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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 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995
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[ ] 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
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COMMISSION FILE NUMBER
0-16439
FAIR, ISAAC AND COMPANY, INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-1499887
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
120 North Redwood Drive, San Rafael, California 94903
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 472-2211
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $0.01 par value per share
(Title of Class)
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 .
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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, 1995, the aggregate market value of the Registrant's
common stock held by nonaffiliates of the Registrant was $185,393,091 based on
the last transaction price as reported on the NASDAQ Stock Market. 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, 1995 was
12,311,406 (excluding 52,765 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, 1996.
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. Business.......................................................... 3
ITEM 2. Properties........................................................ 11
ITEM 3. Legal Proceedings................................................. 11
ITEM 4. Submission of Matters to a Vote of Security Holders............... 11
EXECUTIVE OFFICERS OF THE REGISTRANT........................................ 12
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................ 13
ITEM 6. Selected Financial Data........................................... 13
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 13
ITEM 8. Financial Statements and Supplementary Data....................... 19
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 33
PART III
ITEM 10. Directors and Executive Officers of the Registrant................ 34
ITEM 11. Executive Compensation............................................ 34
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.... 34
ITEM 13. Certain Relationships and Related Transactions ................... 34
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K....................................................... 35
SIGNATURES ............................................................... 38
Supplemental Information.................................................... 39
2
PART I
ITEM 1. BUSINESS
DEVELOPMENT OF THE BUSINESS
Fair, Isaac and Company (NASDAQ: FICI) is a leading developer of data
management systems and services for the consumer credit, personal lines
insurance, and direct marketing industries. The Company employs various tools,
such as database enhancement software, predictive modeling, adaptive control,
and systems automation to help its customers make "better decisions through
data."
Established in 1956, Fair, Isaac pioneered the credit risk scoring
technologies now employed by most major U.S. consumer credit grantors. Its
rule-based decision management systems, originally developed to screen consumer
credit applicants, are now routinely employed in all phases of the credit
account cycle: direct mail solicitation (credit cards, lines of credit, etc.),
application processing, card reissuance, on-line credit authorization, and
collection. Although direct comparisons are difficult, management believes Fair,
Isaac ranks first or second in sales of every type of credit management product
or service it markets, and that its total sales to the consumer credit market
exceed those for similar products by any direct competitor.
More than half of fiscal 1995 revenues were derived from usage-priced
products and services marketed through alliances with major U.S. credit bureaus
and third-party credit card processors. Sales of decision management products
and services directly to credit industry end-users accounted for approximately
30 percent of revenues.
In recent years Fair, Isaac has branched out, applying its proven
risk/reward modeling capabilities to auto and home insurance underwriting, small
business lending, and home mortgage financing. With the acquisition of DynaMark
in December 1992, the Company made its first foray into marketing data
processing and database management, an area it considers a prime target for
diversification. Its strategy in this area is to develop and market an array of
services combining DynaMark's strengths in warehousing and manipulating complex
consumer databases with Fair, Isaac's expertise in predictive modeling and
decision systems. DynaMark contributed $17.8 million or 16 percent of Fair,
Isaac's fiscal 1995 revenues. Insurance group revenues in 1995 were just under
$3 million or 2.6 percent of revenues.
Fair, Isaac numbers hundreds of the world's leading credit card and travel
card issuers, retail establishments, and consumer lenders among its regular
customers. It has enjoyed continuous client relationships with some of these
companies for more than 25 years. Through alliances with all three major U.S.
credit bureaus the Company also serves a large and growing number of
middle-market credit grantors, primarily by providing direct mail solicitation
screening, application scoring, and account management services on a usage-fee
basis. In addition, some of its newer end-user products, such as CreditDesk(R)
application processing software, are designed to meet the needs of relatively
small users of scoring systems.
Approximately 13 percent of Fair, Isaac's fiscal 1995 revenues came from
sales outside the United States. With its long-standing presence in Western
Europe and Canada and the more recent establishment of operating bases in Great
Britain, France, Germany, Japan, Mexico and South Africa, the Company is well
positioned to benefit from the expected growth in global credit card issuance
and usage through the balance of the 1990s.
Since 1990, Fair, Isaac's revenues and earnings per share have increased at
a compound rate of 35 percent and 50 percent, respectively. The Company
attributes this growth to rising market demand for credit scoring and account
management services; success in increasing its share of market; and a gradual
shift in marketing and pricing strategy, from primary reliance on direct,
end-user sales of customized analytical and software products to ongoing usage
revenues from services provided through credit bureaus and bankcard processing
agencies. The 26 percent increases in revenues and net income achieved in fiscal
1995 are closer to the Company's long-term historical growth rates and more in
line with the rates that management believes can be sustained in the future.
Because Fair, Isaac already holds the major share of the maturing North
American credit scoring and account management markets, management believes the
Company's long-term growth prospects will largely rest on its ability to (a)
develop additional, high value products and services for its present customer
base; (b) increase its penetration of established or emerging credit markets
outside the U.S. and Canada; and (c) develop new markets and
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applications for its technologies--direct marketing, insurance, small business
lending and health care information being prime examples.
PRODUCTS AND SERVICES
The Company's principal products are statistically derived, rule-based
analytic tools designed to help businesses make better decisions on their
customers and prospective customers, and software systems and components to
implement these analytic tools. In addition to sales of these products directly
to end-users, the Company also makes these products available in service mode
through arrangements with credit bureaus and third-party credit card processors.
The Company's DynaMark subsidiary provides data processing, database management,
and personalized printing services to businesses engaged in direct marketing.
Products and services sold to the consumer credit industry have
traditionally accounted for most of the Company's revenues. However, the Company
is actively promoting its products and services to other segments of the credit
industry, including mortgage and small business lending; and to non-credit
industries, particularly personal lines insurance and direct marketing. Consumer
credit accounted for over 80 percent of the Company's revenues in each of the
three years in the period ended September 30, 1995. Sales to customers in the
direct marketing business, including the marketing arms of financial service
businesses, accounted for about 16 percent of revenues in fiscal 1995 and 1994,
and 12 percent in fiscal 1993. Revenues from sales to the insurance industry
accounted for less than three percent of revenues in each of the three years in
the period ended September 30, 1995.
ANALYTIC PRODUCTS
The Company's primary analytic products are scoring algorithms (also called
"scorecards") which can be used in screening lists of prospective customers,
evaluating applicants for credit or insurance, and managing existing credit
accounts. Some of the most common types of scoring algorithms developed by the
Company are described below. Scoring algorithms are developed by correlating
information available at the time a particular decision is made with known
performance at a later date. Scoring algorithms can be developed to predict the
likelihood of different kinds of performance (e.g. credit delinquency, response
to a solicitation, and insurance claims frequency); they can be developed from
different data sources (e.g. credit applications and credit bureau files); and
they can be developed either for a particular user ("custom" scorecards) or for
many users in a particular industry ("pooled data" or "generic" scorecards).
Credit Application Scoring Algorithms. First introduced in 1958, Credit
Application Scoring Algorithms are tools that permit credit grantors to
calculate the risk of lending to individual applicants. They are delivered in
the form of a table of numbers, one for each possible answer to each of about
ten to twelve selected predictive questions that are found on the form filled in
by the applicant or on a credit report purchased by the credit grantor. The user
"scores" an applicant by looking in the table for the number associated with the
answers provided about the applicant and calculating their sum. The "score" thus
obtained is compared to a "cutoff score" previously established by the credit
grantor's management to determine whether or not to extend the requested credit.
A significant proportion of revenues from Credit Application Scoring Algorithms
is derived from sales of new or replacement algorithms to existing users.
Behavior Scoring Algorithms. The Company pioneered Behavior Scoring
Algorithms with a research program in 1969. The first commercially successful
products were introduced in 1978. In contrast to Credit Application Scoring
Algorithms which deal with credit applicants, Behavior Scoring Algorithms permit
managements to define rules for the treatment of existing credit customers on an
ongoing basis.
Although similar in statistical principle and manner of construction,
Behavior Scoring Algorithms differ in several important respects from Credit
Application Scoring Algorithms. First, rather than using an applicant's answers
on a credit application or a credit report, the data used to determine a
behavior score come from the customer's purchase and payment history with that
credit grantor. Second, each customer is scored monthly, rather than only at
application time, and an action is selected each time in response to the score.
Third, the available actions are much more varied than simply granting or
denying credit to an applicant. For example, if an account is delinquent, the
actions available to a credit manager can include a simple message on a
customer's bill calling attention to the delinquency, a dunning letter, a phone
call, or a referral to a collection agency, with the action to be taken in any
given case to be determined by the customer's behavior score.
Scores produced by specially designed Behavior Scoring Algorithms can be
used to select actions for mailing promotional materials to customers, for
changing the credit limits allowed, for authorizing individual credit card
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transactions, for taking various actions on delinquent accounts, and for
reissuing credit cards which are about to expire. Behavior Scoring Algorithms
are also components of the Adaptive Control Systems described below.
Credit Bureau Scoring Services. The Company also provides scoring
algorithms to each of the three major automated credit bureaus in the United
States based solely on the information in their files. Customers of the credit
bureau can use the scores derived from these algorithms to prescreen
solicitation candidates, to evaluate applicants for new credit and to review
existing accounts. Credit grantors using these services pay based on usage and
the Company and the credit bureau share these usage revenues. The PreScore(R)
service offered by the Company combines a license to use such algorithms for
prescreening solicitation candidates along with tracking and consulting services
provided by the Company and is priced on a time or usage basis.
ScoreNetSM Service. The ScoreNet Service, introduced in August 1991, allows
credit grantors to obtain Fair, Isaac's credit bureau scores and related data on
a regular basis and in a format convenient for use in their account management
programs. In most cases the account management program is a Fair, Isaac Adaptive
Control System or Adaptive Control service at a credit card processor. The
Company obtains the data from the credit bureau(s) selected by each subscriber
and delivers it to the subscriber in a format compatible with the subscriber's
account management system.
Insurance Scoring Algorithms. The Company has also delivered scoring
systems for insurance underwriters. Such systems use the same underlying
statistical technology as credit scoring systems, but are designed to predict
claim frequency or profitability of applicants for personal insurance such as
automobile or homeowners' coverage. During fiscal 1993, the Company introduced a
Property Loss Score ("PLS") service in conjunction with Equifax, Inc., a leading
provider of data to insurance underwriters. In 1994, the Company introduced a
similar service in conjunction with Trans Union called "ASSIST" which is
designed to predict automobile insurance risk. PLS and ASSIST are similar to the
credit bureau scoring services in that a purchaser of data from Equifax or Trans
Union can use the scores to evaluate the risk posed by applicants for
homeowners' or auto insurance. The Company and Equifax or Trans Union, as the
case may be, share the usage revenue produced by these services. Aspects of
automated application processing systems and Adaptive Control Systems are also
applicable to insurance underwriting decisions. The Company is actively
marketing its products and services to the insurance industry.
Other Scoring Algorithms. The Company has developed scoring algorithms for
other users, which include public utilities that require deposits from selected
applicants before starting service, tax authorities that select returns to be
audited, and mortgage lenders. The Company has also developed scoring algorithms
for use in selecting life insurance salesmen, finance company managers, and
prisoners suitable for early release, although to date these algorithms have not
generated significant revenues.
