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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
For the fiscal year ended September 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from_____________to_____________
Commission File Number
0-16439
FAIR, ISAAC AND COMPANY, INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 94-1499887
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
120 North Redwood Drive, San Rafael, California 94903
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 472-2211
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value per share New York Stock Exchange, Inc.
(Title of Class) (Name of each exchange on
which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No .
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of December 6, 1996, the aggregate market value of the Registrant's
common stock held by nonaffiliates of the Registrant was $207,499,270 based on
the last transaction price as reported on the New York Stock Exchange. This
calculation does not reflect a determination that certain persons are affiliates
of the Registrant for any other purposes.
The number of shares of common stock outstanding on December 6, 1996 was
12,631,049 (excluding 3,057 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 4, 1997.
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.........................................14
ITEM 8. Financial Statements and Supplementary Data.........................19
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..............................................34
PART III
ITEM 10. Directors and Executive Officers of the Registrant..................35
ITEM 11. Executive Compensation..............................................35
ITEM 12. Security Ownership of Certain Beneficial Owners and Management......35
ITEM 13. Certain Relationships and Related Transactions .....................35
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....36
SIGNATURES...................................................................39
Supplemental Information.....................................................40
2
PART I
ITEM 1. BUSINESS
Development Of The Business
Fair, Isaac and Company (NYSE: FIC) is a leading developer of data
management systems and services for the 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 1996 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 $21.2 million or 14 percent of Fair,
Isaac's fiscal 1996 revenues. Insurance group revenues in 1996 were $4.5 million
or 3 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 and CrediTable(R) pooled-data scoring systems,
are designed to meet the needs of relatively small users of scoring systems.
Approximately 15 percent of Fair, Isaac's fiscal 1996 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 34 percent and 44 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 Company's average revenue growth rate over the last 20 years has
been approximately 22 percent which is closer to the rate 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 and database
management 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, 1996. Sales to customers in the
direct marketing business, including the marketing arms of financial service
businesses, accounted for 14 to 16 percent of revenues in each of the three
years in the period ended September 30, 1996. Revenues from sales to the
insurance industry accounted for two to three percent of revenues in each of the
three years in the period ended September 30, 1996.
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.
4
Scores produced by specially designed Behavior Scoring Algorithms can be
used to select actions for mailing promotional materials to customers, for
changing the credit limits allowed, for authorizing individual credit card
transactions, for taking various actions on delinquent accounts, and for
reissuing credit cards which are about to expire. Behavior Scoring Algorithms
are also components of the Adaptive Control Systems described below.
Credit Bureau Scoring Services. The Company also provides scoring
algorithms to each of the three major automated credit bureaus in the United
States based solely on the information in their files. Customers of the credit
bureau can use the scores derived from these algorithms to prescreen
solicitation candidates, to evaluate applicants for new credit and to review
existing accounts. Credit grantors using these services pay based on usage and
the Company and the credit bureau share these usage revenues. The PreScore(R)
service offered by the Company combines a license to use such algorithms for
prescreening solicitation candidates along with tracking and consulting services
provided by the Company and is priced on a time or usage basis.
ScoreNetSM Service. The ScoreNet Service, introduced in August 1991, allows
credit grantors to obtain Fair, Isaac's credit bureau scores and related data on
a regular basis and in a format convenient for use in their account management
programs. In most cases the account management program is a Fair, Isaac Adaptive
Control System or Adaptive Control service at a credit card processor. The
Company obtains the data from the credit bureau(s) selected by each subscriber
and delivers it to the subscriber in a format compatible with the subscriber's
account management system.
Insurance Scoring Algorithms. The Company has also delivered scoring
systems for insurance underwriters. 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, StrategyWare(TM), and ScoreWare consisting of software
for IBM and IBM compatible mainframe computers; and CreditDesk which consists of
software for personal computers. The Company does not expect significant sales
of new Mid-Range ASAP systems but still derives significant maintenance and
enhancement revenues from existing systems.
The tasks performed by ASAPs include: (i) checking for the completeness of
the data initially given and printing an inquiry letter in the case of
insufficient information; (ii) checking whether an applicant is a known
perpetrator of fraud; (iii) electronically requesting, receiving, and
interpreting a credit report when it is economic to do so; (iv) assigning a
credit limit to the account, if acceptable, and printing a denial letter if not;
and (v) forwarding the data necessary to originate billing records for accepted
applicants.
Mid-Range ASAP is a minicomputer-based system which carries out the tasks
listed above in a manner extensively "tailored" to each user's unique
requirements. Mainframe ASAP is a software-only package designed to be executed
on IBM or IBM compatible mainframe computers. It is most useful for very large
volume credit grantors who elect to enter application information from a number
of separate locations. CreditDesk is designed for use on
5
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." SEARCH acquires and interprets credit bureau reports as a separate
package. ScoreWare provides for easy installation of credit application
scorecards and computes scores from such scorecards as part of the application
processing sequence. StrategyWare combines the application processing features
described above with the "Champion/Challenger" strategy concept described below
under Adaptive Control Systems.
The Company's Mid-Range and Mainframe ASAP systems are currently being used
in the United States, Canada, and Europe by banks, retailers, and other
financial institutions. CreditDesk is being used by over 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.
Adaptive Control Systems
The Company's most advanced product is the Adaptive Control System, now
generally marketed under the tradename "TRIAD". An Adaptive Control System is a
complex of behavior scoring algorithms, computer software, and account
management strategy addressed to one or more aspects of the management of a
consumer credit or similar portfolio. For example, the Company has developed an
Adaptive Control System for use by an electric utility in the management of its
customer accounts.
A principal feature of an Adaptive Control System is software for testing
and evaluation of alternative management strategies, designated the "Champion
and Challenger Strategy Software." The "Champion" strategy applied to any aspect
of controlling a portfolio of accounts (such as determining collection messages
or setting credit limits) is that set of rules considered by management to be
the most effective at the time. A "Challenger" strategy is a different set of
rules which is considered a viable candidate to outperform the Champion. The
Company's Champion and Challenger Strategy software is tailored to the
customer's billing system and is designed to permit the operation of both
strategies at the same time and also to permit varying fractions of the accounts
to go to each of the competing strategies. For example, if a Challenger is very
different from the Champion, management may wish to test it on a very small
fraction of the accounts, rather than to risk a large loss. Alternatively, if a
Challenger appears to be outperforming a Champion, management can direct more
and more of the account flow to it. There need not, in fact, be a limitation on
the number of Challengers in place at any one time beyond the limits imposed by
the ability of the Company and the user management to study the results.
A Champion/Challenger structure is based on one or more of the Company's
component products, usually Behavior Scoring Algorithms, as well as
Company-developed software that permits convenient allocation of accounts to
strategies and convenient modification of the strategies themselves. Adaptive
Control Systems can also consider information external to the particular
creditor, particularly scores and other information obtained from credit
bureaus, in the design of strategies. A specific goal of the Company's Adaptive
Control System product is to make the account management functions of the user
as independent as possible of the user's overall data processing systems
development department.
For a Champion/Challenger structure to function effectively, new Challenger
strategies must be developed continually as insight is gained, as external
conditions change, and as management goals are modified. The Company often
participates in the design and development of new Challenger strategies and in
the evaluation of the results of Champion/Challenger competitions as they
develop.
Contracts for Adaptive Control Systems for end-users generally include
multi-year software maintenance, strategy design and evaluation, and consulting
components. The Company also provides Adaptive Control services through First
Data Resources, Inc. and Total System Services, Inc. the two largest third-party
credit card processors in the United States. The Adaptive Control service is
also available in the United Kingdom through First Data Resources, Ltd. and Bank
of Scotland. Credit card issuers subscribing to these services pay monthly fees
based on the number of accounts processed. During fiscal 1996, the Company
introduced StrategyWare which is an Adaptive Control System designed to apply
Champion-Challenger principles to the processing of new credit accounts, rather
than the management of existing accounts. The Company also believes that
Adaptive Control Systems can operate in areas other than consumer credit; and,
as noted above, has provided an Adaptive Control System to an electric utility
company.
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DynaMark
DynaMark provides a variety of data processing and database management
services to companies and organizations in direct marketing. DynaMark offers
several proprietary tools in connection with such services including DynaLink
and DynaMatch. DynaLink gives financial institutions and other users remote
computer access to their "warehoused" customer account files or marketing
databases. It allows them to perform on-line analyses ranging from profiling the
history of a single customer purchase or credit usage to calling up print-outs
of all files having certain defined characteristics in common. DynaMatch uses a
unique scoring system to identify matching or duplicate records that most
standard "merge-purge" systems would overlook. Credit managers and direct
marketers can use it to identify household relationships (accounts registered in
different names, but sharing a common address and surname) and to eliminate
costly duplicate mailings. Credit card issuers can use it to spot potentially
fraudulent or overlimit credit card charges by individuals using two or more
cards issued under slightly different names or addresses.
