United States
Securities and Exchange Commission
Washington, D.C. 20549
----------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1998
[ ] 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
-----------------------------
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. [ ]
As of December 7, 1998, the aggregate market value of the Registrant's
common stock held by nonaffiliates of the Registrant was $382,136,797 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 7, 1998
was 14,047,284 (excluding 10,690 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 2, 1999.
TABLE OF CONTENTS
Page
----
PART I
ITEM 1. Business............................................................. 3
ITEM 2. Properties........................................................... 13
ITEM 3. Legal Proceedings.................................................... 13
ITEM 4. Submission of Matters to a Vote of Security Holders.................. 13
EXECUTIVE OFFICERS OF THE REGISTRANT......................................... 14
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................................ 15
ITEM 6. Selected Financial Data.............................................. 16
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 17
ITEM 7A.Quantitative and Qualitative Disclosures About Market Risks.......... 24
ITEM 8. Financial Statements and Supplementary Data.......................... 25
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................... 44
PART III
ITEM 10. Directors and Executive Officers of the Registrant.................. 45
ITEM 11. Executive Compensation.............................................. 45
ITEM 12. Security Ownership of Certain Beneficial Owners and Management...... 45
ITEM 13. Certain Relationships and Related Transactions ..................... 45
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.... 46
SIGNATURES ................................................................ 51
Supplemental Information..................................................... 52
2
PART I
ITEM 1. BUSINESS
Development Of The Business
Fair, Isaac and Company, Incorporated (NYSE: FIC)("Fair, Isaac" or the
"Company") 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 1998 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 25 percent of revenues.
In more recent years Fair, Isaac has expanded its product and service
offerings, applying its proven risk/reward modeling capabilities to automobile
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 $49.2 million or 20 percent of Fair,
Isaac's fiscal 1998 revenues. The Company's Insurance business unit generated
revenues in fiscal 1998 of $9.2 million or 4 percent of revenues. In fiscal
l997, the Company recorded its first revenues from its new Healthcare
Information business unit, and during fiscal 1998 derived revenues from
providing analytical marketing services to a large pharmaceuticals manufacturer
to help improve customer relationships and management of prescription compliance
(i.e., a patient's fulfillment of prescriptions and taking them to completion).
In July 1997 the Company acquired Risk Management Technologies (RMT), a
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 l998 were $6.2 million, or 3 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 nearly 30 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.
3
Approximately 17 percent of Fair, Isaac's fiscal 1998 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.
Since 1993, Fair, Isaac's revenues and diluted earnings per share have
increased at a compound rate of 30 percent and 35 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
businesses 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 73 percent
of the Company's revenues in each of the three years in the period ended
September 30, 1998. Sales to customers in the direct marketing business,
including the marketing arms of financial service businesses, accounted for 13
to 20 percent of revenues in each of the three years in the period ended
September 30, 1998. Revenues from sales to the insurance industry accounted for
3 to 4 percent of revenues in each of the three years in the period ended
September 30, 1998. In fiscal 1997 the Company's recorded the first revenues
from its new Healthcare Information business unit, and during fiscal 1998
derived revenues from providing analytical marketing services to a large
pharmaceuticals manufacturer to help improve customer relationships and
management of prescription compliance (i.e., a patient's fulfillment of
prescriptions and taking them to completion).
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
4
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.
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.
ScoreNet(SM) 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'
5
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 Corporation 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.
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,(R) 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 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
IBM-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.
6
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
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(R), 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
7
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 remain 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. The
first revenue-generating contract for this product was signed in October 1998.
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
8
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 42 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 computer languages used
for coding.
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, and 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 1998. Revenues generated through the Company's
alliances with the three major credit bureaus in the United States, Equifax,
Experian Information Solutions, Inc. (formerly known as TRW Information Systems
& Services) and Trans Union, each accounted for approximately seven to ten
percent of the Company's total revenues in fiscal 1998.
The percentage of revenues derived from customers outside the United
States was approximately 17 percent in each of fiscal 1998, 1997, and 1996. 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
9
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 60 countries. The information set forth under the caption "Segment
Information" in Note 12 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.
As of September 30, 1998, the Company's backlog, which includes only
firm contracts, was approximately $68,517,000, as compared with approximately
$70,168,000 as of September 30, 1997. Most usage-based revenues do not appear as
part of the backlog. The Company believes that approximately 25 percent of the
September 30, 1998 backlog will be delivered after the end of the current fiscal
year ending September 30, 1999. 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.
10
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 Experian, formerly
known as, 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). CCN has since been renamed "Experian".
Both AMS and Experian 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 Experian 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 database 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 database. The Company believes its technology is superior to expert
system technology where sufficient performance data are available. Neural
networks, on the other hand, are an alternative method of developing scoring
algorithms from a database 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 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.
11
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. Due to recent changes in the
case law and Patent and Trademark Office Guidelines with respect to the
patentability of software, algorithms and "methods of doing business," the
Company is currently reevaluating the possibility of obtaining patent protection
for certain aspects of its technology.
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.
In addition to 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.
Personnel
As of September 30, 1998, the Company employed approximately 1,487
persons. None of its employees is covered by a collective bargaining agreement
and no work stoppages have been experienced.
12
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 2000 or later. It also leases approximately 5,884 square feet
of warehouse space in San Rafael for its hardware operations and for storage
under month-to-month leases. In May 1998 the Company entered into a synthetic
lease agreement for an office complex with approximately 406,000 square feet in
San Rafael, California with an expected initial occupancy date in the year 2001.
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
2012. DynaMark has entered into a lease for a fourth building with approximately
50,407 square feet at the same location, with an anticipated occupancy date of
July 1999 and expiring in 2012. DynaMark also leases approximately 25,000 square
feet of office and data processing space in New York City under a lease expiring
in 2004 and approximately 14,800 square feet for offices in Brookings and
Madison, South Dakota and Shoreview, Minnesota. RMT leases approximately 14,740
square feet of office space in Berkeley, California. The Company also leases a
total of approximately 47,147 square feet of office space for offices in
Baltimore, Maryland; New Castle, Delaware; Atlanta, Georgia; Chicago, Illinois;
Toronto, Ontario; Birmingham, England; Tokyo, Japan; Paris, France; Mexico City,
Mexico; Sao Paulo, Brazil; Milan, Italy; Johannesburg, South Africa; and
Wiesbaden, Germany. See Notes 5 and 11 in the Consolidated Financial Statements
for information regarding the Company's obligations under leases. 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.
13
EXECUTIVE OFFICERS OF THE REGISTRANT
Name Positions Held Age
---- -------------- ---
Larry E. Rosenberger President and Chief Executive Officer 52
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 55
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 58
joining 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 44
1995; Senior Vice President 1992-
1995; Vice President 1990-1992;
joined the Company in 1985.
H. Robert Heller Executive Vice President since 58
September 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, 49
Vice President 1980-1986. Treasurer
1981-1983. Joined the Company in
1975.
Kenneth M. Rapp Senior Vice President since August 52
1994, and President and Chief
Operating Officer of DynaMark, Inc.
since it was founded in 1985.
Peter L. McCorkell Senior Vice President since August 52
1995; Vice President, Secretary and
General Counsel since joining the
Company in 1987.
Patricia Cole Senior Vice President, Chief 49
Financial Officer and Treasurer since
November 1996; Controller since
joining the Company in September
1995. Vice President and Controller
of Qwest Communications International
Inc. 1993-1995; Controller of Los
Angeles Cellular Telephone Company
1990-1992.
David M. LaCross President, Chief Executive Officer of 46
Risk Management Technologies since it
was founded in 1989.
- ----------------------
The term of office for all officers is at the pleasure of the Board of
Directors.
14
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
7, 1998, Fair, Isaac had 340 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, 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
October 1 - December 31, 1997 46 30 1/4
January 1 - March 31, 1998 38 5/8 28 3/16
April 1 - June 30, 1998 40 9/16 31 1/2
July 1 - September 30, 1998 41 1/2 29 1/4
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 the 1997
and 1998 fiscal years. There are no current plans to change the cash dividend or
to issue any further stock dividend.
Recent Sales of Unregistered Securities
On July 21, 1997, the Company acquired all the outstanding stock of
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 number of shares of the Company's
common stock and option equivalents issued by the Company in connection with the
Merger was 1,252,655.
At the time of the transaction, the issuance of the shares of the
Company's common stock and the options to purchase the Company common stock to
the former RMT security holders in the Merger was 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.
