UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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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, 1997
[ ] 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.)
120 North Redwood Drive, San Rafael, California 94903
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 472-2211
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value per share 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. [X]
As of December 5, 1997, the aggregate market value of the Registrant's
common stock held by nonaffiliates of the Registrant was $324,231,823.50 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 December 5, 1997 was
13,507,887 (excluding 12,008 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 3, 1998.
TABLE OF CONTENTS
Page
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PART I
ITEM 1. Business............................................................................... 3
ITEM 2. Properties............................................................................. 12
ITEM 3. Legal Proceedings...................................................................... 12
ITEM 4. Submission of Matters to a Vote of Security Holders.................................... 12
EXECUTIVE OFFICERS OF THE REGISTRANT........................................................... 13
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters............. 14
ITEM 6. Selected Financial Data........................................................... 15
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................... 16
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risks....................... 22
ITEM 8. Financial Statements and Supplementary Data....................................... 23
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................................ 40
PART III
ITEM 10. Directors and Executive Officers of the Registrant................................ 41
ITEM 11. Executive Compensation............................................................ 41
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.................... 41
ITEM 13. Certain Relationships and Related Transactions ................................... 41
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................. 42
SIGNATURES .................................................................................. 46
Supplemental Information....................................................................... 47
PART I
ITEM 1. BUSINESS
Development Of The Business
Fair, Isaac and Company (NYSE: FIC) is a leading developer of data
management systems and services for the financial services, direct marketing and
personal lines insurance industries. The Company employs various tools, such as
database enhancement software, predictive modeling, adaptive control and systems
automation to help its customers make "better decisions through data."
Established in 1956, Fair, Isaac pioneered the credit risk scoring
technologies now employed by most major U.S. consumer credit grantors. Its
rule-based decision management systems, originally developed to screen consumer
credit applicants, are now routinely employed in all phases of the credit
account cycle: direct mail solicitation (credit cards, lines of credit, etc.),
application processing, card reissuance, on-line credit authorization and
collection. Although direct comparisons are difficult, management believes Fair,
Isaac ranks first or second in sales of every type of credit management product
or service it markets, and that its total sales to the consumer credit market
exceed those for similar products by any direct competitor.
Approximately 48 percent of fiscal 1997 revenues were derived from
usage-priced products and services marketed through alliances with major credit
bureaus and third-party credit card processors. Sales of decision management
products and services directly to credit industry end-users accounted for
approximately 29 percent of revenues.
In more recent years Fair, Isaac has branched out, applying its proven
risk/reward modeling capabilities to auto and home insurance underwriting, small
business and mortgage lending, telecommunications and most recently, healthcare.
With the acquisition of DynaMark in December 1992, the Company made its first
foray into marketing data processing and database management, an area it
considers a prime target for diversification. Its strategy in this area is to
develop and market an array of services combining DynaMark's strengths in
warehousing and manipulating complex consumer databases with Fair, Isaac's
expertise in predictive modeling and decision systems. DynaMark contributed
$29.8 million or 15 percent of Fair, Isaac's fiscal 1997 revenues. The Company's
Insurance business unit generated revenues in fiscal 1997 of $5.8 million or 3
percent of revenues, and in fiscal l997 the Company recorded its first revenues
from its new Healthcare Information business unit.
In July 1997 the Company acquired Risk Management Technologies (RMT), a
privately held company that is the leading provider of enterprise-wide risk
management and performance measurement solutions to major financial institutions
around the world. This acquisition enables the Company to extend its franchise
in providing data-driven decision support to the financial services industries
beyond its current focus on individual customers. With RMT's products and
services, the Company has positioned itself to support an institution's entire
financial risk management operation, encompassing both the consumer and
enterprise levels. RMT's revenues in fiscal l997 were $8.4 million or 4 percent
of the Company's revenues. The Company's historical financial statements for
prior fiscal year periods have been restated to account for the Company's merger
with RMT on a pooling-of-interests basis.
Fair, Isaac numbers hundreds of the world's leading credit card and travel
card issuers, retail establishments and consumer lenders among its regular
customers. It has enjoyed continuous client relationships with some of these
companies for more than 27 years. Through alliances with all three major U.S.
credit bureaus, the Company also serves a large and growing number of
middle-market credit grantors, primarily by providing direct mail solicitation
screening, application scoring and account management services on a usage-fee
basis. In addition, some of its newer end-user products, such as CreditDesk(R)
application processing software and CrediTable(R) pooled-data scoring systems,
are designed to meet the needs of relatively small users of scoring systems.
Approximately 17 percent of Fair, Isaac's fiscal 1997 revenues came from
sales outside the United States. With its long-standing presence in Western
Europe and Canada and the more recent establishment of operating bases in Great
Britain, France, Germany, Japan, Mexico and South Africa, the Company is well
positioned to benefit from the expected growth in global credit card issuance
and usage through the balance of the 1990s. In September l997 the Company signed
an agreement with Serasa Centralizaco de Servicos dos Banco, Brazil's largest
credit reporting agency, which will result in the first bureau-based score
delivery service in Brazil.
3
Since 1993, Fair, Isaac's revenues and earnings per share have increased at
a compound rate of 31 percent and 41 percent, respectively. The Company
attributes this growth to rising market demand for credit scoring and account
management services; success in increasing its share of the market; and a
gradual shift in marketing and pricing strategy, from primary reliance on
direct, end-user sales of customized analytical and software products to ongoing
usage revenues from services provided through credit bureaus and bankcard
processing agencies.
During the period since 1990, while the rate of account growth in the U.S.
bankcard industry has been slowing and many of the Company's largest
institutional clients have merged and consolidated, the Company has generated
above-average growth in revenues--even after adjusting for the effect of
acquisitions--from its bankcard-related scoring and account management business
by deepening its penetration of large banks and other credit issuers. The
Company believes much of its future growth prospects will rest on its ability
to: (1) develop new, high-value products, (2) increase its penetration of
established or emerging credit markets outside the U.S. and Canada and (3)
expand--either directly or through further acquisitions--into relatively
undeveloped or underdeveloped markets for its products and services, such as
direct marketing, insurance, small business lending and healthcare information
management.
Products and Services
The Company's principal products are statistically derived, rule-based
analytic tools designed to help businesses make better decisions on their
customers and prospective customers, and software systems and components to
implement these analytic tools. In addition to sales of these products directly
to end-users, the Company also makes these products available in service mode
through arrangements with credit bureaus and third-party credit card processors.
The Company's DynaMark subsidiary provides data processing and database
management services to businesses engaged in direct marketing. Its RMT
subsidiary provides management tools to larger, more sophisticated financial
institutions for enterprise-wide, integrated financial risk and profitability
management.
Products and services sold to the consumer credit industry have
traditionally accounted for most of the Company's revenues. However, the Company
is actively promoting its products and services to other segments of the credit
industry, including mortgage and small business lending; and to non-credit
industries, particularly personal lines insurance, direct marketing,
telecommunications and healthcare. Consumer credit accounted for over 77 percent
of the Company's revenues in each of the three years in the period ended
September 30, 1997. Sales to customers in the direct marketing business,
including the marketing arms of financial service businesses, accounted for 13
to 15 percent of revenues in each of the three years in the period ended
September 30, 1997. Revenues from sales to the insurance industry accounted for
2 to 3 percent of revenues in each of the three years in the period ended
September 30, 1997. In fiscal 1997 the Company's recorded the first revenues
from its new Healthcare Information business unit.
Analytic Products
The Company's primary analytic products are scoring algorithms (also called
"scorecards") which can be used in screening lists of prospective customers,
evaluating applicants for credit or insurance and managing existing credit
accounts. Some of the most common types of scoring algorithms developed by the
Company are described below. Scoring algorithms are developed by correlating
information available at the time a particular decision is made with known
performance at a later date. Scoring algorithms can be developed to predict the
likelihood of different kinds of performance (e.g. credit delinquency, response
to a solicitation, and insurance claims frequency); they can be developed from
different data sources (e.g. credit applications and credit bureau files); and
they can be developed either for a particular user ("custom" scorecards) or for
many users in a particular industry ("pooled data" or "generic" scorecards).
Credit Application Scoring Algorithms. First introduced in 1958, Credit
Application Scoring Algorithms are tools that permit credit grantors to
calculate the risk of lending to individual applicants. They are delivered in
the form of a table of numbers, one for each possible answer to each of about
ten to twelve selected predictive questions that are found on the form filled in
by the applicant or on a credit report purchased by the credit grantor. The user
"scores" an applicant by looking in the table for the number associated with the
answers provided about the applicant and calculating their sum. The "score" thus
obtained is compared to a "cutoff score" previously established by the credit
grantor's management to determine whether or not to extend the requested credit.
A significant proportion of revenues from Credit Application Scoring Algorithms
is derived from sales of new or replacement algorithms to existing users.
4
Behavior Scoring Algorithms. The Company pioneered Behavior Scoring
Algorithms with a research program in 1969. The first commercially successful
products were introduced in 1978. In contrast to Credit Application Scoring
Algorithms which deal with credit applicants, Behavior Scoring Algorithms permit
management to define rules for the treatment of existing credit customers on an
ongoing basis.
Although similar in statistical principle and manner of construction,
Behavior Scoring Algorithms differ in several important respects from Credit
Application Scoring Algorithms. First, rather than using an applicant's answers
on a credit application or a credit report, the data used to determine a
behavior score come from the customer's purchase and payment history with that
credit grantor. Second, each customer is scored monthly, rather than only at
application time, and an action is selected each time in response to the score.
Third, the available actions are much more varied than simply granting or
denying credit to an applicant. For example, if an account is delinquent, the
actions available to a credit manager can include a simple message on a
customer's bill calling attention to the delinquency, a dunning letter, a phone
call, or a referral to a collection agency, with the action to be taken in any
given case to be determined by the customer's behavior score.
Scores produced by specially designed Behavior Scoring Algorithms can be
used to select actions for mailing promotional materials to customers, for
changing the credit limits allowed, for authorizing individual credit card
transactions, for taking various actions on delinquent accounts and for
reissuing credit cards which are about to expire. Behavior Scoring Algorithms
are also components of the Adaptive Control Systems described below.
Credit Bureau Scoring Services. The Company also provides scoring
algorithms to each of the three major automated credit bureaus in the United
States based solely on the information in their files. Customers of the credit
bureau can use the scores derived from these algorithms to prescreen
solicitation candidates, to evaluate applicants for new credit and to review
existing accounts. Credit grantors using these services pay based on usage and
the Company and the credit bureau share these usage revenues. The PreScore(R)
service offered by the Company combines a license to use such algorithms for
prescreening solicitation candidates along with tracking and consulting services
provided by the Company and is priced on a time or usage basis.
ScoreNetSM Service. The ScoreNet Service, introduced in August 1991, allows
credit grantors to obtain Fair, Isaac's credit bureau scores and related data on
a regular basis and in a format convenient for use in their account management
programs. In most cases the account management program is a Fair, Isaac Adaptive
Control System or Adaptive Control service at a credit card processor. The
Company obtains the data from the credit bureau(s) selected by each subscriber
and delivers it to the subscriber in a format compatible with the subscriber's
account management system.
Insurance Scoring Algorithms. The Company has also delivered scoring
systems for insurance underwriters and marketers. Such systems use the same
underlying statistical technology as credit scoring systems, but are designed to
predict claim frequency or profitability of applicants for personal insurance
such as automobile or homeowners' coverage. During fiscal 1993, the Company
introduced a Property Loss Score ("PLS") service in conjunction with Equifax,
Inc., a leading provider of data to insurance underwriters. In 1994, the Company
introduced a similar service in conjunction with Trans Union called "ASSIST"
which is designed to predict automobile insurance risk. In 1995, with Equifax
Inc., the Company introduced a risk prediction score for automobile insurance
called Casualty Loss Score ("CLS") service. Equifax subsequently spun off its
Insurance Unit, which is now Choicepoint. In 1996 with Acxiom, the Company
introduced a risk prediction score for homeowners' and automobile insurance
called InfoScore. PLS, ASSIST, CLS and InfoScore are similar to the credit
bureau scoring services in that a purchaser of data from Choicepoint, Trans
Union or Acxiom can use the scores to evaluate the risk posed by applicants for
homeowners' or automobile insurance. The Company and Choicepoint, Trans Union or
Acxiom, as the case may be, share the usage revenue produced by these services.
Aspects of automated application processing systems and Adaptive Control Systems
are also applicable to insurance underwriting decisions. The Company is actively
marketing its products and services to the insurance industry.
Other Scoring Algorithms. The Company has developed scoring algorithms for
other users, which include public utilities that require deposits from selected
applicants before starting service, tax authorities that select returns to be
audited, and mortgage lenders. The Company has also developed scoring algorithms
for use in selecting life insurance salesmen, finance company managers, and
prisoners suitable for early release, although to date these algorithms have not
generated significant revenues.
5
Automated Strategic Application Processing Systems (ASAP)
The Company's Automated Strategic Application Processing systems (ASAP)
automate the processing of credit applications, including the implementation of
the Company's Credit Application Scoring Algorithms. The Company offers
Mid-Range ASAPs which are stand-alone assemblies of hardware and software;
Mainframe ASAP, SEARCH, StrategyWare,(TM) and ScoreWare consisting of software
for IBM and IBM compatible mainframe computers; and CreditDesk which consists of
software for personal computers. The Company does not expect significant sales
of new Mid-Range ASAP systems but still derives significant maintenance and
enhancement revenues from existing systems.
The tasks performed by ASAPs include: (i) checking for the completeness of
the data initially given and printing an inquiry letter in the case of
insufficient information; (ii) checking whether an applicant is a known
perpetrator of fraud; (iii) electronically requesting, receiving, and
interpreting a credit report when it is economic to do so; (iv) assigning a
credit limit to the account, if acceptable, and printing a denial letter if not;
and (v) forwarding the data necessary to originate billing records for accepted
applicants.
Mid-Range ASAP is a minicomputer-based system which carries out the tasks
listed above in a manner extensively "tailored" to each user's unique
requirements. Mainframe ASAP is a software-only package designed to be executed
on IBM or IBM compatible mainframe computers. It is most useful for very large
volume credit grantors who elect to enter application information from a number
of separate locations. CreditDesk is designed for use on stand-alone or
networked personal computers. Although its software functions are not tailored
as extensively as the other versions of ASAP, CreditDesk features an easy-to-use
graphics interface. The Company also sells software components for IBM or
compatible mainframe computers under the tradenames "SEARCH" and "ScoreWare."
