UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
------------------
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
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
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value per share New York Stock Exchange, Inc.
Preferred Stock Purchase Rights New York Stock Exchange, Inc.
(Title of Class) (Name of each exchange on which
registered)
Securities registered pursuant to Section 12(g) of the Act:
None
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 __.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of November 30, 2001 the aggregate market value of the Registrant's
common stock held by nonaffiliates of the Registrant was $829,492,495 based on
the last transaction price as reported on the New York Stock Exchange. This
calculation does not reflect a determination that certain persons are affiliates
of the Registrant for any other purposes.
The number of shares of common stock outstanding on November 30, 2001 was
22,809,408 (excluding 942,512 shares held by the Company as treasury stock).
Items 10, 11, 12 and 13 of Part III incorporate information by reference
from the definitive proxy statement for the Annual Meeting of Stockholders to be
held on February 5, 2002.
TABLE OF CONTENTS
PART I
ITEM 1. Business.......................................................................... 3
ITEM 2. Properties........................................................................ 10
ITEM 3. Legal Proceedings................................................................. 10
ITEM 4. Submission of Matters to a Vote of the Security Holders........................... 10
EXECUTIVE OFFICERS OF THE REGISTRANT........................................................... 11
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters............. 13
ITEM 6. Selected Financial Data........................................................... 14
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.............................................................. 15
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk........................ 23
ITEM 8. Financial Statements and Supplementary Data....................................... 24
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure....................................................... 46
PART III
ITEM 10. Directors and Executive Officers of the Registrant................................ 47
ITEM 11. Executive Compensation............................................................ 47
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.................... 47
ITEM 13. Certain Relationships and Related Transactions ................................... 47
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................. 48
SIGNATURES .................................................................................. 52
Supplemental Information....................................................................... 53
2
Forward Looking Statements
Certain statements contained in this Report that are not statements of
historical fact constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act (the "Act"). In addition, certain
statements in our future filings with the Securities and Exchange Commission, in
press releases, and in oral and written statements made by us or with our
approval that 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 that 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 Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations-Risk Factors, below. 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. Readers should
carefully review the risk factors described in this and other documents the
Company files from time to time with the Securities and Exchange Commission,
including the Quarterly Reports on Form 10-Q to be filed by the Company in
fiscal year 2002.
PART I
ITEM 1. BUSINESS
GENERAL
Fair, Isaac and Company, Incorporated (NYSE: FIC) (the "Company", which may
be referred to as we, us or our) is the preeminent provider of creative
analytics that unlock value for people, businesses and industries. Our
predictive modeling, decision analysis, intelligence management and decision
engine systems power more than 14 billion decisions a year. Founded in 1956, we
help thousands of companies in over 60 countries acquire customers more
efficiently, increase customer value, reduce risk and credit losses, lower
operating expenses and enter new markets more profitably. Most leading banks and
credit card issuers rely on our analytic solutions, as do many insurers,
retailers, telecommunications providers and other customer-oriented companies.
Through the www.myFICO.com Web site, consumers use our FICO(R) scores, the
standard measure of credit risk, to understand and manage their credit risk
profile. Our home page on the Internet is at www.fairisaac.com. You can learn
more about us by visiting that site. The information on these Web sites is not
incorporated by reference into this Report.
As of October 1, 2000, we reorganized the operating structure of our
business into three reportable segments on a worldwide basis. Our segments
consist of the following: Global Data Repositories and Processors, Global
Financial Services and Other, which are described below. You can find financial
information with respect to our segments in Note 12 to the consolidated
financial statements.
Note that throughout this 2001 10-K report, we "incorporate by reference"
certain information from other documents filed with the Securities and Exchange
Commission (SEC). The SEC allows us to disclose important information by
incorporating by reference. Please refer to such information.
3
OUR PRODUCTS AND SERVICES
Fair, Isaac helps companies solve business problems related to customer
acquisition, customer management and business process management. Our solutions
automate and improve business strategies: the sequence of decisions and actions
a company takes to improve results. We help our clients:
o Increase sales and product or service utilization;
o Increase response to product offers;
o Increase customer value and loyalty;
o Reduce credit losses and fraud losses;
o Manage customer relationships across channels, product lines, and
organizational boundaries;
o Integrate their Web sites into their marketing and customer
management strategies;
o Reduce operating expenses;
o Make business decisions based on a comprehensive view of customers;
and
o Increase their return on customer relationship management
investments.
We operate and manage our three worldwide segments, Global Data
Repositories and Processors, Global Financial Services and Other, as strategic
business units. Products and services marketed by each of our business segments
are described below.
Global Data Repositories and Processors
In fiscal 2001, approximately 51% of our revenues were derived from our
Global Data Repositories and Processors products and services. Most of these
products and services generate revenues based on usage. The principal products
and services offered through our Global Data Repositories and Processors segment
include:
o Credit scoring services and insurance bureau scores distributed through
major credit bureaus, including our FICO scores sold through the three
major credit bureaus in the United States--TransUnion LLC, Experian
Information Solutions, Inc. and Equifax Inc.;
o Our credit account management services which are distributed through
third-party bankcard processors worldwide;
o Our ScoreNet(R)services sold directly to credit grantors;
o Our PreScore(R)services sold by us and delivered through credit bureaus;
and
o The Score Power(TM) service, offered jointly with Equifax, providing online
delivery of FICO scores directly to consumers, along with Equifax credit
reports and explanatory information to help consumers manage their credit.
Credit Scoring Services And Insurance Bureau Scores. Our FICO scores
include general risk scores, industry-specific risk scores, bankruptcy scores,
revenue scores, and attrition scores. Credit grantors using these services pay
the credit bureau based on usage, and the credit bureau shares these usage
revenues with us.
We provide scoring models to each of the three major credit bureaus in the
United States--TransUnion, Experian and Equifax--for calculating our proprietary
FICO scores. FICO scores are widely used by North American lenders managing
credit cards, installment loans, mortgage loans and other products. Customers of
the credit bureaus use the FICO scores derived from these models to prescreen
solicitation candidates, to evaluate applicants for new credit and to review
existing accounts.
In fiscal 2001 we introduced our new U.S. credit bureau product, NextGen
credit bureau risk scores, at Experian, making them available at all three major
credit bureaus. The NextGen risk scores are risk assessment tools designed to
rank-order consumer applicants, prospects and customers according to the
likelihood of future default on credit obligations. NextGen risk scores provide
a more refined risk assessment making them an alternative to the classic FICO
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risk scores. By using the NextGen risk scores, credit grantors in many
industries are able to more accurately and confidently design strategies for
prospects, applicants, and customers across the entire risk spectrum.
We have also developed scoring systems for insurance underwriters and
marketers. Such systems use the same underlying statistical technology as our
FICO risk scores but are designed to predict claim frequency or applicant
profitability for automobile or homeowners' coverage. Our insurance scores are
available through TransUnion, Experian, Equifax and Choicepoint, Inc.
Account Management Services at Credit Card Processors. We also provide
account management products and services through First Data Resources, Inc.
(FDR) and Total System Services, Inc. (TSYS), the two largest third-party credit
card processors in the United States. FDR and TSYS provide processing and
related services to financial institutions issuing credit cards and debit cards
and to issuers of private label cards. Our adaptive control system is recognized
as the "industry standard" by North American lenders in managing their credit
card accounts. Customers of the credit card processors can use the adaptive
control system products and services to reduce losses, increase profitability,
and improve customer service on their existing accounts. The adaptive control
system product offerings include behavior scoring, automated decision strategy
software, and a consulting service to help our clients enhance the value of
their customer relationships. Customers using our adaptive control system pay
the processors based on usage, and we share in these usage revenues.
PreScore Services. Our PreScore Service offered through credit bureaus
combines a license to use the technology that generates certain of our FICO
scores for prescreening solicitation candidates with tracking and our consulting
services. The service is generally priced on a usage basis and may include
time-based pricing for consulting. Clients of the service receive FICO scores
from a credit bureau or bureaus but pay us directly for the FICO scores.
ScoreNet Services. Our ScoreNet Service allows credit grantors to obtain
our credit bureau scores and related data on their existing accounts on a
regular basis and in a format convenient for use in their account management
system or for integration with the services of a credit card processor. We
obtain the data from the credit bureaus selected by each subscriber and deliver
it to the subscriber in a format compatible with the subscriber's account
management system.
Score Power Online FICO Score Delivery Service. In March 2001 we launched
the Score Power service jointly with Equifax. The Score Power service is the
online credit score delivery service for consumers that delivers Fair, Isaac's
FICO credit risk score. Consumers also receive their Equifax Credit Profile(TM)
(on which the FICO score is based) and a personalized analysis of the score that
includes suggestions for improving and maintaining it. This service represents a
nationwide first, providing consumers immediate, on-demand access to FICO scores
via the Internet. Our goal is to become the preeminent provider of online
consumer tools for managing personal credit.
Global Financial Services
Our Global Financial Services business segment serves our direct clients in
banking, credit and personal lines insurance worldwide. The principal products
and services offered to these clients directly by Fair, Isaac include:
o Fair, Isaac MarketSmart Decision System(R)("MarketSmart") products;
o StrategyWare(R)decision engine for credit account origination;
o TRIAD(TM)adaptive control systems for credit account management;
o Fair, Isaac Decision System(TM) products; and
o Strategy Science service.
Global Financial Services products are sold under a combination of
fixed-fee and usage-based pricing. MarketSmart and ClickPremium are sold on a
usage basis and the TRIAD and StrategyWare products are generally sold to single
users on a fixed-price basis. CLSO may be sold on a usage or fixed priced basis,
or a combination of these.
Fair, Isaac MarketSmart Decision System. Our MarketSmart Decision System is
a multi-channel, Web-enabled marketing solution with campaign management, data
warehousing, analytic and other capabilities. It helps financial
5
institutions, retailers and telecommunications companies determine where, when
and how to interact with their prospects and customers to build stronger
relationships.
StrategyWare Decision Engine. Our StrategyWare product is a comprehensive
and flexible decision strategy management software system that processes
decision requests by applying user-defined decision strategies and generates
decision responses with respect to processing applications for new credit
accounts.
TRIAD Adaptive Control System. Our TRIAD product is an adaptive control
system for account and customer management composed of behavior scoring models,
software, and account management strategies which address one or more aspects of
the management of a consumer credit or similar portfolio. TRIAD is used in
various markets including credit card, debit card, revolving credit, installment
lending, mail order, and retail, among others. We generally provide TRIAD for
customers with multi-year software maintenance, strategy design and evaluation,
and consulting services.
Fair, Isaac Decision System. Our Fair, Isaac Decision System allows Fair,
Isaac, its clients or partners to design and implement analytically-driven
strategies that can be executed in real time to consistently and automatically
make decisions that lead to improved business performance, such as improving
account management decisions on credit limit increase, customer pre-approval,
and collection strategy implementation.
Strategy Science Services. Strategy Science is our new line of existing and
anticipated product offerings for optimizing business strategy design. Strategy
Science brings an empirical approach to business strategy design through the use
of decision models and optimization technology that map mathematical
relationships between hundreds of variables that influence desired business
outcomes. In the third quarter of fiscal 2001, we introduced the first offering
in this product line, our Credit Line Strategy Optimization(TM) (CLSO) service.
CLSO helps credit card issuers improve account profitability through optimal
credit line assignments. In November 2001 we introduced the second offering in
this product line, Customer Acquisition Strategy Optimization service, designed
to assist credit card issuers in customer acquisition efforts.
Other
This segment includes our smaller business units, which are focused on
various offering types or vertical markets. All of these units have global
responsibility for the solutions they market. The principal products and
services marketed by units included in the Other segment are:
o Custom Analytics offerings;
o LiquidCredit(R)services;
o Retail market offerings; and
o Telecommunications product offerings.
Products and services in the Other segment are priced in various ways.
Products developed specifically for a single user, such as our custom
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.
MarketSmart products, marketed to retail and telecommunications clients, are
sold on a usage basis.
Custom Analytics. Custom analytic products include our custom models,
custom software and related consulting projects which are sold directly to
credit grantors and other businesses. These products are used for screening
lists of prospective customers, evaluating applicants for credit or insurance
and managing existing credit accounts.
LiquidCredit Service. LiquidCredit is a Web-based credit decisioning
service that enables click-and-mortar financial institutions, Internet financing
marketplaces and Web-based retailers to offer immediate credit to consumers and
small businesses at the point of contact. The LiquidCredit line has three
solutions:
o LiquidCredit application engine allows traditional Web-enabled credit
grantors to make instant credit decisions by providing complete credit
application processing capabilities for consumer and small business
credit products.
o LiquidCredit decision engine provides e-tailers, click-and-mortar
financial institutions and retailers with the ability to determine the
right product or products for a credit applicant based on that credit
grantor's product matching and decisioning criteria, so the applicant
receives a tailored selection of credit offers from the credit grantor.
6
o LiquidCredit broker engine delivers to Internet brokers and
e-marketmakers a tool that sits behind their own Web sites and matches
scored applicants to credit grantors' criteria, to present applicants
with a variety of credit options within minutes. Applicants receive a
list of credit offers with multiple terms, while participating lenders
receive exposure to additional borrowers.
Retail. Retail products include Fair, Isaac MarketSmart Decision System, as
well as data processing, database management services, Internet delivery
services, and custom analytics. These products are offered to retailers,
catalogers and manufacturers selling directly to consumers. Credit account
management solutions are offered to those merchandisers and catalogers that have
proprietary credit card programs or otherwise offer the direct financing of
merchandise to their customers. Fair, Isaac also offers its Fair, Isaac
MarketSmart Decision System solution, as well as the Fair, Isaac Decision
System, in the pharmaceuticals market to enable manufactures to manage their
increasing sophisticated DTC (direct to customer) marketing and patient
education programs. Our solutions are generally sold on a fixed price plus
maintenance basis; Fair, Isaac MarketSmart Decision System is sold on a usage
basis.
Telecommunications. Telecommunications offerings include end user product
solutions such as analytics, Decision System, and TRIAD. The associated
netsourced solution offerings are TelAdaptive and Fair, Isaac MarketSmart
Decision System for telecommunications. Our TelAdaptive solution is a
Web-delivered account management solution designed for collection of delinquent
accounts in the telecommunications service industry. The fundamental component
of TelAdaptive is TRIAD and is complemented with a sophisticated analytical data
warehouse.
CONSULTING
Consulting services are offered to our clients in the financial services,
insurance, retail and communications markets through our same three business
segments--Global Data Repositories and Processors, Global Financial Services and
Other. We generate revenues from analytics, custom applications, data
warehousing, integration, and risk management consulting services. We undertake
consulting engagements primarily with companies that are users of our analytics,
software and netsourced solutions, and with companies deemed to be attractive
prospective clients for those solutions. Consulting services include advising
clients on how to develop and implement sound analytic solutions, providing
expert analysis of model development and assisting with successful
implementation or repositioning of predictive modeling within the business for
greater effectiveness.
INTERNATIONAL
Our operations outside the United States are conducted primarily through
our subsidiaries, distributors and through distribution channel partners, and
are organized under the same business segments, Global Data Repositories and
Processors, Global Financial Services and Other, described above.