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. Part of
the consideration paid for Printronic and CRMA consisted of 84,735 Company
shares of common stock. At the time of each of these transactions, the issuance
of the shares of the Company's common stock was not registered under 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.
15
ITEM 6. Selected Financial Data
(dollars in thousands, except per share data)
Fiscal year ended September 30, 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
Revenues $245,545 $199,009 $155,913 $117,089 $92,046
Income from operations 40,432 37,756 29,518 19,828 16,420
Income before income taxes 42,105 35,546 28,704 21,390 17,178
Net income 24,327 20,686 17,423 12,753 10,559
Earnings per share:
Diluted $ 1.68 $ 1.46 $ 1.25 $ .93 $ .79
Basic $ 1.77 $ 1.55 $ 1.32 $ .99 $ .85
Dividends per share* $ .08 $ .08 $ .08 $ .055 $ .07
At September 30, 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
Working capital $ 54,852 $ 47,727 $ 34,699 $ 23,448 $ 17,436
Total assets 189,614 145,228 118,023 91,009 72,056
Long-term obligations 789 1,183 1,552 1,930 2,333
Stockholders' equity 133,451 103,189 79,654 56,176 42,929
<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, 1994
through 1996 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.
16
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. The Company's Risk Management Technologies subsidiary provides
enterprise-wide risk management and performance measurement solutions to major
financial institutions.
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.
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. 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 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 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.
17
Percentage of Period-to-period
revenue percentage changes
---------------------- ------------------
Years ended 1997 1996
September 30, to to
1998 1997 1996 1998 1997
- ---------------------------------------------------------------------------------------------
Credit:
Fixed-price 25 29 29 9 28
Usage-priced 48 48 50 21 23
DynaMark 20 15 13 65 41
RMT 3 4 5 (26) 18
Insurance 4 3 3 58 27
Healthcare Less than 1 1 -- (4) NM*
---- ---- ----
Total revenues 100 100 100 23 28
==== ==== ====
<FN>
*Not meaningful
</FN>
Revenues from credit application scoring products increased by 22
percent in fiscal 1997 compared with fiscal 1996, and decreased by 12 percent in
fiscal 1998 compared with fiscal 1997. The increase in fiscal 1997 was due
primarily to the Company's sales of new products and increased sales of small
business loan scoring products. The decrease in revenues in fiscal 1998
reflected the impact of bank consolidations. ASAP revenues increased by 47
percent in fiscal 1997 compared with fiscal 1996, and by 14 percent in fiscal
1998 compared with fiscal 1997, primarily due to increased sales of PC-based
ASAP products (CreditDesk) and sales of the StrategyWare(R) decision support
system.
Revenues from sales of credit account management systems (TRIAD) sold
to end-users decreased by 5 percent from fiscal 1996 to fiscal 1997, and
increased by 18 percent from fiscal l997 to fiscal l998. 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. The increase in fiscal 1998 was due primarily to
the release of the next version of TRIAD (TRIAD 5.0) 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.
The Company provides credit risk management consulting services
primarily through CRMA, which it acquired in September 1996. CRMA completed its
second year as part of the Credit business unit on September 30, l998. CRMA's
revenues increased by 62 percent in fiscal l998 compared with fiscal 1997 and
comprised approximately 4 percent of the Company's Credit revenues in fiscal
1998 as compared to 3 percent in fiscal l997.
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 22 percent in both fiscal l997 and fiscal 1998
and accounted for approximately 35 percent of revenues in fiscal 1997 and 1998.
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.
Revenues derived from alliances with credit bureaus and credit card
processors have accounted for much of the Company's revenue growth in 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 8 to 10 percent of the
Company's total revenues in fiscal 1996 and 1997, and approximately 7 to 10
percent of the Company's total revenues in fiscal 1998.
18
In 1996 Experian was 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 1997 and l998.
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 $21.2 million in fiscal 1996 to
$29.8 million in fiscal 1997 and to $49.2 million in fiscal 1998. The increases
in DynaMark's revenues (excluding intercompany revenues) were due primarily to
increased revenues from customers in the financial services industry. Gross
margins for fiscal 1996, 1997 and 1998 were approximately 39, 42 and 51 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 each of fiscal 1996 and 1997, such intercompany revenue
represented approximately 14 percent of DynaMark's total revenues, and in fiscal
1998 such revenue represented approximately 8 percent of DynaMark's total
revenues. Accordingly, DynaMark's externally reported revenues may tend to
understate DynaMark's growth and contribution to the Company as a whole.
RMT's revenues for fiscal l997 increased by 18 percent compared with
fiscal l996, and in fiscal 1998 decreased by 26 percent compared with fiscal
1997, due primarily to the impact of bank consolidations.
Increases in insurance revenues for fiscal l998, compared with fiscal
1997, were due to strong growth in both insurance products sold to end-users and
in the insurance scoring services offered through consumer reporting agencies.
In fiscal 1997, the Company recorded its first revenues from its Healthcare
business unit, and during fiscal 1998 derived revenues from providing analytical
marketing services to a large pharmaceuticals manufacturer to help improve
customer relationships and management of prescription compliance (i.e., a
patient's fulfillment of prescriptions and taking them to completion).
The Company's revenues derived from clients outside the United States
increased from $26.1 million in 1996 to $33.9 million in fiscal l997 and to
$42.9 million in fiscal 1998. RMT contributed $4.3 million, $4.6 million and
$3.7 million to the Company's non-U.S. revenues for fiscal years 1996, l997 and
l998, respectively. DynaMark has not had significant non-U.S. revenues. Sales of
software products, including TRIAD and CreditDesk, increased usage of credit
bureau scores in Canada, 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 1997 and 1998. Gains or losses due to fluctuations in currency exchange
rates have not been significant to date but may become more important if, as
expected, the proportion of the Company's revenues denominated in foreign
currencies increases in the future.
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, 1998, 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: (a) develop new, high-value products, (b) increase its penetration of
established or emerging credit markets outside the U.S. and Canada and (c)
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
19
management. During fiscal 1998, the Company's backlog of orders for fixed-priced
products declined slightly. This indicates that revenue growth in fiscal 1999
and later years may depend to a large extent on sales of newly developed
products.
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 Statements 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 1997 1996
September 30, to to
1998 1997 1996 1998 1997
- ---------------------------------------------------------------------------------------------
Total revenues 100 100 100 23 28
----- ----- -----
Costs and expenses:
Cost of revenues 35 36 37 17 26
Sales and marketing 15 15 17 28 13
Research and development 12 9 6 66 90
General and administrative 21 20 21 28 23
Amortization of intangibles 1 1 -- 9 74
----- ----- -----
Total costs and expenses 84 81 81 27 28
----- ----- -----
Income from operations 16 19 19 7 28
Other income (expense) 1 (1) (1) NM* NM*
----- ----- -----
Income before income taxes 17 18 18 18 24
Provision for income taxes 7 8 7 20 32
----- ----- -----
Net income 10 10 11 18 19
===== ===== =====
<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, declined slightly in the
periods from fiscal l996 to fiscal 1997 and from fiscal l997 to fiscal 1998. The
decrease in both fiscal l997 and fiscal 1998 was due primarily to the
reassignment to research and development activities of certain personnel whose
primary assignment had been production and delivery.
20
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 1997 compared with
fiscal 1996 due primarily to a reduction in media advertising and remained
essentially unchanged from fiscal 1997 to fiscal 1998.
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 l996 to fiscal 1997 and from fiscal 1997 to fiscal 1998. 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.
In fiscal 1998, the Company continued to emphasize development of new
technologies. Research and development expenditures in fiscal 1998 were
primarily related to new bankruptcy scoring products for Visa (Integrated
Solutions Concepts) and Trans Union, new fraud-detection software products,
joint product development projects with Deluxe Financial Services, Inc.,
healthcare receivables management and Year 2000 compliance work.
General and administrative
General and administrative expenses consist mainly of compensation
expenses for certain senior management, corporate facilities expenses, the costs
of administering certain benefit plans, legal expenses, expenses associated with
the exploration of new business opportunities and the costs of operating
administrative functions, such as finance and computer information systems. As a
percentage of revenues, general and administrative expenses were essentially
unchanged for fiscal l996, l997 and l998.
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 13 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, 1998, the Company had approximately $46.5 million invested in
U.S. treasury securities and other interest-bearing instruments. Interest income
increased in both fiscal 1997 and 1998 due to higher average cash balances in
interest-bearing accounts and instruments.