SEARCH acquires and interprets credit bureau reports as a separate package.
ScoreWare provides for easy installation of credit application scorecards and
computes scores from such scorecards as part of the application processing
sequence. StrategyWare combines the application processing features described
above with the "Champion/Challenger" strategy concept described below under
Adaptive Control Systems.
The Company's Mid-Range and Mainframe ASAP systems are currently being used
in the United States, Canada, and Europe by banks, retailers, and other
financial institutions. CreditDesk is being used by over 600 credit grantors in
more than a dozen countries. To support these installations, the Company
provides complete hardware and software maintenance, general software support in
the form of consulting, and specific software support by producing enhancements,
as well as other modifications at a user's request.
Adaptive Control Systems
The Company's most advanced product is the Adaptive Control System, now
generally marketed under the tradename "TRIAD". An Adaptive Control System is a
complex of behavior scoring algorithms, computer software, and account
management strategy addressed to one or more aspects of the management of a
consumer credit or similar portfolio. For example, the Company has developed an
Adaptive Control System for use by an electric utility in the management of its
customer accounts.
A principal feature of an Adaptive Control System is software for testing
and evaluation of alternative management strategies, designated the "Champion
and Challenger Strategy Software." The "Champion" strategy applied to any aspect
of controlling a portfolio of accounts (such as determining collection messages
or setting credit limits) is that set of rules considered by management to be
the most effective at the time. A "Challenger" strategy is a different set of
rules which is considered a viable candidate to outperform the Champion. The
Company's Champion and Challenger Strategy software is tailored to the
customer's billing system and is designed to permit the operation of both
strategies at the same time and also to permit varying fractions of the accounts
to go to each of the competing strategies. For example, if a Challenger is very
different from the Champion, management may wish to test it on a very small
fraction of the accounts, rather than to risk a large loss. Alternatively, if a
Challenger appears to be outperforming a Champion, management can direct more
and more of the account flow to it. There need not, in fact, be a limitation on
the number of Challengers in place at any one time beyond the limits imposed by
the ability of the Company and the user management to study the results.
A Champion/Challenger structure is based on one or more of the Company's
component products, usually Behavior Scoring Algorithms, as well as
Company-developed software that permits convenient allocation of accounts to
strategies and convenient modification of the strategies themselves. Adaptive
Control Systems can also consider information external to the particular
creditor, particularly scores and other information obtained from credit
6
bureaus, in the design of strategies. A specific goal of the Company's Adaptive
Control System product is to make the account management functions of the user
as independent as possible of the user's overall data processing systems
development department.
For a Champion/Challenger structure to function effectively, new Challenger
strategies must be developed continually as insight is gained, as external
conditions change, and as management goals are modified. The Company often
participates in the design and development of new Challenger strategies and in
the evaluation of the results of Champion/Challenger competitions as they
develop.
Contracts for Adaptive Control Systems for end-users generally include
multi-year software maintenance, strategy design and evaluation, and consulting
components. The Company also provides Adaptive Control services through First
Data Resources, Inc. and Total System Services, Inc., the two largest
third-party credit card processors in the United States. The Adaptive Control
service is also available in the United Kingdom through First Data Resources,
Ltd. and Bank of Scotland; in Buenos Aires, through Argencard S.A.; and in
Frankfurt, through B+S Card Service Gmbh. Credit card issuers subscribing to
these services pay monthly fees based on the number of accounts processed.
During fiscal 1996, the Company introduced StrategyWare which is an Adaptive
Control System designed to apply Champion-Challenger principles to the
processing of new credit accounts, rather than the management of existing
accounts. The Company also believes that Adaptive Control Systems can operate in
areas other than consumer credit; and, as noted above, has provided an Adaptive
Control System to an electric utility company.
DynaMark
DynaMark provides a variety of data processing and database management
services to companies and organizations in direct marketing. DynaMark offers
several proprietary tools in connection with such services including DynaLink
and DynaMatch. DynaLink gives financial institutions and other users remote
computer access to their "warehoused" customer account files or marketing
databases. It allows them to perform on-line analyses ranging from profiling the
history of a single customer purchase or credit usage to calling up print-outs
of all files having certain defined characteristics in common. DynaMatch uses a
unique scoring system to identify matching or duplicate records that most
standard "merge-purge" systems would overlook. Credit managers and direct
marketers can use it to identify household relationships (accounts registered in
different names, but sharing a common address and surname) and to eliminate
costly duplicate mailings. Credit card issuers can use it to spot potentially
fraudulent or overlimit credit card charges by individuals using two or more
cards issued under slightly different names or addresses.
Risk Management Technologies
Risk Management Technologies (RMT) provides management tools to larger,
more sophisticated financial institutions around the world for enterprise-wide,
integrated financial risk and profitability management. Financial institutions
must constantly evaluate the effect of interest rate changes and other factors
on their entire operation including their loan, credit card and investment
portfolios, to determine bottom line exposure and potential revenues. RMT's
financial decision support software, the RADAR System, is a comprehensive
enterprise management system that performs asset-liability management, transfer
pricing, and performance measurement modeling. RMT's Genesis product is a
graphical data integration management tool used to integrate data rapidly from
multiple legacy systems and other sources into a consolidated, client/server
data warehouse. Within this warehouse, data remains readily available for use in
multiple decision-support applications.
Healthcare
The Company is currently providing analytical marketing services to a large
pharmaceuticals manufacturer to help improve customer relationship and
"compliance" management using a variety of techniques including internet
communications. "Compliance" in this instance refers to whether prescriptions
are actually filled and taken to completion. The Company has also introduced a
receivables management system for hospitals and other healthcare providers which
is currently in beta testing.
7
Customer Service and Support
The Company provides service and support to its customers in a variety of
ways. They include: (i) education of liaison teams appointed by buyers of
scoring algorithms and software; ( ii) maintenance of an answering service that
responds to inquiries on minor technical questions; (iii) proactive
Company-initiated follow-up with purchasers of the Company's products and
services; (iv) conducting seminars held several times a year in various parts of
the United States and, less often, in other countries; (v) conducting annual
conferences for clients in which user experience is exchanged and new products
are introduced; (vi) delivery of special studies which are related to the use of
the Company's products and services; and (vii) consulting and training services
provided by the Company's subsidiary, Credit & Risk Management Associates, Inc.
("CRMA").
Scoring algorithms can diminish in effectiveness over time as the
population of applicants or customers changes. Such changes take place for a
variety of reasons, many of which are unknown or poorly understood, but some are
a result of marketing strategy changes or shifts in the national or the local
economy. It is to the user's advantage, therefore, to monitor the performance of
its algorithms so that they can be replaced when it is economic to do so. In
response to this need as well as the requirement of the Equal Credit Opportunity
Act that scoring algorithms be periodically validated, the Company provides
tracking services and software products which measure the continuing performance
of its scoring algorithms while in use by customers.
Technology
The Company's personnel have a high degree of expertise in several separate
disciplines: operations research, mathematical statistics, computer-based
systems design, programming and data processing.
The fundamental principle of operations research is to direct attention to
a class of management decisions, to make a mathematical model of the situation
surrounding that class of decisions and to find rules for making the decisions
which maximize achievement of the manager's goal. The Company's analytic
products are classic examples of this doctrine reduced to practice. The entire
focus is on decision making using the best mathematical and computational
techniques available.
The fundamental goal of mathematical statistics is to provide the method
for deriving the maximum amount of useful information from an undigested body of
data. The objective of the design of computer-based systems is to provide a
mechanism for efficiently accepting input data from a source, storing that data
in a cost-effective medium, operating on the data with reliable algorithms and
decision rules and reporting results in readily comprehensible forms.
The Company's analytic products have a clear distinguishing characteristic
in that they make management by rule possible in situations where the only
alternative is reliance on a group of people whose actions can never be entirely
consistent. Rules for selecting actions require computation of probabilities of
results. But computing the probability of a particular result in the traditional
mode, that is, by counting the number of occurrences of each possible result in
all possible combinations of circumstances, clearly breaks down when the number
of combinations becomes very large. When only a few thousand cases of results
are available, more subtle mathematical methods must be used. The Company has
been actively developing and using techniques of this kind for 41 years, as
indicated by the development and continual enhancement of its proprietary suite
of algorithms and computer programs used to develop scoring algorithms.
The Company's products must also interface successfully with systems
already in place. For example, they must accept data in various forms and in
various media such as handwritten applications, video display terminal input,
and telecommunications messages from credit bureaus. They must also provide
output in diverse forms and media, such as video displays, printed reports,
transactions on magnetic tape and printed letters. The Company's response to
this interface requirement has been to develop a staff which is expert in both
logical design of information systems and the various languages used for coding.
8
Markets and Customers
The Company's products for use in the area of consumer credit are marketed
to banks, retailers, finance companies, oil companies, credit unions and credit
card companies. The Company has over 600 users of products sold directly by the
Company to end-users. 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; more than 70 retailers; 7 oil companies; major travel and
entertainment card companies; and more than 40 finance companies. Custom
algorithms and systems have generally been sold to larger credit grantors. The
scoring, application processing and adaptive control services offered through
credit bureaus and third-party processors are intended, in part, to extend usage
of the Company's technology to smaller credit issuers and the Company believes
that users of its products and services distributed through third-parties number
in the thousands. As noted above, the Company also sells its products to
utilities, tax authorities, telecommunications and insurance companies.
DynaMark markets its services to a wide variety of businesses engaged in
direct marketing. These include banks and insurance companies, catalog
merchandisers, fund-raisers and others. Most of DynaMark's revenues come from
direct sales to the end user of its services, but in some cases DynaMark acts as
a subcontractor to advertising agencies or others managing a particular project
for the end-user. RMT markets to large financial institutions throughout the
world. Its clients are typically large financial institutions with a wide range
of products, investments and operational units and a sophisticated balance
sheet.
No single end-user customer accounted for more than 10% of the Company's
revenues in fiscal 1997. Revenues generated through the Company's alliances with
the three major credit bureaus in the United States, Equifax, Inc., Experian
Information Solutions, Inc. (formerly known as TRW Information Services) and
Trans Union Corporation, each accounted for approximately eight to ten percent
of the Company's total revenues in fiscal 1997.
The percentage of revenues derived from customers outside the United States
was approximately 17 percent in fiscal 1997, 17 percent in fiscal 1996, and 14
percent in fiscal 1995. RMT derives more than half of its revenues from clients
outside the United States. DynaMark had virtually no non-U.S. revenues prior to
fiscal 1997. The United Kingdom, Japan and Canada are the largest international
market segments. Mexico, South Africa, a number of countries in South America
and almost all of the Western European countries are represented in the user
base. The Company has delivered products to users in approximately 50 countries.
The information set forth under the caption "Segment Information" in Note 13 to
the Consolidated Financial Statements is incorporated herein by reference. The
Company's foreign offices are primarily sales and customer service offices
acting as agents on behalf of the U.S. production operations. Net identifiable
assets, capital expenditures and depreciation associated with foreign offices
are not material.
The Company has enjoyed good relations with the majority of its customers
over extended periods of time, and a substantial portion of its revenue is
derived from repeat customers. As noted above, the Company is actively pursuing
new users, particularly in the marketing, insurance and healthcare fields as
well as those potential users in the consumer credit area not yet using the
Company's products.
Contracts and Backlog
The Company's practice is to enter into contracts with several different
kinds of payment terms. Scoring algorithms have historically been sold through
one-time, fixed-price contracts. The Company will continue to sell scoring
algorithms on this basis but has also entered into longer term contractual
arrangements with some of its largest customers for the delivery of multiple
algorithms. PC-ASAP ("CreditDesk") customers have the option to enter into
contracts that provide for a one-time license fee or volume-sensitive monthly
lease payments. The one-time and usage-based contracts contain a provision
requiring monthly maintenance payments. Mainframe ASAP contracts include a
one-time fee for the basic software license, plus monthly fees for maintenance
and enhancement services. The Company also realizes maintenance and enhancement
revenues from users of its line of Mid-Range ASAP systems. PreScore contracts
call for usage or periodic license fees and there is generally a minimum charge.
Contracts for the delivery of complete Adaptive Control Systems typically
contain both fixed and variable elements in recognition of the fact that they
extend over multiple years and must be negotiated in the face of substantial
uncertainties. As noted above, the Company is also providing scoring algorithms
and application processing on a service basis through credit bureaus, and credit
account management services through third-party bankcard processors. Subscribers
pay for these services and for the ScoreNet service based on usage. DynaMark and
RMT employ a combination of fixed fee and volume-or usage-based pricing for
their services.
9
As of September 30, 1997, the Company's backlog, which includes only firm
contracts, was approximately $70,168,000, as compared with approximately
$64,650,000 as of September 30, 1996. Most usage-based revenues do not appear as
part of the backlog. The Company believes that approximately 30 percent of the
September 30, 1997 backlog will be delivered after the end of the current fiscal
year ending September 30, 1998. Most DynaMark contracts include unit or usage
charges, the total amount of which cannot be determined until the work is
completed. DynaMark's and CRMA's backlog are not significant in amount, are not
considered a significant indicator of future revenues, and are not included in
the foregoing figures. RMT's backlog is included in the foregoing backlog
figures.
Competition
The Company believes that its typical product development cycle, which in
the past has extended as long as ten years, has tended to moderate the Company's
growth rate. It also believes, however, that this long product development lead
time provides a barrier to entry of competitive products. As credit scoring,
automated application processing, and behavioral scoring algorithms, all of
which were pioneered by the Company, have become standard tools for credit
providers, competition has emerged from five sectors: scoring algorithm
builders, providers of automated application processing services, data vendors,
neural network developers and artificial intelligence system builders. It is
likely that a number of new entrants will be attracted to the market, including
both large and small companies. Many of the Company's present and potential
competitors have substantially greater financial, managerial, marketing, and
technological resources than the Company. The Company believes that none of its
competitors offer the same mix of products as the Company. However certain
competitors may have larger shares of particular geographic or product markets.
In-house analytic and systems developers are also a significant source of
competition for the Company.