We have offices throughout the world to deliver products and services that
cover our core competencies in analytics, software and consulting. Our foreign
offices are primarily sales and customer service offices acting as agents on
behalf of the U. S. production operations. The information set forth under the
caption "Segment Information" in Note 12 to the Consolidated Financial
Statements is incorporated herein by reference. Net identifiable assets, capital
expenditures and depreciation associated with foreign offices are not material.
Revenues derived from clients outside the United States were $60.0 million
in fiscal 2001, $57.1 million in fiscal 2000 and $41.5 million in fiscal 1999.
In fiscal 1999, 2000 and 2001, the Canadian and European markets collectively
generated over half of our international revenues. Currently the principal
products marketed internationally are custom analytics, TRIAD, StrategyWare and
scoring models for account origination and account management. As noted above,
we establish and maintain alliance relationships through which our products,
chiefly scores and account management services are sold. These include
third-party credit card processors and credit bureaus.
MARKETS AND CUSTOMERS
We serve clients in multiple industries, including financial services,
insurance, retail, telecommunications and pharmaceuticals. We have more than
1,000 end-users of our products who purchase directly from us. These include
about 75 of the 100 largest banks in the United States; several of the largest
banks in Canada; approximately 40 banks in the United Kingdom; over 300
insurers; more than 70 retailers; seven oil companies; major travel and
entertainment card companies; and more than 40 finance companies. The scoring,
application processing and account management services offered through credit
bureaus and third-party processors extend usage of our technology to smaller
credit issuers.
We market our services to a wide variety of businesses engaged in direct
marketing. These include banks, insurance companies and retailers, among others.
Most of our Global Financial Services product revenues come from direct sales to
the end user of our services, but in some cases we act as a subcontractor to
others managing a particular project for the end user. We market our consumer
services to an estimated 190 million U.S. consumers whose credit relationships
are reported to the three major credit bureaus.
7
In fiscal 2001, TransUnion accounted for approximately 9% of our revenues;
Equifax, approximately 11%; and Experian, approximately 8%. In fiscal 2000,
TransUnion, Equifax, and Experian accounted for approximately 12%, 10% and 7% of
revenues, respectively.
The United Kingdom and Canada are our largest market segments outside the
United States. Mexico, South Africa, a number of countries in South America and
almost all of the Western European countries are represented in our user base.
We have delivered products to users in approximately 60 countries.
We are actively pursuing new users and markets for our products. We enjoy
good relations with the majority of our clients and a substantial portion of our
revenues is derived from repeat clients.
COMPETITION
Our competitors include scoring model builders, providers of credit reports
and credit scores, providers of automated application processing services, data
vendors, neural network developers and artificial intelligence system builders.
In-house analytic and systems developers are also a significant source of
competition for our products and services. We believe that none of our
competitors offer the same mix of products as we do, or have the same expertise
in predictive analytics. However certain competitors may have larger shares of
particular geographic or product markets.
We compete with both outside suppliers and in-house computer systems
departments for scoring business. Major competitors among outside suppliers of
scoring models include the three major credit bureaus. In the consumer market we
compete with companies that provide consumers with their credit reports, credit
scores other than FICO scores, and related monitoring and score analysis
services. Homestore.com, Inc. offers such services through several consumer Web
sites it maintains, including iPlace.com, consumerinfo.com, and Qspace.com.
Experian and TransUnion offer similar services through their Web sites. In
addition to offering similar services, TrueLink, Inc. provides a consolidated
credit report representing information from all three national credit reporting
agencies. Only Fair, Isaac and Equifax offer consumers access to their FICO
scores and associated services. FICO scores are used by the overwhelming
majority of financial institutions to make the credit decisions that impact
consumers and we believe that this provides us an advantage over our competition
in this market.
Both American Management Systems, Incorporated ("AMS") and Experian offer
products intended to perform some of the same functions as our TRIAD,
StrategyWare and LiquidCredit products and services. We believe that our
customers using these systems, in both custom end-user form and through
third-party processors, significantly outnumber users of the competing AMS and
Experian products. We believe that the principal factors affecting competition
in the market for LiquidCredit are the same as those affecting scoring models,
together with experience in developing computer software products. Competitors
in this area include outside computer service providers and in-house computer
systems departments. There are regional risk management, marketing, systems
integration, and data warehousing competitors that have recently emerged for
consulting services comparable to ours, but we believe that few offer the
comprehensive business and technical expertise found within our consulting
offerings.
Several companies provide data processing and database management services
in competition with our MarketSmart products, some of which are larger than us.
We believe the market for such services will continue to expand rapidly for the
foreseeable future. Competition in this area is based on price, service, and, in
some cases, the ability of the processor to perform specialized tasks. Principal
competitors in this area are Acxiom Corporation and Harte-Hanks Inc.
PRODUCT PROTECTION AND TRADEMARKS
We have generally relied upon the laws protecting trade secrets and upon
contractual non-disclosure safeguards and restrictions on transferability in our
client agreements to protect our software and proprietary interests in our
product methodology and know-how. We retain title to, and protect the suite of
models and software used to develop scoring models, as a trade secret. We also
claim copyright protection for certain proprietary software and documentation.
In addition, we are seeking to protect certain of our technologies through the
filing of patent applications due to favorable developments in the past few
years in the case law and Patent and Trademark Office Guidelines for
patentability of software, models and "methods of doing business." We do not
otherwise have patent protection for our proprietary software.
Despite our precautions, it may be possible for competitors or users to
copy or reproduce aspects of our software or to obtain information that we
regard as trade secrets. In addition, the laws of some foreign countries do not
protect proprietary rights to the same extent as do the laws of the United
States. Patents and other protections for our intellectual property are
important, but we believe our success and growth will depend principally on such
factors as the knowledge,
8
ability, experience and creative skills of our personnel, new products, frequent
product enhancements, and name recognition.
We have used, registered and/or applied to register certain trademarks and
service marks for our technologies, products and services.
RESEARCH AND DEVELOPMENT
At present we are concentrating our efforts on both new versions and next
generations of our decision engines, data management and analytics, and
cutting-edge work on Strategy Science optimization. In addition, we have ongoing
projects for improving our fundamental knowledge in the areas of both predictive
and decision technology.
We will continue to invest in research and product development that is
market-oriented and supports our focus areas. We believe that timely development
of new products and enhancements to our existing products is essential to
maintain our leadership position in our market and to address the increasingly
sophisticated needs of our clients. We anticipate that certain new products and
services will be developed internally but we have and may, based on timing and
cost considerations, acquire or license technology or software from third
parties when appropriate. The information set forth in the line entitled
"Research and development" in the Consolidated Statement of Income and the
information set forth under the caption "Software costs" in Note 1 to the
Consolidated Financial Statements is incorporated herein by reference.
PERSONNEL
As of September 30, 2001, we employed 1,470 persons worldwide. Of these,
606 full-time employees were located in our San Rafael offices and 516 full-time
employees in our offices in Arden Hills, Minnesota. None of our employees are
covered by a collective bargaining agreement and no work stoppages have been
experienced.
Information regarding our officers is included in "Executive Officers of
The Registrant" at the end of Part I of this report.
9
ITEM 2. PROPERTIES
Our properties consist primarily of leased office facilities for sales,
data processing, research and development, consulting and administrative
personnel. Our principal office is located in San Rafael, California,
approximately 15 miles north of San Francisco. We lease approximately 270,000
square feet of office space in four buildings at that location under leases
expiring in 2011 or later. We also lease approximately 5,000 square feet of
warehouse space in San Rafael for hardware operations and for storage under
month-to-month leases and have a 2,400 square foot telecommute center in
Petaluma, California.
Our leased properties also include
o Approximately 167,000 square feet of office and data processing space
in four buildings in Arden Hills, Minnesota, under leases expiring in
2005 or later.
o An aggregate of approximately 135,000 square feet of office space in
Baltimore, Maryland; Emeryville, California; Wilmington, Delaware; New
York City, New York; Atlanta, Georgia; Chicago, Illinois; Brookings,
South Dakota; Shoreview, Minnesota; Toronto, Ontario; Birmingham,
England; Tokyo, Japan; Paris, France; Sao Paulo, Brazil; Johannesburg,
South Africa; Madrid, Spain; Vienna, Austria; and Wiesbaden, Germany.
See Notes 4 and 11 in the Consolidated Financial Statements for information
regarding our obligations under leases. We believe that suitable additional
space will be available to accommodate future needs.
ITEM 3. LEGAL PROCEEDINGS
We are currently party to various legal proceedings arising in the ordinary
course of business. While the outcome of these proceedings and claims cannot be
predicted with certainty, we do not believe that the outcome of any of these
proceedings or claims will have a material adverse effect on our consolidated
financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers as of December 10, 2001 were as follows:
Name Positions Held Age
---- -------------- ---
Thomas G. Grudnowski President and Chief Executive Officer 51
since joining the Company in December
1999. Became a Director of the Company
in December 1999. Partner at Andersen
Consulting from 1983-1999. Joined
Andersen Consulting in 1972.
Chad L. Becker Vice President, Global Financial Services 33
since October 2000. Since joining the Company
in 1991, held various senior and executive
positions in the Company.
Jonathan R. Bond Vice President and Controller since joining 52
the Company in May 2000. Chief Financial
Officer of Altitude Software from August
1999 to May 2000. Chief Financial Officer
of Versata from March 1999 to August 1999.
Chief Financial Officer of Intrepid Systems
from September 1996 to December 1998.
Douglas O. Clare Vice President, Global Retail since October 34
2000. Joined the Company (DynaMark) in
1987 and was first named an officer in
February 2000.
Richard S. Deal Vice President, Human Resources since 34
joining the Company in January 2001.
Top HR role at Arcadia Financial, Ltd.
from 1998 to 2001. Managed HR function
for corporate trust and mortgage business
at U.S. Bancorp from 1993 to 1998.
Eric J. Educate Vice President, Worldwide Sales since July 49
2000. Vice President of Global Sales for
Imation Corporation, 1999-2000. Key sales
executive at EMC Corporation, 1997-1999.
Silicon Graphics, 1987-1997.
Henk J. Evenhuis Vice President and Chief Financial Officer 58
since joining the Company in October 1999.
Executive Vice President and Chief Financial
Officer of Lam Research Corporation 1987-
1998.
Andrea M. Fike Vice President and General Counsel since 41
February 2001. Senior Counsel from October
1999 to February 2001. Partner at Faegre &
Benson, LLP since January 1998. Associate
at Faegre & Benson from 1989 to 1998.
Michael A. Gandolfo Vice President, Global Telecom since joining 43
the Company in April 2000. Associate
Partner at Andersen Consulting from
1999 to 2000 and Worldwide Business
Development Director from 1996 to
1999.
11
Raffi M. Kassarjian Vice President and General Manager, Liquid 34
Credit since joining the Company in October
1999. Senior Manager at Andersen Consulting
from 1997-1999. Joined Andersen Consulting
in 1995.
W. Thomas McEnery Vice President, Strategic Marketing since 39
joining the Company in 2001. Group Director
at Fallon Worldwide from 1993 to 2001.
Daniel J. Mulvaney Vice President, Business Operations since 41
joining the Company in October 2001.
President and CEO, Mulvaney & Associates
from January through October 2001. COO,
North American Heritage Brands, Inc. in 2000.
CFO, Space Center, Inc. from 1994 to 1999.
Mark P. Pautsch Vice President and Chief Information Officer 45
since August 2000. Managing Partner for the
CIO Technology Services Organization of
Andersen Consulting. 21 years at Anderson
Consulting.
Larry E. Rosenberger Vice President, Research & Development/ 55
Analytics since December 1999. President
and Chief Executive Officer from March
1991 to December 1999. First named an
officer in 1983. A Director from 1983-1999.
Joined the Company in 1974.
Steven A. Sjoblad Vice President, Corporate Development since 52
joining the Company in May, 2001. Managing
Director and President of Fallon McElligott
from 1981 to 2001.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock began trading on the New York Stock Exchange as of May 6,
1996, under the symbol: FIC. Prior to that date, it was traded over-the-counter
on the NASDAQ Stock Market under the symbol: FICI. According to records of our
transfer agent, at November 30, 2001, we had 432 shareholders of record of our
common stock.
The high and low sales prices for our stock, based on the last sale, for
each full quarterly period within the two most recent fiscal years as reported
on the New York Stock Exchange are:
Fiscal 2000
High Low
---- ---
October 1 - December 31, 1999 $55.63 $28.00
January 1 - March 31, 2000 $55.38 $38.00
April 1 - June 30, 2000 $46.13 $36.56
July 1 - September 30, 2000 $51.13 $39.81
Fiscal 2001
High Low
---- ---
October 1 - December 31, 2000 $51.00 $38.19
January 1 - March 31, 2001 $65.55 $46.00
April 1 - June 30, 2001 $77.00 $51.30
July 1 - September 30, 2001 $69.90 $46.40
Dividends
We paid quarterly dividends of 2 cents per share or 8 cents per year during
the 1999, 2000 and 2001 fiscal years. There are no current plans to change the
amount of the cash dividends. On June 4, 2001, the Company effected a
three-for-two common stock dividend. Unless specifically noted, all stock
numbers in this Form 10-K report reflect this stock dividend.
13
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share data)
Fiscal years ended September 30, 2001 2000 1999 1998 1997
- --------------------------------------------- ------------- -------------- -------------- --------------- --------------
Revenues $329,148 $298,630 $277,041 $245,545 $199,009
Income from operations 72,107 44,614 46,375 40,432 37,756
Income before income taxes 76,853 47,070 50,600 42,105 35,546
Net income 46,112 27,631 29,980 24,327 20,686
Earnings per share:
Diluted $2.00 $1.26 $1.39 $1.12 $0.97
Basic $2.10 $1.29 $1.42 $1.18 $1.03
Dividends per share $.08 $ .08 $ .08 $ .08 $ .08
At September 30, 2001 2000 1999 1998 1997
- --------------------------------------------- ------------- -------------- -------------- --------------- --------------
Working capital $ 94,624 $100,694 $ 55,885 $ 54,852 $ 47,727
Total assets 317,013 241,288 210,353 189,614 145,228
Long-term capital lease obligations -- -- 364 789 1,183
Stockholders' equity 271,772 199,001 156,499 133,451 103,189
Due to certain reclassification of foreign exchange gain (loss) in
fiscal 2001, revenues of prior years are restated to conform to 2001
classification.
In May 2001, the Company's Board of Directors authorized a
three-for-two stock split effected in the form of a 50% stock dividend with cash
payment in lieu of fractional shares, payable on June 4, 2001 to holders of
common stock of the Company on record at the close of business on May 14, 2001.
All share and earnings per share amounts are restated.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues
Our reportable business segments consist of three segments on a worldwide
basis: Global Data Repositories and Processors, Global Financial Services and
Other. Comparative segment revenues, operating income, and related financial
information in fiscal 2001, 2000 and 1999 are set forth in Note 12 to the
Consolidated Financial Statements.
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. Prior year information has been reclassified to conform to
the current year financial presentation for comparability.