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 fiscal year ended September 30, l997, the Company
wrote off non-marketable investments with an equity basis of $773,000, primarily
related to an Italian start-up venture that was adversely affected by a new
privacy law. In fiscal year ended September 30, 1998, the Company liquidated its
share of this non-marketable security resulting in a gain of $165,000 and has no
further financial commitments in connection with this investment. Note 4 to the
Consolidated Financial Statements describes the Company's investment in such
companies.
In fiscal 1998, the difference between the increase in operating income
(7 percent) and the increase in net income (18 percent) was primarily due to the
interest income derived from investments in U.S. treasury securities and other
interest-bearing instruments, and the absence of losses from investments in
start-ups.
21
Provision for income taxes
The Company's effective tax rate was 39.3, 41.8 and 42.2 percent in
fiscal l996, 1997 and l998, respectively. The increase to 42.2 percent in fiscal
1998 was due primarily to the nondeductible nature of goodwill, deferred
compensation and an increase in the effective state tax rate. The Company
expects its effective tax rate in fiscal 1999 to be approximately 42 percent,
barring any change in the tax laws.
Capital Resources and Liquidity
Working capital increased from $34,699,000 at September 30, 1996, to
$47,727,000 at September 30, l997, and to $54,852,000 at September 30, 1998. 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 increase in fiscal 1998 was due primarily to increases in
short-term investments, unbilled work in progress and accounts receivable, which
more than offset the increase in accounts payable and other accrued liabilities
and accrued compensation and employee benefits.
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 increases in accounts receivable and billings in excess
of earned revenues were proportional to the increase in revenues. The greater
increase in unbilled work in progress was due primarily to changes in product
mix and contract terms. During fiscal 1998, the increase in accounts receivable
was proportionally much less than the increase in revenues due to improved
collection efforts by the Company, and the increases in unbilled work in
progress and billings in excess of earned revenues were proportional to the
increase in revenues.
The Company capitalized $45,000 as goodwill relating to amounts due to
the former stockholders of CRMA under the CRMA purchase agreement based upon its
financial results in fiscal 1997, and has capitalized $263,000 based upon CRMA's
financial results in fiscal 1998. An additional payment to the former
stockholders of CRMA based upon CRMA's financial results in fiscal 1999 may also
be required. That amount, which will be paid 55 percent in Company stock and 45
percent in cash, will not exceed $1,833,000.
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.
In fiscal 1998, cash provided by operations resulted primarily from net
income before depreciation and amortization, and increases in accounts payable
and other accrued liabilities and accrued compensation and employee benefits,
partially offset by the increases in accounts receivable, other assets and
unbilled work in progress. Cash was used in investing activities primarily for
additions to property and equipment, and purchases of interest-bearing
investments, partially offset by the maturities of interest-bearing investments.
Cash was provided by financing activities primarily from the exercise of stock
options, partially offset by cash used for the payment of dividends and the
reduction of capital lease obligations.
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, 1998, the Company had no significant capital
commitments other than those obligations described in Notes 2, 5 and 11 of the
Consolidated Financial Statements.
On December 1, 1997, the Company purchased undeveloped land in San
Rafael, California, with the intention of constructing an office complex to
accommodate future growth. Development has commenced, and on May 15, 1998, the
Company entered into a synthetic lease arrangement, which will materially
increase the Company's future operating lease expenses. Rental payments will
commence upon completion of construction, which is expected to
22
occur in the second quarter of fiscal 2001. With this external financing, 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.
Year 2000
The Company is performing Year 2000 remediation work and compliance
testing on its software products marketed to customers. The updated versions of
most of its software products currently being shipped to customers are Year 2000
compliant. Certain international versions of the Company's software products are
not yet Year 2000 compliant, but the Company expects to be prepared to ship
upgrade "patches" for these products by the end of calendar 1998. Year 2000
remediation work, including compliance testing, for most 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. Prior to the end of calendar
1999, the Company will discontinue support for some software products that have
been replaced by other products, and Year 2000 upgrades for these products will
not be available. Revenues from such products are not significant. There are no
assurances that the Company's current products do not contain undetected errors
or defects associated with Year 2000 date functions that may result in material
costs to the Company. However, the Company currently does not expect significant
disruption of its revenues or operations from the Year 2000 issues associated
with its products. The Company has not made an assessment of the potential
impact of failing to complete its own Year 2000 remediation work nor has it
developed any contingency plans for such an event.
Additionally, the Company has substantially completed its Year 2000
inventory and assessment of internal information technology (IT) and non-IT
systems and applications and expects all major internal systems to be fully
compliant by the end of December 1998. The Company has determined that the
majority of its internally developed systems are Year 2000 compliant. All
applications supplied to Company by third parties are either Year 2000 compliant
today or have "patches" currently available to bring them into compliance.
Extensive compliance testing has commenced and will continue through most of the
calendar year 1999. The most reasonably likely worst-case scenarios would
include: (a) corruption of data contained in the Company's internal information
systems, and (b) hardware/operating system failure. The Company is in the
process of completing its contingency plans for business-critical IT and non-IT
internal systems as an extension of its existing disaster recovery plan and
expects to complete such planning by June 30, 1999.
The Company estimates that the costs of Year 2000 remediation
(including compliance testing) for its products and internal systems will be in
the range of $4 million to $5 million. Approximately two-thirds of these
estimated costs have been expended as of September 30, 1998. These costs
principally consist of both internal staff costs and expenses for external
consultants, software and hardware, which have been or will be expensed by the
Company during the period they are incurred. Expected costs for the Year 2000
remediation work (including compliance testing) and projected completion dates
are based on the Company's management's estimates and assumptions and actual
results may vary materially from those anticipated.
The Company has also initiated communications with third parties on
which it is dependent for essential services and for the distribution of its
significant services to determine how they are addressing Year 2000 issues and
to evaluate any impact on the Company's operations. The Company is working with
these third parties to resolve Year 2000 issues and information received to date
indicates that these parties are in the process of implementing and/or testing
remediation strategies to ensure Year 2000 compliance of systems, services
and/or products. However, the lack of resolution of Year 2000 issues by these
parties--especially the credit bureaus and credit card processors through which
the Company distributes credit scoring and account management services--could
have a material adverse impact on the Company's future business operations,
financial condition and results of operations.
The Company anticipates that the most reasonably likely worst-case
scenarios involving third-party Year 2000 issues would include: (a) failure of
infrastructure services provided by government agencies and third parties (e.g.,
transportation, electricity, telephone, Internet services, etc.) and (b) failure
of one or more of the credit bureaus or credit card processors through which the
Company distributes its credit scoring and account management services to
achieve timely and successful Year 2000 compliance. Contingency plans to address
these most reasonably likely
23
worst-case scenarios are under development and are expected to be completed by
June 30, 1999. At this time the Company cannot quantify the potential impact of
third-party Year 2000 issues.
The foregoing information and statements regarding the Company's Year
2000 capabilities and readiness are "Year 2000 Information and Readiness
Disclosures" in conformance with the Year 2000 Information and Readiness
Disclosure Act of 1998 enacted on October 19, 1998.
European Economic and Monetary Union (EMU)
Under the European Union's plan for Economic and Monetary Union (EMU),
the euro becomes the sole accounting currency of EMU countries on January 1,
2002. Its initial phase goes into effect on January 1, 1999, in 11 participating
countries: Austria, Belgium, Finland, France, Germany, Ireland, Italy,
Luxembourg, the Netherlands, Portugal and Spain. In this initial phase the EMU
mandates that key financial systems be able to triangulate conversion rates so
that any amount booked will be logged and processed simultaneously in both the
local currency and euros. The Company believes that its computer systems and
programs are euro-compliant. Costs associated with compliance were not material
and were expensed by the Company as they were incurred.
Quarterly Results
The table in Note 15 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 Risk
Market Risk Disclosures. The following discussion about the Company's
market risk disclosures involves forward-looking statements. Actual results
could differ materially from those projected in the forward-looking statements.
The Company is exposed to market risk related to changes in interest rates,
foreign currency exchange rates and equity security price risk. The Company does
not use derivative financial instruments for speculative or trading purposes.
Interest Rate Sensitivity. The Company maintains a short-term
investment portfolio consisting mainly of income securities with an average
maturity of less than one year. These available-for-sale securities are subject
to interest rate risk and will fall in value if market interest rates increase.
If market interest rates were to increase immediately and uniformly by 10
percent from levels at September 30, 1998, the fair value of the portfolio would
decline by an immaterial amount. The Company has the ability to hold its fixed
income investments until maturity, and therefore the Company would not expect
its operating results or cash flows to be affected to any significant degree by
the effect of a sudden change in market interest rates on its securities
portfolio. The Company believes foreign currency and equity risk is not
material.