The Company believes that the principal factors affecting competition for
scoring algorithms are product performance and reliability; expertise and
knowledge of the credit industry; ability to deliver algorithms in a timely
manner; customer support, training and documentation; ongoing enhancement of
products; and comprehensiveness of product applications. It competes with both
outside suppliers and in-house groups for this business. The Company's primary
competitor among outside suppliers of scoring algorithms is C.C.N. Systems
Limited ("CCN") of Nottingham, England, a subsidiary of Great Universal Stores
plc, a large British retailer. Scores sold by credit bureaus in conjunction with
credit reports, including scores computed by algorithms developed by the
Company, provide potential customers with the alternative of purchasing scores
on a usage-priced basis.
The Company believes that the principal factors affecting competition in
the market for automated application processing systems (such as ASAP) are the
same as those affecting scoring algorithms, together with experience in
developing computer software products. Competitors in this area include outside
computer service providers and in-house computer systems departments. The
Company believes that its primary competitor in this area is American Management
Systems, Incorporated ("AMS"). AMS also offers credit scoring algorithms.
The Company competes with data vendors in the market for its credit bureau
scoring services including PreScore and ScoreNet. In the past several years,
data vendors have expanded their services to include evaluation of the raw data
they provide. All of the major credit bureaus offer competing prescreening and
credit bureau scoring services developed, in some cases, in conjunction with the
Company's primary scoring algorithm competitor, CCN. In November 1996 it was
announced that CCN had agreed to acquire Experian Information Solutions, Inc.
(formerly known as TRW Information Systems & Services).
Both AMS and CCN offer products intended to perform some of the same
functions as the Company's Adaptive Control Systems. The Company believes that
customers using its Adaptive Control Systems, in both custom end-user form and
through third-party processors, significantly outnumber users of the competing
AMS and CCN products.
Another source of emerging competition comes from companies developing
artificial intelligence systems including those known as "expert systems" and
"neural networks." An expert system is computer software that replicates the
decision-making process of the best available human "experts" in solving a
particular class of problem, such as credit approval, charge card authorization,
or insurance underwriting. Scoring technology differs from expert systems in
that scoring technology is based upon a large data base of results, from which
rules and algorithms are developed, as compared to expert systems, which are
typically based primarily on the "expert's" judgment and less so upon a
significant data base. The Company believes its technology is superior to expert
system technology where sufficient performance data is available. Neural
networks, on the other hand, are an alternative method of developing scoring
algorithms from a data base but using mathematical techniques quite different
from those used by the Company. For example, HNC Software, Inc. has developed
systems using neural network technology which
10
compete with some of the Company's products and services. The Company believes
that analytical skill and knowledge of the business environment in which an
algorithm will be used are generally more important than the choice of
techniques used to develop the algorithm; and, further, that the Company has an
advantage in these areas with respect to its primary markets as compared with
neural network developers.
There are a large number of companies providing data processing and
database management services in competition with DynaMark, some of which are
considerably larger than DynaMark. The Company believes 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, ability of the
processor to perform specialized tasks. DynaMark has concentrated on providing
specialized types of data processing and database management services using
proprietary tools which, it believes, give it an edge over its competition in
these areas. RMT is a leading provider of enterprise-wide risk management and
performance-measurement solutions to major financial institutions. There are a
number of companies offering enterprise-wide "solutions", or serving
sub-segments of this market (such as trading operations of financial
institutions), in competition with RMT. The Company believes that no direct
competitor currently offers the depth and scope of analytical functionality in
products and services for financial risk management that RMT provides, which
gives RMT an advantage in this market.
Product Protection
The Company relies upon the laws protecting trade secrets and upon
contractual non-disclosure safeguards, including its employee non-disclosure
agreements and restrictions on transferability that are incorporated into its
customer agreements, to protect its software and proprietary interests in its
product methodology and know-how. The Company currently has one patent
application pending but does not otherwise have patent protection for any of its
programs or algorithms, nor does it believe that the law of copyrights affords
any significant protection for its proprietary software. The Company instead
relies principally upon such factors as the knowledge, ability, and experience
of its personnel, new products, frequent product enhancements, and name
recognition for its success and growth. The Company retains title to and
protects the suite of algorithms and software used to develop scoring algorithms
as a trade secret and has never distributed its source code.
In spite of these precautions, it may be possible for competitors or users
to copy or reproduce aspects of the Company's software or to obtain information
that the Company regards as trade secrets. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to the same extent as
do the laws of the United States.
Research and Development
Technological innovation and excellence have been goals of the Company
since its founding. The Company has devoted, and intends to continue to devote,
significant funds to research and development. The Company has ongoing projects
for improving its fundamental knowledge in the area of algorithm design, its
capabilities to produce algorithms efficiently, and its ability to specify and
code algorithm executing software. 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.
Above and beyond the projects formally designated as Research and
Development, many of the Company's activities contain a component that produces
new knowledge. For example, an Adaptive Control System, by its nature and
purpose, must be designed to match its environment and learn as it operates. In
the areas in which the Company's products are useful, the "laboratory" is
necessarily the site of the user's operations.
Hardware Manufacturing
Hardware for the Company's Mid-Range ASAP systems consists primarily of a
Motorola MC 68030-based central processing unit, one or more video display
terminals, a disk storage unit, and various other input-output and peripheral
devices. The Company's manufacturing process at its San Rafael, California
facility involves assembly, testing, and quality assurance functions. Components
and parts used in the Company's Mid-Range ASAP systems are purchased from
outside vendors, and the Company generally seeks to use components and parts
that are available in quantity from a number of distributors. The Company
believes that, should any of these components become unavailable from current
sources, alternative sources could be developed. Hardware manufacturing and
enhancements account for less than one percent of total revenue.
11
Personnel
As of September 30, 1997, the Company employed approximately 1,221 persons.
None of its employees is covered by a collective bargaining agreement and no
work stoppages have been experienced.
ITEM 2. PROPERTIES
The Company's principal office is located in San Rafael, California,
approximately 15 miles north of San Francisco. The Company leases approximately
270,000 square feet of office space in four buildings at that location under
leases expiring in 2001 or later. It also leases approximately 7,822 square feet
of warehouse space in San Rafael for its hardware operations and for storage
under month-to-month leases. The Company has also exercised an option to
purchase land in San Rafael for construction of approximately 406,000 square
feet of additional office space with an expected initial occupancy date in the
year 2000. DynaMark leases approximately 109,000 square feet of office and data
processing space in three buildings in Arden Hills, Minnesota under leases which
expire in 2006. DynaMark's Printronic Division leases approximately 25,000
square feet of office and data processing space in New York City under a lease
expiring in 2004. RMT leases approximately 9,200 square feet of office space in
Berkeley, California. The Company also leases a total of approximately 36,000
square feet of office space for offices in Baltimore, Maryland; New Castle,
Delaware; Atlanta, Georgia; Chicago, Illinois; Tampa, Florida; Toronto, Ontario;
Birmingham, England; Tokyo, Japan; Paris, France; Mexico City, Mexico; and
Wiesbaden, Germany. See Notes 6 and 12 in the Consolidated Financial Statements
for information regarding the Company's obligations under leases and Note 15 in
the Consolidated Financial Statements for information with respect to the
proposed purchase of land in San Rafael. The Company believes that suitable
additional space will be available to accommodate future needs.
ITEM 3. LEGAL PROCEEDINGS
No material legal proceedings are pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
12
EXECUTIVE OFFICERS OF THE REGISTRANT
Name Positions Held Age
---- -------------- ---
Larry E. Rosenberger President and Chief Executive Officer 51
since March, 1991, Executive Vice
President 1985-1991, Senior Vice
President 1983-1985, Vice President
1977-1983. A Director since 1983.
Joined the Company in 1974.
John D. Woldrich Appointed Chief Operating Officer 54
effective August 1, 1995. Executive
Vice President since 1985, Senior Vice
President 1983-1985, Vice President
1977-1983. A Director since 1983.
Joined the Company in 1972.
Barrett B. Roach Executive Vice President since joining 57
the Company in August 1992. Chief
Administrative and Financial Officer of
Network Equipment Technologies, Inc.
from 1986 to July 1990. Owned and
operated a vineyard from July 1990 to
August 1992.
Patrick G. Culhane Executive Vice President since August 43
1995; Senior Vice President 1992-
1995; Vice President 1990-1992;
joined the Company in 1985.
H. Robert Heller Executive Vice President since September 57
1996 and a Director since February 1994.
President of International Payments Institute
from December 1994 to September 1996;
President and Chief Executive Officer of
Visa U.S.A., Inc. 1991-1993,
Executive Vice President of Visa
International 1989-1991.
Jeffrey F. Robinson Senior Vice President since 1986, Vice 48
President 1980-1986. Treasurer 1981-
1983. Joined the Company in 1975.
Kenneth M. Rapp Senior Vice President since August 1994, 51
and President and Chief Operating Officer
of DynaMark, Inc. since it was founded
in 1985.
Peter L. McCorkell Senior Vice President since August 1995; 51
Vice President, Secretary and General
Counsel since joining the Company
in 1987.
Patricia Cole Senior Vice President, Chief Financial 48
Officer and Treasurer since November
1996; Controller since joining the
Company in September 1995. Vice
President and Controller of Quest
Communications International Inc. 1993-
1995; Controller of Los Angeles Cellular
Telephone Company 1990-1992.
David M. LaCross President, Chief Executive Officer of 45
Risk Management Technologies
since it was founded in 1989.
<FN>
- ------------
The term of office for all officers is at the pleasure of the Board of
Directors.
</FN>
13
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
As of May 6, 1996, the Company's common stock began trading on the New York
Stock Exchange under the symbol: FIC. Prior to that date, it was traded
over-the-counter on the NASDAQ Stock Market under the symbol: FICI. At December
5, 1997, Fair, Isaac had 312 holders of record of its common stock. The
following table lists the high and low last transaction prices for the periods
shown, as reported by the New York Stock Exchange and the NASDAQ Stock Market.
Stock Prices High Low
- ------------------------------------------------------------
October 1 - December 31, 1995 29 1/4 25
January 1 - March 31, 1996 30 3/8 21 1/2
April 1 - June 30, 1996 50 30
July 1 - September 30, 1996 46 1/4 37 5/8
October 1 - December 31, 1996 39 3/8 33 5/8
January 1 - March 31, 1997 43 1/8 35
April 1 - June 30, 1997 44 7/8 30 1/4
July 1 - September 30, 1997 47 1/2 40 3/4
Dividends
On May 24, 1995, Fair, Isaac announced a 100 percent stock dividend
(equivalent to a two-for-one stock split) and its intention to pay quarterly
dividends of 2 cents per share or 8 cents per year subsequent to issuance of the
stock dividend. Quarterly dividends of that amount were paid throughout fiscal
1997. There are no current plans to change the cash dividend or to issue any
further stock dividend.
Unregistered Equity Sales
On July 21, l997, the Company acquired all the outstanding stock of Risk
Management Technologies ("RMT"), a privately held California corporation,
pursuant to a merger of a wholly owned subsidiary of the Company and RMT in
which RMT became a wholly-owned subsidiary of the Company (the "Merger").The
Merger was effected pursuant to an Agreement and Plan of Reorganization dated as
of June 12, l997 (the "Merger Agreement") among the Company, RMT and the
shareholders and option holders of RMT. RMT was founded in 1989 to provide
enterprise-wide risk management and performance measurement solutions to major
financial institutions.
Under the terms of the Merger Agreement, each outstanding share of RMT
common stock and options to purchase RMT stock (after adjustment for the
exercise price) were exchanged for .3254 shares of Company common stock or
option equivalents. The number of shares and option equivalents issued by the
Company in connection with the Merger is 1,252,655. The Company accounted for
the Merger under the "pooling of interests" method.
At the time of the transaction, the shares of the Company common stock and
the options to purchase the Company common stock issued to the former RMT
security holders in the Merger were not registered under the Securities Act of
1933, as amended (the "1933 Act"), because the transaction involved a non-public
offering exempt from registration under Section 4(2) of the 1933 Act and
Regulation D promulgated thereunder.
14
ITEM 6. Selected Financial Data
(dollars in thousands, except per share data)
Fiscal year ended September 30, 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
Revenues $199,009 $155,913 $117,089 $92,046 $67,269
Income from operations 37,756 29,518 19,828 16,420 7,599
Income before income taxes 35,546 28,704 21,390 17,178 8,143
Net income 20,686 17,423 12,753 10,559 4,768
Earnings per share $1.46 $1.25 $ .93 $ .79 $ .37
Dividends per share * $ .08 $ .08 $ .055 $ .07 $ .07
At September 30, 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
Working capital $ 47,727 $ 34,699 $ 23,448 $17,436 $15,126
Total assets 145,228 118,023 91,009 72,056 54,875
Long-term obligations 1,183 1,552 1,930 2,333 2,729
Stockholders' equity 103,189 79,654 56,176 42,929 31,133
<FN>
* Because the change to quarterly dividends was initiated in September
1995, the rate of dividends paid in fiscal 1995 does not reflect the current
annual rate of 8 cents per share.
</FN>
The financial data for the fiscal years ended September 30, 1993 through
1997 have been restated to reflect the merger, effective July 1997, between
Fair, Isaac and Company, Incorporated and Risk Management Technologies which has
been accounted for under the pooling-of-interests method.
15
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Fair, Isaac and Company, Incorporated, provides products and services
designed to help a variety of businesses use data to make better decisions on
their customers, prospective customers and existing portfolios. The Company's
products include statistically derived, rule-based analytical tools, software
designed to implement those analytical tools and consulting services to help
clients use and track the performance of those tools. The Company also provides
a range of credit scoring and credit account management services in conjunction
with credit bureaus and credit card processing agencies. Its DynaMark subsidiary
provides data processing and database management services to businesses engaged
in direct marketing activities, many of which are in the credit and insurance
industries.
On July 21, l997, the Company acquired Risk Management Technologies (RMT),
a privately held company, which provides enterprise-wide risk management and
performance measurement solutions to major financial institutions. The Company's
historical statements for prior periods have been restated to account for the
Company's merger with RMT on a pooling-of-interests basis.