Percentage of Period-to-Period
Revenues Percentage
Years Ended Change
September 30, 2001 2000
------------ to to
2001 2000 1999 2000 1999
------ ------ ------- ------ -----
Global Data Repositories
And Processors 51% 50% 49% 11% 11%
Global Financial Services 29% 32% 30% - 14%
Other 20% 18% 21% 26% (10)%
------ ------ ------- ------ -----
Total Revenues 100% 100% 100% 10% 8%
====== ====== ======= ====== =====
The growth in revenues from the Global Data Repositories and Processors
segment in fiscal 2001 was primarily due to a strong demand for risk scoring
services at the credit bureaus. This growth was fueled in part by increased
marketing efforts of credit card issuers, a strong market for mortgage
re-financings and revenues from the Score Power service. Increased revenues from
services provided through bankcard processors and from our insurance bureau
scores at the credit bureaus also contributed to the growth of revenues in this
segment in fiscal 2001 compared to fiscal 2000. Similarly, in fiscal 2000 the
revenues of the Global Data Repositories segment increased primarily due to a
strong demand for risk scoring services at the credit bureaus, increased
revenues from services provided through bankcard processors and from our
insurance bureau scores at the credit bureaus. These increases were partially
offset by decreased revenues derived from the ScoreNet Service in fiscal 2000.
Revenues derived from alliances with credit bureaus and credit card
processors have accounted for most of our revenue growth in the last three
years. Revenues from services produced through credit bureaus increased 14% in
fiscal 2001, 13% in fiscal 2000 and 14% in fiscal 1999, and accounted for
approximately 38% of revenues in fiscal 2001, 37% 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. In fiscal 2001, revenues generated from our alliances with
TransUnion, Equifax, and Experian accounted for approximately 9%, 11% and 7% of
revenues, respectively. In fiscal 2000, TransUnion accounted for approximately
12% of our revenues; Equifax, approximately 10%; and Experian, approximately 7%.
TransUnion, Equifax, and Experian accounted for approximately 10%, 9% and 7% of
revenues, respectively, in fiscal 1999.
Revenues derived from the Global Financial Services segment in fiscal 2001
were essentially unchanged compared to fiscal 2000. Global Financial Services
revenues increased in fiscal 2000 compared with fiscal 1999 due principally to
increased sales of StrategyWare products and sales of Fair, Isaac MarketSmart,
ClickPremium and Fair, Isaac Decision System products.
The increase of 26% in the Other segment revenues in fiscal 2001 compared
to fiscal 2000 reflected growth in sales of all product categories in this
segment. Revenues from the LiquidCredit products grew strongly in 2001,
increasing 86%, and were the largest contributor to the overall increase in
revenues in this segment. In addition, revenues from Analytics products
increased 9%, Retail increased 3% and Telecommunication products increased 20%,
compared to fiscal 2000.
15
The decrease in Other segment revenues from fiscal 1999 to fiscal 2000 was
primarily due to the impact of bank consolidations and external marketing forces
related to the Year 2000 issue.
Cutting across all reportable segments, revenues derived from clients
outside the United States were $60.0 million in fiscal 2001, $57.1 million in
fiscal 2000 and $41.5 million in fiscal 1999. Increases in international
revenues in fiscal 2001 reflected growth in sales of products from the Other
segment, primarily Retail and Telecommunications products. In fiscal 2000,
increases were due primarily to increased sales of software products, including
TRIAD, increased usage of credit bureau scores and the number of accounts using
our account management services at credit card processors in Europe.
Fluctuations in currency exchange rates have not had a significant effect on
revenues to date. In October 2001 we initiated a hedging program to reduce our
exposure to fluctuations in certain foreign currency translation rates resulting
from holding net assets denominated in foreign currencies.
Revenues from consulting services were 11% of revenues in fiscal 2001 and
less than 10% of revenues in each of fiscal 2000 and 1999. Revenues from
software maintenance accounted for less than 10% of revenues in each of the
three years ended September 30, 2001. We do not expect revenues from software
maintenance to exceed 10% of revenues in the foreseeable future.
Costs and 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 amount of each such line item from the prior fiscal year.
Percentage of Period-to-period
revenues percentage change
-------------------------------------------------------
Years ended 2001 2000
September 30, to to
2001 2000 1999 2000 1999
- -----------------------------------------------------------------------------------------------
Revenues 100 100 100 10 8
Costs and expenses:
Cost of revenues 44 43 38 15 22
Research and development 9 10 11 (5) ---
Sales, general and administrative 24 30 33 (13) (4)
Amortization of intangibles 1 1 1 --- 16
Restructuring charge -- 1 -- (100) ---
--- ----- ---
Total costs and expenses 78 85 83 1 10
----- ----- -----
Income from operations 22 15 17 62 (4)
Other income, net 1 1 1 93 (42)
----- ----- -----
Income before income taxes 23 16 18 63 (7)
Provision for income taxes 9 7 7 58 (6)
----- ----- -----
Net income 14 9 11 67 (8)
===== ===== =====
Cost of revenues consists primarily of personnel directly involved in
creating, installing and supporting revenue products; travel and related
overhead costs; costs of computer service bureaus; and our payments made to
credit bureaus for scores and for related outside support in connection with the
ScoreNet Service.
Cost of revenues, as a percentage of revenues, increased in each of fiscal
2001 and 2000 over the prior fiscal year. In fiscal 2001, the increase was
primarily due to greater operating costs incurred for telecommunications
services, planning and compliance functions and software and consulting services
related to the North American market. In fiscal 2000, the increase was
principally due to costs related to the discontinued Healthcare Receivables
Management System (HRMS) line of business; increased revenues coming from Global
Financial Services products and services, all of which generally have a lower
gross margin than our other products and services; and an increase in personnel
costs because of a change in policy for accrued vacation and sick leave.
Research and development expenses include the personnel and related
overhead costs incurred in development, researching mathematical and statistical
models and developing software tools that are aimed at improving productivity,
profitability and management control.
Research and development expenses decreased in fiscal 2001 as a percentage
of revenues compared to the prior period, due primarily to the redeployment of
research and development personnel to support roles for our new products,
16
such as Strategy Science line including Credit Line Strategy Optimization. The
decrease in research and development expenses, as a percentage of revenues, in
fiscal 2000 was due principally to the redeployment of personnel to focus on
increasing netsourced delivery capacity for new software application products.
Sales, general and administrative expenses consist principally of employee
salaries and benefits, travel, overhead, advertising and other promotional
expenses, corporate facilities expenses, the costs of administering certain
benefit plans, legal expenses, business development expenses, and the cost of
operating the computer systems. As a percentage of revenues, sales, general and
administrative expenses for fiscal 2001 were lower in fiscal 2000, due primarily
to reductions in personnel costs, consulting costs, and travel expenses as a
result of our cost containment efforts. Sales, general and administrative
expenses for fiscal 2000, as a percentage of revenues, was lower in fiscal 1999,
due primarily to non-recurring consulting fees related to our reorganization
incurred in fiscal 1999.
We are amortizing the intangible assets arising from various acquisitions
over periods ranging from four to fifteen years. Also see Notes 1 and 5 to the
Consolidated Financial Statements for additional information.
In October 1999, the Company announced the discontinuance of its Healthcare
Receivables Management System product line, and as a result of exiting this
business, recorded a restructuring charge totaling $1,935,000 for the year ended
September 30, 2000. The Company further recorded a restructuring charge totaling
$988,000 related to a reduction in staff during fiscal year 2000. The Company's
restructuring actions were completed under the plan by June 30, 2000, and the
combined restructuring charges for fiscal year 2000 totaled $2,923,000, of which
$263,000 was related to write-down of operating assets. At September 30, 2000,
the Company had an outstanding provision of $385,000 for restructuring charges
included under other accrued liabilities. During fiscal year 2001, the Company
made cash payments of $221,000 and wrote off operating assets of $164,000,
leaving no outstanding provision at September 30, 2001. See Note 7 to the
Consolidated Financial Statements for additional information.
Other income, net
Other income, net consists mainly of interest income from investments,
interest expense, exchange rate gains/losses from holding foreign currencies in
bank accounts, and other non-operating items. At September 30, 2001, we had
approximately $141,000,000 invested in U.S. treasury securities and other
interest-bearing instruments. See Note 13 to the Consolidated Financial
Statements for additional information.
Interest income increased 41% in fiscal 2001 compared to fiscal 2000, and
increased 31% in fiscal 2000 compared to fiscal 1999. Interest income is derived
from the investment of funds in excess of our immediate operating requirements.
Interest income increased in both fiscal 2001 and 2000 due to higher average
cash balances in interest-bearing accounts and instruments. In fiscal 2001,
interest income was partially offset by our share of operating losses in an
early stage development company accounted for using the equity method, interest
expense and foreign currency losses.
In fiscal 1998, the Company entered into a lease arrangement to construct
an office complex located at Second and Lindaro Streets in downtown San Rafael
to accommodate future growth. During fiscal 2000, the Company decided not to
build out the site as planned following a five-month study of its options. Under
an agreement with the San Rafael City Government, the Company was released from
its obligation to occupy buildings on the site, and a real estate development
firm agreed to continue with the development of the site. As a result of the
transaction concluded in the fourth quarter of fiscal year 2000, the Company
recorded a loss of approximately $1.4 million in other income in fiscal 2000.
In fiscal 1999, we realized a one-time gain of $0.7 million due to the
curtailment of our pension plan, as described in Note 8 to the Consolidated
Financial Statements, and realized a gain of $483,000 from the sale of
marketable securities.
Provision for income taxes
Our effective tax rate was 40%, 41.3%, and 40.8% in fiscal 2001, 2000 and
1999, respectively. The decrease in fiscal 2001 compared to fiscal 2000 was due
primarily to revision of state tax rates to reflect increased activities in
states with lower tax rates. The increase to 41.3% in fiscal 2000 compared to
fiscal 1999 was due primarily to the increased goodwill amortization in fiscal
2000 resulting from the earnout paid to former stockholders of Credit Risk
Management Associates, a consulting company acquired in 1996.
17
Capital Resources and Liquidity
Working capital at September 30, 2001, September 30, 2000 and September 30,
1999 was $94,624,000, $100,694,000 and $55,885,000, respectively. The decrease
in working capital in fiscal 2001 was due primarily to decreases in cash and
cash equivalents, short-term investments, and increases in accrued compensation
and employee benefits, the total of which was more than offset by increases in
accounts receivable, unbilled work in progress, and prepaid expenses and other
current assets. The increase in fiscal 2000 was due primarily to increases in
cash and cash equivalents, a higher proportion of investments in short-term
investments, a lower accrual for compensation and employee benefits expenses,
and increases in accounts receivable and billings in excess of earned revenues.
Our exposure to collection risks is comprised of the sum of accounts
receivable plus unbilled work in progress, less billings in excess of earned
revenues. Changes in contract terms and product offerings, along with variations
in timing, may cause fluctuations in any or all of these items. Accounts
receivable at September 30, 2001 were 24% higher than at September 30, 2000,
primarily due to the resolution of usage fees on a large client account in the
last quarter of fiscal 2001; unbilled work-in-progress increased by 7%,
primarily due to the increase in revenues from Global Data Repositories and
Processors; and the total of billings in excess of earned revenue had only
minimal change. Comparing fiscal 2000 with 1999, increases in accounts
receivable by 15% and increases in billings in excess of earned revenues by 14%
were proportional, with minimal change in unbilled work in progress.
Our primary method for funding operations and growth has been cash flows
generated from operations and occasional lease financing. Net operating cash
flows in fiscal 2001 increased by $33,887,000 compared to fiscal 2000, primarily
due to an increase in net income and non-cash adjustments, partially offset by
net working capital changes. Net operating cash flows in fiscal 2000 decreased
by $5,832,000 compared to fiscal 1999, primarily due to a decrease in net
income, non-cash adjustment for deferred income tax, and net working capital
changes, partially offset by an increase in non-cash adjustments for
depreciation.
The $70,541,000 increase of net cash used in investing activities during
fiscal 2001 primarily reflected increased purchases of marketable securities and
a moderate increase in purchase of property and equipment. The $2,092,000
increase in investment activities spending during fiscal 2000 compared to 1999
was primarily due to the purchase of property and equipment. We expect to
continue to invest in capital and other assets to support our growth.
Our financing activities include principal payments for capital lease
obligations, proceeds from stock option exercises, share repurchases under the
Board-authorized program described below and dividend payments. The $2,965,000
increase of net cash provided by financing activities in fiscal 2001 was due
primarily to increased proceeds from stock option exercises and issuance of
treasury stock totaling $34,283,000, partially offset by higher stock
repurchases totaling $19,864,000. Net cash provided by financing activities in
fiscal 2000 was primarily attributable to proceeds of $11,329,000 received from
the exercise of stock options and the issuance of treasury stock partially
offset by principal payments for capital lease obligations and cash dividends.
The negative cash flows from financing activities in fiscal 1999 were due
primarily to stock repurchases and dividends paid, partially offset by proceeds
from the exercise of stock options and issuance of treasury stock.
Future cash flows will continue to be affected by operating results,
contractual billing terms and collections, investment decisions and dividend
payments, if any. At September 30, 2001, we had no significant capital
commitments other than those obligations described in Notes 4 and 11 to the
Consolidated Financial Statements.
On June 4, 2001, the Company effected a three-for-two stock split in the
form of a 50% stock dividend, with cash payments in lieu of fractional shares.
The cash payments in lieu of fractional shares totaled $49,000. All share
amounts have been restated to reflect the retroactive effect of the stock split.
In fiscal 1999, we initiated a stock repurchase program to purchase up to
1.5 million shares of our common stock, to be funded by cash on hand. During
fiscal 2001, we repurchased approximately 638,000 shares at a cost of $19.9
million. Since the program was initiated, we have purchased a total of 1,177,500
shares at an aggregate cost of $32.1 million. We expect to continue to evaluate
opportunities to repurchase shares under the program.
In the normal course of business we enter into leases for new or expanded
facilities in both domestic and global locations. We also evaluate, on an
ongoing basis, the merits of acquiring technology or businesses, or establishing
strategic relationships with or investing in these businesses. We may decide to
use cash and cash equivalents to fund such activities in the future. We believe
that the cash, cash equivalents and short-term investments will be adequate to
meet our capital and liquidity needs for both the current fiscal year and the
foreseeable future.
18
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.
The euro initially went into effect on January 1, 1999, and is now in 12
participating countries: Austria, Belgium, Finland, France, Greece, Germany,
Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. 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. Our costs associated with
compliance were not material and were expensed as they were incurred. 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 fiscal 2001, approximately 29% of our revenues
were derived from products in our Global Financial Services segment. A downturn
in the consumer credit industry or the financial services industry caused by
increases in interest rates or a tightening of credit, among other 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. 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 U.S.
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. For example, consolidation in the financial services industry could
change the demand for our products and services that support our clients'
customer acquisitions programs. There can be no assurance that we will be able
to effectively promote future revenue growth in our business. In addition,
recent terrorist attacks upon the U.S. have added (or exacerbated) economic,
political and other uncertainties, which could adversely affect the Company's
revenue growth.