24
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, 1998 and
1997, 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, 1998. 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, 1998 and 1997,
and the results of their operations and their cash flows for each of the years
in the three-year period ended September 30, 1998, in conformity with generally
accepted accounting principles.
San Francisco, California
October 29, 1998
25
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Years ended September 30, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues $ 245,545 $ 199,009 $ 155,913
Costs and expenses:
Cost of revenues 84,980 72,566 57,732
Sales and marketing 37,470 29,162 25,722
Research and development 29,136 17,572 9,265
General and administrative 52,132 40,679 32,942
Amortization of intangibles 1,395 1,274 734
------------ ------------ ------------
Total costs and expenses 205,113 161,253 126,395
------------ ------------ ------------
Income from operations 40,432 37,756 29,518
Other income (expense), net 1,673 (2,210) (814)
------------ ------------ ------------
Income before income taxes 42,105 35,546 28,704
Provision for income taxes 17,778 14,860 11,281
------------ ------------ ------------
Net income $ 24,327 $ 20,686 $ 17,423
============ ============ ============
Earnings per share:
Diluted $ 1.68 $ 1.46 $ 1.25
============ ============ ============
Basic $ 1.77 $ 1.55 $ 1.32
============ ============ ============
Shares used in computing earnings per share:
Diluted 14,463,000 14,202,000 13,922,000
============ ============ ============
Basic 13,763,000 13,386,000 13,161,000
============ ============ ============
<FN>
See accompanying notes to the consolidated financial statements.
</FN>
26
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
September 30, 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 14,242 $ 13,209
Short-term investments 18,283 6,108
Accounts receivable, net of allowance (1998: $1,163; 1997: $758) 39,028 36,147
Unbilled work in progress 22,004 18,176
Prepaid expenses and other current assets 4,040 3,673
Deferred income taxes 5,016 4,517
--------- ---------
Total current assets 102,613 81,830
Long-term investments 24,368 13,261
Property and equipment, net 36,893 34,486
Intangibles, net 10,458 8,361
Deferred income taxes 6,398 3,369
Other assets 8,884 3,921
--------- ---------
$ 189,614 $ 145,228
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and other accrued liabilities $ 17,418 $ 8,228
Accrued compensation and employee benefits 22,065 19,160
Billings in excess of earned revenues 7,862 6,346
Capital lease obligations 416 369
--------- ---------
Total current liabilities 47,761 34,103
Other liabilities 7,613 6,753
Capital lease obligations 789 1,183
--------- ---------
Total liabilities 56,163 42,039
--------- ---------
Stockholders' equity:
Preferred stock -- --
Common stock 140 135
Paid in capital in excess of par value 32,454 26,025
Retained earnings 100,678 77,453
Less treasury stock (351) (433)
Cumulative translation adjustments (170) (308)
Unrealized gains on investments 700 317
--------- ---------
Total stockholders' equity 133,451 103,189
--------- ---------
$ 189,614 $ 145,228
<FN>
See accompanying notes to the consolidated financial statements.
</FN>
27
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Period from September 30, 1995, to September 30, 1998 (in thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
Common stock Paid in Unrealized Total
------------- capital in Cumulative gains on stock-
Par excess of Retained Treasury Pension translation Invest- holders'
Share value par value earnings stock adjustments adjustments ments equity
------ ----- ---------- --------- -------- ----------- ----------- ---------- ---------
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 exercised 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 exercised stock
options -- -- 1,474 -- -- -- -- -- 1,474
Contribution/sale to ESOP 41 -- 504 -- 105 -- -- -- 609
Deferred compensation -- -- 68 -- -- -- -- -- 68
Repurchase of company 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
Issuance of common stock 33 -- 1,468 -- -- -- -- -- 1,468
Vesting of restricted stock -- -- 185 -- -- -- -- -- 185
Exercise of stock options 487 5 2,726 -- -- -- -- -- 2,731
Tax benefit of exercised stock
options -- -- 1,660 -- -- -- -- -- 1,660
Deferred compensation -- -- 472 -- -- -- -- -- 472
Repurchase of company stock (3) -- (82) -- (28) -- -- -- (110)
Issuance of treasury stock 3 -- -- -- 110 -- -- -- 110
Net income -- -- -- 24,327 -- -- -- -- 24,327
Dividends declared -- -- -- (1,102) -- -- -- -- (1,102)
Unrealized gains on investments -- -- -- -- -- -- -- 383 383
Cumulative translation adjustments -- -- -- -- -- -- 138 -- 138
------ ----- -------- --------- ------- --------- ------- ------- --------
Balances at September 30, 1998 13,982 $ 140 $ 32,454 $ 100,678 $ (351) $ -- $ (170) $ 700 $133,451
====== ===== ======== ========= ======= ========= ======= ======= ========
28
<FN>
See accompanying notes to the consolidated financial statements.
</FN>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Years ended September 30, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 24,327 $ 20,686 $ 17,423
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 14,948 11,753 7,928
Deferred compensation 472 -- --
Deferred income taxes (3,809) (2,824) 84
Equity loss in investments -- 2,082 821
Investment write-off -- 773 1,535
Charge to reflect change in RMT's fiscal year -- (214) --
Changes in operating assets and liabilities:
(Increase) in accounts receivable (2,743) (8,104) (7,824)
Decrease (increase) in unbilled work in progress (3,828) (7,611) 1,425
Decrease (increase) in prepaid expenses and other assets 473 2,945 (3,180)
Decrease (increase) in other assets (4,963) 515 (40)
Increase in accounts payable and other accrued liabilities 10,226 329 2,894
Increase in accrued compensation and employee benefits 4,413 3,659 5,105
Increase (decrease) in billings in excess of earned revenues 1,516 1,406 (1,244)
Increase (decrease) in other liabilities 236 664 (1,002)
-------- -------- --------
Net cash provided by operating activities 41,268 26,059 23,925
-------- -------- --------
Cash flows from investing activities
Purchases of property and equipment (15,669) (21,653) (13,472)
Proceeds from sale of property and equipment -- 340 --
Payments for acquisition of subsidiaries (3,347) (78) (2,811)
Purchases of investments (33,491) (9,658) (10,781)
Proceeds from maturities of investments 11,030 7,568 5,913
-------- -------- --------
Net cash used in investing activities (41,477) (23,481) (21,151)
-------- -------- --------
Cash flows from financing activities
Principal payments of capital lease obligations (387) (378) (391)
Proceeds from the exercise of stock options and issuance of treasury stock 2,841 1,020 928
Dividends paid (1,102) (1,028) (991)
Repurchase of company stock (110) (470) --
-------- -------- --------
Net cash provided by (used in) financing activities 1,242 (856) (454)
-------- -------- --------
Increase in cash and cash equivalents 1,033 1,722 2,320
Cash and cash equivalents, beginning of year 13,209 11,487 9,167
-------- -------- --------
Cash and cash equivalents, end of year $ 14,242 $ 13,209 $ 11,487
======== ======== ========
<FN>
See accompanying notes to the consolidated financial statements.
</FN>
29
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. In addition, an allowance for
doubtful accounts is maintained at a level which management believes is
sufficient to cover potential credit losses for accounts receivable. Actual
losses 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.
30
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 that 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, 1998, 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 to five years. For
the years ended September 30, 1998, 1997 and 1996, amortization of capitalized
software was $528,000, $808,000 and $248,000, respectively. At September 30,
1998 and 1997, unamortized purchased computer software costs were $6,508,000 and
$1,221,000, 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.
31
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.
Earnings per share
Diluted earnings per share are based on the weighted-average number of
common shares outstanding and common stock equivalent shares. Common stock
equivalent shares result from the assumed exercise of outstanding stock options
that have a dilutive effect when applying the treasury stock method. Basic
earnings per share is computed on the basis of the weighted average number of
common stock shares outstanding.
Accounting pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 130, "Reporting
Comprehensive Income." SFAS No. 130 established standards for reporting
comprehensive income and its components in financial statements. This statement
requires that all items which are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Comprehensive income is equal to net income plus the change in
"other comprehensive income." SFAS No. 130 requires that an entity: (a) classify
items of other comprehensive income by their nature in a financial statement,
and (b) report the accumulated balance of other comprehensive income separately
from common stock and retained earnings in the equity section of the balance
sheet. This statement is effective for financial statements issued for fiscal
years beginning after December 15, 1997. Beginning with the first quarter of
1999, management intends to conform its consolidated financial statements to
this pronouncement.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This statement establishes standards
for publicly held entities to follow in reporting information about operating
segments in annual financial statements and requires that those entities report
selected information about operating segments in interim financial statements.