Customer Service and Support
The Company provides service and support to its customers in a variety of
ways. They include: (i) education of liaison teams appointed by buyers of
scoring algorithms and software; (ii) maintenance of an answering service that
responds to inquiries on minor technical questions; (iii) proactive
Company-initiated follow-up with purchasers of the Company's products and
services; (iv) conducting seminars held several times a year in various parts of
the United States and, less often, in other countries; (v) conducting annual
conferences for clients in which user experience is exchanged and new products
are introduced; (vi) delivery of special studies which are related to the use of
the Company's products and services; and (vii) consulting and training services
provided by the Company's subsidiary, Credit & Risk Management Associates, Inc.
Scoring algorithms can diminish in effectiveness over time as the
population of applicants or customers changes. Such changes take place for a
variety of reasons, many of which are unknown or poorly understood, but some are
a result of marketing strategy changes or shifts in the national or the local
economy. It is to the user's advantage, therefore, to monitor the performance of
its algorithms so that they can be replaced when it is economic to do so. In
response to this need as well as the requirement of the Equal Credit Opportunity
Act that scoring algorithms be periodically validated, the Company provides
tracking services and software products which measure the continuing performance
of its scoring algorithms while in use by customers.
Technology
The Company's personnel have a high degree of expertise in several separate
disciplines: operations research, mathematical statistics, computer-based
systems design, programming, and data processing.
The fundamental principle of operations research is to direct attention to
a class of management decisions, to make a mathematical model of the situation
surrounding that class of decisions, and to find rules for making the decisions
which maximize achievement of the manager's goal. The Company's analytic
products are classic examples of this doctrine reduced to practice. The entire
focus is on decision making using the best mathematical and computational
techniques available.
The fundamental goal of mathematical statistics is to provide the method
for deriving the maximum amount of useful information from an undigested body of
data. The objective of the design of computer-based systems is to provide a
mechanism for efficiently accepting input data from a source, storing that data
in a cost-effective medium, operating on the data with reliable algorithms and
decision rules, and reporting results in readily comprehensible forms.
The Company's analytic products have a clear distinguishing characteristic
in that they make management by rule possible in situations where the only
alternative is reliance on a group of people whose actions can never be entirely
consistent. Rules for selecting actions require computation of probabilities of
results. But computing the probability of a particular result in the traditional
mode, that is, by counting the number of occurrences of each possible result in
all possible combinations of circumstances, clearly breaks down when the number
of combinations becomes very large. When only a few thousand cases of results
are available, more subtle mathematical methods must be used. The Company has
been actively developing and using techniques of this kind for 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 about 75 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 some 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 1996. Revenues generated through the Company's alliances with
the three major credit bureaus in the United States, Equifax, Inc., Experian
Information Solutions, Inc. (formerly known as TRW Information Services) and
Trans Union Corporation, each accounted for approximately nine to eleven percent
of the Company's total revenues in fiscal 1996.
The percentage of revenues derived from customers outside the United Sates
was approximately 15 percent in fiscal 1996, 13 percent in fiscal 1995, and 14
percent in fiscal 1994. DynaMark had virtually no non-U.S. revenues prior to
fiscal 1996. 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 13 to the Consolidated Financial Statements is incorporated
herein by reference. The Company's foreign offices are primarily sales and
customer service offices acting as agents on behalf of the U.S. production
operations. Net identifiable assets, capital expenditures and depreciation
associated with foreign offices are not material.
The Company has enjoyed good relations with the majority of its customers
over extended periods of time, and a substantial portion of its revenue is
derived from repeat customers. As noted above, the Company is actively pursuing
new users, particularly in the marketing 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, 1996, the Company's backlog, which includes only firm
contracts, was approximately $60,098,000, as compared with approximately
$46,137,000 as of September 30, 1995. Most usage-based revenues do not appear as
part of the backlog. The Company believes that approximately 30% of the
September 30, 1996 backlog will be delivered after the end of the current fiscal
year, September 30, 1997. 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. In November 1996 it was
announced that CCN had agreed to acquire Experian Information Solutions, Inc.
(formerly known as TRW Information Systems & Services).
Both AMS and CCN offer products intended to perform some of the same
functions as the Company's Adaptive Control Systems. The Company believes that
customers using its Adaptive Control Systems, in both custom end-user form and
through third-party processors, significantly outnumber users of the competing
AMS and CCN products.
Another source of emerging competition comes from companies developing
artificial intelligence systems including those known as "expert systems" and
"neural networks." An expert system is computer software that replicates the
decision-making process of the best available human "experts" in solving a
particular class of problem,
9
such as credit approval, charge card authorization, or insurance underwriting.
Scoring technology differs from expert systems in that scoring technology is
based upon a large data base of results, from which rules and algorithms are
developed, as compared to expert systems, which are typically based primarily on
the "expert's" judgment and less so upon a significant data base. The Company
believes its technology is superior to expert system technology where sufficient
performance data is available. Neural networks, on the other hand, are an
alternative method of developing scoring algorithms from a data base but using
mathematical techniques quite different from those used by the Company. For
example, HNC Software, Inc. has developed systems using neural network
technology which compete with some of the Company's products and services. The
Company believes that analytical skill and knowledge of the business environment
in which an algorithm will be used are generally more important than the choice
of techniques used to develop the algorithm; and, further, that the Company has
an advantage in these areas with respect to its primary markets as compared with
neural network developers.
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 currently has one patent
application pending but does not otherwise have patent protection for any of its
programs or algorithms, nor does it believe that the law of copyrights affords
any significant protection for its proprietary software. The Company instead
relies principally upon such factors as the knowledge, ability, and experience
of its personnel, new products, frequent product enhancements, and name
recognition for its success and growth. The Company retains title to and
protects the suite of algorithms and software used to develop scoring algorithms
as a trade secret and has never distributed its source code.
In spite of these precautions, it may be possible for competitors or users
to copy or reproduce aspects of the Company's software or to obtain information
that the Company regards as trade secrets. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to the same extent as
do the laws of the United States.
Research and Development
Technological innovation and excellence have been goals of the Company
since its founding. The Company has devoted, and intends to continue to devote,
significant funds to research and development. The Company has ongoing projects
for improving its fundamental knowledge in the area of algorithm design, its
capabilities to produce algorithms efficiently, and its ability to specify and
code algorithm executing software. The information set forth in the line
entitled "Research and development" in the Consolidated Statement of Income and
the information set forth under the caption "Software costs" in Note 1 to the
Consolidated Financial Statements is incorporated herein by reference.
Above and beyond the projects formally designated as Research and
Development, many of the Company's activities contain a component that produces
new knowledge. For example, an Adaptive Control System, by its nature and
purpose, must be designed to match its environment and learn as it operates. In
the areas in which the Company's products are useful, the "laboratory" is
necessarily the site of the user's operations.
Hardware Manufacturing
Hardware for the Company's Mid-Range ASAP systems consists primarily of a
Motorola MC 68030-based central processing unit, one or more video display
terminals, a disk storage unit, and various other input-output and peripheral
devices. The Company's manufacturing process at its San Rafael, California
facility involves assembly, testing, and quality assurance functions. Components
and parts used in the Company's Mid-Range ASAP systems are purchased from
outside vendors, and the Company generally seeks to use components and parts
that are available in quantity from a number of distributors. The Company
believes that, should any of these components become
10
unavailable from current sources, alternative sources could be developed.
Hardware manufacturing and enhancements account for less than one percent of
total revenue.
Personnel
As of September 30, 1996, the Company employed approximately 1,037 persons.
None of its employees is covered by a collective bargaining agreement and no
work stoppages have been experienced.
ITEM 2. PROPERTIES
The Company's principal office is located in San Rafael, California,
approximately 15 miles north of San Francisco. The Company leases approximately
144,000 square feet of office space in three buildings at that location under
leases expiring in 2001, and an additional 34,000 square feet under a lease
expiring September 30, 1997. 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. The Company has entered into a lease for a building under
construction adjacent to its San Rafael headquarters for an additional 124,000
square feet of office space in increments over the period from April 1997 to May
1998. It has also entered into a letter of intent for a build-to-suit lease,
with an option to purchase, approximately 300,000 square feet of additional
office space in San Rafael with an expected initial occupancy date in the year
2000. DynaMark leases approximately 77,000 square feet of office and data
processing space in two buildings in Arden Hills, Minnesota under leases which
expire in 2005. DynaMark sold its personalized printing business in a
transaction which closed on November 4, 1996. The purchaser is obligated to
assume DynaMark's obligations with respect to those facilities not later than
March 31, 1997. DynaMark is currently negotiating for an option for a
build-to-suit lease for a third building of approximately 30,000 square feet
adjacent to its headquarters in Arden Hills. DynaMark's Printronic Division
leases approximately 25,000 square feet of office and data processing space in
New York City. The Company also leases a total of approximately 32,000 square
feet of office space for offices in Monterey, California; New Castle, Delaware;
Atlanta, Georgia; Chicago, Illinois; Tampa, Florida; Toronto, Ontario;
Birmingham, England; Tokyo, Japan; Paris, France; Mexico City, Mexico; and
Wiesbaden, Germany. See Notes 6 and 12 of Notes to Consolidated Financial
Statements for information regarding the Company's obligations under leases. The
Company believes that suitable additional space will be available to accommodate
future needs.
ITEM 3. LEGAL PROCEEDINGS
No material legal proceedings are pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
11
EXECUTIVE OFFICERS OF THE REGISTRANT
Name Positions Held Age
---- -------------- ---
Larry E. Rosenberger President and Chief Executive Officer 50
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 53
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, 50
Senior Vice President 1983-1985, Vice
President 1977-1983. Joined the
Company in 1972.