AUTOMATED STRATEGIC APPLICATION PROCESSING SYSTEMS (ASAP)
The Company's Automated Strategic Application Processing systems (ASAP)
automate the processing of credit applications, including the implementation of
the Company's Credit Application Scoring Algorithms. The Company offers
Mid-Range ASAPs which are stand-alone assemblies of hardware and software;
Mainframe ASAP, SEARCH, and ScoreWare consisting of software for IBM and IBM
compatible mainframe computers; and CreditDesk(TM) which consists of software
for personal computers. The Company does not expect significant sales of new
Mid-Range ASAP systems but still derives significant maintenance and enhancement
revenues from existing systems.
The tasks performed by ASAPs include: (i) checking for the completeness of
the data initially given and printing an inquiry letter in the case of
insufficient information; (ii) checking whether an applicant is a known
perpetrator of fraud; (iii) electronically requesting, receiving, and
interpreting a credit report when it is economic to do so; (iv) assigning a
credit limit to the account, if acceptable, and printing a denial letter if not;
and (v) forwarding the data necessary to originate billing records for accepted
applicants.
Mid-Range ASAP is a minicomputer-based system which carries out the tasks
listed above in a manner extensively "tailored" to each user's unique
requirements. Mainframe ASAP is a software-only package designed to be executed
on IBM or IBM compatible mainframe computers. It is most useful for very large
volume credit grantors who elect to enter application information from a number
of separate locations. CreditDesk is designed for use on stand-alone or
networked personal computers. Although its software functions are not tailored
as extensively as the other versions of ASAP, CreditDesk features an easy-to-use
graphics interface. The Company also sells software components for IBM or
compatible mainframe computers under the tradename "SEARCH" and "ScoreWare."
5
SEARCH acquires and interprets credit bureau reports as a separate package.
ScoreWare provides for easy installation of credit application scorecards and
computes scores from such scorecards as part of the application processing
sequence.
The Company's Mid-Range and Mainframe ASAP systems are currently being used
in the United States, Canada, and Europe by banks, retailers, and other
financial institutions. CreditDesk is being used by over 300 credit grantors in
more than a dozen countries. To support these installations, the Company
provides complete hardware and software maintenance, general software support in
the form of consulting, and specific software support by producing enhancements,
as well as other modifications at a user's request. In September 1989, Equifax
Credit Information Services of Toronto, Canada's largest credit bureau, began
providing an application processing and scoring service using a custom-designed
version of the Company's Mainframe ASAP Software. The Company shares in the
usage revenue produced by this service.
ADAPTIVE CONTROL SYSTEMS
The Company's most advanced product is the Adaptive Control System, now
generally marketed under the tradename "TRIAD". An Adaptive Control System is a
complex of behavior scoring algorithms, computer software, and account
management strategy addressed to one or more aspects of the management of a
consumer credit or similar portfolio. For example, the Company has developed an
Adaptive Control System for use by an electric utility in the management of its
customer accounts.
A principal feature of an Adaptive Control System is software for testing
and evaluation of alternative management strategies, designated the "Champion
and Challenger Strategy Software." The "Champion" strategy applied to any aspect
of controlling a portfolio of accounts (such as determining collection messages
or setting credit limits) is that set of rules considered by management to be
the most effective at the time. A "Challenger" strategy is a different set of
rules which is considered a viable candidate to outperform the Champion. The
Company's Champion and Challenger Strategy software is tailored to the
customer's billing system and is designed to permit the operation of both
strategies at the same time and also to permit varying fractions of the accounts
to go to each of the competing strategies. For example, if a Challenger is very
different from the Champion, management may wish to test it on a very small
fraction of the accounts, rather than to risk a large loss. Alternatively, if a
Challenger appears to be outperforming a Champion, management can direct more
and more of the account flow to it. There need not, in fact, be a limitation on
the number of Challengers in place at any one time beyond the limits imposed by
the ability of the Company and the user management to study the results.
A Champion/Challenger structure is based on one or more of the Company's
component products, usually Behavior Scoring Algorithms, as well as
Company-developed software that permits convenient allocation of accounts to
strategies and convenient modification of the strategies themselves. Adaptive
Control Systems can also consider information external to the particular
creditor, particularly scores and other information obtained from credit
bureaus, in the design of strategies. A specific goal of the Company's Adaptive
Control System product is to make the account management functions of the user
as independent as possible of the user's overall data processing systems
development department.
For a Champion/Challenger structure to function effectively, new Challenger
strategies must be developed continually as insight is gained, as external
conditions change, and as management goals are modified. The Company often
participates in the design and development of new Challenger strategies and in
the evaluation of the results of Champion/Challenger competitions as they
develop.
Contracts for Adaptive Control Systems for end-users generally include
multi-year software maintenance, strategy design and evaluation, and consulting
components. The Company also provides Adaptive Control services through First
Data Resources, Inc., Total System Services, Inc. and MBNA Information Services
(formerly Southwestern States Bankcard Association), three of the largest
third-party credit card processors in the United States. The Adaptive Control
service is also available in the United Kingdom through First Data Resources,
Ltd. and Bank of Scotland. Credit card issuers subscribing to these services pay
monthly fees based on the number of accounts processed. During fiscal 1995, the
Company began developing an Adaptive Control System designed to apply
Champion-Challenger principles to the processing of new credit accounts, rather
than the management of existing accounts. The Company also believes that
Adaptive Control Systems can operate in areas other than consumer credit; and,
as noted above, has provided an Adaptive Control System to an electric utility
company.
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DYNAMARK
DynaMark provides a variety of data processing, database management and
personalized printing services to companies and organizations in direct
marketing. DynaMark offers several proprietary tools in connection with such
services including DynaLink and DynaMatch. DynaLink gives financial institutions
and other users remote computer access to their "warehoused" customer account
files or marketing databases. It allows them to perform on-line analyses ranging
from profiling the history of a single customer purchase or credit usage to
calling up print-outs of all files having certain defined characteristics in
common. DynaMatch uses a unique scoring system to identify matching or duplicate
records that most standard "merge-purge" systems would overlook. Credit managers
and direct marketers can use it to identify household relationships (accounts
registered in different names, but sharing a common address and surname) and to
eliminate costly duplicate mailings. Credit card issuers can use it to spot
potentially fraudulent or overlimit credit card charges by individuals using two
or more cards issued under slightly different names or addresses.
CUSTOMER SERVICE AND SUPPORT
The Company provides service and support to its customers in a variety of
ways. They include: (i) education of liaison teams appointed by buyers of
scoring algorithms and software; (ii) maintenance of an answering service that
responds to inquiries on minor technical questions; (iii) proactive
Company-initiated follow-up with purchasers of the Company's products and
services; (iv) conducting seminars held several times a year in various parts of
the United States, Canada and Europe; (v) conducting a Risk Management
Conferences for clients, usually in San Francisco, in which user experience is
exchanged and new products are introduced; and (vi) delivery of special studies
which are related to the use of the Company's products and services.
Scoring algorithms can diminish in effectiveness over time as the
population of applicants or customers changes. Such changes take place for a
variety of reasons, many of which are unknown or poorly understood, but some are
a result of marketing strategy changes or shifts in the national or the local
economy. It is to the user's advantage, therefore, to monitor the performance of
its algorithms so that they can be replaced when it is economic to do so. In
response to this need as well as the requirement of the Equal Credit Opportunity
Act that scoring algorithms be periodically validated, the Company provides
tracking services and software products which measure the continuing performance
of its scoring algorithms while in use by customers.
TECHNOLOGY
The Company's personnel have a high degree of expertise in several separate
disciplines: operations research, mathematical statistics, computer-based
systems design, programming, and data processing.
The fundamental principle of operations research is to direct attention to
a class of management decisions, to make a mathematical model of the situation
surrounding that class of decisions, and to find rules for making the decisions
which maximize achievement of the manager's goal. The Company's analytic
products are classic examples of this doctrine reduced to practice. The entire
focus is on decision making using the best mathematical and computational
techniques available.
The fundamental goal of mathematical statistics is to provide the method
for deriving the maximum amount of useful information from an undigested body of
data. The objective of the design of computer-based systems is to provide a
mechanism for efficiently accepting input data from a source, storing that data
in a cost-effective medium, operating on the data with reliable algorithms and
decision rules, and reporting results in readily comprehensible forms.
The Company's analytic products have a clear distinguishing characteristic
in that they make management by rule possible in situations where the only
alternative is reliance on a group of people whose actions can never be entirely
consistent. Rules for selecting actions require computation of probabilities of
results. But computing the probability of a particular result in the traditional
mode, that is, by counting the number of occurrences of each possible result in
all possible combinations of circumstances, clearly breaks down when the number
of combinations becomes very large. When only a few thousand cases of results
are available, more subtle mathematical methods must be used or invented. The
Company has been actively developing and using techniques of this kind for
nearly 40 years, as indicated by the development and continual enhancement of
its proprietary suite of algorithms and computer programs used to develop
scoring algorithms.
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The Company's products must also interface successfully with systems
already in place. For example, they must accept data in various forms and in
various media such as handwritten applications, video display terminal input,
and telecommunications messages from credit bureaus. They must also provide
output in diverse forms and media, such as video displays, printed reports,
transactions on magnetic tape, and printed letters. The Company's response to
this interface requirement has been to develop a staff which is expert in both
logical design of information systems and the various languages used for coding.
Although DynaMark has many competitors in the data processing field, some
of which are significantly larger, DynaMark has concentrated on providing
specialized types of data processing and database management services using
proprietary tools which, it believes, give it an edge over its competition in
these areas.
MARKETS AND CUSTOMERS
The Company's products for use in the area of consumer credit are marketed
to banks, retailers, finance companies, oil companies, credit unions, and credit
card companies. The Company has approximately 500 users of products sold
directly by the Company to end-users. These include over 50 of the 100 largest
banks in the United States; several of the largest banks in Canada;
approximately 20 banks in the United Kingdom; more than 40 retailers; 12 oil
companies; major travel and entertainment card companies; and more than 40
finance companies. Custom algorithms and systems have generally been sold to
larger credit grantors. The scoring, application processing and adaptive control
services offered through credit bureaus and third-party processors are intended,
in part, to extend usage of the Company's technology to smaller credit issuers
and the Company believes that users of its products and services distributed
through third-parties number in the thousands. As noted above, the Company also
sells its products to utilities, tax authorities and insurance companies.
DynaMark markets its services to a wide variety of businesses engaged in
direct marketing. These include banks and insurance companies, catalog
merchandisers, fund-raisers and others. Most of DynaMark's revenues come from
direct sales to the end user of its services, but in many cases DynaMark acts as
a subcontractor to advertising agencies or others managing a particular project
for the end-user.
No single end-user customer accounted for more than 10% of the Company's
revenues in fiscal 1994. Revenues generated through the Company's alliances with
the three major credit bureaus in the United States, Equifax, Inc., TRW, Inc.,
and Trans Union Corporation, each accounted for approximately nine to eleven
percent of the Company's total revenues in fiscal 1995.
The percentage of revenues derived from customers outside the United Sates
was approximately 13 percent in fiscal 1995, 14 percent in fiscal 1994, and 16
percent in fiscal 1993. DynaMark has had virtually no non-U.S. revenues. Canada,
the United Kingdom and Germany are the largest international market segments.
Mexico, Japan, South Africa, a number of countries in South America and almost
all of the Western European countries are represented in the user base. The
Company has delivered products to users in approximately 40 countries. The
information set forth under the caption "Segment Information" in Note 12 to the
Consolidated Financial Statements is incorporated herein by reference. The
Company's foreign offices are sales and customer service offices acting as
agents on behalf of the U.S. production operations. Net identifiable assets,
capital expenditures and depreciation associated with foreign offices are not
material.
