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, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________ to ______________
Commission File Number
0-16439
FAIR, ISAAC AND COMPANY, INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 94-1499887
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Smith Ranch Road, San Rafael, California 94903
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 472-2211
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value per share New York Stock Exchange, Inc.
(Title of Class) (Name of each exchange
on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No .
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of December 3, 1999, the aggregate market value of the Registrant's
common stock held by nonaffiliates of the Registrant was $428,893,638 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 3, 1999 was
14,065,557 (excluding 282,174 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 1, 2000.
TABLE OF CONTENTS
Page
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PART I
ITEM 1. Business.............................................................. 3
ITEM 2. Properties............................................................13
ITEM 3. Legal Proceedings.....................................................13
ITEM 4. Submission of Matters to a Vote of Security Holders...................13
EXECUTIVE OFFICERS OF THE REGISTRANT..........................................14
PART II
ITEM 5. Market for Registrant's Common Equity and
Related Stockholder Matters......................................15
ITEM 6. Selected Financial Data..........................................16
ITEM 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................17
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.......26
ITEM 8. Financial Statements and Supplementary Data......................27
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..............................47
PART III
ITEM 10. Directors and Executive Officers of the Registrant...............48
ITEM 11. Executive Compensation...........................................48
ITEM 12. Security Ownership of Certain Beneficial
Owners and Management............................................48
ITEM 13. Certain Relationships and Related Transactions ..................48
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K..............................................49
SIGNATURES .................................................................54
Supplemental Information......................................................56
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PART I
ITEM 1. BUSINESS
Development Of The Business
Fair, Isaac and Company, Incorporated (NYSE: FIC) ("Fair, Isaac" or the
"Company") is a leading developer of data management systems and services for
the financial services, retail, telecommunications, healthcare, personal lines
insurance and other industries. The Company employs various tools, such as
database enhancement software, predictive modeling, adaptive control and systems
automation to help businesses worldwide use data to make faster, more profitable
decisions on their marketing, customers, operations and portfolios. Fair, Isaac
(www.fairisaac.com) is headquartered in San Rafael, California.
Established in 1956, Fair, Isaac pioneered the credit risk scoring
technologies now employed by most major U.S. consumer credit grantors. Its
rule-based decision management systems, originally developed to screen consumer
credit applicants, are now routinely employed in all phases of the credit
account cycle: direct mail solicitation (credit cards, lines of credit, etc.),
application processing, card reissuance, on-line credit authorization, and
collection. Although direct comparisons are difficult, management believes Fair,
Isaac ranks first or second in sales of every type of credit management product
or service it markets, and that its total sales to the consumer credit market
exceed those for similar products by any direct competitor. Approximately 48% of
the Company's revenues in fiscal 1999 were derived from usage-priced products
and services marketed through alliances with major credit bureaus and
third-party credit card processors. Sales of decision management products and
services directly to credit industry end-users accounted for approximately 23%
of revenues.
In more recent years Fair, Isaac has expanded its product and service
offerings, applying its proven risk/reward modeling capabilities to automobile
and home insurance underwriting, small business and mortgage lending,
telecommunications, retail, healthcare, and eBusiness. With the acquisition of
DynaMark in 1992, the Company made its first foray into marketing data
processing and database management, combining DynaMark's strengths in
warehousing and manipulating complex consumer databases with Fair, Isaac's
expertise in predictive modeling and decision systems. DynaMark contributed
$65.3 million or 24% of Fair, Isaac's fiscal 1999 revenues. On October 1, 1999,
DynaMark was merged into Fair, Isaac.
The Company's Insurance business unit generated revenues in fiscal 1999 of
$9.4 million or 3% of revenues. In fiscal l997, the Company recorded its first
revenues from its new Healthcare business unit, and in fiscal 1998, derived
revenues from providing analytical marketing services to a large pharmaceuticals
manufacturer to help improve customer relationships and management of
prescription compliance (i.e., a patient's fulfillment of prescriptions and
taking them to completion). Following the end of fiscal 1999, the Company
announced its intent to exit the receivables management segment of its
Healthcare business to focus on other opportunities.
In July 1997 the Company acquired Risk Management Technologies (RMT), a
provider of enterprise-wide risk management and performance measurement
solutions to major financial institutions around the world. RMT's revenues in
fiscal l999 were $2.7 million, or 1% of the Company's revenues.
Fair, Isaac numbers, among its regular customers, hundreds of the world's
leading credit card and travel card issuers, retail establishments and consumer
lenders. It has enjoyed continuous client relationships with some of these
companies for nearly 30 years. Through alliances with all three major U.S.
credit bureaus, the Company also serves a large and growing number of
middle-market credit grantors, primarily by providing direct mail solicitation
screening, application scoring and account management services on a usage-fee
basis. In addition, some of the Company's 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.
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Approximately 15% of Fair, Isaac's fiscal 1999 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 Brazil, Great
Britain, France, Germany, Italy, Japan, Mexico, South Africa and Spain, the
Company is well positioned to benefit from the expected growth in global credit
card issuance and usage into the next century.
Since 1994, Fair, Isaac's revenues and diluted earnings per share have
increased at a compound rate of 25% and 21%, respectively. The Company
attributes this growth to rising market demand for credit scoring and account
management services; success in increasing its share of the market; and a
gradual shift in marketing and pricing strategy, from primary reliance on
direct, end-user sales of customized analytical and software products to ongoing
usage revenues from services provided through credit bureaus and bankcard
processing agencies.
During the period since 1990, while the rate of account growth in the U.S.
bankcard industry has been slowing and many of the Company's largest
institutional clients have merged and consolidated, the Company has generated
above-average growth in revenues--even after adjusting for the effect of
acquisitions--from its bankcard-related scoring and account management
businesses by deepening its penetration of large banks and other credit issuers.
The Company believes much of its future growth prospects will rest on its
ability to: (1) develop new, high-value added products, (2) increase its
penetration of established or emerging credit markets outside the U.S. and
Canada and (3) expand--either directly or through further acquisitions--into
relatively undeveloped or underdeveloped markets for its products and services,
such as direct marketing, insurance, small business lending, healthcare, retail,
telecommunications and eBusiness.
In fiscal 1999, the Company was organized into business units that
corresponded to its principal markets: consumer credit, insurance, direct
marketing (DynaMark), enterprise-wide financial risk management (RMT) and
healthcare. In October 1999 the Company formally adopted new organizational
structure and business models to focus on growth opportunities in the retail and
telecommunications markets and to implement its new strategic objective of
becoming an "analytic application service provider."
Late in calendar 1999, the Company declared its intent to become a
Web-based "analytic application service provider" or "ASP." The Company already
delivers certain of its capabilities through secure Web sites and it will try to
adopt this delivery mode whenever possible in the future. Although not
Web-based, certain other services-such as credit scores delivered through credit
reporting agencies and account management services delivered through credit card
processors-fall within the broader definition of an ASP. The Company is actively
looking for more opportunities to deliver its capabilities in service bureau
mode rather than as discrete component deliverables.
Products and Services
The Company's principal products are statistically derived, rule-based
analytic tools designed to help businesses make more profitable 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 provides data processing and database management
services to businesses engaged in direct marketing. The Company's RMT subsidiary
provides management tools to larger, more sophisticated financial institutions
for enterprise-wide, integrated financial risk and profitability management.
Products and services sold to the consumer credit industry have
traditionally accounted for most of the Company's revenues. However, the Company
is actively promoting its products and services to other segments of the credit
industry, including mortgage and small business lending; and to non-credit
industries, particularly personal lines insurance, direct marketing,
telecommunications, retail and healthcare. Consumer credit accounted for over
71% of the Company's revenues in each of the three years in the period ended
September 30, 1999. Sales to customers in the direct marketing business,
including the marketing arms of financial service businesses, accounted for 15%
to 24% of revenues in each of the three years in the period ended September 30,
1999. Revenues from sales to the insurance industry accounted for 3% to 4% of
revenues in each of the three years in the period ended September 30, 1999. In
fiscal 1997 the Company recorded the first revenues from its new Healthcare
business unit, and during fiscal 1998 derived revenues from providing analytical
marketing services to a large pharmaceuticals manufacturer to help improve
customer relationships and management of prescription compliance (i.e., a
patient's fulfillment of prescriptions and taking them to completion) and
introduced its healthcare receivables management
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system product. In October 1999 the Company announced its intent to exit the
healthcare receivables management business.
Analytic Products
The Company's primary analytic products are scoring algorithms (also called
"models" or "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" models or scorecards) or for many users in a particular industry
("pooled data" or "broad-based" models or 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 10
to 12 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 model
"scores" an applicant by totaling the numbers associated with the answers
provided about the applicant. 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, and on what terms. A significant
proportion of revenues from Credit Application Scoring Algorithms is derived
from sales of new or replacement algorithms to existing users.
Behavior Scoring Algorithms. The Company pioneered Behavior Scoring
Algorithms with a research program in 1969. The first commercially successful
products were introduced in 1978. In contrast to Credit Application Scoring
Algorithms which deal with credit applicants, Behavior Scoring Algorithms permit
management to define rules for the treatment of existing 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
organization. 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. For example, if an account is
delinquent, the actions available to a 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.
To use a credit card example, 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. The algorithms calculate scores based solely on the information in
consumer credit bureau 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 through
credit bureaus combines a license to use such algorithms for prescreening
solicitation candidates along with tracking and consulting services provided by
the Company, and is priced on a time or usage basis.
ScoreNet(R) Service. 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
5
by each subscriber and delivers it to the subscriber in a format compatible with
the subscriber's account management system.
Insurance Scoring Algorithms. The Company has also delivered scoring
systems for insurance underwriters and marketers. Such systems use the same
underlying statistical technology as credit scoring systems, but are designed to
predict claim frequency or profitability of applicants for personal insurance
such as automobile or homeowners' coverage. During fiscal 1993, the Company
introduced a Property Loss Score ("PLS") service in conjunction with Equifax,
Inc., a leading provider of data to insurance underwriters. In 1994, the Company
introduced a similar service in conjunction with Trans Union Corporation called
"ASSIST" which is designed to predict automobile insurance risk. In 1995, with
Equifax Inc., the Company introduced a risk prediction score for automobile
insurance called Casualty Loss Score ("CLS") service. Equifax subsequently spun
off its Insurance unit, which is now Choicepoint. In 1996, with Acxiom, the
Company introduced a risk prediction score for homeowners' and automobile
insurance called InfoScore and during fiscal 1999, the Company introduced a
similar score with Experian named the Experian/Fair, Isaac score. PLS, ASSIST,
CLS, InfoScore and the Experian/Fair, Isaac scoring services are similar to the
credit bureau scoring services in that a purchaser of data from ChoicePoint,
Trans Union, Acxiom and Experian can use the scores to evaluate the risk posed
by applicants for homeowners' or automobile insurance. The Company and
ChoicePoint, Trans Union, Acxiom and Experian, as the case may be, share the
usage revenue produced by these services. Aspects of automated application
processing systems and Adaptive Control Systems are also applicable to insurance
underwriting decisions. The Company is actively marketing its products and
services to the insurance industry.
Other Scoring Algorithms. The Company has developed scoring algorithms for
other users, which include public utilities that require deposits from selected
applicants before starting service, tax authorities that select returns to be
audited, and mortgage lenders. The Company has also developed scoring algorithms
for use in selecting life insurance salesmen, finance company managers, and
prisoners suitable for early release, although to date these algorithms have not
generated significant revenues.
Automated Strategic Application Processing Systems (ASAP)
The Company's Automated Strategic Application Processing systems (ASAP)
automate the processing of credit applications, including the implementation of
the Company's Credit Application Scoring Algorithms. The Company offers
Mid-Range ASAPs which are stand-alone assemblies of hardware and software;
Mainframe ASAP, SEARCH, StrategyWare(R) and ScoreWare consisting of software for
IBM and IBM-compatible mainframe computers; CreditDesk which consists of
software for personal computers; and CreditCenter(TM) which is a new product for
application processing that integrates components from Mainframe ASAP,
StrategyWare and SEARCH with a web enabled user interface. The Company does not
expect significant sales of new Mid-Range ASAP systems but still derives
maintenance and enhancement revenues from existing systems.
The tasks performed by these systems may include: (i) checking for the
completeness of the data initially given and printing an inquiry letter in the
case of insufficient information; (ii) checking whether an applicant is a known
perpetrator of fraud; (iii) electronically requesting, receiving, and
interpreting a credit report when it is economic to do so; (iv) assigning a
credit limit to the account, if acceptable, and printing a denial letter if not;
and (v) forwarding the data necessary to originate billing records for accepted
applicants.
Mid-Range ASAP is a minicomputer-based system which carries out the tasks
listed above in a manner extensively "tailored" to each user's unique
requirements. Mainframe ASAP is a software-only package designed to be executed
on IBM or IBM-compatible mainframe computers. It is most useful for very large
volume credit grantors who elect to enter application information from a number
of separate locations. CreditDesk is designed for use on stand-alone or
networked personal computers. Although its software functions are not tailored
as extensively as the other versions of ASAP, CreditDesk features an easy-to-use
graphics interface. The Company also sells software components for IBM or
IBM-compatible mainframe computers under the tradenames "SEARCH" and
"ScoreWare." SEARCH acquires and interprets credit bureau reports as a separate
package. ScoreWare provides for easy installation of credit application
scorecards and computes scores from such scorecards as part of the application
processing sequence. StrategyWare combines the application processing features
described above with the "Champion/Challenger" strategy concept described below
under "Adaptive Control Systems".
The Company's Mid-Range and Mainframe ASAP systems are currently being used
in the United States, Canada, and Europe by banks, retailers, and other
financial institutions. CreditDesk is being used by over 600 credit
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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
Adaptive Control Systems for use by an electric utility and a telecommunications
company in the management of its customer accounts.
A principal feature of an Adaptive Control System is software for testing
and evaluation of alternative management strategies, designated the "Champion
and Challenger Strategy Software." The "Champion" strategy applied to any aspect
of controlling a portfolio of accounts (such as determining collection messages
or setting credit limits) is that set of rules considered by management to be
the most effective at the time. A "Challenger" strategy is a different set of
rules which is considered a viable candidate to outperform the Champion. The
Company's Champion and Challenger Strategy software is tailored to the
customer's billing system and is designed to permit the operation of both
strategies at the same time and also to permit varying fractions of the accounts
to go to each of the competing strategies. For example, if a Challenger is very
different from the Champion, management may wish to test it on a very small
fraction of the accounts, rather than to risk a large loss. Alternatively, if a
Challenger appears to be outperforming a Champion, management can direct more
and more of the account flow to it. There need not, in fact, be a limitation on
the number of Challengers in place at any one time beyond the limits imposed by
the ability of the Company and the user management to study the results.
A Champion/Challenger structure is based on one or more of the Company's
component products, usually Behavior Scoring Algorithms, as well as
Company-developed software that permits convenient allocation of accounts to
strategies and convenient modification of the strategies themselves. Adaptive
Control Systems can also consider information external to the particular
creditor, particularly scores and other information obtained from credit
bureaus, in the design of strategies. A specific goal of the Company's Adaptive
Control System product is to make the account management functions of the user
as independent as possible of the user's overall data processing systems
development department.
For a Champion/Challenger structure to function effectively, new Challenger
strategies must be developed continually as insight is gained, as external
conditions change, and as management goals are modified. The Company often
participates in the design and development of new Challenger strategies and in
the evaluation of the results of Champion/Challenger competitions as they
develop.
Contracts for Adaptive Control Systems for end-users generally include
multi-year software maintenance, strategy design and evaluation, and consulting
components. The Company also provides Adaptive Control services through First
Data Resources, Inc. and Total System Services, Inc., the two largest
third-party credit card processors in the United States. The Adaptive Control
service is also available in the United Kingdom through First Data Resources,
Ltd. and Bank of Scotland; in Buenos Aires, through Argencard S.A.; and in
Frankfurt, through B+S Card Service Gmbh. Credit card issuers subscribing to
these services pay monthly fees based on the number of accounts processed. The
Company's StrategyWare(R) product 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 believes that
Adaptive Control Systems also can operate in areas other than consumer credit;
and, as noted above, has provided an Adaptive Control System to an electric
utility company and a telecommunications 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.
Risk Management Technologies
Risk Management Technologies (RMT) provides management tools to larger,
more sophisticated financial institutions around the world for enterprise-wide,
integrated financial risk and profitability management. Financial institutions
must constantly evaluate the effect of interest rate changes and other factors
on their entire operation including their loan, credit card and investment
portfolios, to determine bottom line exposure and potential revenues. RMT's
financial decision support software, the RADAR System, is a comprehensive
enterprise management system that performs asset-liability management, transfer
pricing, and performance measurement modeling. RMT's Genesis product is a
graphical data integration management tool used to integrate data rapidly from
multiple legacy systems and other sources into a consolidated, client/server
data warehouse. Within this warehouse, data remain readily available for use in
multiple decision-support applications.
Healthcare
The Company is currently providing analytical marketing services to a large
pharmaceuticals manufacturer to help improve customer relationship and
"compliance" management using a variety of techniques including internet
communications. "Compliance" in this instance refers to whether prescriptions
are actually filled and taken to completion. The Company also introduced a
healthcare receivables management system for hospitals and other healthcare
providers, and signed its first revenue-generating contract for this product in
October 1998. Following the end of fiscal 1999 the Company announced its intent
to exit the healthcare receivables management business.
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
follow-up with purchasers of the Company's products and services; (iv)
conducting seminars held several times a year in various parts of the United
States and, less often, in other countries; (v) conducting annual conferences
for clients in which user experience is exchanged and new products are
introduced; (vi) delivery of special studies which are related to the use of the
Company's products and services; and (vii) consulting and training services
provided by the Company's subsidiary, Credit & Risk Management Associates, Inc.
("CRMA"). CRMA was merged into the Company on October 1, 1999.
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.
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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 43 years, as
indicated by the development and continual enhancement of its proprietary suite
of algorithms and computer programs used to develop scoring algorithms.
The Company's products must also interface successfully with systems
already in place. For example, they must accept data in various forms and in
various media such as handwritten applications, video display terminal input,
and telecommunications messages from credit bureaus. They must also provide
output in diverse forms and media, such as video displays, printed reports,
transactions on magnetic tape and printed letters. The Company's response to
this interface requirement has been to develop a staff which is expert in both
logical design of information systems and the various computer languages used
for coding.
Markets and Customers
The Company's products for use in the area of consumer credit are marketed
to banks, retailers, finance companies, oil companies, credit unions and credit
card companies. The Company has over 600 users of products sold directly by the
Company to end-users. These include about 75 of the 100 largest banks in the
United States; several of the largest banks in Canada; approximately 40 banks in
the United Kingdom; more than 70 retailers; 7 oil companies; major travel and
entertainment card companies; and more than 40 finance companies. Custom
algorithms and systems have generally been sold to larger credit grantors. The
scoring, application processing and adaptive control services offered through
credit bureaus and third-party processors are intended, in part, to extend usage
of the Company's technology to smaller credit issuers and the Company believes
that users of its products and services distributed through third-parties number
in the thousands. As noted above, the Company also sells its products to
utilities, tax authorities, and telecommunications and insurance companies.
The Company 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 the DynaMark unit's revenues
come from direct sales to the end user of its services, but in some cases the
DynaMark unit acted as a subcontractor to advertising agencies or others
managing a particular project for the end user. RMT markets to large financial
institutions throughout the world. Its clients are typically large financial
institutions with a wide range of products, investments and operational units
and a sophisticated balance sheet.
No single end user customer accounted for more than 10% of the Company's
revenues in fiscal 1999. Revenues generated through the Company's alliances with
the three major credit bureaus in the United States, Equifax,
9
Experian Information Solutions, Inc. (formerly known as TRW Information Systems
& Services) and Trans Union, each accounted for approximately eight to ten
percent of the Company's total revenues in fiscal 1999.
The percentage of revenues derived from customers outside the United States
was approximately 15% in fiscal 1999 and approximately 17% in each of fiscal
1998 and 1997. RMT derives less than half of its revenues from clients outside
the United States. DynaMark had virtually no non-U.S. revenues prior to fiscal
1997. The United Kingdom and Canada are the largest international market
segments. Mexico, South Africa, a number of countries in South America and
almost all of the Western European countries are represented in the user base.
The Company has delivered products to users in approximately 60 countries. The
information set forth under the caption "Segment Information" in Note 12 to the
Consolidated Financial Statements is incorporated herein by reference. The
Company's foreign offices are primarily sales and customer service offices
acting as agents on behalf of the U.S. production operations. Net identifiable
assets, capital expenditures and depreciation associated with foreign offices
are not material.
The Company has enjoyed good relations with the majority of its customers
over extended periods of time, and a substantial portion of its revenue is
derived from repeat customers. As noted above, the Company is actively pursuing
new users, particularly in the marketing, insurance, telecommunications, retail
and healthcare fields as well as those potential users in the consumer credit
area not yet using the Company's products.
Contracts and Backlog
The Company's practice is to enter into contracts with several different
kinds of payment terms. Scoring algorithms have historically been sold through
one-time, fixed-price contracts. The Company will continue to sell scoring
algorithms on this basis but has also entered into longer term contractual
arrangements with some of its largest customers for the delivery of multiple
algorithms. PC-ASAP ("CreditDesk") customers have the option to enter into
contracts that provide for a one-time license fee or volume-sensitive monthly
lease payments. The one-time and usage-based contracts contain a provision
requiring monthly maintenance payments. Mainframe ASAP contracts include a
one-time fee for the basic software license, plus monthly fees for maintenance
and enhancement services. The Company also realizes maintenance and enhancement
revenues from users of its line of Mid-Range ASAP systems. PreScore contracts
call for usage or periodic license fees and there is generally a minimum charge.