The Company is organized into business units that correspond to its
principal markets: consumer credit, insurance, direct marketing (DynaMark),
enterprise-wide financial risk management (RMT) and a new unit, healthcare
information. Sales to the consumer credit industry have traditionally accounted
for the bulk of the Company's revenues. Products developed specifically for a
single user in this market are generally sold on a fixed-price basis. Such
products include application and behavior scoring algorithms (also known as
"analytic products" or "scorecards"), credit application processing systems
(ASAP(TM) and CreditDesk(R)) and custom credit account management systems,
including those marketed under the name TRIAD(TM). Software systems usually also
have a component of ongoing maintenance revenue, and CreditDesk systems have
also been sold under time- or volume-based price arrangements. Credit scoring
and credit account management services sold through credit bureaus and
third-party credit card processors are generally priced based on usage. Products
sold to the insurance industry are generally priced based on the number of
policies in force, subject to contract minimums. DynaMark and RMT employ a
combination of fixed-fee and usage-based pricing, and the Healthcare Information
unit intends to employ a combination of fixed-fee and usage-based pricing for
its products.
This discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and Notes. In addition to historical
information, this report includes certain forward-looking statements regarding
events and trends that may affect the Company's future results. Such statements
are subject to risks and uncertainties that could cause the Company's actual
results to differ materially. Such factors include, but are not limited to,
those described in this discussion and analysis.
RESULTS OF OPERATIONS
Revenues
The following table sets forth for the fiscal periods indicated (a) the
percentage of revenues represented by fixed-price and usage-priced revenues from
the Credit business unit, and the percentage of revenues contributed by the
DynaMark, RMT, Insurance and Healthcare Information business units; and (b) the
percentage change in revenues within each category from the prior fiscal year.
Credit fixed-price revenues include all revenues from custom scorecard, software
and consulting projects. Most credit usage revenues are generated through
third-party alliances such as those with credit bureaus and third-party credit
card processors. In addition, some credit scorecards and software products are
licensed under volume-based fee arrangements and these are included in credit
usage-priced revenues.
16
Percentage of Period-to-period
revenue percentage changes
Years ended 1996 1995
September 30, to to
1997 1996 1995 1997 1996
- ------------------------------------------------------------------------------------------------
Credit:
Fixed-price 29 29 29 28 34
Usage-priced 48 50 51 23 31
DynaMark 15 13 15 41 19
RMT 4 5 3 18 123
Insurance 3 3 2 27 63
Healthcare Information 1 -- -- NM* NM*
---- ---- -----
Total Revenues 100 100 100 28 33
==== ==== =====
<FN>
* Not meaningful
</FN>
Revenues from credit application scoring products increased by 36 percent
in fiscal 1996 compared with fiscal 1995, and by 22 percent in fiscal 1997
compared with fiscal 1996, due primarily to the Company's sales of new products
and increased sales of small business loan scoring products. ASAP revenues
increased by 30 percent in fiscal l996 compared with fiscal l995, and by 47
percent in fiscal 1997 compared with fiscal 1996, primarily due to increased
sales of PC-based ASAP products (CreditDesk) and sales of StrategyWare(TM), a
new decision support software product released in September l996.
Revenues from sales of credit account management systems (TRIAD) sold to
end-users increased by 38 percent from 1995 to 1996, but decreased by 5 percent
from l996 to l997. The major factor in the decline in revenues in fiscal l997
was a delay in the completion of the next major release of the software. That
release (TRIAD 5.0) was completed in November l997. The Company's high degree of
success in penetrating the U.S. bankcard industry with these products has
limited, and may continue to limit, the revenue growth in that market. However,
the Company has added functionality for the existing base of TRIAD users and is
actively marketing TRIAD for other types of credit products and in overseas
markets.
Usage revenues are generated primarily by credit scoring services
distributed through major credit bureaus and credit account management services
distributed through third-party bankcard processors. Revenues from credit
bureau-related services increased by 30 percent in fiscal l996 and 22 percent in
fiscal l997 and accounted for approximately 37 percent and 35 percent of
revenues in fiscal 1996 and 1997, respectively. 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.
The Company provides credit risk management consulting services primarily
through CRMA, which was acquired in September 1996. CRMA completed its first
year as part of the Credit business unit on September 30, l997. CRMA's revenues
were 3 percent of the Company's Credit revenues.
Revenues derived from alliances with credit bureaus and credit card
processors have accounted for much of the Company's revenue growth and
improvement in operating margins over the last three years. While the Company
has been very successful in extending or renewing such agreements in the past,
and believes it will generally be able to do so in the future, the loss of one
or more such alliances or an adverse change in terms could have a significant
impact on revenues and operating margin. Revenues generated through the
Company's alliances with Equifax, Inc., Experian Information Solutions, Inc.,
(formerly TRW Information Systems & Services) and Trans Union Corporation each
accounted for approximately eight to ten percent of the Company's total revenues
in fiscal 1996 and 1997.
On November 14, 1996, it was announced that Experian had been acquired by
CCN Group Ltd., a subsidiary of Great Universal Stores, PLC. CCN is the
Company's largest competitor, worldwide, in the area of credit scoring.
TRW/Experian has offered scoring products developed by CCN in competition with
those of the Company for several years. The acquisition had no apparent impact
on the Company's revenues from Experian in fiscal l997.
17
On September 30, 1997, amendments to the federal Fair Credit Reporting Act
became effective. The Company believes these changes to the federal law
regulating credit reporting will be favorable to the Company and its clients.
Among other things, the new law expressly permits the use of credit bureau data
to prescreen consumers for offers of credit and insurance and allows affiliated
companies to share consumer information with each other subject to certain
conditions. There is also a seven-year moratorium on new state legislation on
certain issues. However, the states remain free to regulate the use of credit
bureau data in connection with insurance underwriting.
The Company believes enacted or proposed state regulation of the insurance
industry has had a negative impact on its efforts to sell insurance risk scores
through credit reporting agencies.
DynaMark`s revenues increased from $17.8 million in fiscal 1995 to $21.2
million in fiscal 1996 and to $29.8 million in fiscal 1997. The increases in
DynaMark's revenues (excluding inter-company revenues) were due primarily to
increased revenues from customers in the financial services industry. Gross
margins for fiscal 1995, 1996 and 1997 were approximately 38, 39 and 42 percent,
respectively. Since its acquisition, DynaMark has taken on an increasing share
of the mainframe batch processing requirements of the Company's other business
units. During fiscal 1997, such inter-company revenue represented approximately
14 percent of DynaMark's total revenues. Accordingly, DynaMark's externally
reported revenues tend to understate DynaMark's growth and contribution to the
Company as a whole.
RMT's revenues for fiscal l996 increased by 123 percent compared with
fiscal l995, and in fiscal 1997 increased by 18 percent compared with fiscal
1996. The rapid growth in revenues in fiscal l996 was a result of the
acquisition by RMT in June l995 of Software Alliance Corporation, with which RMT
had formed an alliance for marketing of all RMT products and sharing of revenues
from such product sales. Under the terms of the alliance, RMT received and
recorded 25 percent of the revenues from sales made by Software Alliance. After
the acquisition, RMT received and recorded 100 percent of the revenues from such
sales.
Increases in insurance revenues for fiscal l997, compared with fiscal 1996,
were due to strong growth in both insurance products sold to end-users and in
the insurance scoring services offered through consumer reporting agencies. The
Company recorded its first revenues from its Healthcare Information business
unit in fiscal 1997.
The Company's revenues derived from clients outside the United States
increased from $16.4 million in fiscal 1995 to $26.1 million in 1996 and to
$33.9 million in fiscal l997. RMT contributed $1.5 million, $4.3 million and
$4.6 million to the Company's non-U.S. revenues for fiscal years 1995, l996 and
l997, respectively. DynaMark has not had significant non-U.S. revenues. Sales of
software products, including TRIAD and CreditDesk, and an increase in the number
of accounts using the Company's account management services at credit card
processors in Europe and Latin America, accounted for most of the increase in
international revenues in fiscal 1996 and 1997.
Revenues from software maintenance and consulting services each accounted
for less than 10 percent of revenues in each of the three years in the period
ended September 30, 1997, and the Company does not expect revenues from either
of these sources to exceed 10 percent of revenues in the foreseeable future.
During the period since 1990, while the rate of account growth in the U.S.
bankcard industry has been slowing and many of the Company's largest
institutional clients have merged and consolidated, the Company has generated
above-average growth in revenues--even after adjusting for the effect of
acquisitions--from its bankcard-related scoring and account management business
by deepening its penetration of large banks and other credit issuers. The
Company believes much of its future growth prospects will rest on its ability
to: (1) develop new, high-value products, (2) increase its penetration of
established or emerging credit markets outside the U.S. and Canada and (3)
expand--either directly or through further acquisitions--into relatively
undeveloped or underdeveloped markets for its products and services, such as
direct marketing, insurance, small business lending and healthcare information
management.
18
Over the long term, in addition to the factors discussed above, the
Company's rate of revenue growth--excluding growth due to acquisitions--is
limited by the rate at which it can recruit and absorb additional professional
staff. Management believes this constraint will continue to exist indefinitely.
On the other hand, despite the high penetration the Company has already achieved
in certain markets, the opportunities for application of its core competencies
are much greater than it can pursue. Thus, the Company believes it can continue
to grow revenues, within the personnel constraint, for the foreseeable future.
At times management may forego short-term revenue growth in order to devote
limited resources to opportunities that it believes have exceptional long-term
potential. This occurred in the period from 1988 through 1990 when the Company
devoted significant resources to developing the usage-priced services
distributed through credit bureaus and third-party processors.
Expenses
The following table sets forth for the fiscal periods indicated: (a) the
percentage of net revenues represented by certain line items in the Company's
Consolidated Statement of Income and (b) the percentage change in the amount of
each such line item from the prior fiscal year.
Percentage of Period-to-period
revenue percentage changes
Years ended 1996 1995
September 30, to to
1997 1996 1995 1997 1996
- ---------------------------------------------------------------------------------------------------
Total revenues 100 100 100 28 33
---- ---- ----
Costs and expenses:
Cost of revenues 36 37 37 26 32
Sales and marketing 15 17 20 13 11
Research and development 9 6 4 90 86
General and administrative 20 21 21 23 33
Amortization of intangibles 1 -- 1 74 3
---- ---- ----
Total costs and expenses 81 81 83 28 30
---- ---- ----
Income from operations 19 19 17 28 49
Other income (expense) (1) (1) 1 NM* NM*
---- ---- ----
Income before income taxes 18 18 18 24 34
---- ---- ----
Provision for income taxes 8 7 7 32 31
---- ---- ----
Net income 10 11 11 19 37
==== ==== ====
<FN>
* Not meaningful
</FN>
Cost of revenues
Cost of revenues consists primarily of personnel, travel and related
overhead costs; costs of computer service bureaus; and the amounts paid by the
Company to credit bureaus for scores and related information in connection with
the ScoreNet(R) Service.
Cost of revenues, as a percentage of revenues, remained essentially
unchanged from fiscal l995 to fiscal 1996, and declined slightly in fiscal l997.
The decrease in fiscal l997 was due primarily to the reassignment to research
and development activities of certain personnel whose primary assignment had
been production and delivery.
Sales and marketing
Sales and marketing expenses consist principally of personnel, travel,
overhead, advertising and other promotional expenses. As a percentage of
revenues, sales and marketing expenses decreased in fiscal 1996 compared with
fiscal 1995 and further decreased in fiscal l997 due primarily to a reduction in
media advertising.
19
Research and development
Research and development expenses include the personnel and related
overhead costs incurred in product development, researching mathematical and
statistical algorithms and developing software tools that are aimed at improving
productivity and management control. Research and development increased sharply
from fiscal l995 to fiscal 1996 and from fiscal 1996 to fiscal 1997. After
several years of concentrating on developing new markets--either geographically
or by industry--for its existing technologies, in fiscal 1996 and fiscal l997
the Company renewed its historical emphasis on developing new technologies,
especially in the area of software development.
General and administrative
General and administrative expenses consist mainly of compensation expenses
for certain senior management, corporate facilities expenses, the costs of
administering certain benefit plans, legal expenses, expenses associated with
the exploration of new business opportunities and the costs of operating
administrative functions, such as finance and computer information systems. As a
percentage of revenues, general and administrative expenses were essentially
unchanged for fiscal l995, l996 and l997.
Amortization of intangibles
The Company is amortizing the intangible assets arising from various
acquisitions over periods ranging from 2 to 15 years. The level of amortization
expense in future years will depend, in part, on the amount of additional
payments to the former shareholders of CRMA, a privately held company acquired
at the end of fiscal l996. See below, under "Capital Resources and Liquidity."
Other income (expense)
The table in Note 14 to the Consolidated Financial Statements presents the
detail of other income and expenses. Interest income is derived from the
investment of funds surplus to the Company's immediate operating requirements.
At September 30, 1997, the Company had approximately $26.1 million invested in
U.S. treasury securities and other interest-bearing instruments. Interest income
increased in fiscal 1996 due to rising interest rates and the increasing balance
in interest-bearing accounts and instruments, and in fiscal 1997 due to higher
average cash balances.
The Company's share of operating losses in certain early-stage development
companies that are accounted for using the equity method is charged to other
expense. During the quarter ended September 30, l997, the Company wrote off
non-marketable investments with an equity basis of $773,000, principally an
Italian start-up venture due to the potential negative impact on the start-up's
operations from a new privacy law. In addition, during the quarter ended
September 30, 1996, the Company wrote off an investment in a different
early-stage development company due to the deteriorating financial condition of
that entity. The write-offs and the Company's share of losses in early-stage
development companies were primarily responsible for the difference between the
increase in operating income in fiscal l996 and 1997 (49 percent and 28 percent,
respectively) and the increase in net income (37 percent and 19 percent,
respectively). Note 5 to the Consolidated Financial Statements describes the
Company's investment in such companies.
Provision for income taxes
The Company's effective tax rate was 40.4 percent, 39.3 percent and 41.8
percent in fiscal l995, l996 and l997, respectively. The increase to 41.8
percent in fiscal 1997 was due primarily to the nondeductible nature of
goodwill, one-time acquisition costs for RMT and an increase in the valuation
allowance of deferred tax assets. The Company expects its effective tax rate in
fiscal 1998 to be approximately 40 percent, barring any change in the tax laws.