The Company has enjoyed good relations with the majority of its customers
over extended periods of time, and a substantial portion of its revenue is
derived from repeat customers. As noted above, the Company is actively pursuing
new users, particularly in the marketing and insurance fields, as well as those
potential users in the consumer credit area not yet using the Company's
products.
CONTRACTS AND BACKLOG
The Company's practice is to enter into contracts with several different
kinds of payment terms. Scoring algorithms have historically been sold through
one-time, fixed-price contracts. The Company will continue to sell scoring
algorithms on this basis but has also entered into longer term contractual
arrangements with some of its largest customers for the delivery of multiple
algorithms. PC-ASAP ("CreditDesk") customers have the option to enter into
contracts that provide for a one-time license fee or volume-sensitive monthly
lease payments. The one-time and usage-based contracts contain a provision
requiring monthly maintenance payments. Mainframe ASAP contracts include a
one-time fee for the basic software license, plus monthly fees for maintenance
and enhancement services. The Company also realizes maintenance and enhancement
revenues from users of its line of Mid-Range ASAP systems. PreScore contracts
call for usage or periodic license fees and there is generally a minimum charge.
8
Contracts for the delivery of complete Adaptive Control Systems typically
contain both fixed and variable elements in recognition of the fact that they
extend over multiple years and must be negotiated in the face of substantial
uncertainties. As noted above, the Company is also providing scoring algorithms
and application processing on a service basis through credit bureaus, and credit
account management services through third-party bankcard processors. Subscribers
pay for these services and for the ScoreNet service based on usage. DynaMark
employs a combination of fixed fee and volume-or usage-based pricing for its
services.
As of September 30, 1995, the Company's backlog, which includes only firm
contracts, was approximately $46,137,000, as compared with approximately
$30,911,000 as of September 30, 1994. Most usage-based revenues do not appear as
part of the backlog. The Company believes that approximately 30% of the
September 30, 1995 backlog will be delivered after the end of the current fiscal
year, September 30, 1996. Most DynaMark contracts include unit or usage charges,
the total amount of which cannot be determined until the work is completed.
DynaMark's backlog is not significant in amount, is not considered a significant
indicator of future revenues, and is not included in the foregoing figures.
COMPETITION
The Company believes that its typical product development cycle, which in
the past has extended as long as ten years, has tended to moderate the Company's
growth rate. It also believes, however, that this long product development lead
time provides a barrier to entry of competitive products. As credit scoring,
automated application processing, and behavioral scoring algorithms, all of
which were pioneered by the Company, have become standard tools for credit
providers, competition has emerged from five sectors: scoring algorithm
builders, providers of automated application processing services, data vendors,
neural network developers and artificial intelligence system builders. It is
likely that a number of new entrants will be attracted to the market, including
both large and small companies. Many of the Company's present and potential
competitors have substantially greater financial, managerial, marketing, and
technological resources than the Company. The Company believes that none of its
competitors offer the same mix of products as the Company. However certain
competitors may have larger shares of particular geographic or product markets.
In-house analytic and systems developers are also a significant source of
competition for the Company.
The Company believes that the principal factors affecting competition for
scoring algorithms are product performance and reliability; expertise and
knowledge of the credit industry; ability to deliver algorithms in a timely
manner; customer support, training and documentation; ongoing enhancement of
products; and comprehensiveness of product applications. It competes with both
outside suppliers and in-house groups for this business. The Company's primary
competitor among outside suppliers of scoring algorithms is C.C.N. Systems
Limited ("CCN") of Nottingham, England, a subsidiary of Great Universal Stores
plc, a large British retailer. Scores sold by credit bureaus in conjunction with
credit reports, including scores computed by algorithms developed by the
Company, provide potential customers with the alternative of purchasing scores
on a usage-priced basis.
The Company believes that the principal factors affecting competition in
the market for automated application processing systems (such as ASAP) are the
same as those affecting scoring algorithms, together with experience in
developing computer software products. Competitors in this area include outside
computer service providers and in-house computer systems departments. The
Company believes that its primary competitor in this area is American Management
Systems, Incorporated ("AMS"). AMS also offers credit scoring algorithms.
The Company competes with data vendors in the market for its credit bureau
scoring services including PreScore and ScoreNet. In the past several years,
data vendors have expanded their services to include evaluation of the raw data
they provide. All of the major credit bureaus offer competing prescreening and
credit bureau scoring services developed, in some cases, in conjunction with the
Company's primary scoring algorithm competitor, CCN.
Both AMS and CCN offer products intended to perform some of the same
functions as the Company's Adaptive Control Systems. The Company believes that
customers using its Adaptive Control Systems, in both custom end-user form and
through third-party processors, significantly outnumber users of the competing
AMS and CCN products.
Another source of emerging competition comes from companies developing
artificial intelligence systems including those known as "expert systems" and
"neural networks." An expert system is computer software that replicates the
decision-making process of the best available human "experts" in solving a
particular class of problem, such as credit approval, charge card authorization,
or insurance underwriting. Scoring technology differs from expert systems in
that scoring technology is based upon a large data base of results, from which
rules and algorithms are
9
developed, as compared to expert systems, which are typically based primarily on
the "expert's" judgment and less so upon a significant data base. Neural
networks, on the other hand, are an alternative method of developing scoring
algorithms from a data base but using mathematical techniques quite different
from those used by the Company. The Company believes its technology is equal or
superior to expert system and neural network technology where sufficient
performance data is available.
As noted above, there are a large number of companies providing data
processing and database management services in competition with DynaMark, some
of which are considerably larger than DynaMark. The Company believes the market
for such services will continue to expand rapidly for the foreseeable future.
Competition in this area is based on price, service, and, in some cases, ability
of the processor to perform specialized tasks. As noted above, DynaMark has
concentrated on providing specialized types of data processing and database
management services using proprietary tools which, it believes, give it an edge
over its competitors in these areas.
PRODUCT PROTECTION
The Company relies upon the laws protecting trade secrets and upon
contractual non-disclosure safeguards, including its employee non-disclosure
agreements and restrictions on transferability that are incorporated into its
customer agreements, to protect its software and proprietary interests in its
product methodology and know-how. The Company does not currently have patent
protection for any of its programs or algorithms, nor does it believe that the
law of copyrights affords any significant protection for its proprietary
software. The Company instead relies principally upon such factors as the
knowledge, ability, and experience of its personnel, new products, frequent
product enhancements, and name recognition for its success and growth. The
Company retains title to and protects the suite of algorithms and software used
to develop scoring algorithms as a trade secret and has never distributed its
source code.
In spite of these precautions, it may be possible for competitors or users
to copy or reproduce aspects of the Company's software or to obtain information
that the Company regards as trade secrets. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to the same extent as
do the laws of the United States.
RESEARCH AND DEVELOPMENT
Technological innovation and excellence have been goals of the Company
since its founding. The Company has devoted, and intends to continue to devote,
significant funds to research and development. The Company has ongoing projects
for improving its fundamental knowledge in the area of algorithm design, its
capabilities to produce algorithms efficiently, and its ability to specify and
code algorithm executing software. The information set forth in the line
entitled "Research and development" in the Consolidated Statement of Income and
the information set forth under the caption "Software costs" in Note 1 to the
Consolidated Financial Statements is incorporated herein by reference.
Above and beyond the projects formally designated as Research and
Development, many of the Company's activities contain a component that produces
new knowledge. For example, an Adaptive Control System, by its nature and
purpose, must be designed to match its environment and learn as it operates. In
the areas in which the Company's products are useful, the "laboratory" is
necessarily the site of the user's operations.
HARDWARE MANUFACTURING
Hardware for the Company's Mid-Range ASAP systems consists primarily of a
Motorola MC 68030-based central processing unit, one or more video display
terminals, a disk storage unit, and various other input-output and peripheral
devices. The Company's manufacturing process at its San Rafael, California
facility involves assembly, testing, and quality assurance functions. Components
and parts used in the Company's Mid-Range ASAP systems are purchased from
outside vendors, and the Company generally seeks to use components and parts
that are available in quantity from a number of distributors. The Company
believes that, should any of these components become unavailable from current
sources, alternative sources could be developed. Hardware manufacturing and
enhancements account for less than one percent of total revenue.
PERSONNEL
As of October 1, 1995, the Company employed approximately 835 persons. None
of its employees is covered by a collective bargaining agreement and no work
stoppages have been experienced.
10
ITEM 2. PROPERTIES
The Company's principal office is located in San Rafael, California,
approximately 15 miles north of San Francisco. The Company leases approximately
134,000 square feet of office space in three buildings at that location under
leases expiring in 2001. It also leases approximately 9,600 square feet of
warehouse space in San Rafael for its hardware operations and for storage under
month-to-month leases. DynaMark leases approximately 82,000 square feet of
office and data processing space in two buildings in Arden Hills, Minnesota
under leases which expire in 2005, and an additional 23,000 square feet of space
for printing facilities in a separate building in Arden Hills, under a lease
which expires in 1997. The Company also leases a total of approximately 26,000
square feet of office space for offices in Monterey, California; New Castle,
Delaware; Atlanta, Georgia; Toronto, Ontario; Birmingham, England; Tokyo, Japan;
Paris, France; Mexico City, Mexico; and Wiesbaden, Germany. See Notes 6 and 11
of Notes to Consolidated Financial Statements for information regarding the
Company's obligations under leases.
The Company is currently investigating various possibilities to meet its
anticipated needs for additional space in future years, primarily in San Rafael.
The Company believes that suitable additional space will be available to
accommodate future needs.
ITEM 3. LEGAL PROCEEDINGS
No material legal proceedings are pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
11
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME POSITIONS HELD AGE
---- -------------- ---
Larry E. Rosenberger President and Chief Executive Officer 49
since March, 1991, Executive Vice
President 1985-1991, Senior Vice
President 1983-1985, Vice President
1977-1983. A Director since 1983.
Joined the Company in 1974.
John D. Woldrich Appointed Chief Operating Officer 52
effective August 1, 1995. Executive
Vice President since 1985, Senior Vice
President 1983-1985, Vice President
1977-1983. A Director since 1983.
Joined the Company in 1972.
Gerald de Kerchove Executive Vice President since 1985, 49
Senior Vice President 1983-1985, Vice
President 1977-1983. Treasurer since
1983 and Chief Financial Officer since
1987. Joined the Company in 1972.
Barrett B. Roach Executive Vice President since joining 55
the Company in August 1992. Chief
Administrative and Financial Officer of
Network Equipment Technologies, Inc.
from 1986 to July 1990. Owned and
operated a vineyard from July 1990 to
August 1992.
Patrick G. Culhane Executive Vice President since August 41
1995; Senior Vice President 1992 to
1995; Vice President 1990 to 1992;
joined the Company in 1985.
Jeffrey F. Robinson Senior Vice President since 1986, Vice 46
President 1980-1986. Treasurer 1981-
1983. Joined the Company in 1975.
Kenneth M. Rapp Senior Vice President since August 1994, 49
and President and Chief Operating Officer
of DynaMark, Inc. since it was founded
in 1985.
Peter L. McCorkell Senior Vice President since August 1995; 49
Vice President, Secretary and General
Counsel since joining the Company in
1987.
Patricia Cole Controller since joining the Company 46
in September 1995. Vice President
and Controller of Southern Pacific
Telecommunications Company 1993 to
1995; Controller of Los Angeles Cellular
Telephone Company 1990-1992.
- ---------------
The term of office for all officers is at the pleasure of the Board of
Directors.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded over-the-counter on the Nasdaq
National Market under the symbol: FICI.