Contracts for the delivery of complete Adaptive Control Systems typically
contain both fixed and variable elements in recognition of the fact that they
extend over multiple years and must be negotiated in the face of substantial
uncertainties. As noted above, the Company is also providing scoring algorithms
and application processing on a service basis through credit bureaus, and credit
account management services through third-party bankcard processors. Subscribers
pay for these services and for the ScoreNet service based on usage. DynaMark,
RMT and the Company's Healthcare unit employ a combination of fixed fee and
volume-or usage-based pricing for their services.
As of September 30, 1999, the Company's backlog, which includes only firm
contracts, was approximately $55.9 million, as compared with approximately $68.5
million as of September 30, 1998. This indicates that revenue in fiscal 2000 and
later years may depend to a large extent on sales of newly developed products.
Most usage-based revenues do not appear as part of the backlog. The Company
believes that approximately 25 percent of the September 30, 1999 backlog will be
delivered after the end of the current fiscal year ending September 30, 2000.
Most DynaMark contracts include unit or usage charges, the total amount of which
cannot be determined until the work is completed. DynaMark's and CRMA's backlog
are not significant in amount, are not considered a significant indicator of
future revenues, and are not included in the foregoing figures. RMT's backlog is
included in the foregoing backlog figures.
Competition
The Company believes that its typical product development cycle, which in
the past has extended as long as ten years, has tended to moderate the Company's
growth rate. It also believes, however, that this long product development lead
time provides a barrier to entry of competitive products. As credit scoring,
automated application processing, and behavioral scoring algorithms, all of
which were pioneered by the Company, have become standard tools for credit
providers, competition has emerged from five sectors: scoring algorithm
builders, providers of automated application processing services, data vendors,
neural network developers and artificial intelligence system builders. It is
likely that a number of new entrants will be attracted to the market, including
both large and small companies. Many of the Company's present and potential
competitors have substantially greater financial, managerial, marketing, and
technological resources than the Company. The Company believes that none of its
10
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 Experian, formerly
known as, C.C.N. Systems Limited ("CCN") of Nottingham, England, a subsidiary of
Great Universal Stores plc, a large British retailer. Scores sold by credit
bureaus in conjunction with credit reports, including scores computed by
algorithms developed by the Company, provide potential customers with the
alternative of purchasing scores on a usage-priced basis.
The Company believes that the principal factors affecting competition in
the market for automated application processing systems (such as ASAP) are the
same as those affecting scoring algorithms, together with experience in
developing computer software products. Competitors in this area include outside
computer service providers and in-house computer systems departments. The
Company believes that its primary competitor in this area is American Management
Systems, Incorporated ("AMS"). AMS also offers credit scoring algorithms.
The Company competes with data vendors in the market for its credit bureau
scoring services including PreScore and ScoreNet. In the past several years,
data vendors have expanded their services to include evaluation of the raw data
they provide. All of the major credit bureaus offer competing prescreening and
credit bureau scoring services developed, in some cases, in conjunction with the
Company's primary scoring algorithm competitor, Experian.
Both AMS and Experian offer products intended to perform some of the same
functions as the Company's Adaptive Control Systems. The Company believes that
customers using its Adaptive Control Systems, in both custom end-user form and
through third-party processors, significantly outnumber users of the competing
AMS and Experian products.
Another source of emerging competition comes from companies developing
artificial intelligence systems including those known as "expert systems" and
"neural networks." An expert system is computer software that replicates the
decision-making process of the best available human "experts" in solving a
particular class of problem, such as credit approval, charge card authorization,
or insurance underwriting. Scoring technology differs from expert systems in
that scoring technology is based upon a large database of results, from which
rules and algorithms are developed, as compared to expert systems, which are
typically based primarily on the "expert's" judgment and less so upon a
significant database. The Company believes its technology is superior to expert
system technology where sufficient performance data are available. Neural
networks, on the other hand, are an alternative method of developing scoring
algorithms from a database but using mathematical techniques quite different
from those used by the Company. For example, HNC Software, Inc. has developed
systems using neural network technology which compete with some of the Company's
products and services. The Company believes that analytical skill and knowledge
of the business environment in which an algorithm will be used are generally
more important than the choice of techniques used to develop the algorithm; and,
further, that the Company has an advantage in these areas with respect to its
primary markets as compared with neural network developers.
There are a large number of companies providing data processing and
database management services in competition with DynaMark, some of which are
considerably larger than DynaMark. The Company believes the market for such
services will continue to expand rapidly for the foreseeable future. Competition
in this area is based on price, service, and, in some cases, the ability of the
processor to perform specialized tasks. DynaMark has concentrated on providing
specialized types of data processing and database management services using
proprietary tools which, it believes, give it an edge over its competition in
these areas.
RMT is a provider of enterprise-wide risk management and
performance-measurement solutions to major financial institutions. There are a
number of companies offering enterprise-wide "solutions", or serving
sub-segments of this market (such as trading operations of financial
institutions), in competition with RMT.
11
Product Protection
The Company relies upon the laws protecting trade secrets and upon
contractual non-disclosure safeguards, including its employee non-disclosure
agreements and restrictions on transferability that are incorporated into its
customer agreements, to protect its software and proprietary interests in its
product methodology and know-how. The Company currently has one patent
application pending but does not otherwise have patent protection for any of its
programs or algorithms, nor does it believe that the law of copyrights affords
any significant protection for its proprietary software. The Company instead
relies principally upon such factors as the knowledge, ability, and experience
of its personnel, new products, frequent product enhancements, and name
recognition for its success and growth. The Company retains title to and
protects the suite of algorithms and software used to develop scoring algorithms
as a trade secret and has never distributed its source code.
In spite of these precautions, it may be possible for competitors or users
to copy or reproduce aspects of the Company's software or to obtain information
that the Company regards as trade secrets. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to the same extent as
do the laws of the United States. Due to recent changes in the case law and
Patent and Trademark Office Guidelines with respect to the patentability of
software, algorithms and "methods of doing business," the Company is currently
reevaluating the possibility of obtaining patent protection for certain aspects
of its technology.
Research and Development
Technological innovation and excellence have been goals of the Company
since its founding. The Company devotes, and intends to continue to devote,
significant funds to research and development to develop both new products and
enhancements to its existing products. In addition, the Company has ongoing
projects for improving its fundamental knowledge in the area of algorithm
design, its capabilities to produce algorithms efficiently, and its ability to
specify and code algorithm executing software. The information set forth in the
line entitled "Research and development" in the Consolidated Statement of Income
and the information set forth under the caption "Software costs" in Note 1 to
the Consolidated Financial Statements is incorporated herein by reference.
In addition to the projects formally designated as Research and
Development, many of the Company's activities contain a component that produces
new knowledge. For example, an Adaptive Control System, by its nature and
purpose, must be designed to match its environment and learn as it operates. In
the areas in which the Company's products are useful, the "laboratory" is
necessarily the site of the user's operations.
Personnel
As of September 30, 1999, the Company employed approximately 1,585 persons.
None of its employees is covered by a collective bargaining agreement and no
work stoppages have been experienced.
12
ITEM 2. PROPERTIES
The Company's principal office is located in San Rafael, California,
approximately 15 miles north of San Francisco. The Company leases approximately
270,000 square feet of office space in four buildings at that location under
leases expiring in 2001 or later. It also leases approximately 3,894 square feet
of warehouse space in San Rafael for its hardware operations and for storage
under month-to-month leases and 2,382 square feet for a telecommute center in
Petaluma, California. In May 1998 the Company entered into a synthetic lease
agreement for an office complex with approximately 406,000 square feet in San
Rafael, California with an expected initial occupancy date in the year 2001.
DynaMark leases approximately 167,000 square feet of office and data processing
space in four buildings in Arden Hills, Minnesota under leases which expire in
2012. DynaMark also leases approximately 25,000 square feet of office and data
processing space in New York City under a lease expiring in 2004 and
approximately 14,800 square feet for offices in Brookings and Madison, South
Dakota. RMT leases approximately 14,740 square feet of office space in Berkeley,
California. The Company also leases a total of approximately 81,550 square feet
of office space for offices in Baltimore, Maryland; Chicago, Illinois; New
Castle, Delaware; Atlanta, Georgia; Toronto, Ontario; Birmingham, England;
Tokyo, Japan; Paris, France; Mexico City, Mexico; Sao Paulo, Brazil; Milan,
Italy; Johannesburg, South Africa; and Madrid, Spain. See Notes 5 and 11 in the
Consolidated Financial Statements for information regarding the Company's
obligations under leases. The Company believes that suitable additional space
will be available to accommodate future needs.
ITEM 3. LEGAL PROCEEDINGS
No material legal proceedings are pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
13
EXECUTIVE OFFICERS OF THE REGISTRANT
Name Positions Held Age
---- -------------- ---
Thomas G. Grudnowski President and Chief Executive Officer 49
since joining the Company in
December 1999. Became a Director of
the Company in December 1999. Partner
at Andersen Consulting from 1983-1999.
Joined Andersen Consulting in 1972.
Larry E. Rosenberger Executive Vice President since December 53
1999. President and Chief Executive Officer
from March, 1991 to December 1999,
Executive Vice President 1985-1991,
Senior Vice President 1983-1985, Vice
President 1977-1983. A Director from
1983-1999. Joined the Company in 1974.
John D. Woldrich Executive Vice President since 1985, 56
Senior Vice President 1983-1985, Vice
President 1977-1983. Chief Operating Officer
August 1995 to November 1999. A Director
` since 1983. Joined the Company in 1972.
Henk J. Evenhius Executive Vice President and Chief 56
Financial Officer since joining
the Company in October 1999. Executive
Vice President and Chief Financial Officer of
Lam Research Corporation 1987-1998.
Patrick G. Culhane Executive Vice President since August 45
1995; Senior Vice President 1992-
1995; Vice President 1990-1992;
joined the Company in 1985.
H. Robert Heller Executive Vice President since September 59
1996 and a Director since February 1994.
President of International Payments Institute
from December 1994 to September 1996;
President and Chief Executive Officer of
Visa U.S.A., Inc. 1991-1993,
Executive Vice President of Visa
International 1989-1991.
Sue Simon Executive Vice President since December 1999; 43
Senior Vice President since January 1999;
Vice President 1997-1999. Joined the
Company in 1996. Partner of The Spectrum
Group from 1993-1996.
Kenneth M. Rapp Executive Vice President since October 1999; 53
Senior Vice President since August 1994,
and President and Chief Operating Officer
of DynaMark, Inc. (acquired by the
Company as of December 1992) since
it was founded in 1985.
Peter L. McCorkell Executive Vice President since December 1999; 53
Senior Vice President since August 1995;
Vice President, Secretary and General
Counsel since joining the Company in 1987.
- ---------------
The term of office for all officers is at the pleasure of the Board of Directors.
14
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
As of May 6, 1996, the Company's common stock began trading on the New York
Stock Exchange under the symbol: FIC. Prior to that date, it was traded
over-the-counter on the NASDAQ Stock Market under the symbol: FICI. At December
3, 1999, Fair, Isaac had 335 shareholders of record of its common stock. The
following table lists the high and low sales 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, 1997 46 30 1/4
January 1 - March 31, 1998 38 5/8 28 3/16
April 1 - June 30, 1998 40 9/16 31 1/2
July 1 - September 30, 1998 41 1/2 29 1/4
October 1 - December 31, 1998 46 1/2 28 9/16
January 1 - March 31, 1999 54 9/16 31 1/2
April 1 - June 30, 1999 37 1/16 32 1/2
July 1 - September 30, 1999 44 9/16 26 1/4
Dividends
On May 24, 1995, Fair, Isaac announced a 100 % stock dividend (equivalent
to a two-for-one stock split) and its intention to pay quarterly dividends of 2
cents per share or 8 cents per year subsequent to issuance of the stock
dividend. Quarterly dividends of that amount were paid throughout the 1997, 1998
and 1999 fiscal years. There are no current plans to change the cash dividend or
to issue any further stock dividend.
Recent Sales of Unregistered Securities
On July 21, 1997, the Company acquired all the outstanding stock of RMT, a
privately held California corporation, pursuant to a merger of a wholly owned
subsidiary of the Company and RMT in which RMT became a wholly owned subsidiary
of the Company (the "Merger"). The number of shares of the Company's common
stock and option equivalents issued by the Company in connection with the Merger
was 1,252,655.
At the time of the transaction, the issuance of the shares of the Company's
common stock and the options to purchase the Company common stock to the former
RMT security holders in the Merger was not registered under the Securities Act
of 1933, as amended (the "1933 Act"), because the transaction involved a
non-public offering exempt from registration under Section 4(2) of the 1933 Act
and Regulation D promulgated thereunder.
15
ITEM 6. Selected Financial Data
(dollars in thousands, except per share data)
Fiscal year ended September 30, 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Revenues $276,931 $245,545 $199,009 $155,913 $117,089
Income from operations 46,375 40,432 37,756 29,518 19,828
Income before income taxes 50,600 42,105 35,546 28,704 21,390
Net income 29,980 24,327 20,686 17,423 12,753
Earnings per share:
Diluted $2.09 $1.68 $1.46 $1.25 $.93
Basic $2.13 $1.77 $1.55 $1.32 $.99
Dividends per share * $ .08 $ .08 $ .08 $ .08 $ .055
At September 30, 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Working capital $ 55,885 $ 54,852 $ 47,727 $ 34,699 $ 23,448
Total assets 210,353 189,614 145,228 118,023 91,009
Long-term capital lease obligations 364 789 1,183 1,552 1,930
Stockholders' equity 156,499 133,451 103,189 79,654 56,176
* Because the change to quarterly dividends was initiated in September
1995, the rate of dividends paid in fiscal 1995 does not reflect the current
annual rate of 8 cents per share.
The financial data for the fiscal years ended September 30, 1995 through
1996 have been restated to reflect the merger, effective July 1997, between
Fair, Isaac and Company, Incorporated, and Risk Management Technologies, which
has been accounted for under the pooling-of-interests method.
16
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Fair, Isaac and Company, Incorporated, provides products and services
designed to help a variety of businesses use data to make faster, more
profitable decisions on their marketing, customers, operations and portfolios.
Widely recognized for its pioneering work in predictive technology, the Company
provides advanced decision-making solutions to the financial services, retail,
telecommunications, healthcare and other industries.
In fiscal 1999, the Company was organized into business units that
corresponded to its principal markets: consumer credit, insurance, direct
marketing (DynaMark), enterprise-wide financial risk management (RMT) and
healthcare. In October 1999 the Company formally adopted new organizational
structure and business models to focus on growth opportunities in the retail and
telecommunications markets and to implement its new strategic objective of
becoming an eBusiness company.
The Company's products include statistically derived, rule-based analytical
tools, software that automates strategy design and implementation, and
consulting services to help clients use and track the performance of those
tools. The Company also provides a range of credit scoring and credit account
management services in conjunction with credit bureaus and credit card
processing agencies.
The Company's DynaMark subsidiary provided data processing and database
management services to businesses engaged in direct marketing activities, many
of which are in the financial services and insurance industries. Effective
October 1, 1999, DynaMark was merged into the Company as part of the Company's
positioning to implement its new strategies. The Company's Risk Management
Technologies subsidiary provides enterprise-wide risk management and performance
measurement solutions to major financial institutions.
This discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and Notes. In addition to historical
information, this report includes certain forward-looking statements regarding
events and trends that may affect the Company's future results. Such statements
are subject to risks and uncertainties that could cause the Company's actual
results to differ materially. Such factors include, but are not limited to,
those described in this discussion and analysis.
17
RESULTS OF OPERATIONS
Revenues
In fiscal 1999 the Company's revenues and earnings were generated primarily
from operations of its five business segments: Credit, DynaMark, RMT, Insurance
and Healthcare strategic business units. The table that follows summarizes the
results by segment for years 1997, 1998 and 1999. The following information
should be read in conjunction with Note 12 of Notes to the Consolidated
Financial Statements.
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," "scorecards" or "models"), credit application processing systems
(ASAP(TM), CreditDesk(R) and CreditCenter(TM)) 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, RMT and
the Healthcare unit employ a combination of fixed-fee and usage-based pricing
for their products.
The following table sets forth for the fiscal periods indicated (a) the
percentage of revenues represented by fixed-price and usage-priced revenues from
the Credit business unit, and the percentage of revenues contributed by the
DynaMark, RMT, Insurance and Healthcare business units; and (b) the percentage
change in revenues within each category from the prior fiscal year.
Percentage of Period-to-period
revenue percentage changes
---------------------- ------------------
Years ended 1998 1997
September 30, to to
1999 1998 1997 1999 1998
- ---------------------------------------------------------------------------------------------
Credit:
Fixed-price 23 25 29 3 9
Usage-priced 48 48 48 12 21
DynaMark 24 20 15 33 65
RMT 1 1 3 4 (57) (26)
Insurance 3 4 3 3 58
Healthcare 1 <1 1 157 (4)
---- ---- ----
Total Revenues 100 100 100 13 23
==== ==== ====
Fixed-price revenues in the Credit business unit include all revenues from
custom models, software and consulting projects. Revenues from credit
application scoring products decreased by 12% in fiscal 1998 compared with
fiscal 1997, and increased by 19% in fiscal 1999 compared with fiscal 1998. The
decrease in revenues in fiscal 1998 reflected the impact of bank consolidations
and external market forces relating to Year 2000. The increase in fiscal 1999
was due primarily to the Company's sales of new products and increased sales of
small business loan scoring products.
ASAP revenues increased by 14% in fiscal 1998 compared with fiscal 1997
primarily due to increased sales of PC-based ASAP products (CreditDesk) and
sales of the StrategyWare(R) decision engine systems. During the quarter ended
September 30, 1999, the Company elected to adopt AICPA statement of Position No.
98-9 (SOP 98-9) though adoption by the Company was not required for periods
prior to October 1, 1999. ASAP revenues decreased by 22% in fiscal 1999 compared
with fiscal 1998, due primarily to the impact of the adoption of SOP 98-9. If
SOP 98-9 had not been adopted, ASAP revenues would have decreased by 2% in
fiscal 1999. As a result of the early adoption of SOP 98-9, software revenues of
approximately $4.7 million were deferred in fiscal 1999. Had the Company
implemented SOP 98-9 as of October 1, 1998, there would have been approximately
$7.4 million less in ASAP revenue for the year ended September 30, 1999, which
would have been deferred to future periods.
Revenues from sales of credit account management systems (TRIAD) sold to
end-users increased by 18% from fiscal l997 to fiscal l998 and by 12% from
fiscal 1998 to fiscal 1999. The increase in fiscal 1998 and fiscal 1999 was due
primarily to continuing sales of the then current version of TRIAD (TRIAD 5.0)
which was released in November l997. The Company's high degree of success in
penetrating the U.S. bankcard industry with these
18
products has limited, and may continue to limit, the revenue growth in that
market. However, the Company has added functionality for the existing base of
TRIAD users and is actively marketing TRIAD for other types of credit products
and in overseas markets.
The Company provides credit risk management consulting services primarily
through its subsidiary, Credit & Risk Management Associates, Inc. (CRMA), the
results of which are included in the Credit business unit. CRMA's revenues
increased by 62% in fiscal l998 compared with fiscal 1997 and by 45% in fiscal
l999 compared with fiscal 1998. The revenues of CRMA comprised approximately 3%
of the Company's revenues in fiscal 1998 and 4% in fiscal 1999. On October 1,
1999, CRMA was merged into the Company to implement the Company's new business
strategies.
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. In addition, some credit
scorecards and software products are licensed under volume-based fee
arrangements, and these are included in credit usage-priced revenues. Revenues
from credit bureau-related services increased 22% in fiscal 1998 compared with
fiscal 1997 and 14% in fiscal 1999 compared with fiscal 1998, and accounted for
approximately 35% and 36% of revenues in fiscal 1998 and 1999, respectively.
Revenues from services provided through bankcard processors also increased in
each of these years, primarily due to increases in the number of accounts at
each of the major processors.
Revenues derived from alliances with credit bureaus and credit card
processors have accounted for much of the Company's revenue growth in the last
three years. While the Company has been very successful in extending or renewing
such agreements in the past, and believes it will generally be able to do so in
the future, the loss of one or more such alliances or an adverse change in terms
could have a significant impact on revenues and operating margin. Revenues
generated through the Company's alliances with Equifax, Inc.; Experian
Information Solutions, Inc. (formerly TRW Information Systems & Services); and
Trans Union Corporation each accounted for approximately 8% to 10% of the
Company's total revenues in fiscal 1997, approximately 7% to 10% in fiscal 1998
and approximately 8% to 10% in fiscal 1999.
On September 30, 1997, amendments to the federal Fair Credit Reporting Act
became effective. The Company believes these changes to the federal law
regulating credit reporting have been favorable to the Company and its clients.
Among other things, the new law expressly permits the use of credit bureau data
to prescreen consumers for offers of credit and insurance and allows affiliated
companies to share consumer information with each other subject to certain
conditions. There is also a seven-year moratorium on new state legislation on
certain issues. However, the states remain free to regulate the use of credit
bureau data in connection with insurance underwriting. The Company believes
enacted or proposed state regulation of the insurance industry has had a
negative impact on its efforts to sell insurance risk scores through credit
reporting agencies.