20
CAPITAL RESOURCES AND LIQUIDITY
Working capital increased from $23,448,000 at September 30, 1995 to
$34,699,000 at September 30, 1996, and to $47,727,000 at September 30, l997. The
increase in fiscal 1996 was due primarily to increases in accounts receivable,
cash and cash equivalents and prepaid expenses and other assets, which more than
offset the increase in accrued compensation and employee benefits and accounts
payable and other accrued liabilities.
The increase in fiscal 1997 was due primarily to increases in accounts
receivable and unbilled work in progress, which more than offset the increase in
accrued compensation and employee benefits and the decrease in prepaid expenses
and other assets.
The Company's 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 mix, along with
variations in timing, may cause fluctuations in any or all of these items.
During fiscal 1997, the increase in accounts receivable and billings in excess
of earned revenues were proportional to the increase in revenues. The greater
increase in unbilled work was due primarily to changes in product mix and
contract terms.
The Company has capitalized as goodwill the amount of $45,000 for amounts
due to the former stockholders of CRMA based upon its financial results in
fiscal 1997 under the CRMA purchase agreement. Additional payments to the former
stockholders of CRMA based upon CRMA's financial results in fiscal 1998 and 1999
may also be required. Those amounts, which will be paid 55 percent in Company
stock and 45 percent in cash, will not exceed $1,833,000 per year.
In fiscal 1996, cash provided by operations resulted primarily from net
income before depreciation and amortization and increases in accrued
compensation and employee benefits, partially offset by the increase in accounts
receivable. Cash was used in investing activities primarily for additions to
property and equipment, purchases of interest-bearing investments, the
acquisitions of Printronic and CRMA, and an "earn-out" payment to the former
shareholders of DynaMark, partially offset by the maturities of interest-bearing
investments. Cash was used in financing activities primarily for the payment of
dividends and the reduction of capital lease obligations, partially offset by
cash generated by the exercise of stock options.
In fiscal 1997, cash provided by operations resulted primarily from net
income before depreciation and amortization, decreases in prepaid expenses and
other assets and increases in accrued compensation and employee benefits,
partially offset by the increase in accounts receivable and unbilled work in
progress. Cash was used in investing activities primarily for additions to
property and equipment and the purchase of interest-bearing investments,
partially offset by the maturities of interest-bearing investments. Cash was
used in financing activities for the payment of dividends, reduction of capital
lease obligations and repurchase of Company stock, partially offset by cash
generated by the exercise of stock options.
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, 1997, the Company had no significant capital
commitments other than those obligations described in Notes 3, 6 and 12 of the
Consolidated Financial Statements.
On December 1, 1997, the Company exercised an option to purchase
undeveloped land in San Rafael, California, with the intention of constructing
an office complex to accommodate future growth. The purchase price is $9.35
million plus certain costs incurred by the seller as defined in the agreement.
Development is expected to commence in fiscal 1998 and will involve a material
capital commitment by the Company. The Company intends to fund the acquisition
and development of this land using long-term debt, equity or other financing.
Excepting external financing of this capital commitment, the Company believes
that the cash and marketable securities on hand, along with cash expected to be
generated by operations, will be adequate to meet its capital and liquidity
needs for both the current year and the foreseeable future.
21
YEAR 2000
The Company is performing Year 2000 conversion work on its software
products marketed to customers. The updated versions of its software products
currently being shipped to customers are Year 2000 compliant. The Year 2000
conversion work for earlier versions of the Company's software installed at
customer sites will be performed as part of the Company's normal upgrade and
maintenance process. Additionally, the Company has completed its Year 2000 audit
of internal systems applications and determined that approximately 95 percent of
its internally developed systems are Year 2000 compliant. Applications supplied
by third parties are either Year 2000 compliant or have patches currently
available to bring them into compliance. The Company plans to be fully compliant
by the end of fiscal l998. The Company cannot now estimate the costs that will
be incurred in performing Year 2000 conversion work.
QUARTERLY RESULTS
The table in Note 16 to the Consolidated Financial Statements presents
unaudited quarterly operating results for the last eight fiscal quarters.
Management believes that all the necessary adjustments have been included in the
amounts stated to present fairly the selected quarterly information, when read
in conjunction with the financial statements included elsewhere in this report.
This information includes all normal recurring adjustments that the Company
considers necessary for a fair presentation thereof, in accordance with
generally accepted accounting principles.
Quarterly results may be affected by fluctuations in revenue associated
with credit card solicitations, by the timing of orders for and deliveries of
certain ASAP and TRIAD systems and by the seasonality of ScoreNet purchases.
With the exception of the cost of ScoreNet data purchased by the Company, most
of its operating expenses are not affected by short-term fluctuations in
revenues; thus short-term fluctuations in revenues may have a significant impact
on operating results. However, in recent years these fluctuations were generally
offset by the strong growth in revenues from services delivered through credit
bureaus and third-party bankcard processors.
Management believes that neither the quarterly variations in net revenues
and net income nor the results of operations for any particular quarter are
necessarily indicative of results of operations for full fiscal years.
Accordingly, management believes that the Company's results should be evaluated
on an annual basis.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risks
None.
22
ITEM 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
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, 1997 and 1996,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the years in the three-year period ended September 30,
1997. 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 generally accepted auditing
standards. 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, 1997 and 1996,
and the results of their operations and their cash flows for each of the years
in the three-year period ended September 30, 1997, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
San Francisco, California
October 29, 1997, except as to note 15,
which is as of December 1, 1997
23
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
Years ended September 30, 1997 1996 1995
- -------------------------------------------------------------------------------------------------
Revenues $199,009 $155,913 $117,089
Costs and expenses:
Cost of revenues 72,566 57,732 43,652
Sales and marketing 29,162 25,722 23,236
Research and development 17,572 9,265 4,973
General and administrative 40,679 32,942 24,689
Amortization of intangibles 1,274 734 711
--------- --------- ---------
Total costs and expenses 161,253 126,395 97,261
--------- --------- ---------
Income from operations 37,756 29,518 19,828
Other income (expense), net (2,210) (814) 1,562
--------- ---------- ---------
Income before income taxes 35,546 28,704 21,390
Provision for income taxes 14,860 11,281 8,637
--------- --------- ---------
Net income $ 20,686 $ 17,423 $ 12,753
========= ========= =========
Earnings per share $1.46 $1.25 $.93
========= ========= =========
Shares used in computing
earnings per share 14,202,000 13,922,000 13,693,000
========== ========== ==========
<FN>
See accompanying notes to the consolidated financial statements.
</FN>
24
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
September 30, 1997 1996
- -------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 13,209 $ 11,487
Short-term investments 6,108 7,487
Accounts receivable, net of
allowance 1997: $758; 1996: $485 36,147 28,206
Unbilled work in progress 18,176 10,565
Prepaid expenses and other current assets 3,673 4,778
Deferred income taxes 4,517 2,904
------------ ----------
Total current assets 81,830 65,427
Long-term investments 13,261 12,647
Property and equipment, net 34,486 23,652
Intangibles, net 8,361 9,557
Deferred income taxes 3,369 2,304
Other assets 3,921 4,436
------------ ----------
$ 145,228 $ 118,023
============ ==========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and other accrued liabilities $ 8,228 $ 7,899
Accrued compensation and employee benefits 19,160 17,511
Billings in excess of earned revenues 6,346 4,940
Capitalized leases 369 378
------------ ----------
Total current liabilities 34,103 30,728
Other liabilities 6,753 6,089
Capitalized leases 1,183 1,552
Commitments and contingencies -- --
------------ ----------
Total liabilities 42,039 38,369
------------ ----------
Stockholders' equity:
Preferred stock -- --
Common stock 135 133
Paid in capital in excess of par value 26,025 21,628
Retained earnings 77,453 58,009
Less treasury stock (1997: 12,114;
1996: 15,938 shares at cost) (433) (68)
Cumulative translation adjustments (308) (145)
Unrealized gains on investments 317 97
------------ ----------
Total stockholders' equity 103,189 79,654
------------ ----------
$ 145,228 $ 118,023
============ ==========
<FN>
See accompanying notes to the consolidated financial statements.
</FN>
25
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Period from September 30, 1994, to September 30, 1997 (in thousands)
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock Paid in Unrealized Total
-------------- capital in Pension Cumulative gains on stock-
Par excess of Retained Treasury adjust- translation invest- holders'
Shares value par value earnings stock ments adjustments ments equity
------ ----- ---------- -------- -------- ------- ----------- --------- --------
Balances at September 30, 1994 12,640 $67 $13,649 $29,554 $(341) $-- $-- $-- $42,929
Issuance of restricted stock 4 -- 4 -- -- -- -- -- 4
Exercise of stock options 217 1 450 -- -- -- -- -- 451
Tax benefit of stock options -- -- 115 -- -- -- -- -- 115
Contribution/sale to ESOP 48 -- 729 -- 113 -- -- -- 842
Net income -- -- -- 12,753 -- -- -- -- 12,753
Dividends declared -- -- -- (668) -- -- -- -- (668)
Stock dividend -- 62 -- (62) -- -- -- -- --
Adoption of SFAS No. 115 at
October 1, 1995 -- -- -- -- -- -- -- (77) (77)
Unrealized gains on investments -- -- -- -- -- -- -- 233 233
Pension adjustment -- -- -- -- -- (406) -- -- (406)
-------- ----- ------- ------- ----- --------- ------ --------- ---------
Balances at September 30, 1995 12,909 130 14,947 41,577 (228) (406) -- 156 56,176
Issuance of common stock 101 1 3,586 -- -- -- -- -- 3,587
Issuance/vesting of restricted
stock 1 -- 115 -- -- -- -- -- 115
Exercise of stock options 221 2 911 -- -- -- -- -- 913
Tax benefit of stock options -- -- 1,124 -- -- -- -- -- 1,124
Contribution/sale to ESOP 38 -- 945 -- 160 -- -- -- 1,105
Net income -- -- -- 17,423 -- -- -- -- 17,423
Dividends declared -- -- -- (991) -- -- -- -- (991)
Pension adjustment -- -- -- -- -- 406 -- -- 406
Unrealized losses on investments -- -- -- -- -- -- -- (59) (59)
Cumulative translation
adjustments -- -- -- -- -- -- (145) -- (145)
-------- ----- ------- ------- ----- --------- ------ --------- ---------
Balances at September 30, 1996 13,270 133 21,628 58,009 (68) -- (145) 97 79,654
Issuance of common stock 47 -- 1,044 -- -- -- -- -- 1,044
Vesting of restricted stock -- -- 289 -- -- -- -- -- 289
Exercise of stock options 141 2 1,018 -- -- -- -- -- 1,020
Tax benefit of stock options -- -- 1,474 -- -- -- -- -- 1,474
Contribution/sale to ESOP 41 -- 504 -- 105 -- -- -- 609
Deferred compensation -- -- 68 -- -- -- -- -- 68
Purchase of treasury stock (37) -- -- -- (470) -- -- -- (470)
Net income -- -- -- 20,686 -- -- -- -- 20,686
Dividends declared -- -- -- (1,028) -- -- -- -- (1,028)
Charge to reflect change in
RMT's fiscal year -- -- -- (214) -- -- -- -- (214)
Unrealized gains on investments -- -- -- -- -- -- -- 220 220
Cumulative translation
adjustments -- -- -- -- -- -- (163) -- (163)
-------- ----- ------- ------- ----- --------- ------ --------- ---------
Balances at September 30, 1997 13,462 $135 $26,025 $77,453 $(433) $ -- $(308) $317 $103,189
======== ===== ======= ======= ===== ========= ====== ========= =========
<FN>
See accompanying notes to the consolidated financial statements.
</FN>
26
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Years ended September 30, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $20,686 $17,423 $12,753
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 11,753 7,928 6,227
Equity loss in investments 2,082 821 97
Investment write-off 773 1,535 --
Deferred income taxes (2,824) 84 (1,714)
Charge to reflect change in RMT's fiscal year (214) -- --
Changes in operating assets and liabilities:
Increase in accounts receivable (8,104) (7,824) (5,380)
Decrease (increase) in unbilled work in progress (7,611) 1,425 (5,149)
Decrease (increase) in prepaid expenses and other assets 2,945 (3,180) (1,585)
Decrease (increase) in other assets 515 (40) (355)
Increase in accounts payable and other accrued liabilities 329 2,894 753
Increase in accrued compensation and employee benefits 3,659 5,105 4,796
Increase (decrease) in billings in excess of earned revenues 1,406 (1,244) 2,679
Increase (decrease) in other liabilities 664 (1,002) (32)
-------- -------- --------
Net cash provided by operating activities 26,059 23,925 13,090
-------- -------- --------
Cash flows from investing activities
Purchases of property and equipment (21,653) (13,472) (10,912)
Proceeds from sale of property and equipment 340 -- --
Purchase of Printronic and CRMA, net of cash acquired (78) (1,682) --
Purchase of DynaMark -- (1,129) (2,150)
Purchases of investments (9,658) (10,781) (9,240)
Proceeds from maturities of investments 7,568 5,913 7,104
-------- -------- --------
Net cash used in investing activities (23,481) (21,151) (15,198)
-------- -------- --------
Cash flows from financing activities
Principal payments of capital lease obligations (378) (391) (478)
Issuance of stock 1,020 928 494
Dividends paid (1,028) (991) (668)
Repurchase of company stock (470) -- --
-------- -------- --------
Net cash used in financing activities (856) (454) (652)
-------- -------- --------
Increase (decrease) in cash and cash equivalents 1,722 2,320 (2,760)
Cash and cash equivalents, beginning of year 11,487 9,167 11,927
-------- -------- --------
Cash and cash equivalents, end of year $13,209 $11,487 $9,167
======== ======== ========
<FN>
See accompanying notes to the consolidated financial statements.
</FN>
27
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 offers a variety of
technological tools to enable users to make better decisions through data. The
Company is a world leader in developing predictive and risk assessment models
for the financial services industry, including credit and insurance scoring
algorithms. The Company also offers direct marketing and database management
services, and enterprise-wide risk management and performance measurement
solutions to major financial institutions through its wholly owned subsidiaries,
DynaMark, Inc. (DynaMark) and Risk Management Technologies (RMT), respectively.
Basis of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned 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.
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.
Investments
Investments in U.S. government obligations and marketable equity securities
are classified as "available-for-sale" and carried at market. Investments in 50%
or less owned companies in which the Company has the ability to exercise
significant influence are accounted for using the equity method and are
classified as non-marketable securities. Other investments are carried at the
lower of cost or net realizable method and are classified as non-marketable
securities.