Quarterly revenues and 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 period 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. In addition, 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. Factors that affect our revenues and operating results
include the following:
o Variability 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 Consumer dissatisfaction with, or problems caused by, the performance
of our personal credit management 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 The level of our operating expenses;
o Changes in competitive conditions in the consumer credit and financial
services industries;
o Fluctuations in domestic and international economic conditions;
o Acquisition-related expenses and charges;
o Timing of orders for and deliveries of certain software systems; and
o Other factors unique to our product lines.
19
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 continue to expand into newer markets for our products
and services, such as direct marketing, insurance, small business lending,
retail, telecommunications and our newest market, personal credit management. If
our current or potential customers are not willing to switch to or adopt our new
products and services, our revenues will be harmed.
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. 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 consumer services and the design of
business strategies using our new Strategy Science technology. 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.
Failure to obtain data from our clients to update and re-develop or to create
new models could harm our business.
Updates of models and development of new and enhanced models depend to a
significant extent on availability of statistically relevant data. Such data is
usually obtained under agreements with our clients. Refusals by clients to
provide such data or to obtain permission of their customers to provide such
data, and privacy and data protection restrictions, could result in loss of
access to required data. Any interruption of our supply of data could have a
material adverse effect on our business, financial condition or results of
operations.
Our business and the business of our clients are subject to government
regulation and changes in regulation.
Legislation and governmental regulation inform how our business is
conducted. Both our core businesses and our newer consumer initiatives are
affected by regulation. In both arenas, significant regulatory areas include:
federal and state regulation of consumer report data and consumer reporting
agencies, like the Fair Credit Reporting Act (the "FCRA"); regulation designed
to insure that lending practices are fair and non-discriminatory, like the Equal
Credit Opportunity Act; and privacy law, like provisions of the Financial
Services Modernization Act of 1999. A variety of other consumer protection laws
affect our business such as federal and state statutes governing the use of the
Internet and telemarketing. In addition, many foreign jurisdictions relevant to
our business have regulation in one or more of these general areas. For example,
in the European Union (EU) the Privacy Directive (Directive 95/46/EC) creates
minimum standards for the protection of personal data. In addition, some EU
member states have enacted protections, which go beyond the requirements of the
Privacy Directive.
In connection with our core business-to-business activities, these statutes
govern our operations directly to some degree. For example, the Financial
Services Modernization Act's restrictions on the use and transmittal of
nonpublic personal information govern some of our activities. However,
governmental regulation has a significant indirect effect on such activities
because such regulation influences our clients' expectations and needs vis-a-vis
our products and services. Our current and prospective clients' activities are
closely governed by the regulations outlined above and by other regulations. For
example, our clients include credit bureaus, credit card processors, state and
federally chartered banks, savings and loan associations, credit unions,
consumer finance companies, and other consumer lenders and insurers, all of
which are subject to extensive and complex federal and state regulations, and
often international regulations. The products and services we sell to such
clients must be appropriately designed to function in these regulated
industries. Moreover, industries we may target in the future may also be subject
to extensive regulations.
20
In connection with our Score Power service, many of the same regulations
are pertinent. In this arena, however, our activities are more directly affected
by regulation. For example, the Fair Credit Reporting Act governs when and how
we may deliver the Score Power service to consumers. The Financial Services
Modernization Act of 1999 requires us to make certain disclosure to consumers
regarding our collection and use of personal information and grants consumers
certain opt out rights. This type of regulation creates risk associated with
compliance, such as possible regulatory enforcement action.
Changes to existing regulation or legislation, or new regulation or
legislation, or more restrictive interpretation of existing regulation by
enforcement agencies, could harm our business, results of operations and
financial condition. Examples of possible regulatory developments that could
affect our business include restrictions on the sharing of information by
affiliated entities, narrowing of the permitted uses of consumer report data,
and mandates to provide credit scores to consumers. The permitted uses of
consumer report data in connection with certain customer acquisition efforts are
governed primarily by the FCRA. The relevant federal preemption provisions
effectively sunset in 2004. Unless extended, the sunset of preemption could lead
to greater state regulation, increasing the cost of customer acquisition
activity. Such state legislation could cause financial institutions to pursue
new strategies, negatively affecting the demand for our existing offerings.
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 fiscal 2001 and 2000, we received approximately 18% 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
arising out of international commerce, some of which are beyond our control.
These factors include:
o The general economic and political conditions in countries where we
sell our products and services;
o Incongruent tax structures;
o Difficulty in staffing and managing our organization's operations in
various countries;
o The effects of a variety of foreign laws and regulations;
o Import and export licensing requirements;
o Longer payment cycles;
o Currency fluctuations and changes in tariffs and other trade barriers;
and
o Difficulties and delays in translating products and related
documentation into foreign languages.
There can be no assurance that we will be able to successfully address each
of these challenges in the near term. Some of our business is conducted in
currencies other than the U.S. dollar. Foreign currency translation gains and
losses are not currently material to our financial position, results of
operations or cash flows. Foreign currency translation losses were $532,000 for
fiscal 2001 compared to $645,000 in fiscal 2000. An increase in our foreign
revenues could subject us to increased foreign currency translation risks in the
future.
If we do not recruit and retain qualified personnel, our business could be
harmed.
Our continued growth and success depend, to a significant extent, on the
continued service of our senior management and other highly qualified key
research, development, sales and marketing personnel and the hiring of new
qualified personnel. Competition for highly skilled business, product
development, technical and other personnel is intense. There can be no assurance
that we will be successful in continually recruiting new personnel and in
retaining existing personnel. In general, we do not have long-term employment or
non-competition agreements with our employees. The loss of one or more key
employees or our inability to attract additional qualified employees or retain
other employees could harm our revenues and results of operations.
We rely upon our proprietary technology rights and if we are unable to protect
them, our business could be harmed.
Because the protection of our proprietary technology is limited, our
proprietary technology could be used by others without our consent. Our success
depends, in part, upon our proprietary technology and other intellectual
property rights. To date, we have relied primarily on a combination of
copyright, patent, trade secret, and trademark laws, and nondisclosure and other
contractual restrictions on copying and distribution to protect our proprietary
technology. We 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
21
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. Similarly, we expect more software products will be subject
to patent infringement claims in light of recent developments in the law that
extend the ability to patent software. Regardless of the merits, responding to
any such claim made against us could be time-consuming, result in costly
litigation and require us to enter into royalty and licensing agreements on
terms unfavorable 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. Several of
our products, including our new personal credit management product, are accessed
through the Internet. Consumers using the Internet to access their personal
information will demand the secure transmission of such data. Security breaches
in connection with the delivery of our products and services, including our
netsourced products and Score Power service, 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 or on which the Score Power service is made available. Anyone who is
able to circumvent our security measures or the security measures of our
business partners 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 and businesses 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. These contracts, which normally have a term of five
years or less, accounted for approximately 38%, 37% and 36% of our revenues in
fiscal 2001, 2000 and 1999, respectively. If we are unable to renew any of these
contracts on the same or similar terms, our revenues and results of operations
would 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. 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 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, and the impairment of
relationships with employees and clients as a result of any integration of new
management personnel. These factors could harm our business, results of
operations or financial position, particularly in the case of a larger
acquisition. Consideration paid for future acquisitions, if any, could be in the
form of cash, stock, and 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 2002 and later years will depend to a
significant extent on sales of newly developed products.
22
ITEM 7A. 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 our securities portfolio. We believe
that our 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 September 30,
2001 and 2000:
September 30, 2001 September 30, 2000
------------------------------------- -------------------------------------
Cost Carrying Average Cost Carrying Average
(in thousands) Basis Amounts Yield Basis Amounts Yield
- ----------------------------------- ------------- ------------ ---------- ------------ ------------ ----------
Cash and cash equivalents $ 16,918 $ 16,918 2.87% $ 35,759 $ 35,759 6.70%
Short-term investments 13,800 13,800 2.57% 19,109 19,109 6.50%
Long-term investments 110,709 110,709 3.78% 27,600 27,600 6.40%
-------- -------- -------- --------
$141,427 $141,427 3.55% $ 82,468 $ 82,468 6.55%
======== ======== ======== ========
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report
The Board of Directors and Stockholders
Fair, Isaac and Company, Incorporated
We have audited the accompanying consolidated balance sheets of Fair, Isaac
and Company, Incorporated, and subsidiaries as of September 30, 2001 and 2000,
and the related consolidated statements of income and comprehensive income,
stockholders' equity and cash flows for each of the years in the three-year
period ended September 30, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Fair, Isaac
and Company, Incorporated, and subsidiaries as of September 30, 2001 and 2000,
and the results of their operations and their cash flows for each of the years
in the three-year period ended September 30, 2001, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
San Francisco, California
October 24, 2001, except as to note 17, which is as of December 17, 2001
24
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in thousands, except per share data and number of shares)
Years ended September 30, 2001 2000 1999
- -----------------------------------------------------------------------------------------------------
Revenues $ 329,148 $ 298,630 $ 277,041
Costs and expenses:
Cost of revenues 148,559 128,961 105,564
Research and development 28,321 29,817 29,720
Sales, general and administrative 78,061 90,215 93,569
Amortization of intangibles 2,100 2,100 1,813
Restructuring charge -- 2,923 --
------------ ------------ ------------
Total costs and expenses 257,041 254,016 230,666
------------ ------------ ------------
Income from operations 72,107 44,614 46,375
Other income, net 4,746 2,456 4,225
------------ ------------ ------------
Income before income taxes 76,853 47,070 50,600
Provision for income taxes 30,741 19,439 20,620
------------ ------------ ------------
Net income $ 46,112 $ 27,631 $ 29,980
============ ============ ============
Net Income
46,112 27,631 29,980
Othercomprehensive income (loss), net of tax:
Unrealized gains (losses) on investments:
Unrealized holding gains (losses)
arising during period 1,954 (84) (293)
Less: reclassification adjustment -- -- (281)
------------ ------------ ------------
Net unrealized gains (losses) 1,954 (84) (574)
Foreign currency translation adjustments 63 (389) (127)
------------ ------------ ------------
Other comprehensive income (loss) 2,017 (473) (701)
------------ ------------ ------------
Comprehensive income $ 48,129 $ 27,158 $ 29,279
============ ============ ============
Earnings per share:
Diluted $ 2.00 $ 1.26 $ 1.39
============ ============ ============
Basic $ 2.10 $ 1.29 $ 1.42
============ ============ ============
Shares used in computing earnings per share:
Diluted 23,059,000 21,952,000 21,594,000
============ ============ ============
Basic 21,986,000 21,390,000 21,109,000
============ ============ ============
See accompanying notes to the consolidated financial statements.
25
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, 2001 2000
- --------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 24,608 $ 39,506
Short-term investments 13,800 19,109
Accounts receivable, net of allowance ($2,514 in 2001 and $1,130 in 2000) 51,619 41,625
Unbilled work in progress 28,452 26,484
Prepaid expenses and other current assets 10,565 4,769
Deferred income taxes 5,217 5,719
--------- ---------
Total current assets 134,261 137,212
Investments 116,143 34,502
Property and equipment, net 49,383 48,565
Intangibles, net 6,530 8,630
Deferred income taxes 5,504 8,778
Other assets 5,192 3,601
--------- ---------
$ 317,013 $ 241,288
========= =========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,415 $ 1,606
Accrued compensation and employee benefits 18,233 15,581
Other accrued liabilities 9,959 8,863
Billings in excess of earned revenues 10,030 10,104
Capital lease obligations -- 364
--------- ---------
Total current liabilities 39,637 36,518
Long-term liabilities:
Accrued compensation and employee benefits 4,755 4,886
Other liabilities 849 883
--------- ---------
Total long-term liabilities 5,604 5,769
--------- ---------
Total liabilities 45,241 42,287
--------- ---------
Stockholders' equity:
Preferred stock ($0.01 par value; 1,000,000 authorized;
none issued and outstanding)
Common stock ($0.01 par value; 35,000,000 shares authorized; 23,253,218 and
22,196,766 shares issued, and 22,637,669 and 21,808,589 shares
outstanding at September 30, 2001 and
2000, respectively) 233 222
Paid in capital in excess of par value 95,875 52,269
Retained earnings 200,737 155,947
Less treasury stock, at cost (26,446) (8,793)
Accumulated other comprehensive income (loss) 1,373 (644)
--------- ---------
Total stockholders' equity 271,772 199,001
--------- ---------
$ 317,013 $ 241,288
========= =========
See accompanying notes to the consolidated financial statements.
26
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended September 30, 1999, 2000 and 2001 (in thousands)
- ---------------------------------------------------------------------------------------------------------------------------
Common stock Paid in Accumulated
------------------- capital in other Total
Par excess of Retained Treasury comprehensive stockholders'
Shares value par value earnings stock income (loss) equity
------ --------- --------- --------- --------- --------- ---------
Balance at September 30, 1998 20,973 $ 210 $ 32,454 $ 100,678 $ (351) $ 530 $ 133,451
Issuance of common stock 66 -- 1,455 -- -- -- 1,455
Vesting of restricted stock -- -- 17 -- -- -- 17
Exercise of stock options 416 5 3,203 (2) -- -- 3,206
Tax benefit of exercised
stock options -- -- 1,285 -- -- -- 1,285
Deferred compensation -- -- 255 -- -- -- 255
Repurchase of company stock (542) -- -- -- (12,232) -- (12,232)
Issuance of treasury stock 57 -- (382) -- 1,293 -- 911
Net income -- -- -- 29,980 -- -- 29,980
Dividends paid -- -- -- (1,128) -- -- (1,128)
Unrealized losses on investments -- -- -- -- -- (574) (574)
Cumulative translation adjustments -- -- -- -- -- (127) (127)
------ --------- --------- --------- --------- --------- ---------
Balance at September 30, 1999 20,970 215 38,287 129,458 (11,290) (171) 156,499
Exercise of stock options 726 7 11,229 (2) -- -- 11,234
Tax benefit of exercised
stock options -- -- 1,786 -- -- -- 1,786
Deferred compensation -- -- 870 -- -- -- 870
Repurchase of company stock -- -- -- -- (41) -- (41)
Issuance of treasury stock 113 -- 97 -- 2,538 -- 2,635
Net income -- -- -- 27,631 -- -- 27,631
Dividends paid -- -- -- (1,140) -- -- (1,140)
Unrealized losses on investments -- -- -- -- -- (84) (84)
Cumulative translation adjustments -- -- -- -- -- (389) (389)
------ --------- --------- --------- --------- --------- ---------
Balance at September 30, 2000 21,809 222 52,269 155,947 (8,793) (644) 199,001
Cash payment in lieu of fractional
shares -- -- (49) -- -- -- (49)
Exercise of stock options 1,385 11 34,234 -- -- -- 34,245
Tax benefit of exercised
stock options -- -- 8,449 -- -- -- 8,449
Deferred compensation -- -- 998 -- -- -- 998
Repurchase of company stock (638) -- -- -- (19,864) -- (19,864)
Issuance of treasury stock 82 -- (26) -- 2,211 -- 2,185
Net income -- -- -- 46,112 -- -- 46,112
Dividends paid -- -- -- (1,322) -- -- (1,322)
Unrealized gains on investments -- -- -- -- -- 1,954 1,954
Cumulative translation adjustments -- -- -- -- -- 63 63
------ --------- --------- --------- --------- --------- ---------
Balance at September 30, 2001 22,638 $ 233 $ 95,875 $ 200,737 $ (26,446) $ 1,373 $ 271,772
====== ========= ========= ========= ========= ========= =========
See accompanying notes to the consolidated financial statements.