The Financial Services Modernization Act of 1999 was enacted and signed
into law on November 12, 1999. The statute contains several privacy provisions.
The legislation also allows banks, securities firms, and insurance companies to
affiliate and enter new business activities. The Company believes that this
legislation will not have a material impact on its operations or revenues.
Revenues from the Company's DynaMark business unit increased from $29.8
million in fiscal 1997 to $49.1 million in fiscal 1998 and to $65.3 million in
fiscal 1999. These increases in DynaMark's revenues (which exclude intercompany
revenues) were due primarily to increased revenues from customers in the
financial services industry. Since its acquisition, DynaMark has taken on an
increasing share of the mainframe batch processing requirements of the Company's
other business units. Such intercompany revenue represented approximately 14% of
DynaMark's total revenues in fiscal 1997, approximately 8% of DynaMark's total
revenues in fiscal 1998, and approximately 4% of DynaMark's total revenues in
fiscal 1999.
RMT's revenues for fiscal l998 decreased by 26% compared with fiscal l997,
and in fiscal 1999 decreased by 57% compared with fiscal 1998, due primarily to
the impact of bank consolidations and delay in releases of new products.
Increases in insurance revenues for fiscal l997 and 1998, compared with the
respective prior year, were due to strong growth in both insurance products sold
to end-users and in the insurance scoring services offered through consumer
reporting agencies. In fiscal 1999, increases in insurance revenues compared
with fiscal 1998 were due to growth in insurance scoring services. The Company
recorded its first revenues from its Healthcare business unit in fiscal 1997. In
the quarter ended December 31, 1998, the Company signed its first
revenue-generating contract for its receivables management system for hospitals
and healthcare providers (introduced in December 1997) and derived revenues from
this new product in fiscal 1999. In October 1999 the Company announced its
intent to exit the
19
healthcare receivables management business to devote more resources to other
opportunities. The Company is currently exploring its exit options and cannot
now forecast the impact of its decision to exit this business. It is possible
that the exit from this business may have an adverse effect on revenues, gross
profit and results of operations in the period during which the exit is
completed.
The Company's revenues derived from clients outside the United States
increased from $33.9 million in fiscal l997 to $42.9 million in fiscal 1998 and
decreased to $41.5 million in fiscal 1999. RMT contributed $4.6 million, $3.7
million and $1.2 million to the Company's non-U.S. revenues for fiscal years
1997, l998 and l999, respectively. DynaMark has not had significant non-U.S.
revenues. Sales of software products, including TRIAD and CreditDesk, increased
usage of credit bureau scores in Canada, and an increase in the number of
accounts using the Company's account management services at credit card
processors in Europe and Latin America accounted for most of the increase in
international revenues in fiscal 1997 and 1998. The decreases in international
revenues in fiscal 1999 were principally the result of a decline in revenues
from sales by RMT in the Asian market. Gains or losses due to fluctuations in
currency exchange rates have not been significant to date but may become more
important if, as expected, the proportion of the Company's revenues denominated
in foreign currencies increases in the future.
Revenues from software maintenance and consulting services each accounted
for less than 10% of revenues in each of the three years in the period ended
September 30, 1999, and the Company does not expect revenues from either of
these sources to exceed 10% 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
most of its revenue growth from its bankcard-related scoring and account
management business by deepening its penetration of large banks and other credit
issuers. The Company believes much of its future growth prospects will rest on
its ability to (a) develop new, high-value products, (b) increase its
penetration of established or emerging credit markets outside the U.S. and
Canada and (c) expand--either directly or through further acquisitions--into
relatively undeveloped or underdeveloped markets for its products and services,
such as direct marketing, insurance, small business lending, healthcare
information management, retail, telecommunications and eBusiness. During fiscal
1998, the Company's backlog of orders for fixed-priced products declined
slightly, and in fiscal 1999 this backlog declined an additional $7.3 million.
This indicates that revenue growth in fiscal 2000 and later years may depend to
a large extent on sales of newly developed products.
Over the long term, in addition to the factors discussed above, the
Company's rate of revenue growth--excluding growth due to acquisitions--is
limited by the rate at which it can recruit and absorb additional professional
staff. Management believes this constraint will continue to exist indefinitely.
On the other hand, despite the high penetration the Company has already achieved
in certain markets, the opportunities for application of its core competencies
are much greater than it can pursue. Thus, the Company believes it can continue
to grow revenues, within the personnel constraint, for the foreseeable future.
At times management may forego short-term revenue growth in order to devote
limited resources to opportunities that it believes have exceptional long-term
potential. This is the basis for the Company's new strategic focus of becoming
an eBusiness company and implementing new growth initiatives targeted at the
retail and telecommunications markets. A similar longer-range strategic
initiative occurred during 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.
20
Expenses
The following table sets forth for the fiscal periods indicated (a) the
percentage of total revenues represented by certain line items in the Company's
Consolidated Statements of Income and Comprehensive Income and (b) the
percentage change in the amount of each such line item from the prior fiscal
year.
Percentage of Period-to-period
revenue percentage changes
------------------------ -------------------
Years ended 1998 1997
September 30, to to
1999 1998 1997 1999 1998
- ---------------------------------------------------------------------------------------------
Total revenues 100 100 100 13 23
----- ----- -----
Costs and expenses:
Cost of revenues 38 35 36 24 17
Sales and marketing 15 15 15 14 28
Research and development 11 12 9 2 66
General and administrative 18 21 20 (2) 28
Amortization of intangibles 1 1 1 30 9
----- ----- -----
Total costs and expenses 83 84 81 12 27
----- ----- -----
Income from operations 17 16 19 15 7
Other income (expense) 1 1 (1) 153 NM*
----- ----- -----
Income before income taxes 18 17 18 20 18
Provision for income taxes 7 7 8 16 20
----- ----- -----
Net income 11 10 10 23 18
===== ===== =====
*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, declined slightly in the
period from fiscal l997 to fiscal 1998 and increased in the period from fiscal
l998 to fiscal 1999. The decrease in fiscal 1998 was due primarily to the
reassignment to research and development activities of certain personnel whose
primary assignment had been production and delivery. In fiscal 1999 the increase
was primarily due to the increasing percentage of revenues coming from
DynaMark's products and services which generally have a lower gross margin than
the Company's other products and services on average.
Sales and marketing
Sales and marketing expenses consist principally of personnel, travel,
overhead, advertising and other promotional expenses. As a percentage of
revenues, sales and marketing expenses have remained essentially unchanged since
fiscal 1997.
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, profitability and management control. Research and development, as
a percentage of revenues, increased sharply from fiscal l997 to fiscal 1998 and
declined slightly from fiscal 1998 to fiscal 1999.
In fiscal 1998 and 1999, the Company continued to emphasize development of
new technologies and new products. Research and development expenditures in
fiscal 1998 were primarily related to new bankruptcy scoring products for Visa
(Integrated Solutions Concepts) and Trans Union, new fraud-detection software
products, joint product development projects with Deluxe Financial Services,
Inc., healthcare receivables management and Year 2000 compliance work. Research
and development expenditures in fiscal 1999 were primarily related to new
fraud-detection software products, a new release of TRIAD software, Year 2000
readiness work, development of a new automated strategic application processing
system for high-end users, next generation credit bureau risk scores and
healthcare receivables management. In the last quarter of fiscal 1999, the
Company began work on a number of
21
projects for clients in the eBusiness and telecommunications industries. The
decrease in research and development expenses, as a percentage of revenues, in
fiscal 1999 was due to a reduction in costs of Year 2000 compliance work and
work related to the Deluxe development, and the replacement of relatively
expensive consultants with regular employees. The Company expects that research
and development expenses will increase in future periods for development of new
products targeted for the telecommunications and retail markets and to implement
its strategic focus on becoming an eBusiness company.
General and administrative
General and administrative expenses consist mainly of compensation expenses
for certain senior management, corporate facilities expenses, the costs of
administering certain benefit plans, legal expenses, expenses associated with
the exploration of new business opportunities and the costs of operating
administrative functions, such as finance and computer information systems. As a
percentage of revenues, general and administrative expenses were essentially
unchanged for fiscal l997 and l998 and declined in fiscal 1999, due primarily to
emphasis on cost reduction measures resulting in slower personnel growth and to
reassignment of personnel and related costs.
Amortization of intangibles
The Company is amortizing the intangible assets arising from various
acquisitions over periods ranging from four to fifteen years. During the quarter
ended June 30, 1999, the Company made the final additional contingent payment to
the former shareholders of CRMA, which was acquired in 1996. The amount of the
payment was approximately $2.1 million, resulting in increased amortization
expenses in fiscal 1999 and in future periods. See "Capital Resources and
Liquidity."
Other income (expense)
The table in Note 13 to the Consolidated Financial Statements presents the
detail of other income and expenses. Interest income is derived from the
investment of funds surplus to the Company's immediate operating requirements.
At September 30, 1999, the Company had approximately $60.1 million invested in
U.S. treasury securities and other interest-bearing instruments. Interest income
increased in both fiscal 1998 and 1999 due to higher average cash balances in
interest-bearing accounts and instruments.
The Company's share of operating losses in certain early-stage development
companies that are accounted for using the equity method is charged to other
expense. In the fiscal year ended September 30, 1998, the Company liquidated its
share of a non-marketable security, which had been written off in fiscal 1997 as
a loss in the amount of $2 million. This liquidation resulted in a gain of
$165,000. The Company has no further financial commitments in connection with
this investment. Note 4 to the Consolidated Financial Statements describes the
Company's investment in such non-marketable securities. In fiscal 1998, the
difference between the increase in operating income (7%) and the increase in net
income (18%) was primarily due to the interest income derived from investments
in U.S. treasury securities and other interest-bearing instruments, and the
absence of losses from investments in start-ups.
In fiscal 1999, the Company realized a one-time gain in the amount of
$720,000 due to curtailment of the Company's pension plan, as described in Note
8 to the Consolidated Financial Statements. The Company also realized a gain of
$483,000 from the sale of marketable securities.
Provision for income taxes
The Company's effective tax rate was 41.8%, 42.2% and 40.8% in fiscal l997,
1998 and l999, respectively. The decrease to 40.8% in fiscal 1999 was due
primarily to a decrease in the Company's effective state tax rate for fiscal
1999.
22
Capital Resources and Liquidity
Working capital increased from $47,727,000 at September 30, l997, to
$54,852,000 at September 30, 1998 and to $55,885,000 at September 30, 1999. The
increase in fiscal 1998 was due primarily to increases in short-term
investments, unbilled work in progress and accounts receivable, which more than
offset the increase in accounts payable and other accrued liabilities and
accrued compensation and employee benefits.
The increase in fiscal 1999 was due primarily to increases in cash, cash
equivalents, unbilled work in progress and decreases in other accrued
liabilities, which more than offset the decreases in short-term investments, and
accounts receivable and increases in accrued compensation and employee benefits.
The Company's exposure to collection risks is comprised of the sum of
accounts receivable plus unbilled work in progress, less billings in excess of
earned revenues. Changes in contract terms and product mix, along with
variations in timing, may cause fluctuations in any or all of these items.
During fiscal 1998, the increase in accounts receivable was proportionally much
less than the increase in revenues due to improved collection efforts by the
Company, and the increases in unbilled work in progress and billings in excess
of earned revenues were proportional to the increase in revenues. During fiscal
1999, accounts receivable decreased compared with fiscal 1998 due to improved
collection efforts. The increases in billings in excess of earned revenues were
proportional to the increase in revenues. The increase in unbilled work in
progress was due primarily to the timing of credit bureau revenues.
The Company capitalized $263,000 as goodwill relating to amounts due to the
former stockholders of CRMA under the CRMA purchase agreement, based upon its
financial results in fiscal 1998. A final additional payment made in June 1999
to the former stockholders of CRMA in the approximate amount of $2.1 million was
capitalized in the third quarter of fiscal 1999. See Note 2 of Notes to the
Consolidated Financial Statements.
In fiscal 1998, cash provided by operations resulted primarily from net
income before depreciation and amortization, and increases in accounts payable
and other accrued liabilities and accrued compensation and employee benefits,
partially offset by the increases in accounts receivable, other assets and
unbilled work in progress. Cash was used in investing activities primarily for
additions to property and equipment, and purchases of marketable securities,
partially offset by the maturities of marketable securities. Cash was provided
by financing activities primarily from the exercise of stock options, partially
offset by cash used for the payment of dividends and the reduction of capital
lease obligations.
In fiscal 1999, cash provided by operations resulted primarily from net
income before depreciation and amortization, decreases in accounts receivable
and increases in accrued compensation and employee benefits, partially offset by
the increases in unbilled work in progress and prepaid expenses and other assets
and decreases in other accrued liabilities and accounts payable. Cash was used
in investing activities primarily for additions to property and equipment and
purchases of marketable securities, partially offset by proceeds from the sale
of marketable securities and maturities of marketable securities. Cash was
provided by financing activities primarily from the exercise of stock options,
which was more than offset by cash used for the repurchases of Company stock,
payment of dividends and the reduction of capital lease obligations.
Future cash flows will continue to be affected by operating results,
contractual billing terms and collections, investment decisions and dividend
payments, if any. At September 30, 1999, the Company had no significant capital
commitments other than those obligations described in Notes 5 and 11 of the
Consolidated Financial Statements.
In May 1998, the Company entered into a synthetic lease arrangement to
construct an office complex intended to accommodate future growth, which will
materially increase the Company's future operating lease expenses. Rental
payments will commence upon completion of construction, which is expected to
occur in fiscal 2001. With this external financing, the Company believes that
the cash and marketable securities on hand, along with cash expected to be
generated by operations, will be adequate to meet its capital and liquidity
needs for both the current year and the foreseeable future.
23
In March 1999, the Company initiated a stock repurchase program under which
the Company was authorized to purchase up to one million shares of its common
stock, to be funded by cash on hand. Through September 30, 1999, the Company had
repurchased 360,004 shares at a cost of approximately $12.2 million.
Year 2000 Readiness
The Company has completed its Year 2000 remediation work and readiness
testing on its software products marketed to customers. New products and updated
versions of its software products currently being shipped to customers are Year
2000 compliant. Year 2000 remediation work, including readiness testing, for
most earlier versions of the Company's software installed at customer sites is
performed as part of the Company's normal upgrade and maintenance process. Prior
to the end of calendar 1999, the Company will discontinue support for some
software products that have been replaced by other products, and Year 2000
upgrades for these products will not be available. Revenues from such products
are not significant. There can be no assurances that the Company's current
products do not contain undetected errors or defects associated with Year 2000
date functions which may result in material costs to the Company.
In addition, the Company believes that Year 2000 issues have caused
customers to slow down computer software purchases as they devote more time to
preparing and testing their systems for Year 2000 readiness. Purchasing patterns
of customers are expected to be impacted by Year 2000 issues through January 1,
2000, and beyond. The Company is also aware of a growing number of lawsuits
against other software vendors arising out of Year 2000 readiness issues.
Because of the unprecedented nature of such litigation, it is uncertain to what
extent the Company may be affected by it. Based on its ongoing assessment of the
impact of Year 2000 issues, the Company currently does not expect significant
disruption of its revenues or operations from the Year 2000 issues associated
with its products. This assessment process is continuing and the Company has
developed contingency plans to address Year 2000 issues. As part of the
implementation of its contingency plans the Company has put in place processes
to address expected increases in requests by customers for greater customer
support in late 1999 and early 2000 and has notified customers of this customer
support availability.
The Company has determined that all of its business-critical internal
information technology ("IT") systems have been thoroughly tested and are Year
2000 ready. For all IT applications supplied to the Company by third parties,
appropriate available "patches" have been applied and the Company believes the
applications are Year 2000 ready. For both IT and non-IT systems, readiness
testing is ongoing and will continue through December 1999, with priority given
to business-critical non-IT systems and applications. The most reasonably likely
worst-case scenarios would include: (a) corruption of data contained in the
Company's internal information systems, and (b) hardware/operating system
failure. The Company has completed its contingency plans for business-critical
IT and non-IT internal systems as an extension of its existing disaster recovery
plan.
Through September 30, 1999, costs expended for Year 2000 remediation
(including readiness testing) of products and internal systems and contingency
planning are approximately $4.8 million, and the Company currently does not
expect such aggregate costs to exceed $5 million. These costs principally
consist of both internal staff costs and expenses for external consultants,
software and hardware, which have been or will be expensed by the Company during
the period they are incurred. Expected costs for the Year 2000 remediation work
(including readiness testing) and projected completion dates are based on
management's estimates and assumptions and actual results may vary materially
from those anticipated.
The Company is working directly with parties on which it is dependent for
essential services and for the distribution of its significant services to
address any remaining Year 2000 issues, including in some cases, jointly
developing contingency plans. Information received to date indicates that these
parties are in the process of implementing and/or testing remediation strategies
to ensure Year 2000 readiness of systems, services and/or products. However, the
lack of resolution of Year 2000 issues by these parties--especially the credit
bureaus and credit card processors through which the Company distributes credit
scoring and account management services--could have a material adverse impact on
the Company's future business operations, financial condition and results of
operations.
The Company anticipates that the most reasonably likely worst-case
scenarios involving third-party Year 2000 issues would include: (a) failure of
infrastructure services provided by government agencies and third parties (e.g.,
transportation, electricity, telephone, Internet services, etc.) and (b) failure
of one or more of the credit bureaus or credit card processors through which the
Company distributes its credit scoring and account management services to
achieve timely and successful Year 2000 readiness. Contingency plans to address
these most reasonably likely worst-
24
case scenarios have been completed. At this time the Company cannot quantify the
potential impact of third-party Year 2000 issues.
The Company believes it is taking reasonable steps consistent with standard
industry practices to prevent major interruptions in business due to Year 2000
issues. Its Year 2000 program is monitored by the Audit Committee of the Board
of Directors.
The foregoing information and statements regarding the Company's Year 2000
capabilities and readiness are "Year 2000 Information and Readiness Disclosures"
in conformance with the Year 2000 Information and Readiness Disclosure Act of
1998 enacted on October 19, 1998.
European Economic and Monetary Union (EMU)
Under the European Union's plan for Economic and Monetary Union (EMU), the
euro becomes the sole accounting currency of EMU countries on January 1, 2002.
Its initial phase went into effect on January 1, 1999, in 11 participating
countries: Austria, Belgium, Finland, France, Germany, Ireland, Italy,
Luxembourg, the Netherlands, Portugal and Spain. In this initial phase the EMU
mandated that key financial systems be able to triangulate conversion rates so
that any amount booked will be logged and processed simultaneously in both the
local currency and euros. The Company believes that its computer systems and
programs are euro-compliant. Costs associated with compliance were not material
and were expensed by the Company as they were incurred. The Company also
believes the conversion to the euro will not have a material impact on the
Company's consolidated financial results.
Quarterly Results
The table in Note 16 to the Consolidated Financial Statements presents
unaudited quarterly operating results for the last eight fiscal quarters.
Management believes that all the necessary adjustments have been included in the
amounts stated to present fairly the selected quarterly information, when read
in conjunction with the financial statements included elsewhere in this report.
This information includes all normal recurring adjustments that the Company
considers necessary for a fair presentation thereof, in accordance with
generally accepted accounting principles.
Quarterly results may be affected by fluctuations in revenue associated
with credit card solicitations, by the timing of orders for and deliveries of
certain software systems and by the seasonality of ScoreNet purchases. With the
exception of the cost of ScoreNet data purchased by the Company, most of its
operating expenses are not affected by short-term fluctuations in revenues;
thus, short-term fluctuations in revenues may have a significant impact on
operating results. However, in recent years these fluctuations were generally
offset by the strong growth in revenues from services delivered through credit
bureaus and third-party bankcard processors.
During the quarter ended September 30, 1999, the Company elected to adopt
AICPA statement of Position No. 98-9 (SOP 98-9) though adoption by the Company
was not required for periods prior to October 1, 1999. As a result of the early
adoption of SOP 98-9, software revenues of approximately $4.7 million were
deferred in fiscal 1999. The one-time gain due to curtailment of the Company's
pension plan, described under "Other income (expense)," was recognized in the
fourth quarter of fiscal 1999.
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.
25
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Disclosures. The following discussion about the Company's
market risk disclosures involves forward-looking statements. Actual results
could differ materially from those projected in the forward-looking statements.
The Company is exposed to market risk related to changes in interest rates,
foreign currency exchange rates and equity security price risk. The Company does
not use derivative financial instruments for speculative or trading purposes.
Interest Rate Sensitivity. The Company maintains an investment portfolio
consisting mainly of income securities with an average maturity of less than
five years. These available-for-sale securities are subject to interest rate
risk and will fall in value if market interest rates increase. The Company has
the ability to hold its fixed income investments until maturity, and therefore
the Company would not expect its operating results or cash flows to be affected
to any significant degree by the effect of a sudden change in market interest
rates on its securities portfolio. The Company believes foreign currency and
equity risk is not material.
The following table presents the principal amounts and related weighted-average
yields for the Company's fixed rate investment portfolio:
Carrying Average
Amounts Yield
Cash and cash equivalents:
Commercial paper $ 2,377,500 5.4%
U.S. government obligations 9,565,597 5.3%
Money market funds 3,189,523 4.5%
-----------
15,132,620 5.2%
-----------
Short-term investments:
U.S. government obligations
5,216,158 5.1%
Long-term investments:
U.S. government obligations 38,774,721 5.4%
-----------
Total $59,123,499
===========
26
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, 1999 and 1998,
and the related consolidated statements of income and comprehensive income,
stockholders' equity and cash flows for each of the years in the three-year
period ended September 30, 1999. 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, 1999 and 1998,
and the results of their operations and their cash flows for each of the years
in the three-year period ended September 30, 1999, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of revenue recognition for certain products in 1999.
