry caused by
increases in interest rates or a tightening of credit, among other factors could
harm our results of operations. The revenue growth and profitability of our
business depends on the overall demand for our existing and new products. A
softening of demand for our decisioning solutions caused by a weakening of the
economy generally may result in decreased revenues or lower growth rates. In
particular, one of the challenges we face in promoting future growth in revenues
is the successful refocusing of our marketing and sales efforts to our new
initiatives. There can be no assurance that we will be able to effectively
promote future revenue growth in our business. Since 1990, while the rate of
account growth in the US bankcard industry has been slowing and many of our
largest institutional clients have merged and consolidated, we have generated
most of our revenue growth from our bankcard-related scoring and account
management business by cross-selling our products and services to large banks
and other credit issuers. As this industry continues to consolidate, we may have
fewer opportunities for revenue growth.
Quarterly operating results have varied significantly in the past and this
unpredictability will likely continue in the future.
Our revenues and operating results have varied significantly in the past.
We expect fluctuations in our operating results to continue for the foreseeable
future. Consequently, we believe that period-to-period comparisons of our
financial results should not be relied upon as an indication of future
performance. It is possible that in some future periods our operating results
may fall below the expectations of market analysts and investors, and in this
event the market price of our common stock would likely fall. Factors that
affect our revenues and operating results include the following:
o A decrease in demand from our existing customers, particularly within
our Global Data Repositories and Processor segment
o The lengthy sales cycle of many of our products
o Failure of our target markets and customers to accept our new products
o Our ability to successfully and timely develop, introduce and market
new products and product enhancements
o The timing of our new product announcements and introductions in
comparison with our competitors
o Changes in the level of our operating expenses
o Competitive conditions in the consumer credit industry
o Competitive conditions in the financial services industry
o Domestic and international economic conditions
o Changes in prevailing technologies
o Acquisition-related expenses and charges
o Timing of orders for and deliveries of certain software systems
-15-
o Increased operating expenses related to the development of products for
the Internet and
o Other factors unique to our product lines
With the exception of the cost of ScoreNet service data purchased by us,
most of our operating expenses are not affected by short-term fluctuations in
revenues; thus, short-term fluctuations in revenues may have a significant
impact on operating results.
Our ability to increase our revenues is highly dependent upon the introduction
of new products and services and if our products and services are not accepted
by the marketplace, our business may be harmed.
We have a significant share of the available market for our traditional
products and services, such as the products and services included in our Global
Data Repositories and Processors segment. To increase our revenues, we must
enhance and improve existing products and continue to introduce new products and
new versions of existing products that keep pace with technological
developments, satisfy increasingly sophisticated customer requirements and
achieve market acceptance. We believe much of our future growth prospects will
rest on our ability to expand into newer markets for our products and services,
such as direct marketing, insurance, small business lending, retail and
telecommunications. If our current or potential customers are not willing to
switch to or adopt our electronic commerce solutions, our growth and revenues
will be limited. The failure to generate a large customer base for our new
products would harm our ability to grow and increase revenues. This failure
could occur for several reasons. Some of our business-to-business electronic
commerce competitors charge their customers large fees upon the execution of
customer agreements. Businesses that have made substantial up-front payments to
our competitors for electronic commerce solutions may be reluctant to replace
their current solution and adopt our solution. As a result, our efforts to
create a larger customer base may be more difficult than expected even if we are
deemed to offer products and services superior to those of our competitors.
Further, because the business-to-business electronic commerce market is new and
underdeveloped, potential customers in this market may be confused or uncertain
about the relative merits of each electronic commerce solution or which
electronic commerce solution to adopt, if any. Confusion and uncertainty in the
marketplace may inhibit current or potential customers from adopting our
solution, which could harm our business, operating results and financial
condition.
There are significant risks associated with the introduction of new products.
Significant undetected errors or delays in new products or new versions of
a product, especially in the area of customer relationship management, may
affect market acceptance of our products and could harm our business, results of
operations or financial position. If we were to experience delays in the
commercialization and introduction of new or enhanced products, if customers
were to experience significant problems with the implementation and installation
of products, or if customers were dissatisfied with product functionality or
performance, our business, results of operations or financial position could be
harmed.