Barrett B. Roach Executive Vice President since joining 56
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 42
1995; Senior Vice President 1992 to
1995; Vice President 1990 to 1992;
joined the Company in 1985.
H. Robert Heller Executive Vice President since September 56
1996 and a Director since February 1994.
President of International Payments Institute
from December 1994 to September 1996;
President and Chief Executive Officer of
Visa U.S.A., Inc. from 1991 to 1993,
Executive Vice President of Visa
International from 1989 to 1991.
Jeffrey F. Robinson Senior Vice President since 1986, Vice 47
President 1980-1986. Treasurer 1981-
1983. Joined the Company in 1975.
Kenneth M. Rapp Senior Vice President since August 1994, 50
and President and Chief Operating Officer
of DynaMark, Inc. since it was founded
in 1985.
Peter L. McCorkell Senior Vice President since August 1995; 50
Vice President, Secretary and General
Counsel since joining the Company in
1987.
Patricia Cole Senior Vice President, Chief Financial 47
Officer and Treasurer since November
18, 1996; Controller since joining the
Company 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
As of May 6, 1996, the company's common stock began trading on the New York
Stock Exchange under the symbol: FIC. Prior to that date, it was traded
over-the-counter on the Nasdaq Stock Market under the symbol: FICI. At December
2, 1996, Fair, Isaac had 255 holders of record of its common stock. The
following table lists the high and low last transaction prices for the periods
shown, as reported by the New York Stock Exchange and the Nasdaq Stock Market.
Stock Prices High Low
- ----------------------------------------------------------
October 1 - December 31, 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
October 1 - December 31, 1995 29 1/4 25
January 1 - March 31, 1996 30 3/8 21 1/2
April 1 - June 30, 1996 50 30
July 1 - September 30, 1996 46 1/4 37 5/8
Dividends
On May 24, 1995, Fair, Isaac announced a 100 percent stock dividend
(equivalent to a two-for-one stock split) and its intention to pay quarterly
dividends of 2 cents per share or 8 cents per year subsequent to issuance of the
stock dividend. Quarterly dividends of that amount were paid throughout fiscal
1996. There are no current plans to change the cash dividend nor to issue any
further stock dividend.
ITEM 6. Selected Financial Data
(dollars in thousands, except per share data)
Fiscal year ended September 30, 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
Revenues $ 148,749 $ 113,881 $ 90,279 $ 66,668 $ 42,614
Income from operations 28,026 19,864 15,795 8,108 5,633
Income before income taxes 27,200 21,446 16,553 8,652 6,667
Net income 16,179 12,695 10,049 5,277 3,932
Earnings per share $1.27 $1.00 $.81 $.44 $.33
Dividends per share * $.08 $.055 $.07 $.07 $.07
At September 30, 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
Working capital $ 33,319 $ 22,162 $ 16,490 $ 14,652 $ 13,401
Total assets 113,054 88,290 70,935 54,230 41,982
Long-term obligations 1,552 1,930 2,333 2,729 2,655
Stockholders' equity 78,347 56,128 42,939 31,516 26,647
* 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.
13
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 consulting services to help clients use and
track the performance of those tools. The Company also provides a range of
credit scoring and credit account management services in conjunction with credit
bureaus and credit card processing agencies. Its DynaMark subsidiary provides
data processing and database management services to businesses engaged in direct
marketing.
This discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and Notes. In addition to historical
information, this report includes certain forward-looking statements regarding
events and trends which may affect the Company's future results. Such statements
are subject to risks and uncertainties that could cause the Company's actual
results to differ materially. Such factors include, but are not limited to,
those described in this discussion and analysis.
The Company is organized into business units that 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(TM) and
CreditDesk(R)) and custom credit account management systems, including those
marketed under the name TRIAD.(TM) Software systems usually also have a
component of ongoing maintenance revenue, and CreditDesk systems have also been
sold under time- or volume-based price arrangements. Credit scoring and credit
account management services sold through credit bureaus and third-party credit
card processors are generally priced based on usage. Products sold to the
insurance industry are generally priced based on the number of policies in
force, subject to contract minimums. DynaMark employs a combination of fixed-fee
and usage-based pricing.
RESULTS OF OPERATIONS
Revenues
The following table sets forth for the fiscal periods indicated (a) the
percentage of revenues represented by fixed-price and usage-priced revenues from
the Credit business unit, and the percentage of revenues contributed by the
DynaMark and Insurance business units; and (b) the percentage change in revenues
within each category from 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
Years ended 1995 1994
September 30, to to
1996 1995 1994 1996 1995
- ------------------------------------------------------------------------------------------------
Credit:
Fixed-price 30 29 32 34 15
Usage-priced 53 53 50 31 33
DynaMark 14 16 16 19 22
Insurance 3 2 2 63 56
---- ---- -----
Total revenues 100 100 100 31 26
==== ==== =====
Since its acquisition, DynaMark has taken on an increasing share of the
mainframe batch processing requirements of the Company's other business units.
During fiscal 1996, such inter-company revenue has represented more than fifteen
percent of DynaMark's total revenues. Accordingly, DynaMark's externally
reported revenues tend to understate DynaMark's growth and contribution to the
Company as a whole. In addition, DynaMark's revenue growth in the first six
months of fiscal 1996 was slowed by disruptions caused by the merger of one of
its largest customers.
14
On July 19, 1996, DynaMark acquired the assets and business of Printronic
Corporation of America, Inc. ("Printronic") and on November 4, 1996, it sold the
assets and business of its personalized printing division to Gage Marketing
Group, LLC. Revenues from the two operations in the twelve-month periods prior
to these transactions were similar, so the net effect on DynaMark's revenue in
future periods is not expected to be material. On September 30, 1996, the
Company acquired Credit & Risk Management Associates, Inc. ("CRMA"). CRMA's
revenues in the year ended September 30, 1996, were approximately $4.3 million.
Revenue from credit application scoring products increased by 10 percent in
fiscal 1995 compared with fiscal 1994, and by 36 percent in fiscal 1996 compared
with fiscal 1995, due primarily to the Company's introduction of new products,
including tracking software and small business loan scoring products. ASAP
revenues increased by 13 percent in 1995 compared with 1994, and by another 30
percent in fiscal 1996, primarily due to increased sales of PC-based ASAP
products (CreditDesk), including sales to small business lenders, and sales of
software components for mainframe ASAP systems.
Revenues from sales of credit account management systems (TRIAD) sold to
end-users increased 28 percent from 1994 to 1995 and by 38 percent from 1995 to
1996. The Company's high degree of success in penetrating the U.S. bankcard
industry with these products has limited, and may continue to limit, the revenue
growth in that market. However, the Company has added functionality for the
existing base of TRIAD users and is actively marketing TRIAD for other types of
credit products and in overseas markets, which accounted for most of the growth
in 1995 and 1996.
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 by more than 30 percent in each of the
last three fiscal years and accounted for approximately 39 percent of revenues
in fiscal 1995 and 1996. 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.
Revenues derived from alliances with credit bureaus and credit card
processors have accounted for much of the Company's revenue growth and
improvement in operating margins over the last three years. While the Company
has been very successful in extending or renewing such agreements in the past,
and believes it will generally be able to do so in the future, the loss of one
or more such alliances or an adverse change in terms could have a significant
impact on revenues and operating margin. Revenues generated through the
Company's alliances with Equifax, Inc., Experian Information Solutions, Inc.,
(formerly TRW Information Systems & Services) and Trans Union Corporation each
accounted for approximately nine to eleven percent of the Company's total
revenues in fiscal 1995 and 1996.
On November 14, 1996, it was announced that Experian was being acquired by
CCN Group Ltd., a subsidiary of Great Universal Stores, PLC. CCN is the
Company's largest competitor, worldwide, in the area of credit scoring.
TRW/Experian has offered scoring products developed by CCN in competition with
those of the Company for several years. The Company is not presently able to
determine what effect, if any, the acquisition of Experian by CCN will have on
its future revenues.
On September 30, 1996, amendments to the Fair Credit Reporting Act were
enacted and signed into law. The Company believes these changes to the federal
law regulating credit reporting will be favorable to the Company and its
clients. Among other things, the new law expressly permits the use of credit
bureau data to prescreen consumers for offers of credit and insurance and allows
affiliated companies to share consumer information with each other subject to
certain conditions. There is also a seven-year moratorium on new state
legislation on certain issues. However, the states remain free to regulate the
use of credit bureau data in connection with insurance underwriting. The Company
believes such enacted or proposed state regulation has had a negative impact on
its efforts to sell insurance risk scores through credit reporting agencies.
The Company's revenues derived from customers outside the United States
increased from $12.5 million in fiscal 1994 to $14.9 million in 1995 and to
$21.8 million in 1996. DynaMark has not had significant 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 Europe and Latin America accounted for most of the increases
in international revenues in fiscal 1995 and 1996.
15
Revenues from software maintenance and consulting services each accounted
for less than 10 percent of revenues in each of the three years in the period
ended September 30, 1996, and the Company does not expect revenues from either
of these sources to exceed 10 percent of revenues in the foreseeable future.