/s/ KPMG LLP
San Francisco, California
October 26, 1999
27
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(dollars in thousands, except per share data)
Years ended September 30, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
Revenues $ 276,931 $ 245,545 $ 199,009
Costs and expenses:
Cost of revenues 105,454 84,980 72,566
Sales and marketing 42,549 37,470 29,162
Research and development 29,720 29,136 17,572
General and administrative 51,020 52,132 40,679
Amortization of intangibles 1,813 1,395 1,274
------------ ------------ ------------
Total costs and expenses 230,556 205,113 161,253
------------ ------------ ------------
Income from operations 46,375 40,432 37,756
Other income (expense), net 4,225 1,673 (2,210)
------------ ------------ ------------
Income before income taxes 50,600 42,105 35,546
Provision for income taxes 20,620 17,778 14,860
------------ ------------ ------------
Net income $ 29,980 $ 24,327 $ 20,686
============ ============ ============
Net income $ 29,980 $ 24,327 $ 20,686
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on investments:
Unrealized holding gains (losses)
arising during period (293) 383 220
Less: reclassification adjustment (281) -- --
------------ ------------ ------------
Net unrealized gains (losses) (574) 383 220
Foreign currency translation adjustments (127) 138 (163)
------------ ------------ ------------
Other comprehensive income (loss) (701) 521 57
------------ ------------ ------------
Comprehensive income $ 29,279 $ 24,848 $ 20,743
============ ============ ============
Earnings per share:
Diluted $ 2.09 $ 1.68 $ 1.46
============ ============ ============
Basic $ 2.13 $ 1.77 $ 1.55
============ ============ ============
Shares used in computing earnings per share:
Diluted 14,364,000 14,463,000 14,202,000
============ ============ ============
Basic 14,073,000 13,763,000 13,386,000
============ ============ ============
See accompanying notes to the consolidated financial statements.
28
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
September 30, 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 20,715 $ 14,242
Short-term investments 5,216 18,283
Accounts receivable, net of allowance (1999: $1,274; 1998: $1,163) 36,007 39,028
Unbilled work in progress 26,859 22,004
Prepaid expenses and other current assets 6,509 4,040
Deferred income taxes 6,021 5,016
--------- ---------
Total current assets 101,327 102,613
Investments 43,934 24,368
Property and equipment, net 39,353 36,893
Intangibles, net 10,730 10,458
Deferred income taxes 5,932 6,398
Other assets 9,077 8,884
--------- ---------
$ 210,353 $ 189,614
========= =========
Liabilities and stockholders' equity Current liabilities:
Accounts payable $ 3,340 $ 3,481
Accrued compensation and employee benefits 23,436 22,065
Other accrued liabilities 9,339 13,937
Billings in excess of earned revenues 8,898 7,862
Capital lease obligations 429 416
--------- ---------
Total current liabilities 45,442 47,761
Long-term liabilities:
Accrued compensation and employee benefits 6,104 6,044
Other liabilities 1,944 1,569
Capital lease obligations 364 789
--------- ---------
8,412 8,402
--------- ---------
Total liabilities 53,854 56,163
--------- ---------
Stockholders' equity:
Preferred stock ($0.01 par value; 1,000,000 authorized;
none issued or outstanding) -- --
Common stock ($0.01 par value; 35,000,000 shares authorized; 14,313,616 and
13,992,126 shares issued, and 13,980,425 and 13,982,339 outstanding at
September 30, 1999 and 1998, respectively) 143 140
Paid in capital in excess of par value 38,287 32,454
Retained earnings 129,530 100,678
Less treasury stock (11,290) (351)
Accumulated other comprehensive income (loss) (171) 530
--------- ---------
Total stockholders' equity 156,499 133,451
--------- ---------
$ 210,353 $ 189,614
========= =========
See accompanying notes to the consolidated financial statements.
29
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended September 30, 1997, 1998 and 1999 (in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
Accumulated
Common stock Paid in other
---------------------- capital in comprehensive Total
Par excess of Retained Treasury income stockholders'
Shares value par value earnings stock (loss) equity
--------- --------- --------- --------- -------- --------- ---------
Balances at September 30, 1996 13,270 $ 133 $ 21,628 $ 58,009 $ (68) $ (48) $ 79,654
Issuance of common stock 47 -- 1,044 -- -- -- 1,044
Vesting of restricted stock -- -- 289 -- -- -- 289
Exercise of stock options 141 2 1,018 -- -- -- 1,020
Tax benefit of exercised
stock options -- -- 1,474 -- -- -- 1,474
Contribution/sale to ESOP 41 -- 504 -- 105 -- 609
Deferred compensation -- -- 68 -- -- -- 68
Repurchase of company stock (37) -- -- -- (470) -- (470)
Net income -- -- -- 20,686 -- -- 20,686
Dividends declared -- -- -- (1,028) -- -- (1,028)
Charge to reflect change in RMT's
fiscal year -- -- -- (214) -- -- (214)
Unrealized gains on investments -- -- -- -- -- 220 220
Cumulative translation adjustments -- -- -- -- -- (163) (163)
--------- --------- --------- --------- --------- --------- ---------
Balances at September 30, 1997 13,462 135 26,025 77,453 (433) 9 103,189
Issuance of common stock 33 -- 1,468 -- -- -- 1,468
Vesting of restricted stock -- -- 185 -- -- -- 185
Exercise of stock options 487 5 2,726 -- -- -- 2,731
Tax benefit of exercised
stock options -- -- 1,660 -- -- -- 1,660
Deferred compensation -- -- 472 -- -- -- 472
Repurchase of company stock (3) -- (82) -- (28) -- (110)
Issuance of treasury stock 3 -- -- -- 110 -- 110
Net income -- -- -- 24,327 -- -- 24,327
Dividends declared -- -- -- (1,102) -- -- (1,102)
Unrealized gains on investments -- -- -- -- -- 383 383
Cumulative translation adjustments -- -- -- -- -- 138 138
--------- --------- --------- --------- --------- --------- ---------
Balances at September 30, 1998 13,982 140 32,454 100,678 (351) 530 133,451
Issuance of common stock 44 -- 1,455 -- -- -- 1,455
Vesting of restricted stock -- -- 17 -- -- -- 17
Exercise of stock options 277 3 3,203 -- -- -- 3,206
Tax benefit of exercised
stock options -- -- 1,285 -- -- -- 1,285
Deferred compensation -- -- 255 -- -- -- 255
Repurchase of company stock (361) -- -- -- (12,232) -- (12,232)
Issuance of treasury stock 38 -- (382) -- 1,293 -- 911
Net income -- -- -- 29,980 -- -- 29,980
Dividends declared -- -- -- (1,128) -- -- (1,128)
Unrealized losses on investments -- -- -- -- -- (574) (574)
Cumulative translation adjustments -- -- -- -- -- (127) (127)
--------- --------- --------- --------- --------- --------- ---------
Balances at September 30, 1999 13,980 $ 143 $ 38,287 $ 129,530 $ (11,290) $ (171) $ 156,499
========= ========= ========= ========= ========= ========= =========
See accompanying notes to the consolidated financial statements.
30
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Years ended September 30, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 29,980 $ 24,327 $ 20,686
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 17,431 14,948 11,753
Deferred compensation 255 472 68
Gain on sale of investments (483) -- --
Deferred income taxes (134) (3,809) (2,824)
Loss in equity investment -- -- 2,082
Investment write-off -- -- 773
Charge to reflect change in RMT's fiscal year -- -- (214)
Other 223 -- --
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 3,024 (2,743) (8,104)
(Increase) in unbilled work in progress (4,855) (3,828) (7,611)
Decrease (increase) in prepaid expenses and other assets (2,213) 473 2,945
Decrease (increase) in other assets (194) (4,963) 515
Increase (decrease) in accounts payable (1,598) 1,070 (419)
Increase in accrued compensation and employee benefits 3,140 4,497 4,578
Increase (decrease) in other accrued liabilities (1,862) 9,156 748
Increase in billings in excess of earned revenues 1,036 1,516 1,406
Increase (decrease) in other liabilities (1,266) 152 (323)
-------- -------- --------
Net cash provided by operating activities 42,484 41,268 26,059
-------- -------- --------
Cash flows from investing activities
Purchases of property and equipment (16,799) (15,669) (21,313)
Payments for acquisition of subsidiaries (1,454) (3,347) (78)
Purchases of investments (80,319) (33,491) (9,658)
Proceeds from sale of investments 46,647 -- --
Proceeds from maturities of investments 26,437 11,030 7,568
-------- -------- --------
Net cash used in investing activities (25,488) (41,477) (23,481)
-------- -------- --------
Cash flows from financing activities
Principal payments of capital lease obligations (413) (387) (378)
Proceeds from the exercise of stock options and issuance of treasury stock 3,250 2,841 1,020
Dividends paid (1,128) (1,102) (1,028)
Repurchase of company stock (12,232) (110) (470)
-------- -------- --------
Net cash provided by (used in) financing activities (10,523) 1,242 (856)
-------- -------- --------
Increase in cash and cash equivalents 6,473 1,033 1,722
Cash and cash equivalents, beginning of year 14,242 13,209 11,487
-------- -------- --------
Cash and cash equivalents, end of year $ 20,715 $ 14,242 $ 13,209
======== ======== ========
See accompanying notes to the consolidated financial statements.
31
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
analysis. The Company is a world leader in developing predictive and risk
assessment models for the financial services industry, including credit and
insurance scoring algorithms. The Company also offers direct marketing and
database management services, and enterprise-wide risk management and
performance measurement solutions to major financial institutions through its
wholly owned subsidiaries, DynaMark, Inc. (DynaMark) and Risk Management
Technologies (RMT), respectively. Effective October 1, 1999, DynaMark merged
into the Company, so it no longer exists as a separate entity.
Basis of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated from the consolidated financial statements.
Use of estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash and cash equivalents
Cash and cash equivalents consist of cash in banks and investments with an
original maturity of 90 days or less at time of purchase.
Fair value of financial instruments
The fair values of cash and cash equivalents, accounts receivable and
accounts payable are approximately equal to their carrying amounts because of
the short-term maturity of these instruments. The fair values of the Company's
investments are disclosed in Note 4. The carrying amount of capital lease
obligations approximates fair value at September 30, 1999.
Investments
Investments in U.S. government obligations and marketable equity securities
are classified as "available-for-sale" and are carried at market value. Other
investments are carried at the lower of cost or net realizable method.
Investments classified with remaining maturities over one year are classified as
long-term investments due to the Company's current intent.
Credit and market risk
The Company invests a portion of its excess cash in U.S. government
obligations and has established guidelines relative to diversification and
maturities that maintain safety and liquidity. In addition, an allowance for
doubtful accounts is maintained at a level which management believes is
sufficient to cover potential credit losses for accounts receivable. Actual
losses have been within management's expectations.
32
Depreciation and amortization
Depreciation and amortization on property and equipment including leasehold
improvements and capitalized leases are provided using the straight-line method
over estimated useful lives ranging from three to seven years or the term of the
respective leases
Intangibles
The intangible assets consisting of goodwill and non-compete agreements
arose principally from business acquisitions and are amortized on a
straight-line basis over the period of expected benefit, which ranges from 4 to
15 years. The Company assesses the recoverability of goodwill by evaluating the
undiscounted projected results of operations over the remaining amortization
period.
Revenue recognition
Revenues from contracts for the development of custom scoring systems and
software are recognized using the percentage-of-completion method of accounting
based upon milestones that are defined using management's estimates of costs
incurred at various stages of the project as compared to total estimated project
costs. Revenues determined by the percentage-of-completion method in excess of
contract billings are recorded as unbilled work in progress. Such amounts are
generally billable upon reaching certain performance milestones that are defined
by the individual contracts. Deposits billed and received in advance of
performance under contracts are recorded as billings in excess of earned
revenues.
Revenues from usage-priced products and services are recognized on receipt
of usage reports from the third parties through which such products and services
are delivered. Amounts due under such arrangements are recorded as unbilled work
in progress until collected. Revenues from non-customized software licenses and
shrink-wrapped products are recognized ratably over the contract period.
Revenues from products and services sold on time-based pricing, including
maintenance of computer and software systems, are recognized ratably over the
contract period.
During the first quarter of fiscal year 1999, the Company adopted Statement
of Position No. 97-2 (SOP 97-2), "Software Revenue Recognition," as amended by
Statement of Position No. 98-4 "Deferral of the Effective Date of a Provision of
SOP 97-2, Software Revenue Recognition." SOP 97-2 provides guidance for software
revenue recognition. The adoption of SOP 97-2 did not have a significant impact
on the Company's financial position or results of operations.
In December 1998, the AICPA issued Statement of Position No. 98-9 (SOP
98-9), "Modifications of SOP 97-2, Software Revenue Recognition, with Respect to
Certain Transactions." SOP 98-9 requires recognition of revenue using the
"residual method" in a multiple-element software arrangement when fair value
does not exist for one or more of the delivered elements in the arrangement.
Under the "residual method," the total fair value of the undelivered elements is
deferred and recognized in accordance with SOP 97-2. SOP 98-9 also extends the
deferral of the application of SOP 97-2 to certain other multiple-element
software arrangements to the Company's fiscal year ending September 30, 2000.
The Company elected to implement SOP 98-9 in its fourth quarter effective July
1, 1999. Implementation of SOP 98-9 resulted in the Company deferring $4.7
million in revenue from the fourth quarter of 1999 into fiscal year 2000.
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 which has been supported by adequate testing. All costs incurred
prior to the resolution of unproven functionality and features, including new
technologies, are expensed as research and development. After the uncertainties
have been tested and the development issues have been resolved, 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, 1999, technological feasibility coincided
with the completion process; thus, all design and development costs were
expensed as research and development costs.
33
Purchased software costs are amortized over three to five years. For the
years ended September 30, 1999, 1998 and 1997, amortization of capitalized
software was $416,000, $528,000 and $808,000, respectively. At September 30,
1999 and 1998, unamortized purchased computer software costs were $6,382,000 and
$6,508,000, respectively.
In March 1998, the AICPA issued SOP No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The SOP requires that
certain costs related to the development or purchase of internal-use software be
capitalized and amortized over the estimated useful life of the software. The
SOP also requires that costs related to the preliminary project stage and the
post-implementation/operations stage of an internal-use computer software
development project be expensed as incurred. This statement is effective for
financial statements issued for fiscal years beginning after December 15, 1998.
Beginning with fiscal year 2000, management intends to conform its consolidated
financial statements to this pronouncement. The Company's management believes
that the adoption of SOP 98-1 will not have a material impact on the Company's
results of operations.
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.
Earnings per share
Diluted earnings per share are based on the weighted-average number of
common shares outstanding and common stock equivalent shares. Common stock
equivalent shares result from the assumed exercise of outstanding stock options
that have a dilutive effect when applying the treasury stock method. Basic
earnings per share are computed on the basis of the weighted average number of
common stock shares outstanding.
New accounting pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 is effective for
all quarters of fiscal years beginning after June 15, 1999. SFAS No. 133
requires the recognition of all derivatives on the balance sheet at fair value.
In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133, An Amendment of FASB Statement No.133." SFAS No. 137 defers
the effective date of SFAS No. 133 by one year. SFAS No. 133 is now effective
for all fiscal quarters of all fiscal years beginning after June 15, 2000.
Because the Company currently holds no derivative instruments and does not
engage in hedging activities, management expects that the adoption of SFAS No.
133 will have no material impact on our financial position, results of
operations or cash flows. Management intends to conform its consolidated
statements to this pronouncement beginning July 1, 2000.
34
2. Mergers and Acquisitions
In July 1997, the Company issued 1,252,665 shares of its common stock
(including 544,218 shares underlying options assumed by the Company) in
connection with the merger with RMT. The acquisition has been accounted for
under the pooling-of-interests method.
For the pre-merger period indicated, revenues and net income of the Company
and RMT are as follows:
Nine-months ended
June 30, 1997
(dollars in thousands) (unaudited)
- --------------------------------------------------------------------------------
Revenues
Fair, Isaac and Company, Incorporated $137,031
Risk Management Technologies 5,746
--------
$142,777
========
Net Income
Fair, Isaac and Company, Incorporated $ 13,732
Risk Management Technologies 630
--------
$ 14,362
========
RMT previously used the fiscal year ended December 31 for its financial
reporting. The statement of income's comparative 1997 results reflect the
operations of the Company and RMT for the year ended September 30, 1997.
Accordingly, the duplication of RMT's net income, for the three months ended
December 31, 1996, has been adjusted by a $214,000 charge to retained earnings
in fiscal 1997.
In 1996, the Company acquired 100% of the stock of Credit & Risk Management
Associates, Inc. (CRMA), a privately held consulting services company, which was
accounted for as a purchase. The CRMA purchase agreement provides for additional
contingent cash and Company stock payments to the former CRMA shareholders not
to exceed $5,499,000 based on specified financial performance of CRMA through
September 1999. For the years ended September 30, 1999, 1998 and 1997, an
additional $2,085,000, $265,000 and $45,000, respectively, were capitalized as
goodwill relating to the additional contingent cash and Company stock payments.
The capitalized goodwill is being amortized on a straight-line basis through
September 2003.
3. Cash Flow Statement
Supplemental disclosure of cash flow information:
Years ended September 30,
(dollars in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Income tax payments $24,457 $17,174 $14,278
Interest paid $ 184 $ 803 $ 336
Non-cash investing and financing activities:
Assets acquired through financing $ 1,641 $ -- $ --
Issuance of common stock to ESOP $ 1,455 $ 1,323 $ 969
Tax benefit of exercised stock options $ 1,285 $ 1,660 $ 1,474
Purchase of CRMA with common/treasury stock $ 631 $ 145 $ --
Contributions of treasury stock to ESOP $ 236 $ -- $ 609
Vesting of restricted stock $ 17 $ 185 $ 289
35
4. Investments
The following is a summary of available-for-sale securities and other
investments at September 30, 1999 and 1998:
1999 1998
------------------------------------------- -------------------------------------
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 $ 5,228 $ -- $ (12) $ 5,216 $ 18,049 $ 234 $-- $ 18,283
======== ======== ======== ======== ======== ======== ==== ========
Long-term investments:
U.S. government obligations $ 39,462 $ 21 $ (709) $ 38,774 $ 20,051 $ 676 $-- $ 20,727
Marketable equity securities 3,751 913 -- 4,664 2,978 281 -- 3,259
Other 496 -- -- 496 382 -- -- 382
-------- -------- -------- -------- -------- -------- ---- --------
$ 43,709 $ 934 $ (709) $ 43,934 $ 23,411 $ 957 $-- $ 24,368
======== ======== ======== ======== ======== ======== ==== ========
The long-term U.S. government obligations mature in one to five years.
For the year ended September 30, 1997, a non-marketable investment with an
equity basis of $773,000 in an overseas start-up venture, principally an Italian
credit reporting agency, was written off due to the potential negative impact on
the agency's operations from a new Italian privacy law. During the year ended
September 30, 1998, the Company liquidated its share of this non-marketable
security for a gain of $165,000. The Company does not have any further financial
commitments with respect to this investment. The Company also recognized its
equity share of losses from this Italian venture of $2,082,000 for the year
ended September 30, 1997.
5. Property and Equipment
Property and equipment at September 30, 1999 and 1998, valued at cost,
consist of the following:
(dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------
Data processing equipment $ 51,530 $ 42,995
Office furniture, vehicles and equipment 18,747 16,156
Leasehold improvements 16,660 13,777
Capitalized leases 2,841 2,841
Less accumulated depreciation and amortization (50,425) (38,876)
-------- --------
Net property and equipment $ 39,353 $ 36,893
======== ========
Depreciation and amortization charged to operations were $15,618,000,
$13,553,000 and $10,479,000 for the years ended September 30, 1999, 1998 and
1997, 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, 1999:
Years ended September 30, (dollars in thousands)
- -------------------------------------------------------------------------------
2000 $ 467
2001 375
-----
842
Less: Amount representing interest (49)
-----
Present value of net minimum lease payments $ 793
=====
36
6. Intangibles
Intangibles at September 30, 1999 and 1998, consist of the following:
(dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------
Goodwill $ 15,515 $ 13,430
Other 2,470 2,470
Less accumulated amortization (7,255) (5,442)
-------- --------
$ 10,730 $ 10,458
======== ========
Amortization charged to operations was $1,813,000, $1,395,000 and
$1,274,000 for the years ended September 30, 1999, 1998 and 1997, respectively.
7. Income Taxes
The provision for income taxes consists of the following:
Years ended September 30,
(dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------
Current:
Federal $ 16,832 $ 17,380 $ 14,685
State 3,695 3,967 2,863
Foreign 227 240 136
-------- -------- --------
20,754 21,587 17,684
-------- -------- --------
Deferred:
Federal (112) (3,152) (2,400)
State (22) (657) (424)
-------- -------- --------
(134) (3,809) (2,824)
-------- -------- --------
$ 20,620 $ 17,778 $ 14,860
======== ======== ========
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.