At December 1, 1995, Fair, Isaac had 265 holders of record of its common
stock. The following table lists the high and low last transaction prices for
the periods shown, as reported by the National Association of Securities Dealers
on the Nasdaq National Market.
Stock Prices High Low
- ------------------------------------------------------------
October 1 - December 31, 1993 11 1/4 10
January 1 - March 31, 1994 13 5/8 10 1/2
April 1 - June 30, 1994 15 3/4 11 5/8
July 1 - September 30, 1994 17 3/4 13 1/2
October 1 - December 31, 1994 28 5/8 17 1/8
January 1 - March 31, 1995 26 3/4 17
April 1 - June 30, 1995 29 3/4 22 1/4
July 1 - September 30, 1995 30 3/4 25 1/2
DIVIDENDS
The Company paid cash dividends of 3.5 cents per share semiannually, or 7
cents per year, from March 1992 through March 1995. On May 24, 1995, it
announced a 100 percent stock dividend (equivalent to a 2 for 1 stock split) and
its intention to pay quarterly dividends of 2 cents per share or 8 cents per
year subsequent to issuance of the stock dividend. The first quarterly dividend
was paid in September 1995. There are no current plans to change the cash
dividend nor to issue any further stock dividend.
ITEM 6. SELECTED FINANCIAL DATA
Fiscal year ended September 30, 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------
Revenues $ 113,881 $ 90,279 $ 66,668 $ 42,614 $ 31,786
Income from operations 19,864 15,795 8,108 5,633 3,099
Income before income taxes 21,446 16,553 8,652 6,667 4,374
Net income 12,695 10,049 5,277 3,932 2,757
Earnings per share $ 1.00 $ .81 $ .44 $ .33 $ .24
Dividends per share (in cents) * 5.5 7 7 7 5
At September 30, 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------
Working capital $ 24,393 $ 16,490 $ 14,652 $ 13,401 $ 16,509
Total assets 88,290 70,935 54,230 41,982 31,405
Long-term obligations 1,930 2,333 2,729 2,655 --
Stockholders' equity $ 56,128 $ 42,939 $ 31,516 $ 26,647 $ 22,277
* Because the change to quarterly dividends was initiated in September
1995, the rate of dividends paid in fiscal 1995 does not reflect the new annual
rate which is 8 cents per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Fair, Isaac and Company, Incorporated, provides products and services
designed to help a variety of businesses use data to make better decisions on
their customers and prospective customers. The Company's products include
statistically derived, rule-based analytical tools, software designed to
implement those analytical tools, and
13
consulting services to help clients use and track the performance of those
tools. The Company also provides a range of credit scoring and credit account
management services in conjunction with credit bureaus and credit card
processing agencies. Its DynaMark subsidiary provides data processing, database
management and personalized printing services to businesses engaged in direct
marketing.
The Company is organized into business units which correspond to its
principal markets: consumer credit, insurance and direct marketing (DynaMark).
Sales to the consumer credit industry have traditionally accounted for the bulk
of the Company's revenues. Products developed specifically for a single user in
this market are generally sold on a fixed-price basis. Such products include
application and behavior scoring algorithms (also known as "analytic products"
or "scorecards"), credit application processing systems (ASAP and CreditDesk)
and custom credit account management systems including those marketed under the
name TRIAD. Software systems usually also have a component of ongoing
maintenance revenue, and CreditDesk systems have also been sold under time- or
volume-based price arrangements. Credit scoring and credit account management
services sold through credit bureaus and third-party credit card processors are
generally priced based on usage. Products sold to the insurance industry are
generally priced based on the number of policies in force, subject to contract
minimums. DynaMark employs a combination of fixed-fee and usage-based pricing.
REVENUES
The following table sets forth for the fiscal periods indicated (a) the
percentage of revenues contributed by the DynaMark and Insurance business units,
and the percentage of revenues represented by fixed-price and usage-priced
revenues from the Credit business unit; and (b) the percentage change in
revenues within each category from the corresponding period in the prior fiscal
year. Fixed-price revenues include all revenues from application processing
software, custom scorecard development and consulting projects for credit.
Virtually all usage revenues are generated through third-party alliances such as
those with credit bureaus and third-party credit card processors.
Percentage of Period-to-Period
Revenue Percentage Changes
Year Ended 1994 1993
September 30, to to
1995 1994 1993 1995 1994
- ----------------------------------------------------------------------------------------------------------------
Credit:
Fixed-price 29 32 37 15 18
Usage-priced 53 50 49 33 38
DynaMark 16 16 12* 22 78*
Insurance 2 2 2 56 36
--------- --------- --------- --------- ---------
Total revenues 100 100 100 26 35
========= ========= ========= ========= =========
* DynaMark was acquired on December 31, 1992, so it contributed to revenues
for only the last nine months of fiscal 1993.
Revenue from credit application scoring products increased by 20 percent in
fiscal 1994 compared with fiscal 1993 and increased another 10 percent in fiscal
1995 due primarily to resurgence in the economy in general and increased
bankcard solicitation activity, and also due to the Company's introduction of
new products including small business loan scoring products and tracking
software. ASAP revenues increased by 35 percent in 1994 compared with 1993, and
by another 13 percent in fiscal 1995, primarily due to increased sales of
PC-based ASAP products (CreditDesk) and software components for mainframe ASAP
systems. Revenues from sales of credit account management systems (TRIAD) sold
to end-users increased 3 percent from 1993 to 1994 and by 28 percent from 1994
to 1995. The Company's high degree of success in penetrating the U.S. bankcard
industry with these products has limited the revenue growth in that market.
However, the Company has added functionality for the existing base of TRIAD
users and is actively marketing TRIAD for other types of credit products and in
overseas markets which accounted for most of the growth in 1995.
Usage revenues are generated primarily by credit scoring services
distributed through major credit bureaus and credit account management services
distributed through third-party bankcard processors. Revenues from credit
bureau-related services have increased rapidly in each of the last three fiscal
years and accounted for approximately 39 percent of revenues in fiscal 1995.
Revenues from services provided through bankcard processors also increased in
each of these years, due primarily to increases in the number of accounts at
each of the major processors.
14
Revenues derived from alliances with credit bureaus and credit card
processors have accounted for much of the Company's revenue growth and
improvement in operating margins over the last three years. While the Company
has been very successful in extending or renewing such agreements in the past,
and believes it will generally be able to do so in the future, the loss of one
or more such alliances could have a significant impact on revenues and operating
margin. Revenues generated through the Company's alliances with Equifax, Inc.,
TRW, Inc. and Trans Union Corporation each accounted for approximately nine to
eleven percent of the Company's total revenues in fiscal 1995.
Potential new government regulation of the use of credit bureau data could
have an impact on the use of any of the Company's credit bureau scoring services
including PreScore(R) and ScoreNet(R). Bills which would substantially amend the
Fair Credit Reporting Act were introduced in each of the last three Congresses
and at least two such bills were introduced in 1995. These bills would impose
new restrictions on the use of credit bureau data to prescreen solicitation
lists. Bills and regulations have also been introduced, and, in some cases
enacted, at the state level that affect the use of credit bureau data in various
ways, including restricting the use of such data in making insurance
underwriting decisions. State regulation of credit bureau data, particularly
regulations imposing requirements on the credit bureaus or users of credit
bureau information which differ from those existing under federal law, may also
have an adverse impact on bureau scoring services. The Company believes certain
enacted or pending state legislation and regulation of credit bureau data in
connection with insurance underwriting has had a negative impact on its efforts
to sell insurance risk scores through credit reporting agencies. However, the
Company cannot predict whether any other particular federal or state legislation
affecting credit bureau information or credit scoring is likely to be enacted in
the foreseeable future, or the extent to which the passage of such legislation
might affect the Company's business.
The Company's revenues derived from customers outside the United States
increased from $10.9 million in fiscal 1993 to $12.5 million in fiscal 1994 and
to $14.9 million in 1995. DynaMark has had virtually no non-U.S. revenues. Sales
of software products, including TRIAD and PC-based ASAP, and an increase in the
number of accounts using the Company's account management services at credit
card processors in the United Kingdom accounted for most of the increases in
international revenues in fiscal 1994 and 1995.
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, 1995, and the Company does not expect revenues from either of
these sources to exceed 10% of revenues in the foreseeable future.
During the period from 1990 through 1994, while the rate of account growth
in the U.S. bankcard industry was slowing and many of the Company's largest
institutional clients were merging and consolidating, the Company generated
above-average growth in revenues--even after correcting for the effect of the
DynaMark acquisition--from its bankcard-related scoring and account management
business by deepening its penetration of large banks and other credit issuers.
The Company's revenues grew by 26 percent in fiscal 1995 which is closer to what
the Company believes is a sustainable, long-term growth rate. The Company
believes much of its future growth prospects will rest on its ability (1) to
develop new, high value products and services for its present client base of
major U.S. consumer credit issuers; (2) to increase its penetration of
established or emerging credit markets outside the U.S. and Canada; and (3) to
expand--either directly or through further acquisitions--into relatively
undeveloped or underdeveloped markets for its products and services such as
direct marketing, insurance, small business lending, and health care information
management.
Over the long term, in addition to the factors discussed above, the
Company's rate of revenue growth--excluding growth due to acquisitions--is
limited by the rate at which it can recruit and absorb additional professional
staff. While the increasing percentage of usage revenues may loosen this
constraint to some extent, management believes it will continue to exist
indefinitely. On the other hand, despite the high penetration the Company has
already achieved in certain markets, the opportunities for application of its
core competencies are much greater than it can pursue. Thus, the Company
believes it can continue to grow revenues, within the personnel constraint, for
the foreseeable future. At times management may forego short-term revenue growth
in order to devote limited resources to opportunities which it believes have
exceptional long-term potential. This occurred in the period from 1988 through
1990 when the Company devoted significant resources to developing the usage
priced services distributed through credit bureaus and third-party processors.
Cumulative revenue since 1987, net of the DynaMark acquisition, is very close to
the Company's twenty-year historical average revenue growth of 21 percent.
15
EXPENSES
The following table sets forth for the fiscal periods indicated (a) the
percentage of net revenues represented by certain line items in the Company's
Consolidated Statement of Income and (b) the percentage change in the amount of
each such line item from the prior fiscal year.
Percentage of Period-to-Period
Revenue Percentage Changes
Year Ended 1994 1993
September 30, to to
1995 1994 1993 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Total revenues 100 100 100 26 35
-------- --------- ---------
Costs and expenses:
Cost of revenues 38 38 40 27 29
Sales and marketing 20 20 20 22 34
Research and development 4 5 7 -- (10)
General and administrative 21 19 20 37 29
Amortization of intangibles -- 1 1 (12) 54
-------- --------- ---------
Total costs and expenses 83 83 88 26 27
-------- --------- ---------
Income from operations 17 17 12 26 95
Interest income, expense and
other (net) 2 1 1 108 39
-------- --------- ---------
Income before income taxes 19 18 13 30 91
Provision for income taxes 8 7 5 35 93
-------- --------- ---------
Net income 11 11 8 26 90
======== ========= =========
COST OF REVENUES
Cost of revenues consists primarily of personnel, travel, and related
overhead costs; costs of computer service bureaus; and the amounts paid by the
Company to credit bureaus for scores and related information in connection with
the ScoreNet Service. The decrease in cost of revenues, as a percentage of
revenues, in 1994 and 1995 compared with 1993 was due primarily to increases in
the volume of usage-priced revenues which, other than ScoreNet, have relatively
low costs of revenues.