Investments classified as available-for-sale securities with remaining
maturities over one year and non-marketable securities are classified as
long-term investments.
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 that maintain safety and liquidity. An allowance for doubtful
accounts is maintained at a level which management believes is sufficient to
cover potential credit losses. Actual losses and allowances have been within
management's expectations.
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 ten years or the term of the
respective leases.
28
Revenue recognition
Revenues from contracts for the development of credit scoring systems and
custom software are recognized using the percentage-of-completion method of
accounting based upon milestones which are defined using management's estimates
of costs incurred at various stages of the project as compared to total
estimated project costs. Revenues determined by the percentage-of-completion
method in excess of contract billings are recorded as unbilled work in progress.
Such amounts are generally billable upon reaching certain performance milestones
that are defined by the individual contracts. Deposits billed and received in
advance of performance under contracts are recorded as billings in excess of
earned revenues.
Revenues from usage-priced products and services are recognized on receipt
of usage reports from the third-parties through which such products and services
are delivered. Amounts due under such arrangements are recorded as unbilled work
in progress until collected. Revenues from non-customized software licenses and
shrink-wrapped products are recognized upon delivery of product and services, or
license renewal. Revenues from products and services sold on time-based pricing,
including maintenance of computer and software systems, are recognized ratably
over the contract period.
Software costs
The Company follows one of two paths to develop software. One involves a
detailed program design, which is used when introducing new technology; the
other involves the creation of a working model for modification to existing
technologies that has been supported by adequate testing. 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, technological
feasibility is achieved and subsequent costs such as coding, debugging and
testing are capitalized.
When developing software using existing technology, the costs incurred
prior to the completion of a working model are expensed. Once the product design
is met, this typically concludes the software development process and is usually
the point at which technological feasibility is established. Subsequent
expenses, including coding and testing, if any, are capitalized. For the
three-year period ending September 30, 1997, technological feasibility coincided
with the completion process; thus, all design and development costs were
expensed as research and development costs.
Purchased software costs are amortized over three years. For the years
ended September 30, 1997, 1996 and 1995, amortization of capitalized software
was $1,069,000, $248,000 and $573,000, respectively. At September 30, 1997 and
1996, unamortized purchased computer software costs were $3,228,000 and
$1,241,000, respectively.
Intangibles
The intangible assets consisting of goodwill and non-compete agreements
arose principally from business acquisitions and are amortized on a
straight-line basis over the period of expected benefit which ranges from 2 to
15 years. The Company assesses the recoverability of goodwill by evaluating the
undiscounted projected results of operations over the remaining amortization
period.
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.
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 U.S. 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.
29
Earnings per share
Earnings per share are based on the weighted-average number of common
shares outstanding and common stock equivalent shares. Common equivalent shares
result from the assumed exercise of outstanding stock options that have a
dilutive effect when applying the treasury stock method. Fully diluted earnings
per share were approximately equal to primary earnings per share in each of the
years in the three-year period ended September 30, 1997.
Reclassifications
Certain reclassifications were made to the 1995 and 1996 financial
statements to conform to the 1997 presentation.
Accounting pronouncements
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
No. 128). SFAS No. 128 establishes standards for computing and presenting
earnings per share (EPS) and applies to entities with publicly held common stock
or potential common stock. SFAS No. 128 simplifies the standards for computing
earnings per share previously found in Accounting Principles Board (APB) Opinion
No. 15, Earnings per Share, and replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement and requires reconciliation of
the numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. SFAS No. 128 is effective for
financial statements issued for both interim and annual periods ending after
December 15, 1997; earlier application is not permitted. This statement requires
restatement of all prior-period EPS data presented. Management does not believe
the impact of the diluted EPS is materially different than the primary EPS
amounts currently reported in the accompanying consolidated financial
statements; however, basic EPS would be higher than the primary EPS.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
SFAS No. 130 established standards for reporting comprehensive income and its
components in financial statements. This statement requires that all items which
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Comprehensive income is equal
to net income plus the change in "other comprehensive income." SFAS No. 130
requires that an entity: (a) classify items of other comprehensive income by
their nature in a financial statement, and (b) report the accumulated balance of
other comprehensive income separately from common stock and retained earnings in
the equity section of the statement of financial position. This statement is
effective for financial statements issued for fiscal years beginning after
December 15, 1997. Management intends to conform its consolidated financial
statements to this pronouncement.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
publicly held entities to follow in reporting information about operating
segments in annual financial statements and requires that those entities report
selected information about operating segments in interim financial statements.
This statement also establishes standards for related disclosures about products
and services, geographic areas and major customers. This statement is effective
for financial statements issued for fiscal years beginning after December 15,
1997. Management intends to conform its consolidated financial statements to
this pronouncement.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position No. 97-2, "Software Revenue Recognition." This
statement establishes standards for when to recognize revenue on software
transactions and in what amounts for licensing, selling, leasing or otherwise
marketing computer software. This statement is effective for financial
statements issued for fiscal years beginning after December 15, 1997. Management
intends to conform its consolidated financial statements to this pronouncement.
The Company is currently evaluating the impact of the statement in the
accompanying consolidated financial statements.
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
investment securities are disclosed in Note 5.
30
2. Dividends
On May 23, 1995, the Company's Board of Directors declared a 100% stock
dividend equivalent to a two-for-one stock split, payable at the close of
business on June 26, 1995. The par value of the additional shares was
reclassified from retained earnings to common stock. All per share amounts,
options, market prices and number of shares have been restated to retroactively
reflect the 100% stock dividend.
Concurrent with the 100% stock dividend, the Board of Directors authorized
payment of a quarterly dividend of 2 cents or 8 cents per year. Previously,
dividends had been paid at a rate of 3.5 cents semi-annually or 7 cents per
year. Because the change to quarterly dividends was initiated in September 1995,
the rate of dividends paid in fiscal 1995 does not reflect the new annual rate.
3. Mergers and Acquisitions
In July 1997, the Company issued 1,252,665 shares of its common stock
(including 544,218 shares underlying options assumed by the Company) in
connection with the merger with RMT. The acquisition has been accounted for
under the pooling-of-interests method. Accordingly, the financial statements
have been restated for all prior periods to include RMT. Further, all common
share and per share data have been restated for prior periods.
For the pre-merger periods indicated, revenues and net income of the
Company and RMT are as follows:
Nine-months ended
June 30, 1997 Years ended September 30,
(dollars in thousands) (Unaudited) 1996 1995
- ------------------------------------------------------------------------------------------------------------
Revenues
Fair, Isaac and Company, Incorporated $137,031 $148,749 $113,881
Risk Management Technologies 5,746 7,164 3,208
-------- -------- --------
$142,777 $155,913 $117,089
======== ======== ========
Net Income
Fair, Isaac and Company, Incorporated $13,732 $16,179 $12,695
Risk Management Technologies 630 1,244 58
-------- -------- --------
$14,362 $17,423 $12,753
======== ======== ========
RMT previously used the fiscal year ended December 31 for its financial
reporting. RMT's operating results for the year ended December 31, 1996 are
included in the accompanying statement of income in the column headed September
30, 1996. The statement of income's comparative 1997 results reflect the
operations of the Company and RMT for the year ended September 30, 1997.
Accordingly, the duplication of RMT's net income, for the three months ended
December 31, 1996, has been adjusted by a $214,000 charge to retained earnings
in fiscal 1997. The balance sheet at September 30, 1996 has been derived from
the combination of the audited consolidated financial statements of the Company
at that date and the audited financial statements of RMT at December 31, 1996.
In July 1996, the Company purchased certain assets and liabilities of
Printronic Corporation of America, Inc. (Printronic), a privately held direct
mail computer processing company, and effective at the close of September 30,
1996, the Company acquired 100% of the stock of Credit & Risk Management
Associates, Inc. (CRMA), a privately held consulting services company.
The consideration paid for Printronic and CRMA consisted of 84,735 Company
shares valued at $3,572,000 plus $1,697,000 in cash. Both acquisitions have been
accounted for as purchases. The results of operations of Printronic have been
included in the consolidated financial statements since the acquisition date; no
results of operations for CRMA are included in the consolidated financial
statements for the year ended September 30, 1996. The purchase price for each
acquisition was allocated based on estimated fair values at the dates of
acquisition. The excess of the purchase prices over the fair value of net assets
or liabilities was $5,547,000 and has been recorded as goodwill, which will be
amortized on a straight-line basis over 7 or 15 years.
31
The CRMA purchase agreement provides for additional contingent cash and
Company stock payments to the former CRMA shareholders not to exceed $5,499,000
based on specified financial performance of CRMA through September 1999. For the
year ended September 30, 1997, an additional $45,000 was capitalized as goodwill
relating to the additional contingent cash and Company stock payments.
Pro forma unaudited consolidated operating results of the Company,
Printronic and CRMA for the years ended September 30, 1996 and 1995, assuming
the acquisitions had been made as of October 1, 1995 and 1994, are summarized
below.
Pro forma summary (unaudited) Years ended September 30,
(dollars in thousands except per share data) 1996 1995
- -------------------------------------------------------------------------------
Revenue $162,491 $122,557
Net income $17,495 $12,425
Earnings per share $1.25 $.97
These pro forma results have been prepared for comparative purposes only
and include certain adjustments such as additional amortization expense as a
result of goodwill and other intangible assets. They do not purport to be
indicative of the results of operations that actually would have resulted had
the combinations been in effect on October 1, 1995 and 1994, or of future
results of operations of the consolidated entities.
4. Cash Flow Statement
Supplemental disclosure of cash flow information:
Years ended September 30,
(dollars in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
Income tax payments $14,278 $13,785 $10,641
Interest paid $ 336 $ 223 $ 243
Non-cash investing and financing activities:
Tax benefit of stock options $ 1,474 $ 1,124 $ 115
Issuance of common stock to ESOP $ 969 $ -- $ --
Contributions of treasury stock to ESOP $ 609 $ 1,105 $ 842
Vesting of restricted stock $ 289 $ 115 $ --
Purchase of Printronic and CRMA with common stock $ -- $ 3,572 $ --
5. Investments
The following is a summary of available-for-sale securities and other
investments at September 30, 1997 and 1996:
1997 1996
---- ----
Gross Gross Gross Gross
Amortized unrealized unrealized Fair Amortized unrealized unrealized Fair
(dollars in thousands) cost gains losses value cost gains losses value
- ---------------------------------------------------------------------------------------------------------------------------
Short-term investments:
U.S. government obligations $ 6,069 $ 39 $-- $ 6,108 $ 7,475 $ 14 $ (2) $ 7,487
======== ======== ===== ======== ======== ======== ======== ========
Long-term investments:
U.S. government obligations $ 10,480 $ 93 $-- $ 10,573 $ 10,520 $ 99 $ (23) $ 10,596
Non-marketable securities 306 -- -- 306 1,900 -- -- 1,900
Marketable equity
securities 1,987 716 (321) 2,382 79 77 (5) 151
-------- -------- ----- -------- -------- -------- -------- --------
$ 12,773 $ 809 $(321) $ 13,261 $ 12,499 $ 176 $ (28) $ 12,647
======== ======== ===== ======== ======== ======== ======== ========
The long-term U.S. government obligations mature in one to five years.
32
For the years ended September 30, 1997 and 1996, the Company made purchases
of non-marketable equity investments of $2,285,000 and $2,343,000, respectively.
For the year ended September 30, 1997, a non-marketable investment with an
equity basis of $773,000 in an overseas start-up venture, principally an Italian
credit reporting agency, was written off due to the potential negative impact on
the agency's operations from a new Italian privacy law. The Company may continue
funding future operating losses of this venture, if any. Currently, the Company
is in negotiations to liquidate its equity share of this non-marketable
security. The Company also recognized its equity share of losses from these
non-marketable equity investments, which includes this Italian venture, of
$2,082,000, $821,000 and $97,000 for the years ended September 30, 1997, 1996
and 1995, respectively.
For the year ended September 30, 1996, an investment of $1,535,000 in the
non-marketable preferred stock of an early-stage enterprise was written off due
to the deteriorating financial condition of the entity. The Company does not
have any further financial commitments with respect to the investment.
6. Property and Equipment
Property and equipment at September 30, 1997 and 1996 valued at cost,
consist of the following:
(dollars in thousands) 1997 1996
- ------------------------------------------------------------------------------
Data processing equipment $34,248 $21,893
Office furniture, vehicles and equipment 14,383 11,424
Leasehold improvements 12,003 8,111
Capitalized leases 2,841 2,969
Less accumulated depreciation and amortization (28,989) (20,745)
--------- ---------
Net property and equipment $34,486 $23,652
========= =========
Depreciation and amortization charged to operations were $10,479,000,
$7,194,000 and $4,874,000 for the years ended September 30, 1997, 1996 and 1995,
respectively.
Capitalized leases consist primarily of one lease bearing an interest rate
of 7% that matures in the year 2001. The following is a schedule, by years, of
future minimum lease payments under capitalized leases, together with the
present value of the net minimum lease payments, at September 30, 1997:
Years ended September 30, (dollars in thousands)
- --------------------------------------------------------------
1998 $ 466
1999 466
2000 466
2001 375
-------
1,773
Less: Amount representing interest (221)
-------
Present value of net minimum lease payments $1,552
=======
33
7. Intangibles
Intangibles at September 30, 1997 and 1996, consist of the following:
(dollars in thousands) 1997 1996
- ----------------------------------------------------------------------
Goodwill $10,138 $10,060
Other 2,270 2,270
Less accumulated amortization (4,047) (2,773)
------- --------
$ 8,361 $ 9,557
======= ========
Amortization charged to operations was $1,274,000, $734,000 and $711,000
for the years ended September 30, 1997, 1996 and 1995, respectively.