27
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the years ended September 30, 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 46,112 $ 27,631 $ 29,980
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 25,074 21,461 17,431
Restructuring charge -- 2,923 --
Gain on sale of investments (54) -- (483)
Deferred compensation 998 870 255
Deferred income taxes 2,428 (2,487) (134)
Tax benefit from exercise of stock options 8,449 1,786 1,285
Other 1,334 376 223
Changes in operating assets and liabilities:
Accounts receivable (9,964) (5,805) 3,024
Unbilled work in progress (1,968) 375 (4,855)
Prepaid expenses and other assets (7,149) 1,857 (2,407)
Accounts payable 1,182 (1,707) (2,883)
Accrued compensation and employee benefits 4,668 (6,531) 3,140
Other accrued liabilities and other liabilities (497) (5,303) (3,128)
Billings in excess of earned revenues (74) 1,206 1,036
--------- --------- ---------
Net cash provided by operating activities 70,539 36,652 42,484
--------- --------- ---------
Cash flows from investing activities
Purchases of property and equipment (24,004) (22,595) (16,799)
Payments for acquisition of subsidiaries -- -- (1,454)
Purchases of investments (125,169) (14,432) (80,319)
Proceeds from sale of investments 27,083 -- 46,647
Proceeds from maturities of investments 23,969 9,447 26,437
--------- --------- ---------
Net cash used in investing activities (98,121) (27,580) (25,488)
--------- --------- ---------
Cash flows from financing activities
Principal payments of capital lease obligations (364) (429) (413)
Proceeds from the exercise of stock options and
issuance of treasury stock 34,283 11,329 3,250
Dividends paid (1,322) (1,140) (1,128)
Repurchase of company stock (19,864) (41) (12,232)
Cash paid in lieu of stock for stock-split (49) -- --
--------- --------- ---------
Net cash provided by (used in) financing
activities 12,684 9,719 (10,523)
--------- --------- ---------
(Decrease) increase in cash and cash equivalents (14,898) 18,791 6,473
Cash and cash equivalents, beginning of year 39,506 20,715 14,242
--------- --------- ---------
Cash and cash equivalents, end of year $ 24,608 $ 39,506 $ 20,715
========= ========= =========
See accompanying notes to the consolidated financial statements.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Summary of Significant Accounting Policies
Nature of business
Fair, Isaac and Company, Incorporated (the "Company") is incorporated under
the laws of the State of Delaware. The Company provides 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.
Our products include 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.
Basis of consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated from the consolidated financial statements.
Use of estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Reclassifications
Certain amounts in the financial statements and notes thereto have been
reclassified to conform to 2001 classifications.
Cash and cash equivalents
Cash and cash equivalents consist of cash in banks and investments with an
original maturity of 90 days or less at time of purchase.
Fair value of financial instruments
The fair values of cash and cash equivalents, accounts receivable and
accounts payable are approximately equal to their carrying amounts because of
the short-term maturity of these instruments. The fair values of the Company's
investments are disclosed in Note 3.
Investments
Investments in US government obligations and marketable equity securities
are classified as "available-for-sale" and are carried at market value. Other
investments are carried at the lower of cost or net realizable value.
Investments with remaining maturities over one year are classified as long-term
investments. Realized gains and losses are included in Other income, net. The
cost of investments sold is based on the specific identification method.
Credit and market risk
The Company invests a portion of its excess cash in U.S. government
obligations and has established guidelines relative to diversification and
maturities for maintaining safety and liquidity. In addition, an allowance for
doubtful accounts is maintained at a level which management believes is
sufficient to cover potential credit losses for accounts receivable.
29
Depreciation and amortization
Depreciation and amortization on property and equipment including
leasehold improvements and capitalized leases are provided using the
straight-line method over estimated useful lives ranging from three to seven
years or the term of the respective leases.
Intangibles
The intangible assets consisting of goodwill arose principally from
business acquisitions and are amortized on a straight-line basis over the
periods of expected benefit, which range from 4 to 15 years.
Revenue Recognition
The Company recognizes software revenue in accordance with the American
Institute of Certified Public Accountants' ("AICPA") Statement of Position 97-2
("SOP 97-2"), "Software Revenue Recognition" as modified by SOP 98-9. The
Company recognized other non-software revenue in accordance with the guidance
provided by SAB 101.
In most cases, the Company recognizes software license revenue upon
delivery, provided all significant obligations have been met, persuasive
evidence of an arrangement exists, fees are fixed and determinable, collections
are probable, and the Company is not involved in significant production,
customization, or modification of the software or services that are essential to
the functionality of the software.
If the arrangement involves (1) development of custom scoring systems or
(2) significant production, customization, or modification of software or
services essential to the functionality of the software, the revenue is
generally recognized under the percentage-of-completion method of contract
accounting. Progress toward completion is generally measured by achieving
certain standard and objectively verifiable milestones present in each project.
Revenues from multiple element arrangements are allocated to each element
based on the relative fair values of the elements. The determination of fair
value is based on objective evidence that is specific to the Company. If such
evidence of fair value for each element of the arrangement does not exist, all
revenue from the arrangement is deferred until such time that evidence of fair
value for each element does exist or until all elements of the arrangement are
delivered. If in a multiple element arrangement, fair value does not exist for
one or more of the delivered elements in the arrangement, but fair value does
exist for all of the undelivered elements, then the residual method of
accounting is applied. Under the residual method, the fair value of the
undelivered elements is deferred, and the remaining portion of the arrangement
fee is recognized as revenue.
Revenue determined by the percentage-of-completion method in excess of
contract billings is recorded as unbilled work in progress. Such amounts are
generally billable upon reaching certain performance milestones as defined by
individual contracts. Billings received in advance of performance under
contracts are recorded as billings in excess of earned revenues.
Revenues recognized from the Company's credit scoring, data processing,
data management, internet delivery services and consulting are generally
recognized as these services are performed, provided all significant obligations
have been met, persuasive evidence of an arrangement exists, fees are fixed and
determinable, and collections are probable.
Revenues from post-contract customer support, such as maintenance, are
recognized on a straight-line basis over the term of the contract.
Software costs
The Company may either create a detailed program design when introducing
new technology or a working model for the modification to existing technologies.
All costs incurred prior to the resolution of unproven functionality and
features, including new technologies, are expensed as research and development.
After the uncertainties have been tested and the development issues have been
resolved and technological feasibility is achieved, subsequent costs such as
coding, debugging and testing are capitalized. See Note 4 for further
discussion.
Income taxes
Income taxes are recognized during the year in which transactions enter
into the determination of financial statement income, with deferred taxes being
provided for temporary differences between amounts of assets and liabilities for
financial reporting purposes and such amounts as measured by tax laws.
30
Foreign currency
The Company has determined that the functional currency of each foreign
operation is the local currency. Assets and liabilities denominated in foreign
currencies are translated into US dollars at the exchange rate on the balance
sheet date, while revenues and expenses are translated at average rates of
exchange prevailing during the period. Translation adjustments are accumulated
as a separate component of stockholders' equity.
Earnings per share
Diluted earnings per share are based on the weighted-average number of
common shares outstanding and common stock equivalent shares. Common stock
equivalent shares result from the assumed exercise of outstanding stock options
that have a dilutive effect when applying the treasury stock method. Basic
earnings per share are computed on the basis of the weighted average number of
common stock shares outstanding.
Impairment of long-lived assets
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, Accounting for the Impairment of Long-lived Assets
and for Long-lived Assets To Be Disposed Of. This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to the future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Fair value is determined by discounting the estimated
future cash flow. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
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 No. 101 provides revenue recognition guidelines in
the absence of authoritative literature addressing a specific arrangement or a
specific industry. The Company implemented SAB 101 in its fourth quarter of
fiscal year 2001, which did not have any material impact on the Company's
consolidated financial position, results of operations or cash flows.
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting. It also specifies the types of acquired
intangible assets that are required to be recognized and reported separately
from goodwill. SFAS No. 142 requires that goodwill and certain intangibles with
indefinite lives are no longer amortized, but instead be tested for impairment
at least annually or more frequently if impairment circumstances arise. SFAS No.
142 is required to be applied starting with fiscal years beginning after
December 15, 2001, with early application permitted in certain circumstances.
The Company is currently evaluating the impact that the adoption of SFAS No. 142
will have on its financial position, and results of its operations. Annual
goodwill amortization was approximately $2,100,000 for fiscal years 2001 and
2000.
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations, which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The standard applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and (or) normal use of the asset. SFAS
No. 143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The fair value of the liability is added to
the carrying amount of the associated asset and this additional carrying amount
is depreciated over the life of the asset. The liability is accreted at the end
of each period through charges to operating expense. If the obligation is
settled for other than the carrying amount of the liability, the Company will
recognize a gain or loss on settlement. SFAS 143 is effective for fiscal years
beginning after June 15, 2002, and early application is encouraged. Beginning
with fiscal year 2002, the Company intends to adopt SFAS 143, and it believes
that the adoption of SFAS No. 143 will not have any material impact on the
Company's consolidated financial position, results of operations or cash flows.
In October 2001, the FASB issued SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 supersedes SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. The SFAS 144 establishes the accounting model for long-lived
assets to be disposed of by sale applies to all long-lived assets, including
discontinued operations, and replaces the provisions of APB opinion No. 30,
Reporting Results of Operations - Reporting the Effects of Disposal of a Segment
of a Business, for the disposal of segments of a business.
31
SFAS 144 is effective for fiscal years beginning after December 15, 2001, and
early application is encouraged. The Company believes that the adoption of SFAS
No. 144 will not have any material impact on the Company's consolidated
financial position, results of operations or cash flows.
2. Cash Flow Statement
Supplemental disclosure of cash flow information:
Years ended September 30,
-------------------------
(in thousands) 2001 2000 1999
- -------------------------------------------------------------------------------
Income tax payments $18,490 $17,518 $24,323
Interest paid 122 75 184
Non-cash investing and financing activities:
Issuance of treasury stock to ESOP and ESPP 2,147 $ -- $ 1,455
Reclassification of other assets to property and
Equipment -- 5,362 --
Assets acquired through capital lease financing -- 953 1,641
Purchase of CRMA with common/treasury stock -- -- 631
Contributions of treasury stock to ESOP and ESPP -- 2,820 236
Vesting of restricted stock -- -- 17
3. Investments
The following is a summary of available-for-sale debt and equity
securities and other investments at September 30, 2001 and 2000:
2001 2000
--------------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Amortized unrealized unrealized Fair Amortized unrealized unrealized Fair
(in thousands) cost gains losses Value cost gains losses Value
- ------------------------------------------------------------------------------------------------------------------------------
Short-term investments:
U.S. government
obligations $ 13,646 $ 154 $- $ 13,800 $ 19,168 $- $ (59) $ 19,109
========= ========= ========= ========= ========= ========= ========= =========
Long-term investments:
U.S. government
obligations 106,861 3,847 -- 110,708 28,159 -- (559) 27,600
Marketable equity
securities 5,088 -- (628) 4,460 5,219 691 -- 5,910
Other 975 -- -- 975 992 -- -- 992
--------- --------- --------- --------- --------- --------- --------- ---------
$ 112,924 $ 3,847 $ (628) $ 116,143 $ 34,370 $ 691 $ (559) $ 34,502
========= ========= ========= ========= ========= ========= ========= =========
The long-term US government obligations mature in one to five years.
The long-term marketable equity securities represent securities held under
a salary deferral plan for high salary employees, which are distributed upon
termination or retirement from the Company.
On June 1, 2000, the Company entered into a joint venture with
MarketSwitch Corporation (MKSW) to form a new limited liability company, which
was converted to a C Corporation during fiscal year 2001. The Company and MKSW,
being Class A Members, each hold a 50% voting interest in the joint venture and
agree to fund capital calls by the joint venture at an maximum of $2,000,000
each. The Company and MKSW each contributed $1,000,000 in
32
fiscal year 2000, and another $1,000,000 each during fiscal year 2001. The joint
venture adopted the calendar year as its fiscal year. The Company accounts for
the investment on an equity basis, and recorded its equity share of the
operating loss of the joint venture at approximately $854,000 and $70,000 in
Other income, net for the twelve-month periods ended September 30, 2001 and
2000, respectively. At September 30, 2001 the investment is valued at $1,076,000
and classified as long-term.
4. Property and Equipment
Property and equipment at September 30, 2001 and 2000, consist of the
following:
(in thousands) 2001 2000
- --------------------------------------------------------------------------------
Data processing equipment and software $ 89,166 $ 70,978
Office furniture, vehicles and equipment 21,649 20,812
Leasehold improvements 19,836 18,032
Capitalized leases 2,841 2,841
Less accumulated depreciation and amortization (84,109) (64,098)
-------- --------
Net property and equipment $ 49,383 $ 48,565
======== ========
When developing software using existing technology, the costs incurred
prior to completion of the product design are expensed. Upon completion of the
product design and with technological feasibility established, subsequent
expenses, including coding and testing, if any, are capitalized. The Company
capitalized approximately $2,910,000 and $2,775,000 of software costs for fiscal
years 2001 and 2000, respectively, which was included within data processing
equipment and software. Such capitalized costs are amortized over a two-year
period.
Total amount of depreciation and amortization charged to operations was
$22,972,000, $19,361,000, and $15,618,000 for fiscal years 2001, 2000 and 1999,
respectively, of which approximately $3,060,000, $301,000 and $0 were related to
the amortization of capitalized software costs for the respective fiscal years
of 2001, 2000 and 1999.
The Company had one capital lease bearing an interest rate of 7% that
matured in June 2001. Amortization of assets held under capital lease is
included with depreciation expense, and amounted to $237,000 and $2,604,000 for
the years ended 2001 and 2000, respectively. The amount of accumulated
amortization of the assets under capital lease was $2,841,000 and $2,604,000 at
September 30, 2001 and 2000, respectively.
5. Intangible Assets
Intangibles at September 30, 2001 and 2000, consist of the following:
(in thousands) 2000 2001
- --------------------------------------------------------------------------------
Goodwill $ 15,515 $15,515
Other 2,670 2,470
Less write-off of fully amortized other intangible asset (2,470) --
Less accumulated amortization (9,185) (9,355)
--------- --------
Net intangibles $ 6,530 $ 8,630
========= ========
Amortization charged to operations was $2,100,000, $2,100,000, and
$1,813,000 for the years ended September 30, 2001, 2000, and 1999, respectively.
33
6. Income Taxes
The provision for income taxes consists of the following:
Years ended September 30,
------------------------------------------------
(in thousands) 2001 2000 1999
- -------------------------------------------------------------------------------
Current:
Federal $ 22,638 $ 17,755 $ 16,832
State 5,310 3,954 3,695
Foreign 364 217 227
------------- -------------- --------------
28,312 21,926 20,754
------------- -------------- --------------
Deferred:
Federal 2,150 (2,188) (112)
State 279 (299) (22)
------------- -------------- --------------
2,429 (2,487) (134)
------------- -------------- --------------
$ 30,741 $ 19,439 $ 20,620
============= ============== ==============
Included in current tax expense is the tax benefit of stock option
deduction charged directly to additional paid-in capital.