SALES AND MARKETING
Sales and marketing expenses consist principally of personnel, travel,
overhead, advertising and other promotional expenses. As a percentage of
revenues, sales and marketing expenses have been relatively stable during the
three years ended September 30, 1995.
RESEARCH AND DEVELOPMENT
Research and development expenses include the personnel and related
overhead costs incurred in product development, researching mathematical and
statistical algorithms, and developing software tools that are aimed at
improving productivity and management control. Research and development
expenses, in absolute dollars, decreased slightly from fiscal 1993 to 1994 and
were essentially unchanged in fiscal 1995. The Company's current primary focus
in seeking growth opportunities is in developing new markets--either
geographical or by industry--for its existing technologies, rather than new
technological developments. Such costs are recorded as sales and marketing or
general and administrative expenses rather than as research and development.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist mainly of compensation expenses
for certain senior management, corporate facilities expenses, the costs of
administering certain benefit plans, legal expenses, and the costs of operating
administrative functions such as finance and computer information systems and
exploration of new business opportunities. As a percentage of revenues, these
expenses decreased in fiscal 1994 compared with fiscal 1993, due primarily to
expense control and rapid revenue growth. The increase in these costs in fiscal
1995 was
16
primarily due to significant increases in office space and expenditures made to
improve the Company's information systems and technology infrastructure, and the
research associated with exploring new business opportunities, primarily in the
health care information management area.
AMORTIZATION OF INTANGIBLES
The Company is amortizing the intangible assets arising from the DynaMark
acquisition, which occurred on December 31, 1992, over periods ranging from two
to 15 years. The level of amortization expense in future years will depend, in
part, on the amount of additional payments to the former share-holders of
DynaMark. See below under "Capital Resources and Liquidity."
INTEREST INCOME AND EXPENSE, AND OTHER
Interest income is derived from the investment of funds surplus to the
Company's immediate operating requirements. At September 30, 1995, the Company
had approximately $23.2 million invested in U.S. treasury securities,
certificates of deposit, and other interest-bearing instruments. Interest income
increased in fiscal 1994 and 1995 due to rising interest rates and/or the
increasing balance in interest bearing accounts and instruments.
The following table shows year-to-year changes in interest income resulting
from changes in market rates of interest and the amount of interest-bearing
investments.
(dollars in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
Balance at September 30: $23,199 $24,888 $13,325
Yield at September 30: 5.6% 4.6% 3.4%
Interest for year ended September 30: $ 1,248 $ 728 $ 560
In 1992, the Company entered into a financing lease for its newly
constructed conference center and financed the construction of the center with a
$2,950,000 secured note. Principal and interest on the note are payable monthly.
Interest income from the note is not included in the table above. In 1993, the
Company earned $212,000 in interest income on the note and incurred $193,000 in
interest expense on the capitalized lease. The Company incurred an additional
$60,000 in interest expense on other capitalized leases in fiscal 1993. In 1994,
the Company earned $293,000 in interest income on the note and incurred $183,000
in interest expense on the lease, and an additional $39,000 in interest expense
on other capitalized leases. The $41,000 in other expenses recorded in fiscal
1994 reflects the loss on sale of a treasury bill prior to its maturity. In 1995
the Company earned $292,000 in interest income on the note and incurred $163,000
in interest expense on the lease, and an additional $29,000 in interest expense
on other capitalized leases. The other income is primarily attributable to
currency exchange gains.
PROVISION FOR INCOME TAXES
The Company's effective tax rate of approximately 41% in fiscal 1995 was
higher than the effective rate of approximately 39% in fiscal 1993 and 1994 due
primarily to a changing mix of applicable state and foreign tax rates. The
Company expects its effective tax rate in fiscal 1996 to be approximately the
same as in fiscal 1995 barring any change in the tax laws.
CAPITAL RESOURCES AND LIQUIDITY
Working capital increased from $14,652,000 at September 30, 1993, to
$16,490,000 at September 30, 1994 and to $24,393,000 at September 30, 1995.
These increases were due primarily to increases in accounts receivable, unbilled
work in progress and short-term investments which offset a decrease in cash and
cash equivalents and increases in accrued compensation and employee benefits and
billings in excess of earned revenues.
The Company may be required to make additional payments to the former
shareholders of DynaMark based upon DynaMark's financial results in calendar
1995. The Company currently estimates that this additional payment for calendar
1995 will be approximately $1.1 million, and will not exceed $2.7 million. No
such additional payments are required in future years.
In fiscal 1994, cash provided by operations ($19,535,000) more than offset
cash used in investing activities ($12,985,000) and financing activities
($800,000). Cash provided by operations resulted primarily from net income
before depreciation and amortization, and increases in accrued compensation and
benefits. Cash was used in investing
17
activities primarily to make net purchases of interest bearing investments, to
purchase property and equipment and to make the additional payment to the former
owners of DynaMark. Payment of dividends and reduction of certain capital lease
obligations more than offset cash provided by the exercise of stock options.
In fiscal 1995 cash provided by operations ($13,316,000) was more than
offset by cash used in investing activities ($15,333,000) and financing
activities ($652,000). Cash provided by operations resulted primarily from net
income before depreciation and amortization, and increases in accrued
compensation and employee benefits, partially offset by the increase in accounts
receivable and unbilled work in progress. Cash was used in investing activities
primarily for additions to property and equipment (including major expansions at
the Company's headquarters in San Rafael, California and at DynaMark's facility
in St. Paul, Minnesota), the additional payment to the former owners of
DynaMark, the purchase of interest bearing investments and investments in a
number of start-up companies, partially offset by the maturities of interest
bearing investments. Cash was used in financing activities primarily for the
payment of dividends and reduction of capital lease obligations, partially
offset by cash generated by the exercise of stock options.
Future cash flows will continue to be affected by operating results,
contractual billing terms and collections, investment decisions and dividend
payments, if any. At September 30, 1995, the Company had no significant capital
commitments other than those obligations described in Notes 3, 6 and 11 to the
consolidated financial statements. The Company believes that the cash and
marketable securities on hand, along with cash expected to be generated by
operations, will be adequate to meet its capital and liquidity needs for both
the current year and the foreseeable future.
The table in Note 13 to the Consolidated Financial Statements presents
unaudited quarterly operating results for the last eight fiscal quarters.
Management believes that all the necessary adjustments have been included in the
amounts stated to present fairly the selected quarterly information, when read
in conjunction with the financial statements included elsewhere in this report.
This information includes all normal recurring adjustments that the Company
considers necessary for a fair presentation thereof, in accordance with
generally accepted accounting principles.
Quarterly results may be affected by fluctuations in revenue associated
with credit card solicitations, by the timing of orders for and deliveries of
certain ASAP and TRIAD systems, and by the seasonality of ScoreNet purchases.
With the exception of the cost of ScoreNet data purchased by the Company, most
of its operating expenses are not affected by short-term fluctuations in
revenues and thus short-term fluctuations in revenue may have a significant
impact on operating results. However, in recent years these fluctuations were
generally offset by the strong growth in revenues from services delivered
through credit bureaus and third-party bankcard processors.
Management believes that neither the quarterly variations in net revenues
and net income, nor the results of operations for any particular quarter, are
necessarily indicative of results of operations for full fiscal years.
Accordingly, management believes that the Company's results should be evaluated
on an annual basis.
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS
FAIR, ISAAC AND COMPANY, INCORPORATED:
We have audited the accompanying consolidated balance sheets of Fair, Isaac
and Company, Incorporated and subsidiaries as of September 30, 1995 and 1994,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended September 30, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Fair, Isaac
and Company, Incorporated and subsidiaries as of September 30, 1995 and 1994,
and the results of their operations and their cash flows for each of the three
years in the period ended September 30, 1995, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick
San Francisco, California
October 25, 1995
19
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
Years ended September 30, 1995 1994 1993
- -------------------------------------------------------------------------------
Revenues:
Fair, Isaac $ 96,074 $ 75,719 $ 58,482
DynaMark 17,807 14,560 8,186
------------ ------------ ------------
Total revenues 113,881 90,279 66,668
------------ ------------ ------------
Costs and expenses:
Cost of revenues
Fair, Isaac 30,298 24,483 21,374
DynaMark 12,734 9,616 5,150
------------ ------------ ------------
Total costs of revenues 43,032 34,099 26,524
Sales and marketing 22,592 18,302 13,672
Research and development 3,986 3,984 4,426
General and administrative 23,696 17,293 13,415
Amortization of intangibles 711 806 523
------------ ------------ ------------
Total costs and expenses 94,017 74,484 58,560
------------ ------------ ------------
Income from operations 19,864 15,795 8,108
Interest income 1,547 1,021 797
Interest expense (196) (222) (253)
Other 231 (41) --
------------ ------------ ------------
Income before income taxes 21,446 16,553 8,652
Provision for income taxes 8,751 6,504 3,375
------------ ------------ ------------
Net income $ 12,695 $ 10,049 $ 5,277
============ ============ ============
Earnings per share $ 1.00 $ .81 $ .44
============ ============ ============
Shares used in computing
earnings per share 12,723,000 12,476,000 12,164,000
============ ============ ============
See accompanying notes to the consolidated financial statements.
20
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
September 30, 1995 1994
- -------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $8,321 $10,990
Short-term investments (Note 5) 5,874 3,938
Accounts receivable, net of
allowance 1995: $276; 1994:$429 19,094 14,242
Unbilled work in progress 11,299 6,590
Deferred income taxes (Note 7) 1,399 1,379
Prepaid expenses and other current assets 1,784 1,188
--------- ---------
Total current assets 47,771 38,327
Long-term investments (Note 5) 10,923 10,461
Note receivable 2,895 2,915
Property and equipment, net (Note 6) 16,815 12,334
Intangibles, net (Note 3) 4,957 3,406
Deferred income taxes and other assets (Note 7) 4,929 3,492
--------- ---------
$88,290 $70,935
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilities $5,830 $6,006
Accrued compensation and employee
benefits (Note 8) 10,631 10,051
Billings in excess of earned revenues 5,314 4,027
Income taxes payable (Note 7) 1,603 1,753
--------- ---------
Total current liabilities 23,378 21,837
Other liabilities (Note 8) 6,854 3,826
Capitalized leases (Note 6) 1,930 2,333
Commitments and contingencies
(Notes 3, 5, 6 and 11) -- --
--------- ---------
Total liabilities 32,162 27,996
--------- ---------
Stockholders' equity (Notes 2, 8, 9 and 10):
Common stock 123 60
Paid in capital in excess of par value 14,508 13,210
Retained earnings 41,975 30,010
Less treasury stock (1995: 53,562;
1994: 101,822 shares at cost) (228) (341)
Less pension adjustment (Note 8) (406) --
Unrealized gain on investment (Note 5) 156 --
--------- ---------
Total stockholders' equity 56,128 42,939
--------- ---------
$88,290 $70,935
========= =========
See accompanying notes to the consolidated financial statements.