This statement also establishes standards for related disclosures about products
and services, geographic areas and major customers. This statement is effective
for financial statements issued for fiscal years beginning after December 15,
1997. Beginning with fiscal year 1999, management intends to conform its annual
consolidated financial statements to this pronouncement.
In October 1997, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) No. 97-2, "Software Revenue
Recognition," which supersedes SOP 91-1. The Company will be required to adopt
SOP 97-2 for software transactions entered into beginning October 1, 1998, and
retroactive application to years prior to adoption is prohibited. SOP 97-2
generally requires revenue earned on software arrangements involving multiple
elements (e.g., software products, upgrades/enhancements, postcontract customer
support, installation, training, etc.) to be allocated to each element based on
the relative fair values of the elements. The fair value of an element must be
based on evidence, which is specific to the vendor. The revenue allocated to
software products (including specified upgrades/enhancements) generally is
recognized upon delivery of the products. The revenue allocated to postcontract
customer support generally is recognized ratably over the term of the support
and revenue allocated to service elements (such as training and installation)
generally is recognized as the services are performed. If a vendor does not have
evidence of the fair value for all elements in a multiple-element arrangement,
all revenue from the arrangement is deferred until such evidence exists or until
all elements are delivered. The Company's management believes that the adoption
of SOP 97-2 will not have a material impact on the Company's results of
operations. Beginning with fiscal year 1999, management intends to conform its
consolidated financial statements to this pronouncement.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure
about Pensions and Other Postretirement Benefits." The statement standardizes
the disclosure requirements for pension and other
32
postretirement benefits. This statement is effective for financial statements
issued for fiscal years beginning after December 15, 1997. The Company is
currently evaluating the impact of the disclosure. Beginning with fiscal year
1999, management intends to conform its consolidated financial statements to
this pronouncement.
In March 1998, the AICPA issued SOP No. 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." The SOP requires
that certain costs related to the development or purchase of internal-use
software be capitalized and amortized over the estimated useful life of the
software. The SOP also requires that costs related to the preliminary project
stage and the post-implementation/operations stage of an internal-use computer
software development project be expensed as incurred. This statement is
effective for financial statements issued for fiscal years beginning after
December 15, 1998. Beginning with fiscal year 2000, management intends to
conform its consolidated financial statements to this pronouncement.
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 4.
2. 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 consolidated financial
statements have been restated for all prior periods to include RMT. Further, all
common share and per share data have been restated for prior periods.
For the pre-merger periods indicated, revenues and net income of the
Company and RMT are as follows:
Nine-months ended
June 30, 1997 Year ended
(dollars in thousands) Unaudited September 30, 1996
- --------------------------------------------------------------------------------
Revenues
Fair, Isaac and Company, Incorporated $137,031 $148,749
Risk Management Technologies 5,746 7,164
-------- --------
$142,777 $155,913
======== ========
Net Income
Fair, Isaac and Company, Incorporated $ 13,732 $ 16,179
Risk Management Technologies 630 1,244
-------- --------
$ 14,362 $ 17,423
======== ========
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.
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.
33
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.
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
years ended September 30, 1998 and 1997, an additional $265,000 and $45,000,
respectively, were 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, assuming the
acquisitions had been made as of October 1, 1995, are summarized below.
Pro forma summary (unaudited) Year ended September 30,
(dollars in thousands except per share data) 1996
- --------------------------------------------------------------------------------
Revenue $ 162,491
Net income $ 17,495
Earnings per share:
Diluted $ 1.25
Basic $ 1.32
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, or of future results of
operations of the consolidated entities.
3. Cash Flow Statement
Supplemental disclosure of cash flow information:
Years ended September 30,
(dollars in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Income tax payments $17,174 $14,278 $13,785
Interest paid $ 803 $ 336 $ 223
Non-cash investing and financing activities:
Tax benefit of exercised stock options $ 1,660 $ 1,474 $ 1,124
Issuance of common stock to ESOP $ 1,323 $ 969 $ --
Vesting of restricted stock $ 185 $ 289 $ 115
Purchase of Printronic and CRMA with common stock $ 145 $ -- $ 3,572
Contributions of treasury stock to ESOP $ -- $ 609 $ 1,105
34
4. Investments
The following is a summary of available-for-sale securities and other
investments at September 30, 1998 and 1997:
1998 1997
---------------------------------------- ----------------------------------------------
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 $ 18,049 $ 234 $ -- $ 18,283 $ 6,069 $ 39 $ -- $ 6,108
======== ======== ==== ======== ======== ======== ======== ========
Long-term investments:
U.S. government obligations $ 20,051 $ 676 $ -- $ 20,727 $ 10,480 $ 93 $ -- $ 10,573
Non-marketable securities 382 -- -- 382 306 -- -- 306
Marketable equity securities 2,978 281 -- 3,259 1,987 716 (321) 2,382
-------- -------- ---- -------- -------- -------- -------- --------
$ 23,411 $ 957 $ -- $ 24,368 $ 12,773 $ 809 $ (321) $ 13,261
======== ======== ==== ======== ======== ======== ======== ========
The long-term U.S. government obligations mature in one to five years.
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. During the
year ended September 30, 1998, the Company liquidated its share of this
non-marketable security for a gain of $165,000. The Company does not have any
further financial commitments with respect to this investment. The Company also
recognized its equity share of losses from this Italian venture of $2,082,000
and $821,000 for the years ended September 30, 1997 and 1996, 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.
5. Property and Equipment
Property and equipment at September 30, 1998 and 1997 valued at cost,
consist of the following:
(dollars in thousands) 1998 1997
- -------------------------------------------------------------------------------
Data processing equipment $ 42,995 $ 34,248
Office furniture, vehicles and equipment 16,156 14,383
Leasehold improvements 13,777 12,003
Capitalized leases 2,841 2,841
Less accumulated depreciation and amortization (38,876) (28,989)
-------- --------
Net property and equipment $ 36,893 $ 34,486
======== ========
Depreciation and amortization charged to operations were $13,553,000,
$10,479,000 and $7,194,000 for the years ended September 30, 1998, 1997 and
1996, respectively.
35
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, 1998:
Years ended September 30, (dollars in thousands)
- -------------------------------------------------------------------------------
1999 $ 487
2000 467
2001 375
-------
1,329
Less: Amount representing interest (124)
-------
Present value of net minimum lease payments $ 1,205
=======
6. Intangibles
Intangibles at September 30, 1998 and 1997, consist of the following:
(dollars in thousands) 1998 1997
- -------------------------------------------------------------------------------
Goodwill $ 13,430 $ 10,138
Other 2,470 2,270
Less accumulated amortization (5,442) (4,047)
-------- --------
$ 10,458 $ 8,361
======== ========
Amortization charged to operations was $1,395,000, $1,274,000 and
$734,000 for the years ended September 30, 1998, 1997 and 1996, respectively.
7. Income Taxes
The provision for income taxes consists of the following:
Years ended September 30,
(dollars in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
Current:
Federal $ 17,380 $ 14,685 $ 9,026
State 3,967 2,863 1,901
Foreign 240 136 270
-------- -------- --------
21,587 17,684 11,197
-------- -------- --------
Deferred:
Federal (3,152) (2,400) 183
State (657) (424) (99)
-------- -------- --------
(3,809) (2,824) 84
-------- -------- --------
$ 17,778 $ 14,860 $ 11,281
======== ======== ========
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.
36
The tax effect of significant temporary differences resulting in
deferred tax assets at September 30, 1998 and 1997, are as follows:
(dollars in thousands) 1998 1997
- -------------------------------------------------------------------------------
Deferred tax assets:
Depreciation and amortization $ 2,350 $ 2,637
Customer advances 2,198 --
Employee benefit plans 1,594 280
Deferred compensation 1,489 2,042
Compensated absences 1,455 1,070
State taxes 1,388 1,007
Capital loss carryforward 1,245 1,530
Bad debt provision 464 283
Capital lease obligations 197 201
Warranty reserves 140 26
Other 630 103
-------- --------
13,150 9,179
Less valuation allowance (1,245) (1,083)
-------- --------
11,905 8,096
Deferred tax liabilities:
Tax on net unrealized gains on available-for-sale
securities (491) (210)
-------- --------
Deferred tax assets, net $ 11,414 $ 7,886
======== ========
The valuation allowance for deferred tax assets at September 30, 1998
and 1997, was $1,245,000 and $1,083,000, 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 carry
forward.
