UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________ to ________
Commission File Number
0-16439
FAIR, ISAAC AND COMPANY, INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 94-1499887
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Smith Ranch Road, San Rafael, California 94903
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 472-2211
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value per share New York Stock Exchange, Inc.
(Title of Class) (Name of each exchange on
which registered)
Securities registered pursuant to Section 12(g)of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No __.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of December 8, 2000 the aggregate market value of the Registrant's
common stock held by nonaffiliates of the Registrant was $367,616,043 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 8, 2000 was
14,550,510 (excluding 258,724 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 6, 2001.
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TABLE OF CONTENTS
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PART I
ITEM 1. Business.......................................................................... 3
ITEM 2. Properties........................................................................ 14
ITEM 3. Legal Proceedings................................................................. 14
ITEM 4. Submission of Matters to a Vote of the Security Holders........................... 14
EXECUTIVE OFFICERS OF THE REGISTRANT........................................................... 15
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters............. 16
ITEM 6. Selected Financial Data........................................................... 17
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.............................................................. 18
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk........................ 30
ITEM 8. Financial Statements and Supplementary Data....................................... 31
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure....................................................... 50
PART III
ITEM 10. Directors and Executive Officers of the Registrant................................ 51
ITEM 11. Executive Compensation............................................................ 51
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.................... 51
ITEM 13. Certain Relationships and Related Transactions ................................... 51
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................. 52
SIGNATURES .................................................................................. 57
Supplemental Information....................................................................... 59
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Forward-Looking Statements
In addition to historical information, this Annual Report contains
forward-looking statements. These forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in these forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed in the section entitled "Management's Discussion and Analysis of
Financial Position and Results of Operations-Risk Factors" as well as those
discussed elsewhere in this report. Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
opinions only as of the date hereof. The Company undertakes no obligation to
revise or publicly release the results of any revision to these forward-looking
statements. Readers should carefully review the risk factors described in other
documents the Company files from time to time with the Securities and Exchange
Commission, including the Quarterly Reports on Form 10-Q to be filed by the
Company in fiscal year 2001.
PART I
ITEM 1. BUSINESS
Development Of The Business
Fair, Isaac and Company, Incorporated, (NYSE: FIC) ("Fair, Isaac" or the
"Company" or "we") is a global provider of decision-making solutions. We serve
clients primarily in the Financial Services industry, and to a lesser extent,
the Insurance, Retail and Telecommunications industries. We employ various
tools, such as database enhancement software, predictive modeling, adaptive
control and systems automation to help businesses use data to make faster, more
profitable decisions on their marketing, customer acquisition campaigns,
operations and portfolio management. Founded in 1956, we pioneered the credit
risk scoring technologies now employed by most major United States consumer
credit grantors. We are headquartered in San Rafael, California.
Our 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, application processing, card
reissuance, online credit authorization, and collection. Among our signature
products are the leading North American credit bureau scores, FICO(R) credit
bureau risk scores, used throughout the credit card, mortgage, auto lending and
other industries; the world's leading credit account management system,
TRIAD(TM); and the leading scoring systems for granting small business credit.
In recent years, using our deep expertise in predictive technology,
database management, profitability management, decision-support software, and
consulting and systems integration, we expanded our product and service
offerings to automobile and home insurance underwriting, small business and
mortgage lending, telecommunications, retail, and e-business. Our work has made
a positive impact on many industries, helping businesses increase revenues,
reduce costs, streamline their operations and give their customers better
service.
Our regular clients include hundreds of the world's leading credit card and
travel card issuers, personal lines insurers, retailers, telecommunications
service providers and consumer and commercial lenders. We have enjoyed
continuous client relationships with some of these companies for nearly 31
years. Through alliances with all three major United States credit bureaus, we
also serve 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 our
end-user products, such as our application risk models and our LiquidCredit(TM)
line of products, are designed to meet the needs of relatively small users as
well as large users.
The impact of our technology is demonstrated by the following:
o More than 12 billion decisions were made in fiscal 2000 using our
credit bureau scores and credit account management systems.
o More than 75% of credit cards issued in United States and 90% of those
issued in the United Kingdom/Ireland are managed with our account
management systems.
o More than 75% of all mortgage applications in the United States are
evaluated using our credit bureau risk scores.
o 90% of the top lenders to small businesses in the United States use our
Small Business Scoring Service sm to speed loan decisions.
o 15 of the 20 largest US insurance companies use our decision-making
solutions.
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o Our products and services are used by companies in more than 60
countries.
Approximately 19% of our fiscal 2000 revenues came from sales outside the
United States. With our long-standing presence in Western Europe and Canada, and
operating bases in Brazil, United Kingdom, France, Germany, Italy, Japan,
Mexico, South Africa and Spain, we believe we are well positioned to benefit
from the expected growth in global credit card issuance and usage and use of the
Internet in business to business e-credit.
During the period since 1990, while the rate of account growth in the U S
bankcard industry has been slowing and many of our largest institutional clients
have merged and consolidated, we generated growth in revenues--even after
adjusting for the effect of acquisitions--from our bankcard-related scoring and
account management businesses by cross-selling our products and services within
large banks and other credit issuers. We believe much of our future growth
prospects will rest on our ability to: (1) develop new, high value-added
products, (2) increase our market share in established or emerging credit
markets outside the US and Canada and (3) expand, either directly or through
further acquisitions, into relatively undeveloped or underdeveloped markets for
our products and services, such as direct marketing, insurance, small business
lending, retail, telecommunications and e-business.
In fiscal 2000, we declared our intent to expand our delivery channel
capabilities by becoming an application service provider or "ASP." An
application service provider is a company that offers individuals or businesses
netsource access (over the Internet to software programs and related services
that would otherwise have to be located in their own personal and enterprise
computers). We have already delivered many of our capabilities through secure
Web sites and will adopt this delivery mode whenever possible in the future.
Although not Web-based, certain other services, such as credit scores delivered
through credit reporting agencies and account management services delivered
through credit card processors, fall within the broader definition of an ASP.
During fiscal 2000 we made significant progress on our initiative to
increase our netsource ASP capabilities and on initiatives to target growth
opportunities in the retail and telecommunications markets, and in the
business-to-business e-credit marketplace. We can provide our technology
directly from our site, or we can become the decisioning technology "inside" our
client's Web site. The overall focus of our netsource ASP-delivered products is
to quickly and simply deliver to our clients the most effective customer
decisioning available in today's complex business environment. We launched four
major new netsource ASP-delivered products in fiscal 2000 to support a broad
range of client needs:
o LiquidCredit service for Web credit origination
o Fair, Isaac MarketSmart Decision System(TM)for multi-channel customer
relationship management
o ClickPremium(TM)service for insurance underwriting
o TelAdaptive(TM)service, our TRIAD-based adaptive control offering for
the telecommunications industry
We also made other changes to support these initiatives that we believe
will further our growth. The following are a few of the steps we have taken to
reach our goals:
o Distribution channels for our TRIAD decisioning technology were
expanded to include additional global card processors, such as
Electronic Data Systems Corp. (EDS) and Equifax, Inc., in new
countries.
o Our NexGen(TM) credit bureau risk scores were released at two of the
three leading U S credit bureaus and are expected to be available at
all three in 2001.
o We increased our emphasis on developing partnerships to supplement our
direct sales organization.
o We bolstered our management team with new management in finance, sales
and technology and centralized our technology group.
o We reorganized the sales organization and implemented a new sales
commission program to focus on obtaining new business.
o Principal products were upgraded and less profitable products were
discontinued.
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Products and Services
Our principal products are statistically derived, rule-based analytic tools
designed to help businesses make more profitable decisions on their customers
and prospective customers; software systems and components to implement these
analytic tools and databases; and data management services that organize,
enhance and make accessible information on an organizations' prospects and
customers. In addition to sales of these products directly to end-users, we also
make these products available in service mode, either directly or through
arrangements with partners such as credit bureaus and third-party credit card
processors.
Products and services sold to the consumer credit industry have
traditionally accounted for most of our revenues and we expect this to continue.
However, we are actively promoting our 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, telecommunications
and retail. Sales to customers in the direct marketing business, including the
marketing arms of financial service businesses, (i.e., financial services
related products) accounted for 20% to 24% of revenues in each of the three
years in the period ended September 30, 2000.
The business segments of the Company for fiscal 2000 are North American
Financial Services, NetSourced Services and Other International business units.
Additional information about these segments appears in Note 12 to the
Consolidated Financial Statements. Products and services marketed by each of our
business segments are described below.
North American Financial Services
The majority of our revenues are derived from our North American Financial
Services business segment, which primarily markets Analytic Products and
Services and Alliance Products and Services in the United States and Canadian
markets.
Analytic Products and Services
We apply a wide array of well-established and cutting-edge data mining and
modeling techniques to support critical business decisions. Our primary Analytic
Products are scoring models (also called "algorithms" or "scorecards") which
include our custom models, custom software and related consulting projects. Our
analytic models support a wide spectrum of business decisions that are based on
modeling customer behavior--assessing the likelihood of a behavior of interest,
understanding customer profiles, and optimizing strategies for taking subsequent
actions. To develop our models, we analyze and aggregate a variety of data
sources, including historical behavior data, customer data, and third party
(e.g., credit reporting agency) data. Models are developed by correlating
information available at the time a particular decision is made with known
performance at a later date and they can be developed either for a particular
user ("custom" models) or for many users in a particular industry ("pooled data"
models). A wide variety of business decisions leverage our analytic services and
products. Some examples of the decisions are screening lists of prospective
customers, evaluating applicants for credit or insurance and managing existing
credit accounts.
Some examples of our products and services are:
Application Scoring Models. Credit application scoring models permit credit
grantors to calculate the risk of lending to individual applicants. A
significant proportion of revenues from credit application scoring risk models
is derived from sales of new or replacement models to existing users.
Behavior Scoring Models. Behavior scoring models permit businesses to
define rules for the treatment of existing customers on an ongoing basis. To use
a credit card portfolio example, scores produced by behavior scoring models can
be used to select the appropriate treatment of an existing customer such as
increases in credit limits, authorizing individual credit card transactions,
taking various actions on delinquent accounts and offering other products or
product features. Behavior scoring models are also components of the adaptive
control systems described under "Account and Customer Management" below.
Other Scoring Models. We have developed scoring models for other users,
which include retailers that want to know the likelihood that a consumer will
buy a particular product, public utilities that require deposits from selected
applicants before starting service, tax authorities that select returns to be
audited, and mortgage lenders.
Analytic Consulting. We have provided analytic services to clients in
incorporating data, models and strategies in their decision making process. For
example, we provide solutions that leverage historical customer behavior data to
determine the best customer treatments. Another example is a service that
analyzes
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portfolio-level profitability dynamics to determine the optimal operating point
based on the trade-offs among risk, volume of business and profitability goals.
Alliance Products and Services
Our Alliance Product and Services offerings are composed of our products
and services that are delivered through alliances with credit bureaus and credit
card processors in North America. The majority of these products generate usage
revenues. Approximately 50% of our revenues in fiscal 2000 were derived from
usage-priced products and services marketed through alliances with major credit
bureaus and third-party credit card processors.
Credit Bureau Scoring Services. We provide scoring models to each of the
three major credit bureaus in the United States--Trans Union Corporation,
Experian Information Solutions, Inc. (formerly known as TRW Information Systems
& Services) and Equifax Inc.--for calculating credit bureau scores. Our scores
are recognized as the "gold standard" by North American lenders managing credit
cards, installment loans, mortgage loans and other products. Customers of the
credit bureau can use the scores derived from these models to prescreen
solicitation candidates, to evaluate applicants for new credit and to review
existing accounts. Using Fair, Isaac credit bureau scores, credit grantors
improve profitability throughout the credit life cycle by targeting the right
actions to the right prospects, applicants and customers.
Our credit bureau scores include risk scores, industry-specific risk
scores, bankruptcy scores, revenue scores, and attrition scores. Credit grantors
using these services pay the credit bureau based on usage and the credit bureau
share these usage revenues with us. Our PreScore(R) Service offered through
credit bureaus combines a license to use such models for prescreening
solicitation candidates along with tracking and our consulting services, and is
priced on a time or usage basis.
Our ScoreNet(R) Service allows North American credit grantors to obtain our
credit bureau scores and related data on a regular basis and in a format
convenient for use in their account management system or service at a credit
card processor. We obtain the data from the credit bureaus selected by each
subscriber and deliver it to the subscriber in a format compatible with the
subscriber's account management system.
In fiscal 2000 we introduced our new US credit bureau product, NextGen
credit bureau risk scores. The NextGen risk scores are credit bureau risk
assessment tools designed to rank-order consumer applicants, prospects and
customers according to the likelihood of future default on credit obligations.
These next generation of credit bureau risk scores will provide a more refined
risk assessment than other credit bureau risk scores, including our FICO scores.
The NextGen models use a new design blueprint to take advantage of constantly
changing credit reporting agency data and our deep analytic expertise and
predictive technology innovations. The NextGen risk scores will be offered as an
alternative to classic credit bureau risk scores, which we will continue to
support and redevelop. By using the NextGen risk scores instead of other credit
bureau risk scores, credit grantors in many industries will be able to more
accurately and confidently design strategies for prospects, applicants, and
customers across the entire risk spectrum.
The NextGen scores are called PinnacleSM scores at Equifax. Pinnacle scores
are generally available in batch mode and online at Equifax. The scores are
called PRECISIONSM scores at Trans Union and are available in pilot program.
Experian is working with us on a NextGen product. We expect that NextGen scores,
when fully implemented, will be available from the credit bureaus in online,
prescreen and account review mode, like the FICO scores. They will also be
available through our PreScore Service for comprehensive prescreening support
and through the ScoreNet Service used for managing existing customers.
We believe that consumers have a right to understand their credit rating,
and what behaviors affect their FICO credit bureau risk score. In October 2000,
we made publicly available the clearest, most comprehensive explanations of FICO
risk scores on the market. To lenders and brokers, we offer a Web-based FICO
Guide(TM) service that provides a personalized explanation of the factors
considered in a given consumer's FICO score, and suggestions on how to improve
the score over time. It can be accessed at www.ficoguide.com. This Web site is
not incorporated into this 10K annual report
Credit Bureau Insurance Scoring Services. We have also developed scoring
systems for insurance underwriters and marketers. Such systems use the same
underlying statistical technology as our "gold standard" credit bureau risk
scores but are designed to predict claim frequency or applicant profitability
for automobile or homeowners' coverage. With Trans Union we offer ASSIST. We
have a similar score with Experian named the Experian/Fair, Isaac Insurance
Score. We offer Property Loss Score (PLS) and Casualty Loss Score (CLS) with
ChoicePoint. We have also introduced a score for homeowners' and automobile
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insurance called InfoScore with Equifax. ASSIST, CLS/PLS, the Experian/Fair,
Isaac Insurance Score and InfoScore rely on data from Trans Union, ChoicePoint,
Experian and Equifax along with Fair, Isaac's unparalleled knowledge and
understanding of the predictive capabilities of that data. We are actively
marketing our products and services to the insurance industry.
Account Management Services at Credit Card Processors. We also provide
account management products and services through First Data Resources, Inc.
(FDR) and Total System Services, Inc. (TSYS), the two largest third-party credit
card processors in the United States. FDR and TSYS provide processing and
related services to financial institutions issuing credit cards and debit cards
and to issuers of private label cards. Our Adaptive Control System (known as ACS
at FDR and TRIAD at TSYS) is recognized as the "industry standard" by North
American lenders in managing their credit card accounts. Customers of the credit
card processors can use the ACS/TRIAD product and services to reduce losses,
increase profitability, and improve customer service on their existing accounts.
The ACS/TRIAD product offering includes behavior scoring, automated decision
strategy software, and a consulting service to help customers get the most value
from the use of this product. Customers using this product pay the processors
based on usage, and the processors and we share these usage revenues.
NetSourced Services
The NetSourced Services business segment principally markets Targeting and
Prospecting and Origination and Underwriting products, together with Account and
Customer Management products and Standalone Consulting services in the North
American market.
Targeting and Prospecting Products
Our Targeting and Prospecting products are principally data processing and
database management services for companies and organizations involved in direct
marketing. We offer several proprietary tools in connection with such services.
Our newest and most sophisticated Targeting and Prospecting product is our Fair,
Isaac MarketSmart Decision System. The Fair, Isaac MarketSmart Decision System
is a multi-channel, Web-enabled marketing solution with campaign management,
data warehousing, analytic and other capabilities. It is a full-service,
multi-channel marketing solution that helps financial institutions, retailers
and telecommunications companies determine where, when and how to interact with
their prospects and customers to build stronger relationships.
Other Targeting and Prospecting products include DynaLink(R) (database
access system) and DynaMatch(R) (merge/purge service). The DynaLink product
gives financial institutions and other users remote computer access to their
"warehoused" customer account files or marketing databases. It allows them to
perform online analyses ranging from profiling the history of a single customer
purchase or credit usage to calling up print-outs of all files having certain
defined characteristics in common. The DynaMatch product 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.