21
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Period from September 30, 1992, to September 30, 1995 (dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------------
Paid in Unrealized Total
Common stock capital in Note gain on stock-
Shares Par excess of Retained receivable Treasury Pension invest- holders'
(000's) value par value earnings from ESOP stock adjustments ments equity
- ---------------------------------------------------------------------------------------------------------------------------
BALANCES AT SEPTEMBER 30, 1992 11,245 $ 57 $11,143 $16,311 $(194) $(670) $ -- $ -- $26,647
Issuance of restricted stock 30 -- -- -- -- -- -- -- --
Exercise of stock options 283 2 443 -- -- -- -- -- 445
Tax benefit of stock options -- -- 207 -- -- -- -- -- 207
Payment on ESOP note receivable -- -- -- -- 194 -- -- -- 194
Contribution to ESOP 29 -- 80 -- -- 96 -- -- 176
Net income -- -- -- 5,277 -- -- -- -- 5,277
Dividends declared -- -- -- (799) -- -- -- -- (799)
Pension adjustment -- -- -- -- -- -- (631) -- (631)
------- ------- ------- ------ ------ ------ ------ ------ -------
BALANCES AT SEPTEMBER 30, 1993 11,587 59 11,873 20,789 -- (574) (631) -- 31,516
Issuance of restricted stock 21 -- -- -- -- -- -- -- --
Exercise of stock options 290 1 474 -- -- -- -- -- 475
Tax benefit of stock options -- -- 350 -- -- -- -- -- 350
Contribution/sale to ESOP 69 -- 513 -- -- 233 -- -- 746
Net income -- -- -- 10,049 -- -- -- -- 10,049
Dividends declared -- -- -- (828) -- -- -- -- (828)
Pension adjustment -- -- -- -- -- -- 631 -- 631
------- ------- ------- ------ ------ ------ ------ ------- -------
BALANCES AT SEPTEMBER 30, 1994 11,967 60 13,210 30,010 -- (341) -- -- 42,939
Issuance of restricted stock 4 -- 4 -- -- -- -- -- 4
Exercise of stock options 217 1 450 -- -- -- -- -- 451
Tax benefit of stock options -- -- 115 -- -- -- -- -- 115
Contribution/sale to ESOP 48 -- 729 -- -- 113 -- -- 842
Net income -- -- -- 12,695 -- -- -- -- 12,695
Dividends declared -- -- -- (668) -- -- -- -- (668)
Stock dividend -- 62 -- (62) -- -- -- -- --
Adoption of SFAS No. 115 at
October 1, 1994 -- -- -- -- -- -- -- (77) (77)
Unrealized gain on investments -- -- -- -- -- -- -- 233 233
Pension adjustment -- -- -- -- -- -- (406) -- (406)
------- ------- ------- -------- ----- ------ ----- ------- --------
BALANCES AT SEPTEMBER 30, 1995 12,236 $123 $14,508 $41,975 $-- $(228) $(406) $156 $56,128
======= ======= ======= ======== ===== ====== ====== ======= ========
See accompanying notes to the consolidated financial statements.
22
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Years ended September 30, 1995 1994 1993
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $12,695 $10,049 $5,277
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 6,153 4,880 4,520
Deferred income taxes (1,714) (1,781) (1,541)
Increase in accounts receivable and
unbilled work in progress (9,561) (1,108) (6,318)
Decrease (increase) in prepaid expenses
and other assets (828 6 (139)
Increase in accounts payable and other liabilities 629 1,635 885
Increase in accrued compensation and
employee benefits 4,796 5,164 3,280
Increase (decrease) in income taxes payable (141) (331) 832
Increase (decrease) in billings in excess
of earned revenues 1,287 1,021 (674)
--------- --------- ---------
Net cash provided by operating activities 13,316 19,535 6,122
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (10,692) (5,272) (4,491)
Purchase of DynaMark, Inc. (2,150) (1,813) (4,501)
Additions to other assets (375) (42) (58)
Note receivable 20 19 (180)
Purchases of investments (9,240) (15,781) (2,018)
Proceeds from maturities/sales of investments 7,104 9,904 4,996
--------- --------- ---------
Net cash used in investing activities (15,333) (12,985) (6,252)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Reduction of capital lease obligations (422) (532) (603)
Issuance of stock 494 560 445
ESOP note receivable -- -- 194
Dividends paid (668) (828) (799)
Repurchase of company stock (56) -- --
--------- --------- ---------
Net cash used in financing activities (652) (800) (763)
--------- --------- ---------
Increase (decrease) in cash and
cash equivalents (2,669) 5,750 (893)
Cash and cash equivalents, beginning of year 10,990 5,240 6,133
--------- --------- ---------
Cash and cash equivalents, end of year $8,321 $10,990 $5,240
========= ========= =========
See accompanying notes to the consolidated financial statements.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Fair, Isaac and Company, Incorporated (the "Company") is incorporated under
the laws of the State of Delaware. The Company offers a variety of technological
tools to enable users to make better decisions through data. The Company is a
world leader in developing predictive and risk assessment models for the
financial services industry. These analytical tools include credit and insurance
scoring algorithms. The Company also offers direct marketing and database
management services through its wholly owned subsidiary, DynaMark, Inc.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated from the consolidated financial statements.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash in banks and investments with an
original maturity of 90 days or less at time of purchase.
INVESTMENTS
Investments, consisting principally of U.S. Government obligations, are
stated at market. Investments with maturities exceeding one year are classified
as long-term investments. The Company adopted Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", effective October 1, 1994. There was no significant effect as a
result of implementation of SFAS No. 115.
Amortized cost was used in calculating the unrealized gain on securities
available for sale for purposes of applying SFAS No. 115.
NOTE RECEIVABLE
The note receivable is secured by a first deed of trust which bears
interest at 10% per annum, with principal and interest payments amortized
monthly over 30 years. The note matures on June 30, 2003.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company maintains reserves for potential bad debts and such
uncollectible amounts have been within management's expectations. At September
30, 1995 and 1994, management believes the allowance for doubtful accounts is
adequate.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization on property and equipment including leasehold
improvements are provided using the straight-line method over estimated useful
lives ranging from three to eight years or the term of the respective leases.
REVENUE RECOGNITION
Revenues from contracts for the development of credit scoring systems and
custom software are recognized using the percentage-of-completion method of
accounting, measured by an output method based on results achieved to date
compared with the results necessary to complete the contract, which approximates
the ratio that incurred costs bear to estimated total completion 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
24
performance milestones that are defined by the individual contracts. Deposits
and other amounts billed in advance of performance under contracts are recorded
as billings in excess of earned revenues.
Revenues from usage-priced products and services are recognized on receipt
of usage reports from the third-parties through which such products and services
are delivered. Revenue from shrink-wrapped products and services are recognized
upon delivery. Revenues from products and services sold on time-based pricing,
including maintenance of computer and software systems, are recognized ratably
over the contract period.
SOFTWARE COSTS
The Company follows one of two paths to develop software. One involves a
detailed program design, which is used when introducing new technology; the
other involves the creation of a working model for modification to existing
technologies that has been supported by adequate testing. All costs incurred
prior to the resolution of unproven functionality and features, including new
technologies, are expensed as research and development. After the uncertainties
have been tested and the development issues have been resolved, technological
feasibility is achieved and subsequent costs such as coding, debugging and
testing are capitalized.
When developing software using existing technology, the costs incurred
prior to the completion of a working model are expensed. Once the product design
is met, this typically concludes the software development process and is usually
the point at which technological feasibility is established. Subsequent
expenses, including coding and testing, if any, are capitalized. For the 3-year
period ending September 30, 1995, technological feasibility coincided with the
completion process, thus all design and development costs were expensed as
research and development costs.
Purchased software costs are amortized over three years. Amortization of
capitalized software was: $544,000 for 1995; $587,000 for 1994; and $1,418,000
for 1993. The 1993 amount includes the write-off of $531,000 of capitalized
software costs.
INTANGIBLES
The intangible assets consisting of goodwill and non-compete agreements
arose principally from a business acquisition and are amortized on a
straight-line basis over their useful lives that range from 2 to 15 years. The
Company assesses the recoverability of goodwill by evaluating the projected
results of operations over the remaining useful life. The accumulated
amortization of intangible assets was $2,040,000 and $1,329,000 as of September
30, 1995 and 1994, respectively.
TAXES ON INCOME
Effective October 1, 1992, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No. 109
requires deferred tax assets and liabilities to be calculated using the enacted
tax rates in effect when the temporary differences are recovered or settled. The
effect of implementing SFAS No. 109 was not significant.
FOREIGN CURRENCY
Gains and losses arising from fluctuations in foreign exchange rates on
non-U.S. dollar-denominated trans-actions were not significant in the past three
years.
EARNINGS PER SHARE
Earnings per share are based on the weighted average number of common
shares outstanding. Common shares outstanding used in computing earnings per
share include weighted average common equivalent shares as if shares issuable
from exercise of stock options (with exercise prices below market value) were
issued as of the beginning of the period or on the date of grant and the
proceeds from exercise were used to purchase common shares (the treasury stock
method). Fully diluted earnings per share were approximately equal to primary
earnings per share in each of the three years in the period ended September 30,
1995.
25
RECLASSIFICATIONS
Certain reclassifications were made to the 1993 and 1994 financial
statements to conform to the 1995 presentation.
ACCOUNTING CHANGES
On October 23, 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation." Statement No. 123
allows a company to either (1) retain the current method of accounting for stock
compensation for purposes of preparing its financial statements or (2) to adopt
a new fair value based method that is established by provisions of the new
Statement. The Company plans to retain its current method of accounting for
stock compensation when it adopts this Statement in fiscal 1997 and thus it is
not expected to have an impact on the Company's financial position or results of
operations.
2. DIVIDENDS
On May 23, 1995, the Company's Board of Directors declared a 100% stock
dividend equivalent to a two-for-one stock split payable at the close of
business on June 26, 1995. The par value of the additional shares was
reclassified from retained earnings to common stock. All per share amounts,
options, market prices and number of shares have been restated to retroactively
reflect the 100% stock dividend.
Concurrent with the 100% stock dividend, the Board of Directors authorized
payment of a quarterly dividend of 2 cents or 8 cents per year. Previously,
dividends had been paid at a rate of 3.5 cents semi-annually or 7 cents per
year. Because the change to quarterly dividends was initiated in September 1995,
the rate of dividends paid in fiscal 1995 does not reflect the new annual rate.
3. ACQUISITION
In December 1992, the Company acquired the assets and liabilities of
DynaMark, Inc., a privately-held company, for $4.6 million in cash and assumed
debt of $2.2 million. The fair market value of the assets was $6.8 million. The
acquisition was accounted for as a purchase, and the operations of DynaMark,
Inc. have been included in the consolidated financial statements since the
acquisition date. The purchase agreement provides for additional contingent cash
payments not to exceed $2.7 million based on specified financial performance of
DynaMark through December, 1995. Goodwill arising from the acquisition is being
amortized over 15 years.
4. CASH FLOW STATEMENT
Supplemental disclosure of cash flow information:
Years ended September 30,
(dollars in thousands) 1995 1994 1993
- -------------------------------------------------------------------------------------------------
Income tax payments $10,640 $8,455 $3,820
Interest paid $196 $222 $253
Non-cash investing and financing activities:
Contributions of stock to ESOP $856 $661 $176
Tax effect of stock options $115 $350 $207
26
5. INVESTMENTS
The Company's investment portfolio consists primarily of U.S. Government
issues or government-backed securities. These are classified as
available-for-sale and are carried at market value, with the un-realized gains
and losses, net of federal income taxes, reported as a separate component of
Stockholders' equity. The following is a summary of available-for-sale
securities and other investments not subject to SFAS No. 115 as of September 30,
1995 (thousands):
1995 Short-Term Long-Term
- ------------------------------------------------------------------
Amortized cost $5,883 $9,561
Gross unrealized gains 1 270
Gross unrealized losses (10) --
--------- ---------
Market value 5,874 9,831
Other securities -- 1,092
--------- ---------
$5,874 $10,923
========= =========
Prior to October 1, 1994, securities were carried at amortized cost. At
September 30, 1994, the market value of the short-term securities was $3,936,000
and $10,335,000 for the long term securities.