8. Income Taxes
The provision for income taxes consists of the following:
Years ended September 30,
(dollars in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------
Current:
Federal $14,685 $ 9,026 $ 7,992
State 2,863 1,901 2,168
Foreign 136 270 191
------- ------- -------
17,684 11,197 10,351
------- ------- -------
Deferred:
Federal (2,400) 183 (1,441)
State (424) (99) (273)
------- ------- -------
(2,824) 84 (1,714)
------- ------- -------
$14,860 $11,281 $ 8,637
======= ======= =======
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 effect of significant temporary differences resulting in deferred
tax assets at September 30, 1997 and 1996 are, as follows:
(dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------
Deferred tax assets:
Depreciation and amortization $ 2,637 $ 1,899
Officers' incentives 2,042 1,429
Loss on investments 1,530 919
Compensated absences 1,070 849
State taxes 1,007 581
Bad debt provision 283 170
Employee benefit plans 280 (226)
Tax on net unrealized gains
on available-for-sale securities (210) (64)
Other 330 254
------- -------
8,969 5,811
Less valuation allowance (1,083) (603)
------- -------
$ 7,886 $ 5,208
======= =======
34
The valuation allowance for deferred tax assets at September 30, 1997 and
1996 was for $1,083,000 and $603,000, respectively. The valuation allowance was
needed to reduce the deferred tax assets since the Company does not meet the
more-likely-than-not requirement for utilization of the capital loss
carryforward.
A reconciliation between the federal statutory income tax rate and the Company's
effective tax rate is shown below:
Years ended September 30,
(dollars in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
Income tax provision at federal statutory
rates in 1997, 1996 and 1995 $ 12,441 $ 10,031 $ 7,487
State income taxes, net of federal benefit 1,586 1,190 1,229
Increase in valuation allowance 480 603 --
Other 353 (543) (79)
-------- -------- -------
$ 14,860 $ 11,281 $ 8,637
======== ======== =======
9. Employee Benefit Plans
Pension plan
The Company has a defined benefit pension plan that covers eligible
full-time employees. The benefits are based on years of service and the
employee's compensation during employment. Contributions are intended to provide
not only for benefits attributed to service to date but also for those expected
to be earned in the future. The following table sets forth the plan's funding
status at September 30, 1997 and 1996:
(dollars in thousands) 1997 1996
- ----------------------------------------------------------------------------
Vested benefit obligation $ 7,578 $ 6,349
Nonvested benefit obligation 479 486
Effect of projected future earnings 3,710 2,778
--------- ---------
Projected benefit obligation 11,767 9,613
Fair value of plan assets (10,266) (7,883)
--------- ---------
Projected benefit obligation in
excess of plan assets 1,501 1,730
Unrecognized prior service cost 68 77
Unrecognized net loss (2,692) (3,226)
Unrecognized net obligation remaining
to be amortized (158) (177)
--------- ---------
Prepaid pension cost $(1,281) $(1,596)
========= =========
The plan assets consist primarily of marketable equity securities, and also
U.S. government securities.
The projected benefit obligation includes an accumulated benefit obligation
of $8,057,000 and $6,835,000 at September 30, 1997 and 1996, respectively. The
obligation exceeded the fair value of the pension plan assets for the years
ended September 30, 1997 and 1996. For the year ended September 30, 1996, the
Company reduced to zero the additional minimum liability of $517,000 (the
intangible asset of $111,000 and pension adjustment of $406,000 in stockholders'
equity) that was recorded in the year ended September 30, 1995.
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 7.5 and 5.0 percent, respectively, at
September 30, 1997, and 8.0 and 5.0 percent, respectively, at September 30,
1996. The expected long-term rate of return on assets was 8.5 percent at
September 30, 1997 and 1996.
35
The net pension cost for the fiscal years ended September 30, 1997 and
1996, included the following components:
(dollars in thousands) 1997 1996
- ---------------------------------------------------------------------------
Service costs $1,011 $ 809
Interest cost on projected benefit obligation 745 609
Actual return on plan assets (2,050) (362)
Net amortization and deferral 1,502 66
------- --------
Net periodic pension plan cost $1,208 $1,122
======= ========
Employee stock ownership plan
The Company has an Employee Stock Ownership Plan (ESOP) that covers
eligible full-time employees. Contributions to the ESOP are determined annually
by the Company's Board of Directors. In addition, the ESOP may purchase stock
from the Company or its stockholders. Provisions for contributions to the ESOP
were $1,534,000, $1,445,000 and $1,046,000 for the years ended September 30,
1997, 1996 and 1995, respectively.
At September 30, 1997, the ESOP held 970,566 shares of Company stock. The
amount of dividends on ESOP shares were $81,000, $94,000 and $64,000 for the
years ended September 30, 1997, 1996 and 1995, respectively.
Company stock held and paid for by the ESOP is allocated annually to
participants based on employee compensation levels. Participants vest in the
allocated shares at rates ranging from 0% to 30% after 1 to 7 years of
employment until fully vested.
Defined contribution plans
The Company offers 401(k) plans for eligible employees. Eligible employees
may contribute up to 15% of compensation. The Company provides a matching
contribution which either vests immediately or over five years. The Company
contributions to 401(k) plans were $673,000, $470,000 and $363,000 for years
ended September 30, 1997, 1996 and 1995, respectively. During fiscal 1995, the
Company established a supplemental retirement and savings plan for certain
officers and senior management employees. Company contributions to that plan
were $132,000, $104,000 and $91,000 for the years ended September 30, 1997, 1996
and 1995, respectively.
Officers' incentive plan
The Company has an executive compensation plan for the benefit of officers.
Benefits are payable based on the achievement of financial and performance
objectives, which are set annually by the Board of Directors, and the market
value of the Company's stock. Total expenses under the plan were $3,842,000,
$3,560,000 and $4,030,000 for the years ended September 30, 1997, 1996 and 1995,
respectively. The incentive earned each year is paid 50% currently, and the
balance is 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. At September 30, 1997 and 1996, the long-term officers'
incentive plan payable was $3,475,000 and $3,678,000, respectively.
Employee incentive plans
The Company has incentive plans for eligible employees not covered under
the executive compensation plan. Awards under these plans are paid annually and
are based on the achievement of certain financial and performance objectives.
Total expenses under these plans were $5,211,000, $4,426,000 and $5,401,000 for
the years ended September 30, 1997, 1996 and 1995, respectively.
36
10. Stock
Common
A total of 35,000,000 shares of common stock, $.01 par value, are
authorized, of which 13,474,382 shares (including 12,114 shares of treasury
stock) were outstanding at September 30, 1997, and 13,286,222 shares (including
15,938 shares of treasury stock) were outstanding at September 30, 1996.
Preferred
A total of 1,000,000 shares of preferred stock, $.01 par value, are
authorized; no preferred stock has been issued.
11. Stock Option Plans
The Company has two stock option plans, one of which is for the granting of
stock options, stock appreciation rights, restricted stock and common stock that
reserves shares of common stock for issuance to officers, key employees and
non-employee directors. The Company accounts for the fair value of its stock
options under these plans in accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation." The Company has elected to continue to apply the
provisions of APB No. 25, and provide the pro forma disclosures of SFAS No. 123.
Granted awards generally have a maximum term of ten years and vest over one to
five years. Under this plan approved by the stockholders, the total number of
shares that may be granted is 1,400,000. The other plan is 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 options under the plan is 650,800.
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:
1997 1996
- -----------------------------------------------------------------------
Expected life (years) 5 5
Interest rate 6.5% 6.2%
Volatility 45 % 45 %
Dividend yield 0 % 0 %
The following information regarding these option plans for the years ended
September 30 is as follows:
1997 1996 1995
---- ---- ----
Weighted-average Weighted-average Weighted-average
Options exercise price Options exercise price Options exercise price
- ----------------------------------------------------------------------------------------------------------------
Outstanding at
beginning of year 1,387,767 $12.21 1,324,407 $ 6.72 1,176,529 $ 4.95
Granted 613,261 $36.82 285,500 $ 32.57 365,378 $11.28
Exercised (141,452) $ 7.19 (222,140) $ 5.62 (217,500) $ 4.83
Forfeited (17,000) $28.96 -- $ -- -- $ --
--------- ---------- ----------
Outstanding at
end of year 1,842,576 $20.63 1,387,767 $12.21 1,324,407 $ 6.72
========= ========= =========
Options exercisable
at year end 782,358 $ 5.33 693,902 $ 3.73 759,029 $ 3.61
========= ========= =========
The weighted-average fair value of options granted for the years ended
September 30, 1997 and 1996 was $17.47 and $15.35, respectively.
37
The following table summarizes information about significant fixed-price
stock option groups outstanding at September 30, 1997:
Options outstanding Options exercisable
-------------------------- -----------------------------
Number Weighted average remaining Weighted average Number Weighted average
Range of exercise prices outstanding contractual life exercise price outstanding exercise price
- ------------------------------------------------------------------------------------------------------------------------------------
$ .92 to $ 8.50 725,026 3.85 $ 2.87 640,018 $ 2.25
$13.25 to $19.31 230,000 4.63 $ 16.87 104,000 $ 13.90
$20.75 to $33.88 347,550 6.77 $ 30.82 27,340 $ 23.73
$34.00 to $40.00 417,500 8.68 $ 38.02 9,000 $ 40.00
$41.13 to $45.63 122,500 8.50 $ 44.69 2,000 $ 41.88
--------- --------
$ .92 to $45.63 1,842,576 5.90 $ 20.63 782,358 $ 5.33
========= ========
Stock-based compensation under SFAS No. 123 would have had the following
pro forma effects for the years ended September 30:
(In thousands, except per share data) 1997 1996
- ---------------------------------------------------------------------------
Net income, as reported $20,686 $17,423
======= =======
Pro forma net income $18,091 $17,002
======= =======
Earnings per share, as reported $ 1.46 $ 1.25
======= =======
Pro forma earnings per share $ 1.27 $ 1.22
======= =======
The pro forma effect on net income for each of the years ended September
30, 1997 and 1996 may not be representative of the effects on reported net
income in future years.
12. 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 provide for annual increases based upon the Consumer Price Index or fixed
increments.
Minimum future rental commitments under operating leases are as follows:
Year ending September 30, (dollars in thousands)
- --------------------------------------------------------------
1998 $ 7,806
1999 8,162
2000 7,174
2001 6,582
2002 4,316
Thereafter 34,016
---------
$68,056
=========
Rent expense under operating leases, including month-to-month leases, was
$6,413,000, $4,821,000 and $3,030,000 for the years ended September 30, 1997,
1996 and 1995, respectively.
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.
38
13. Segment Information
The Company operates principally in the financial services industry.
Operations in other industries are less than 10% of consolidated revenues. The
Company's international operations consist primarily of sales and service
offices. Substantially all foreign sales are exports. The Company's revenues
from customers outside the United States were $33,879,000, $26,142,000 and
$16,370,000 for the years ended September 30, 1997, 1996 and 1995, respectively.
14. Other Income (Expense)
Other income (expense) for the years ended September 30, 1997, 1996 and
1995, consists of the following:
(dollars in thousands) 1997 1996 1995
- ------------------------------------------------------------------------------
Interest income $ 2,040 $1,748 $1,574
Equity loss in investments (2,082) (821) (97)
Investment write-off (773) (1,535) --
Foreign currency gain (loss) (677) (97) 261
Acquisition expenses (558) -- --
Interest expense (336) (223) (243)
Other 176 114 67
-------- ------- -------
$(2,210) $ (814) $1,562
======== ====== ======
15. Subsequent Events
On November 26, 1997, the Company entered into an option agreement to
purchase undeveloped land in San Rafael, California, with the intention of
constructing an office complex to accommodate future growth. On December 1,
1997, the Company exercised the option to purchase the land for $9.35 million
plus amounts necessary to reimburse certain costs incurred by the seller as
defined in the agreement. The consummation of the purchase is subject to a
variety of closing conditions, including receipt of required government
approvals.
On November 26, 1997, the Company also signed a lease agreement and
land purchase agreement related to the undeveloped land discussed in the above
paragraph. However, these agreements will not be in effect if the purchase of
the land described in the above paragraph is consummated.
39
16. 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, 1997. 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.
(in thousands except Dec. 31, Mar. 31, June 30, Sept. 30,
per share data) 1995 1996 1996 1996
- -------------------------------------------------------------------------------------------------
Revenues $34,218 $36,950 $39,213 $45,532
Cost of revenues 13,531 13,838 14,622 15,741
-------- --------- --------- ---------
Gross profit $20,687 $23,112 $24,591 $29,791
======== ========= ========= =========
Net income $3,785 $4,573 $4,867 $4,198
======== ========= ========= =========
Earnings per share $.27 $.33 $.35 $.30
======== ========= ========= =========
Shares used in computing
earnings per share 13,791 13,857 13,829 13,891
======== ========= ========= =========
(in thousands except Dec. 31, Mar. 31, June 30, Sept. 30,
per share data) 1996 1997 1997 1997
- -------------------------------------------------------------------------------------------------
Revenues $43,337 $48,366 $51,074 $56,232
Cost of revenues 16,372 17,825 18,715 19,654
-------- --------- --------- ---------
Gross profit $26,965 $30,541 $32,359 $36,578
======== ========= ========= =========
Net income $4,698 $5,370 $4,294 $6,324
======== ========= ========= =========
Earnings per share $.33 $.38 $.30 $.44
======== ========= ========= =========
Shares used in computing
earnings per share 14,144 14,228 14,325 14,452
======== ========= ========= =========
The financial data for the above quarterly information has been restated to
reflect the merger, effective July 1997, between Fair, Isaac and Company,
Incorporated and Risk Management Technologies which has been accounted for under
the pooling-of-interests method.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The required information regarding Directors of the registrant is
incorporated by reference from the information under the caption "Election of
Directors - Nominees" in the Company's definitive proxy statement for the Annual
Meeting of Stockholders to be held on February 3, 1998.
The required information regarding Executive Officers of the registrant 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 Compliance" in the
Company's definitive proxy statement for the Annual Meeting of Stockholders to
be held on February 3, 1998.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the information under the captions
"Compensation of Directors and Executive Officers," "Compensation Committee
Interlocks and Insider Participation," and "Director Consulting Arrangements" in
the Company's definitive proxy statement for the Annual Meeting of Stockholders
to be held on February 3, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the information under the caption "Stock
Ownership" in the Company's definitive proxy statement for the Annual Meeting of
Stockholders to be held on February 3, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the information under the captions "Director
Consulting Arrangements" and "Compensation Committee Interlocks and Insider
Participation" in the Company's definitive proxy statement for the Annual
Meeting of Stockholders to be held on February 3, 1998.