Origination and Underwriting
Our Origination and Underwriting products automate the processing of credit
applications, including the implementation of our credit application scoring
models. The tasks performed by these systems may 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 economical 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.
Our traditional Origination and Underwriting systems are mainframe systems
consisting of software for IBM and IBM-compatible mainframe computers or
personal computer-based systems for smaller credit grantors, principally our
CreditDesk(R) product. Our new LiquidCredit line of products is the next
evolution in credit origination. We intend to concentrate the majority of our
future enhancement efforts on this new platform. Our ClickPremium product is
Web-based decisioning product in an ASP model directed to the Insurance
industry.
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Our new and traditional Origination and Underwriting systems are:
--------------------------- ----------------------------------------------------
LiquidCredit A Web-based credit decisioning solution that enables
click-and-mortar financial institutions, Internet
financing marketplaces and Web-based retailers to
turn browsers into buyers by offering immediate
credit to consumers and small businesses at the
point of contact. LiquidCredit has three solutions:
LiquidCredit app engine which allows traditional
Web-enabled credit grantors to make instant credit
decisions by providing complete credit application
processing capabilities for consumer and small
business credit products; LiquidCredit decision
engine which provides e-tailers, click-and-mortar
financial institutions and retailers with the
ability to determine the right product or products
for a credit applicant based on that credit
grantor's product matching and decisioning criteria
so the applicant receives a tailored selection of
credit offers from the credit grantor; and
LiquidCredit broker engine which delivers to
Internet brokers and e-marketmakers a tool that sits
behind their own Web site, and matches scored
applicants to credit grantors' criteria, to present
applicants with a variety of credit options within
minutes. Applicants receive a list of credit offers
with multiple terms, while participating lenders
receive exposure to potential quality borrowers.
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ClickPremium A powerful decision engine and application generator
that supports the definition, testing and automated
execution of insurance decision strategies. The
software can be used to establish automated
strategies at any level of complexity for multiple
insurance decision areas, including insurance
underwriting, retention, cross-selling, claims
handling, prospect targeting and collections.
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CreditDesk Software designed for use on stand alone or
networked personal computers. CreditDesk is a
bundled scoring and automated application processing
solution which performs data collection, credit
bureau report acquisition and analysis, credit
scoring, decision recommendation based on
user-defined parameters, online review resolution,
letter generation and reporting.
--------------------------------------------------------------------------------
ScoreWare(R) Software that provides for easy installation of
credit application models and computes scores from
such models as part of the application processing
sequence
--------------------------- ----------------------------------------------------
StrategyWare(R) A comprehensive and flexible decision strategy
management software system that processes decision
requests by applying user defined decision
strategies and generates decision responses
including decisions and actions, for example,
processing an application.
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SEARCH(TM) Software that acquires and interprets credit bureau
reports as a separate package.
--------------------------- ----------------------------------------------------
CreditCenter(TM) Product for application processing that integrates
components from mainframe ASAP(TM), StrategyWare and
SEARCH with a web-enabled user interface.
--------------------------- ----------------------------------------------------
Our mainframe Origination and Underwriting systems are currently being used
in the United States and Canada by banks, retailers, and other financial
institutions. We do not expect significant new sales of mid-range Origination
and Underwriting systems, but still derive maintenance and enhancement revenues
from existing systems. It is our intention to migrate our current CreditDesk
clients to the new LiquidCredit products as quickly as possible, to allow them
to begin taking advantage of Web-based decisioning in an ASP model.
Account and Customer Management
One of our most sophisticated products is an adaptive control system for
account and customer management, generally marketed under the tradename TRIAD.
TRIAD is a complex system composed of behavior scoring models, software, and
account management strategies which addresses one or more aspects of the
management of a consumer credit or similar portfolio. TRIAD is used by
industries of various kinds: credit card, debit card, revolving credit,
installment lending, mail order, retail, and others.
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 strategy.
TRIAD allows testing of innovative challenger strategies on a small group of
customers and comparison of the results to existing champion strategies. The new
winning strategies can then be applied to larger segments of the portfolio.
TRIAD allows a number of challengers to be in place at any one time.
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Contracts for TRIAD for end-users generally include multi-year software
maintenance, strategy design and evaluation, and consulting components. Our
Origination and Underwriting product, StrategyWare, 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. Our new
netsource ASP product, TelAdaptive, has TRIAD as its core and is a comprehensive
Web-delivered account management solution for the telecommunications industry.
It focuses on four key areas of account management: delinquent collections,
usage limit, authorizations management and marketing communications. It also
includes a sophisticated data warehouse that facilitates the use of scoring and
decisioning modules, and provides easy access to critical business data.
Standalone Consulting
Our Standalone Consulting products generate revenues from analytics, custom
applications, data warehousing, integration, and risk management consulting
services in North America. These services were provided by our former
subsidiary, Credit & Risk Management Associates, Inc. (CRMA), which was merged
into us in fiscal 1999. We undertake consulting engagements primarily with
credit grantors who are users of our analytics, software and ASP solutions, and
with credit grantors deemed to be attractive prospective clients for those
solutions. We advise clients on how to develop and implement sound analytic
solutions, provide expert view of model development and assist with successful
implementation or repositioning of predictive modeling within the business for
greater effectiveness.
Other International
The Other International business unit covers all of our operations outside
of the United States and Canadian markets. We have offices throughout the world
to deliver products and services which cover our core competencies in analytics,
software and consulting. European and South African markets represent a little
over half of our international business, followed by Latin America and Asia.
Currently the principal products marketed internationally are TRIAD, CreditDesk,
scoring models for account origination and account management (including those
marketed under the name CrediTable(R)), fraud systems, StrategyWare and
ScoreWare. We also market to insurance companies, retailers and
telecommunications firms, with the primary offerings being scoring models and
adaptive control systems. As noted above, we establish and maintain alliance
relationships through which our products-chiefly scores and credit account
management services-are sold. These include third-party credit card processors
and credit bureaus. We provide credit account management services 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.
Customer Service and Support
We provide service and support to our customers in a variety of ways. These
include: (i) consulting and training services; (ii) delivery of special studies
which are related to the use of our products and services; (iii) conducting
annual conferences for clients in which user experiences are shared and new
products are introduced; (iv) education of liaison teams appointed by buyers of
scoring models and software; (v) maintenance of an answering service that
responds to inquiries on minor technical questions; (vi) proactive follow-up
with purchasers of our products and services; and (vii) conducting seminars
several times a year both in the United States and in other countries.
We provide tracking services and software products that measure the
continuing performance of scoring models used by our customers. The
effectiveness of scoring models can diminish 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 models
so that they can be replaced when it is economical to do so.
Technology
We are focusing our technological development in the following areas: 1)
enhancing our current offerings for our existing clients who look to us to
provide products and services that add value to their businesses, and 2)
developing and applying analytic and software technologies to create real-time
decision-making solutions for the Internet. At present we are concentrating our
efforts on both new versions and next
9
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generations of our decision engines, innovative analytic solutions for Web-based
decisioning, and groundbreaking work on decision strategy optimization.
Our personnel are experienced in several disciplines: operations research,
mathematical statistics, computer-based systems design, programming and data
processing.
Operations research is focused on developing mathematical models to assist
managers in making decisions that maximize the utility of available information.
Our analytic products are examples of this research reduced to practice. The
focus is on decision making using the best mathematical and computational
techniques available.
The goal of mathematical statistics is to provide a method for deriving the
maximum amount of useful information from raw statistical data. The objective of
the design of computer-based systems is to provide a mechanism for efficiently
accepting input data from a source, storing the data in a cost-effective medium,
utilizing the data with reliable models and decision rules and reporting results
in a readily comprehensible format.
Our analytic products' distinguishing characteristic is that they make
management by rule possible where the only alternative is reliance on a group of
people whose actions can never be entirely consistent. Rules for selecting
actions require the computation of probabilities of results. However, computing
the probability of a particular result using traditional methods, that is, by
counting the number of occurrences of each possible result in all possible
combinations of circumstances, breaks down as the number of combinations becomes
large. When as few as a few thousand results are available, more subtle
mathematical methods must be used. We have been actively developing and using
techniques of this kind for 44 years, as indicated by the development and
continual enhancement of our proprietary suite of models and computer programs
used to develop scoring models.
Our products must also interface successfully with our clients' existing
systems. For example, our products must accept data in various formats and
media, such as handwritten applications, display terminal input, and
telecommunications messages from credit bureaus. Our products must also provide
output in diverse formats and media, such as magnetic and electronic media. In
response to this interface requirement we have recruited and trained a staff
that has expertise in both logical design of information systems and the various
computer languages used for coding.
Markets and Customers
Our products for consumer credit are marketed to banks, retailers,
e-tailers, finance companies, oil companies, credit unions and credit card
companies. We have more than 600 end-users of our products who purchase directly
from us. These include about 75 of the 100 largest banks in the United States;
several of the largest banks in Canada; approximately 40 banks in the United
Kingdom; more than 70 retailers (and e-tailers); seven oil companies; major
travel and entertainment card companies; and more than 40 finance companies.
Custom models and systems have generally been sold to larger credit grantors.
The scoring, application processing and account management services offered
through credit bureaus and third-party processors are intended, in part, to
extend usage of our technology to smaller credit issuers and we believe that
users of our products and services distributed through third-parties number in
the thousands. As noted above, we also sell our products to telecommunications
service providers, insurance companies, and utilities.
We market our services to a wide variety of businesses engaged in direct
marketing. These include banks and insurance companies, catalog merchandisers,
fund-raisers among others. Most of our Targeting and Prospecting product
revenues come from direct sales to the end user of our services, but in some
cases we act as a subcontractor to advertising agencies or others managing a
particular project for the end user.
In fiscal 2000, Trans Union Corporation accounted for approximately 12% of
our revenues; Equifax, Inc., approximately 10%; and Experian Information
Solutions, Inc., less than 10%. Revenues generated through our alliances with
Equifax, Experian and Trans Union each accounted for approximately 8% to 10% in
fiscal 1999 and 7% to 10% of our revenues in fiscal 1998.
The percentage of revenues derived from clients outside the United States
was approximately 19% in fiscal 2000 and 15% in fiscal 1999 and approximately
17% in fiscal 1998. The United Kingdom and Canada are our largest market
segments outside the United States. Mexico, South Africa, a number of countries
in South America and almost all of the Western European countries are
represented in our user base. We have delivered products to users in
approximately 60 countries. The information set forth under the caption "Segment
Information" in Note 12 to the Consolidated Financial Statements is incorporated
herein by
10
<PAGE>
reference. Our 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.
We enjoy good relations with the majority of our clients and a substantial
portion of our revenue is derived from repeat customers. As noted above, we are
actively pursuing new users, particularly in the marketing, insurance,
telecommunications and retail industries, as well as potential users in the
consumer credit area not currently using our products.
Contracts and Backlog
Our practice is to enter into contracts with several different kinds of
payment terms. Scoring models are sold through one-time, fixed-price contracts
and through longer term contractual arrangements for our largest clients, who
receive multiple models. CreditDesk customers have the option to enter into
contracts that provide for a one-time license fee or volume-sensitive monthly
lease payments, with a provision requiring monthly maintenance payments. We
derive revenues from LiquidCredit products under usage-based contracts that are
subject to a minimum quarterly and annual fee. Contracts for mainframe
Origination and Underwriting systems include a one-time fee for the basic
software license, plus monthly fees for maintenance and enhancement services. We
also realize maintenance and enhancement revenues from users of our line of
mid-range Origination and Underwriting systems. PreScore contracts call for
usage or periodic license fees and there is generally a minimum charge.
Contracts for the delivery of complete Account and Customer Management Systems
typically contain both fixed and variable elements because they extend over
multiple years and must be negotiated in light of substantial uncertainties. As
noted above, we are also providing scoring models 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. Targeting and Prospecting products,
including our new Fair, Isaac MarketSmart products, are priced using a
combination of fixed fee and volume or usage-based pricing.
As of September 30, 2000, our backlog, which consisted of firm contracts,
was approximately $64.1 million, as compared with approximately $55.9 million as
of September 30, 1999. Most usage-based revenues do not appear as part of the
backlog. Most contracts for our Targeting and Prospecting products include unit
or usage charges, the total amount of which cannot be determined until the work
is completed. Backlog for our Targeting and Prospecting and Standalone
Consulting services are not significant in amount, are not considered a
significant indicator of future revenues, and are not included in the foregoing
figures. Our backlog is subject to significant fluctuations and is not
necessarily indicative of our future revenues.
Competition
As credit scoring, rule-based decision systems, and behavioral scoring
models, all of which we pioneer, have become standard tools for credit
providers, competition has emerged from five sectors: scoring model 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 our present and potential competitors have
substantially greater financial, managerial, marketing, and technological
resources than we do. We believe that none of our competitors offer the same mix
of products as we do. 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 our products and
services.
We believe that the principal factors affecting competition for scoring
models are product performance and reliability; expertise and knowledge of the
credit industry; the ability to deliver models in a timely manner; customer
support, training and documentation; ongoing enhancement of products; and
comprehensiveness of product applications. We compete with both outside
suppliers and in-house computer systems departments for this business. Major
competitor among outside suppliers of scoring models include Experian and Trans
Union. Scores sold by credit bureaus in conjunction with credit reports,
including scores computed by models developed by us, provide potential customers
with the alternative of purchasing scores on a usage-priced basis.
We believe that the principal factors affecting competition in the market
for automated application processing systems (such as CreditDesk and
LiquidCredit) are the same as those affecting scoring models, together with
experience in developing computer software products. Competitors in this area
include outside computer service providers and in-house computer systems
departments. We believe that a major competitor in this area is American
Management Systems, Incorporated ("AMS"). AMS also offers credit scoring models.
11
<PAGE>
We compete with data vendors in the market for our 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 our
primary scoring model competitor, Experian.
Both AMS and Experian offer products intended to perform some of the same
functions as our adaptive control systems, TRIAD and StrategyWare. We believe
that customers using our 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 models are developed, as compared to expert systems, which are
typically based primarily on the "expert's" judgment and less so upon a
significant database. We believe our 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 models from a
database but using mathematical techniques quite different from those used by
us. For example, HNC Software, Inc., has developed systems using neural network
technology which compete with some of our products and services. We believe that
analytical skill and knowledge of the business environment in which a model will
be used are generally more important than the choice of techniques used to
develop the model; and, further, that we have an advantage in these areas with
respect to our primary markets as compared with neural network developers.
There is a large number of companies providing data processing and database
management services in competition with our Targeting and Prospecting products,
some of which are considerably larger than us. We believe the market for such
services will continue to expand rapidly for the foreseeable future. Competition
in this area is based on price, service, and, in some cases, the ability of the
processor to perform specialized tasks. We have concentrated on providing
specialized types of data processing and database management services using
proprietary tools which, we believe, give us an edge over our competition in
these areas.
We also have developed a new model for our Targeting and Prospecting
solutions, most of which are now marketed under the Fair, Isaac MarketSmart
Decision System brand, in which we have formed alliances with several companies
which are judged to provide the "best of breed" for their particular service.
Clients who contract with us may access services we have developed (e.g.,
analytics, consulting) integrated with services developed by our partners (e.g.,
campaign management service provided by Prime Response). We believe the range
and quality of the services we provide in this model further enhances our
competitive position, by broadening the type of value we can bring to clients
without requiring us to develop expertise in all the services provided for
database marketing.
There are regional risk management, marketing, systems integration, and
data warehousing competitors that have recently emerged for consulting services
comparable to ours, but we believe that few offer the comprehensive business and
technical expertise found within our consulting unit. Most often we compete
against HNC, AMS and The Dun & Bradstreet Corporation.
Product Protection
We rely upon the laws protecting trade secrets and upon contractual
non-disclosure safeguards, including our employee non-disclosure agreements and
restrictions on transferability that are incorporated into our client
agreements, to protect our software and proprietary interests in our product
methodology and know-how. We currently have seven patent applications pending
but do not otherwise have patent protection for any of our proprietary software.
We instead rely principally upon such factors as the knowledge, ability, and
experience of our personnel, new products, frequent product enhancements, and
name recognition for our success and growth. We retain title to and protect the
suite of models and software used to develop scoring models as a trade secret.
Despite these precautions, it may be possible for competitors or users to
copy or reproduce aspects of our software or to obtain information that we
regard as trade secrets. In addition, the laws of some foreign countries do not
protect proprietary rights to the same extent as do the laws of the United
States. Due to recent changes in the case law and Patent and Trademark Office
Guidelines with respect to the patentability
12
<PAGE>
of software, models and "methods of doing business," we are currently pursuing
efforts to obtain patent protection for additional aspects of our technology.
Research and Development
We devote, and intend to continue to devote, significant funds to research
and development to develop both new products and enhancements to our existing
products. We believe that our future performance will in large part depend on
our ability to enhance our current products and to develop new products on a
timely and cost-effective basis that will keep pace with technological
developments and address the increasingly sophisticated needs of our clients. In
addition, we have ongoing projects for improving our fundamental knowledge in
the area of algorithm design for both predictive and decision technology, our
ability to develop and execute real-time, dynamic decisioning, our capabilities
to produce models efficiently, and our ability to specify and code algorithm
executing software. We anticipate that certain new products and services will be
developed internally but we have and may, based on timing and cost
considerations, acquire or license technology or license software from third
parties when appropriate. The information set forth in the line entitled
"Research and development" in the Consolidated Statement of Income and the
information set forth under the caption "Software costs" in Note 1 to the
Consolidated Financial Statements is incorporated herein by reference.