Amounts for the current year are based upon estimates and assumptions as
of the date of this report and could vary significantly from amounts shown on
the tax returns as filed.
The tax effects of significant temporary differences resulting in deferred
tax assets and liabilities at September 30, 2001 and 2000 are as follows:
(in thousands) 2001 2000
- ----------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Depreciation and amortization $ 1,543 $ 5,515
Compensated absences 2,767 2,733
Employee benefit plans 1,838 1,766
State taxes 1,364 1,284
Customer advances 2,131 1,213
Deferred compensation 536 527
Bad debt provision 1,005 446
Other 1,136 1,257
------------------- ------------------
12,320 14,741
Less valuation allowance (222) (214)
------------------- ------------------
12,098 14,527
------------------- ------------------
Deferred tax liabilities:
Tax on net unrealized gains on available-for-sale
securities (1,376) (30)
------------------- ------------------
Deferred tax assets, net $ 10,722 $ 14,497
=================== ==================
Based upon the level of historical taxable income and projections for
future taxable income over the periods that the deferred tax assets are
deductible, management believes it is more likely than not the Company will
realize the benefits of these deductible differences, net of the existing
valuation allowances at September 30, 2001.
34
The reconciliation between the federal statutory income tax rate of 35%
and the Company's effective tax rate is shown below:
Years ended September 30,
--------------------------------------------------
(in thousands) 2001 2000 1999
-------------------------------------------------------------------------------------------------------------
Income tax provision at federal statutory rates $ 26,898 $ 16,475 $ 17,710
State income taxes, net of federal benefit 3,633 2,376 2,387
Increase (decrease) in valuation allowance 8 (196) (236)
Other 202 784 759
--------------- -------------- --------------
$ 30,741 $ 19,439 $ 20,620
=============== ============== ==============
7. 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 $1,935,000 for the year
ended September 30, 2000. The Company further recorded a restructuring charge
totaling $988,000 related to a reduction in staff during fiscal year 2000. The
Company's restructuring actions were completed under the plan by June 30, 2000,
and the combined restructuring charges for fiscal year 2000 totaled $2,923,000,
of which $263,000 was related to write-down of operating assets. At September
30, 2000, the Company had an outstanding provision of $385,000 for restructuring
charges included under other accrued liabilities. During fiscal year 2001, the
Company made cash payments of $221,000 and wrote off operating assets of
$164,000, leaving no outstanding provision at September 30, 2001.
The following table summarizes the restructuring activity for fiscal years
2000 and 2001:
Payments to Write-down
Employees of Operating Payments on
Involuntarily Assets Cancelled
(in thousands) Terminated to Be Sold Contracts Total
- ----------------------------------------------------------------------------------------------------------
Fiscal year 2000 provision $ 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 -- (164) -- (164)
------- ------- ------- -------
Balance at September 30, 2001 $ -- $ -- $ -- $ --
======= ======= ======= =======
8. Employee Benefit Plans
Pension plan
The Company had a defined benefit pension plan that covered eligible
full-time employees. The benefits were based on years of service and the
employee's compensation during employment. Contributions were intended to
provide for benefits attributed to service to date plus those expected to be
earned in the future.
In September 1999, the Company curtailed the pension plan so that no new
participants would be eligible for the plan, and no additional benefits would
accrue to participants after October 1, 1999. The curtailment resulted in a gain
of $720,000 in 1999. The pension plan was settled during fiscal year 2000 after
receiving governmental approval. At September 30, 2000, the plan's funding
status consisted of vested benefit obligation of $73,000 against a fair value of
plan assets at $64,000, resulting in an accrued pension cost of $9,000. During
October 2000, the Company made a contribution of $9,000 to settle the
outstanding vested benefit obligation.
35
The net pension cost for the fiscal year ended September 30, 2000 was
$104,000, which was comprised of interest cost on projected benefit obligation
of $666,000, reduced by actual return, and net amortization and deferral of
$257,000 and $305,000 on plan assets, respectively.
Employee stock ownership plan
The Company had an Employee Stock Ownership Plan (ESOP) that covered
eligible full-time employees. Contributions to the ESOP were determined annually
by the Company's Board of Directors. Effective October 1, 1999, the Company no
longer accepted new participants, and made no provisions for contributions to
the ESOP in fiscal years 2001 and 2000. Provisions for contributions to the ESOP
were $0, $0, and $1,585,000 for the years ended September 30, 2001, 2000, and
1999, respectively.
At September 30, 2001 and 2000, the ESOP held 730,000 and 646,000 shares
of Company stock, respectively. The amounts of dividends on ESOP shares were
$49,000, $58,000, and $67,000 for the years ended September 30, 2001, 2000, and
1999, respectively.
The Company is currently in the process of communicating to the Internal
Revenue Service and the participants its intent to terminate the ESOP and effect
distribution of the ESOP assets to its participants in January 2002.
Defined contribution plans
The Company offers 401(k) plans for eligible employees. Eligible employees
may contribute up to 15% of compensation or the statutory limit. The Company
also provides a matching contribution. The Company contributions to 401(k) plans
were $3,799,000, $3,618,000, and $1,357,000 for the years ended September 30,
2001, 2000, and 1999, respectively. Fair, Isaac merged the old Fair, Isaac
401(k) Plan and the old DynaMark 401(k) Plan during fiscal 2000 resulting in one
active plan that we are administering. Effective October 1, 1999, the 401(k)
plan does not require a minimum service period, and all Company matching
contributions will vest 100% immediately. Also, all Company contributions made
prior to October 1, 1999 vested 100% at October 1, 1999. Fair, Isaac is still
maintaining a legacy 401(k) Plan from the merger with RMT. This plan is frozen
and no additional contributions are being made to the plan.
The Company maintained a supplemental retirement and savings plan for
certain officers and senior management employees, to which the Company may make
contributions at its discretion. Company contributions to that plan were $0, $0,
and $298,000 for the years ended September 30, 2001, 2000 and 1999,
respectively.
Discretionary profit sharing plan
On October 1, 1999, the Company established a discretionary profit sharing
plan that covered eligible employees after six months of continuous employment.
Contributions to the plan are determined annually by the Company's Board of
Directors based on the Company's performance. Participants vest at varying rates
over a five-year period until fully vested. There were no contributions made to
this plan during fiscal years 2001 and 2000.
Officers' incentive plan
The Company had an executive compensation plan for the benefit of
officers. Benefits were payable based on the achievement of financial and
performance objectives set annually by the Board of Directors, and the market
value of the Company's stock. Total expenses under the plan were $0, $1,348,000,
and $1,391,000 for the years ended September 30, 2001, 2000, and 1999,
respectively. Fifty percent of the incentive earned each year will be paid in
that year, and the balance would be payable over a four-year period, subject to
certain adjustments, as defined in the plan, based on employment status and the
market value of the Company's common stock. The officers' incentive plan was
consolidated with the employee incentive plan during fiscal year 2000. At
September 30, 2001 and 2000, there were no long-term officers' incentive plan
payables.
Employee incentive plans
The Company has incentive plans for eligible employees not covered under
the officers' incentive plan. Awards under these plans were calculated and paid
annually for 1999 and 2000, and paid quarterly in 2001. Awards are based on the
achievement of certain financial and performance objectives. The officers'
incentive plan was consolidated with the employee incentive plan during fiscal
2000. Total expenses under the employee incentive plans were $4,841,000,
$1,661,000, and $8,263,000 for the years ended September 30, 2001, 2000, and
1999, respectively.
36
Employee Stock Purchase Plan
At the Company's Annual Meeting held on February 1, 2000, the shareholders
approved the adoption of the Company's 1999 Employee Stock Purchase Plan (the
Purchase Plan) which was unanimously adopted by the Board of Directors on
November 19, 1999. Under the Purchase Plan, the Company is authorized to issue
up to 1,500,000 shares of common stock to eligible employees of the Company and
its subsidiaries. Eligible employees can enter on the start date of any offering
period or on any subsequent semi-annual entry date. Employees may have up to 10%
of their base salary withheld through payroll deductions to purchase common
stock of the Company. The purchase price of the stock is the lower of 85% of 1)
the fair market value of the common stock on the enrollment date (the first day
of the next offering period) or 2) the fair market value on the exercise date
(the last day of each offering period). Offering period means approximately
six-month periods commencing (a) on the first trading day on or after January 1
and terminating on the last trading day in the following June, and (b) on the
first trading day on or after July 1 and terminating on the last trading day in
the following December.
A total of 67,429 and 22,283 shares of common stock with a weighted
average fair value of $31.63 and $37.40 per share were issued under the Purchase
Plan in fiscal year 2001 and 2000, respectively. With respect to the shares
issued during fiscal year 2001, 27,659 were issued prior to the stock-split
payable on June 4, 2001 (see Note 9 for details), and 39,770 were issued post
stock-split. The number of shares remaining available for issuance on June 4,
2001 was 1,450,058, which was adjusted to 2,175,087 to reflect the stock-split
in accordance with the terms of the Purchase Plan. At September 30, 2001,
2,135,317 shares remained available for issuance.
9. Common Stock
Common shares outstanding
A total of 943,152 and 388,177 shares of treasury stock were included in
the number of common shares outstanding at September 30, 2001 and 2000,
respectively.
Stock split
On May 1, 2001 the Company's Board of Directors authorized a three-for-two
stock split effected in the form of a 50% stock dividend with cash payment in
lieu of fractional shares, payable on June 4, 2001 to holders of common stock of
the Company on record on May 14, 2001 at the close of business. The par value of
the Company's common stock remains unchanged after the stock split. As a result
of the stock dividend, the accompanying consolidated financial statements
reflect an increase of 7,408,000 and 328,000 issued shares of common stock to
the existing stockholders and the treasury stock, respectively and the transfer
of the par value of the additional shares issued to the existing stockholders of
$74,000 from retained earnings, as well as cash payments totaling $49,000 in
lieu of 1,004 fractional shares from the paid-in capital. All share and per
share amounts are restated.
10. Stock Option Plans
The Company has a stock option plan approved by the stockholders for
granting stock options, stock appreciation rights, restricted stock and common
stock pursuant to which shares of common stock are reserved for issuance to
officers, key employees and non-employee directors. Under this plan, a number of
shares equal to 4% of the number of shares of the Company's common stock
outstanding on the last day of the preceding fiscal year is added to the shares
available under the plan each fiscal year, provided that the number of shares
for grants of incentive stock options for the remaining term of the plan shall
not exceed 1,500,000 shares (adjusted to 2,250,000 shares as a result of the
stock split announced by the Company during May 2001 in accordance with the
stock plan terms). Additionally the Company has individual stock option plans
for certain of its officers. The Company has elected to continue to apply the
provisions of APB No. 25, and provide the pro forma disclosures of SFAS No. 123,
"Accounting for Stock-Based Compensation." Granted awards generally have a
maximum term of ten years and vest over one to five years. The Company also has
a plan limited to the former employees of RMT, who, as of the merger date, held
unexpired and unexercised stock option grants under the RMT stock option plans.
Granted awards have a maximum term of ten years and vest over three years. The
total number of issuable shares under the plan is 650,800. As of September 30,
2001, there were no options outstanding under the RMT plan as all options were
either exercised or expired under the plan during fiscal year 2001.
During fiscal 2000, the Company granted 630,000 stock options to an
employee for which it recorded deferred compensation of $3,951,000. The deferred
compensation is being amortized on a straight-line basis over a 4-year vesting
period for which the Company recorded $998,000 and $831,000 in sales, general
and administrative expense during fiscal years ended September 30, 2001 and
2000, respectively.
37
The fair value of options at the date of grant was estimated using the
Black-Scholes model with the following weighted-average assumptions for the
years ended September 30:
Years ended September 30,
------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
Expected life (years) 5 5 5
Interest rate 5.1% 6.4% 5.3%
Volatility 49% 41% 42%
Dividend yield 0% 0% 0%
The following information regarding these option plans for the years ended
September 30 is as follows:
2001 2000 1999
----------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Option price Option price Option price
- -------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 4,398,000 $ 24.71 3,555,000 $ 22.14 2,694,000 $ 19.41
Granted 1,524,000 $ 38.04 2,288,000 $ 25.91 1,514,000 $ 23.59
Exercised (1,385,000) $ 24.73 (726,000) $ 15.47 (416,000) $ 7.69
Forfeited (256,000) $ 25.51 (719,000) $ 25.20 (237,000) $ 25.77
--------- --------- ---------
Outstanding at end of year 4,281,000 $ 29.40 4,398,000 $ 24.71 3,555,000 $ 22.14
========= ========= =========
Options exercisable at year end 926,000 $ 25.34 836,000 $ 23.86 921,000 $ 15.75
========= ========= =========
The weighted-average fair value of options granted for the years ended
September 30, 2001, 2000 and 1999, was $15.96, $11.82, and $10.50, respectively.
The following table summarizes information about significant fixed-price
stock option groups outstanding at September 30, 2001:
Options outstanding Options exercisable
-------------------------------------------------------------------------
Weighted-
average Weighted- Weighted-
remaining average average
Number Contractual exercise Number exercise
Outstanding Life price Outstanding price
- -----------------------------------------------------------------------------------------------------------------
$10.25 to $24.50 1,627,000 6.85 $ 22.50 353,000 $ 21.15
$24.63 to $28.13 1,139,000 6.73 $ 26.74 371,000 $ 25.75
$28.29 to $40.67 1,273,000 8.94 $ 36.62 202,000 $ 31.94
$46.28 to $64.75 242,000 9.52 $ 50.30 -- $ --
--------- -------
$10.25 to $64.75 4,281,000 7.59 $ 29.40 926,000 $ 25.34
========= =======
Stock-based compensation under SFAS No. 123 would have had the following
pro forma effects for the years ended September 30:
38
Years ended September 30,
----------------------------------
(in thousands except per share data) 2001 2000 1999
- --------------------------------------------------------------------------------
Net income, as reported $46,112 $27,631 $ 29,980
======= ======= ==========
Pro forma net income $33,573 $19,010 $ 25,440
======= ======= ==========
Earnings per share, as reported:
Diluted $ 2.00 $ 1.26 $ 1.39
======= ======= ==========
Basic $ 2.10 $ 1.29 $ 1.42
======= ======= ==========
Pro forma earnings per share:
Diluted $ 1.46 $ 0.87 $ 1.18
======= ======= ==========
Basic $ 1.53 $ 0.89 $ 1.21
======= ======= ==========
The pro forma effect on net income for each of the years ended September
30, 2001, 2000, and 1999, may not be representative of the effects on reported
net income in future years.
11. Commitments and Contingencies
The Company conducts certain of its operations in facilities occupied
under non-cancelable operating leases with lease terms in excess of one year.
The leases generally provide for annual increases based upon the Consumer Price
Index or fixed increments.