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) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Income tax provision at federal statutory rates in 1998, 1997 and 1996 $ 14,737 $ 12,441 $ 10,031
State income taxes, net of federal benefit 2,152 1,586 1,190
Increase in valuation allowance 162 480 603
Other 727 353 (543)
-------- -------- --------
$ 17,778 $ 14,860 $ 11,281
======== ======== ========
37
8. 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, 1998 and 1997:
(dollars in thousands) 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Vested benefit obligation $ 9,524 $ 7,578
Nonvested benefit obligation 1,457 479
Effect of projected future earnings 5,877 3,710
-------- --------
Projected benefit obligation 16,858 11,767
Fair value of plan assets (10,413) (10,266)
-------- --------
Projected benefit obligation in excess of plan assets 6,445 1,501
Unrecognized prior service cost 59 68
Unrecognized net loss (5,895) (2,692)
Unrecognized net obligation remaining to be amortized (138) (158)
Additional minimum liability 97 --
-------- --------
(Prepaid) accrued pension cost $ 568 $ (1,281)
======== ========
The plan assets consist primarily of U.S. government and marketable
equity securities.
The projected benefit obligation includes an accumulated benefit
obligation of $10,981,000 and $8,057,000 at September 30, 1998 and 1997,
respectively. The projected benefit obligation exceeded the fair value of the
pension plan assets for the years ended September 30, 1998 and 1997,
respectively.
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 6.5% and 4.0%, respectively, at September 30,
1998, and 7.5% and 5.0%, respectively, at September 30, 1997. The expected
long-term rate of return on assets was 8.5% at September 30, 1998 and 1997.
The net pension cost for the fiscal years ended September 30, 1998 and
1997, included the following components:
(dollars in thousands) 1998 1997
- -------------------------------------------------------------------------------
Service costs $ 1,516 $ 1,011
Interest cost on projected benefit obligation 943 745
Actual return on plan assets (840) (2,050)
Net amortization and deferral 132 1,502
------- -------
Net periodic pension plan cost $ 1,751 $ 1,208
======= =======
38
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 $1,803,000, $1,534,000 and $1,445,000 for the years ended September 30,
1998, 1997 and 1996, respectively.
At September 30, 1998 and 1997, the ESOP held 835,693 and 970,566
shares of Company stock, respectively. The amount of dividends on ESOP shares
were $75,212, $81,000 and $94,000 for the years ended September 30, 1998, 1997
and 1996, respectively.
Company stock held and paid for by the ESOP is allocated annually to
participants based on employee compensation levels. While employed by the
Company, participants vest in the allocated shares at rates ranging from 0% to
30% over a period of 1 to 7 years until fully vested, depending on the plan.
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,
depending on the plan. The Company contributions to 401(k) plans were $790,000,
$673,000 and $470,000 for the years ended September 30, 1998, 1997 and 1996,
respectively. In addition, the Company maintains a supplemental retirement and
savings plan for certain officers and senior management employees. Company
contributions to that plan were $247,000, $132,000 and $104,000 for the years
ended September 30, 1998, 1997 and 1996, 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
$3,273,000, $3,842,000 and $3,560,000 for the years ended September 30, 1998,
1997 and 1996, 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, 1998 and 1997, the
long-term officers' incentive plan payable was $3,066,000 and $3,475,000,
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 $5,537,000, $5,211,000 and
$4,426,000 for the years ended September 30, 1998, 1997 and 1996, respectively.
9. Stock
Common
A total of 35,000,000 shares of common stock, $.01 par value, are
authorized, of which 13,992,126 shares (including 9,787 shares of treasury
stock) were outstanding at September 30, 1998, and 13,474,382 shares (including
12,114 shares of treasury stock) were outstanding at September 30, 1997.
Preferred
A total of 1,000,000 shares of preferred stock, $.01 par value, are
authorized; no preferred stock has been issued.
39
10. 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 reserve shares of common stock for issuance to officers, key
employees and non-employee directors. The Company has elected to continue to
apply the provisions of APB No. 25, and provide the pro forma disclosures of
SFAS No. 123, "Accounting for Stock-Based Compensation." Granted awards
generally have a maximum term of ten years and vest over one to five years.
Under this plan approved by the stockholders, a number of shares equal to 4% of
the number of shares of the Company's common stock outstanding on the last day
of the preceding fiscal year is added to the shares available under the plan
each fiscal year, provided that the number of shares suitable for grants of
incentive stock options for the remaining term of the plan shall not exceed
1,500,000 shares. 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:
1998 1997 1996
- -------------------------------------------------------------------------------
Expected life (years) 5 5 5
Interest rate 5.5% 6.5% 6.2%
Volatility 43% 45% 45%
Dividend yield 0% 0% 0%
The following information regarding these option plans for the years ended
September 30 is as follows:
1998 1997 1996
---------------------- ------------------------ ----------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Options price Options price Options price
- ----------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 1,843,000 $20.63 1,388,000 $12.21 1,324,000 $ 6.72
Granted 526,000 $38.02 613,000 $36.82 286,000 $ 32.57
Exercised (487,000) $ 5.61 (141,000) $ 7.19 (222,000) $ 5.62
Forfeited (86,000) $34.43 (17,000) $28.96 -- $ --
--------- --------- ---------
Outstanding at end of year 1,796,000 $29.11 1,843,000 $20.63 1,388,000 $ 12.21
========= ========= =========
Options exercisable at year end 541,000 $11.80 782,000 $ 5.33 694,000 $ 3.73
========= ========= =========
The weighted-average fair value of options granted for the years ended
September 30, 1998, 1997 and 1996, was $17.30, $17.47 and $15.35, respectively.
40
The following table summarizes information about significant fixed-price stock
option groups outstanding September 30, 1998:
Options outstanding Options exercisable
------------------------------------------------ ----------------------------
Weighted
average Weighted Weighted
Number remaining average Number average
Range of exercise prices outstanding contractural life exercise price outstanding exercise price
- ------------------------------------------------------------------------------------------------------------------------
$ .92 to $ 3.50 238,000 1.27 $ 2.09 238,000 $ 2.09
$ 3.84 to $ 19.31 226,000 5.00 $ 11.95 209,000 $ 12.41
$20.75 to $ 36.94 430,000 6.22 $ 31.91 45,000 $ 27.11
$38.25 to $ 45.63 902,000 7.84 $ 39.22 49,000 $ 42.33
--------- -------
$ .92 to $ 45.63 1,796,000 6.22 $ 29.11 541,000 $ 11.80
========= =======
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) 1998 1997 1996
- --------------------------------------------------------------------------------
Net income, as reported $ 24,327 $ 20,686 $ 17,423
======== ======== ==========
Pro forma net income $ 20,655 $ 18,091 $ 17,002
======== ======== ==========
Earnings per share, as reported:
Diluted $ 1.68 $ 1.46 $ 1.25
======== ======== ==========
Basic $ 1.77 $ 1.55 $ 1.32
======== ======== ==========
Pro forma earnings per share:
Diluted $ 1.43 $ 1.27 $ 1.22
======== ======== ==========
Basic $ 1.50 $ 1.35 $ 1.29
======== ======== ==========
The pro forma effect on net income for each of the years ended
September 30, 1998, 1997 and 1996, may not be representative of the effects on
reported net income in future years.
11. Commitments and Contingencies
The Company conducts certain of its operations in facilities occupied
under non-cancelable operating leases with lease terms in excess of one year.
The leases generally provide for annual increases based upon the Consumer Price
Index or fixed increments.
In May 1998, the Company entered into a synthetic lease agreement to
lease land in San Rafael, California, and improvements comprising the first
phase of an office complex facility to be constructed on the land. A synthetic
lease is asset-based financing structured to be treated as a lease for
accounting purposes but as a loan for tax purposes. The office complex facility
is intended to accommodate the future growth of the Company.
The Company had an option (the "Option") to purchase the undeveloped
land in December 1997, and the Option was assigned to the lessor in connection
with the synthetic lease transaction. The lessor under the synthetic lease has
committed to spend up to $55 million for the purchase of the land and
construction of this first phase of the facility, and the Company will act as
construction agent for the lessor. At September 30, 1998, the lessor's total
accumulated cost for land and construction of the facility was $15.1 million.
The lease term began in May 1998 and continues thereafter for five years for the
land and, when they are constructed, will incorporate the buildings and other
improvements that will comprise the first phase of the facility. Rental payments
will commence on completion of construction, and at that time the rental
payments will be based on the total construction costs for the facility and the
one month LIBOR rate plus 0.75% or 1.00%. The completion of construction is
expected to occur in January 2001.