Personnel
As of September 30, 2000, we employed 1,534 persons. None of our employees
is covered by a collective bargaining agreement and no work stoppages have been
experienced.
13
<PAGE>
ITEM 2. PROPERTIES
Our properties consist primarily of leased office facilities for sales,
data processing, research and development, consulting and administrative
personnel. Our principal office is located in San Rafael, California,
approximately 15 miles north of San Francisco. We lease approximately 270,000
square feet of office space in four buildings at that location under leases
expiring in 2001 or later. We also lease approximately 6,800 square feet of
warehouse space in San Rafael for hardware operations and for storage under
month-to-month leases and have a 2,400 square foot telecommute center in
Petaluma, California.
Our leased properties also include
o Approximately 168,000 square feet of office and data processing space
in four buildings in Arden Hills, Minnesota, under leases expiring in
2005 or later.
o Approximately 138,000 square feet of office space in Baltimore,
Maryland; Berkeley, California; Wilmington, Delaware; New York City,
New York; Atlanta, Georgia; Chicago, Illinois; Brookings and Madison,
South Dakota; Shoreview, Minnesota; Toronto, Ontario; Birmingham,
England; Tokyo, Japan; Paris, France; Mexico City, Mexico; Sao Paulo,
Brazil; Milan, Italy; Johannesburg, South Africa; Madrid, Spain;
Vienna, Austria; Kuala Lumpur, Malaysia; and Wiesbaden, Germany.
See Notes 4 and 11 in the Consolidated Financial Statements for information
regarding our obligations under leases. We believe that suitable additional
space will be available to accommodate future needs.
ITEM 3. LEGAL PROCEEDINGS
No material legal proceedings are pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
Name Positions Held Age
Thomas G. Grudnowski President and Chief Executive Officer 50
since joining the Company in
December 1999. Became a Director of
the Company in December 1999. Partner
at Andersen Consulting from 1983-1999.
Joined Andersen Consulting in 1972.
Larry E. Rosenberger Executive Vice President since December 54
1999. President and Chief Executive Officer
from March 1991 to December 1999,
Executive Vice President 1985-1991,
Senior Vice President 1983-1985, Vice
President 1977-1983. A Director from
1983-1999. Joined the Company in 1974.
John D. Woldrich Executive Vice President since 1985, 57
Senior Vice President 1983-1985, Vice
President 1977-1983. Chief Operating Officer
August 1995 to November 1999. A Director
from 1983 to November 1999. Joined the
Company in 1972. Will retire from the
Company effective January 5, 2001.
H. Robert Heller Executive Vice President since September 60
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.
Henk J. Evenhius Executive Vice President and Chief 57
Financial Officer since joining the
Company in October 1999. Executive
Vice President and Chief Financial
Officer of Lam Research Corporation
1987-1998.
Sue A. Simon Executive Vice President since December 1999; 44
Vice President 1997-1999. Joined the
Company in 1996. Partner of The Spectrum
Group from 1993-1996.
Kenneth M. Rapp Executive Vice President since October 1999; 54
Senior Vice President since August 1994,
and President and Chief Operating Officer
of DynaMark, Inc. (acquired by the Company
as of December 1992) since it was founded
in 1985. Resigned effective September 30, 2000.
Eric J. Educate Executive Vice President since July, 2000. 48
Vice President of Global Sales for
Imation Corporation, 1999-2000; key
sales executive at EMC Corporation,
1997-1999; Silicon Graphics,
1987-1997.
Mark P. Pautsch Executive Vice President since August, 2000. 44
Managing Partner for the CIO Technology
Services Organization of Anderson Consulting.
Mr. Pautsch spent 21 years at Anderson
Consulting.
The term of office for all officers is at the pleasure of the Board of
Directors.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of May 6, 1996, our 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
8, 2000, Fair, Isaac had 460 shareholders of record of our common stock. The
following table lists the high and low sales prices for the period shown, as
reported by the New York Stock Exchange.
Stock Prices High Low
------------------------------------------------------------
October 1 - December 31, 1998 461/2 289/16
January 1 - March 31, 1999 549/16 311/2
April 1 - June 30, 1998 371/16 321/2
July 1 - September 30, 1999 449/16 261/4
October 1 - December 31, 1999 5510/16 28
January 1 - March 31, 2000 556/16 38
April 1 - June 30, 2000 461/8 369/16
July 1 - September 30, 2000 511/8 3913/16
Dividends
We paid quarterly dividends of 2 cents per share or 8 cents per year during
the 1998, 1999 and 2000 fiscal years. There are no current plans to change the
amount of the cash dividend.
16
<PAGE>
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA
<CAPTION>
(in thousands, except per share data)
Fiscal years ended September 30, 2000 1999 1998 1997 1996
-------------------------------------- ------------------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues $297,985 $276,931 $245,545 $199,009 $155,913
Income from operations 44,614 46,375 40,432 37,756 29,518
Income before income taxes 47,070 50,600 42,105 35,546 28,704
Net income 27,631 29,980 24,327 20,686 17,423
Earnings per share:
Diluted $1.89 $2.09 $1.68 $1.46 $1.25
Basic $1.94 $2.13 $1.77 $1.55 $1.32
Dividends per share $.08 $ .08 $ .08 $ .08 $ .08
At September 30, 2000 1999 1998 1997 1996
-------------------------------------- ------------------------- ------------ ------------- ------------ ------------
Working capital $100,694 $ 55,885 $ 54,852 $ 47,727 $ 34,699
Total assets 241,288 210,353 189,614 145,228 118,023
Long-term capital lease obligations -- 364 789 1,183 1,552
Stockholders' equity 199,001 156,499 133,451 103,189 79,654
</TABLE>
The financial data for the fiscal year ended September 30, 1996 has been
restated to reflect the merger, effective July 1997, between Fair, Isaac and
Company, Incorporated, and Risk Management Technologies, which has been
accounted for under the pooling-of-interests method.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Business Overview
We are a global provider of analytics and decision technology. We provide
products and services designed to help a variety of businesses use data to make
faster, more profitable decisions on their marketing, customers, operations and
portfolios. In fiscal 2000 we powered more than 12 billion decisions. Widely
recognized for our pioneering work in predictive technology, we develop,
produce, market and distribute advanced decision-making solutions to the
financial services, retail, telecommunications, e-business, insurance and other
industries.
Our products include statistically derived, rule-based analytical tools;
software that automates strategy design and implementation; and consulting
services to help clients use and track the performance of those tools. We also
provide a range of credit scoring and credit account management services for
credit bureaus and credit card processing agencies, and data processing and
database management services to businesses engaged in direct marketing
activities, many of which are in the financial services and insurance
industries.
During fiscal 2000 we made significant progress on our initiatives
announced in fiscal 1999 that included targeting growth opportunities in the
retail and telecommunications markets and becoming a Web-based ASP or netsourced
service provider. We launched four major new products that use our netsource ASP
model designed to service a broad range of our clients' needs. These products
include LiquidCredit(TM) for e-business credit decision making; Fair, Isaac
MarketSmart Decision System(TM) for netsourced customer relationship management;
ClickPremium for insurance underwriting; and TelAdaptive(TM), our TRIAD(TM)
adaptive control offering for the telecommunications industry. We released our
NexGen bureau scores currently available at two of the three credit bureaus in
the United States and expect to roll out to the third in early 2001. We put a
new management team in place. We changed our sales commission structure to
provide greater incentive to acquire new business, and upgraded a number of
current products and retired unprofitable products. We also expanded our
distribution channels for our TRIAD decisioning technology with additional
global card processors, such as EDS and Equifax into new countries and plan to
focus our efforts on developing partnerships to supplement our direct sales
organization. We also recently announced our Decision Technology Venture Program
designed to identify, pursue and transact strategic equity investments. We
believe that these changes will further the corporate vision to become the
premier provider of decision technology on the Internet as well as promote
growth in other areas.
This discussion and analysis should be read in conjunction with our
Consolidated Financial Statements and Notes. In addition to historical
information, this report includes certain forward-looking statements regarding
events and trends that may affect our future results. Such statements are
subject to risks and uncertainties that could cause our actual results to differ
materially. Such factors include, but are not limited to, those described in the
"Risk Factors" section of this discussion and analysis.
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<PAGE>
RESULTS OF OPERATIONS
Revenues
Our business segments are:
o North American Financial Services. The majority of our revenues are
derived from our North American Financial Services unit, which
primarily markets our Alliance Products and Services and Analytic
Products and Services in the United States and Canadian markets.
o NetSourced Services. The NetSourced Services unit principally markets
Targeting and Prospecting products, together with Origination and
Underwriting, Account and Customer Management products and Standalone
Consulting services in the North American market.
o Other International. The Other International business unit covers all
of our operations outside of the United States and Canadian markets.
Comparative segment revenues, profits and related financial information for
2000, 1999 and 1998 are set forth in Note 12 to the Consolidated Financial
Statements.
Sales to the consumer credit industry continue to account for the majority
of our revenues. Credit scoring and credit account management services sold
through credit bureaus and third-party credit card processors are generally
priced based on usage. 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 models (also known as "Analytic Products,"
"scorecards" or "models"), credit application processing systems (CreditDesk and
CreditCenter) 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. Products sold to the insurance industry
are generally priced based on the number of policies in force, subject to
contractual minimums. Targeting and Prospecting products are sold under a
combination of fixed-fee and usage-based pricing.
<TABLE>
The following table displays (a) the percentage of revenues by product
category and (b) the percentage change in revenues within each product category
from the prior fiscal year.
<CAPTION>
Percentage of Period-to-period
revenues percentage changes
----------------------------- ------------------
Years ended 1999 1998
September 30, to to
2000 1999 1998 2000 1999
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Alliance Products and Services 50 49 49 10 13
Targeting and Prospecting 24 24 20 11 33
Analytic Products and Services 8 9 9 (8) 13
Origination and Underwriting 7 7 11 15 (22)
Account and Customer Management 7 5 5 43 10
Standalone Consulting 3 4 3 (23) 45
Other 1 2 3 (59) (20)
----- ---- ------
Total Revenues 100 100 100 8 13
===== ==== ======
</TABLE>
Alliance Products and Services revenues are generated primarily by
usage-priced credit scoring services distributed through major credit bureaus
and credit account management services distributed through third-party bankcard
processors in the United States and Canada. Alliance Products and Services also
include our ScoreNet and PreScore services, insurance bureau scores, and other
related products. The growth in Alliance Products and Services revenues in
fiscal 2000 and fiscal 1999 compared to the respective prior fiscal periods were
primarily due to a strong demand for risk scoring services at the credit
bureaus, and increased revenues from services provided through bankcard
processors and from our insurance bureau scores at the credit bureaus. In fiscal
2000, these increases were partially offset by decreased revenues derived from
the ScoreNet services and in fiscal 1999, were partially offset by decreased
revenues derived from the ScoreNet and PreScore service. We believe that the
decline in ScoreNet service revenues primarily reflects a shift in the
purchasing patterns of our customers from these products to credit scoring
service at the credit bureaus.
Revenues derived from alliances with credit bureaus and credit card
processors have accounted for most of our revenue growth in the last three
years. Revenues from services produced through credit bureaus increased 13% in
fiscal 2000 compared with fiscal 1999 and 14% in fiscal 1999 compared with
fiscal 1998, and accounted for approximately 37% of revenues in fiscal 2000 and
36% in fiscal 1999. Revenues from services provided through bankcard processors
also increased in each of these years, primarily due to increases in the number
of accounts at each of the major processors.
19
<PAGE>
While we have been successful in extending or renewing our agreements with
credit bureaus and credit card processors in the past, and believe we will
likely be able to do so in the future, the loss of one or more such alliances or
an adverse change in terms could have a material adverse effect on revenues and
operating margin. In fiscal 2000, Trans Union Corporation accounted for
approximately 12% of our revenues; Equifax, Inc., approximately 10%; and
Experian Information Solutions, Inc., less than 10%. Revenues generated through
our alliances with Equifax, Experian and Trans Union each accounted for
approximately 8% to 10% in fiscal 1999 and 7% to 10% of our revenues in fiscal
1998.
Targeting and Prospecting Services, comprised principally of the former
DynaMark business unit, include a variety of data processing, database
management and Internet delivery services provided to companies and
organizations involved in direct marketing. Revenues from Targeting and
Prospecting products are generated from a combination of fixed fee and
usage-based pricing arrangements. The increases in Targeting and Prospecting
products revenues in fiscal 2000 and fiscal 1999 were due primarily to increased
demand for services from customers in the financial services industry.
Analytic Products and Services include all revenues from our custom models,
custom software and related consulting projects used for screening lists of
prospective customers, evaluating applicants for credit or insurance and
managing existing credit accounts. The decrease in revenues in fiscal 2000
primarily reflects the impact of bank consolidations and external marketing
forces related to the Year 2000 issue. The increase in fiscal 1999 was due
primarily to our sales of new products and increased sales of small business
loan scoring products.
Origination and Underwriting products automate the processing of credit
applications and are primarily comprised of products that were formerly referred
to as ASAP(TM) products. Revenues from Origination and Underwriting products
increased in fiscal 2000 compared with fiscal 1999 due primarily to increased
sales of CreditDesk and sales of StrategyWare(R) decision engine systems. In May
2000 we released a new line of products, LiquidCredit, which provides real-time
credit decisioning over the Internet. We believe that the LiquidCredit line of
products will, over time, replace our CreditDesk product offerings. During the
quarter ended September 30, 1999, we elected to adopt AICPA Statement of
Position No. 98-9 (SOP 98-9) though adoption by us was not required for periods
prior to October 1, 1999. Origination and Underwriting revenues decreased by 22%
in fiscal 1999 compared with fiscal 1998, due primarily to the deferral of
revenues resulting from the adoption of SOP 98-9. If SOP 98-9 had not been
adopted, Origination and Underwriting revenues would have decreased by 2% in
fiscal 1999. As a result of the early adoption of SOP 98-9, software revenues of
approximately $4.7 million were deferred to fiscal 1999. If we had implemented
SOP 98-9 as of October 1, 1998, there would have been approximately $7.4 million
less in Origination and Underwriting revenue for the year ended September 30,
1999, which would have been deferred to future periods.
Account and Customer Management products include our revenues from sales of
credit account management systems (TRIAD) sold to end-users, and our fraud
control systems products. The increases in revenues from fiscal 1999 to fiscal
2000 were primarily due to the release of TRIAD 6.0 in fiscal 2000 and increases
from fiscal 1998 to fiscal 1999 were due primarily to continuing sales of TRIAD
5.0. With respect to TRIAD, our high degree of success in penetrating the US
bankcard industry with these products has limited, and may continue to limit,
the revenue growth in that market. However, we have added functionality for the
existing base of TRIAD users and are actively marketing TRIAD for other types of
credit products and in overseas markets.
Standalone Consulting Services, composed principally of the services
offered by our former Credit and Risk Management Associates subsidiary. Revenues
declined in fiscal 2000 compared to fiscal 1999 due to redeployment of personnel
to implement the Company's new focus and initiatives after having increased in
fiscal 1999, compared to 1998, due to increased sales of consulting services.
Our revenues derived from clients outside the United States increased to
$57.1 million in fiscal 2000, compared to $41.5 million in fiscal 1999 and $42.9
million in fiscal 1998. Increases in international revenues in fiscal 2000 were
due primarily to sales of software products, including TRIAD and CreditDesk,
increased usage of credit bureau scores and the number of accounts using our
account management services at credit card processors in Europe. The decrease in
international revenues in fiscal 1999 was principally the result of a decline in
revenues from sales by our subsidiary, Risk Management Technologies ("RMT'), in
the Asian market. Fluctuations in currency exchange rates have not had a
significant effect on revenues to date, but may become more important if, as
expected, the proportion of our revenues denominated in foreign currencies
increases in the future.
Other products include our smaller, discrete product lines and revenues of
RMT. The revenues of RMT were down significantly in fiscal 1999 from fiscal 1998
due primarily to bank consolidations and delay in releases of new products and
in fiscal 2000 from fiscal 1999 were due principally to our decision to cease
marketing RMT's RADAR(TM) product line.
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Revenues from software maintenance and consulting services each accounted
for less than 10% of revenues in each of the three years in the period ended
September 30, 2000, and we do not expect revenues from either of these sources
to exceed 10% of revenues in the foreseeable future.
Over the long term, in addition to the factors discussed above, our rate of
revenue growth--excluding growth due to acquisitions--is limited by the rate at
which we can recruit and absorb additional professional staff. We believe this
constraint will continue to exist indefinitely. On the other hand, despite the
high penetration we have already achieved in certain markets, the opportunities
for application of our core competencies are much greater than we can pursue.