37
The tax effects of significant temporary differences resulting in deferred
tax assets and liability at September 30, 1999 and 1998 are as follows:
(dollars in thousands) 1999 1998
- ---------------------------------------------------------------------------------------
Deferred tax assets:
Employee benefit plans $ 2,183 $ 1,594
Customer advances 1,819 2,198
Depreciation and amortization 1,708 2,350
Compensated absences 1,659 1,455
Deferred compensation 1,617 1,489
State taxes 1,313 1,388
Capital loss carryforward 1,009 1,245
Bad debt provision 504 464
Capital lease obligations 180 197
Warranty reserves 129 140
Other 928 630
-------- --------
13,049 13,150
Less valuation allowance (1,009) (1,245)
-------- --------
12,040 11,905
-------- --------
Deferred tax liabilities:
Tax on net unrealized gains on available-for-sale securities (87) (491)
-------- --------
Deferred tax assets, net $ 11,953 $ 11,414
======== ========
The valuation allowance for deferred tax assets at September 30, 1999 and
1998, was $1,009,000 and $1,245,000, respectively. The valuation allowance was
needed to reduce the deferred tax assets since the Company does not meet the
more-likely-than-not requirements for utilization of the capital loss
carryforward.
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) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
Income tax provision at federal statutory rates in 1999, 1998 and 1997 $ 17,710 $ 14,737 $ 12,441
State income taxes, net of federal benefit 2,387 2,152 1,586
Increase (decrease) in valuation allowance (236) 162 480
Other 759 727 353
-------- -------- --------
$ 20,620 $ 17,778 $ 14,860
======== ======== ========
38
8. Employee Benefit Plans
Pension plan
The Company has a defined benefit pension plan that covers eligible
full-time employees. The benefits are based on years of service and the
employee's compensation during employment. Contributions are intended to provide
not only for benefits attributed to service to date but also for those expected
to be earned in the future.
In September 1999, the Company curtailed the pension plan so that no new
participants are eligible for the plan, and no additional benefits will accrue
to participants after October 1, 1999. The curtailment resulted in a gain of
$720,000. The pension plan is expected to be settled in the Company's fiscal
year 2000 subject to governmental approval.
The following table sets forth the plan's funding status at September 30,
1999 and 1998:
(dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------
Vested benefit obligation $ 14,140 $ 9,524
Nonvested benefit obligation -- 1,457
Effect of projected future earnings -- 5,877
-------- --------
Projected benefit obligation 14,140 16,858
Fair value of plan assets (11,885) (10,413)
-------- --------
Projected benefit obligation in excess of plan assets 2,255 6,445
Unrecognized prior service cost -- 59
Unrecognized net loss -- (5,895)
Unrecognized net obligation remaining to be amortized -- (138)
Additional minimum liability -- 97
-------- --------
Accrued pension cost $ 2,255 $ 568
======== ========
The plan assets consist primarily of cash equivalents.
The projected benefit obligation includes an accumulated benefit obligation
of $14,140,000 and $10,981,000 at September 30, 1999 and 1998, respectively. The
projected benefit obligation exceeded the fair value of the pension plan assets
for the years ended September 30, 1999 and 1998, respectively.
The weighted-average discount rate used in determining the actuarial
present value of the projected benefit obligation was 6.0% at September 30,
1999. A rate of increase in future compensation levels for determining the
actuarial present value of the projected benefit obligation is not applicable at
September 30, 1999, due to the curtailment of the plan. The weighted average
discount rate and rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation were
6.5% and 4.0%, respectively, at September 1998. The expected long-term rate of
return on assets was 8.5% at September 30, 1999 and 1998.
The net pension cost for the fiscal years ended September 30, 1999 and
1998, included the following components:
(dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------
Service costs $ 2,134 $ 1,516
Interest cost on projected benefit obligation 1,048 943
Actual return on plan assets (2,363) (840)
Net amortization and deferral 1,682 132
------- -------
Net periodic pension plan cost $ 2,501 $ 1,751
======= =======
39
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. Effective October 1, 1999, the Company no
longer accepts new participants, and will no longer make provisions for
contributions to the ESOP. In addition, the ESOP may purchase stock from the
Company or its stockholders. Provisions for contributions to the ESOP were
$1,585,000, $1,803,000 and $1,534,000 for the years ended September 30, 1999,
1998 and 1997, respectively.
At September 30, 1999 and 1998, the ESOP held 808,000 and 836,000 shares of
Company stock, respectively. The amounts of dividends on ESOP shares were
$67,000, $75,000 and $81,000 for the years ended September 30, 1999, 1998 and
1997, respectively.
Company stock held and paid for by the ESOP is allocated annually to
participants based on employee compensation levels. While employed by the
Company, participants vest in the allocated shares at rates ranging from 0% to
30% over a period of 1 to 7 years until fully vested, depending on the plan.
Defined contribution plans
The Company offers 401(k) plans for eligible employees. Eligible employees
may contribute up to 15% of compensation. The Company also provides a matching
contribution. The Company contributions to 401(k) plans were $1,357,000,
$790,000 and $673,000 for the years ended September 30, 1999, 1998 and 1997,
respectively. Effective October 1, 1999 the 401(k) plan does not require a
minimum service period, and all Company matching contributions will vest 100%
immediately. Also, all Company contributions made prior to October 1, 1999,
vested 100% at October 1, 1999.
The Company maintains a supplemental retirement and savings plan for
certain officers and senior management employees. Company contributions to that
plan were $298,000, $247,000 and $132,000 for the years ended September 30,
1999, 1998 and 1997, respectively. Effective October 1, 1999, the Company will
no longer make matching contributions to the supplemental retirement and savings
plan.
Profit sharing plan
On October 1, 1999, the Company has established a profit sharing plan that
covers eligible employees after six months of continuous employment.
Contributions to the plan are determined annually by the company's Board of
Directors based on company performance. Participants vest at varying rates over
a five-year period until fully vested.
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 $1,391,000,
$3,273,000 and $3,842,000 for the years ended September 30, 1999, 1998 and 1997,
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, 1999 and 1998, the long-term officers'
incentive plan payable was $2,353,000 and $3,066,000, 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 $8,263,000, $6,962,000 and $6,490,000 for
the years ended September 30, 1999, 1998 and 1997, respectively.
40
9. Stock
Common
A total of 35,000,000 shares of common stock, $.01 par value, are
authorized, of which 14,313,616 shares (including 333,191 shares of treasury
stock) were issued September 30, 1999, and 13,992,126 shares (including 9,787
shares of treasury stock) were issued September 30, 1998.
Preferred
A total of 1,000,000 shares of preferred stock, $.01 par value, are
authorized; no preferred stock has been issued.
10. Stock Option Plans
The Company has two stock option plans, one of which is for the granting of
stock options, stock appreciation rights, restricted stock and common stock that
reserve shares of common stock for issuance to officers, key employees and
non-employee directors. The Company has elected to continue to apply the
provisions of APB No. 25, and provide the pro forma disclosures of SFAS No. 123,
"Accounting for Stock-Based Compensation." Granted awards generally have a
maximum term of ten years and vest over one to five years. Under this plan
approved by the stockholders, a number of shares equal to 4% of the number of
shares of the Company's common stock outstanding on the last day of the
preceding fiscal year is added to the shares available under the plan each
fiscal year, provided that the number of shares suitable for grants of incentive
stock options for the remaining term of the plan shall not exceed 1,500,000
shares. The other plan is limited to the former employees of RMT, who, as of the
merger date, held unexpired and unexercised stock option grants under the RMT
stock option plans. Granted awards have a maximum term of ten years and vest
over three years. The total number of issuable shares under the plan is 650,800.
The fair value of options at the date of grant was estimated using the
Black-Scholes model with the following weighted-average assumptions for the
years ended September 30:
1999 1998 1997
- --------------------------------------------------------------------------------
Expected life (years) 5 5 5
Interest rate 5.3% 5.5% 6.5%
Volatility 42% 43% 45%
Dividend yield 0% 0% 0%
The following information regarding these option plans for the years ended
September 30 is as follows:
1999 1998 1997
------------------------- ------------------------- -------------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Options price Options price Options price
- ----------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 1,796,000 $ 29.11 1,843,000 $ 20.63 1,388,000 $ 12.21
Granted 1,009,000 $ 35.38 526,000 $ 38.02 613,000 $ 36.82
Exercised (277,000) $ 11.53 (487,000) $ 5.61 (141,000) $ 7.19
Forfeited (158,000) $ 38.66 (86,000) $ 34.43 (17,000) $ 28.96
---------- ---------- ----------
Outstanding at end of year 2,370,000 $ 33.21 1,796,000 $ 29.11 1,843,000 $ 20.63
========== ========== ==========
Options exercisable at year end 614,000 $ 23.63 541,000 $ 11.80 782,000 $ 5.33
========== ========== ==========
The weighted-average fair value of options granted for the years ended
September 30, 1999, 1998 and 1997, was $15.74, $17.30 and $17.47, respectively.
41
The following table summarizes information about significant fixed-price stock
option groups outstanding September 30, 1999:
Options outstanding Options exercisable
------------------- -------------------
Weighted-
average remaining Weighted- Weighted-
Number contractual average Number average
Range of exercise prices outstanding life exercise price outstanding exercise price
- ----------------------------------------------------------------------------------------------------------------------
$ .92 to $30.06 282,000 2.94 $ 10.26 266,000 $ 9.73
$30.63 to $34.75 687,000 8.09 $ 32.23 245,000 $ 31.57
$35.06 to $40.00 1,277,000 7.30 $ 37.66 61,000 $ 38.17
$40.56 to $49.44 124,000 7.32 $ 45.06 42,000 $ 44.61
--------- -------
$ .92 to $49.44 2,370,000 7.01 $ 33.21 614,000 $ 23.63
========= =======
Stock-based compensation under SFAS No. 123 would have had the following
pro forma effects for the years ended September 30:
(in thousands, except per share data) 1999 1998 1997
- --------------------------------------------------------------------------------
Net income, as reported $ 29,980 $ 24,327 $ 20,686
======== ======== ==========
Pro forma net income $ 25,440 $ 20,655 $ 18,091
======== ======== ==========
Earnings per share, as reported:
Diluted $ 2.09 $ 1.68 $ 1.46
======== ======== ==========
Basic $ 2.13 $ 1.77 $ 1.55
======== ======== ==========
Pro forma earnings per share:
Diluted $ 1.77 $ 1.43 $ 1.27
======== ======== ==========
Basic $ 1.81 $ 1.50 $ 1.35
======== ======== ==========
The pro forma effect on net income for each of the years ended September
30, 1999, 1998 and 1997, may not be representative of the effects on reported
net income in future years.
11. Commitments and Contingencies
The Company conducts certain of its operations in facilities occupied under
non-cancelable operating leases with lease terms in excess of one year. The
leases generally provide for annual increases based upon the Consumer Price
Index or fixed increments.
In May 1998, the Company entered into a synthetic lease agreement to lease
land in San Rafael, California, and improvements comprising the first phase of
an office complex facility to be constructed on the land. A synthetic lease is
asset-based financing structured to be treated as a lease for accounting
purposes but as a loan for tax purposes. The office complex facility is intended
to accommodate the future growth of the Company.
The Company had an option (the "Option") to purchase the undeveloped land
in December 1997, and the Option was assigned to the lessor in connection with
the synthetic lease transaction. The lessor under the synthetic lease has
committed to spend up to $55 million for the purchase of the land and
construction of this first phase of the facility, and the Company will act as
construction agent for the lessor. At September 30, 1999, the lessor's total
accumulated cost for land and construction of the facility was $22.1 million.
The lease term began in May 1998 and continues thereafter for five years for the
land and, when they are constructed, will incorporate the buildings and other
improvements that will comprise the first phase of the facility. Rental payments
will commence on completion of construction, and at that time the rental
payments will be based on the total construction costs for the facility and the
one month LIBOR rate plus 0.75% or 1.00%. The completion of construction is
expected to occur in November 2001.
42
With the approval of lessor, the Company may extend the lease term for up
to three one-year periods or one three-year period. The Company has the option
to: purchase the entire facility at a purchase price approximating lessor's
then-accumulated total costs; to purchase only certain portions of the facility,
at a pre-set price, at any time during the term; or, at the expiration of the
lease term, to cause the facility to be sold to a third party.
The synthetic lease requires the Company to maintain specified financial
covenants, all of which the Company was in compliance with at September 30,
1999. Future minimum lease payments under the synthetic lease are not included
in the schedule below.
Minimum future rental commitments under operating leases are as follows:
Year ending September 30, (dollars in thousands)
- -------------------------------------------------------------------------------
2000 $ 11,179
2001 10,697
2002 8,867
2003 5,907
2004 4,342
Thereafter 43,161
--------
$ 84,153
========
Rent expense under operating leases, including month-to-month leases, was
$9,161,000, $8,298,000 and $6,413,000 for the years ended September 30, 1999,
1998 and 1997, respectively.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial condition.
12. Segment Information
The Company adopted Statement of Financial Accounting No. 131, "Disclosures
about Segments of an Enterprise and Related Information" for the annual
consolidated financial statements for the year ended September 30, 1999. This
statement establishes standards for publicly held entities to follow in
reporting information about operating segments in annual financial statements
and requires that those entities report selected information about operating
segments in interim financial statements. This statement also establishes
standards for related disclosures about products and services, geographic areas
and major customers. Operating segments are defined by SFAS No. 131 as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
The Company's Chief Executive and Operating Officers evaluate financial
performance based on measures of business segment revenues and operating profit
or loss. Intercompany revenues between business segments are accounted for on a
cost basis. Unallocated corporate expenses consist mainly of cost associated
with marketing, computer information systems, human resources, legal and
finance. Unallocated other income (expense) consists mainly of interest revenues
and an equity loss in an investment. The Company does not evaluate the financial
performance of each segment based on its assets or capital expenditures.
The Company has identified two reportable operating segments based on the
criteria of SFAS No. 131, which include the Credit and DynaMark strategic
business units. The Credit business segment provides a wide variety of products
and services to lending and payment system institutions, worldwide, to help them
make more profitable decisions regarding prospects, customers and portfolios.
The DynaMark business segment processes, develops and manages marketing
databases for industries engaged in direct marketing.
43
Year ended September 30, 1999
(dollars in thousands) Credit DynaMark Other Total
- -----------------------------------------------------------------------------------------------------------------------
Revenues:
External $ 196,442 $ 68,194 $ 15,150 $ 279,786
Intercompany eliminations -- (2,855) -- (2,855)
--------- --------- --------- ---------
$ 196,442 $ 65,339 $ 15,150 $ 276,931
========= ========= ========= =========
Segment income (loss) from operations:
External $ 94,173 $ 10,210 $ (3,131) $ 101,252
Intercompany eliminations 2,855 (2,855) -- --
--------- --------- --------- ---------
$ 97,028 $ 7,355 $ (3,131) 101,252
========= ========= =========
Unallocated corporate expenses (54,877)
---------
46,375
Unallocated other income, net 4,225
---------
$ 50,600
=========
Year ended September 30, 1998
(dollars in thousands) Credit DynaMark Other Total
- -----------------------------------------------------------------------------------------------------------------------
Revenues:
External $ 179,857 $ 53,237 $ 16,564 $ 249,658
Intercompany eliminations -- (4,113) -- (4,113)
--------- --------- --------- ---------
$ 179,857 $ 49,124 $ 16,564 $ 245,545
========= ========= ========= =========
Segment income (loss) from operations:
External $ 84,140 $ 6,792 $ (2,997) $ 87,935
Intercompany eliminations 4,113 (4,113) -- --
--------- --------- --------- ---------
$ 88,253 $ 2,679 $ (2,997) 87,935
========= ========= =========
Unallocated corporate expenses (47,503)
---------
40,432
Unallocated other income, net 1,673
---------
$ 42,105
=========
Year ended September 30, 1997
(dollars in thousands) Credit DynaMark Other Total
- -----------------------------------------------------------------------------------------------------------------------
Revenues:
External $ 153,734 $ 34,589 $ 15,442 $ 203,765
Intercompany eliminations -- (4,756) -- (4,756)
--------- --------- --------- ---------
$ 153,734 $ 29,833 $ 15,442 $ 199,009
========= ========= ========= =========
Segment (loss) from operations:
External $ 74,630 $ 7,146 $ (1,253) $ 80,523
Intercompany eliminations 4,756 (4,756) -- --
--------- --------- --------- ---------
$ 79,386 $ 2,390 $ (1,253) 80,523
========= ========= =========
Unallocated corporate expenses (42,767)
---------
37,756
Unallocated other expense, net (2,210)
---------
$ 35,546
=========
The Company's international operations consist primarily of providing
products and services principally to the financial services industry.
International revenues are principally derived from sales through subsidiaries
in the United Kingdom and Canada for the year ended September 30, 1999, and
through subsidiaries in the United Kingdom, Canada and Japan for the years ended
September 30, 1998 and 1997. The Company's revenues from customers outside the
United States were $41,526,000, $42,894,000 and $33,879,000 for the years ended
September 30, 1999, 1998 and 1997, respectively.
44
13. Other Income (Expense)
Other income (expense) consists of the following:
Years ended September 30,
(dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------
Interest income $ 3,145 $ 2,403 $ 2,040
Pension curtailment gain 720 -- --
Gain on sale of investments 483 -- --
Interest expense (184) (803) (336)
Foreign currency loss (183) (278) (677)
Equity loss in investment -- -- (2,082)
Investment write-off -- -- (773)
Acquisition expenses -- -- (558)
Other 244 351 176
------- ------- -------
$ 4,225 $ 1,673 $(2,210)
======= ======= =======
14. Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Income
(Loss) Balance
In fiscal 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in financial
statements. SFAS No. 130 requires classification of other comprehensive income
(loss) in a financial statement and display of accumulated other comprehensive
income (loss) separately from retained earnings and additional paid-in capital.
Other comprehensive income (loss) includes unrealized gains (losses) on
investments and foreign currency translation adjustments.
Supplemental disclosure of other comprehensive income (loss) information:
Year ended September 30, 1999
Before-tax Tax Net-of-tax
(dollars in thousands) amount amount amount
- -------------------------------------------------------------------------------
Unrealized losses on investments:
Unrealized holding losses
arising during period $ (494) $ (201) $ (293)
Less: reclassification adjustment (474) (193) (281)
------- ------- -------
Net unrealized loss (968) (394) (574)
Foreign currency translation adjustments (214) (87) (127)
------- ------- -------
Other comprehensive loss $(1,182) $ (481) $ (701)
======= ======= =======
Year ended September 30, 1998
Before-tax Tax Net-of-tax
(dollars in thousands) amount amount amount
- -------------------------------------------------------------------------------
Unrealized gains on investments:
Unrealized holding gains
arising during period $ 663 $ 280 $ 383
Foreign currency translation adjustments 238 100 138
------- ------- -------
Other comprehensive income $ 901 $ 380 $ 521
======= ======= =======
45
Year ended September 30, 1997
Before-tax Tax Net-of-tax
(dollars in thousands) amount amount amount
- -------------------------------------------------------------------------------
Unrealized gains on investments:
Unrealized holding gains
arising during period $ 378 $ 158 $ 220
Foreign currency translation adjustments (280) (117) (163)
------- ------- -------
Other comprehensive income $ 98 $ 41 $ 57
======= ======= =======
Supplemental disclosure of accumulated comprehensive income (loss) balance:
Period from September 30, 1997, to September 30, 1999 (dollars in thousands)
- -----------------------------------------------------------------------------------------------
Foreign Accumulated
Unrealized currency other
gains (losses) on translation comprehensive
investments adjustments income (loss)
----------- ----------- -------------
Balances at September 30, 1997 $ 317 $(308) $ 9
Current period change 383 138 521
----- ----- -----
Balances at September 30, 1998 700 (170) 530
Current period change (574) (127) (701)
----- ----- -----
Balances at September 30, 1999 $ 126 $(297) $(171)
===== ===== =====
15. Earnings Per Share
The following reconciles the numerators and denominators of diluted and
basic earnings per share (EPS):
Years ended September 30,
(dollars in thousands, except per share data) 1999 1998 1997
- ---------------------------------------------------------------------------------------------
Numerator - Net income $ 29,980 $ 24,327 $ 20,686
======== ======== ========
Denominator - Shares:
Diluted weighted-average shares and assumed
conversions of stock options 14,364 14,463 14,202
Effect of dilutive securities - employee stock options (291) (700) (816)
-------- -------- --------
Basic weighted-average shares 14,073 13,763 13,386
======== ======== ========
Earnings per share:
Diluted $ 2.09 $ 1.68 $ 1.46
======== ======== ========
Basic $ 2.13 $ 1.77 $ 1.55
======== ======== ========
The computation of diluted EPS for the years ended September 30, 1999, 1998
and 1997, respectively, excludes stock options to purchase 813,000, 930,000 and
474,000 shares of common stock. The shares were excluded because the exercise
prices for the options were greater than the respective average market price of
the common shares and their inclusion would be antidilutive.
46
16. Supplementary Financial Data (Unaudited)
The following table presents selected unaudited consolidated financial
results for each of the eight quarters in the two-year period ended September
30, 1999. In the Company's opinion, this unaudited information has been prepared
on the same basis as the audited information and includes all adjustments
(consisting of only normal recurring adjustments) necessary for a fair statement
of the consolidated financial information for the period presented.