During the period since 1990, while the rate of account growth in the U.S.
bankcard industry has been slowing and many of the Company's largest
institutional clients have merged and consolidated, the Company has generated
above-average growth in revenues--even after 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 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 healthcare
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 increased 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
slightly above the Company's 20-year historical average revenue growth of about
22 percent.
Expenses
The following table sets forth for the fiscal periods indicated (a) the
percentage of net revenues represented by certain line items in the Company's
Consolidated Statement of Income, and (b) the percentage change in the amount of
each such line item from the prior fiscal year.
Percentage of Period-to-period
revenue percentage changes
Years ended 1995 1994
September 30, to to
1996 1995 1994 1996 1995
- ---------------------------------------------------------------------------------------------------
Total revenues 100 100 100 31 26
---- ---- ----
Costs and expenses:
Cost of revenues 38 38 38 31 27
Sales and marketing 17 20 20 9 23
Research and development 5 4 5 96 --
General and administrative 21 21 19 32 37
Amortization of intangibles -- -- 1 3 (12)
---- ---- ----
Total costs and expenses 81 83 83 28 26
---- ----
Income from operations 19 17 17 41 26
Other income (expense) (1) 2 1 NM* 109
---- ---- ----
Income before income taxes 18 19 18 27 30
---- ---- ----
Provision for income taxes 7 8 7 26 35
---- ---- ----
Net income 11 11 11 27 26
==== ==== ====
* Not meaningful
Cost of revenues
Cost of revenues consists primarily of personnel, travel and related
overhead costs; costs of computer service bureaus; and the amounts paid by the
Company to credit bureaus for scores and related information in connection with
the ScoreNet(R) Service.
Cost of revenues, as a percentage of revenues, has remained essentially
unchanged since fiscal 1994.
16
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 were essentially unchanged in fiscal 1995
compared with fiscal 1994, but decreased in fiscal 1996 due primarily to a
reduction in media advertising.
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, were essentially unchanged from fiscal 1994 to
1995 and increased sharply in fiscal 1996. After several years of concentrating
on developing new markets--either geographical or by industry--for its existing
technologies, the Company has recently increased emphasis on developing new
technologies, especially in the area of software development.
General and administrative
General and administrative expenses consist mainly of compensation expenses
for certain senior management, corporate facilities expenses, the costs of
administering certain benefit plans, legal expenses, expenses associated with
the exploration of new business opportunities and the costs of operating
administrative functions such as finance and computer information systems. As a
percentage of revenues, these expenses increased in fiscal 1995 compared with
fiscal 1994, due to significant increases in office space, expenditures made to
improve the Company's information systems and technology infrastructure, and the
costs of exploring new business opportunities, primarily in the healthcare
information management area. As a percentage of revenues, general and
administrative expenses were essentially unchanged in fiscal 1996 compared with
fiscal 1995.
Amortization of intangibles
The Company is amortizing the intangible assets arising from various
acquisitions 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 shareholders of an acquired company. See
below, under "Capital Resources and Liquidity."
Other income (expense)
The table in Note 15 to the Consolidated Financial Statements presents the
detail of other income and expenses. Interest income is derived from the
investment of funds surplus to the Company's immediate operating requirements.
At September 30, 1996, the Company had approximately $23.0 million invested in
U.S. treasury securities and other interest-bearing instruments. Interest income
increased in fiscal 1995 and 1996 due to rising interest rates and the
increasing balance in interest-bearing accounts and instruments.
The Company's share of operating losses in certain early-stage development
companies that are accounted for using the equity method is charged to other
expense. In addition, during the quarter ended September 30, 1996, the Company
wrote off an investment in a different early-stage development company due to
the deteriorating financial condition of that entity. This write-off and the
Company's share of losses in these early-stage development companies were
primarily responsible for the difference between the increase in operating
income in fiscal 1996 (41 percent) and the increase in net income (27 percent).
Note 5 to the Consolidated Financial Statements describes the Company's
investment in such companies.
Provision for income taxes
The Company's effective tax rate increased to approximately 41 percent in
fiscal 1995 from an effective rate of approximately 39 percent in fiscal 1994,
and decreased to 40.5 percent in fiscal 1996 due primarily to a changing mix of
applicable state and foreign tax rates. The Company expects its effective tax
rate in fiscal 1997 to be approximately the same as in fiscal 1996, barring any
change in the tax laws.
17
CAPITAL RESOURCES AND LIQUIDITY
Working capital increased from $16,490,000 at September 30, 1994, to
$22,162,000 at September 30, 1995, and to $33,319,000 at September 30, 1996. The
increase in fiscal 1996 was due primarily to increases in accounts receivable
and short-term investments and decreases in billings in excess of earned
revenues and income taxes payable, which more than offset increases in accounts
payable and other accrued liabilities, and in accrued compensation and employee
benefits.
The Company may be required to make additional payments to the former
stockholders of CRMA based upon its financial results in fiscal 1997, 1998 and
1999. Those amounts, which will be paid 55 percent in Company stock and 45
percent in cash, will not exceed $1.833 million per year.
In fiscal 1995, cash provided by operations was more than offset by cash
used in investing activities and financing activities. 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 "earn-out" 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.
In fiscal 1996, cash provided by operations was offset by cash used in
investing activities and financing activities. Cash provided by operations
resulted primarily from net income before depreciation and amortization and
increases in accrued compensation and benefits, partially offset by the increase
in accounts receivable and the decrease in billings in excess of earned
revenues. Cash was used in investing activities primarily for additions to
property and equipment, purchases of interest-bearing investments, the
acquisitions of Printronic and CRMA, and an "earn-out" payment to the former
shareholders of DynaMark, partially offset by the maturities of interest-bearing
investments. Cash was used in financing activities primarily for the payment of
dividends and 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, 1996, the Company had no significant capital
commitments other than those obligations described in Notes 3, 6 and 12 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.
QUARTERLY RESULTS
The table in Note 17 to the Consolidated Financial Statements presents
unaudited quarterly operating results for the last eight fiscal quarters.
Management believes that all the necessary adjustments have been included in the
amounts stated to present fairly the selected quarterly information, when read
in conjunction with the financial statements included elsewhere in this report.
This information includes all normal recurring adjustments that the Company
considers necessary for a fair presentation thereof, in accordance with
generally accepted accounting principles.
Quarterly results may be affected by fluctuations in revenue associated
with credit card solicitations, by the timing of orders for and deliveries of
certain ASAP and TRIAD systems, and by the seasonality of ScoreNet purchases.
With the exception of the cost of ScoreNet data purchased by the Company, most
of its operating expenses are not affected by short-term fluctuations in
revenues; thus short-term fluctuations in 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, 1996 and 1995,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the years in the three-year period ended September 30,
1996. 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, 1996 and 1995,
and the results of their operations and their cash flows for each of the years
in the three-year period ended September 30, 1996, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
San Francisco, California
October 23, 1996, except as to note 16,
which is as of November 4, 1996
19
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
Years ended September 30, 1996 1995 1994
- -----------------------------------------------------------------------------
Revenues:
Fair, Isaac $127,589 $96,074 $75,719
DynaMark 21,160 17,807 14,560
--------- --------- ---------
Total revenues 148,749 113,881 90,279
--------- --------- ---------
Costs and expenses:
Cost of revenues
Fair, Isaac 43,513 31,954 25,124
DynaMark 12,883 11,078 8,975
--------- --------- ---------
Total costs of revenues 56,396 43,032 34,099
Sales and marketing 24,583 22,592 18,302
Research and development 7,811 3,986 3,984
General and administrative 31,199 23,696 17,293
Amortization of intangibles 734 711 806
--------- --------- ---------
Total costs and expenses 120,723 94,017 74,484
--------- --------- ---------
Income from operations 28,026 19,864 15,795
Other income (expense) (826) 1,582 758
--------- --------- ---------
Income before income taxes 27,200 21,446 16,553
Provision for income taxes 11,021 8,751 6,504
--------- --------- ---------
Net income $16,179 $12,695 $10,049
========= ========= =======
Earnings per share $1.27 $1.00 $.81
========= ========= =========
Shares used in computing
earnings per share 12,749,000 12,723,000 12,476,000
========== ========== ==========
See accompanying notes to the consolidated financial statements.
20
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
September 30, 1996 1995
- -------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $8,247 $8,321
Short-term investments 7,487 5,874
Accounts receivable, net of
allowance 1996: $445; 1995: $276 27,675 18,822
Unbilled work in progress 10,276 11,299
Prepaid expenses and other current assets 4,423 2,056
Deferred income taxes 2,759 1,399
Income taxes receivable 610 --
--------- ---------
Total current assets 61,477 47,771
Long-term investments 12,647 10,923
Property and equipment, net 23,219 16,815
Intangibles, net 9,557 4,957
Deferred income taxes 2,239 4,089
Other assets 3,915 3,735
--------- ---------
$113,054 $88,290
========= =========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and other accrued liabilities $7,466 $5,439
Accrued compensation and employee benefits 16,648 12,862
Billings in excess of earned revenues 3,666 5,314
Capitalized leases 378 391
Income taxes payable -- 1,603
--------- ---------
Total current liabilities 28,158 25,609
Other liabilities 4,997 4,623
Capitalized leases 1,552 1,930
Commitments and contingencies -- --
--------- ---------
Total liabilities 34,707 32,162
--------- ---------
Stockholders' equity:
Preferred stock -- --
Common stock 126 123
Paid in capital in excess of par value 21,174 14,508
Retained earnings 57,163 41,975
Less treasury stock (1996: 15,938;
1995: 53,562 shares at cost) (68) (228)
Less pension adjustment -- (406)
Cumulative translation adjustments (145) --
Unrealized gain on investment 97 156
--------- ---------
Total stockholders' equity 78,347 56,128
--------- ---------
$113,054 $88,290
========= =========
See accompanying notes to the consolidated financial statements.