Thus, we believe we can continue to grow revenues, within the personnel
constraint, for the foreseeable future. At times we may forego short-term
revenue growth in order to devote limited resources to opportunities that we
believe have exceptional long-term potential. This is the basis for our new
strategic focus on becoming an e-business company and implementing new growth
initiatives targeted at the retail and telecommunications markets.
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Expenses
<TABLE>
The following table sets forth for the fiscal periods indicated (a) the
percentage of revenues represented by certain line items in our Consolidated
Statements of Income and Comprehensive Income and (b) the percentage change in
the amount of each such line item from the prior fiscal year.
<CAPTION>
Percentage of Period-to-period
revenue percentage changes
-----------------------------------------------------
Years ended 1999 1998
September 30, to to
2000 1999 1998 2000 1999
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues 100 100 100 8 13
----- ----- -----
Costs and expenses:
Cost of revenues 43 38 35 22 24
Research and development 10 11 12 <1 2
Sales, general and administrative 30 33 36 (4) 4
Amortization of intangibles 1 1 1 16 30
Restructuring Charge 1 --- --- --- ---
Total costs and expenses 85 83 84 10 12
----- ----- -----
Income from operations 15 17 16 (4) 15
Other income (expense) 1 1 1 (42) 153
----- ----- -----
Income before income taxes 16 18 17 (7) 20
Provision for income taxes 7 7 7 (6) 16
----- ----- -----
Net income 9 11 10 (8) 23
===== ===== =====
</TABLE>
Cost of revenues
Cost of revenues consists primarily of personnel directly involved in
creating revenue, travel and related overhead costs; costs of computer service
bureaus; and the amounts paid by us to credit bureaus for scores and related
information in connection with the ScoreNet Service.
Cost of revenues, as a percentage of revenues, increased in fiscal 2000 and
fiscal 1999 over the prior year. In fiscal 2000 the increase was primarily due
to costs related to the discontinued Healthcare Receivables Management System
(HRMS) line of business, the increasing revenues coming from Targeting and
Prospecting products and services, all of which generally have a lower gross
margin than our other products and services, and an increase in personnel costs
because of a change in policy for accrued vacation and sick leave. In fiscal
1999, the increase was primarily due to the increasing percentage of revenues
coming from Targeting and Prospecting products and services, which generally
have a lower gross margin than our other products and services on average.
Research and development
Research and development expenses include the personnel and related
overhead costs incurred in new and existing product development, researching
mathematical and statistical models and developing software tools that are aimed
at improving productivity, profitability and management control.
Research and development expenses decreased in fiscal 2000 as a percentage
of revenues compared to the prior period, due primarily to redeployment of
personnel to focus on increasing ASP delivery capacity for new products.
Research and development expenditures in fiscal 2000 were primarily related to
new products, product extensions and charges for a software development license.
Research and development expenditures in fiscal 1999 were primarily related
to new fraud detection software products, the release of a new version of TRIAD
software, Year 2000 compliance work, development of a new automated strategic
application processing system for high-end users, next generation credit bureau
risk scores and healthcare receivables management. In the last quarter of fiscal
1999, we began work on a number of projects for clients in the e-business and
telecommunications industries. The decrease in research and development
expenses, as a percentage of revenues, in fiscal 1999 was due to a reduction in
costs of Year 2000 compliance work and work related to product development for
eFunds (formerly Deluxe Financial Services, Inc.), and the replacement of
relatively expensive consultants with salaried employees.
Though individual offerings accounted for a decreasing percentage of
revenues in fiscal 2000 and 1999, we continue to invest in innovations in the
context of current offerings for existing clients and developing and applying
analytic and software technologies to create real time decision-making solutions
for Internet applications. We expect that research and
22
<PAGE>
development expenses will continue to be a significant expense in future periods
as new products targeted at the telecommunications and retail markets are
developed and we continue to implement our strategy to become an e-business
company.
Sales, general and administrative
Sales, general and administrative expenses consist principally of employee
salaries and benefits, travel, overhead, advertising and other promotional
expenses, corporate facilities expenses, the costs of administering certain
benefit plans, legal expenses, expenses associated with the exploration of new
business opportunities, the costs of operating administrative functions, such as
finance and computer information systems and compensation expenses for certain
senior management. Sales, general and administrative expenses for fiscal 2000,
as a percentage of revenues, were lower as compared with fiscal 1999, due
primarily to a reduction in consulting expenses. In the prior fiscal year, we
incurred consulting fees related to our Northstar reorganization and incurred no
such fees in the current fiscal year. As a percentage of revenues, sales,
general and administrative expenses for fiscal 1999 were lower than in fiscal
1998, due primarily to emphasis on cost reduction measures resulting in slower
personnel growth and reassignment of personnel and related costs.
Amortization of intangibles
We are amortizing the intangible assets arising from various acquisitions
over periods ranging from four to fifteen years. Also see Note 1 and 5 of Notes
to the Consolidated Financial Statements.
Restructuring charge
In the first quarter of fiscal 2000, we announced the discontinuance of our
HRMS line and recorded restructuring charges totaling $1,935,000. During the
second quarter we announced and began to implement supplemental restructuring
actions aimed at reducing costs and recognized a $988,000 charge for the
estimated costs of those actions. The restructuring action consisted of
terminating approximately 40 full-time employees. The combined restructuring
actions have resulted in cash expenditures of $2,439,000 and a non-cash asset
write-down of $99,000 through September 30, 2000. See Note 7 to the Consolidated
Financial Statements for additional information.
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 our immediate operating requirements. At
September 30, 2000, we had approximately $83.0 million invested in U S treasury
securities and other interest-bearing instruments. Interest income increased in
both fiscal 2000 and 1999 due to higher average cash balances in
interest-bearing accounts and instruments.
In fiscal 1998, we entered into a synthetic lease arrangement to construct
an office complex intended to accommodate future growth. On September 27, 2000,
we sold our office complex project (the "Lindaro project") to a real estate
development firm and have decided not to occupy any part of the project. The
transaction closed in the fourth quarter of fiscal 2000 and resulted in a loss
of approximately $1.4 million as detailed in Note 13 to the Consolidated
Financial Statements.
In fiscal 1999, we realized a one-time gain of $720,000 due to curtailment
of our pension plan, as described in Note 8 and 13 to the Consolidated Financial
Statements, and realized a gain of $483,000 from the sale of marketable
securities. In fiscal 1998, the difference between the increase in operating
income of 7% and the increase in net income of 18% was primarily due to the
interest income derived from investments in US treasury securities and other
interest-bearing instruments, and the absence of losses from equity investments
in start-ups.
Provision for income taxes
Our effective tax rate was 41.3%, 40.8% and 42.2%, in fiscal 2000, 1999 and
1998, respectively. The increase to 41.3% in fiscal 2000 compared to fiscal 1999
was due primarily to the increased goodwill amortization in the current year
resulting from the earnout paid to former stockholders of CRMA under the 1996
CRMA purchase agreement.
Capital Resources and Liquidity
Working capital increased to $100,694,000 at September 30, 2000 from
$55,885,000 at September 30, 1999 and $54,852,000 at September 30, 1998. The
increase in fiscal 2000 was due primarily to increases in cash, cash
equivalents, a higher proportion of investments in short-term investments, a
lower accrual for compensation and employee benefits expenses, and increases in
accounts receivable and billings in excess of earned revenues. The increase in
fiscal 1999 was due primarily to increases in cash, cash equivalents, unbilled
work in progress and decreases in other accrued liabilities,
23
<PAGE>
which more than offset the decreases in short-term investments and accounts
receivable and increases in accrued compensation and employee benefits.
Our exposure to collection risks is comprised of the sum of accounts
receivable plus unbilled work in progress, less billings in excess of earned
revenues. Changes in contract terms and product offerings, along with variations
in timing, may cause fluctuations in any or all of these items. During fiscal
1999, accounts receivable decreased compared with fiscal 1998 due to improved
collection efforts. The increases in billings in excess of earned revenues were
proportional to the increase in revenues. The increase in unbilled work in
progress was due primarily to the implementation of Statement of Position (SOP)
97-2, "Software Revenue Recognition" as amended by SOP 98-4 and SOP 98-9 during
fiscal year ended 1999. Compared with fiscal 1999, during fiscal 2000, increases
in accounts receivables (15%) and increases in billings in excess of earned
revenues (14%) were proportional, with minimal change in unbilled work in
progress.
Our primary method for funding operations and growth has been cash flows
generated from operations and occasional lease financing. Cash flows from
operating activities were $36,652,000 in fiscal 2000 compared to $42,484,000 in
fiscal 1999 and $41,268,000 in 1998. Net operating cash flows in fiscal 2000
decreased $5,832,000 compared to fiscal 1999, primarily due to a decrease in net
income, non-cash adjustment for deferred income tax, and net working capital
changes, partially offset by increase in a non-cash adjustments for
depreciation. Net operating cash flows in fiscal 1999 increased $1,216,000
compared to fiscal 1998, primarily due to an increase in net income and a
non-cash adjustment for depreciation, partially offset by a non-cash adjustment
for deferred income tax charge and net working capital increases.
Investing activities consumed $27,580,000 in cash in fiscal 2000, compared
to $25,488,000 in fiscal 1999 and $41,477,000 in fiscal 1998. We primarily use
cash for purchases of property and equipment and investment in marketable
securities. Increase in spending during fiscal 2000 compared to 1999 was
primarily due to the purchase of property and equipment. The decrease in
spending during fiscal 1999 compared to fiscal 1998 was primarily due to a
decrease in net investments in marketable securities, and a non-recurring
payment for acquisition of subsidiaries during 1998.
Financing activities provided $9,719,000 in cash in fiscal 2000, compared
to using cash of $10,523,000 in fiscal 1999, and providing cash of $1,242,000 in
fiscal 1998. Our financing activities primarily consist of proceeds from the
exercise of stock options and the issuance of treasury stock, principal payments
for capital lease obligations, and for dividends and repurchases of our stock.
Net cash provided by financing activities in fiscal 2000 and 1998 was primarily
due to proceeds received from the exercise of stock options and the issuance of
treasury stock. Net cash used in financing during fiscal 1999 was primarily made
for repurchases of our stock.
The Lindaro project was closed out in the fourth quarter of fiscal 2000 and
resulted in a loss of approximately $1.4 million. 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, 2000, we had no significant capital commitments other than those obligations
described in Notes 4 and 11 of the Consolidated Financial Statements.
In fiscal 1999, the Company initiated a stock repurchase program under
which the Company was authorized to purchase up to one million shares of its
common stock, to be funded by cash on hand. Through September 30, 2000, the
Company had repurchased 360,004 shares at a cost of approximately $12.2 million.
We believe that the cash and marketable securities on hand, along with cash
expected to be generated by operations, will be adequate to meet our capital and
liquidity needs for both the current fiscal year and the foreseeable future.
European Economic and Monetary Union (EMU)
Under the European Union's plan for Economic and Monetary Union (EMU), the
euro becomes the sole accounting currency of EMU countries on January 1, 2002.
Its initial phase went into effect on January 1, 1999, in 11 participating
countries: Austria, Belgium, Finland, France, Germany, Ireland, Italy,
Luxembourg, the Netherlands, Portugal and Spain. In this initial phase the EMU
mandated that key financial systems be able to triangulate conversion rates so
that any amount booked will be logged and processed simultaneously in both the
local currency and euros. We believe that our computer systems and programs are
euro-compliant. Costs associated with compliance were not material and were
expensed by us as they were incurred. We also believe the conversion to the euro
will not have a material impact on our consolidated financial results.
Risk Factors
Our revenues are dependent, to a great extent, upon general economic conditions
and more particularly, upon conditions in the consumer credit and the financial
services industries.
The majority of our revenues are derived from sales to the consumer credit
industry. In addition, during fiscal 2000, 24 % of our revenues were derived
from financial services related products. A downturn in the consumer credit
industry
24
<PAGE>
or the financial services industry caused by increases in interest rates or a
tightening of credit, among other factors could harm our results of operations.
The revenue growth and profitability of our business depends on the overall
demand for our existing and new products, particularly in the product segments
in which we compete. Because our sales are primarily to major corporations, our
business also depends on general economic and business conditions. A softening
of demand for our decisioning solutions caused by a weakening of the economy may
result in decreased revenues or lower growth rates. In particular, one of the
challenges we face in promoting future growth in revenues is the successful
refocusing of our marketing and sales efforts to our new initiatives. There can
be no assurances that we will be able to effectively promote future revenue
growth in our business. Since 1990, while the rate of account growth in the U S
bankcard industry has been slowing and many of our largest institutional clients
have merged and consolidated, we have generated most of our revenue growth from
our bankcard-related scoring and account management business by cross-selling
our products and services to large banks and other credit issuers. As this
industry continues to consolidate, we may have fewer opportunities for revenue
growth.
Quarterly operating results have varied significantly in the past and this
unpredictability will likely continue in the future.
Our revenues and operating results have varied significantly in the past.
We expect fluctuations in our operating results to continue for the foreseeable
future. Consequently, we believe that period-to-period comparisons of our
financial results should not be relied upon as an indication of future
performance. It is possible that in some future periods our operating results
may fall below the expectations of market analysts and investors, and in this
event the market price of our common stock would likely fall. Factors that
affect our revenues and operating results include the following:
o Decrease in recurring revenues
o The lengthy sales cycle of many of our products
o Failure of our target markets and customers to accept our new
products
o Our ability to successfully and timely develop, introduce and
market new products and product enhancements
o The timing of our new product announcements and introductions in
comparison with our competitors
o Changes in the level of our operating expenses
o Competitive conditions in the consumer credit industry
o Competitive conditions in the financial services industry
o Domestic and international economic conditions
o Changes in prevailing technologies
o Acquisition-related expenses and charges
o Timing of orders for and deliveries of certain software systems
o Increased operating expenses related to the development of
products for the Internet and
o Other factors unique to our product lines
With the exception of the cost of ScoreNet data purchased by us, most of
our operating expenses are not affected by short-term fluctuations in revenues;
thus, short-term fluctuations in revenues may have a significant impact on
operating results.
Our ability to increase our revenues is highly dependent upon the introduction
of new products and services and if our products and services are not accepted
by the marketplace, our business may be harmed.
We have a significant share of the available market for our traditional
products and services, such as our Alliance Products and Services. To increase
our revenues, we must enhance and improve existing products and continue to
introduce new products and new versions of existing products that keep pace with
technological developments, satisfy increasingly sophisticated customer
requirements and achieve market acceptance. We believe much of our future growth
prospects will rest on our ability to expand into newer markets for our products
and services, such as direct marketing, insurance, small business lending,
retail and telecommunications. If our current or potential customers are not
willing to switch to or adopt our electronic commerce solution, our growth and
revenues will be limited. The failure to generate a large customer base for our
new products would harm our ability to grow and increase revenues. This failure
could occur for several reasons. Some of our business-to-business electronic
commerce competitors charge their customers large fees upon the execution of
customer agreements. Businesses that have made substantial up-front payments to
our competitors for electronic commerce solutions may be reluctant to replace
their current solution and adopt our solution. As a result, our efforts to
create a larger customer base may be more difficult than expected even if we are
deemed to offer products and services superior to those of our competitors.
Further, because the business-to-business electronic commerce market is new and
underdeveloped, potential customers in this market may be confused or uncertain
about the relative merits of each electronic commerce solution or which
electronic commerce solution to adopt, if any. Confusion and uncertainty in the
marketplace may inhibit current or potential customers from adopting our
solution, which could harm our business, operating results and financial
condition.
25
<PAGE>
There are significant risks associated with the introduction of new products.
Significant undetected errors or delays in new products or new versions of
a product, especially in the area of customer relationship management, or may
affect market acceptance of our products and could harm our business, results of
operations or financial position. If we were to experience delays in the
commercialization and introduction of new or enhanced products, if customers
were to experience significant problems with the implementation and installation
of products, or if customers were dissatisfied with product functionality or
performance, our business, results of operations or financial position could be
harmed.
There can be no assurance that our new products will achieve significant
market acceptance or will generate significant revenue. Additional products that
we plan to directly or indirectly market in the future are in various stages of
development. We are expanding our technology into a number of new business areas
to foster long-term growth, including exchanges for a number of business
procurement needs, Internet/electronic commerce, online business services and
Internet computing. These areas are relatively new to our product development
and sales and marketing personnel. There is no assurance that we will compete
effectively or will generate significant revenues in these new areas. The
success of Internet computing and, in particular, our current Internet computing
software products is difficult to predict because Internet computing represents
a method of computing that is relatively new to the computer industry. The
successful introduction of Internet computing to the market will depend in large
measure on (i) the lower cost of ownership of Internet computing relative to
client/server architecture, (ii) the ease of use and administration relative to
client/server architecture, and (iii) the means by which hardware and software
vendors choose to compete in this market. There can be no assurances that
sufficient numbers of vendors will undertake this commitment, that the market
will accept Internet computing or that Internet computing will generate
significant revenues for us.
Failure to obtain data from our clients to update and re-develop or to create
new models could harm our business.