(dollars in thousands, except per share data) Dec. 31, 1998 Mar. 31, 1999 June 30, 1999 Sept. 30, 1999
- ---------------------------------------------------------------------------------------------------------------------------
Revenues $ 67,977 $ 68,874 $ 67,241 $ 72,839
Cost of revenues 25,071 26,941 25,196 28,246
----------- ----------- ----------- -----------
Gross profit $ 42,906 $ 41,933 $ 42,045 $ 44,593
=========== =========== =========== ===========
Net income $ 7,048 $ 7,464 $ 6,973 $ 8,495
=========== =========== =========== ===========
Earnings per share:
Diluted $ .49 $ .51 $ .49 $ .60
=========== =========== =========== ===========
Basic $ .50 $ .53 $ .50 $ .61
=========== =========== =========== ===========
Shares used in computing earnings per share:
Diluted 14,354,000 14,578,000 14,301,000 14,212,000
=========== =========== =========== ===========
Basic 14,014,000 14,177,000 14,081,000 14,020,000
=========== =========== =========== ===========
(dollars in thousands, except per share data) Dec. 31, 1997 Mar. 31, 1998 June 30, 1998 Sept. 30, 1998
- ---------------------------------------------------------------------------------------------------------------------------
Revenues $ 53,511 $ 59,655 $ 64,642 $ 67,737
Cost of revenues 19,865 21,206 21,946 21,963
----------- ----------- ----------- -----------
Gross profit $ 33,646 $ 38,449 $ 42,696 $ 45,774
=========== =========== =========== ===========
Net income $ 3,967 $ 5,488 $ 6,399 $ 8,473
=========== =========== =========== ===========
Earnings per share:
Diluted $ .28 $ .38 $ .45 $ .59
=========== =========== =========== ===========
Basic $ .29 $ .40 $ .46 $ .61
=========== =========== =========== ===========
Shares used in computing earnings per share:
Diluted 14,346,000 14,304,000 14,359,000 14,449,000
=========== =========== =========== ===========
Basic 13,489,000 13,707,000 13,894,000 13,964,000
=========== =========== =========== ===========
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
47
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 1, 2000.
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 1, 2000.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the information under the captions
"Compensation of Directors and Executive Officers," "Compensation Committee
Interlocks and Insider Participation," and "Director Consulting Arrangements" in
the Company's definitive proxy statement for the Annual Meeting of Stockholders
to be held on February 1, 2000.
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 1, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the information under the captions "Director
Consulting Arrangements" and "Compensation Committee Interlocks and Insider
Participation" in the Company's definitive proxy statement for the Annual
Meeting of Stockholders to be held on February 1, 2000.
48
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......................... 27
Consolidated statements of income and comprehensive
income for each of the years in the three-year
period ended September 30, 1999................... 28
Consolidated balance sheets at September 30, 1999 and
September 30, 1998................................ 29
Consolidated statements of stockholders' equity for
each of the years in the three-year period ended
September 30, 1999................................ 30
Consolidated statements of cash flows for each of the
years in the three-year period ended
September 30, 1999................................ 31
Notes to consolidated financial statements............. 32
2. Financial statement schedule:
Independent Auditor's Report on Financial Statement
Schedule................................................ 56
II Valuation and qualifying accounts at September 30, 1998,
1997 and 1996........................................... 57
3. Exhibits:
2.1 Lease dated December 2, 1998, by and between DynaMark, Inc.,
and CSM Corporation filed as Exhibit 2.1 to the Company's
report on Form 10-K for the fiscal year ended September 30,
1998, and incorporated herein by reference.
2.2 Agreement and Plan of Reorganization, dated June 12, l997,
among the Company, FIC Acquisition Corporation, Risk
Management Technologies ("RMT"), and the shareholders and
optionholders of RMT, filed as Exhibit 2.2 to the Company's
report on Form 10-K for the fiscal year ended September 30,
1997, and incorporated herein by reference. Pursuant to Item
601(b)(2) of Regulation S-K, certain schedules were omitted
but will be furnished supplementally to the Commission on
request.
2.3 First Amendment to Agreement and Plan of Merger and
Reorganization effective as of May 17, 1999, by and among
Fair, Isaac and Company, Incorporated; Credit & Risk
Management Associates, Inc.; and Donald J.
Sanders, Paul A. Makowski, and Lawrence E. Dukes.
2.4 Amendment To Lease, dated December 2, 1998, by and between CSM
Corporation (assignee) and DynaMark, Inc. amending lease dated
May 1,1995 between DynaMark, Inc. and Control Data Systems
Inc. filed as Exhibit 2.4 to the Company's report on Form 10-K
for the fiscal year ended September 30, 1998, and incorporated
herein by reference.
3.1 Restated Certificate of Incorporation of the Company, filed as
Exhibit 3.1 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1997, and incorporated herein
by reference.
3.2 Restated By-laws of the Company(as amended effective November
19, 1999).
49
4.1 Registration Rights Agreement, dated June 23, l997, among the
Company, David LaCross and Kathleen O. LaCross, Trustees U/D/T
dated April 2, 1997, Jefferson Braswell, Software Alliance
LLC, Robert Ferguson, James T. Fan and Leland Prussia, filed
as Exhibit 4.1 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1997, and incorporated herein
by reference.*
4.2 Registration Rights Agreement, dated September 30, 1996, among
the Company, Donald J. Sanders, Paul A. Makowski and Lawrence
E. Dukes, filed as Exhibit 4.2 to the Company's report on Form
10-K for the fiscal year ended September 30, 1995, and
incorporated herein by reference.
10.1 Certificate of Resolution Changing Officers' Incentive Plan,
Exempt Employees Bonus Plan and other Company Plan
Parameters.*
10.2 Fair, Isaac and Company, Inc. 1999 Employee Stock Purchase
Plan.*
10.3 Lease dated April 28, 1995, between CSM Investors, Inc., and
DynaMark, Inc. filed as Exhibit 10.3 to the Company's report
on Form 10-K for the fiscal year ended September 30, 1995, and
incorporated herein by reference.
10.4 Fair, Isaac and Company, Inc. Officers' Incentive Plan
(effective October 1, 1992), originally filed as Exhibit 10.4
to the Company's report on Form 10-K for the fiscal year ended
September 30, 1994.*
10.5 Lease, dated October 30, 1983, between S.R.P. Limited
Partnership and the Company, as amended, originally filed as
Exhibit 10.7 to the Registration Statement filed as Exhibit
10.5 to the Company's report on Form 10-K for the fiscal year
ended September 30, 1998, and incorporated herein by
reference.
10.6 Stock Option Plan for Non-Employee Directors, originally filed
as Exhibit 10.8 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1988, filed as Exhibit 10.6 to
the Company's report on Form 10-K for the fiscal year ended
September 30, 1998, and incorporated herein by reference.*
10.7 Lease dated July 1, 1993, between The Joseph and Eda Pell
Revocable Trust and the Company and the First through Fifth
Addenda thereto filed as Exhibit 10.7 to the Company's report
on Form 10-K for the fiscal year ended September 30, 1995, and
incorporated herein by reference.
10.8 Amendment No. 3 to the Company's 1992 Long-Term Incentive Plan
(as amended and restated effective November 19, 1999).*
10.9 First Amendment to the Company's Stock Option Plan for
Non-Employee Directors, originally filed as Exhibit 10.12 to
the Company's report on Form 10-K for the fiscal year ended
September 30, 1989, filed as Exhibit 10.9 to the Company's
report on Form 10-K for the fiscal year ended September 30,
1998, and incorporated herein by reference.*
10.10 Amendment No.1 to the Company's 1992 Long-Term Incentive Plan
(as amended and restated effective November 21, 1995), filed
as Exhibit 10.10 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1997 and incorporated herein
by reference.*
10.11 Addendum Number Seven to lease between S.R.P. Limited
Partnership and the Company, originally filed as Exhibit 10.15
to the Company's report on Form 10-K for the fiscal year ended
September 30, 1990 filed as Exhibit 10.11 to the Company's
report on Form 10-K for the fiscal year ended September 30,
1998, and incorporated herein by reference.
10.12 Addenda Numbers Eight and Nine to lease between 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.
50
10.13 Lease, dated September 5, 1991, between 111 Partners, a
California general partnership, and the Company originally
filed as Exhibit 10.20 to the Company's report on Form 10-K
for the fiscal year ended September 30, 1991 filed as Exhibit
10.13 to the Company's report on Form 10-K for the fiscal year
ended September 30, 1998, and incorporated herein by
reference.
10.14 Construction Loan Agreement, dated September 5, 1991, between
111 Partners and the Company originally filed as Exhibit 10.21
to the Company's report on Form 10-K for the fiscal year ended
September 30, 1991 filed as Exhibit 10.14 to the Company's
report on Form 10-K for the fiscal year ended September 30,
1998, and incorporated herein by reference.
10.15 Amendment No.2 to the Company's 1992 Long-Term Incentive Plan
(as amended and restated effective November 21, 1995) filed as
Exhibit 10.15 to the Company's report on Form 10K for the
fiscal year ended September 30, 1997 and incorporated herein
by reference.*
10.16 The Company's 1992 Long-Term Incentive Plan as amended and
restated effective November 21, 1995, filed as Exhibit 10.16
to the Company's report on Form 10-K for the fiscal year ended
September 30, 1996, and incorporated herein by reference.*
10.17 Amendment No.3 to the Company's Stock Option Plan for
Non-Employee Directors, filed as Exhibit 10.17 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1997, and incorporated herein by reference.*
10.18 Lease dated May 1, 1995, between Control Data Corporation and
DynaMark, Inc. filed as Exhibit 10.18 to the Company's report
on Form 10-K for the fiscal year ended September 30, 1995, and
incorporated herein by reference.
10.19 First Amendment to Participation Agreement dated April 5, 1999
by and between Company, Lease Plan North America, Inc., ABN
Amro Bank N.V. and other participants named therein.
10.20 Fair, Isaac Supplemental Retirement and Savings Plan and Trust
Agreement effective November 1, 1994, filed as Exhibit 10.20
to the Company's report on Form 10-K for the fiscal year ended
September 30, 1994, and incorporated herein by reference.*
10.21 Lease dated July 10, 1993, between the Joseph and Eda Pell
Revocable Trust and the Company filed as Exhibit 10.21 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1995, and incorporated herein by reference.
10.22 Lease dated October 11, 1993, between the Joseph and Eda Pell
Revocable Trust and the Company and the First through Fourth
Addenda thereto filed as Exhibit 10.22 to the Company's report
on Form 10-K for the fiscal year ended September 30, 1995, and
incorporated herein by reference.
10.23 Second Amendment to Lease dated December 2, 1998, between CSM
Corporation and DynaMark, Inc. amending lease between the
parties dated March 11, 1997 filed as Exhibit 10.23 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1998, and incorporated herein by reference.
10.24 Exchange Agreement and Plan of Reorganization, dated July 19,
1996, among DynaMark, Inc., Printronic Corporation of America,
Inc., Leo R. Yochim, and Susan Keenan, filed as Exhibit 10.24
to the Company's report on Form 10-K for the fiscal year ended
September 30, 1996, and incorporated herein by reference.
10.25 Agreement and Plan of Merger and Reorganization, dated
September 30, 1996, among the Company, FIC Acquisition
Corporation, Credit & Risk Management Associates, Inc., Donald
J. Sanders, Paul A. Makowski and Lawrence E. Dukes, filed as
Exhibit 10.25 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1996, and incorporated herein
by reference.
51
10.26 Contract between the Company and Dr. Robert M. Oliver, dated
April 2, 1996, filed as Exhibit 10.26 to the Company's report
on Form 10-K for the fiscal year ended September 30, 1996, and
incorporated herein by reference.*
10.27 Letter of Intent dated July 15, 1996, between the Company and
Village Properties, and the First Amendment thereto dated July
18, 1996, filed as Exhibit 10.27 to the Company's report on
Form 10-K for the fiscal year ended September 30, 1996, and
incorporated herein by reference.
10.28 Office Building Lease, dated November 14, 1996, between the
Company and Regency Center, filed as Exhibit 10.28 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1996, and incorporated herein by reference.
10.29 Sixth and Seventh Addenda to the Lease, dated July 1, 1993,
between the Company and the Joseph and Eda Pell Revocable
Trust, filed as Exhibit 10.29 to the Company's report on Form
10-K for the fiscal year ended September 30, 1996, and
incorporated herein by reference.
10.30 First and Second Addenda to the Lease dated July 10, 1993,
between the Company and the Joseph and Eda Pell Revocable
Trust, filed as Exhibit 10.30 to the Company's report on Form
10-K for the fiscal year ended September 30, 1996, and
incorporated herein by reference.
10.31 Fifth Addendum to the Lease, dated October 11, 1993, between
the Company and the Joseph and Eda Pell Revocable Trust, filed
as Exhibit 10.31 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1996, and incorporated herein
by reference.
10.32 First Addendum to Lease, dated August 13, l997, by and between
the Company and Regency Center, filed as Exhibit 10.32 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1997, and incorporated herein by reference.
10.33 Option Agreement, dated November 26, l997, by and between the
Company and Village Builders, L.P., filed as Exhibit 10.33 to
the Company's report on Form 10-K for the fiscal year ended
September 30, 1997, and incorporated herein by reference.
10.34 Leasehold Improvements Agreement, dated November 26, l997, by
and between the Company and Village Builders, L.P., filed as
Exhibit 10.34 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1997, and incorporated herein
by reference.
10.35 Lease, dated March 11, l997, by and between DynaMark, Inc. and
CSM, filed as Exhibit 10.35 to the Company's report on Form
10-K for the fiscal year ended September 30, 1997, and
incorporated herein by reference.
10.36 First Amendment to Lease, dated September 24, l997, by and
between DynaMark, Inc. and CSM, filed as Exhibit 10.36 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1997, and incorporated herein by reference.
10.37 Chase Database Agreement, dated October 29, l997, by and among
DynaMark, Inc. and Chase Manhattan Bank USA, National
Association, filed as Exhibit 10.37 to the Company's report on
Form 10-K for the fiscal year ended September 30, 1997, and
incorporated herein by reference. Confidential treatment has
been requested for certain portions of this document. Such
portions have been omitted from the filing and have been filed
separately with the Commission.
10.38 Participation Agreement, dated May 15, 1998, between Company,
Lease Plan North America, Inc., ABN Amro Bank N.V. and other
participants named therein filed as Exhibit 10.38 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1998, and incorporated herein by reference.
10.39 Lease Agreement, Construction Deed of Trust with Assignment of
Rents, Security Agreement and Fixture Filing, dated May 15,
1998, between Company and Lease Plan North America, Inc. filed
52
as Exhibit 10.39 to the Company's report on Form 10-K for the
fiscal year ended September 30, 1998, and incorporated herein
by reference.
10.40 Purchase Agreement dated May 15, 1998, between Company and
Lease Plan North America, Inc. filed as Exhibit 10.40 to the
Company's report on Form 10-K for the fiscal year ended
September 30, 1998, and incorporated herein by reference.
10.41 Third Amendment to Lease Dated December 2, 1998, by and
between CSM Corporation and DynaMark, Inc. amending lease
between the parties dated April 28, 1995 filed as Exhibit
10.41 to the Company's report on Form 10-K for the fiscal year
ended September 30, 1998, and incorporated herein by
reference.
10.42 Employment Agreement entered into effective as of August 23,
1999, by and between Fair, Isaac and Company, Inc. and Thomas
G. Grudnowski.*
10.43 First Amendment to Employment Agreement entered into effective
as of December 3, 1999, by and between Fair, Isaac and
Company, Inc. and Thomas G. Grudnowski.*
21.1 Subsidiaries of the Company.
23.1 Consent of KPMG, LLP (see page 58 of this Form 10-K).
24.1 Power of Attorney (see page 54 of this Form 10-K).
27 Financial Data Schedule.
* Management Contract or Compensatory Plan or Arrangement
(b) Reports on Form 8-K:
One report on Form 8-K was filed with the Securities and Exchange
Commission during the fiscal quarter ended September 30, 1999.
53
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 21, 1999
By /S/PETER L. MCCORKELL
-------------------------------------
Peter L. McCorkell
Executive Vice President, Secretary
and General Counsel
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints PETER L. McCORKELL his attorney-in-fact,
with full power of substitution, for him in any and all capacities, to sign any
amendments to this Report on Form 10-K and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorney-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
/S/ THOMAS G. GRUDNOWSKI President, Chief Executive Officer December 21, 1999
- ---------------------------------------- (Principal Executive Officer) and Director
Thomas G. Grudnowski
/S/ HENK J. EVENHUIS Executive Vice President and December 21, 1999
- ---------------------------------------- Chief Financial Officer
Henk J. Evenhuis
/S/ A. GEORGE BATTLE Director December 21, 1999
- ----------------------------------------
A. George Battle
/S/ H. ROBERT HELLER Director December 21,1999
- ----------------------------------------
H. Robert Heller
/S/ GUY R. HENSHAW Director December 21, 1999
- ----------------------------------------
Guy R. Henshaw
/S/ DAVID S. P. HOPKINS Director December 21, 1999
- ----------------------------------------
David S. P. Hopkins
/S/ ROBERT M. OLIVER Director December 21, 1999
- ----------------------------------------
Robert M. Oliver
/S/ ROBERT D. SANDERSON Director December 21, 1999
- ----------------------------------------
Robert D. Sanderson
/S/ JOHN D. WOLDRICH Director December 21, 1999
- ----------------------------------------
John D. Woldrich
54
FAIR, ISAAC AND COMPANY, INCORPORATED
Form 10K for fiscal year ended September 30, 1999
SIGNATURES AND POWER OF ATTORNEY continued
/S/ TONY J. CHRISTIANSON Director December 21, 1999
- ----------------------------------------
Tony J. Christianson
/S/ MARGARET L. TAYLOR Director December 21, 1999
- ----------------------------------------
Margaret L. Taylor
55
The Board of Directors
Fair, Isaac and Company, Incorporated:
Under date of October 26, 1999, we reported on the consolidated balance
sheets of Fair, Isaac and Company, Incorporated and subsidiaries as of September
30, 1999 and 1998, and the related consolidated statements of income and
comprehensive income, stockholders' equity, and cash flows for each of the years
in the three-year period ended September 30, 1999, which are included in the
1999 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 1999 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.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of revenue recognition for certain products in 1999.
/s/ KPMG LLP
San Francisco, California
October 26, 1999
56
Schedule II
Fair, Isaac and Company, Incorporated
VALUATION AND QUALIFYING ACCOUNTS
September 30, 1999, 1998 and 1997
Balance at Balance at
Beginning Charged Charged End of
Description of Period to Expense to Revenues Write-offs Period
----------- --------- ---------- ----------- ---------- ------
September 30, 1999:
Allowance for Doubtful Accounts $1,163,000 $ 123,000 $ 441,000 $ (453,000) $1,274,000
September 30, 1998:
Allowance for Doubtful Accounts $ 758,000 $ 677,000 $ 271,000 $ (543,000) $1,163,000
September 30, 1997:
Allowance for Doubtful Accounts $ 485,000 $ 438,000 -- $ (165,000) $ 758,000
57
Consent of Independent Auditors
The Board of Directors
Fair, Isaac and Company, Incorporated:
We consent to incorporation by reference in the registration statements
(Nos. 33-20349, 33-26659, 33-63428, 333-02121, 333-32309, 333-65179 and
333-83905) on Form S-8 and the registration statements (Nos. 333-20537 and
333-42475) on Form S-3 of Fair, Isaac and Company, Incorporated and subsidiaries
of our reports dated October 26, 1999, relating to the consolidated balance
sheets of Fair, Isaac and Company, Incorporated and subsidiaries as of September
30, 1999 and 1998, and the related consolidated statements of income and
comprehensive income, stockholders' equity, and cash flows and related financial
statement schedule for each of the years in the three-year period ended
September 30, 1999, which reports appear in the September 30, 1999 annual report
on Form 10-K of Fair, Isaac and Company, Incorporated, and subsidiaries. Our
reports dated October 26, 1999 contain an explanatory paragraph that states that
the Company changed its method of revenue recognition for certain products in
1999.
/s/ KPMG LLP
San Francisco, California
December 22, 1999
58
EXHIBIT INDEX
TO FAIR, ISAAC AND COMPANY, INCORPORATED
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
Exhibit No. Exhibit
- ----------- -------
2.3 First Amendment to Agreement and Plan of Merger and
Reorganization effective as of May 17, 1999, by and among Fair,
Isaac and Company, Incorporated, a Delaware corporation; Credit &
Risk Management Associates, Inc.; and Donald J. Sanders, Paul A.
Makowski, and Lawrence E. Dukes.
3.2 Restated By-laws of the Company (as amended effective November
19, 1999).
10.1 Certificate of Resolution Changing Officers' Incentive Plan,
Exempt Employees Bonus Plan and other Company Plan Parameters.
10.2 Fair, Isaac and Company, Inc. 1999 Employee Stock Purchase Plan.
10.8 Amendment No. 3 to the Company's 1992 Long-Term Incentive Plan
(as amended and restated effective November 19, 1999).
10.19 First Amendment to Participation Agreement dated April 5, 1999 by
and between Company, Lease Plan North America, Inc., ABN Amro
Bank N.V. and other participants named therein.
10.42 Employment Agreement entered into effective as of August 23,
1999, by and between Fair, Isaac and Company, Inc. and Thomas G.
Grudnowski.
10.43 First Amendment to Employment Agreement entered into effective as
of December 3, 1999, by and between Fair, Isaac and Company, Inc.
and Thomas G. Grudnowski.