21
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Period from September 30, 1993, to September 30, 1996 (in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock Paid in Unrealized Total
------------ capital in Pension Cumulative gain on stock-
Par excess of Retained Treasury adjust- translation invest- holders'
Shares value par value earnings stock ments adjustments ments equity
------ ----- --------- -------- ----- ----- ----------- ----- ------
Balances at September 30, 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
Issuance of common stock 85 1 3,571 -- -- -- -- -- 3,572
Issuance/vesting of restricted 1 -- 115 -- -- -- -- -- 115
stock
Exercise of stock options 221 2 911 -- -- -- -- -- 913
Tax benefit of stock options -- -- 1,124 -- -- -- -- -- 1,124
Contribution to ESOP 38 -- 945 -- 160 -- -- -- 1,105
Net income -- -- -- 16,179 -- -- -- -- 16,179
Dividends declared -- -- -- (991) -- -- -- -- (991)
Pension adjustment -- -- -- -- -- 406 -- -- 406
Unrealized loss on investments -- -- -- -- -- -- -- (59) (59)
Cumulative translation
adjustments -- -- -- -- -- -- (145) -- (145)
-------- ----- -------- -------- ----- ----- ----- ----- --------
Balances at September 30, 1996 12,581 $ 126 $ 21,174 $ 57,163 $ (68) $-- $(145) $ 97 $ 78,347
======== ===== ======== ======== ===== ===== ===== ===== ========
See accompanying notes to the consolidated financial statements.
22
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Years ended September 30, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 16,179 $ 12,695 $ 10,049
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 7,784 6,153 4,880
Equity loss in investment 821 97 --
Deferred income taxes 294 (1,714) (1,781)
Changes in operating assets and liabilities:
Increase in accounts receivable (7,946) (4,852) (3,213)
Decrease (increase) in unbilled work in progress 1,273 (4,709) 2,105
Decrease (increase) in prepaid expenses and other assets (2,356) (828) 6
Increase in income tax receivable (610) -- --
Increase in other assets (40) (355) (23)
Increase in accounts payable and other accrued liabilities 2,115 532 1,635
Increase in accrued compensation and employee benefits 5,105 4,796 5,164
Increase (decrease) in billings in excess of earned revenues (1,648) 1,287 1,021
Decrease in income taxes payable (479) (141) (331)
Decrease in other liabilities (807) -- --
-------- -------- --------
Net cash provided by operating activities 19,685 12,961 19,512
-------- -------- --------
Cash flows from investing activities
Purchases of property and equipment (13,146) (10,692) (5,272)
Purchase of Printronic and CRMA, net of cash acquired (1,682) -- --
Purchase of DynaMark (1,129) (2,150) (1,813)
Purchases of investments (10,781) (9,240) (15,781)
Proceeds from maturities of investments 5,913 7,104 9,904
Investment write-off 1,535 -- --
-------- -------- --------
Net cash used in investing activities (19,290) (14,978) (12,962)
-------- -------- --------
Cash flows from financing activities
Principal payments of capital lease obligations (391) (422) (532)
Issuance of stock 913 494 560
Dividends paid (991) (668) (828)
Repurchase of company stock -- (56) --
-------- -------- --------
Net cash used in financing activities (469) (652) (800)
-------- -------- --------
Increase (decrease) in cash and cash equivalents (74) (2,669) 5,750
Cash and cash equivalents, beginning of year 8,321 10,990 5,240
-------- -------- --------
Cash and cash equivalents, end of year $ 8,247 $ 8,321 $ 10,990
======== ======== ========
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.
(DynaMark).
Basis of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated from the consolidated financial statements.
Use of estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and cash equivalents
Cash and cash equivalents consist of cash in banks and investments with an
original maturity of 90 days or less at time of purchase.
Investments
The Company adopted Statement of Financial Accounting Standard (SFAS) No.
115, "Accounting for Certain Investments in Debt and Equity Securities,"
effective October 1, 1994. The impact as a result of the adoption of this
Statement was not material.
Investments in U.S. government obligations and marketable equity securities
are classified as available for sale and carried at market value in accordance
with SFAS 115. Investments in 50% or less owned companies in which the Company
has the ability to exercise significant influence are accounted for using the
equity method and are classified as non-marketable securities. Other investments
are carried at the lower of cost or net realizable method and are classified as
non-marketable securities.
Investments with remaining maturity over one year are classified as
long-term investments.
Credit and market risk
The Company invests a portion of its excess cash in U.S. government
obligations and has established guidelines relative to diversification and
maturities that maintain safety and liquidity. An allowance for doubtful
accounts is maintained at a level which management believes is sufficient to
cover potential credit losses. Actual losses and allowances have been within
management's expectations.
Depreciation and amortization
Depreciation and amortization on property and equipment including leasehold
improvements and capitalized leases are provided using the straight-line method
over estimated useful lives ranging from three to eight years or the term of the
respective leases.
24
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 performance milestones that are defined by the individual
contracts. Deposits billed and received in advance of performance under
contracts are recorded as billings in excess of earned revenues.
Revenues from usage-priced products and services are recognized on receipt
of usage reports from the third-parties through which such products and services
are delivered. Revenues under such arrangements are recorded as unbilled work in
progress until collected. Revenue from shrink-wrapped products 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
three-year period ending September 30, 1996, technological feasibility coincided
with the completion process; thus all design and development costs were expensed
as research and development costs.
Purchased software costs are amortized over three years. For the years
ended September 30, 1996, 1995 and 1994, amortization of capitalized software
was $209,000, $544,000 and $587,000, respectively. At September 30, 1996 and
1995, unamortized purchased computer software costs were $1,187,000 and
$395,000, respectively.
Intangibles
The intangible assets consisting of goodwill and non-compete agreements
arose principally from business acquisitions and are amortized on a
straight-line basis over the period of expected benefit that ranges from 2 to 15
years. The Company assesses the recoverability of goodwill by evaluating the
undiscounted projected results of operations over the remaining amortization
period.
Income taxes
Income taxes are recognized during the year in which transactions enter
into the determination of financial statement income, with deferred taxes being
provided for temporary differences between amounts of assets and liabilities for
financial reporting purposes and such amounts as measured by tax laws.
Foreign currency
The Company has determined that the functional currency of each foreign
operation is the local currency. Assets and liabilities denominated in foreign
currencies are translated into U.S. dollars at the exchange rate on the balance
sheet date, while revenues and expenses are translated at average rates of
exchange prevailing during the period. Translation adjustments are accumulated
as a separate component of stockholders' equity.
25
Earnings per share
Earnings per share are based on the weighted number of common shares
outstanding and common stock equivalent shares. Common equivalent shares result
from the assumed exercise of outstanding stock options that have a dilutive
effect when applying the treasury stock method. Fully diluted earnings per share
were approximately equal to primary earnings per share in each of the years in
the three-year period ended September 30, 1996.
Reclassifications
Certain reclassifications were made to the 1994 and 1995 financial
statements to conform to the 1996 presentation.
Accounting pronouncements
In 1995, the Financial Accounting Standards Board issued SFAS Statement No.
121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of."
This Statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes of circumstances indicate that the carrying amount of an asset
may not be recoverable. The Company will adopt SFAS No. 121 in fiscal 1997, and
the impact, if any, is not expected to be material.
In 1995, the Financial Accounting Standards Board issued SFAS Statement No.
123, "Accounting for Stock-Based Compensation." Statement No. 123 allows a
company either to (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.
Fair value of financial instruments
Cash and cash equivalents, accounts receivable, short-term investments,
accounts payable and other accrued liabilities, and accrued compensation and
employee benefits are reflected in the financial statements at fair value
because of the short-term maturity of these instruments. The fair values of the
Company's investment securities are disclosed in Note 5.
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. Acquisitions
In July 1996, the Company purchased certain assets and liabilities of
Printronic Corporation of America, Inc. (Printronic), a privately held direct
mail computer processing company, and effective at the close of September 30,
1996, the Company acquired 100% of the stock of Credit & Risk Management
Associates, Inc. (CRMA), a privately held consulting services company.
The consideration paid for Printronic and CRMA consisted of 84,735 Company
shares valued at $3,572,000 plus $1,697,000 in cash. Both acquisitions have been
accounted for as purchases. The results of operations of Printronic have been
included in the Consolidated Financial Statements since the acquisition date; no
results of operations for CRMA are included in the Consolidated Financial
Statements. The purchase price for each acquisition was allocated based on
estimated fair values at the dates of acquisition. The excess of the purchase
prices over the fair
26
value of net assets or liabilities was $5,547,000 and has been recorded as
goodwill, which will be amortized on a straight-line basis over 7 or 15 years.