Updates of models and development of new and enhanced models depend to a
significant extent on availability of statistically relevant data. Such data is
usually obtained under agreements with our clients. Refusals by clients to
provide such data or to obtain permission of their customers to provide such
data, and privacy and data protection restrictions, could result in loss of
access to required data.
Our business and the business of our clients is subject to government regulation
and changes in regulation.
Our current and prospective clients, which primarily consist of credit
bureaus, credit card processors, state and federally chartered banks, savings
and loan associations, credit unions, consumer finance companies and other
consumer lenders, as well as customers in the industries that we may target in
the future, operate in markets that are subject to extensive and complex federal
and state regulations. While we may not be directly subject to such regulations,
our products and services must be designed to work within the extensive and
evolving regulatory constraints in which our clients operate and to meet our
client expectations with respect to handling data in conformity with applicable
data protection laws. These constraints include federal and state
truth-in-lending disclosure rules, state usury laws, the Equal Credit
Opportunity Act, the Fair Credit Reporting Act, the Community Reinvestment Act
and the Financial Services Modernization Act of 1999.
Amendments to the federal Fair Credit Reporting Act (which became law in
September 1997) 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. These
amendments impose a seven-year moratorium on new state legislation on certain
issues; however score disclosure regulation by states is not pre-empted under
this legislation and the states remain free to regulate the use of credit bureau
data in connection with insurance underwriting.
On September 30, 2000, the Score Disclosure Statute was signed into law in
California and is the first legislation to require the disclosure of credit risk
scores. The Score Disclosure Statute becomes effective July 1, 2001, and imposes
significant new requirements on credit reporting agencies and residential
creditors and brokers to disclose credit risk scores. In addition there are
several pending federal score disclosure bills and other states may follow
California's lead and pass score disclosure legislation. In September 2000 we
initiated the FICO Guide service which delivers to lenders and brokers a
personalized explanation of the factors considered in a given consumer's FICO
score, and suggestions on how to improve the score over time.
We believe enacted or proposed state regulation of the insurance industry
has had some detrimental impact on our efforts to sell insurance risk scores
through credit reporting, but state regulation has not prevented growth of such
sales. Examples of recent legislation include legislation pending in Missouri
that would prohibit sole use of credit information
26
<PAGE>
in the issuance, renewal, and cancellation of policies covering private
passenger automobiles and a Connecticut law that will not allow use of credit
inquiries in a model used in insurance underwriting.
Providing an individual with control over what personal information a
business collects and uses is a growing, global trend. The recent Financial
Services Modernization Act of 1999 (Gramm-Leach-Bliley Act) includes several
privacy provisions and introduces new controls over the transfer and use of
individual data by financial institutions. Additional federal legislation is
proposed. In addition over 400 state privacy bills are pending. On the
International front, in the European Union (EU), the Data Protection Directive
became effective October 1998 and places strict controls on the collection, use
and transfer of personal data. We have registered under the US Safe Harbor
provisions in the UK, pledging to meet the EU level of adequate protection for
personal data, have another registration pending in Spain and are evaluating the
desirability of registering in other counties. We expect increased costs of
compliance with these regulations but such costs are not expected to have a
material impact on our results of operation or financial condition.
Furthermore, some consumer groups have expressed concern regarding the
privacy and security of automated credit processing, the use of automated credit
scoring tools in credit underwriting and whether electronic lending is a
desirable technological development in light of the current level of consumer
debt.
The failure of our products and services to support customers' compliance
with current regulations and to address changes in customers' regulatory
environment, or our failure to comply with current regulations or adapt to
changes in regulatory environment, in an efficient and cost-effective manner,
could harm our business, results of operations and financial condition.
Our operations outside the United States subject us to unique risks that may
harm our results of operations.
A growing portion of our revenues is derived from international sales.
During the last fiscal year, we received approximately 19% of our revenues from
business outside the United States. As part of our growth strategy, we plan to
continue to pursue opportunities outside the United States. Accordingly, our
future operating results could be negatively affected by a variety of factors,
some of which are beyond our control. These factors include:
o The general economic conditions in each country
o Incongruent tax structures
o Difficulty in managing an organization spread over various countries
o Compliance with a variety of foreign laws and regulations
o Import and export licensing requirements
o Trade restrictions and tariffs o Longer payment cycles and
o Volatile exchange rates for foreign currencies
There can be no assurances that we will be able to successfully address
each of these challenges in the near term. Although some of our business is
conducted in currencies other than the US dollar, foreign currency translation
gains and losses are not currently material to our position, results of
operations or cash flows. However, an increase in our foreign revenues could
subject us to foreign currency translation risks in the future. We have found it
to be impractical to hedge all foreign currencies in which we conduct business.
As a result, we have experienced non-material foreign currency gains and losses
and may continue to do so.
If we do not recruit and retain qualified personnel, our business could be
harmed.
Our continued growth and success depend to a significant extent on the
continued service of our senior management and other key research, development,
sales and marketing personnel and the hiring of new qualified personnel.
Competition for highly skilled business, product development, technical and
other personnel is becoming more intense due to lower overall unemployment
rates, the dramatic increase in information technology spending and private
companies that can offer equity incentives that provide the potential for
greater compensation in connection with an initial public offering. Accordingly,
we expect to experience increased compensation costs that may not be offset
through either improved productivity or higher prices. There can be no
assurances that we will be successful in continually recruiting new personnel
and in retaining existing personnel. In general, we do not have long-term
employment or non-competition agreements with our employees. The loss of one or
more key employees or our inability to attract additional qualified employees or
retain other employees could harm our continued growth.
Over the long term, our rate of revenue growth is likely to be limited by
the rate at which we can recruit and absorb additional professional staff. We
believe this constraint will continue to exist indefinitely. At times we may
forego short-term revenue growth in order to devote limited resources to
opportunities that we believe have exceptional long-term
27
<PAGE>
potential. This is the basis for our strategic focus of becoming an e-business
company and implementing new growth initiatives targeted at the retail and
telecommunications markets.
We rely upon our proprietary technology rights and if we are unable to protect
them, our business could be harmed.
Because the protection of our proprietary technology is limited, our
proprietary technology could be used by others without our consent. Our success
depends, in part, upon our proprietary technology and other intellectual
property rights. To date, we have relied primarily on a combination of
copyright, patent, trade secret, and trademark laws, and nondisclosure and other
contractual restrictions on copying and distribution to protect our proprietary
technology. We have only seven patent applications and no issued patents to
date. We cannot assure you that our means of protecting our intellectual
property rights in the United States or abroad will be adequate or that others,
including our competitors, will not use our proprietary technology without our
consent. Furthermore, litigation may be necessary to enforce our intellectual
property rights, to protect our trade secrets, to determine the validity and
scope of the proprietary rights of others, or to defend against claims of
infringement or invalidity. Such litigation could result in substantial costs
and diversion of resources and could harm our business, operating results and
financial condition.
We may be subject to possible infringement claims that could harm our business.
With recent developments in the law that permit patentability of business
methods, we expect that products in the industry segments in which we compete
will increasingly be subject to such claims as the number of products and
competitors in our industry segments grow and the functionality of products
overlaps. In addition, we expect to receive more patent infringement claims as
companies increasingly seek to patent their software, also in light of recent
developments in the law that extend the ability to patent software. Regardless
of the merits, responding to any such claim could be time-consuming, result in
costly litigation and require us to enter into royalty and licensing agreements
which may not be offered or available on terms acceptable to us. If a successful
claim is made against us and we fail to develop or license a substitute
technology, our business, results of operations or financial position could be
harmed.
Security is important to our business, and breaches of security, or the
perception that e-commerce is not secure could harm our business.
Internet-based, business-to-business electronic commerce requires the
secure transmission of confidential information over public networks. Security
breaches of networks on which netsourced products are used or well publicized
security breaches affecting the Internet in general, could significantly harm
our business, operating results and financial condition. We cannot be certain
that advances in computer capabilities, new discoveries in the field of
cryptography, or other developments will not result in a compromise or breach of
the models we use to protect content and transactions on the networks on which
the netsourced products or proprietary information in our databases. Anyone who
is able to circumvent our security measures could misappropriate proprietary,
confidential customer information or cause interruptions in our operations. We
may be required to incur significant costs to protect against security breaches
or to alleviate problems caused by such breaches. Further, a well-publicized
compromise of security could deter people from using the Internet to conduct
transactions that involve transmitting confidential information
We are dependent upon major contracts with credit bureaus.
A substantial portion of our revenues is derived from contracts with the
three major credit bureaus with usual terms of five years or less. In the last
fiscal year, these contracts accounted for approximately 30% of our revenues. If
we are unable to renew any of these contracts on the same or similar terms with
one or more of these credit bureaus, our revenues and results of operations may
be harmed.
We may incur risks related to acquisitions or significant investment in
businesses.
As part of our business strategy, we have made in the past and may make in
the future acquisitions of, or significant investments in, businesses that offer
complementary products, services and technologies. Although we do not currently
have plans to do so, any acquisitions or investments will be accompanied by the
risks commonly encountered in acquisitions of businesses. Such risks include,
among other things, the possibility that we will pay much more than the acquired
company or assets are worth, the difficulty of assimilating the operations and
personnel of the acquired businesses, the potential product liability associated
with the sale of the acquired company's products, the potential disruption of
our ongoing business, the distraction of management from our business, the
inability of management to maximize the financial and our strategic position,
the maintenance of uniform standards, controls, procedures and policies and the
impairment of relationships with employees and clients as a result of any
integration of new management personnel. These factors could harm our business,
results of operations or financial position, particularly in the case of a
larger acquisition. Consideration paid for future acquisitions, if any, could be
in the form of cash, stock, rights to purchase
28
<PAGE>
stock or a combination thereof. Dilution to existing stockholders and to
earnings per share may result in connection with any such future acquisitions.
Backlog orders may be cancelled or delayed.
There is no assurance that backlog will result in revenues. We believe that
increased revenue growth in fiscal 2001 and later years will depend to a
significant extent on sales of newly developed products.
29
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Disclosures
The following discussion about our market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. We are exposed to market risk
related to changes in interest rates, foreign currency exchange rates and equity
security price risk. We do not use derivative financial instruments for
speculative or hedging purposes.
Interest Rate Sensitivity
We maintain an investment portfolio consisting mainly of income securities
with an average maturity of less than five years. These available-for-sale
securities are subject to interest rate risk and will fall in value if market
interest rates increase. We have the ability to hold its fixed income
investments until maturity, and therefore we would not expect our operating
results or cash flows to be affected to any significant degree by the effect of
a sudden change in market interest rates on our securities portfolio. We believe
that our foreign currency and equity risk is not material.
The following table presents the principal amounts and related
weighted-average yields for our fixed rate investment portfolio at September 30,
2000:
Carrying Average
Amounts Yield
Cash equivalents:
Commercial paper $35,587,000 6.7%
Money market funds 172,000 6.3%
-----------
35,759,000 6.7%
-----------
Short-term investments:
Commercial paper 19,109,000 6.5%
Long-term investments:
US government obligations 27,600,000 6.4%
-----------
Total $82,468,000
===========
30
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report Of Independent Auditors
The Board of Directors and Stockholders
Fair, Isaac and Company, Incorporated:
We have audited the accompanying consolidated balance sheets of Fair,
Isaac and Company, Incorporated, and subsidiaries as of September 30, 2000 and
1999, and the related consolidated statements of income and comprehensive
income, stockholders' equity and cash flows for each of the years in the
three-year period ended September 30, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Fair, Isaac
and Company, Incorporated, and subsidiaries as of September 30, 2000 and 1999,
and the results of their operations and their cash flows for each of the years
in the three-year period ended September 30, 2000, in conformity with accounting
principles generally accepted in the United States of America.
San Francisco, California
October 27, 2000
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<CAPTION>
(in thousands, except per share data and number of shares)
Years ended September 30, 2000 1999 1998
----------------------------------------------------- ----------------------------- ---------------- -----------------
<S> <C> <C> <C>
Revenues $297,985 $276,931 $245,545
Costs and expenses:
Cost of revenues 128,316 105,454 84,980
Research and development 29,817 29,720 29,136
Sales, general and administrative 90,215 93,569 89,602
Amortization of intangibles 2,100 1,813 1,395
Restructuring charge 2,923 -- --
---------- ---------- ----------
Total costs and expenses 253,371 230,556 205,113
---------- ---------- ----------
Income from operations 44,614 46,375 40,432
Other income, net 2,456 4,225 1,673
---------- ---------- ----------
Income before income taxes 47,070 50,600 42,105
Provision for income taxes 19,439 20,620 17,778
---------- ---------- ----------
Net income $27,631 $29,980 $24,327
======= ======= =======
Net income $27,631 $29,980 $24,327
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on investments:
Unrealized holding gains (losses)
arising during period (84) (293) 383
Less: reclassification adjustment -- (281) --
---------- ---------- ----------
Net unrealized gains (losses) (84) (574) 383
Foreign currency translation adjustments (389) (127) 138
---------- ---------- ----------
Other comprehensive income (loss) (473) (701) 521
---------- ---------- ----------
Comprehensive income $27,158 $29,279 $24,848
========== ========== ==========
Earnings per share:
Diluted $1.89 $2.09 $1.68
===== ===== =====
Basic $1.94 $2.13 $1.77
===== ===== =====
Shares used in computing earnings per share:
Diluted 14,635,000 14,364,000 14,463,000
========== ========== ==========
Basic 14,260,000 14,073,000 13,763,000
========== ========== ==========
<FN>
See accompanying notes to the consolidated financial statements.
</FN>
32
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
(in thousands)
September 30, 2000 1999
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 39,506 $ 20,715
Short-term investments 19,109 5,216
Accounts receivable, net of allowance ($1,130 and $1,274) 41,625 36,007
Unbilled work in progress 26,484 26,859
Prepaid expenses and other current assets 4,769 6,509
Deferred income taxes 5,719 6,021
-------- --------
Total current assets 137,212 101,327
Investments 34,502 43,934
Property and equipment, net 48,565 44,715
Intangibles, net 8,630 10,730
Deferred income taxes 8,778 5,932
Other assets 3,601 3,715
-------- --------
$241,288 $210,353
======== ========
Liabilities and stockholders' equity Current liabilities:
Accounts payable $1,606 $ 3,340
Accrued compensation and employee benefits 15,581 23,436
Other accrued liabilities 8,863 9,339
Billings in excess of earned revenues 10,104 8,898
Capital lease obligations 364 429
-------- --------
Total current liabilities 36,518 45,442
Long-term liabilities:
Accrued compensation and employee benefits 4,886 6,104
Other liabilities 883 1,944
Capital lease obligations -- 364
-------- --------
Total liabilities 42,287 53,854
-------- --------
Stockholders' equity:
Preferred stock ($0.01 par value; 1,000,000 authorized;
none issued or outstanding) -- --
Common stock ($0.01 par value; 35,000,000 shares authorized; 14,797,844 and
14,313,616 shares issued, and 14,539,059 and 13,980,425 outstanding at
September 30, 2000 and 1999, respectively) 148 143
Paid in capital in excess of par value 52,269 38,287
Retained earnings 156,021 129,530
Less treasury stock, at cost (8,793) (11,290)
Accumulated other comprehensive loss (644) (171)
-------- --------
Total stockholders' equity 199,001 156,499
-------- --------
$241,288 $210,353
======== ========
<FN>
See accompanying notes to the consolidated financial statements.
</FN>
33
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
For the years ended September 30, 1998, 1999 and 2000 (in thousands)
-------------------------------------------------------------------------------------------------------------
Paid in Accumulated
Common stock capital in Other Total
Par excess of Retained Treasurt comprehensive stockholders'
Shares value par value earnings stock income (loss) equity
----------------- ---------- -------- -------- ------------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at September 30, 1997 13,462 $135 $26,025 $77,453 $(433) $ 9 $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 paid -- -- -- (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) 530 133,451
Issuance of common stock 44 -- 1,455 -- -- -- 1,455
Vesting of restricted stock -- -- 17 -- -- -- 17
Exercise of stock options 277 3 3,203 -- -- -- 3,206
Tax benefit of exercised
stock options -- -- 1,285 -- -- -- 1,285
Deferred compensation -- -- 255 -- -- -- 255
Repurchase of company stock (361) -- -- -- (12,232) -- (12,232)
Issuance of treasury stock 38 -- (382) -- 1,293 -- 911
Net income -- -- -- 29,980 -- -- 29,980
Dividends paid -- -- -- (1,128) -- -- (1,128)
Unrealized losses on investments -- -- -- -- -- (574) (574)
Cumulative translation adjustments -- -- -- -- -- (127) (127)
------ ---- ------- -------- -------- ------ --------
Balances at September 30, 1999 13,980 143 38,287 129,530 (11,290) (171) 156,499
Exercise of stock options 484 5 11,229 -- -- -- 11,234
Tax benefit of exercised
stock options -- -- 1,786 -- -- -- 1,786
Deferred compensation -- -- 870 -- -- -- 870
Repurchase of company stock -- -- -- -- (41) -- (41)
Issuance of treasury stock 75 -- 97 -- 2,538 -- 2,635
Net income -- -- -- 27,631 -- -- 27,631
Dividends paid -- -- -- (1,140) -- -- (1,140)
Unrealized losses on investments -- -- -- -- -- (84) (84)
Cumulative translation adjustments -- -- -- -- (389) (389)
------ ---- ------- -------- -------- ------ --------
Balances at September 30, 2000 14,539 $148 $52,269 $156,021 $(8,793) $(644) $199,001
====== ==== ======= ======== ======== ====== ========
<FN>
See accompanying notes to the consolidated financial statements.