The long-term securities mature in one to five years.
During the year, the Company made an investment in the preferred stock of
an early-stage enterprise, which is being accounted for using the cost method.
The total investment at year-end amounted to $660,000. The maximum commitment
with respect to this investment is $3,000,000; investment up to this ceiling is
dependent on the enterprise attaining defined performance milestones.
6. PROPERTY AND EQUIPMENT
Property and equipment as of September 30, 1995 and 1994, consist of the
following:
(dollars in thousands) 1995 1994
- -----------------------------------------------------------------------------
Data processing equipment $13,295 $11,367
Office furniture, vehicles and equipment 7,964 4,249
Leasehold improvements 5,372 2,995
Capitalized leases 3,123 3,282
Less accumulated depreciation and amortization (12,939) (9,559)
--------- ---------
Net property and equipment $16,815 $12,334
========= =========
Depreciation and amortization charged to operations were $4,812,000,
$3,457,000, and $2,538,000 for the years ended September 30, 1995, 1994 and
1993, respectively.
27
The following is a schedule, by years, of future minimum lease payments
under capitalized leases, together with the present value of the net minimum
lease payments as of September 30, 1995:
Years ended September 30 (dollars in thousands)
- --------------------------------------------------------------
1996 $ 547
1997 499
1998 466
1999 466
2000 466
Thereafter 375
---------
2,819
Less: Amount representing interest (498)
---------
Present value of net minimum lease payments $2,321
=========
7. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
Years ended September 30,
(dollars in thousands) 1995 1994 1993
- --------------------------------------------------------------------------
Current:
Federal $8,107 $6,456 $3,912
State 2,167 1,665 941
Foreign 191 164 63
--------- --------- ---------
10,465 8,285 4,916
--------- --------- ---------
Deferred:
Federal (1,441) (1,415) (1,267)
State (273) (366) (274)
--------- --------- ---------
(1,714) (1,781) (1,541)
--------- --------- ---------
$8,751 $6,504 $3,375
========= ========= =========
- --------------------------------------------------------------------------------
The tax effect of significant temporary differences resulting in deferred
tax assets at September 30, 1995 and 1994 are as follows:
(dollars in thousands) 1995 1994
- ------------------------------------------------------------------------------
Deferred tax assets:
Amortization of intangibles $1,037 $709
Property and equipment 465 145
Compensated absences 418 466
Officer's incentive 2,588 1,548
State taxes 758 582
Other 222 324
--------- ---------
$5,488 $3,774
========= =========
28
The principal reasons for the difference between the total tax provision
and taxes computed at the applicable federal statutory rates are as follows:
Years ended September 30,
(dollars in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
Income tax provision at federal
statutory rate of 35% in 1995
and 1994, and 34% in 1993 $7,506 $5,794 $2,942
State income taxes, net of federal benefit 1,231 844 440
Other 14 (134) (7)
--------- --------- ---------
$8,751 $6,504 $3,375
========= ========= =========
8. EMPLOYEE BENEFIT PLANS
PENSION PLAN
The Company has a defined benefit pension plan that covers eligible
full-time employees. The benefits are based on years of service and the
employee's compensation during employment. The Company's policy is to fund the
pension plan to the maximum extent for which a tax deduction is allowed.
Contributions are intended to provide not only for benefits attributed to
service to date but also for those expected to be earned in the future. The
following table sets forth the plan's funding status at September 30, 1995 and
1994:
(dollars in thousands) 1995 1994
- --------------------------------------------------------------------------------
Vested benefit obligation $5,067 $3,930
Nonvested benefit obligation 373 381
Effect of projected future earnings 2,353 1,560
--------- ---------
Projected benefit obligation 7,793 5,871
Fair value of plan assets (5,155) (4,353)
--------- ---------
Projected benefit obligation in
excess of plan assets 2,638 1,518
Unrecognized prior service cost 85 26
Unrecognized net loss (2,759) (1,567)
Unrecognized net obligation remaining
to be amortized (196) (216)
Additional minimum liability 517 --
--------- ---------
(Prepaid) Accrued pension cost $285 $(239)
========= =========
The plan assets consist primarily of U.S. government securities.
The projected benefit obligation includes an accumulated benefit obligation
of $5,440,000 and $4,311,000 for 1995 and 1994, respectively. The obligation
exceeded the fair value of the pension plan assets at September 30, 1995. The
Company recorded an additional minimum liability of $517,000. An intangible
asset of $111,000 was also recorded (up to the unrecognized prior service costs)
and a reduction was made in stockholder's equity of $406,000 for the excess
additional minimum liability over the unrecognized prior service costs.
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 7.5 percent and 5.5 percent, respectively, at
September 30, 1995, and 8 and 5.5 percent at September 30, 1994. The expected
long-term rate of return on assets was 7.5 percent at September 30, 1995 and
1994.
29
The net pension cost for the fiscal years ended September 30, 1995 and
1994, included the following components:
(dollars in thousands) 1995 1994
- --------------------------------------------------------------------------------
Service costs $483 $510
Interest cost on projected benefit obligation 500 414
Actual return on plan assets (510) (116)
Net amortization and deferral 266 (13)
--------- ---------
Net periodic pension plan cost $739 $795
========= =========
EMPLOYEE STOCK OWNERSHIP PLAN
The Company has an Employee Stock Ownership Plan ("ESOP") that covers
eligible full-time employees. Contributions in cash or stock to the ESOP are
determined annually by the Company's board of directors. In addition, the ESOP
may purchase stock from the Company or its stockholders. Provisions for
contributions to the ESOP were $1,046,000, $856,000, and $645,000 for the years
ended September 30, 1995, 1994, and 1993, respectively.
At September 30, 1995, the ESOP held 1,099,178 shares of Company stock. The
amount of dividends on ESOP shares were $64,000, $85,000 and $82,000 for the
years ended September 30, 1995, 1994, and 1993, respectively.
Company stock held and paid for by the ESOP is allocated annually to
participants based on employee compensation levels. Participants vest in the
allocated shares at the rate of 30 percent after three years of employment, 10
percent in the fourth year and 20 percent annually thereafter.
DEFINED CONTRIBUTION PLANS
The Company offers 401(k) plans for eligible employees. Eligible employees
may contribute up to 15% of compensation. The Company provides a matching
contribution which is vested over five years. The Company contributions to
401(k) plans were $454,000, $291,000 and $224,000 for years ended September 30,
1995, 1994, and 1993. During fiscal 1995, the Company established a supplemental
retirement and savings plan for certain officers and senior management
employees. Company contributions to that plan for fiscal 1995 were $91,000.
OFFICERS' INCENTIVE PLAN
The Company has an executive compensation plan for the benefit of officers.
Benefits are payable based on the achievement of financial and performance
objectives which are set annually by the Board of Directors and the market value
of the Company's stock. Total expenses under the plan were $4,030,000,
$3,381,000 and $2,566,000 for the years ended September 30, 1995, 1994, and
1993, respectively. The incentive earned each year is paid 50% currently, and
the balance is payable over a four-year period, subject to certain adjustments,
as defined in the plan, based on employment status and the market value of the
Company's common stock.
EMPLOYEE INCENTIVE PLANS
The Company has incentive plans for eligible employees not covered under
the executive compensation plan. Awards under these plans are paid annually and
are based on the achievement of certain financial and performance objectives.
Total expenses under these plans were $4,764,000, $3,738,000, and $2,724,000 for
the years ended September 30, 1995, 1994, and 1993 respectively.
30
9. STOCK
COMMON
A total of 15,000,000 shares of common stock, $0.01 par value, are
authorized, of which 12,289,862 shares (including 53,562 shares of treasury
stock) were issued at September 30, 1995, and 12,068,804 shares (including
101,822 shares of treasury stock) were issued at September 30, 1994.
PREFERRED
A total of 1,000,000 shares of preferred stock, $0.01 par value, are
authorized; no preferred stock has been issued.
10. STOCK OPTION PLANS
Officers, key employees and non-employee directors have been granted
options under the Company's stock option plans to purchase Company common stock
at fair market value at date of grant. Total options exercisable were 449,900
and 609,400 at September 30, 1995 and 1994, respectively.
Changes in options outstanding during the three years in the period ended
September 30, 1995:
Number Exercise
of Price
Shares per Share
- ----------------------------------------------------------------------------
Options outstanding
Sept. 30, 1992 1,172,000 $1.11-$4.44
Granted 194,000 $8.25-$8.50
Exercised (283,000) $1.11-$3.50
---------
Options outstanding
Sept. 30, 1993 1,083,000 $1.11-$8.50
Granted 142,000 $13.25-$15.38
Forfeitures (68,000) $8.25-$8.50
Exercised (289,600) $1.11-$3.50
---------
Options outstanding
Sept. 30, 1994 867,400 $1.11-$15.38
Granted 161,850 $19.31-$28.38
Exercised (217,500) $1.11-$8.50
---------
Options outstanding
Sept. 30, 1995 811,750 $1.89-$28.38
=========
31
11. COMMITMENTS AND CONTINGENCIES
The Company conducts certain of its operations in facilities occupied under
operating leases expiring principally in December 2001. The leases provide for
annual increases based upon the Consumer Price Index ("CPI").
Minimum future rental commitments under operating leases are as follows:
Year ending September 30, (dollars in thousands)
- --------------------------------------------------------------
1996 $3,837
1997 3,805
1998 3,627
1999 3,300
2000 3,389
Thereafter 4,509
---------
$22,467
=========
Rent expense under operating leases, including month-to-month leases, was
$2,939,000, $2,155,000 and $2,046,000 for the years ended September 30, 1995,
1994, and 1993, respectively.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial condition.
12. SEGMENT INFORMATION
The Company operates principally in the financial services industry. Its
DynaMark subsidiary provides services to the direct marketing industry.
Operations in other industries are less than 10% of consolidated revenues. The
Company's international operations consist primarily of sales and service
offices. Substantially all foreign sales are exports. The Company's revenues
from customers outside the United States were $14,851,000, $12,531,000 and
$10,915,000 in 1995, 1994 and 1993 respectively.
32
13. SUPPLEMENTARY FINANCIAL DATA (UNAUDITED)
The following table presents selected unaudited consolidated financial
results for each of the eight quarters in the two-year period ended September
30, 1995. 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 financial information for the period presented.
(in thousands except Dec. 31, Mar. 31, June 30, Sept. 30,
per share data) 1993 1994 1994 1994
- -------------------------------------------------------------------------------------------------
Revenues $21,106 $21,025 $22,636 $25,512
Cost of revenues 7,842 8,119 8,258 9,880
Gross profit $13,264 $12,906 $14,378 $15,632
======== ========= ========= =========
Net income $2,295 $2,183 $2,553 $3,018
======== ========= ========= =========
Earnings per share $.19 $.18 $.20 $.24
======== ========= ========= =========
Shares used in computing
earnings per share 12,408 12,476 12,488 12,546
(in thousands except Dec. 31, Mar. 31, June 30, Sept. 30,
per share data) 1994 1995 1995 1995
- -------------------------------------------------------------------------------------------------
Revenues $25,632 $26,383 $28,675 $33,192
Cost of revenues 9,337 10,436 10,812 12,447
Gross profit $16,295 $15,947 $17,863 $20,745
======== ========= ========= =========
Net income $2,822 $2,928 $3,130 $3,816
======== ========= ========= =========
Earnings per share $.22 $.23 $.25 $.30
======== ========= ========= =========
Shares used in computing
earnings per share 12,676 12,706 12,754 12,779
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
33
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The required information regarding Directors of the registrant is
incorporated by reference from the information under the caption "Election of
Directors - Nominees" in the Company's definitive proxy statement for the Annual
Meeting of Stockholders to be held on February 6, 1996.