41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Reference Page
Form 10-K
(a) 1. Consolidated financial statements:
Report of Independent Auditors............................................... 23
Consolidated statements of income for each of the years
in the three-year period ended September 30, 1997....................... 24
Consolidated balance sheets at September 30, 1997 and
September 30, 1996...................................................... 25
Consolidated statements of stockholders' equity for each of the
years in the three-year period ended September 30, 1997................. 26
Consolidated statements of cash flows for each of the
years in the three-year period ended September 30, 1997................. 27
Notes to consolidated financial statements................................... 28
2. Financial statement schedule:
II Valuation and qualifying accounts at September 30, 1997 and 1996......... 47
3. Exhibits:
2.1 Asset Purchase Agreement, dated December 31, 1992, by and
between the Company and DynaMark, Inc., filed as Exhibit 2.1
to the Company's report on Form 8-K dated December 31, 1992,
and incorporated herein by reference.
2.2 Agreement and Plan of Reorganization, dated June 12, l997,
among the Company, FIC Acquisition Corporation, Risk
Management Technologies ("RMT"), and the shareholders and
optionholders of RMT. Pursuant to Item 601(b)(2) of Regulation
S-K, certain schedules have been omitted but will be furnished
supplementally to the Commission on request.
2.3 Employment Agreement, dated July 21, l997, by and between the
Company and David LaCross.*
2.4 Employment and Non-Competition Agreement, dated December 31,
1992, by and between the Company and Kenneth M. Rapp, filed as
Exhibit 2.2 to the Company's report on Form 8-K dated December
31, 1992, and incorporated herein by reference.*
3.1 Restated Certificate of Incorporation of the Company.
3.2 Restated By-laws of the Company.
4.1 Registration Rights Agreement, dated June 23, l997, among the
Company, David LaCross and Kathleen O. LaCross, Trustees U/D/T
dated April 2, 1997, Jefferson Braswell, Software Alliance
LLC, Robert Ferguson, James T. Fan and Leland Prussia.
4.2 Registration Rights Agreement, dated September 30, 1996, among
the Company, Donald J. Sanders, Paul A. Makowski and Lawrence
E. Dukes, filed as Exhibit 4.2 to the Company's report on Form
10-K for the fiscal year ended September 30, 1995, and
incorporated herein by reference.
42
10.1 Company's Stock Option Plan (1984) and form of Stock Option
Agreement, filed as Exhibit 10.1 to the Registration Statement
and incorporated herein by reference.*
10.2 Company's 1987 Stock Option Plan, filed as Exhibit 10.2 to the
Registration Statement and incorporated herein by reference.*
10.3 Lease dated April 28, 1995, between CSM Investors, Inc., and
DynaMark, Inc. filed as Exhibit 10.3 to the Company's report
on Form 10-K for the fiscal year ended September 30, 1995, and
incorporated herein by reference.
10.4 Fair, Isaac and Company, Inc. Officers' Incentive Plan
(effective October 1, 1992), filed as Exhibit 10.4 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1994, and incorporated herein by reference.*
10.5 Lease, dated October 30, 1983, between S.R.P. Limited
Partnership and the Company, as amended, filed as Exhibit 10.7
to the Registration Statement and incorporated herein by
reference.
10.6 Stock Option Plan for Non-Employee Directors, filed as Exhibit
10.8 to the Company's report on Form 10-K for the fiscal year
ended September 30, 1988 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 through Fifth
Addenda thereto filed as Exhibit 10.7 to the Company's report
on Form 10-K for the fiscal year ended September 30, 1995, and
incorporated herein by reference.
10.8 First Amendment to the Company's 1987 Stock Option Plan, filed
as Exhibit 10.11 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1989, and incorporated herein
by reference.*
10.9 First Amendment to the Company's Stock Option Plan for
Non-Employee Directors, filed as Exhibit 10.12 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1989, and incorporated herein by reference.*
10.10 Amendment No.1 to the Company's 1992 Long-Term Incentive Plan
(as amended and restated effective November 21, 1995).*
10.11 Addendum Number Seven to lease between S.R.P. Limited
Partnership and the Company filed as Exhibit 10.15 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1990, and incorporated herein by reference.
10.12 Addenda Numbers Eight and Nine to lease between SRP Limited
Partnership and the Company filed as Exhibit 10.12 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1995, and incorporated herein by reference.
10.13 Lease, dated September 5, 1991, between 111 Partners, a
California general partnership, and the Company filed as
Exhibit 10.20 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1991, and incorporated herein
by reference.
10.14 Construction Loan Agreement, dated September 5, 1991, between
111 Partners and the Company filed as Exhibit 10.21 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1991, and incorporated herein by reference.
10.15 Amendment No.2 to the Company's 1992 Long-Term Incentive Plan
(as amended and restated effective November 21, 1995).*
10.16 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.*
10.17 Amendment No.3 to the Company's Stock Option Plan for
Non-Employee Directors.*
43
10.18 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, and
incorporated herein by reference.
10.19 Lease dated April 10, 1994, between Leed Properties and
DynaMark, Inc., filed as Exhibit 10.19 to the Company's report
on Form 10-K for the fiscal year ended September 30, 1994, and
incorporated herein by reference.
10.20 Fair, Isaac Supplemental Retirement and Savings Plan and Trust
Agreement effective November 1, 1994, filed as Exhibit 10.20
to the Company's report on Form 10-K for the fiscal year ended
September 30, 1994, and incorporated herein by reference.*
10.21 Lease dated July 10, 1993, between the Joseph and Eda Pell
Revocable Trust and the Company filed as Exhibit 10.21 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1995, and incorporated herein by reference.
10.22 Lease dated October 11, 1993, between the Joseph and Eda Pell
Revocable Trust and the Company and the First through Fourth
Addenda thereto filed as Exhibit 10.22 to the Company's report
on Form 10-K for the fiscal year ended September 30, 1995, and
incorporated herein by reference.
10.23 Fourth Contract Extension, dated April 7, 1995, to the
Consulting Contract between the Company and William R. Fair,
filed as Exhibit 10.23 to the Company's report on Form 10-K
for the fiscal year ended September 30, 1995, and incorporated
herein by reference.*
10.24 Exchange Agreement and Plan of Reorganization, dated July 19,
1996, among DynaMark, Inc., Printronic Corporation of America,
Inc., Leo R. Yochim, and Susan Keenan, filed as Exhibit 10.24
to the Company's report on Form 10-K for the fiscal year ended
September 30, 1996, and incorporated herein by reference.
10.25 Agreement and Plan of Merger and Reorganization, dated
September 30, 1996, among the Company, FIC Acquisition
Corporation, Credit & Risk Management Associates, Inc., Donald
J. Sanders, Paul A. Makowski and Lawrence E. Dukes, filed as
Exhibit 10.25 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1996, and incorporated herein
by reference.
10.26 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.*
10.27 Letter of Intent dated July 15, 1996, between the Company and
Village Properties, and the First Amendment thereto dated July
18, 1996, filed as Exhibit 10.27 to the Company's report on
Form 10-K for the fiscal year ended September 30, 1996, and
incorporated herein by reference.
10.28 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.
10.29 Sixth and Seventh Addenda to the Lease, dated July 1, 1993,
between the Company and the Joseph and Eda Pell Revocable
Trust, filed as Exhibit 10.29 to the Company's report on Form
10-K for the fiscal year ended September 30, 1996, and
incorporated herein by reference.
10.30 First and Second Addenda to the Lease dated July 10, 1993,
between the Company and the Joseph and Eda Pell Revocable
Trust, filed as Exhibit 10.30 to the Company's report on Form
10-K for the fiscal year ended September 30, 1996, and
incorporated herein by reference.
10.31 Fifth Addendum to the Lease, dated October 11, 1993, between
the Company and the Joseph and Eda Pell Revocable Trust, filed
as Exhibit 10.31 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1996, and incorporated herein
by reference.
44
10.32 First Addendum to Lease, dated August 13, l997, by and between
the Company and Regency Center.
10.33 Option Agreement, dated November 26, l997, by and between the
Company and Village Builders, L.P.
10.34 Leasehold Improvements Agreement, dated November 26, l997, by
and between the Company and Village Builders, L.P.
10.35 Lease, dated March 11, l997, by and between DynaMark, Inc. and
CSM.
10.36 First Amendment to Lease, dated September 24, l997, by and
between DynaMark, Inc. and CSM.
10.37 Chase Database Agreement, dated October 29, l997, by and among
DynaMark, Inc. and Chase Manhattan Bank USA, National
Association. 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.
11.1 Computation of net income per common share.
21.1 Subsidiaries of the Company.
23.1 Consent of KPMG Peat Marwick LLP (see page 48 of this Form
10-K).
24.1 Power of Attorney (see page 46 of this Form 10-K).
27 Financial Data Schedule.
* Management contract or compensatory plan or arrangement.
45
(b) Reports on Form 8-K:
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the fiscal quarter ended September 30, 1997.
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 26, 1997
By /s/ PETER L. MCCORKELL
----------------------------------------
Peter L. McCorkell
Senior Vice President, Secretary and
General Counsel
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints PETER L. McCORKELL his attorney-in-fact,
with full power of substitution, for him in any and all capacities, to sign any
amendments to this Report on Form 10-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.
LARRY E. ROSENBERGER President, Chief Executive Officer December 26, 1997
- ---------------------------------------- (Principal Executive Officer) and Director
Larry E. Rosenberger
PATRICIA COLE Senior Vice President, Chief December 26, 1997
- ---------------------------------------- Financial Officer and Controller
Patricia Cole
A. GEORGE BATTLE Director December 26, 1997
- ----------------------------------------
A. George Battle
BRYANT J. BROOKS Director December 26, 1997
- ----------------------------------------
Bryant J. Brooks
H. ROBERT HELLER Director December 26, 1997
- ----------------------------------------
H. Robert Heller
GUY R. HENSHAW Director December 26, 1997
- ----------------------------------------
Guy R. Henshaw
DAVID S. P. HOPKINS Director December26, 1997
- ----------------------------------------
David S. P. Hopkins
ROBERT M. OLIVER Director December 26, 1997
- ----------------------------------------
Robert M. Oliver
ROBERT D. SANDERSON Director December 26, 1997
- ----------------------------------------
Robert D. Sanderson
JOHN D. WOLDRICH Director December 26, 1997
- ----------------------------------------
John D. Woldrich
46
SCHEDULE II
FAIR, ISAAC AND COMPANY, INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
RULE 12-09
SEPTEMBER 30, 1997 AND 1996
Additions
Balance at ----------------------------- Balance at
Beginning Charged End of
Description of Period to Expense Other (1) Write-offs Period
----------- --------- ---------- --------- ---------- ------
September 30, 1997:
Allowance for Doubtful
Accounts $485,000 $438,000 $ -- $(165,000) $758,000
September 30, 1996:
Allowance for Doubtful
Accounts $332,450 $600,000 $11,000 $(458,450) $485,000
September 30, 1995:
Allowance for Doubtful
Accounts $539,000 $ 16,000 $ -- $(222,550) $332,450
<FN>
(1) Amount represents the allowance recorded due to the acquisition of Credit &
Risk Management Associates, Inc.
</FN>
47
Consent of Independent Auditors
The Board of Directors
Fair, Isaac and Company, Incorporated:
We consent to incorporation by reference in the registration statement (No.
33-20349) on Form S-8, the registration statement (No. 33-26659) on Form S-8,
the registration statement (No. 33-63428) on Form S-8, the registration
statement (No. 333-02121) on Form S-8, the registration statement (No.
333-32309) on Form S-8, the registration statement (No. 333-42473) on Form S-3
of Fair, Isaac and Company, Incorporated and subsidiaries of our reports dated
October 29, 1997, except as to note 15, which is as of December 1, 1997,
relating to the consolidated balance sheets of Fair, Isaac and Company,
Incorporated and subsidiaries as of September 30, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows and
related financial statement schedule for each of the years in the three-year
period ended September 30, 1997, which reports appear in the September 30, 1997
annual report on Form 10-K of Fair, Isaac and Company, Incorporated, and
subsidiaries.
KPMG PEAT MARWICK LLP
San Francisco, California
December 26, 1997
48
EXHIBIT INDEX
TO FAIR, ISAAC AND COMPANY, INCORPORATED
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
Exhibit No. Exhibit
- ----------- -------
2.2 Agreement and Plan of Reorganization, dated June 12, l997, among
the Company, FIC Acquisition Corporation, Risk Management
Technologies ("RMT"), and the shareholders and optionholders of
RMT. Pursuant to Item 601(b)(2) of Regulation S-K, certain
schedules have been omitted but will be furnished supplementally
to the Commission on request.
2.3 Employment Agreement, dated July 21, l997, by and between the
Company and David LaCross.
3.1 Restated Certificate of Incorporation of the Company.
3.2 Restated By-laws of the Company.
4.1 Registration Rights Agreement dated June 23, l997, among the
Company, David LaCross and Kathleen O. LaCross, Trustees U/D/T
dated April 2, 1997, Jefferson Braswell, Software Alliance LLC,
Robert Ferguson, James T. Fan and Leland Prussia.
10.10 Amendment No.1 to the Company's 1992 Long-Term Incentive Plan (as
amended and restated effective November 21, 1995).
10.15 Amendment No.2 to the Company's 1992 Long-Term Incentive Plan (as
amended and restated effective November 21, 1995).
10.17 Amendment No.3 to the Company's Stock Option Plan for
Non-Employee Directors.
10.32 First Addendum to Lease, dated August 13, l997, by and between
the Company and Regency Center.
10.33 Option Agreement, dated November 26, l997, by and between the
Company and Village Builders, L.P.
10.34 Leasehold Improvements Agreement, dated November 26, l997, by and
between the Company and Village Builders, L.P.
10.35 Lease dated March 11, l997, by and between DynaMark, Inc. and
CSM.
10.36 First Amendment to Lease, dated September 24, l997, by and
between DynaMark, Inc. and CSM.
10.37 Chase Database Agreement, dated October 29, l997, by and among
DynaMark, Inc. and Chase Manhattan Bank USA, National
Association. 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.
11.1 Computation of net income per common share.
21.1 Subsidiaries of the Company.
23.1 Consent of KPMG Peat Marwick LLP (see page 48 of this Form 10-K).
24.1 Power of Attorney (see page 46 of this Form 10-K).
27 Financial Data Schedule.
49