The CRMA purchase agreement provides for additional cash payments not to
exceed $5,499,000 based on specified financial performance of CRMA through
September 1999. The Company also expects to pay $100,000 in cash for Printronic
due to purchase price adjustments as defined in the purchase agreement.
Pro forma unaudited consolidated operating results of the Company,
Printronic and CRMA for the years ended September 30, 1996 and 1995, assuming
the acquisitions had been made as of October 1, 1995 and 1994, are summarized
below.
Pro forma summary (unaudited) Years ended September 30,
(dollars in thousands except per share data) 1996 1995
- --------------------------------------------------------------------------------
Revenue $155,327 $119,349
Net income $16,251 $12,367
Earnings per share $1.27 $.97
These pro forma results have been prepared for comparative purposes only
and include certain adjustments such as additional amortization expense as a
result of goodwill and other intangible assets. They do not purport to be
indicative of the results of operations that actually would have resulted had
the combinations been in effect on October 1, 1995 and 1994, or of future
results of operations of the consolidated entities.
4. Cash Flow Statement
Supplemental disclosure of cash flow information:
Years ended September 30,
(dollars in thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
Income tax payments $13,234 $10,640 $8,455
Interest paid $148 $196 $222
Non-cash investing and financing activities:
Purchase of Printronic and CRMA with common stock $3,572 $-- $--
Tax benefit of stock options $1,124 $115 $350
Contributions of treasury stock to ESOP $1,105 $856 $661
Vesting of restricted stock $115 $-- $--
5. Investments
The following is a summary of available-for-sale securities and other
investments at September 30, 1996 and 1995:
1996 1995
---- ----
Gross Gross Gross Gross
Amortized unrealized unrealized Fair Amortized unrealized unrealized Fair
(dollars in thousands) cost gains losses value cost gains losses value
- ------------------------------------------------------------------------------------------------------------------------------
Short-term investments:
U.S. government
obligations $ 7,475 $ 14 $ (2) $ 7,487 $ 5,883 $ 1 $ (10) $ 5,874
========= ======== ======= ======= ======== ======= ====== ========
Long-term investments:
U.S. government
obligations $ 10,520 $ 99 $ (23) $10,596 $ 9,493 $ 199 -- $ 9,692
Non-marketable securities 1,900 -- -- 1,900 1,092 -- -- 1,092
Marketable equity
securities 79 77 (5) 151 68 71 -- 139
--------- -------- ------- ------- -------- ------- ------ --------
$ 12,499 $ 176 $ (28) $12,647 $ 10,653 $ 270 $ -- $ 10,923
========= ======== ======= ======= ======== ======= ====== ========
The long-term U.S. government obligations mature in one to five years.
27
For the years ended September 30, 1996 and 1995, the Company made purchases
of non-marketable security investments of $2,343,000 and $1,092,000,
respectively. In 1996 an investment of $1,535,000 in the non-marketable
preferred stock of an early-stage enterprise was written off due to the
deteriorating financial condition of the entity during the past year. The
Company does not have any further financial commitments with respect to the
investment.
The Company also realized its equity share of losses from another
non-marketable security investment of $821,000 and $97,000 for the years ended
September 30, 1996 and 1995, respectively. The Company has a $466,000 receivable
for operating expenses incurred by the Company on behalf of this investment, and
an $821,000 payable due to this investment for funding operating losses at
September 30, 1996. The Company does not have any further financial commitments
with respect to this investment except for funding future operating losses, if
any.
6. Property and Equipment
Property and equipment at September 30, 1996 and 1995 valued at cost,
consist of the following:
(dollars in thousands) 1996 1995
- -------------------------------------------------------------------------------
Data processing equipment $21,295 $13,295
Office furniture, vehicles and equipment 11,350 7,964
Leasehold improvements 8,062 5,372
Capitalized leases 2,969 3,123
Less accumulated depreciation and amortization (20,457) (12,939)
--------- --------
Net property and equipment $23,219 $16,815
========= ========
Depreciation and amortization charged to operations were $7,050,000,
$4,812,000 and $3,457,000 for the years ended September 30, 1996, 1995 and 1994,
respectively.
Capitalized leases consist primarily of one lease bearing an interest rate
of 7% that matures in the year 2001. The following is a schedule, by years, of
future minimum lease payments under capitalized leases, together with the
present value of the net minimum lease payments at September 30, 1996:
Years ended September 30 (dollars in thousands)
- --------------------------------------------------------------
1997 $506
1998 466
1999 466
2000 466
2001 375
---------
2,279
Less: Amount representing interest (349)
---------
Present value of net minimum lease payments $1,930
=========
7. Intangibles
Intangibles at September 30, 1996 and 1995, consist of the following:
(dollars in thousands) 1996 1995
- ------------------------------------------------------------------------------
Goodwill $10,060 $4,815
Other 2,270 2,181
Less accumulated amortization (2,773) (2,039)
------- -------
$9,557 $4,957
======= =======
Amortization charged to operations was $734,000, $711,000 and $806,000 for
the years ended September 30, 1996, 1995 and 1994, respectively.
28
8. Income Taxes
The provision for income taxes consists of the following:
Years ended September 30,
(dollars in thousands) 1996 1995 1994
- --------------------------------------------------------------------------
Current:
Federal $8,631 $8,107 $6,456
State 1,826 2,167 1,665
Foreign 270 191 164
--------- --------- ---------
10,727 10,465 8,285
--------- --------- ---------
Deferred:
Federal 366 (1,441) (1,415)
State (72) (273) (366)
--------- --------- ---------
294 (1,714) (1,781)
--------- --------- ---------
$11,021 $8,751 $6,504
========= ========= =========
Amounts for the current year are based upon estimates and assumptions as of
the date of this report and could vary significantly from amounts shown on the
tax returns as filed.
The tax effect of significant temporary differences resulting in deferred
tax assets at September 30, 1996 and 1995 are as follows:
(dollars in thousands) 1996 1995
- -----------------------------------------------------------------------------
Deferred tax assets:
Amortization of intangibles and other assets $1,769 $1,037
Officers' incentive 1,447 2,588
State taxes 713 758
Capital loss carryforward 610 --
Compensated absences 606 418
Property and equipment 463 465
Other -- 222
--------- ---------
5,608 5,488
--------- ---------
Less valuation allowance (610) --
--------- ---------
$4,998 $5,488
========= =========
The valuation allowance for deferred tax assets as of September 30, 1996
was $610,000. The valuation allowance was needed to reduce the deferred tax
assets as it is not likely that the capital loss carryforward will be realized
through future capital gains.
A reconciliation between the federal statutory income tax rate and the
Company's effective tax rate is shown below:
Years ended September 30,
(dollars in thousands) 1996 1995 1994
- -----------------------------------------------------------------------------
Income tax provision at federal
statutory rate of 35% in 1996, 1995 and 1994 $9,520 $7,506 $5,794
State income taxes, net of federal benefit 1,140 1,231 844
Increase in valuation allowance 610 -- --
Other (249) 14 (134)
------- ------ ------
$11,021 $8,751 $6,504
======= ====== ======
29
9. Employee Benefit Plans
Pension plan
The Company has a defined benefit pension plan that covers eligible
full-time employees. The benefits are based on years of service and the
employee's compensation during employment. 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, 1996 and
1995:
(dollars in thousands) 1996 1995
- -----------------------------------------------------------------------------
Vested benefit obligation $6,349 $5,067
Nonvested benefit obligation 486 373
Effect of projected future earnings 2,778 2,353
-------- ------
Projected benefit obligation 9,613 7,793
Fair value of plan assets (7,883) (5,155)
-------- ------
Projected benefit obligation in
excess of plan assets 1,730 2,638
Unrecognized prior service cost 77 85
Unrecognized net loss (3,226) (2,759)
Unrecognized net obligation remaining
to be amortized (177) (196)
Additional minimum liability -- 517
-------- ------
(Prepaid) accrued pension cost $(1,596) $285
======== ======
The plan assets consist primarily of U.S. government securities and
marketable equity securities.
The projected benefit obligation includes an accumulated benefit obligation
of $6,835,000 and $5,440,000 at September 30, 1996 and 1995, respectively. The
obligation exceeded the fair value of the pension plan assets for the year ended
September 30, 1995. For the year ended September 30, 1996, the Company reduced
to zero the additional minimum liability of $517,000 (the intangible asset of
$111,000 and pension adjustment of $406,000 in stockholders' equity) that was
recorded in the year ended September 30, 1995.
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 8 percent and 5 percent, respectively, at
September 30, 1996, and 7.5 and 5.5 percent at September 30, 1995. The expected
long-term rate of return on assets was 8.5 and 7.5 percent at September 30, 1996
and 1995, respectively.
The net pension cost for the fiscal years ended September 30, 1996 and
1995, included the following components:
(dollars in thousands) 1996 1995
- ----------------------------------------------------------------------------
Service costs $809 $483
Interest cost on projected benefit obligation 609 500
Actual return on plan assets (362) (510)
Net amortization and deferral 66 266
------ -----
Net periodic pension plan cost $1,122 $739
====== =====
30
Employee stock ownership plan
The Company has an Employee Stock Ownership Plan (ESOP) that covers
eligible full-time employees. Contributions to the ESOP are determined annually
by the Company's board of directors. In addition, the ESOP may purchase stock
from the Company or its stockholders. Provisions for contributions to the ESOP
were $1,445,000, $1,046,000 and $856,000 for the years ended September 30, 1996,
1995 and 1994, respectively.