21.1 Subsidiaries of the Company.
23.1 Consent of KPMG, LLP.
24.1 Power of Attorney.
27 Financial Data Schedule.
59
FIRST AMENDMENT TO
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
AND
EMPLOYMENTAND NON-COMPETITION AGREEMENT
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
and EMPLOYMENT AND NON-COMPETITION AGREEMENT (hereinafter this "Amendment
Agreement") is made and entered into effective as of May 17, 1999 (the
"Effective Date"), by and among Fair, Isaac and Company, Incorporated ("Fair,
Isaac"), a Delaware corporation; Credit & Risk Management Associates, Inc.
("CRMA"), a Delaware corporation; and Donald J. Sanders ("Sanders"), Paul A.
Makowski ("Makowski"), and Lawrence E. Dukes("Dukes") (collectively, the "former
CRMA Shareholders").
RECITALS:
A. Fair, Isaac, as buyer, entered into that certain Agreement and
Plan of Merger and Reorganization dated as of September 30, 1996
(the "Merger Agreement") to acquire by forward subsidiary merger
all of the assets and business of Credit & Risk Management
Associates, Inc., as seller; and the former CRMA Shareholders, as
the owners of all of the issued and outstanding capital stock of
CRMA (the "Merger"), disposed of their interests in CRMA upon the
terms and conditions set forth therein. CRMA is now a wholly-owned
subsidiary of Fair, Isaac.
B. The Merger Agreement provided for Earnout Payments to the former
CRMA Shareholders for each of the fiscal years ending September
30, 1997, September 30, 1998 and September 30, 1999.
C. The parties desire to amend the terms of the Merger Agreement
governing such Earnout Payments to provide for termination of the
Earnout Payments, on the terms and conditions set forth below.
D. In connection with the Merger, each of the former CRMA
Shareholders entered into a five-year Employment and
Non-Competition Agreement with Fair, Isaac as of September 30,
1996 (the "Employment Agreement") and now desire to amend that
Agreement as to Sanders and Dukes and terminate that Agreement as
to Makowski, as set forth herein.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained herein, and for other valuable consideration,
the receipt and adequacy of which is hereby acknowledged, the parties mutually
agree as follows
1. Meaning of Terms: Effective Date.
Except as otherwise stated in this Amendment Agreement, (a) all capitalized
terms in this Amendment Agreement will have the respective defined meanings
as stated in the Merger Agreement, and (b) the terms and provisions of this
Amendment Agreement will be considered to be effective as of the date of
this Amendment Agreement.
1 EXHIBIT 2.3
2. Termination of Earnout Payments; Amendment of Employment Agreement.
(a) For and in consideration of the sum of $2,108,402.00 (the
"Consideration"), the former CRMA Shareholders agree as follows: (i)
Any and all obligations relating to Earnout Payments including but not
limited to those arising under Sections 2.2, 2.8 and 5.9 of the Merger
Agreement are terminated as of the Effective Date; and the parties'
rights and obligations thereunder are hereby replaced and superseded by
the terms of this Agreement.
(ii) On the Effective Date, Sanders and Dukes shall execute and deliver
an amendment to the Employment Agreement for each such individual in
the form attached hereto as Exhibit A.
(iii) On the Effective Date, Makowski shall execute and deliver the
termination of the Employment Agreement in the form attached hereto as
Exhibit B.
(b) The Consideration shall be paid thirty-one percent (31%) in the form of
Buyer Common Stock valued at their Average Market Price as of the
Effective Date in proportion to their holdings of Seller Shares (such
holdings are defined in the Merger Agreement to be 500 shares each of
1500 shares total). The Buyer Common Stock issued hereunder shall be
subject to the Registration Rights Agreement described in Section 2.2
of the Merger Agreement. The balance of the Consideration (69%) will be
paid in cash and made by delivery of certified or cashier's check or
equivalent instruments or funds in proportion to their holdings of
Seller Shares within ten (10) business days of receipt by Fair, Isaac
of the Amendment Agreement and Exhibits fully executed by the CRMA
Shareholders.
3. General Release and Waiver of Claims.
Except as expressly set forth in this Amendment Agreement, each former CRMA
Shareholder releases, remises and forever discharges CRMA and Fair, Isaac,
and Fair, Isaac and CRMA release, remise and forever discharge the former
CRMA Shareholders, from any and all claims, counterclaims, liabilities,
demands and causes of action of any nature whatsoever whether known or
unknown, fixed or contingent, matured or unmatured, arising out of,
connected with or incidental to, the Earnout Payments determined under
Section 2.2, and 2.8 (including but not limited to those under Section 5.9)
of the Merger Agreement up to and as of the Effective Date, including but
not limited to claims that may have existed or were pending or threatened
before the Effective Date of this Agreement (all of which are referred to
collectively as the "Claims"). The provisions, waivers, releases of this
Section 3 shall inure to the benefit of the parties, including without
limitation, their agents, employees, attorneys, representatives, officers,
directors, divisions, participants, subsidiaries, Affiliates, assigns,
heirs, successors in interests and shareholders. The provisions herein
shall survive the full performance of all the terms of this Amendment
Agreement and the Merger Agreement
This is intended as a full settlement and compromise of each, every and all
Claims. The parties acknowledge that they may have claims against each
other of which they have no knowledge at the time of execution of this
Amendment Agreement. The parties agree that the waivers and releases in
this Section 3, are specifically intended to and do extend to claims,
demands, or causes of action of which they have no knowledge. The parties
specifically waive the benefit of Section 1542 of the California Civil
Code, which provides as follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
2
EXECUTING THE RELEASE WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED
HIS SETTLEMENT WITH THE DEBTOR."
4. Incorporation by Reference.
The Recitals and Exhibits A and B to this Amendment Agreement are hereby
incorporated by reference.
5. Construction.
Except as explicitly modified by this Amendment Agreement no other changes to
the Merger Agreement are being made and all provisions of the Merger Agreement
shall remain in full force and effect. This Agreement does not constitute a
renewal or novation of the Merger Agreement.
The headings and captions of this Amendment Agreement are provided for
convenience only and are intended to have no effect on construing or
interpreting this Amendment Agreement. The language in all parts of this
Amendment Agreement shall be in all cases construed according to its fair
meaning and not strictly for out against any party.
6. Counterparts.
This Amendment Agreement may be executed in multiple counterparts, each of which
shall be deemed an original, but all of which taken together shall constitute
one and the same instrument. Execution and delivery of this Amendment Agreement
be exchange of facsimile copies bearing facsimile signature of a party hereto
shall constitute a valid and binding execution and delivery of this Amendment
Agreement by such party. Such facsimile copy shall constitute enforceable
original documents.
In Witness Whereof, this Amendment Agreement has been executed as of
the date first set forth above.
FAIR, ISAAC AND COMPANY, INCORPORATED
By ______________________________________
Its ___________________________________
CREDIT & RISK MANAGEMENT ASSOCIATES, INC.
By ______________________________________
Its ___________________________________
_________________________________________
Donald J. Sanders
_________________________________________
Paul A. Makowski
3
_________________________________________
Lawrence E. Dukes
4
B Y - L A W S
OF
FAIR, ISAAC AND COMPANY, INCORPORATED
(as amended and restated effective November 19, 1999)
ARTICLE I
Offices
Section 1.1. Registered Office. The registered office shall be in the
City of Wilmington, County of New Castle, State of Delaware.
Section 1.2. Additional Offices. The Corporation may also have offices
at such other places both within and without the State of Delaware as the board
of directors may from time to time determine or the business of the Corporation
may require.
ARTICLE II
Stockholders
Section 2.1. Annual Meetings. An annual meeting of stockholders shall
be held for the election of directors on the last Tuesday of December of each
year, at 10:00 A.M. or, should such day fall upon a legal holiday, at the same
time on the next business day thereafter that is not a legal holiday, or at such
other date and time as may be designated by the Board of Directors from time to
time. The annual meeting of stockholders shall be held at such place either
within or without the State of Delaware as may be designated by the Board of
Directors from time to time; in the absence of any such designation, the annual
meeting shall be held at the principal executive offices of the Corporation. At
such meeting, the stockholders shall elect directors and transact such other
business as may be properly brought before the meeting.
To be properly brought before the annual meeting, business must be
either (a) specified in the notice of meeting (or any supplement thereto) given
by or at the direction of the Board of Directors, (b) otherwise properly brought
before the meeting by or at the direction of the Board of Directors, or (c)
otherwise properly brought before the meeting by a stockholder of record. In
addition to any other applicable requirements, for business to be properly
brought before the annual meeting by a stockholder, the stockholder must have
given timely notice thereof in writing to the Secretary of the Corporation. To
be timely, a stockholder's notice must be delivered by a nationally recognized
courier service or mailed by first class United States mail, postage or delivery
charges prepaid, and received at the principal executive offices of the
Corporation, addressed to the attention of the Secretary of the Corporation, not
less than 60 days nor more than 90 days prior to the scheduled date of the
meeting (regardless of any postponements, deferrals or adjournments of that
meeting to a later date); provided, however,
-1- EXHIBIT 3.2
that in the event that less than 70 days' notice or prior public disclosure of
the date of the scheduled meeting is given or made to stockholders, notice by
the stockholder to be timely must be so received not later than the earlier of
(a) the close of business on the 10th day following the day on which such notice
of the date of the scheduled annual meeting was mailed or such public disclosure
was made, whichever first occurs, and (b) two days prior to the date of the
scheduled meeting. A stockholder's notice to the Secretary shall set forth as to
each matter the stockholder proposes to bring before the annual meeting (i) a
brief description of the business desired to be brought before the annual
meeting, (ii) the name and record address of the stockholder proposing such
business, (iii) the class, series and number of shares of the Corporation that
are owned beneficially by the stockholder, and (iv) any material interest of the
stockholder in such business. Notwithstanding anything in these by-laws to the
contrary, no business shall be conducted at the annual meeting except in
accordance with the procedures set forth in this Section 2.1; provided, however,
that nothing in this Section 2.1 shall be deemed to preclude discussion by any
stockholder of any business properly brought before the annual meeting.
The Chairman of the Board of Directors (or such other person presiding
at the meeting in accordance with Section 2.6 of these by-laws) shall, if the
facts warrant, determine and declare to the meeting that business was not
properly brought before the meeting in accordance with the provisions of this
Section 2.1, and if he should so determine, he shall so declare to the meeting
and any such business not properly brought before the meeting shall not be
transacted.
Section 2.2. Special Meetings. Special meetings of stockholders may be
called at any time only by the Chairman of the Board, if any, the Vice Chairman
of the Board, if any, the President or the Board of Directors, to be held at
such date, time and place either within or without the State of Delaware as may
be stated in the notice of the meeting. Business transacted at any special
meeting of stockholders shall be limited to the purposes stated in the notice of
the meeting.
Section 2.3. Notice of Meetings. Whenever stockholders are required or
permitted to take any action at a meeting, a written notice of the meeting shall
be given which shall state the place, date and hour of the meeting, and, in the
case of a special meeting, the purpose or purposes for which the meeting is
called. Unless otherwise provided by law, the written notice of any meeting
shall be given not less than ten nor more than sixty days before the date of the
meeting to each stockholder entitled to vote at such meeting.
Section 2.4. Adjournments. Any meeting of stockholders, annual or
special, may adjourn from time to time to reconvene at the same or some other
place, and notice
-2-
need not be given of any such adjourned meeting if the time and place thereof
are announced at the meeting at which the adjournment is taken. At the adjourned
meeting the Corporation may transact any business which might have been
transacted at the original meeting. If the adjournment is for more than thirty
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting.
Section 2.5. Quorum. At each meeting of stockholders, except where
otherwise provided by law or the certificate of incorporation or these by-laws,
the holders of a majority of the outstanding shares of each class of stock
entitled to vote at the meeting, present in person or represented by proxy,
shall constitute a quorum. For purposes of the foregoing, two or more classes or
series of stock shall be considered a single class if the holders thereof are
entitled to vote together as a single class at the meeting. In the absence of a
quorum the stockholders so present may, by majority vote, adjourn the meeting
from time to time in the manner provided by Section 2.4 of these by-laws until a
quorum shall attend. Shares of its own capital stock belonging on the record
date for the meeting to the Corporation or to another corporation, if a majority
of the shares entitled to vote in the election of directors of such other
corporation is held, directly or indirectly, by the Corporation, shall neither
be entitled to vote nor be counted for quorum purposes; provided, however, that
the foregoing shall not limit the right of the Corporation to vote stock,
including but not limited to its own stock, held by it in a fiduciary capacity.
Section 2.6. Organization. Meetings of stockholders shall be presided
over by the Chairman of the Board, if any, or in the absence of the Chairman of
the Board by the President, or in the absence of the President by a Vice
President, or in the absence of the foregoing persons by a chairman designated
by the Board of Directors, or in the absence of such designation by a chairman
chosen at the meeting. The Secretary shall act as secretary of the meeting, or
in the absence of the Secretary by an Assistant Secretary, or in their absence
the chairman of the meeting may appoint any person to act as secretary of the
meeting.
Section 2.7. Voting; Proxies. Unless otherwise provided in the
certificate of incorporation, each stockholder entitled to vote at any meeting
of stockholders shall be entitled to one vote for each share of stock held by
such stockholder which has voting power upon the matter in question. Each
stockholder entitled to vote at a meeting of stockholders or to express consent
or dissent to corporate action in writing without a meeting may authorize
another person or persons to act for such stockholder by proxy, but no such
proxy shall be voted or acted upon after three years from its date, unless the
proxy provides for a longer period. A duly executed proxy shall be irrevocable
if it states that it is irrevocable and if, and only as long as, it is coupled
with an interest sufficient in law to support an irrevocable power. A
stockholder may revoke any proxy which is not irrevocable by attending the
meeting and voting in person or by filing an
-3-
instrument in writing revoking the proxy or another duly executed proxy bearing
a later date with the Secretary of the Corporation. Voting at meetings of
stockholders need not be by written ballot and need not be conducted by
inspectors unless the holders of a majority of the outstanding shares of all
classes of stock entitled to vote thereon present in person or by proxy at such
meeting shall so determine. At all meetings of stockholders for the election of
directors a plurality of the votes cast shall be sufficient to elect. With
respect to other matters, unless otherwise provided by law or by the certificate
of incorporation or these by-laws, the affirmative vote of the holders of a
majority of the shares of all classes of stock present in person or represented
by proxy at the meeting and entitled to vote on the subject matter shall be the
act of the stockholders, provided that (except as otherwise required by law or
by the certificate of incorporation) the Board of Directors may require a larger
vote upon any such matter. Where a separate vote by class is required, the
affirmative vote of the holders of a majority of the shares of each class
present in person or represented by proxy at the meeting shall be the act of
such class, except as otherwise provided by law or by the certificate of
incorporation or these by-laws.
Section 2.8. Fixing Date for Determination of Stockholders of Record.
In order that the corporation may determine the stockholders entitled to notice
of or to vote at any meeting of stockholders or any adjournment thereof, or to
express consent to corporate action in writing without a meeting, or entitled to
receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any change, conversion
or exchange of stock or for the purpose of any other lawful action, the Board of
Directors may fix, in advance, a record date, which shall not be more than sixty
nor less than ten days before the date of such meeting, nor more than sixty days
prior to any other action. If no record date is fixed: (1) the record date for
determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held; (2) the record date
for determining stockholders entitled to express consent to corporate action in
writing without a meeting, when no prior action by the Board is necessary, shall
be the day on which the first written consent is expressed; and (3) the record
date for determining stockholders for any other purpose shall be at the close of
business on the day on which the Board adopts the resolution relating thereto. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board may fix a new record date for the adjourned meeting.
Section 2.9. List of Stockholders Entitled To Vote. The Secretary shall
prepare and make, at least ten days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any
-4-
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten days prior to the meeting, either at a place
within the city where the meeting is to be held, which place shall be specified
in the notice of the meeting, or, if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at the time and
place of the meeting during the whole time thereof and may be inspected by any
stockholder who is present.
Section 2.10. Consent of Stockholders in Lieu of meeting. Unless
otherwise provided in the certificate of incorporation, any action required by
law to be taken at any annual or special meeting of stockholders of the
Corporation, or any action which may be taken at any annual or special meeting
of such stockholders, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted. Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing.
ARTICLE III
Board of Directors
Section 3.1. Powers; Number; Qualifications. The business and affairs
of the Corporation shall be managed by or under the direction of the Board of
Directors, except as may be otherwise provided by law or in the certificate of
incorporation. The number of directors which shall constitute the Board of
Directors shall be ten (10). Directors need not be stockholders.
Section 3.2. Election; Term of Office; Resignation; Removal; Vacancies;
Nominations. Each director shall hold office until the annual meeting of
stockholders next succeeding his or her election and until his or her successor
is elected and qualified or until his or her earlier resignation or removal. Any
director may resign at any time upon written notice to the Board of Directors or
to the President or the Secretary of the Corporation. Such resignation shall
take effect at the time specified therein, and unless otherwise specified
therein no acceptance of such resignation shall be necessary to make it
effective. Any director or the entire Board of Directors may be removed, with or
without cause, by the holders of a majority of the shares then entitled to vote
at an election of directors. Unless otherwise provided in the certificate of
incorporation or these by-laws, vacancies and newly created directorships
resulting from any increase in the authorized number of directors or from any
other cause may be filled by a majority of the directors then in office,
although less than a quorum, or by the sole remaining director.
-5-
Only persons who are nominated in accordance with the following
procedures shall be eligible for election as directors. Nominations of persons
for election to the Board of Directors at the annual meeting, by or at the
direction of the Board of Directors, may be made by any Nominating Committee or
person appointed by the Board of Directors; nominations may also be made by any
stockholder of record of the Corporation entitled to vote for the election of
directors at the meeting who complies with the notice procedures set forth in
this Section 3.2. Such nominations, other than those made by or at the direction
of the Board of Directors, shall be made pursuant to timely notice in writing to
the Secretary of the Corporation. To be timely, a stockholder's notice shall be
delivered by a nationally recognized courier service or mailed by first class
United States mail, postage or delivery charges prepaid, and received at the
principal executive offices of the Corporation addressed to the attention of the
Secretary of the Corporation not less than 60 days nor more than 90 days prior
to the scheduled date of the meeting (regardless of any postponements, deferrals
or adjournments of that meeting to a later date); provided, however, that, in
the case of an annual meeting and in the event that less than 70 days' notice or
prior public disclosure of the date of the scheduled meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received not
later than the earlier of (a) the close of business on the 10th day following
the day on which such notice of the date of the scheduled meeting was mailed or
such public disclosure was made, whichever first occurs, or (b) two days prior
to the date of the scheduled meeting. Such stockholder's notice to the Secretary
shall set forth (a) as to each person whom the stockholder proposes to nominate
for election or reelection as a director, (i) the name, age, business address
and residence address of the person, (ii) the principal occupation or employment
of the person, (iii) the class, series and number of shares of capital stock of
the Corporation that are owned beneficially by the person, (iv) a statement as
to the person's citizenship, and (v) any other information relating to the
person that is required to be disclosed in solicitations for proxies for
election of directors pursuant to Section 14 of the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder; and (b)
as to the stockholder giving the notice, (i) the name and record address of the
stockholder and (ii) the class, series and number of shares of capital stock of
the Corporation that are owned beneficially by the stockholder. The Corporation
may require any proposed nominee to furnish such other information as may
reasonably be required by the Corporation to determine the eligibility of such
proposed nominee to serve as director of the Corporation. No person shall be
eligible for election as a director of the Corporation unless nominated in
accordance with the procedures set forth herein.
In connection with any annual meeting, the Chairman of the Board of
Directors (or such other person presiding at such meeting in accordance with
Section 2.6 of these by-laws) shall, if the facts warrant, determine and declare
to the meeting that a nomination was not made in accordance with the foregoing
procedure, and if he should so determine, he shall so declare to the meeting and
the defective nomination shall be disregarded.
-6-
Section 3.3. Regular meetings. Regular meetings of the Board of
Directors may be held at such places within or without the State of Delaware and
at such times as the Board may from time to time determine, and if so determined
notice thereof need not be given.
Section 3.4. Special Meetings. Special meetings of the Board of
Directors may be held at any time or place within or without the State of
Delaware whenever called by the Chairman of the Board, if any, by the Vice
Chairman of the Board, if any, by the President or by any two directors.
Reasonable notice thereof shall be given by the person or persons calling the
meeting.
Section 3.5. Participation in Meetings by Conference Telephone
Permitted. Unless otherwise restricted by the certificate of incorporation or
these by-laws, members of the Board of Directors, or any committee designated by
the Board, may participate in a meeting of the Board or of such committee, as
the case may be, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this by-law shall
constitute presence in person at such meeting.
Section 3.6. Quorum; Vote Required for Action. At all meetings of the
Board of Directors one third of the entire Board, but not less than two shall
constitute a quorum for the transaction of business. The vote of a majority of
the directors present at a meeting at which a quorum is present shall be the act
of the Board unless the certificate of incorporation or these by-laws shall
require a vote of a greater number. In case at any meeting of the Board a quorum
shall not be present, the members of the Board present may adjourn the meeting
from time to time until a quorum shall attend.
Section 3.7. Organization. Meetings of the Board of Directors shall be
presided over by the Chairman of the Board, if any, or in the absence of the
Chairman of the Board by the Vice Chairman of the Board, if any, or in the
absence of the Vice Chairman of the Board by the President, or in their absence
by a chairman chosen at the meeting. The Secretary, or in the absence of the
Secretary an Assistant Secretary, shall act as secretary of the meeting, but in
the absence of the Secretary and any Assistant Secretary the chairman of the
meeting may appoint any person to act as secretary of the meeting.