There can be no assurance that our new products will achieve significant
market acceptance or will generate significant revenue. Additional products that
we plan to directly or indirectly market in the future are in various stages of
development. We are expanding our technology into a number of new business areas
to foster long-term growth, including Internet/electronic commerce, online
business services and Internet computing. These areas are relatively new to our
product development and sales and marketing personnel. There is no assurance
that we will compete effectively or will generate significant revenues in these
new areas. The success of Internet computing and, in particular, our current
Internet computing software products is difficult to predict because Internet
computing represents a method of computing that is relatively new to the
computer industry. The successful introduction of Internet computing to the
market will depend in large measure on (i) the lower cost of ownership of
Internet computing relative to client/server architecture, (ii) the ease of use
and administration relative to client/server architecture, and (iii) the means
by which hardware and software vendors choose to compete in this market. There
can be no assurance that sufficient numbers of vendors will undertake this
commitment, that the market will accept Internet computing or that Internet
computing will generate significant revenues for us.
Failure to obtain data from our clients to update and re-develop or to create
new models could harm our business.
Updates of models and development of new and enhanced models depend to a
significant extent on availability
-16-
of statistically relevant data. Such data is usually obtained under agreements
with our clients. Refusals by clients to provide such data or to obtain
permission of their customers to provide such data, and privacy and data
protection restrictions, could result in loss of access to required data.
Our business and the business of our clients is subject to government regulation
and changes in regulation.
Our current and prospective clients, which primarily consist of credit
bureaus, credit card processors, state and federally chartered banks, savings
and loan associations, credit unions, consumer finance companies and other
consumer lenders, as well as customers in the industries that we may target in
the future, operate in markets that are subject to extensive and complex federal
and state regulations. While we may not be directly subject to such regulations,
our products and services must be designed to work within the extensive and
evolving regulatory constraints in which our clients operate and to meet our
client expectations with respect to handling data in conformity with applicable
data protection laws. These constraints include federal and state
truth-in-lending disclosure rules, state usury laws, the Equal Credit
Opportunity Act, the Fair Credit Reporting Act, the Community Reinvestment Act
and the Financial Services Modernization Act of 1999.
In September 1997, amendments to the federal Fair Credit Reporting Act
became law that expressly permit the use of credit bureau data to prescreen
consumers for offers of credit and insurance and allows affiliated companies to
share consumer information with each other subject to certain conditions. These
amendments impose a seven-year moratorium on new state legislation on certain
issues; however, score disclosure regulation by states is not pre-empted under
this legislation and the states remain free to regulate the use of credit bureau
data in connection with insurance underwriting.
On September 30, 2000, the Score Disclosure Statute was signed into law in
California and is the first legislation to require the disclosure of credit risk
scores. The Score Disclosure Statute becomes effective July 1, 2001, and imposes
significant new requirements on credit reporting agencies and residential
mortgage creditors and brokers to disclose credit risk scores. In addition,
there is a federal score disclosure bill pending, and other states may follow
California's lead and pass score disclosure legislation. In September 2000, we
initiated the FICO Guide(TM) service which delivers to lenders and brokers a
personalized explanation of the factors considered in a given consumer's FICO(R)
score, and suggestions on how to improve the score over time. In March 2001, we
launched, with Equifax, ScorePower(TM), an online score delivery service to
consumers that delivers our FICO(TM) credit risk score, with an explanation of
the score, how it is derived, and steps consumers can take to actively maintain
or improve their score over time.
We believe enacted or proposed state regulation of the insurance industry
has had some detrimental impact on our efforts to sell insurance risk scores
through credit reporting agencies. Examples of recent legislation include
legislation pending in Missouri that would prohibit sole use of credit
information in the issuance, renewal, and cancellation of policies covering
private passenger automobiles and a Connecticut law that will not allow use of
credit inquiries in a model used in insurance underwriting.
Providing an individual with control over what personal information a
business collects and uses is a growing, global trend. The recent Financial
Services Modernization Act of 1999 (Gramm-Leach-Bliley Act) includes several
privacy provisions and introduces new controls over the transfer and use of
individual data by financial institutions. Additional federal legislation is
proposed. In addition over 400 state privacy bills are pending. On the
International front, in the European Union (EU), the Data Protection Directive
(the "EU Directive") became effective October 1998 and places strict controls on
the collection, use and transfer of personal data. We have registered under the
EU Directive in the UK, pledging to meet the EU level of adequate protection for
personal data. We have another registration pending in Spain, and we are
evaluating the desirability of registering in other countries. We expect
increased costs of compliance with these regulations but such costs are not
expected to have a material impact on our results of operations or financial
condition.
Furthermore, some consumer groups have expressed concern regarding the
privacy and security of automated credit processing, the use of automated credit
scoring tools in credit underwriting and whether electronic lending is a
desirable technological development in light of the current level of consumer
debt.
-17-
The failure of our products and services to support customers' compliance
with current regulations and to address changes in customers' regulatory
environment, or our failure to comply with current regulations or adapt to
changes in regulatory environment, in an efficient and cost-effective manner,
could harm our business, results of operations and financial condition.