Minimum future rental commitments under operating leases are as follows:
Years ending September 30, (in thousands)
- -------------------------------------------------------------------------------
2002 $ 13,087
2003 12,976
2004 11,840
2005 11,539
2006 9,999
Thereafter 69,218
----------
$ 128,659
==========
Rent expense under operating leases, including month-to-month leases, was
$17,181,000, $9,135,000, and $9,161,000 for the years ended September 30, 2001,
2000 and 1999, respectively.
The Company entered into a fixed-price mainframe service contract in
excess of one year in August 2001. Commitments to such services are as follows:
Years ending September 30, in thousands)
- --------------------------------------------------------------------------------
2002 $ 12,498
2003 12,498
2004 12,498
2005 1,042
---------
$ 38,536
=========
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial condition.
39
12. Segment Information
Effective October 1, 2000, the Company reorganized its reportable
segments based on a combination of two factors: industry and product. The
reportable segments include Global Data Repositories & Processors (Alliance
products and services which previously were included in the North American
Financial Services and in Other International segments), Global Financial
Services (bank and insurance industries excluding Analytic and LiquidCredit
products, which was previously included in NetSourced Services and Other
International segments), and Other (an aggregation of Analytic products,
LiquidCredit products, the retail industry and telecommunications industry),
each of which represented less than 10% and in aggregate represented 20%, 18%
and 21% of the Company's total revenue for the years ended September 30, 2001,
2000 and 1999, respectively. Analytic and LiquidCredit products, included in the
"Other" segment, were previously in the North American Financial Services and
Other International segments and the retail industry and telecommunications
industry, also included in "Other", were previously included in the NetSourced
Services and Other International segments. Each of these segments are managed
and reported on separately within the organization.
Significant changes include classifying all related international
revenues and expenses within each reportable segment, separating Alliance
products from Analytic products and classifying segments by major industries or
products. The segment information for fiscal years 2000 and 1999 has been
restated to conform to the fiscal year 2001 presentation.
The Company's Chief Executive and Operating Officers evaluate segment
financial performance based on segment revenues and operating income. Operating
income is calculated as revenue less expenses such as personnel, facilities,
consulting and travel. Unallocated other income consists mainly of interest
income and net gain on sales of investments. The Company does not evaluate the
financial performance of each segment based on its assets or capital
expenditures.
Year ended September 30, 2001
-------------------------------------------
Global Data Global
Repositories Financial
(in thousands) & Processors Services Other Total
- --------------------------------------------------------------------------------
Revenues $167,284 $ 96,020 $ 65,844 $329,148
======== ======== ======== ========
Operating income $ 54,698 $ 10,075 $ 7,334 $ 72,107
======== ======== ========
Unallocated other income, net $ 4,746
--------
Income before income taxes $ 76,853
========
Depreciation and amortization $ 16,686 $ 3,683 $ 4,705 $ 25,074
======== ======== ======== ========
Year ended September 30, 2000
------------------------------------------
Global Data Global
Repositories Financial
(in thousands) & Processors Services Other Total
- --------------------------------------------------------------------------------
Revenues $150,129 $ 96,168 $ 52,333 $298,630
======== ======== ======== ========
Operating income $ 34,640 $ 6,571 $ 3,403 $ 44,614
======== ======== ========
Unallocated other income, net $ 2,456
--------
Income before income taxes $ 47,070
========
Depreciation and amortization $ 15,380 $ 3,502 $ 2,579 $ 21,461
======== ======== ======== ========
40
Year ended September 30, 1999
------------------------------------------
Global Data Global
Repositories Financial
(in thousands) & Processors Services Other Total
- --------------------------------------------------------------------------------
Revenues $134,889 $ 84,113 $ 58,039 $277,041
======== ======== ======== ========
Operating income $ 32,107 $ 6,304 $ 7,964 $ 46,375
======== ======== ========
Unallocated other income, net $ 4,225
--------
Income before income taxes $ 50,600
========
Depreciation and amortization $ 11,347 $ 2,684 $ 3,400 $ 17,431
======== ======== ======== ========
In addition, the Company's revenue and percentage of revenue by significant
specific product groups within each segment are as follows:
(in thousands)
Years ended September 30, 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------
Global Data Repository & Processors
Scoring Products $127,878 39% $112,675 37% $ 95,028 34%
Processor Products 34,800 11% 32,117 11% 23,826 9%
Other 4,606 1% 5,337 2% 16,035 6%
-------- --- -------- --- -------- ---
167,284 51% 150,129 50% 134,889 49%
-------- --- -------- --- -------- ---
Global Financial Services
Marketing Products 58,203 18% 56,342 19% 53,969 19%
Other 37,817 11% 39,826 13% 30,144 11%
-------- --- -------- --- -------- ---
96,020 29% 96,168 32% 84,113 30%
-------- --- -------- --- -------- ---
Other
Marketing Products 14,754 4% 14,971 5% 9,986 4%
Credit Products 16,446 5% 8,072 3% 9,397 3%
Other 34,644 11% 29,290 10% 38,656 14%
-------- --- -------- --- -------- ---
65,844 20% 52,333 18% 58,039 21%
-------- --- -------- --- -------- ---
$329,148 100% $298,630 100% $277,041 100%
======== === ======== === ======== ===
Significant customer information is as follows. Amounts not presented were
less than 10%.
Percent of Revenue
Years ended September 30,
------------------------------------------------
2001 2000 1999
- -----------------------------------------------------------------------------
Customer A -- 12% 10%
Customer B 11% 10% --
No geographic area other than the United States accounted for more than
10% of total revenue for fiscal years 2001, 2000, and 1999, and in aggregate
international revenues accounted for 18%, 19% and 15% of the Company's total
revenue for fiscal years 2001, 2000 and 1999, respectively.
41
13. Other Income, Net
Other income, net consists of the following:
Years ended September 30,
------------------------------
(in thousands) 2001 2000 1999
- --------------------------------------------------------------------------------
Interest income $ 5,785 $ 4,110 $ 3,145
Loss on termination of the development right of
the Lindaro property -- (1,373) --
Pension plan curtailment gain -- -- 720
Gain on sale of investments 54 -- 483
Share of loss on equity investments (855) (70) --
Interest expense (123) (75) (184)
Foreign currency loss (174) (122) (183)
Other 59 (14) 244
------- ------- -------
$ 4,746 $ 2,456 $ 4,225
======= ======= =======
In fiscal year 1998, the Company entered into a lease arrangement to
construct an office complex located at Second and Lindaro Streets in downtown
San Rafael to accommodate future growth. During fiscal 2000, the Company decided
not to build out the site as planned following a five-month study of its
options. Under a plan approved by the San Rafael City Government, the Company
was released from its obligation to occupy buildings on the site. As a result of
the transaction concluded in the fourth quarter of fiscal year 2000, the Company
recorded a loss of approximately $1,373,000 in other income in fiscal year 2000.
14. Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Income
(Loss) Balance
SFAS No. 130, "Reporting Comprehensive Income", establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in financial statements. SFAS No. 130 requires
classification of other comprehensive income (loss) in a financial statement and
display of accumulated other comprehensive income (loss) separately from
retained earnings and additional paid-in capital. Other comprehensive income
(loss) includes unrealized gains (losses) on investments and foreign currency
translation adjustments.
Supplemental disclosure of other comprehensive income (loss) information:
Year ended September 30, 2001
--------------------------------
Before-tax Tax Net-of-tax
(in thousands) amount amount amount
- --------------------------------------------------------------------------------
Unrealized gains on investments $3,300 $1,346 $1,954
Foreign currency translation adjustments 105 42 $ 63
------ ------ ------
Other comprehensive income $3,405 1,388 2,017
====== ====== ======
Year ended September 30, 2000
---------------------------------
Before-tax Tax Net-of-tax
(in thousands) amount amount amount
- --------------------------------------------------------------------------------
Unrealized losses on investments $(143) $ 59 $ (84)
Foreign currency translation adjustments (663) 274 (389)
----- ----- -----
Other comprehensive loss $(806) $ 333 $(473)
===== ===== =====
42
Year ended September 30, 1999
--------------------------------
Before-tax Tax Net-of-tax
(in thousands) amount amount amount
- --------------------------------------------------------------------------------
Unrealized losses on investments
Unrealized holding losses arising
during period $ (494) $ 201 $ (293)
Less: reclassification adjustment (474) 193 (281)
------- ------- -------
Net unrealized loss (968) 394 (574)
Foreign currency translation adjustments (214) 87 (127)
------- ------- -------
Other comprehensive loss $(1,182) $ 481 $ (701)
======= ======= =======
Supplemental disclosure of accumulated comprehensive income (loss)
balance:
Foreign Accumulated
Unrealized currency other
gains (losses) translation comprehensive
(in thousands) on investments adjustments income (loss)
- --------------------------------------------------------------------------------
Balance at September 30, 1999 $ 126 $ (297) $ (171)
Current period change (84) (389) (473)
------- ------- -------
Balance at September 30, 2000 42 (686) (644)
Current period change 1,954 63 2,017
------- ------- -------
Balance at September 30, 2001 1,996 (623) 1,373
======= ======= =======
15. Earnings Per Share
The following reconciles the numerators and denominators of diluted and
basic earnings per share (EPS):
Years ended September 30,
--------------------------------
(in thousands except per share data) 2001 2000 1999
- -------------------------------------------------------------------------------------------
Numerator - Net income $ 46,112 $ 27,631 $ 29,980
======== ======== ========
Denominator - Shares:
Diluted weighted-average shares 23,059 21,952 21,594
Effect of dilutive securities - employee stock options (1,073) (562) (485)
-------- -------- --------
Basic weighted-average shares 21,986 21,390 21,109
-------- -------- --------
Earnings per share
Diluted $ 2.00 $ 1.26 $ 1.39
======== ======== ========
Basic $ 2.10 $ 1.29 $ 1.42
======== ======== ========
The computation of diluted EPS for the years ended September 30, 2001,
2000, and 1999, respectively, excludes stock options to purchase 76,000,
189,000, and 813,000 shares of common stock. The shares were excluded because
the exercise prices for the options were greater than the respective average
market prices of the common shares and their inclusion would be antidilutive.
43
16. Related Party Transaction
In June 2001, the Company signed a consulting service agreement with
Cherry Tree Development (CTD), under which CTD provides consulting services to
the Company at a service fee of $30,000 plus reimbursement of $3,000 for normal
business expenses each month for a term of six months. Tony J. Christianson, a
director of the Company, has a 50% beneficial equity interest in CTD. During
fiscal 2001, the Company recorded $159,000 in sales, general and administrative
expenses related to the aforementioned agreement.
17. Subsequent Event
On December 11, 2001, the Company announced that it was acquiring
substantially all of the assets of Nykamp Consulting Group, Inc. (Nykamp), a
privately held company. Nykamp provides customer relationship management
strategy and implementation services. The agreement was signed on December 10,
2001 and the acquisition was effective on December 17, 2001. Under the
acquisition agreement, the Company will pay total consideration of approximately
$5.8 million over the next three years. The assets acquired and liabilities
assumed will be recorded at estimated fair values as determined by the Company's
management based on information currently available and on current assumptions
as to future operations.
18. Supplementary Financial Data (Unaudited)
The following table presents selected unaudited consolidated financial
results for each of the eight quarters in the two-year period ended September
30, 2001. In the Company's opinion, this unaudited information has been prepared
on the same basis as the audited information and includes all adjustments
(consisting of only normal recurring adjustments) necessary for a fair statement
of the consolidated financial information for the period presented.
Dec. 31, Mar. 31, Jun. 30, Sept. 30,
(in thousands, except per share data) 2000 2001 2001 2001
- --------------------------------------------------------------------------------------
Revenues $77,123 $81,331 $84,233 $86,461
Cost of revenues 35,265 37,458 37,991 37,845
------- ------- ------- -------
Gross profit $41,858 $43,873 $46,242 $48,616
======= ======= ======= =======
Net income $ 8,817 $10,659 $12,352 $14,284
======= ======= ======= =======
Earnings per share:
Diluted $ 0.40 $ 0.47 $ 0.53 $ 0.60
======= ======= ======= =======
Basic $ 0.40 $ 0.49 $ 0.56 $ 0.65
======= ======= ======= =======
Shares used in computing earnings per share:
Diluted 22,168 22,444 23,304 23,862
======= ======= ======= =======
Basic 21,801 21,544 22,128 22,465
======= ======= ======= =======
44
Dec. 31, Mar. 31, Jun. 30, Sept. 30,
(in thousands, except per share data) 1999 2000 2000 2000
- ---------------------------------------------------------------------------------------
Revenue $70,251 $73,393 $76,140 $78,846
Cost of revenues 29,937 30,381 34,104 34,539
------- ------- ------- -------
Gross profit $40,314 $43,012 $42,036 $44,307
======= ======= ======= =======
Net income $ 4,934 $ 7,147 $ 7,712 $ 7,838
======= ======= ======= =======
Earnings per share:
Diluted $ 0.23 $ 0.32 $ 0.35 $ 0.36
======= ======= ======= =======
Basic $ 0.23 $ 0.34 $ 0.36 $ 0.36
======= ======= ======= =======
Shares used in computing earnings per share:
Diluted 21,587 22,020 21,902 22,275
======= ======= ======= =======
Basic 21,042 21,321 21,507 21,689
======= ======= ======= =======
During the fourth quarter of fiscal 2001, the Company recognized $6.2
million of revenue related to the resolution of usage fees on a large client
account. The cost of sales related to this revenue was insignificant.
45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not Applicable.
46
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The required information regarding our Directors is incorporated by
reference from the information under the caption "Election of Directors -
Nominees" in our definitive proxy statement for the Annual Meeting of
Stockholders to be held on February 5 2002.
The required information regarding our Executive Officers is contained in
Part I of this Form 10-K.
The required information regarding compliance with Section 16(a) of the
Securities Exchange Act is incorporated by reference from the information under
the caption "Section 16(a) Beneficial Ownership Reporting Employer Compliance"
in our definitive proxy statement for the Annual Meeting of Stockholders to be
held on February 5, 2002.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the information under the captions
"Directors Compensation," "Executive Compensation," "Compensation Committee
Interlocks and Insider Participation," and "Certain Relationships And Related
Transactions" in our definitive proxy statement for the Annual Meeting of
Stockholders to be held on February 5, 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the information under the caption "Security
Ownership Of Certain Beneficial Owners And Management" in our definitive proxy
statement for the Annual Meeting of Stockholders to be held on February 5, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the information under the captions "Certain
Relationships And Related Transactions" and "Compensation Committee Interlocks
and Insider Participation" in our definitive proxy statement for the Annual
Meeting of Stockholders to be held on February 5, 2002.
47
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Reference Page
Form 10-K
(a) 1. Consolidated financial statements:
Independent Auditors' Report................................................. 24
Consolidated statements of income and comprehensive income for each
of the years in the three-year period ended September 30, 2001.......... 25
Consolidated balance sheets at September 30, 2001 and
September 30, 2000...................................................... 26
Consolidated statements of stockholders' equity for each of the
years in the three-year period ended September 30, 2001................. 27
Consolidated statements of cash flows for each of the
years in the three-year period ended September 30, 2001................. 28
Notes to consolidated financial statements................................... 29
2. Financial statement schedule:
Independent Auditors' Report on Financial Statement Schedule....................... 53
Schedule II Valuation and qualifying accounts at September 30, 2001, 2000 and 1999 54
3. Exhibits:
2.1 Rights Agreement dated as of August 8, 2001 between Fair,
Isaac and Company, Incorporated and Mellon Investor Services
LLC, which includes as Exhibit B the form of Rights
Certificate and as Exhibit C the Summary of Rights.