34
</FN>
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
(in thousands)
Years ended September 30, 2000 1999 1998
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $27,631 $29,980 $24,327
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 21,461 17,431 14,948
Restructuring charge 2,923 -- --
Deferred compensation 870 255 472
Gain on sale of investments -- (483) --
Deferred income taxes (2,487) (134) (3,809)
Tax Benefit from exercise of stock options 1,786 1,285 1,660
Other 376 223 --
Changes in operating assets and liabilities:
Accounts receivable (5,805) 3,024 (2,743)
Unbilled work in progress 375 (4,855) (3,828)
Prepaid expenses and other current assets 1,740 (2,213) 473
Other assets 117 (194) (4,963)
Accounts payable (1,707) (2,883) (590)
Accrued compensation and employee benefits (6,531) 3,140 4,497
Other accrued liabilities (3,289) (1,862) 9,156
Billings in excess of earned revenues 1,206 1,036 1,516
Other liabilities (2,014) (1,266) 152
------- ------- -------
Net cash provided by operating activities 36,652 42,484 41,268
------- ------- -------
Cash flows from investing activities
Purchases of property and equipment (22,595) (16,799) (15,669)
Payments for acquisition of subsidiaries -- (1,454) (3,347)
Purchases of investments (14,432) (80,319) (33,491)
Proceeds from sale of investments -- 46,647 --
Proceeds from maturities of investments 9,447 26,437 11,030
------- ------- -------
Net cash used in investing activities (27,580) (25,488) (41,477)
------- ------- -------
Cash flows from financing activities
Principal payments of capital lease obligations (429) (413) (387)
Proceeds from the exercise of stock options and issuance of treasury stock 11,329 3,250 2,841
Dividends paid (1,140) (1,128) (1,102)
Repurchase of company stock (41) (12,232) (110)
------- ------- -------
Net cash provided by (used in) financing activities 9,719 (10,523) 1,242
------- ------- -------
Increase in cash and cash equivalents 18,791 6,473 1,033
Cash and cash equivalents, beginning of year 20,715 14,242 13,209
------- ------- -------
Cash and cash equivalents, end of year $39,506 $20,715 $14,242
======= ======= =======
<FN>
See accompanying notes to the consolidated financial statements.
</FN>
35
</TABLE>
<PAGE>
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
products and services designed to help businesses use data to make better
decisions about their customers. Products include analytical tools, software
designed to implement those analytical tools and consulting services to help
clients track the performance of those tools. The Company is a market leader in
developing predictive and risk assessment models for the financial services
industry, including credit and insurance scoring models. The Company also offers
direct marketing and database management services, and enterprise-wide risk
management and performance measurement solutions to major financial
institutions.
Basis of consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated from the consolidated financial statements.
Use of estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Reclassifications
Certain amounts in the financial statements and notes thereto have been
reclassified to conform to 2000 classifications.
Cash and cash equivalents
Cash and cash equivalents consist of cash in banks and investments with an
original maturity of 90 days or less at time of purchase.
Fair value of financial instruments
The fair values of cash and cash equivalents, accounts receivable and
accounts payable are approximately equal to their carrying amounts because of
the short-term maturity of these instruments. The fair values of the Company's
investments are disclosed in Note 3. The carrying amount of capital lease
obligations approximates fair value at September 30, 2000.
Investments
Investments in US government obligations and marketable equity securities
are classified as "available-for-sale" and are carried at market value. Other
investments are carried at the lower of cost or net realizable value method.
Investments with remaining maturities over one year are classified as long-term
investments due to the Company's current intent. Realized gains and losses are
included in Other Income, net. The cost of investments sold is based on the
specific identification method.
Credit and market risk
The Company invests a portion of its excess cash in US government
obligations and has established guidelines relative to diversification and
maturities for maintaining safety and liquidity. In addition, an allowance for
doubtful accounts is maintained at a level which management believes is
sufficient to cover potential credit losses for accounts receivable.
36
<PAGE>
Depreciation and amortization
Depreciation and amortization on property and equipment including
leasehold improvements and capitalized leases are provided using the
straight-line method over estimated useful lives ranging from three to seven
years or the term of the respective leases.
Intangibles
The intangible assets consisting of goodwill and non-compete agreements
arose principally from business acquisitions and are amortized on a
straight-line basis over the periods of expected benefit, which range from 4 to
15 years.
Revenue recognition
The Company has adopted Statement of Position (SOP) 97-2, "Software
Revenue Recognition" as amended by SOP 98-4 and SOP 98-9 during fiscal year
ended 1999. SOP 97-2 as amended generally requires revenue earned on software
arrangements involving multiple elements to be allocated to each element based
on the relative fair value of the elements.
Revenues from contracts for the development of custom scoring systems and
software which require significant consulting for customization 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 as defined by individual contracts.
Deposits billed and received in advance of performance under contracts are
recorded as billings in excess of earned revenues.
Revenues from credit-bureau usage-priced products and services are
recognized based on usage reports received 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
ratably over the contract period or upon delivery to customers depending on
whether certain revenue recognition criteria are met. 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 establish technological
feasibility of a computer software product. 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 which 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 and technological feasibility is achieved,
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 fiscal year
2000, the Company capitalized approximately $2,775,000 software costs to be
amortized over a two-year period, and recorded total amortization charges of
approximately $319,000 for fiscal year 2000. There were no software costs
capitalized for fiscal year 1999 or 1998.
Income taxes
Income taxes are recognized during the year in which transactions enter
into the determination of financial statement income, with deferred taxes being
provided for temporary differences between amounts of assets and liabilities for
financial reporting purposes and such amounts as measured by tax laws.
Foreign currency
The Company has determined that the functional currency of each foreign
operation is the local currency. Assets and liabilities denominated in foreign
currencies are translated into US dollars at the exchange rate on the balance
sheet date, while revenues and expenses are translated at average rates of
exchange prevailing during the period. Translation adjustments are accumulated
as a separate component of stockholders' equity.
37
<PAGE>
Earnings per share
Diluted earnings per share are based on the weighted-average number of
common shares outstanding and common stock equivalent shares. Common stock
equivalent shares result from the assumed exercise of outstanding stock options
that have a dilutive effect when applying the treasury stock method. Basic
earnings per share are computed on the basis of the weighted average number of
common stock shares outstanding.
New accounting pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, as amended by SFAS
No. 137 and SFAS No. 138. This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities. The Company will adopt SFAS No. 133 for the fiscal year
beginning October 1, 2000. Management believes that the adoption of SFAS No. 133
will not have a material impact on the Company's consolidated financial
position, results of operations or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101 regarding recognition, presentation and
disclosure of revenue. SAB 101 is required to be implemented no later than the
fourth quarter of fiscal year 2001. Management believes that the adoption of SAB
No. 101 will not have a material impact on the Company's consolidated financial
position, results of operations or cash flows.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 (FIN No. 44), "Accounting for Certain Transactions
Involving Stock Compensation, an Interpretation of APB Opinion No. 25." FIN No.
44 is effective July 1, 2000. This interpretation provides guidance for applying
APB Opinion No. 25, "Accounting for Stock Issued to Employees." The Company's
consolidated financial statements conform to FIN No. 44 beginning July 1, 2000.
The adoption of FIN No. 44 did not have any material impact on the Company's
consolidated financial position, results of operations or cash flows.
In March 2000, the Emerging Issues Task Force (EITF), published their
consensus on EITF Issue No. 00-2, "Accounting for Web Site Development Costs",
which requires that costs incurred during the development of web site
applications and infrastructure, involving developing software to operate the
web site, including graphics that affect the "look and feel" of the web page and
all costs relating to software used to operate a web site should be accounted
for under Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". However, if a plan exists or
is being developed to market the software externally, the costs relating to the
software should be accounted for pursuant to FASB Statement No. 86, "Accounting
for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed".
EITF Issue No. 00-2 is effective for all quarters of fiscal years beginning
after June 30, 2000. The Company's consolidated statements conformed to EITF
Issue No. 00-2 beginning June 1, 2000. The adoption of EITF Issue No. 00-2
resulted in the capitalization of approximately $2,775,000 in software costs for
fiscal year 2000.
38
<PAGE>
2. Cash Flow Statement
<TABLE>
Supplemental disclosure of cash flow information:
<CAPTION>
Years ended September 30,
---------------------------------------------------
(in thousands) 2000 1999 1998
-------------------------------------------------------------------- ------------------ ---------------- ---------------
<S> <C> <C> <C>
Income tax payments $17,518 $24,457 $17,174
Interest paid 75 184 803
Non-cash activities:
Reclassification of other assets to property and equipment $ 5,362 -- --
Assets acquired through financing 953 1,641 --
Issuance of common stock to ESOP -- 1,455 1,323
Purchase of CRMA with common/treasury stock -- 631 145
Contributions of treasury stock to ESOP and ESP 2,820 236 --
Vesting of restricted stock -- 17 185
</TABLE>
3 Investments
<TABLE>
The following is a summary of available-for-sale securities and other
investments at September 30, 2000 and 1999:
<CAPTION>
2000 1999
----------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Amortized unrealized unrealized Fair Amortized unrealized unrealized Fair
(in thousands) cost gains losses value cost gains losses value
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short-term investments:
U.S. government obligations $19,168 $ -- $ (59) $19,109 $ 5,228 $ -- $ (12) $ 5,216
======= ==== ===== ======= ======= ==== ====== =======
Long-term investments:
U.S. government obligations $28,159 $ -- $(559) $27,600 $39,462 $ 21 $(709) $38,774
Marketable equity securities 5,219 691 -- 5,910 3,751 913 -- 4,664
Other 992 -- -- 992 496 -- -- 496
------- ---- ----- ------- ------- ---- ----- -------
$34,370 $691 $(559) $34,502 $43,709 $934 $(709) $43,934
======= ==== ===== ======= ======= ==== ====== =======
</TABLE>
The long-term US government obligations mature in one to five years.
On June 1, 2000, the Company entered into a joint venture with
MarketSwitch Corporation (MKSW) to form a new limited liability company, ("the
LLC"). The Company and MKSW, being Class A Members, each holds a 50% voting
interest in the LLC and agrees to fund capital calls by the LLC in an amount not
to exceed $4,000,000. The Company and MKSW each contributed $1,000,000 during
fiscal year 2000. The LLC adopts the calendar year as its fiscal year. The
Company accounts for the investment on an equity basis, and recorded its equity
share of the operating loss of the LLC at approximately $70,000 for the period
ended September 30, 2000. At September 30, 2000 the investment is valued at
$930,000.
During the year ended September 30, 1998, the Company disposed its
non-marketable investment in a start-up Italian credit reporting agency at a
gain of $165,000. The investment had an equity basis of $773,000 which was
written off in 1997 due to the potential negative impact on the agency's
operations resulting from a new privacy law. The Company does not have any
further financial commitments with respect to this investment.
39
<PAGE>
4. Property and Equipment
<TABLE>
Property and equipment at September 30, 2000 and 1999, valued at cost,
consist of the following:
<CAPTION>
(in thousands) 2000 1999
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Data processing equipment $70,978 $56,892
Office furniture, vehicles and equipment 20,812 18,747
Leasehold improvements 18,032 16,660
Capitalized leases 2,841 2,841
Less accumulated depreciation and amortization (64,098) (50,425)
------- -------
Net property and equipment $48,565 $44,715
======= =======
</TABLE>
Depreciation and amortization charged to operations were $19,361,000,
$15,618,000 and $13,553,000 for the years ended September 30, 2000, 1999 and
1998, respectively.
The Company has one capital lease bearing an interest rate of 7%, maturing
in the year 2001. The future minimum lease payments are $375,000, with the
present value of the net minimum lease payments of $364,000 at September 30,
2000. Amortization of assets held under capital lease is included with
depreciation expense, and amount to $2,604,000 and $2,282,000 in 2000 and 1999
respectively.
5. Intangibles
<TABLE>
Intangibles at September 30, 2000 and 1999, consist of the following:
<CAPTION>
<S> <C> <C>
(in thousands) 2000 1999
---------------------------------------------------------------------------------------------------------------------
Goodwill $15,515 $15,515
Other 2,470 2,470
Less accumulated amortization (9,355) (7,255)
------- --------
$8,630 $10,730
======= ========
</TABLE>
Amortization charged to operations was $2,100,000, $1,813,000 and
$1,395,000 for the years ended September 30, 2000, 1999 and 1998, respectively.
6. Income Taxes
<TABLE>
The provision for income taxes consists of the following:
<CAPTION>
Years ended September 30,
(in thousands) 2000 1999 1998
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $17,755 $16,832 $17,380
State 3,954 3,695 3,967
Foreign 217 227 240
------- ------- -------
21,926 20,754 21,587
------- ------- -------
Deferred:
Federal (2,188) (112) (3,152)
State (299) (22) (657)
------- ------- -------
(2,487) (134) (3,809)
------- ------- -------
$19,439 $20,620 $17,778
======= ======= =======
</TABLE>
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.
40
<PAGE>
<TABLE>
The tax effects of significant temporary differences resulting in deferred
tax assets and liabilities at September 30, 2000 and 1999 are as follows:
<CAPTION>
(in thousands) 2000 1999
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Employee benefit plans $ 1,766 $ 2,183
Customer advances 1,213 1,819
Depreciation and amortization 5,515 1,708
Compensated absences 2,733 1,659
Deferred compensation 527 1,617
State taxes 1,284 1,313
Bad debt provision 446 504
Other 1,257 1,647
-------- -------
14,741 12,450
Less valuation allowance (214) (410)
-------- -------
14,527 12,040
-------- -------
Deferred tax liabilities:
Tax on net unrealized gains on available-for-sale securities (30) (87)
-------- -------
Deferred tax assets, net $14,497 $11,953
======== =======
</TABLE>
The valuation allowance for deferred tax assets at September 30, 2000 and
1999 was $214,000 and $410,000, respectively. The valuation allowance was needed
to reduce the deferred tax assets since the Company does not meet the
more-likely-than-not requirements for utilization of a capital loss
carryforward. Variances from the amounts previously reported for the fiscal year
of 1999 were primarily related to adjustments and/or reclassifications made to
conform to the tax returns as filed.
<TABLE>
The Reconciliation between the federal statutory income tax rate of 35%
and the Company's effective tax rate of 41.3% is shown below:
<CAPTION>
Years ended September 30,
(in thousands) 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax provision at federal statutory rates in 2000, 1999 and 1998 $16,475 $17,710 $14,737
State income taxes, net of federal benefit 2,376 2,387 2,152
Increase (decrease) in valuation allowance (196) (236) 162
Other 784 759 727
------- ------- -------
$19,439 $20,620 $17,778
======= ======= =======
</TABLE>
7. Restructuring Charge
In October 1999, the Company announced a restructuring plan to discontinue
its Healthcare Receivables Management System ("HRMS") product line beginning
December 1999. The restructuring plan was necessitated by disappointing market
acceptance and the prospect of continuing losses in fiscal year 2000, and the
Company's adoption of a new strategic direction. The restructuring actions
consisted of terminating approximately 30 full-time employees before the end of
January 2000; canceling certain facility leases and other operating leases
supporting the HRMS product line; and writing down computer hardware and
leasehold improvements due to the abandonment of the HRMS facility.
Restructuring actions were completed under the plan by June 30, 2000 The Company
recognized a net charge of $1,935,000, of which $263,000 was related to
write-downs of operating assets.
During the second quarter of fiscal year 2000, the Company announced and
began to implement supplemental restructuring actions aimed at reducing costs.
The restructuring action consisted of terminating approximately 40 full-time
employees during the second and the third quarters of fiscal year 2000. The
restructuring actions were completed by June 30, 2000. The Company recognized a
net charge of $988,000 as a result of the supplemental restructuring actions.
The combined restructuring charges totaled $2,923,000 for fiscal 2000. The
Company made cash expenditures of $2,439,000, and wrote off operating assets of
$99,000 through September 30, 2000, resulting in a provision of $385,000 for
restructuring charges included in its other accrued liabilities at September 30,
2000.
<PAGE>
<TABLE>
The following table summarizes the restructuring activity for fiscal years
2000:
<CAPTION>
Payments to
Employees Write-Down of Payments on
Involuntarily Operating Assets Canceled
(in thousands) Terminated To Be Sold Contracts Total
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net additions $1,827 263 $833 $2,923
Expenditures and decreases (1,806) (99) (633) (2,538)
------ ---- ----- -------
Balance as of September 30, 2000 $ 21 $164 $200 $ 385
====== ==== ===== =======
41
</TABLE>
<PAGE>
8. Employee Benefit Plans
Pension plan
The Company had a defined benefit pension plan that covered eligible
full-time employees. The benefits were based on years of service and the
employee's compensation during employment. Contributions were intended to
provide for benefits attributed to service to date plus those expected to be
earned in the future.