The required information regarding Executive Officers of the registrant is
contained in Part I of this Form 10-K.
The required information regarding compliance with Section 16(a) of the
Securities Exchange Act is incorporated by reference from the information under
the caption "Section 16(a) Reporting" in the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held on February 6, 1996.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the information under the captions
"Compensation of Executive Officers," "Compensation Committee Interlocks and
Insider Participation," and "Director Consulting Arrangement" in the Company's
definitive proxy statement for the Annual Meeting of Stockholders to be held on
February 6, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the information under the caption "Stock
Ownership" in the Company's definitive proxy statement for the Annual Meeting of
Stockholders to be held on February 6, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the information under the captions "Director
Consulting Arrangement" and "Compensation Committee Interlocks and Insider
Participation" in the Company's definitive proxy statement for the Annual
Meeting of Stockholders to be held on February 6, 1996.
34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Reference Page
Form 10-K
(a) 1. CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Auditors................................ 19
Consolidated balance sheets at September 30, 1995 and
September 30, 1994.......................................... 20
Consolidated statements of income for each of the three years
in the period ended September 30, 1995...................... 21
Consolidated statements of stockholders' equity for each of the
three years in the period ended September 30, 1995.......... 22
Consolidated statements of cash flows for each of the three
years in the period ended September 30, 1995................ 23
Notes to financial statements................................. 24
Audit report on financial statement schedule.................. 39
2. FINANCIAL STATEMENT SCHEDULES:
VIII Valuation and qualifying accounts at September 30,
1995 and 1994...................................... 40
3. EXHIBITS:
2.1 Asset Purchase Agreement, dated December 31, 1992, by and
between the Registrant and DynaMark, Inc., filed as Exhibit
2.1 to the Company's report on Form 8-K dated December 31,
1992, and incorporated herein by reference.
2.2 Employment and Non-Competition Agreement, dated December 31,
1992, by and between the Registrant and Kenneth M. Rapp, filed
as Exhibit 2.2 to the Company's report on Form 8-K dated
December 31, 1992, and incorporated herein by reference.*
3.1 Restated Certificate of Incorporation of the Company, filed as
Exhibit 3.1 to the Company's Registration Statement on Form
S-1 (Commission File No. 33-14491) (the "Registration
Statement") and incorporated herein by reference.
3.2 By-laws of the Company, filed as Exhibit 3.2 to the
Registration Statement and incorporated herein by reference.
3.3 Amendment as of August 23, 1994, to Section 3.1 of the By-laws
of the Company, filed as Exhibit 3.3 to the Company's report
on Form 10-K for the fiscal year ended September 30, 1994, and
incorporated herein by reference.
3.4 Amendment as of January 28, 1988, adding Article 7 to the
Restated Certificate of Incorporation of the Company, filed as
Exhibit 3.4 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1989, and incorporated herein
by reference.
10.1 Company's Stock Option Plan (1984) and form of Stock Option
Agreement, filed as Exhibit 10.1 to the Registration Statement
and incorporated herein by reference.*
35
10.2 Company's 1987 Stock Option Plan, filed as Exhibit 10.2 to the
Registration Statement and incorporated herein by reference.*
10.3 Lease dated April 28, 1995, between CSM Investors, Inc., and
DynaMark, Inc.
10.4 Fair, Isaac and Company, Inc. Officers' Incentive Plan
(effective October 1, 1992), filed as Exhibit 10.4 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1994, and incorporated herein by reference.*
10.5 Lease, dated October 30, 1983, between S.R.P. Limited
Partnership and the Company, as amended, filed as Exhibit 10.7
to the Registration Statement and incorporated herein by
reference.
10.6 Stock Option Plan for Non-Employee Directors, filed as Exhibit
10.8 to the Company's report on Form 10-K for the fiscal year
ended September 30, 1988 and incorporated herein by
reference.*
10.7 Lease dated July 1, 1993, between The Joseph and Eda Pell
Revocable Trust and the Company and the First through Fifth
Addenda thereto.
10.8 First Amendment to the Company's 1987 Stock Option Plan, filed
as Exhibit 10.11 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1989, and incorporated herein
by reference.*
10.9 First Amendment to the Company's Stock Option Plan for
Non-Employee Directors, filed as Exhibit 10.12 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1989, and incorporated herein by reference.*
10.10 Amendment Number 1 to Stock Option Plan (1984) of the Company,
filed as Exhibit 10.13 to the Company's report on Form 10-K
for the fiscal year ended September 30, 1989, and incorporated
herein by reference.*
10.11 Addendum Number Seven to lease between S.R.P. Limited
Partnership and the Company filed as Exhibit 10.15 to the
Company's report on Form 10-K for the fiscal year ended
September 30,1990, and incorporated herein by reference.
10.12 Addenda Numbers Eight and Nine to lease between SRP Limited
Partnership and the Company.
10.13 Lease, dated September 5, 1991, between 111 Partners, a
California general partnership, and the Company filed as
Exhibit 10.20 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1991, and incorporated herein
by reference.
10.14 Construction Loan Agreement dated September 5, 1991, between
111 Partners and the Company filed as Exhibit 10.21 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1991, and incorporated herein by reference.
10.15 Consulting contract between the Company and William R. Fair
dated April 10, 1991 filed as Exhibit 10.22 to the Company's
report on Form 10-K for the fiscal year ended September 30,
1991, and incorporated herein by reference.*
10.16 Fair, Isaac and Company, Incorporated 1992 Long-term Incentive
Plan filed as Exhibit 10.24 to the Company's report on Form
10-K for the fiscal year ended September 30, 1992, and
incorporated herein by reference.*
10.17 Consulting Contracts between the Company and Robert M. Oliver
effective January 1, 1995 and July 1, 1995.*
10.18 Lease dated May 1, 1995, between Control Data Corporation and
DynaMark, Inc.
10.19 Lease dated April 10, 1994, between Leed Properties and
DynaMark, Inc., filed as Exhibit 10.19 to the Company's report
on Form 10-K for the fiscal year ended September 30, 1994, and
incorporated herein by reference.
36
10.20 Fair, Isaac Supplemental Retirement and Savings Plan and Trust
Agreement effective November 1, 1994, filed as Exhibit 10.20
to the Company's report on Form 10-K for the fiscal year ended
September 30, 1994, and incorporated herein by reference.*
10.21 Lease dated July 10, 1993, between the Joseph and Eda Pell
Revocable Trust and the Company.
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.
10.23 Fourth Contract Extension, dated April 7, 1995, to the
Consulting Contract between the Company and William R. Fair.*
11.1 Computation of net income per common share.
13.1 Annual Report to Stockholders for the Fiscal Year Ended
September 30, 1995.
21.1 Subsidiaries of the Company.
23.1 Consent of KPMG Peat Marwick LLP (see page 41 of this Form
10-K).
24.1 Power of Attorney (see page 38 of this Form 10-K).
27 Financial Data Schedule.
* Management contract or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the fiscal quarter ended September 30, 1995.
37
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 22, 1995
By PETER L. McCORKELL
-----------------------------------------------
Peter L. McCorkell
Senior Vice President, Secretary and General Counsel
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints PETER L. McCORKELL his attorney-in-fact,
with full power of substitution, for him in any and all capacities, to sign any
amendments to this Report on Form 10-K and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorney-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
LARRY E. ROSENBERGER President, Chief Executive Officer December 22, 1995
- ---------------------------------------- (Principal Executive Officer) and Director
Larry E. Rosenberger
GERALD DE KERCHOVE Executive Vice President, December 22, 1995
- ---------------------------------------- Chief Financial Officer
Gerald de Kerchove
- ---------------------------------------- Director December , 1995
William R. Fair
ROBERT D. SANDERSON Director December 22, 1995
- ----------------------------------------
Robert D. Sanderson
JOHN D. WOLDRICH Director December 22, 1995
- ----------------------------------------
John D. Woldrich
H. ROBERT HELLER Director December 22, 1995
- ----------------------------------------
H. Robert Heller
GUY R. HENSHAW Director December 22, 1995
- ----------------------------------------
Guy R. Henshaw
DAVID S.P. HOPKINS Director December 22, 1995
- ----------------------------------------
David S.P. Hopkins
ROBERT M. OLIVER Director December 22, 1995
- ----------------------------------------
Robert M. Oliver
BRYANT J. BROOKS Director December 22, 1995
- ----------------------------------------
Bryant J. Brooks
PATRICIA COLE Controller December 22, 1995
- ----------------------------------------
Patricia Cole
38
Independent Auditors' Report
The Board of Directors
Fair, Isaac and Company, Incorporated:
Under date of October 25, 1995, we reported on the consolidated balance sheets
of Fair, Isaac and Company, Incorporated and subsidiaries as of September 30,
1995 and 1994, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended September
30, 1995, which are included in the 1995 annual report on Form 10-K. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related financial statement schedule in the 1995
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.
KPMG Peat Marwick LLP
San Francisco, California
October 25, 1995
39
SCHEDULE VIII
FAIR, ISAAC AND COMPANY, INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
RULE 12-09
SEPTEMBER 30, 1995 AND 1994
Balance at Additions Balance at
Beginning Charged End of
Description of Period to Expense Deductions Period
----------- --------- ---------- ---------- ----------
September 30, 1995:
Allowance for Doubtful Accounts
$429,000 $-- ($152,550) $276,450
September 30, 1994:
Allowance for Doubtful Accounts
$188,000 $293,000 ($52,000) $429,000
40
Consent of Independent Auditors
The Board of Directors
Fair, Isaac and Company, Incorporated:
We consent to incorporation by reference in the registration statement (No.
33-20349) on Form S-8, the registration statement (No. 33-26659) on Form S-8,
the registration statement (No. 33-63428) on Form S-8, and the registration
statement (No. 33-33057) on Form S-8 of Fair, Isaac and Company, Incorporated
and subsidiaries of our report dated October 25, 1995, relating to the
consolidated balance sheets of Fair, Isaac and Company, Incorporated and
subsidiaries as of September 30, 1995 and 1994, and the related consolidated
statements of income, stockholders' equity, and cash flows, and the related
financial statement schedule, which report appears in the September 30, 1995
annual report on Form 10-K of Fair, Isaac and Company, Incorporated, and
subsidiaries.
KPMG Peat Marwick LLP
San Francisco, California
December 22, 1995
41
EXHIBIT INDEX
TO FAIR, ISAAC AND COMPANY, INCORPORATED
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995
Sequentially
Exhibit No. Exhibit Numbered Page
- ----------- ------- -------------
10.3 Lease dated April 28, 1995, between CSM
Investors, Inc., and DynaMark, Inc.
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.
10.12 Addenda Numbers Eight and Nine to lease
between SRP Limited Partnership and the Company.
10.17 Consulting Contracts between the Company and
Robert M. Oliver effective January 1, 1995 and
July 1, 1995.
10.18 Lease dated May 1, 1995, between Control Data
Corporation and DynaMark, Inc.
10.21 Lease dated July 10, 1993, between the Joseph and
Eda Pell Revocable Trust and the Company.
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.
10.23 Fourth Contract Extension, dated April 7, 1995, to
the Consulting Contract between the Company and
William R. Fair.
11.1 Computation of net income per common share.
13.1 Annual Report to Stockholders for the Fiscal Year
Ended September 30, 1995.
21.1 Subsidiaries of the Company.
27 Financial Data Schedule.
42