(Incorporated by reference to Exhibit 4.1 of the Company's
Registration Statement on Form 8-A relating to the Series A
Participating Preferred Stock Purchase Rights filed August 10,
2001.)
3.1 Restated Certificate of Incorporation of the Company, filed as
Exhibit 3.1 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1997, and incorporated herein
by reference.
3.2 Restated By-laws of the Company (as amended and restated
effective February 6, 2001) filed as Exhibit 3.1 to the
Company's report on Form 10-Q for the fiscal quarter ended
December 31, 2001, and incorporated by reference.
3.3 Amendment to By-laws of the Company (as amended and restated
effective February 6, 2001) filed as Exhibit 3.1 to the
Company's report on Form 10-Q for the fiscal quarter ended
March 31, 2001, and incorporated by reference.
10.1 Certificate of Resolution Changing Officers' Incentive Plan,
Exempt Employees Bonus Plan and other Company Plan Parameters
filed as Exhibit 10.1 to the Company's report on Form 10-K for
the fiscal year ended September 30, 1999, and incorporated
herein by reference. *
10.2 Fair, Isaac and Company, Inc. 1999 Employee Stock Purchase
Plan filed as Exhibit 10.2 to the Company's report on Form
10-K for the fiscal year ended September 30, 1999, and
incorporated herein by reference.*
10.3 Lease dated April 28, 1995, between CSM Investors, Inc., and
DynaMark, Inc. originally filed as Exhibit 10.3 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1995.
10.4 Lease dated June 1, 2001 by and between The Prudential
Assurance Company Limited and Fair, Isaac International UK
Corporation.
48
10.5 Lease, dated October 20, 1983 (originally reported date of
October 30, 1983), between S.R.P. Limited Partnership and the
Company, as amended, originally filed as Exhibit 10.7 to the
Registration Statement, refiled as Exhibit 10.5 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1998, and incorporated herein by reference.
10.6 Stock Option Plan for Non-Employee Directors, originally filed
as Exhibit 10.8 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1988, refiled as Exhibit 10.6
to the Company's report on Form 10-K for the fiscal year ended
September 30, 1998, and incorporated herein by reference.*
10.7 Lease dated July 1, 1993, between The Joseph and Eda Pell
Revocable Trust and the Company and the First Addendum thereto
originally filed as Exhibit 10.7 to the Company's report on
Form 10-K for the fiscal year ended September 30, 1995.
10.8 The Company's Long Term Incentive Plan as amended and restated
effective November 16, 2001.*
10.9 First Amendment to the Company's Stock Option Plan for
Non-Employee Directors, originally filed as Exhibit 10.12 to
the Company's report on Form 10-K for the fiscal year ended
September 30, 1989 and refiled as Exhibit 10.9 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1998, and incorporated herein by reference. *
10.10 Addendum Number Seven to Lease between S.R.P. Limited
Partnership and the Company, originally filed as Exhibit 10.15
to the Company's report on Form 10-K for the fiscal year ended
September 30, 1990 and refiled as Exhibit 10.11 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1998, and incorporated herein by reference.
10.11 Office Building Lease, Regency Center, by and between The
Joseph and Eda Pell Revocable Trust and fthe Company dated
June 13, 2001.
10.12 Lease, dated September 5, 1991, between 111 Partners, a
California general partnership, and the Company originally
filed as Exhibit 10.20 to the Company's report on Form 10-K
for the fiscal year ended September 30, 1991 and re-filed as
Exhibit 10.13 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1998, and incorporated herein
by reference.
10.13 First Amendment to Lease by and between 111 Partners and the
Company, effective as of July 1, 2001.
10.14 The Company's 1992 Long-Term Incentive Plan as amended and
restated effective November 21, 1995, filed as Exhibit 10.16
to the Company's report on Form 10-K for the fiscal year ended
September 30, 1996, and incorporated herein by reference. *
10.15 Lease dated May 1, 1995, between Control Data Corporation and
DynaMark, Inc. filed as Exhibit 10.18 to the Company's report
on Form 10-K for the fiscal year ended September 30, 1995.
10.16 Fair, Isaac Supplemental Retirement and Savings Plan and Trust
Agreement effective November 1, 1994, originally filed as
Exhibit 10.20 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1994.
10.17 Lease dated July 10, 1993, between the Joseph and Eda Pell
Revocable Trust and the Company originally filed as Exhibit
10.21 to the Company's report on Form 10-K for the fiscal year
ended September 30, 1995.
10.18 Lease dated October 11, 1993, between the Joseph and Eda Pell
Revocable Trust and the Company and the First Addendum thereto
filed as Exhibit 10.22 to the Company's report on Form 10-K
for the fiscal year ended September 30, 1995.
10.19 Second Amendment to Lease dated December 2, 1998, between CSM
Corporation and DynaMark, Inc. amending lease between the
parties dated March 11, 1997 filed as Exhibit 10.23 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1998, and incorporated herein by reference.
49
10.20 Lease dated December 2, 1998, by and between DynaMark, Inc.,
and CSM Corporation filed as Exhibit 2.1 to the Company's
report on Form 10-K for the fiscal year ended September 30,
1998, and incorporated herein by reference.
10.21 Amendment To Lease, dated December 2, 1998, by and between CSM
Corporation (assignee) and DynaMark, Inc. amending lease dated
May 1,1995 between DynaMark, Inc. and Control Data Systems
Inc. filed as Exhibit 2.4 to the Company's report on Form 10-K
for the fiscal year ended September 30, 1998, and incorporated
herein by reference.
10.22 Contract between the Company and Dr. Robert M. Oliver, dated
April 2, 1996, filed as Exhibit 10.26 to the Company's report
on Form 10-K for the fiscal year ended September 30, 1996, and
incorporated herein by reference. *
10.23 Office Building Lease, dated November 14, 1996, between the
Company and Regency Center, filed as Exhibit 10.28 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1996, and incorporated herein by reference.
10.24 First Addendum to Lease, dated August 13, l997, by and between
the Company and Regency Center, filed as Exhibit 10.32 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1997, and incorporated herein by reference.
10.25 Lease, dated March 11, l997, by and between DynaMark, Inc. and
CSM, filed as Exhibit 10.35 to the Company's report on Form
10-K for the fiscal year ended September 30, 1997, and
incorporated herein by reference.
10.26 First Amendment to Lease, dated September 24, l997, by and
between DynaMark, Inc. and CSM, filed as Exhibit 10.36 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1997, and incorporated herein by reference.
10.27 Chase Database Agreement, dated October 29, l997, by and among
DynaMark, Inc. and Chase Manhattan Bank USA, National
Association, filed as Exhibit 10.37 to the Company's report on
Form 10-K for the fiscal year ended September 30, 1997, and
incorporated herein by reference. Confidential treatment has
been requested for certain portions of this document. Such
portions have been omitted from the filing and have been filed
separately with the Commission.
10.28 Third Amendment to Lease dated December 2, 1998, by and
between CSM Corporation and DynaMark, Inc. amending lease
between the parties dated April 28, 1995 filed as Exhibit
10.41 to the Company's report on Form 10-K for the fiscal year
ended September 30, 1998, and incorporated herein by
reference.
10.29 Employment Agreement entered into effective as of August 23,
1999, by and between Fair, Isaac and Company, Inc. and Thomas
G. Grudnowski filed as Exhibit 10.42 to the Company's report
on Form 10-K for the fiscal year ended September 30, 1999, and
incorporated herein by reference. *
10.30 First Amendment to Employment Agreement entered into effective
as of December 3, 1999, by and between Fair, Isaac and
Company, Inc. and Thomas G. Grudnowski filed as Exhibit 10.43
to the Company's report on Form 10-K for the fiscal year ended
September 30, 1999, and incorporated herein by reference. *
10.31 Second Amendment to Employment Agreement entered into
effective as of December 26, 2001, by and between Fair, Isaac
and Company, Inc. and Thomas G. Grudnowski.*
21.1 Subsidiaries of the Company.
23.1 Consent of KPMG, LLP (see page 55 of this Form 10-K).
24.1 Power of Attorney (see page 52 of this Form 10-K).
*Management contract or compensatory plan or arrangement
50
(b) Reports on Form 8-K:
None.
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, 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: December 27, 2001
By /s/ HENK J. EVENHUIS
-------------------------------------
Henk J. Evenhuis
Vice President, Chief Financial
Officer and Secretary
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints HENK J. EVENHUIS 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-K 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, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
/s/ THOMAS G. GRUDNOWSKI President, Chief Executive Officer December 27, 2001
- ---------------------------------------- (Principal Executive Officer) and Director
Thomas G. Grudnowski
/s/ HENK J. EVENHUIS Vice President, Chief Financial Officer December 27, 2001
- ---------------------------------------- and Secretary
Henk J. Evenhuis (Principal Financial Officer and
Principal Accounting Officer)
/s/ A. GEORGE BATTLE Director December 27, 2001
- ----------------------------------------
A. George Battle
/s/ GUY R. HENSHAW Director December 27, 2001
- ----------------------------------------
Guy R. Henshaw
/s/ DAVID S.P. HOPKINS Director December 27, 2001
- ----------------------------------------
David S. P. Hopkins
/s/ ROBERT M. OLIVER Director December 27, 2001
- ----------------------------------------
Robert M. Oliver
/s/ PHILIP G. HEASLEY Director December 27, 2001
- ----------------------------------------
Philip G. Heasley
/s/ TONY J. CHRISTIANSON Director December 27, 2001
- ----------------------------------------
Tony J. Christianson
/s/ MARGARET L. TAYLOR Director December 27, 2001
- ----------------------------------------
Margaret L. Taylor
52
INDEPENDENT AUDITORS' REPORT ON
FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders
Fair, Isaac and Company, Incorporated:
Under date of October 24, 2001, except as to note 17, which is as of
December 17, 2001, we reported on the consolidated balance sheets of Fair, Isaac
and Company, Incorporated, and subsidiaries as of September 30, 2001 and 2000,
and the related consolidated statements of income and comprehensive income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended September 30, 2001, which are included in the 2001 annual report on
Form 10-K. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated financial
statement schedule in the 2001 annual report on form 10-K. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
San Francisco, California
October 24, 2001
53
SCHEDULE II
Fair, Isaac and Company, Incorporated
VALUATION AND QUALIFYING ACCOUNTS
September 30, 2001, 2000 and 1999
(in thousands)
Balance at Balance
Beginning Charged Charged at End
Description of Year to Expense to Revenue Write-off of Year
- -----------------------------------------------------------------------------------------------------
September 30, 2001
Allowance for doubtful
accounts $ 1,130 $ 2,542 $ -- $(1,158) $ 2,514
September 30, 2000
Allowance for doubtful
accounts $ 1,274 $ 218 $ 86 $ (448) $ 1,130
September 30, 1999
Allowance for doubtful
accounts $ 1,163 $ 123 $ 441 $ (453) $ 1,274
54
CONSENT OF KPMG LLP
The Board of Directors and Stockholders
Fair, Isaac and Company, Incorporated:
We consent to incorporation by reference in the registration statements (Nos.
33-63426, 333-02121, 333-32309, 333-65179, 333-83905, 333-95889, 333-32396,
333-32398, 333-66348 and 333-66332) on Form S-8 and the registration statements
(Nos. 333-20537 and 333-42473) on Form S-3 of Fair, Isaac and Company,
Incorporated, and subsidiaries of our reports dated October 24, 2001, except as
to note 17, which is as of December 17, 2001, relating to the consolidated
balance sheets of Fair, Isaac and Company, Incorporated, and subsidiaries as of
September 30, 2001 and 2000, and the related consolidated statements of income
and comprehensive income, stockholders' equity, and cash flows for each of the
years in the three-year period ended September 30, 2001 and related financial
statement schedule, which reports appear in the September 30, 2001 annual report
on Form 10-K of Fair, Isaac and Company, Incorporated, and subsidiaries.
/s/ KPMG LLP
San Francisco, California
December 28, 2001
55
EXHIBIT INDEX
TO FAIR, ISAAC AND COMPANY, INCORPORATED
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2001
Exhibit No. Exhibit Name
----------- ------------
2.1 Rights Agreement dated as of August 8, 2001 between Fair,
Isaac and Company, Incorporated and Mellon Investor Services
LLC, which includes as Exhibit B the form of Rights
Certificate and as Exhibit C the Summary of Rights.
(Incorporated by reference to Exhibit 4.1 of the Company's
Registration Statement on Form 8-A relating to the Series A
Participating Preferred Stock Purchase Rights filed August 10,
2001.)
3.2 Restated By-laws of the Company (as amended and restated
effective February 6, 2001) filed as Exhibit 3.1 to the
Company's report on Form 10-Q for the fiscal quarter ended
December 31, 2001, and incorporated by reference.
3.3 Amendment to By-laws of the Company (as amended and restated
effective February 6, 2001) filed as Exhibit 3.1 to the
Company's report on Form 10-Q for the fiscal quarter ended
March 31, 2001, and incorporated by reference.
10.3 Lease dated April 28, 1995, between CSM Investors, Inc., and
DynaMark, Inc. originally filed as Exhibit 10.3 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1995.
10.4 Lease dated June 1, 2001 by and between The Prudential
Assurance Company Limited and Fair, Isaac International UK
Corporation.
10.7 Lease dated July 1, 1993, between The Joseph and Eda Pell
Revocable Trust and the Company and the First Addendum thereto
originally filed as Exhibit 10.7 to the Company's report on
Form 10-K for the fiscal year ended September 30, 1995.
10.8 The Company's Long Term Incentive Plan as amended and restated
effective November 16, 2001.
10.11 Office Building Lease, Regency Center, by and between The
Joseph and Eda Pell Revocable Trust and the Company dated
June 13, 2001.
10.13 First Amendment to Lease by and between 111 Partners and the
Company, effective as of July 1, 2001.
10.15 Lease dated May 1, 1995, between Control Data Corporation and
DynaMark, Inc. originally filed as Exhibit 10.18 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1995.
10.16 Fair, Isaac Supplemental Retirement and Savings Plan and Trust
Agreement effective November 1, 1994, originally filed as
Exhibit 10.20 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1994.
10.17 Lease dated July 10, 1993, between the Joseph and Eda Pell
Revocable Trust and the Company originally filed as Exhibit
10.21 to the Company's report on Form 10-K for the fiscal year
ended September 30, 1995.
10.18 Lease dated October 11, 1993, between the Joseph and Eda Pell
Revocable Trust and the Company and the First Addendum thereto
originally filed as Exhibit 10.22 to the Company's report on
Form 10-K for the fiscal year ended September 30, 1995.
10.31 Second Amendment to Employment Agreement entered into
effective as of December 26, 2001, by and between Fair, Isaac
and Company, Inc. and Thomas G. Grudnowski.
56
21.1 Subsidiaries of the Company.
23.1 Consent of KPMG, LLP.
24.1 Power of Attorney.
57