At September 30, 1996, the ESOP held 1,047,484 shares of Company stock. The
amount of dividends on ESOP shares were $94,000, $64,000 and $85,000 for the
years ended September 30, 1996, 1995 and 1994, respectively.
Company stock held and paid for by the ESOP is allocated annually to
participants based on employee compensation levels. Participants vest in the
allocated shares at rates ranging from 0% to 30% after 1 to 7 years of
employment until fully vested.
Defined contribution plans
The Company offers 401(k) plans for eligible employees. Eligible employees
may contribute up to 15% of compensation. The Company provides a matching
contribution which is vested over five years. The Company contributions to
401(k) plans were $470,000, $363,000 and $291,000 for years ended September 30,
1996, 1995 and 1994, respectively. During fiscal 1995, the Company established a
supplemental retirement and savings plan for certain officers and senior
management employees. Company contributions to that plan were $104,000 and
$91,000 for the years ended September 30, 1996 and 1995, respectively.
Officers' incentive plan
The Company has an executive compensation plan for the benefit of officers.
Benefits are payable based on the achievement of financial and performance
objectives, which are set annually by the Board of Directors, and the market
value of the Company's stock. Total expenses under the plan were $3,560,000,
$4,030,000 and $3,381,000 for the years ended September 30, 1996, 1995 and 1994,
respectively. The incentive earned each year is paid 50% currently, and the
balance is payable over a four-year period, subject to certain adjustments, as
defined in the plan, based on employment status and the market value of the
Company's common stock. At September 30, 1996 and 1995, the long-term officers'
incentive plan payable was $3,678,000 and $4,082,000, respectively.
Employee incentive plans
The Company has incentive plans for eligible employees not covered under
the executive compensation plan. Awards under these plans are paid annually and
are based on the achievement of certain financial and performance objectives.
Total expenses under these plans were $3,919,000, $4,764,000 and $3,738,000 for
the years ended September 30, 1996, 1995 and 1994, respectively.
10. Stock
Common
A total of 35,000,000 shares of common stock, $0.01 par value, are
authorized, of which 12,581,468 shares (including 15,938 shares of treasury
stock) were outstanding at September 30, 1996, and 12,289,862 shares (including
53,562 shares of treasury stock) were outstanding at September 30, 1995.
Preferred
A total of 1,000,000 shares of preferred stock, $0.01 par value, are
authorized; no preferred stock has been issued.
31
11. 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 the date of grant. Total options exercisable were
316,930 and 449,900 at September 30, 1996 and 1995, respectively.
The following is a summary of changes in options outstanding during the
three years in the period ended September 30, 1996:
Number Exercise
of price
shares per share
- ------------------------------------------------------------------------------
Options outstanding
September 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
September 30, 1994 867,400 $1.11-$15.38
Granted 161,850 $19.31-$28.38
Exercised (217,500) $1.11-$8.50
----------
Options outstanding
September 30, 1995 811,750 $1.89-$28.38
Granted 285,500 $27.38-$41.88
Exercised (222,140) $1.89-$8.50
---------
Options outstanding
September 30, 1996 875,110 $2.63-$41.88
==========
12. Commitments and Contingencies
The Company conducts certain of its operations in facilities occupied under
non-cancelable operating leases with lease terms in excess of one year. The
leases provide for annual increases based upon the Consumer Price Index or fixed
increments.
Minimum future rental commitments under operating leases are as follows:
Year ending September 30, (dollars in thousands)
- --------------------------------------------------------------
1997 $4,742
1998 3,809
1999 3,550
2000 3,480
2001 3,102
Thereafter 2,879
-------
$21,562
=======
Rent expense under operating leases, including month-to-month leases, was
$4,608,000, $2,939,000 and $2,155,000 for the years ended September 30, 1996,
1995 and 1994, 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.
32
13. 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 $21,846,000, $14,851,000 and
$12,531,000 for the years ended September 30, 1996, 1995 and 1994, respectively.
14. Significant Customer
For the years ended September 30, 1996, 1995 and 1994, the Company had a
major customer who contributed net revenues of $15,444,000, $10,507,000 and
$8,546,000, respectively. At September 30, 1996 and 1995, unbilled work in
progress included balances due from this customer of $1,097,000 and $895,000,
respectively.
15. Other Income (Expense)
Other income (expense) for the years ended September 30, 1996, 1995 and
1994, consist of the following:
(dollars in thousands) 1996 1995 1994
- ------------------------------------------------------------------------
Interest income $1,661 $1,547 $872
Investment write-off (1,535) -- --
Equity loss in investment (821) (97) --
Interest expense (148) (196) (100)
Foreign currency gain (loss) (97) 261 --
Other 114 67 (14)
------- ------- ------
$ (826) $1,582 $758
======= ======= ======
16. Subsequent Event
On November 4, 1996, the Company sold the assets and certain liabilities of
the personalization business within DynaMark for $510,000. For the years ended
September 30, 1996, 1995 and 1994, the personalization business accounted for
approximately $2,938,000, $3,983,000 and $4,037,000 in revenues, respectively.
33
17. 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, 1996. 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) 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
======== ========= ========= =========
(in thousands except Dec. 31, Mar. 31, June 30, Sept. 30,
per share data) 1995 1996 1996 1996
- --------------------------------------------------------------------------------
Revenues $32,628 $35,275 $37,119 $43,727
Cost of revenues 13,173 13,530 14,281 15,412
-------- --------- --------- ---------
Gross profit $19,455 $21,745 $22,838 $28,315
======== ========= ========= =========
Net income $3,524 $4,373 $4,298 $3,984
======== ========= ========= =========
Earnings per share $.28 $.34 $.34 $.31
======== ========= ========= =========
Shares used in computing
earnings per share 12,761 12,803 12,745 12,718
======== ========= ========= =========
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
34
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 4, 1997.
The required information regarding Executive Officers of the registrant is
contained in Part I of this Form 10-K.
The required information regarding compliance with Section 16(a) of the
Securities Exchange Act is incorporated by reference from the information under
the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's definitive proxy statement for the Annual Meeting of Stockholders to
be held on February 4, 1997.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the information under the captions
"Compensation of Directors and Executive Officers," "Compensation Committee
Interlocks and Insider Participation," and "Director Consulting Arrangement" in
the Company's definitive proxy statement for the Annual Meeting of Stockholders
to be held on February 4, 1997.
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 4, 1997.
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 4, 1997.
35
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 statements of income for each of the years
in the three-year period ended September 30, 1996....................... 20
Consolidated balance sheets at September 30, 1996 and
September 30, 1995...................................................... 21
Consolidated statements of stockholders' equity for each of the
years in the three-year period ended September 30, 1996................. 22
Consolidated statements of cash flows for each of the
years in the three-year period ended September 30, 1996................. 23
Notes to consolidated financial statements................................... 24
2. Financial statement schedule:
Independent auditors' report on financial statement schedule................. 40
II Valuation and qualifying accounts at September 30, 1996 and 1995.... 41
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.
3.2 Restated By-laws of the Company.
4.1 Registration Rights Agreement dated July 19, 1996, among the
Company, Leo Yochim, and Susan Keenan.
4.2 Registration Rights Agreement dated September 30, 1996, among
the Company, Donald J. Sanders, Paul A. Makowski, and Lawrence
E. Dukes.
10.1 Company's Stock Option Plan (1984) and form of Stock Option
Agreement, filed as Exhibit 10.1 to the Registration Statement
and incorporated herein by reference.*
10.2 Company's 1987 Stock Option Plan, filed as Exhibit 10.2 to the
Registration Statement and incorporated herein by reference.*
36
10.3 Lease dated April 28, 1995, between CSM Investors, Inc., and
DynaMark, Inc. filed as Exhibit 10.3 to the Company's report
on Form 10-K for the fiscal year ended September 30, 1995, and
incorporated herein by reference.
10.4 Fair, Isaac and Company, Inc. Officers' Incentive Plan
(effective October 1, 1992), filed as Exhibit 10.4 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1994, and incorporated herein by reference.*
10.5 Lease, dated October 30, 1983, between S.R.P. Limited
Partnership and the Company, as amended, filed as Exhibit 10.7
to the Registration Statement and incorporated herein by
reference.
10.6 Stock Option Plan for Non-Employee Directors, filed as Exhibit
10.8 to the Company's report on Form 10-K for the fiscal year
ended September 30, 1988 and incorporated herein by
reference.*
10.7 Lease dated July 1, 1993, between The Joseph and Eda Pell
Revocable Trust and the Company and the First through Fifth
Addenda thereto filed as Exhibit 10.7 to the Company's report
on Form 10-K for the fiscal year ended September 30, 1995, and
incorporated herein by reference.