In September 1999, the Company curtailed the pension plan so that no new
participants would be eligible for the plan, and no additional benefits would
accrue to participants after October 1, 1999. The curtailment resulted in a gain
of $720,000 in 1999. The pension plan was settled during fiscal year 2000 after
receiving governmental approval.
The following table sets forth the plan's funding status at September 30,
2000 and 1999:
(in thousands) 2000 1999
-------------------------------------------------------------------------------
Vested benefit obligation $73 $14,140
Fair value of plan assets (64) (11,885)
--- -------
Accrued pension cost $ 9 $ 2,255
=== =======
The plan assets consist primarily of cash equivalents.
All remaining benefits as of September 30, 2000 are assumed to be paid as
lump sums using an interest rate of 5.72%. At September 30, 1999, the projected
benefit obligation included an accumulated benefit obligation of $14,140,000,
which exceeded the fair value of the pension plan assets.
The net pension cost for the fiscal years ended September 30, 2000 and
1999, included the following components:
(in thousands) 2000 1999
--------------------------------------------------------------------------------
Service costs $ -- $ 2,134
Interest cost on projected benefit obligation 666 1,048
Actual return on plan assets (257) (2,363)
Net amortization and deferral (305) 1,682
---- -------
Net periodic pension plan cost $104 $ 2,501
==== =======
42
<PAGE>
Employee stock ownership plan
The Company had an Employee Stock Ownership Plan (ESOP) that covered
eligible full-time employees. Contributions to the ESOP were determined annually
by the Company's Board of Directors. Effective October 1, 1999, the Company no
longer accepted new participants, and made no provisions for contributions to
the ESOP in fiscal year 2000. Provisions for contributions to the ESOP were $0,
$1,585,000 and $1,803,000 for the years ended September 30, 2000, 1999 and 1998,
respectively.
At September 30, 2000 and 1999, the ESOP held 646,000 and 808,000 shares
of Company stock, respectively. The amounts of dividends on ESOP shares were
$58,000, $67,000 and $75,000 for the years ended September 30, 2000, 1999 and
1998, respectively.
Defined contribution plans
The Company offers 401(k) plans for eligible employees. Eligible employees
may contribute up to 15% of compensation or the statutory limit. The Company
also provides a matching contribution. The Company contributions to 401(k) plans
were $3,618,000, $1,357,000 and $790,000 for the years ended September 30, 2000,
1999 and 1998, respectively. Effective October 1, 1999 the 401(k) plan does not
require a minimum service period, and all Company matching contributions will
vest 100% immediately. Also, all Company contributions made prior to October 1,
1999 vested 100% at October 1, 1999.
The Company maintained a supplemental retirement and savings plan for
certain officers and senior management employees. Effective October 1, 1999, the
Company made no matching contributions to the supplemental retirement and
savings plan. Company contributions to that plan were $0, $298,000 and $247,000
for the years ended September 30, 2000, 1999 and 1998, respectively.
Profit sharing plan
On October 1, 1999, the Company established a profit sharing plan that
covered eligible employees after six months of continuous employment.
Contributions to the plan are determined annually by the company's Board of
Directors based on company performance. Participants vest at varying rates over
a five-year period until fully vested. There were no contributions made to this
plan during fiscal year 2000.
Officers' incentive plan
The Company had an executive compensation plan for the benefit of
officers. Benefits were payable based on the achievement of financial and
performance objectives set annually by the Board of Directors, and the market
value of the Company's stock. Total expenses under the plan were $1,348,000,
$1,391,000 and $3,273,000 for the years ended September 30, 2000, 1999 and 1998,
respectively. The incentive earned each year would be paid 50% currently, and
the balance would be payable over a four-year period, subject to certain
adjustments, as defined in the plan, based on employment status and the market
value of the Company's common stock. The officers' incentive plan was
consolidated with the employee incentive plan during fiscal year 2000. At
September 30, 2000 and 1999, the long-term officers' incentive plan payables
were $0 and $2,353,000, 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.
The officers' incentive plan was consolidated with the employee incentive plan
during fiscal 2000. Total expenses under the employee incentive plans were
$1,661,000, $8,263,000 and $6,962,000 for the years ended September 30, 2000,
1999 and 1998, respectively.
Employee Stock Purchase Plan
At the Company's Annual Meeting held on February 1, 2000, the shareholders
approved the adoption of the Company's 1999 Employee Stock Purchase Plan (the
Purchase Plan) which was unanimously adopted by the Board of Directors on
November 19, 1999. Under the Purchase Plan, the Company is authorized to issue
up to 1,500,000 shares of common stock to eligible employees of the Company and
its subsidiaries. Eligible employees can enter on the start date of any offering
period or on any subsequent semi-annual entry date. Employees may have up to 10%
of their base salary withheld through payroll deductions to purchase common
stock of the Company. The purchase price of the stock is the lower of 85% of 1)
the fair market value of the common stock on the enrollment date (the first day
of the next offering
43
<PAGE>
period) or 2) the fair market value on the exercise date (the last day of each
offering period). Offering period means approximately six-month periods
commencing (a) on the first trading day on or after January 1 and terminating on
the last trading day in the following June, and (b) on the first trading day on
or after July 1 and terminating on the last trading day in the following
December. A total of 22,283 shares of common stock with a weighted average fair
value of $37.40 per share were issued under the Purchase Plan in fiscal year
2000. At September 30, 2000, 1,477,717 shares remained available for issuance.
9. Common Stock
Common
A total of 258,785 and 333,191 shares of treasury stock were included in
the number of common shares outstanding at September 30, 2000 and 1999,
respectively.
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 shares 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:
2000 1999 1998
--------------------------------------------------------------------------------
Expected life (years) 5 5 5
Interest rate 6.4% 5.3% 5.5%
Volatility 41% 42% 43%
Dividend yield 0% 0% 0%
44
<PAGE>
<TABLE>
The following information regarding these option plans for the years ended
September 30 is as follows:
<CAPTION>
2000 1999 1998
----------------------------------------------------------------------------------
Weighted-average Weighted-average Weighted-average
exercise exercise exercise
Options price Options price Options price
---------------------------------------- ------------ ------------ ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,370,000 $33.21 1,796,000 $29.11 1,843,000 $20.63
Granted 1,525,000 $38.86 1,009,000 $35.38 526,000 $38.02
Exercised (484,000) $23.20 (277,000) $11.53 (487,000) $ 5.61
Forfeited (479,000) $37.80 (158,000) $38.66 (86,000) $34.43
--------- --------- ---------
Outstanding at end of year 2,932,000 $37.06 2,370,000 $33.21 1,796,000 $29.11
========= ========= =========
Options exercisable at year end 557,000 $35.79 614,000 $23.63 541,000 $11.80
========= ========= =========
</TABLE>
The weighted-average fair value of options granted for the years ended
September 30, 2000, 1999 and 1998, was $17.73, $15.74 and $17.30, respectively.
<TABLE>
The following table summarizes information about significant fixed-price stock
option groups outstanding at September 30, 2000:
<CAPTION>
Options outstanding Options exercisable
-----------------------------------------------------------------------------------
Weighted -
average remaining Weighted - Weighted -
Number contractual life average Number average
Range of exercise prices outstanding exercise price outstanding exercise price
---------------------------------- -------------- ------------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 6.15 to $33.06 878,000 7.34 $ 31.49 152,000 $ 25.75
$33.13 to $37.06 978,000 7.38 $ 36.60 101,000 $ 34.98
$38.25 to $43.25 760,000 7.14 $ 39.59 235,000 $ 39.41
$43.38 to $51.94 316,000 8.52 $ 47.86 69,000 $ 46.79
--------- -------
$ 6.15 to $51.94 2,932,000 7.43 $ 37.06 557,000 $ 35.79
========= =======
</TABLE>
<TABLE>
Stock-based compensation under SFAS No. 123 would have had the following
pro forma effects for the years ended September 30:
<CAPTION>
(in thousands, except per share data) 2000 1999 1998
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income, as reported $27,631 $29,980 $24,327
======= ======= =======
Pro forma net income $19,010 $25,440 $20,655
======= ======= =======
Earnings per share, as reported:
Diluted $1.89 $2.09 $1.68
======= ======= =======
Basic $1.94 $2.13 $1.77
======= ======= =======
Pro forma earnings per share:
Diluted $1.30 $1.77 $1.43
======= ======= =======
Basic $1.33 $1.81 $1.50
======= ======= =======
</TABLE>
The pro forma effect on net income for each of the years ended September
30, 2000, 1999 and 1998, 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.
45
<PAGE>
Minimum future rental commitments under operating leases are as follows:
Years ending September 30, (in thousands)
--------------------------------------------------------------------------------
2001 $13,872
2002 7,928
2003 6,277
2004 6,062
2005 5,446
Thereafter 48,767
------
$88,352
Rent expense under operating leases, including month-to-month leases, was
$9,135,000, $9,161,000 and $8,298,000 for the years ended September 30, 2000,
1999 and 1998, 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
Effective October 1, 1999, the Company reorganized the operating structure
of the business segments. As a result, the Company changed its segment reporting
structure to more closely match management's internal reporting of business
operations. Significant changes included moving end-user software for clients in
the US and Canada from the former Credit and other segments and combining this
business with the former DynaMark business to form the Netsourced Services
segment, and establishing two new segments named North American Financial
Services and Other International, which are comprised primarily of businesses
formerly included in the Credit segment. The segment information for the fiscal
years ended September 30, 1999 and 1998 are restated to conform to the fiscal
year 2000 presentation.
Our business segments are:
o North American Financial Services. The majority of our revenues is
derived from our North American Financial Services unit, which
primarily markets our Alliance Products and Services and Analytic
Products and Services in the United States and Canadian markets.
o NetSourced Services. The NetSourced Services unit principally
markets Targeting and Prospecting products, together with
Origination and Underwriting, Account and Customer Management
products and Standalone Consulting services in the North American
market.
o Other International. The Other International business unit covers
all of our operations outside the United States and Canadian
markets.
<TABLE>
The Company's Chief Executive and Operating Officers evaluate financial
performance based on measures of business segment revenues and operating profit
or loss, therefore, information regarding depreciation, capital expenditure and
amortization by segments are not presented. Unallocated other income consists
mainly of interest income and net gain on sales of investments. The Company does
not evaluate the financial performance of each segment based on its assets or
capital expenditures.
<CAPTION>
Year ended September 30, 2000
-------------------------------------------------------------------
North
American
Financial Other Netsourced
(in thousands) Services International Services Total
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Segment $159,610 $40,647 $97,728 $297,985
========= ======= ======== ========
Segment income (loss) from operations $ 41,643 $ 5,864 $(2,893) $ 44,614
========= ======= ========
Unallocated other income, net 2,456
--------
Income before Income Taxes $ 47,070
========
46
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year ended September 30, 1999
-------------------------------------------------------------------
North
American
Financial Other Netsourced
(in thousands) Services International Services Total
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Segment $141,335 $29,276 $106,320 $276,931
======== ======= ======== ========
Segment income (loss) for operations $ 45,074 $ 2,216 $ (915) $ 46,375
======== ======= ========
Unallocated other income, net 4,225
--------
Income before Income Taxes $ 50,600
========
Year ended September 30, 1998
-------------------------------------------------------------------
North
American
Financial Other Netsourced
(in thousands) Services International Services Total
----------------------------------------------------------------------------------------------------------------------
Revenues:
Segment $124,845 $31,758 $88,942 $245,545
========= ======= ======= ========
Segment income from operations $37,313 $ 1,366 $ 1,753 $40,432
======== ======= ========
Unallocated other income, net 1,673
---------
Income before Income Taxes $ 42,105
========
</TABLE>
Due to minor reclassifications, the revenues and income for the year ended
September 30, 2000 are slightly different than the combination of the first four
quarters.
Significant customer information is as follows. Amounts not presented were
less than 10%.
Percent of Revenues
--------------------------------------
Year ended September 30,
2000 1999 1998
----------- ----------- -----------
Customer A 12% 10% ---
Customer B 10% --- ---
13. Other Income, Net
<TABLE>
Other income, net consists of the following:
<CAPTION>
Years ended September 30,
-------------------------------------------------------------------------
(in thousands) 2000 1999 1998
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $4,110 $3,145 $2,403
Loss on termination of the
development right of the
Lindaro property (1,373) -- --
Pension plan curtailment gain -- 720 --
Gain on sale of investments -- 483 --
Interest expense (75) (184) (803)
Foreign currency loss (122) (183) (278)
Other (84) 244 351
------ ------ ------
$2,456 $4,225 $1,673
====== ====== ======
47
</TABLE>
<PAGE>
In fiscal year 1998, the Company entered into a synthetic lease
arrangement to construct an office complex located at Second and Lindaro Streets
in downtown San Rafael to accommodate future growth. During fiscal 2000, the
Company decided not to build out the site as planned following a five-month
study of its options. Under a plan proposed to the San Rafael City Government,
the Company would be released from its obligation to occupy buildings on the
site, and Wilson Cornerstone, a real estate development firm would continue with
the development of the site. As a result of the transaction concluded in the
fourth quarter of fiscal year 2000, the Company recorded a loss of approximately
$1,373,000 in other income in fiscal year 2000.
14. Other Comprehensive Income (Loss) and Accumulated Other Comprehensive
Income (Loss) Balance
In fiscal 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in financial
statements. SFAS No. 130 requires classification of other comprehensive income
(loss) in a financial statement and display of accumulated other comprehensive
income (loss) separately from retained earnings and additional paid-in capital.
Other comprehensive income (loss) includes unrealized gains (losses) on
investments and foreign currency translation adjustments.
<TABLE>
Supplemental disclosure of other comprehensive income (loss) information:
<CAPTION>
Year ended September 30, 2000
-----------------------------------------------------------------------------------------------------------------------
Before-tax Tax
(in thousands) amount amount Net-of-tax amount
---------------------------------------------- ----------------------- ------------------------ -----------------------
<S> <C> <C> <C>
Unrealized losses on investments $(143) $ 59 $ (84)
Foreign currency translation adjustments (663) 274 (389)
----- ---- -------
Other comprehensive loss $(806) $333 $ (473)
===== ==== =======
Year ended September 30, 1999
-----------------------------------------------------------------------------------------------------------------------
Before-tax Tax
(in thousands) amount amount Net-of-tax amount
---------------------------------------------- ----------------------- ------------------------ -----------------------
Unrealized losses on investments:
Unrealized holding losses
arising during period $ (494) $ 201 $ (293)
Less: reclassification adjustment (474) 193 (281)
------- ----- -------
Net unrealized loss (968) 394 (574)
Foreign currency translation adjustments (214) 87 (127)
------- ----- -------
Other comprehensive loss $(1,182) $ 481 $ (701)
======= ===== =======
Year ended September 30, 1998
----------------------------------------------------------------------------------------------------------------------
Before-tax Tax
(in thousands) amount amount Net-of-tax amount
---------------------------------------------- ----------------------- ------------------------ ----------------------
Unrealized gains on investments:
$ 663 $ (280) $ 383
Foreign currency translation adjustments 238 (100) 138
----- ------ --------
Other comprehensive income $ 901 $ (380) $ 521
===== ====== ========
</TABLE>
<PAGE>
<TABLE>
Supplemental disclosure of accumulated comprehensive income (loss)
balance:
Period from September 30, 1998 to September 30, 2000
<CAPTION>
Foreign Accumulated
Unrealized currency other
gains (losses) on translation comprehensive
(in thousands) investments adjustments income (loss)
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balances at September 30, 1998 700 (170) 530
Current period change (574) (127) (701)
------- -------- -----
Balances at September 30, 1999 126 (297) (171)
------- -------- -----
Current period change (84) (389) (473)
------- -------- -----
Balances at September 30, 2000 $ 42 $ (686) $(644)
======= ======== =====
48
</TABLE>
<PAGE>
15. Earnings Per Share
<TABLE>
The following reconciles the numerators and denominators of diluted and
basic earnings per share (EPS):
<CAPTION>
Years ended September 30,
-----------------------------------------------------
(in thousands, except per share data) 2000 1999 1998
---------------------------------------------------------------- ----------------- ---------------- ------------------
<S> <C> <C> <C>
Numerator - Net income $27,631 $29,980 $24,327
======= ======= =======
Denominator - Shares:
Diluted weighted-average shares and assumed
conversions of stock options 14,635 14,364 14,463
Effect of dilutive securities - employee stock options (375) (291) (700)
------ ------- -------
Basic weighted-average shares 14,260 14,073 13,763
====== ======= =======
Earnings per share:
Diluted $ 1.89 $ 2.09 $ 1.68
====== ======= =======
Basic $ 1.94 $ 2.13 $ 1.77
====== ======= =======
</TABLE>
The computation of diluted EPS for the years ended September 30, 2000,
1999 and 1998, respectively, excludes stock options to purchase 189,000, 813,000
and 930,000 shares of common stock. The shares were excluded because the
exercise prices for the options were greater than the respective average market
price of the common shares and their inclusion would be antidilutive.