Our operations outside the United States subject us to unique risks that may
harm our results of operations.
A growing portion of our revenues is derived from international sales.
During the last fiscal year and the first half of fiscal 2001, we received
approximately 19% of our revenues from business outside the United States. As
part of our growth strategy, we plan to continue to pursue opportunities outside
the United States. Accordingly, our future operating results could be negatively
affected by a variety of factors, some of which are beyond our control. These
factors include:
o The general economic conditions in each country
o Incongruent tax structures
o Difficulty in managing an organization spread over various countries
o Compliance with a variety of foreign laws and regulations
o Import and export licensing requirements
o Trade restrictions and tariffs
o Longer payment cycles and
o Volatile exchange rates for foreign currencies
There can be no assurance that we will be able to successfully address each
of these challenges in the near term. Although some of our business is conducted
in currencies other than the US dollar, foreign currency translation gains and
losses are not currently material to our financial position, results of
operations or cash flows. However, an increase in our foreign revenues could
subject us to foreign currency translation risks in the future. We have found it
to be impractical to hedge all foreign currencies in which we conduct business.
As a result, we have experienced non-material foreign currency gains and losses
and may continue to do so.
If we do not recruit and retain qualified personnel, our business could be
harmed.
Our continued growth and success depend to a significant extent on the
continued service of our senior management and other key research, development,
sales and marketing personnel and the hiring of new qualified personnel.
Competition for highly skilled business, product development, technical and
other personnel is becoming more intense due to lower overall unemployment
rates, the dramatic increase in information technology spending and private
companies that can offer equity incentives that provide the potential for
greater compensation in connection with an initial public offering. Accordingly,
we expect to experience increased compensation costs that may not be offset
through either improved productivity or higher prices. There can be no assurance
that we will be successful in continually recruiting new personnel and in
retaining existing personnel. In general, we do not have long-term employment or
non-competition agreements with our employees. The loss of one or more key
employees or our inability to attract additional qualified employees or retain
other employees could harm our continued growth.
Over the long term, our rate of revenue growth is likely to be limited by
the rate at which we can recruit and absorb additional professional staff. We
believe this constraint will continue to exist indefinitely. At times we may
forego short-term revenue growth in order to devote limited resources to
opportunities that we believe have exceptional long-term potential. This is the
basis for our strategic focus of becoming an e-business company and implementing
new growth initiatives targeted at the retail and telecommunications markets.
We rely upon our proprietary technology rights and if we are unable to protect
them, our business could be harmed.
Because the protection of our proprietary technology is limited, our
proprietary technology could be used by others without our consent. Our success
depends, in part, upon our proprietary technology and other intellectual
property rights. To date, we have relied primarily on a combination of
copyright, patent, trade secret, and trademark laws, and nondisclosure and other
contractual restrictions on copying and distribution to protect our proprietary
-18-
technology. We have only twelve (12) patent applications filed and no issued
patents to date. We cannot assure you that our means of protecting our
intellectual property rights in the United States or abroad will be adequate or
that others, including our competitors, will not use our proprietary technology
without our consent. Furthermore, litigation may be necessary to enforce our
intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others, or to defend against
claims of infringement or invalidity. Such litigation could result in
substantial costs and diversion of resources and could harm our business,
operating results and financial condition.
We may be subject to possible infringement claims that could harm our business.
With recent developments in the law that permit patenting of business
methods, we expect that products in the industry segments in which we compete
will increasingly be subject to claims of patent infringement as the number of
products and competitors in our industry segments grow and the functionality of
products overlaps. In addition, we expect to receive more patent infringement
claims as companies increasingly seek to patent their software, also in light of
recent developments in the law that extend the ability to patent software.
Regardless of the merits, responding to any such claim could be time-consuming,
result in costly litigation and require us to enter into royalty and licensing
agreements which may not be offered or available on terms acceptable to us. If a
successful claim is made against us and we fail to develop or license a
substitute technology, our business, results of operations or financial position
could be harmed.
Security is important to our business, and breaches of security or the
perception that e-commerce is not secure could harm our business.
Internet-based, business-to-business electronic commerce requires the
secure transmission of confidential information over public networks. Security
breaches of networks on which netsourced products are used or well-publicized
security breaches affecting the Internet in general, could significantly harm
our business, operating results and financial condition. We cannot be certain
that advances in computer capabilities, new discoveries in the field of
cryptography, or other developments will not result in a compromise or breach of
the technology we use to protect content and transactions on the networks on
which the netsourced products and the proprietary information in our databases
are accessed. Anyone who is able to circumvent our security measures could
misappropriate proprietary, confidential customer information or cause
interruptions in our operations. We may be required to incur significant costs
to protect against security breaches or to alleviate problems caused by such
breaches. Further, a well-publicized compromise of security could deter people
from using the Internet to conduct transactions that involve transmitting
confidential information.