41
With the approval of lessor, the Company may extend the lease term for
up to three one-year periods or one three-year period. The Company has the
option either to purchase the entire facility at a purchase price approximating
lessor's then-accumulated total costs or only certain portions of the facility,
at a pre-set price, at any time during the term or, at the expiration of the
lease term to cause the facility to be sold to a third party.
The synthetic lease requires the Company to maintain specified
financial covenants, all of which the Company was in compliance with at
September 30, 1998. Future minimum lease payments under the synthetic lease are
not included in the schedule below.
Minimum future rental commitments under operating leases are as
follows:
Year ending September 30, (dollars in thousands)
- -------------------------------------------------------------------------------
1999 $ 7,954
2000 8,198
2001 7,779
2002 7,544
2003 5,075
Thereafter 33,270
--------
$ 69,820
========
Rent expense under operating leases, including month-to-month leases,
was $8,298,000, $6,413,000 and $4,821,000 for the years ended September 30,
1998, 1997 and 1996, 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.
12. 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, production and
service offices. Foreign sales are primarily exports. The Company's revenues
from customers outside the United States were $42,894,000, $33,879,000 and
$26,142,000 for the years ended September 30, 1998, 1997 and 1996, respectively.
13. Other Income (Expense)
Other income (expense) consists of the following:
Years ended September 30,
(dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Interest income $ 2,403 $ 2,040 $ 1,748
Interest expense (803) (336) (223)
Foreign currency loss (278) (677) (97)
Equity loss in investments -- (2,082) (821)
Investment write-off -- (773) (1,535)
Acquisition expenses -- (558) --
Other 351 176 114
------- ------- -------
$ 1,673 $(2,210) $ (814)
======= ======= =======
42
Earnings Per Share
The following reconciles the numerators and denominators of diluted and
basic earnings per share (EPS):
Years ended September 30,
(dollars in thousands, except per share data) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Numerator - Net income $ 24,327 $ 20,686 $ 17,423
======== ======== ========
Denominator - Shares:
Diluted weighted-average shares and assumed
conversions of stock options 14,463 14,202 13,922
Effect of dilutive securities - employee stock options (700) (816) (761)
-------- -------- --------
Basic weighted-average shares 13,763 13,386 13,161
======== ======== ========
Earnings per share:
Diluted $ 1.68 $ 1.46 $ 1.25
======== ======== ========
Basic $ 1.77 $ 1.55 $ 1.32
======== ======== ========
Total options outstanding included 930,000, 474,000 and 59,000 options
to purchase shares of common stock at prices ranging from $36.50 to $45.63,
$38.25 to $45.63 and $40.00 to $41.88 at September 30, 1998, 1997 and 1996,
respectively. These options were not included in the computation of diluted EPS
because the exercise price for such options was greater than the average market
price of the common shares for the years ended September 30, 1998, 1997 and
1996, respectively.
15. 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, 1998. 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 per share data) Dec. 31, 1996 Mar. 31, 1997 June 30, 1997 Sept. 30, 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:
Diluted $ .33 $ .38 $ .30 $ .44
=========== =========== =========== ===========
Basic $ .35 $ .40 $ .32 $ .47
=========== =========== =========== ===========
Shares used in computing earnings per share:
Diluted 14,155,000 14,228,000 14,325,000 14,452,000
=========== =========== =========== ===========
Basic 13,291,000 13,361,000 13,395,000 13,449,000
=========== =========== =========== ===========
43
(in thousands, except per share data) Dec. 31, 1997 Mar. 31, 1998 June 30, 1998 Sept. 30, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues $ 53,511 $ 59,655 $ 64,642 $ 67,737
Cost of revenues 19,865 21,206 21,946 21,963
----------- ----------- ----------- -----------
Gross profit $ 33,646 $ 38,449 $ 42,696 $ 45,774
=========== =========== =========== ===========
Net income $ 3,967 $ 5,488 $ 6,399 $ 8,473
=========== =========== =========== ===========
Earnings per share:
Diluted $ .28 $ .38 $ .45 $ .59
=========== =========== =========== ===========
Basic $ .29 $ .40 $ .46 $ .61
=========== =========== =========== ===========
Shares used in computing earnings per share:
Diluted 14,346,000 14,304,000 14,359,000 14,449,000
=========== =========== =========== ===========
Basic 13,489,000 13,707,000 13,894,000 13,964,000
=========== =========== =========== ===========
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.
44
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 2, 1999.
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 2, 1999.
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 2, 1999.
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 2, 1999.
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 2, 1999.
45
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................................ 25
Consolidated statements of income for each of the years
in the three-year period ended September 30, 1998........ 26
Consolidated balance sheets at September 30, 1998 and
September 30, 1997....................................... 27
Consolidated statements of stockholders' equity for each
of the years in the three-year period ended
September 30, 1998....................................... 28
Consolidated statements of cash flows for each of the
years in the three-year period ended September 30, 1998.. 29
Notes to consolidated financial statements.................... 30
2. Financial statement schedule:
Independent Auditor's Report on Financial Statement Schedule.... 52
II Valuation and qualifying accounts at September 30, 1998,
1997 and 1996............................................ 53
3. Exhibits:
2.1 Lease dated December 2, 1998, by and between DynaMark, Inc.,
and CSM Corporation.
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, filed as Exhibit 2.2 to the Company's
report on Form 10-K for the fiscal year ended September 30,
1997, and incorporated herein by reference. Pursuant to Item
601(b)(2) of Regulation S-K, certain schedules were 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, filed as Exhibit 2.3 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1997, and incorporated herein by reference.*
2.4 Amendment To Lease, dated December 2, 1998, by and between CSM
Corporation (assignee) and DynaMark, Inc. amending lease dated
May 1,1995 between DynaMark, Inc. and Control Data Systems
Inc.
3.1 Restated Certificate of Incorporation of the Company, filed as
Exhibit 3.1 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1997, and incorporated herein
by reference.
46
3.2 Restated By-laws of the Company, filed as Exhibit 3.2 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1997, and incorporated herein by reference.
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, filed
as Exhibit 4.1 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1997, and incorporated herein
by reference.*
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.
10.1 Certificate of Resolution Changing Officers' Incentive Plan,
Exempt Employees Bonus Plan and other Company Plan
Parameters.*
10.2 Company's 1987 Stock Option Plan, originally filed as Exhibit
10.2 to the Company's Registration Statement on Form S-1
(Commission File No. 33-14491) (the "Registration
Statement").*
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), originally filed as Exhibit 10.4
to the Company's report on Form 10-K for the fiscal year ended
September 30, 1994.*
10.5 Lease, dated October 30, 1983, between S.R.P. Limited
Partnership and the Company, as amended, originally filed as
Exhibit 10.7 to the Registration Statement.
10.6 Stock Option Plan for Non-Employee Directors, originally filed
as Exhibit 10.8 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1988.*
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,
originally filed as Exhibit 10.11 to the Company's report on
Form 10-K for the fiscal year ended September 30, 1989.*
10.9 First Amendment to the Company's Stock Option Plan for
Non-Employee Directors, originally filed as Exhibit 10.12 to
the Company's report on Form 10-K for the fiscal year ended
September 30, 1989.*
10.10 Amendment No.1 to the Company's 1992 Long-Term Incentive Plan
(as amended and restated effective November 21, 1995), filed
as Exhibit 10.10 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1997 and incorporated herein
by reference.*
10.11 Addendum Number Seven to lease between S.R.P. Limited
Partnership and the Company, originally filed as Exhibit 10.15
to the Company's report on Form 10-K for the fiscal year ended
September 30, 1990.
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.
47
10.13 Lease, dated September 5, 1991, between 111 Partners, a
California general partnership, and the Company originally
filed as Exhibit 10.20 to the Company's report on Form 10-K
for the fiscal year ended September 30, 1991.
10.14 Construction Loan Agreement, dated September 5, 1991, between
111 Partners and the Company originally filed as Exhibit 10.21
to the Company's report on Form 10-K for the fiscal year ended
September 30, 1991.
10.15 Amendment No.2 to the Company's 1992 Long-Term Incentive Plan
(as amended and restated effective November 21, 1995) filed as
exhibit 10.15 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1997, and incorporated herein
by reference.*
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, filed as Exhibit 10.17 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1997, and incorporated herein by reference.*
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 Second Amendment to Lease dated December 2, 1998, between CSM
Corporation and DynaMark, Inc. amending lease between the
parties dated March 11, 1997.