10.8 First Amendment to the Company's 1987 Stock Option Plan, filed
as Exhibit 10.11 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1989, and incorporated herein
by reference.*
10.9 First Amendment to the Company's Stock Option Plan for
Non-Employee Directors, filed as Exhibit 10.12 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1989, and incorporated herein by reference.*
10.10 Amendment 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 filed as Exhibit 10.12 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1995, and incorporated herein by reference.
10.13 Lease, dated September 5, 1991, between 111 Partners, a
California general partnership, and the Company filed as
Exhibit 10.20 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1991, and incorporated herein
by reference.
10.14 Construction Loan Agreement dated September 5, 1991, between
111 Partners and the Company filed as Exhibit 10.21 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1991, and incorporated herein by reference.
10.15 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 as amended and restated effective November 21, 1995.*
10.17 Consulting Contracts between the Company and Robert M. Oliver
effective January 1, 1995 and July 1, 1995 filed as Exhibit
10.17 to the Company's report on form 10-K for the fiscal year
ended September 30, 1995, and incorporated herein by
reference.*
10.18 Lease dated May 1, 1995, between Control Data Corporation and
DynaMark, Inc. filed as Exhibit 10.18 to the Company's report
on Form 10-K for the fiscal year ended September 30, 1995, and
incorporated herein by reference.
37
10.19 Lease dated April 10, 1994, between Leed Properties and
DynaMark, Inc., filed as Exhibit 10.19 to the Company's report
on Form 10-K for the fiscal year ended September 30, 1994, and
incorporated herein by reference.
10.20 Fair, Isaac Supplemental Retirement and Savings Plan and Trust
Agreement effective November 1, 1994, filed as Exhibit 10.20
to the Company's report on Form 10-K for the fiscal year ended
September 30, 1994, and incorporated herein by reference.*
10.21 Lease dated July 10, 1993, between the Joseph and Eda Pell
Revocable Trust and the Company filed as Exhibit 10.21 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1995, and incorporated herein by reference.
10.22 Lease dated October 11, 1993, between the Joseph and Eda Pell
Revocable Trust and the Company and the First through Fourth
Addenda thereto filed as Exhibit 10.22 to the Company's report
on Form 10-K for the fiscal year ended September 30, 1995, and
incorporated herein by reference.
10.23 Fourth Contract Extension, dated April 7, 1995, to the
Consulting Contract between the Company and William R. Fair,
filed as Exhibit 10.23 to the Company's report on Form 10-K
for the fiscal year ended September 30, 1995, and incorporated
herein by reference.*
10.24 Exchange Agreement and Plan of Reorganization dated July 19,
1996, among DynaMark, Inc., Printronic Corporation of America,
Inc., Leo R. Yochim, and Susan Keenan.
10.25 Agreement and Plan of Merger and Reorganization dated
September 30, 1996, among the Company, FIC Acquisition
Corporation, Credit & Risk Management Associates, Inc., Donald
J. Sanders, Paul A. Makowski, and Lawrence E. Dukes.
10.26 Contract between the Company and Dr. Robert M. Oliver dated
April 2, 1996.*
10.27 Letter of Intent dated July 15, 1996, between the Company and
Village Properties, and the First Amendment thereto dated July
18, 1996.
10.28 Office Building Lease dated November 14, 1996, between the
Company and Regency Center.
10.29 Sixth and Seventh Addenda to the Lease dated July 1, 1993,
between the Company and the Joseph and Eda Pell Revocable
Trust.
10.30 First and Second Addenda to the Lease dated July 10, 1993,
between the Company and the Joseph and Eda Pell Revocable
Trust.
10.31 Fifth Addendum to the Lease dated October 11, 1993, between
the Company and the Joseph and Eda Pell Revocable Trust.
11.1 Computation of net income per common share.
13.1 Annual Report to Stockholders for the Fiscal Year Ended
September 30, 1996.
21.1 Subsidiaries of the Company.
23.1 Consent of KPMG Peat Marwick LLP (see page 42 of this Form
10-K).
24.1 Power of Attorney (see page 39 of this Form 10-K).
27 Financial Data Schedule.
* Management contract or compensatory plan or arrangement.
38
(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, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
FAIR, ISAAC AND COMPANY, INCORPORATED
DATE: December 26, 1996
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 26, 1996
- ---------------------------------------- (Principal Executive Officer) and Director
Larry E. Rosenberger
PATRICIA COLE Senior Vice President, Chief December 26, 1996
- ---------------------------------------- Financial Officer and Controller
Patricia Cole
A. GEORGE BATTLE Director December 26, 1996
- ----------------------------------------
A. George Battle
BRYANT J. BROOKS Director December 26, 1996
- ----------------------------------------
Bryant J. Brooks
H. ROBERT HELLER Director December 26, 1996
- ----------------------------------------
H. Robert Heller
GUY R. HENSHAW Director December 26, 1996
- ----------------------------------------
Guy R. Henshaw
DAVID S. P. HOPKINS Director December 26, 1996
- ----------------------------------------
David S. P. Hopkins
ROBERT M. OLIVER Director December 26, 1996
- ----------------------------------------
Robert M. Oliver
ROBERT D. SANDERSON Director December 26, 1996
- ----------------------------------------
Robert D. Sanderson
JOHN D. WOLDRICH Director December 26, 1996
- ----------------------------------------
John D. Woldrich
39
Independent Auditors' Report
The Board of Directors
Fair, Isaac and Company, Incorporated:
Under date of October 23, 1996, except as to note 16, which is as of November 4,
1996, we reported on the consolidated balance sheets of Fair, Isaac and Company,
Incorporated and subsidiaries as of September 30, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three-year period ended September 30, 1996, which are
included in the 1996 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 1996 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 23, 1996, except as to note 16,
which is as of November 4, 1996
40
SCHEDULE II
FAIR, ISAAC AND COMPANY, INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
RULE 12-09
SEPTEMBER 30, 1996 AND 1995
Additions
Balance at ----------------------------- Balance at
Beginning Charged End of
Description of Period to Expense Other (1) Write Offs Period
----------- --------- ---------- --------- ---------- ------
September 30, 1996:
Allowance for Doubtful Accounts $276,450 $574,000 $11,000 $(416,450) $445,000
September 30, 1995:
Allowance for Doubtful Accounts $429,000 $-- $-- ($152,550) $276,450
(1) Amount represents the allowance recorded due to the acquisition of Credit &
Risk Management Associates, Inc.
41
Consent of Independent Auditors
The Board of Directors
Fair, Isaac and Company, Incorporated:
We consent to incorporation by reference in the registration statement (No.
33-20349) on Form S-8, the registration statement (No. 33-26659) on Form S-8,
the registration statement (No. 33-63428) on Form S-8, the registration
statement (No. 33-33057) on Form S-8, and the registration statement (No.
333-02121) on Form S-8 of Fair, Isaac and Company, Incorporated and subsidiaries
of our report dated October 23, 1996, except as to note 16, which is as of
November 4, 1996, relating to the consolidated balance sheets of Fair, Isaac and
Company, Incorporated and subsidiaries as of September 30, 1996 and 1995, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the years in the three-year period ended September 30, 1996,
which report appears in the September 30, 1996 annual report on Form 10-K of
Fair, Isaac and Company, Incorporated, and subsidiaries.
KPMG PEAT MARWICK LLP
San Francisco, California
December 26, 1996
42
EXHIBIT INDEX
TO FAIR, ISAAC AND COMPANY, INCORPORATED
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
Exhibit No. Exhibit
- ----------- -------
3.1 Restated Certificate of Incorporation of the Company.
3.2 Restated By-laws of the Company.
4.1 Registration Rights Agreement dated July 19, 1996,
among the Company, Leo Yochim, and Susan Keenan.
4.2 Registration Rights Agreement dated September 30, 1996,
among the Company, Donald J. Sanders, Paul A. Makowski,
and Lawrence E. Dukes.
10.16 Fair, Isaac and Company, Incorporated 1992 Long-term
Incentive Plan as amended and restated effective
November 21, 1995.
10.24 Exchange Agreement and Plan of Reorganization dated
July 19, 1996, among DynaMark, Inc., Printronic
Corporation of America, Inc., Leo R. Yochim, and
Susan Keenan.
10.25 Agreement and Plan of Merger and Reorganization dated
September 30, 1996, among the Company, FIC Acquisition
Corporation, Credit & Risk Management Associates, Inc.,
Donald J. Sanders, Paul A. Makowski, and Lawrence E. Dukes.
10.26 Contract between the Company and Dr. Robert M. Oliver
dated April 2, 1996.
10.27 Letter of Intent dated July 15, 1996, between the Company
and Village Properties, and the First Amendment thereto
dated July 18, 1996.
10.28 Office Building Lease dated November 14, 1996, between
the Company and Regency Center.
10.29 Sixth and Seventh Addenda to the Lease dated July 1, 1993,
between the Company and the Joseph and Eda Pell
Revocable Trust.
10.30 First and Second Addenda to the Lease dated July 10, 1993,
between the Company and the Joseph and Eda Pell
Revocable Trust.
10.31 Fifth Addendum to the Lease dated October 11, 1993,
between the Company and the Joseph and Eda Pell
Revocable Trust.
11.1 Computation of net income per common share.
13.1 Annual Report to Stockholders for the Fiscal Year
Ended September 30, 1996.
21.1 Subsidiaries of the Company.
27 Financial Data Schedule.
43