We are dependent upon major contracts with credit bureaus.
A substantial portion of our revenues is derived from contracts with the
three major credit bureaus with usual terms of five years or less. In the first
half of fiscal 2001, these contracts accounted for approximately 26% of our
revenues and in the first half of fiscal 2000, accounted for 30% of our
revenues. If we are unable to renew any of these contracts on the same or
similar terms with one or more of these credit bureaus, our revenues and results
of operations may be harmed.
We may incur risks related to acquisitions or significant investment in
businesses.
As part of our business strategy, we have made in the past and may make in
the future acquisitions of, or significant investments in, businesses that offer
complementary products, services and technologies. Although we do not currently
have plans to do so, any acquisitions or investments will be accompanied by the
risks commonly encountered in acquisitions of businesses. Such risks include,
among other things, the possibility that we will pay much more than the acquired
company or assets are worth, the difficulty of assimilating the operations and
personnel of the acquired businesses, the potential product liability associated
with the sale of the acquired company's products, the potential disruption of
our ongoing business, the distraction of management from our business, the
inability of management to maximize our financial and strategic position, the
maintenance of uniform standards, controls, procedures and policies and the
impairment of relationships with employees and clients as a result of any
integration of new management personnel. These factors could harm our business,
results of operations or financial position, particularly in the case of a
larger acquisition. Consideration paid for future acquisitions, if
-19-
any,could be in the form of cash, stock, rights to purchase stock or a
combination thereof. Dilution to existing stockholders and to earnings per share
may result in connection with any such future acquisitions.
Backlog orders may be cancelled or delayed.
There is no assurance that backlog will result in revenues. We believe that
increased revenue growth in fiscal 2001 and later years will depend to a
significant extent on sales of newly developed products.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Disclosures. The following discussion about our market risk
disclosures involves forward-looking statements. Actual results could differ
materially from those projected in the forward-looking statements. We are
exposed to market risk related to changes in interest rates, foreign currency
exchange rates and equity security price risk. We do not use derivative
financial instruments for speculative or trading purposes.
Interest Rate Sensitivity. We maintain an investment portfolio consisting
mainly of income securities with an average maturity of less than five years.
These available-for-sale securities are subject to interest rate risk and will
fall in value if market interest rates increase. We have the ability to hold our
fixed income investments until maturity, and therefore we would not expect our
operating results or cash flows to be affected to any significant degree by the
effect of a sudden change in market interest rates on its securities portfolio.
We believe foreign currency and equity risks are not material.
The following table presents the principal amounts and related
weighted-average yields for our fixed rate investment portfolio at March 31,
2001:
Cost Carrying Average
Basis Amounts Yield
Cash and cash equivalents:
U.S. government obligations $ 2,500 $ 2,500 6.17%
Money market funds 23,279 23,279 5.28%
------ ------
25,779 25,779 5.37%
------ ------
Short-term investments:
US government obligations 20,511 20,600 5.71%
Long-term investments:
US government obligations 39,558 39,912 5.33%
------ -------
Total $85,848 $86,291
======= =======
-20-
PART II - OTHER INFORMATION
ITEM 5. Other Information:
Effective May 1, 2001 Robert D. Sanderson resigned from our Board of
Directors. Mr. Sanderson joined the Board of Directors in March 1977.
On May 2, 2001, we announced a three-for-two stock split of our
outstanding shares of common stock. As a result of the stock split, shareholders
of record at the close of business on May 14, 2001 will receive an additional
share of our common stock for every two shares owned. Additional shares
resulting from the split will be distributed on June 4, 2001 and we will pay
cash in lieu of fractional shares. The stock split will increase the number of
shares outstanding to approximately 22.2 million from 14.8 million.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
3.1 Amended and Restated Bylaws
(b) Reports on Form 8-K:
No report on Form 8-K was filed during the quarter ended March 31, 2001.
-21-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FAIR, ISAAC AND COMPANY, INCORPORATED
DATE: May 14, 2001
By /s/ Henk J. Evenhuis
------------------------------------
Henk J. Evenhuis
Executive Vice President, Finance
and Chief Financial Officer
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EXHIBIT INDEX
TO FAIR, ISAAC AND COMPANY, INCORPORATED
REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2001
Exhibit No. Exhibit
3.1 Amendment to By-laws