16. Supplementary Financial Data (Unaudited)
<TABLE>
The following table presents selected unaudited consolidated financial
results for each of the eight quarters in the two-year period ended September
30, 2000. 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.
<CAPTION>
(in thousands, except per share data and the
number of shares) Dec. 31, 1999 Mar. 31, 2000 June 30, 2000 Sept. 30, 2000
-------------------------------------------------- --------------- ------------------ ---------------- -----------------
<S> <C> <C> <C> <C>
Revenues $70,094 $73,300 $75,903 $78,688
Cost of revenues 29,780 30,288 33,867 34,381
------- ------- ------- -------
Gross profit $40,977 $43,012 $42,036 $44,307
======= ======= ======= =======
Net income $4,934 $7,147 $7,712 $7,838
======= ======= ======= =======
Earnings per share:
Diluted $.34 $.49 $.53 $.53
======= ======= ======= =======
Basic $.35 $.50 $.54 $.54
======= ======= ======= =======
Shares used in computing earnings per share:
Diluted 14,392,000 14,680,000 14,601,000 14,851,000
========== ========== ========== ==========
Basic 14,028,000 14,214,000 14,338,000 14,460,000
========== ========== ========== ==========
(in thousands, except per share data and the
number of shares) Dec. 31, 1998 Mar. 31, 1999 June 30, 1999 Sept. 30, 1999
-------------------------------------------------- --------------- ------------------ ----------------- ----------------
Revenues $67,977 $68,874 $67,241 $72,839
Cost of revenues 25,071 26,941 25,196 28,246
------- ------- ------- -------
Gross profit $42,906 $41,933 $42,045 $44,593
======= ======= ======= =======
Net income $ 7,048 $ 7,464 $ 6,973 $ 8,495
======= ======= ======= =======
Earnings per share:
Diluted $ .49 $ .51 $ .49 $ .60
======= ======= ======= =======
Basic $ .50 $ .53 $ .50 $ .61
======= ======= ======= =======
Shares used in computing earnings per share:
Diluted 14,354,000 14,578,000 14,301,000 14,212,000
========== ========== ========== ==========
Basic 14,014,000 14,177,000 14,081,000 14,020,000
========== ========== ========== ==========
49
</TABLE>
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL
None.
50
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The required information regarding our Directors is incorporated by
reference from the information under the caption "Election of Directors -
Nominees" in our definitive proxy statement for the Annual Meeting of
Stockholders to be held on February 6, 2001.
The required information regarding our Executive Officers is contained in
Part I of this Form 10-K.
The required information regarding compliance with Section 16(a) of the
Securities Exchange Act is incorporated by reference from the information under
the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in our
definitive proxy statement for the Annual Meeting of Stockholders to be held on
February 6, 2001.
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
our definitive proxy statement for the Annual Meeting of Stockholders to be held
on February 6, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the information under the caption "Stock
Ownership" in our definitive proxy statement for the Annual Meeting of
Stockholders to be held on February 6, 2001.
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 our definitive proxy statement for the Annual Meeting of
Stockholders to be held on February 6, 2001.
51
<PAGE>
PART IV
<TABLE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<CAPTION>
Reference Page
Form 10-K
<S> <C>
(a) 1. Consolidated financial statements:
Report of Independent Auditors............................................... 31
Consolidated statements of income and comprehensive income for each
of the years in the three-year period ended September 30, 2000........ 32
Consolidated balance sheets at September 30, 2000 and
September 30, 1999...................................................... 33
Consolidated statements of stockholders' equity for each of the
years in the three-year period ended September 30, 2000................. 34
Consolidated statements of cash flows for each of the
years in the three-year period ended September 30, 2000................. 35
Notes to consolidated financial statements................................... 36
2. Financial statement schedule:
Independent Auditor's Report on Financial Statement Schedule....................... 59
II Valuation and qualifying accounts at September 30, 2000, 1999 and 1998......... 60
</TABLE>
3. Exhibits:
2.1 Lease dated December 2, 1998, by and between DynaMark, Inc.,
and CSM Corporation filed as Exhibit 2.1 to the Company's
report on Form 10-K for the fiscal year ended September 30,
1998, and incorporated herein by reference.
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 First Amendment to Agreement and Plan of Merger and
Reorganization effective as of May 17, 1999, by and among the
Company; Credit & Risk Management Associates, Inc.; and Donald
J. Sanders, Paul A. Makowski, and Lawrence E. Dukes filed as
Exhibit 2.3 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1999, 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. filed as Exhibit 2.4 to the Company's report on Form 10-K
for the fiscal year ended September 30, 1998, and incorporated
herein by reference.
3.1 Restated Certificate of Incorporation of the Company, filed as
Exhibit 3.1 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1997, and incorporated herein
by reference.
3.2 Restated By-laws of the Company (as amended effective November
19, 1999) filed as Exhibit 3.2 to the Company's report on Form
10-K for the fiscal year ended September 30, 1999, 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
52
<PAGE>
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
filed as Exhibit 10.1 to the Company's report on Form 10-K for
the fiscal year ended September 30, 1999, and incorporated
herein by reference. *
10.2 Fair, Isaac and Company, Inc. 1999 Employee Stock Purchase
Plan filed as Exhibit 10.2 to the Company's report on Form
10-K for the fiscal year ended September 30, 1999, and
incorporated herein by reference.*
10.3 Lease dated April 28, 1995, between CSM Investors, Inc., and
DynaMark, Inc. 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 UK Lease dated October, 2000 by and between The Prudential
Assurance Company Limited and Fair, Isaac International UK
Corporation.
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, filed as Exhibit
10.5 to the Company's report on Form 10-K for the fiscal year
ended September 30, 1998, and incorporated herein by
reference.
10.6 Stock Option Plan for Non-Employee Directors, originally filed
as Exhibit 10.8 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1988, filed as Exhibit 10.6 to
the Company's report on Form 10-K for the fiscal year ended
September 30, 1998, and incorporated herein by reference. *
10.7 Lease dated July 1, 1993, between The Joseph and Eda Pell
Revocable Trust and the Company and the First 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 Amendment No. 3 to the Company's 1992 Long-Term Incentive Plan
(as amended and restated effective November 19, 1999) filed as
Exhibit 10.8 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1999, and incorporated herein
by reference. *
10.9 First Amendment to the Company's Stock Option Plan for
Non-Employee Directors, originally filed as Exhibit 10.12 to
the Company's report on Form 10-K for the fiscal year ended
September 30, 1989 and re-filed as Exhibit 10.9 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1998, and incorporated herein by reference. *
10.10 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 and re-filed as Exhibit 10.11 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1998, and incorporated herein by reference.
10.12 Addenda Numbers Eight and Nine to lease between S.R.P Limited
Partnership and the Company filed as Exhibit 10.12 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1995, and incorporated herein by reference.
10.13 Lease, dated September 5, 1991, between 111 Partners, a
California general partnership, and the Company originally
filed as Exhibit 10.20 to the Company's report on Form 10-K
for the fiscal year ended September 30, 1991and re-filed as
Exhibit 10.13 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1998, and incorporated herein
by reference.
53
<PAGE>
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 and re-filed as Exhibit 10.14 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1998, and incorporated herein by reference.
10.15 Amendment No. 2 to the Company's 1992 Long-Term Incentive Plan
(as amended and restated effective November 21, 1995) filed as
Exhibit 10.15 to the Company's report on Form 10K 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 First Amendment to Participation Agreement dated April 5, 1999
by and between Company, Lease Plan North America, Inc., ABN
Amro Bank N.V. and other participants named therein filed as
Exhibit 10.19 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1999, and incorporated herein
by reference.
10.20 Fair, Isaac Supplemental Retirement and Savings Plan and Trust
Agreement effective November 1, 1994, originally filed as
Exhibit 10.20 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1994. *
10.21 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 filed as Exhibit 10.23 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1998, and incorporated herein by reference.
10.24 Exchange Agreement and Plan of Reorganization, dated July 19,
1996, among DynaMark, Inc., Printronic Corporation of America,
Inc., Leo R. Yochim, and Susan Keenan, filed as Exhibit 10.24
to the Company's report on Form 10-K for the fiscal year ended
September 30, 1996, and incorporated herein by reference.
10.25 Agreement and Plan of Merger and Reorganization, dated
September 30, 1996, among the Company, FIC Acquisition
Corporation, Credit & Risk Management Associates, Inc., Donald
J. Sanders, Paul A. Makowski and Lawrence E. Dukes, filed as
Exhibit 10.25 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1996, and incorporated herein
by reference.
10.26 Contract between the Company and Dr. Robert M. Oliver, dated
April 2, 1996, filed as Exhibit 10.26 to the Company's report
on Form 10-K for the fiscal year ended September 30, 1996, and
incorporated herein by reference. *
10.27 Letter of Intent dated July 15, 1996, between the Company and
Village Properties, and the First Amendment thereto dated July
18, 1996, filed as Exhibit 10.27 to the Company's report on
Form 10-K for the fiscal year ended September 30, 1996, and
incorporated herein by reference.
54
<PAGE>
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 Stock Agreement between the Company and Judith W. Isaac dated
December 16, 1998.
10.39 Intentionally omitted.
10.40 Intentionally omitted.
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 filed as Exhibit
10.41 to the Company's report on Form 10-K for the fiscal year
ended September 30, 1998, and incorporated herein by
reference.
10.42 Employment Agreement entered into effective as of August 23,
1999, by and between Fair, Isaac and Company, Inc. and Thomas
G. Grudnowski filed as Exhibit 10.42 to the Company's report
on Form 10-K for the fiscal year ended September 30, 1999, and
incorporated herein by reference. *
10.43 First Amendment to Employment Agreement entered into effective
as of December 3, 1999, by and between Fair, Isaac and
Company, Inc. and Thomas G. Grudnowski filed as Exhibit 10.43
to the Company's report on Form 10-K for the fiscal year ended
September 30, 1999, and incorporated herein by reference. *
55
<PAGE>
10.44 Purchase Agreement dated June 28, 2000, between the Company
and San Rafael Corporate Center Investor, L.L.C.
10.45 Assignment of Contract dated July 28, 2000, between and San
Rafael Corporate Center Investor, L.L.C. and San Rafael
Corporate Center, LLC.
10.46 First Amendment to Purchase Agreement dated July 28, 2000,
between the Company and San Rafael Corporate Center, LLC.
10.47 Amendment to Development Agreement dated September 22, 2000,
among the City, the Company and San Rafael Corporate Center,
LLC
10.48 Termination Agreement dated September 27, 2000, between Lease
Plan North America, Inc. and the Company.
21.1 Subsidiaries of the Company.
23.1 Consent of KPMG, LLP (see page 61 of this Form 10-K).
24.1 Power of Attorney (see page 57 of this Form 10-K).
27 Financial Data Schedule.
*Management contract or compensatory plan or arrangement
(b) Reports on Form 8-K:
None.
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
FAIR, ISAAC AND COMPANY, INCORPORATED
DATE: December 27, 2000
By /s/ HENK J. EVENHUIS
----------------------------------------------------
Henk J. Evenhuis
Executive Vice President and Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints HENK J. EVENHUIS his attorney-in-fact,
with full power of substitution, for him in any and all capacities, to sign any
amendments to this Report on Form 10-K and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorney-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
<TABLE>
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.
<CAPTION>
<S> <C> <C>
/s/ THOMAS G. GRUDNOWSKI President, Chief Executive Officer December 27, 2000
---------------------------------------- (Principal Executive Officer) and Director
Thomas G. Grudnowski
/s/ HENK J. EVENHUIS Executive Vice President and December 27, 2000
---------------------------------------- Chief Financial Officer
Henk J. Evenhuis (Principal Financial Officer)
/s/ JONATHAN R. BOND Senior Vice President of Finance, December 27, 2000
---------------------------------------- Corporate Controller
Jonathan R. Bond (Principal Accounting Officer)
/s/ A. GEORGE BATTLE Director December 27, 2000
----------------------------------------
A. George Battle
/s/ H. ROBERT HELLER Director December 27, 2000
----------------------------------------
H. Robert Heller
/s/ GUY R. HENSHAW Director December 27, 2000
----------------------------------------
Guy R. Henshaw
/s/ DAVID S.P. HOPKINS Director December 27, 2000
----------------------------------------
David S. P. Hopkins
/s/ ROBERT M. OLIVER Director December 27, 2000
----------------------------------------
Robert M. Oliver
/s/ ROBERT D. SANDERSON Director December 27, 2000
----------------------------------------
Robert D. Sanderson
57
<PAGE>
FAIR, ISAAC AND COMPANY, INCORPORATED
Form 10K for fiscal year ended September 30, 2000
SIGNATURES AND POWER OF ATTORNEY continued
/s/ PHILIP G. HEASLEY Director December 27, 2000
----------------------------------------
Philip G. Heasley
/s/ TONY J. CHRISTIANSON Director December 27, 2000
----------------------------------------
Tony J. Christianson
/s/ MARGARET L. TAYLOR Director December 27, 2000
----------------------------------------
Margaret L. Taylor
58
</TABLE>
<PAGE>
The Board of Directors and Stockholders
Fair, Isaac and Company, Incorporated:
Under date of October 27, 2000, we reported on the consolidated balance
sheets of Fair, Isaac and Company, Incorporated, and subsidiaries as of
September 30, 2000 and 1999, and the related consolidated statements of income
and comprehensive income, stockholders' equity, and cash flows for each of the
years in the three-year period ended September 30, 2000, which are included in
the 2000 annual report on Form 10-K. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedule in the 2000 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 27, 2000
59
<PAGE>
<TABLE>
Schedule II
Fair, Isaac and Company, Incorporated
VALUATION AND QUALIFYING ACCOUNTS
September 30, 2000, 1999 and 1998
<CAPTION>
Balance at Balance at
Beginning Charged Charged End of
Description of Period to Expense to Revenues Write-offs Period
----------- --------- ---------- ----------- ---------- ------
<S> <C> <C> <C> <C> <C>
September 30, 2000:
Allowance for Doubtful Accounts $1,274,000 $218,000 $86,000 $(448,000) $1,130,000
September 30, 1999:
Allowance for Doubtful Accounts $1,163,000 $123,000 $441,000 $(453,000) $1,274,000
September 30, 1998:
Allowance for Doubtful Accounts $758,000 $677,000 $271,000 $(543,000) $1,163,000
60
</TABLE>
<PAGE>
Consent of KPMG LLP
The Board of Directors and Stockholders
Fair, Isaac and Company, Incorporated:
We consent to incorporation by reference in the registration statements
(Nos. 33-20349, 33-26659, 33-63426, 333-02121, 333-32309, 333-65179, 333-83905,
333-95889, 333-32396, and 333-32398) on Form S-8 and the registration statements
(Nos. 333-20537 and 333-42473) on Form S-3 of Fair, Isaac and Company,
Incorporated, and subsidiaries of our reports dated October 27, 2000, relating
to the consolidated balance sheets of Fair, Isaac and Company, Incorporated, and
subsidiaries as of September 30, 2000 and 1999, and the related consolidated
statements of income and comprehensive income, stockholders' equity, and cash
flows for each of the years in the three-year period ended September 30, 2000
and related financial statement schedule, which reports appear in the September
30, 2000 annual report on Form 10-K of Fair, Isaac and Company, Incorporated,
and subsidiaries.
San Francisco, California
December 28, 2000
/s/ KPMG LLP
61
<PAGE>
EXHIBIT INDEX
TO FAIR, ISAAC AND COMPANY, INCORPORATED REPORT ON FORM 10-K FOR THE
FISCAL YEAR ENDED SEPTEMBER 30, 2000
Exhibit No. Exhibit
10.4 UK Lease dated October, 2000 by and between The Prudential
Assurance Company Limited and Fair, Isaac International UK
Corporation.
10.20 Fair, Isaac Supplemental Retirement and Savings Plan and Trust
Agreement effective November 1, 1994, originally filed as Exhibit
10.20 to the Company's report on Form 10-K for the fiscal year
ended September 30, 1994.
10.38 Stock Agreement between the Company and Judith W. Isaac dated
December 16, 1998.
10.44 Purchase Agreement dated June 28, 2000, between the Company and
San Rafael Corporate Center Investor, L.L.C.
10.45 Assignment of Contract dated July 28, 2000, between San Rafael
Corporate Center Investor, L.L.C. and San Rafael Corporate Center,
LLC.
10.46 First Amendment to Purchase Agreement dated July 28, 2000, between
the Company and San Rafael Corporate Center, LLC.
10.47 Amendment to Development Agreement dated September 22, 2000, among
the City of San Rafael, the Company and San Rafael Corporate
Center, LLC.
10.48 Termination Agreement dated September 27, 2000, between Lease Plan
North America, Inc. and the Company.
21.1 Subsidiaries of the Company.
23.1 Consent of KPMG, LLP.
24.1 Power of Attorney.
27 Financial Data Schedule.
62