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.
48
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.
10.32 First Addendum to Lease, dated August 13, l997, by and between
the Company and Regency Center, filed as Exhibit 10.32 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1997, and incorporated herein by reference.
10.33 Option Agreement, dated November 26, l997, by and between the
Company and Village Builders, L.P., filed as Exhibit 10.33 to
the Company's report on Form 10-K for the fiscal year ended
September 30, 1997, and incorporated herein by reference.
10.34 Leasehold Improvements Agreement, dated November 26, l997, by
and between the Company and Village Builders, L.P., filed as
Exhibit 10.34 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1997, and incorporated herein
by reference.
10.35 Lease, dated March 11, l997, by and between DynaMark, Inc. and
CSM, filed as Exhibit 10.35 to the Company's report on Form
10-K for the fiscal year ended September 30, 1997, and
incorporated herein by reference.
10.36 First Amendment to Lease, dated September 24, l997, by and
between DynaMark, Inc. and CSM, filed as Exhibit 10.36 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1997, and incorporated herein by reference.
10.37 Chase Database Agreement, dated October 29, l997, by and among
DynaMark, Inc. and Chase Manhattan Bank USA, National
Association, filed as Exhibit 10.37 to the Company's report on
Form 10-K for the fiscal year ended September 30, 1997, and
incorporated herein by reference. Confidential treatment has
been requested for certain portions of this document. Such
portions have been omitted from the filing and have been filed
separately with the Commission.
10.38 Participation Agreement, dated May 15, 1998, between Company,
Lease Plan North America, Inc., ABN Amro Bank N.V. and other
participants named therein.
49
10.39 Lease Agreement, Construction Deed of Trust with Assignment of
Rents, Security Agreement and Fixture Filing, dated May 15,
1998, between Company and Lease Plan North America, Inc.
10.40 Purchase Agreement dated May 15, 1998, between Company and
Lease Plan North America, Inc.
10.41 Third Amendment to Lease Dated December 2, 1998, by and
between CSM Corporation and DynaMark, Inc. amending lease
between the parties dated April 28, 1995.
21.1 Subsidiaries of the Company.
23.1 Consent of KPMG Peat Marwick LLP (see page 54 of this Form
10-K).
24.1 Power of Attorney (see page 51 of this Form 10-K).
27 Financial Data Schedule.
* Management contract or compensatory plan or arrangement.
(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, 1998.
50
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 28, 1998
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.
/s/ Larry E. Rosenberger
- ------------------------------------ President, Chief Executive Officer December 28, 1998
Larry E. Rosenberger (Principal Executive Officer) and Director
/s/ Patricia Cole
- ------------------------------------ Senior Vice President and December 28, 1998
Patricia Cole Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ A. George Battle
- ------------------------------------ Director December 28, 1998
A. George Battle
/s/ Bryant J. Brooks
- ------------------------------------ Director December 28, 1998
Bryant J. Brooks
/s/ H. Robert Heller
- ------------------------------------ Director December 28, 1998
H. Robert Heller
/s/ Guy R. Henshaw
- ------------------------------------ Director December 28, 1998
Guy R. Henshaw
/s/ David S. P. Hopkins
- ------------------------------------ Director December 28, 1998
David S. P. Hopkins
/s/ Robert M. Oliver
- ------------------------------------ Director December 28, 1998
Robert M. Oliver
/s/ Robert D. Sanderson
- ------------------------------------ Director December 28, 1998
Robert D. Sanderson
/s/ John D. Woldrich
- ------------------------------------ Director December 28, 1998
John D. Woldrich
51
The Board of Directors
Fair, Isaac and Company, Incorporated:
Under date of October 29, 1998, we reported on the consolidated balance
sheets of Fair, Isaac and Company, Incorporated and subsidiaries as of September
30, 1998 and 1997, 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, 1998, which are included in the 1998 annual report on
Form 10-K. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related financial statement schedule
in the 1998 annual report on Form 10-K. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
San Francisco, California
October 29, 1998
52
Schedule II
Fair, Isaac and Company, Incorporated
VALUATION AND QUALIFYING ACCOUNTS
Rule 12-09
September 30, 1998, 1997 and 1996
Additions
Balance at -------------------- Balance at
Beginning Charged End of
Description of Period to Expense Other(1) Write-offs Period
----------- ---------- ---------- ---------- ---------- ----------
September 30, 1998:
Allowance for Doubtful Accounts $ 758,000 $ 677,000 $ -- $ (272,000) $1,163,000
September 30, 1997:
Allowance for Doubtful Accounts $ 485,000 $ 438,000 $ -- $ (165,000) $ 758,000
September 30, 1996:
Allowance for Doubtful Accounts $ 332,000 $ 600,000 $ 11,000 $ (458,000) $ 485,000
<FN>
(1) Amount represents the allowance recorded due to the acquisition of
Credit & Risk Management Associates, Inc.
</FN>
53
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. 333-20537) on Form S-3,
the registration statement (No. 333-42473) on Form S-3 of Fair, Isaac and
Company, Incorporated and subsidiaries of our reports dated October 29, 1998,
relating to the consolidated balance sheets of Fair, Isaac and Company,
Incorporated and subsidiaries as of September 30, 1998 and 1997, 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, 1998, which reports appear in the September 30, 1998
annual report on Form 10-K of Fair, Isaac and Company, Incorporated, and
subsidiaries.
San Francisco, California
December 28, 1998
54
EXHIBIT INDEX
TO FAIR, ISAAC AND COMPANY, INCORPORATED
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
Exhibit No. Exhibit
- ----------- -------
2.1 Lease dated December 2, 1998, by and between DynaMark, Inc.
and CSM Corporation.
2.4 Amendment To Lease, dated December 2, 1998, by and between CSM
Corporation (assignee) and DynaMark, Inc. amending lease dated
May 1,1995 between DynaMark, Inc. and Control Data Systems
Inc.
10.1 Certificate of Resolution Changing Officers' Incentive Plan,
Exempt Employees Bonus Plan and other Company Plan Parameters.
10.2 Company's 1987 Stock Option Plan, originally filed as Exhibit
10.2 to the Registration Statement.
10.5 Lease, dated October 30, 1983, between S.R.P. Limited
Partnership and the Company, as amended, originally filed as
Exhibit 10.7 to the Registration Statement.
10.6 Stock Option Plan for Non-Employee Directors, originally filed
as Exhibit 10.8 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1988.
10.8 First Amendment to the Company's 1987 Stock Option Plan,
originally filed as Exhibit 10.11 to the Company's report on
Form 10-K for the fiscal year ended September 30, 1989.
10.9 First Amendment to the Company's Stock Option Plan for
Non-Employee Directors, originally filed as Exhibit 10.12 to
the Company's report on Form 10-K for the fiscal year ended
September 30, 1989.
10.11 Addendum Number Seven to lease between S.R.P. Limited
Partnership and the Company, originally filed as Exhibit 10.15
to the Company's report on Form 10-K for the fiscal year ended
September 30, 1990.
10.13 Lease, dated September 5, 1991, between 111 Partners, a
California general partnership, and the Company originally
filed as Exhibit 10.20 to the Company's report on Form 10-K
for the fiscal year ended September 30, 1991.
10.14 Construction Loan Agreement, dated September 5, 1991, between
111 Partners and the Company originally filed as Exhibit 10.21
to the Company's report on Form 10-K for the fiscal year ended
September 30, 1991.
10.23 Second Amendment to Lease dated December 2, 1998 between CSM
Corporation and DynaMark, Inc. amending lease between the
parties dated March 11, 1997.
10.38 Participation Agreement, dated May 15, 1998, between Company,
Lease Plan North America, Inc., ABN Amro Bank N.V. and other
participants named therein.
55
10.39 Lease Agreement, Construction Deed of Trust with Assignment of
Rents, Security Agreement and Fixture Filing, dated May 15,
1998, between Company and Lease Plan North America, Inc.
10.40 Purchase Agreement dated May 15, 1998, between Company and
Lease Plan North America, Inc.
10.41 Third Amendment To Lease, dated December 2, 1998, by and
between CSM Corporation and DynaMark, Inc. amending lease
between the parties dated April 28, 1995.
21.1 Subsidiaries of the Company.
23.1 Consent of KPMG Peat Marwick LLP (see page 54 of this Form
10-K).
24.1 Power of Attorney (see page 51 of this Form 10-K).
27 Financial Data Schedule.
56