Section 3.8. Action by Directors Without a Meeting. Unless otherwise
restricted by the certificate of incorporation or these by-laws, any action
required or permitted to be taken at any meeting of the Board of Directors, or
of any committee thereof, may be taken without a meeting if all members of the
Board or of such committee, as the case may be, consent thereto in writing, and
the writing or writings are filed with the minutes of proceedings of the Board
or committee.
-7-
Section 3.9. Compensation of Directors. The Board of Directors shall
have the authority to fix the compensation of directors.
-8-
ARTICLE IV
Committees
Section 4.1. Executive Committee. The Board of Directors may, by
resolution approved by at least a majority of the authorized number of
Directors, establish and appoint one or more members of the Board of Directors
to constitute an Executive Committee (the "Executive Committee"), with such
powers as may be expressly delegated to it by resolution of the Board of
Directors. The Executive Committee shall act only in the intervals between
meetings of the Board of Directors and shall be subject at all times to the
control of the Board of Directors.
Section 4.2. Committees. In addition to the Executive Committee, the
Board of Directors may, by resolution passed by a majority of the whole Board,
designate one or more other committees, each committee to consist of one or more
of the directors of the Corporation. The Board may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not such
member or members constitute a quorum, may unanimously appoint another member of
the Board to act at the meeting in place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
Board, shall have and may exercise all the powers and authority of the Board in
the management of the business and affairs of the Corporation, and may authorize
the seal of the Corporation to be affixed to all papers which may require it;
but no such committee shall have power or authority in reference to amending the
certificate of incorporation (except that a committee may, to the extent
authorized in the resolution or resolutions providing for the issuance of shares
of stock adopted by the Board of Directors as provided in Section 151(a) of the
General Corporation Law of Delaware fix any of the preferences or rights of such
shares relating to dividends, redemption, dissolution, any distribution of
assets of the corporation or the conversion into, or the exchange of such shares
for, shares of any other class or classes or any other series of the same or any
other class or classes of stock of the corporation), adopting an agreement of
merger or consolidation, recommending to the stockholders the sale, lease or
exchange of all or substantially all of the Corporation's property and assets,
recommending to the stockholders a dissolution of the Corporation or a
revocation of dissolution, removing or indemnifying directors or amending these
by-laws; and, unless the resolution expressly so provides, no such committee
shall have the power or authority to declare a dividend or to authorize the
issuance of stock or adopt a certificate of ownership and merger.
-9-
Section 4.3. Committee Rules. Unless the Board of Directors otherwise
provides, the committee designated by the Board may adopt, amend and repeal
rules for the conduct of its business. In the absence of a provision by the
Board or a provision in the rules of such committee to the contrary, a majority
of the entire authorized number of members of such committee shall constitute a
quorum for the transaction of business, the vote of a majority of the members
present at a meeting at the time of such vote if a quorum is then present shall
be the act of such committee, and in other respects each committee shall conduct
its business in the same manner as the Board conducts its business pursuant to
Article III of these by-laws.
ARTICLE V
Officers
Section 5.1. Officers; Election. As soon as practicable after the
annual meeting of stockholders in each year, the Board of Directors shall elect
a President and a Secretary, and it may, if it so determines, elect from among
its members a Chairman of the Board. The Board may also elect one or more Vice
Presidents, one or more Assistant Vice Presidents, one or more Assistant
Secretaries, a Treasurer and one or more Assistant Treasurers and such other
officers as the Board may deem desirable or appropriate and may give any of them
such further designations or alternate titles as it considers desirable. Any
number of offices may be held by the same person; provided, however, that the
offices of President and Secretary shall not be held by the same person.
Section 5.2. Term of Office; Resignation; Removal; Vacancies. Except as
otherwise provided in the resolution of the Board of Directors electing any
officer, each officer shall hold office until the first meeting of the Board
after the annual meeting of stockholders next succeeding his or her election,
and until his or her successor is elected and qualified or until his or her
earlier resignation or removal. Any officer may resign at any time upon written
notice to the Board or to the President or the Secretary of the Corporation.
Such resignation shall take effect at the time specified therein, and unless
otherwise specified therein no acceptance of such resignation shall be necessary
to make it effective. The Board may remove any officer with or without cause at
any time. Any such removal shall be without prejudice to the contractual rights
of such officer, if any, with the Corporation, but the election of an officer
shall not of itself create contractual rights. Any vacancy occurring in any
office of the Corporation by death, resignation, removal or otherwise may be
filled for the unexpired portion of the term by the Board at any regular or
special meeting.
-10-
Section 5.3. Powers and Duties. The officers of the Corporation shall
have such powers and duties in the management of the Corporation as shall be
stated in these by-laws or in a resolution of the Board of Directors which is
not inconsistent with these by-laws and, to the extent not so stated, as
generally pertain to their respective offices, subject to the control of the
Board. The Board may require any officer, agent or employee to give security for
the faithful performance of his or her duties.
Section 5.4. Chairman of the Board. The Chairman of the Board, if there
shall be such an officer, shall, if present, preside at all meetings of the
Board of Directors and exercise and perform such other powers and duties as may
be from time to time assigned to him by the Board of Directors or prescribed by
the By-laws.
Section 5.5. President. The President shall be the chief executive
officer of the Corporation. Subject to such supervisory powers, if any, as may
be given by the Board of Directors to the Chairman of the Board, if there be
such an officer, and subject to the provisions of these by-laws and to the
direction of the Board of Directors, the President shall have supervision over
and may exercise general executive powers of the business and affairs of the
Corporation and shall perform all duties and have all powers which are commonly
incident to the office of chief executive or which are delegated to him by the
Board of Directors. He shall have power to sign all stock certificates,
contracts and other instruments of the Corporation which are authorized and
shall have general supervision and direction of all of the other officers,
employees and agents of the Corporation. The President shall be ex officio, a
member of all the standing committees, including the Executive Committee. In the
absence of the Chairman of the Board, the President shall preside at all
meetings of the Board of Directors.
Section 5.6. Vice President. In the absence of the President or in his
inability or refusal to act, the Vice President (or in the event there be more
than one Vice President, the Vice Presidents in the order designated by the
directors, or in the absence of any designation, then in the order of their
election) shall perform the duties of the President, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
President. The Vice Presidents shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
Section 5.7. Secretary. The Secretary shall attend all meetings of the
Board of Directors and all meetings of the stockholders and record all the
proceedings of the meetings of the corporation and of the Board of Directors in
a book to be kept for that purpose and shall perform like duties for the
standing committees when required. He shall give, or cause to be given, notice
of all meetings of the stockholders and special meetings of the Board of
Directors, and shall perform such other duties as may be prescribed by the Board
of Directors or president, under whose supervision he shall be. He shall have
custody of the corporate seal of the Corporation and he, or an Assistant
Secretary, shall have authority to affix the same to any instrument requiring it
and when so affixed, it may be attested by his signature or by the signature of
such Assistant
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Secretary. The Board of Directors may give general authority to any other
officer to affix the seal of the Corporation and to attest the affixing by his
signature.
Section 5.8. Assistant Secretary. The Assistant Secretary, or if there
be more than one, the Assistant Secretaries in the order determined by the Board
of Directors (or if there be no such determination, then in the order of their
election) shall, in the absence of the Secretary or in the event of his
inability or refusal to act, perform the duties and exercise the powers of the
Secretary and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.
Section 5.9. Treasurer. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. He shall disburse the funds of the Corporation as may be ordered by
the Board of Directors, taking proper vouchers for such disbursements, and shall
render to the President and the Board of Directors, at its regular meetings, or
when the Board of Directors so requires, an account of all his transactions as
Treasurer and of the financial condition of the Corporation.
Section 5.10. Assistant Treasurer. The Assistant Treasurer, or if there
shall be more than one, the Assistant Treasurers in the order determined by the
Board of Directors (or if there be no such determination, then in the order of
their election) shall, in the absence of the Treasurer or in the event of his
inability or refusal to act, perform the duties and exercise the powers of the
Treasurer and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.
ARTICLE VI
Stock
Section 6.1. Certificates. Every holder of stock in the Corporation
shall be entitled to have a certificate signed by or in the name of the
Corporation by the Chairman or Vice Chairman of the Board of Directors, if any,
or the President or a Vice President, and by the Treasurer or an Assistant
Treasurer, or the Secretary or an Assistant Secretary, of the Corporation,
certifying the number of shares owned by such holder in the Corporation. If such
certificate is manually signed by one officer or manually countersigned by a
transfer agent or by a registrar, any other signature on the certificate may be
a facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be
-12-
issued by the Corporation with the same effect as if such person were such
officer, transfer agent or registrar at the date of issue.
Upon the face or back of each stock certificate issued to represent any partly
paid shares, or upon the books and records of the Corporation in the case of
uncertificated partly paid shares, shall be set forth the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
If the Corporation shall be authorized to issue more than one class of stock or
more than one series of any class, the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualification, limitations or restrictions of such
preferences and/or rights shall be set forth in full or summarized on the face
or back of the certificate which the Corporation shall issue to represent such
class or series of stock, provided that, except as otherwise provided in Section
202 of the General Corporation Law of Delaware, in lieu of the foregoing
requirements, there may be set forth on the face or back of the certificate
which the Corporation shall issue to represent such class or series of stock, a
statement that the Corporation will furnish without charge to each stockholder
who so requests the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights.
Section 6.2. Lost, Stolen or Destroyed Stock Certificates; Issuance of
New Certificates. The Corporation may issue a new certificate of stock in the
place of any certificate theretofore issued by it, alleged to have been lost,
stolen or destroyed, and the Corporation may require the owner of the lost,
stolen or destroyed certificate, or such owner's legal representative, to give
the Corporation a bond sufficient to indemnify it against any claim that may be
made against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate.
Section 6.3. Transfer of Stock. Upon surrender to the Corporation or
the transfer agent of the Corporation of a certificate for shares duly endorsed
or accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books. Upon receipt of proper transfer instructions from
the registered owner of uncertified shares such uncertified shares shall be
canceled and issuance of new equivalent uncertificated shares or certificated
shares shall be made to the person entitled thereto and the transaction shall be
recorded upon the books of the Corporation.
Section 6.4. Fixing Record Date. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change,
-13-
conversion or exchange of stock or for the purpose of any other lawful action,
the Board of Directors may fix, in advance, a record date, which shall not be
more than sixty nor less than ten days before the date of such meeting, nor more
than sixty days prior to any other action. A determination of stockholders of
record entitled to notice of or to vote at a meeting of stockholders shall apply
to any adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting.
Section 6.5. Registered Stockholders. The Corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the owner
of shares, and shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by the laws of Delaware.
ARTICLE VII
Miscellaneous
Section 7.1. Fiscal Year. The fiscal year of the Corporation shall be
determined by the Board of Directors.
Section 7.2. Seal. The Corporation may have a corporate seal which
shall have the name of the Corporation inscribed thereon and shall be in such
form as may be approved from time to time by the Board of Directors. The
corporate seal may be used by causing it or a facsimile thereof to be impressed
or affixed or in any other manner reproduced.
Section 7.3. Waiver of Notice of Meetings of Stockholders, Directors
and Committees. Whenever notice is required to be given by law or under any
provision of the certificate of incorporation or these by-laws, a written waiver
thereof, signed by the person entitled to notice, whether before or after the
time stated therein, shall be deemed equivalent to notice. Attendance of a
person at a meeting shall constitute a waiver of notice of such meeting, except
when the person attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the stockholders,
directors, or members of a committee of directors need be specified in any
written waiver of notice unless so required by the certificate of incorporation
or these by-laws.
Section 7.4. Interested Directors; Quorum. No contract or transaction
between the Corporation and one or more of its directors or officers, or between
the Corporation and any other corporation, partnership, association or other
organization in which one
-14-
or more of its directors or officers are directors or officers, or have a
financial interest, shall be void or voidable solely for this reason, or solely
because the director or officer is present at or participates in the meeting of
the Board of Directors or committee thereof which authorizes the contract or
transaction, or solely because his or her or their votes are counted for such
purpose, if: (1) the material facts as to his or her relationship or interest
and as to the contract or transaction are disclosed or are known to the Board or
the committee, and the Board or committee in good faith authorizes the contract
or transaction by the affirmative votes of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum; or (2)
the material facts as to his or her relationship or interest and as to the
contract or transaction are disclosed or are known to the stockholders entitled
to vote thereon, and the contract or transaction is specifically approved in
good faith by vote of the stockholders; or (3) the contract or transaction is
fair as to the Corporation as of the time it is authorized, approved or
ratified, by the Board, a committee thereof or the stockholders. Common or
interested directors may be counted in determining the presence of a quorum at a
meeting of the Board or of a committee which authorizes the contract or
transaction.
Section 7.5. Amendment of By-Laws. These by-laws may be amended or
repealed, and new by-laws adopted, by the Board of Directors, but the
stockholders entitled to vote may adopt additional by-laws and may amend or
repeal any by-law whether or not adopted by them.
-15-
CERTIFICATE
I, Peter L. McCorkell, the duly elected and acting Secretary of Fair,
Isaac and Company, Incorporated, a Delaware corporation ("the Company"), do
hereby certify that the following resolutions are true and correct copies of
resolutions which were duly adopted by the Board of Directors of the Company at
a meeting held on October 6, 1999:
RESOLVED, for fiscal 2000, the revenue and profit factors for the
Company's Officers' Incentive Plan, the Exempt and Non-Exempt
Employees' Bonus Plans and other plans using said factors shall be as
follows:
[ ] Incentive Plan Profit Margin results:
o 14% margin Minimum (P = 0.0)
o 16% margin On Target (P = 0.5)
o 18% margin Maximum (P= 1.0)
[ ] Incentive Plan Revenue Growth results:
o 15% growth Minimum (P = 0.0)
o 20% growth On Target (P = 0.5)
o 25% growth Maximum (P= 1.0)
The multiplier formula shall be changed to:
Multiplier = P + R
I further certify that the foregoing resolutions have not been rescinded,
modified or amended since their adoption and are currently in full force and
effect.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of the
Company this 20th day of December, 1999.
/s/ Peter L. McCorkell
-----------------------------------
Peter L. McCorkell
Secretary
1 Exhibit 10.1
FAIR, ISAAC AND COMPANY, INCORPORATED
1999 Employee Stock Purchase Plan
EXHIBIT 10.2
FAIR, ISAAC AND COMPANY, INCORPORATED
1999 Employee Stock Purchase Plan
1. Purpose.................................................................1
2. Definitions.............................................................1
3 Eligibility.............................................................3
4. Offering Periods........................................................3
5. Participation...........................................................3
6 Payroll Deductions......................................................4
7. Grant of Options........................................................5
8. Exercise of Option......................................................5
9 Delivery of Shares; Participant Accounts................................5
10. Withdrawal of Payroll Deductions or Shares; Termination of Employment...6
11. Interest................................................................7
12. Stock...................................................................7
13. Administration..........................................................7
14. Designation of Beneficiary..............................................8
15. Transferability.........................................................8
16. Use of Funds............................................................8
17. Reports.................................................................9
18. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation,
Merger or Asset Sale....................................................9
19. Amendment or Termination................................................9
20. Notices................................................................10
21. Conditions Upon Issuance of Shares.....................................10
22. Plan Effective Date and Stockholder Approval...........................10
(i)
FAIR, ISAAC AND COMPANY, INCORPORATED
1999 Employee Stock Purchase Plan
1. Purpose. The purpose of this 1999 Employee Stock Purchase Plan (the
"Plan") is to provide employees of Fair, Isaac and Company, Incorporated (the
"Company") and its Designated Subsidiaries with an opportunity to purchase Stock
of the Company through accumulated payroll deductions, enabling such persons to
acquire or increase a proprietary interest in the Company in order to strengthen
the mutuality of interests between such persons and the Company's stockholders.
It will also provide a benefit that will assist the Company in competing to
attract and retain employees of high quality. It is the intention of the Company
that the Plan qualify as an "employee stock purchase plan" under Section 423 of
the Code. Accordingly, the provisions of the Plan shall be construed in a manner
consistent with the requirements of that Section of the Code.
2. Definitions. For purposes of the Plan, the following terms shall be
defined as set forth below, in addition to such terms as defined in Section 1
hereof:
(a) "Account" means the account maintained on behalf of
the participant by the Custodian for the purpose of
investing in Stock and engaging in other transactions
permitted under the Plan.
(b) "Administrator" means the person or persons
designated to administer the Plan under Section
13(a).
(c) "Board" means the Company's Board of Directors.
(d) "Code" means the Internal Revenue Code of 1986, as
amended from time to time, including regulations
thereunder and successor provisions and regulations
thereto.
(e) "Committee" means the Compensation Committee of the
Company's Board of Directors.
(f) "Compensation" means all gross earnings and
commissions, including payments for overtime, shift
premium, incentive compensation, incentive payments,
bonuses and other cash compensation, but excluding
grants of options , restricted stock, stock
appreciation rights and payments for severance.
(g) "Custodian" means a custodian or any successor
thereto as appointed by the Board from time to time.
(h) "Designated Subsidiaries" means the Subsidiaries
which have been designated by the Board from time to
time in its sole discretion as eligible to have their
Employees participate in the Plan.
1
(i) "Employee" means any individual who is a common law
employee of the Company or a Designated Subsidiary.
(j) "Enrollment Date" means the first day of the next
Offering Period.
(k) "Exercise Date" means the last day of each Offering
Period.
(l) "Fair Market Value" means the fair market value of a
share of Stock as determined by the Committee or
under procedures established by the Committee. Unless
otherwise determined by the Committee, the Fair
Market Value of Stock as of any given date shall be
the last trade price of a share of Stock reported on
a consolidated basis for securities listed on the New
York Stock Exchange for trades on the date as of
which such value is being determined or, if that day
is not a Trading Day, then on the latest previous
Trading Day.
(m) "Offering Period" means the approximately six-month
periods commencing (a) on the first Trading Day on or
after January 1 and terminating on the last Trading
Day in the following June, and (b) on the first
Trading Day on or after July 1 and terminating on the
last Trading Day in the following December. The
beginning and ending dates and duration of Offering
Periods may be changed pursuant to Section 4 of the
Plan.
(n) "Purchase Price" means an amount equal to 85% of the
Fair Market Value of a share of Stock on the
Enrollment Date or 85% of the Fair Market Value of a
share of Stock on the Exercise Date, whichever is
lower.
(o) "Reserves" means the number of shares of Stock
covered by all options under the Plan which have not
yet been exercised and the number of shares of Stock
which have been authorized for issuance under the
Plan but which have not yet become subject to
options.
(p) "Stock" means the Company's Common Stock, and such
other securities as may be substituted (or
resubstituted) for Stock pursuant to Section 18
hereof.
(q) "Subsidiary" means any corporation (other than the
Company) in an unbroken chain of corporations
beginning with the Company if each of the
corporations (other than the last corporation in the
unbroken chain) owns stock possessing 50% or more of
the total combined voting power of all classes of
stock in one of the other corporations in the chain.
(r) "Trading Day" means a day on which the New York Stock
Exchange is open for trading.
2
3. Eligibility.
(a) All Employees (as determined in accordance with
Section 2(i) hereof) of the Company or a Designated
Subsidiary on a given Enrollment Date shall be
eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary
notwithstanding, no Employee shall be granted an
option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any
other person whose Stock would be attributed to such
Employee pursuant to Section 424(d) of the Code)
would own capital stock and/or hold outstanding
options to purchase such stock possessing 5% or more
of the total combined voting power or value of all
classes of the capital stock of the Company or of any
Subsidiary, or (ii) to the extent that his or her
rights to purchase stock under all employee stock
purchase plans of the Company and its Subsidiaries
accrue at a rate which exceeds $25,000 worth of stock
(determined at the fair market value of the shares at
the time such option is granted) for each calendar
year in which such option is outstanding at any time.
(c) All participants in the Plan shall have equal rights
and privileges (subject to the terms of the Plan)
with respect to options outstanding during any given
Offering Period.
4. Offering Periods. The Plan shall be implemented by consecutive
Offering Periods with a new Offering Period commencing on the first Trading Day
on or after January 1 and July 1 of each year following the initial Offering
Period, or on such other date as the Committee shall determine, and continuing
thereafter until terminated in accordance with Section 19 hereof. The Committee
shall have the power to change the beginning date, ending date, and duration of
Offering Periods with respect to future offerings without stockholder approval
if such change is announced at least five days prior to the scheduled beginning
of the first Offering Period to be affected thereafter, provided that Offering
Periods will in all cases comply with applicable limitations under Section
423(b)(7) of the Code.
5. Participation.
(a) Any person who will be an eligible Employee on a
given Enrollment Date may become a participant in the
Plan by completing a subscription agreement
authorizing payroll deductions and filing it with the
Administrator at least 15 days prior to such
Enrollment Date.
(b) Payroll deductions for a participant shall commence
on the first payroll following the Enrollment Date
and shall end on the last payroll in the Offering
Period to which such authorization is applicable,
unless sooner terminated by the participant as
provided in Section 10 hereof.
3
6. Payroll Deductions.
(a) At the time a participant files his or her
subscription agreement, he or she shall elect to have
payroll deductions made on each pay day during the
Offering Period in an amount from 1% to 10% of the
Compensation which he or she receives for each pay
period during the Offering Period.
(b) All payroll deductions made for a participant shall
be credited to his or her Account under the Plan.
Payroll deductions shall be withheld in whole
percentages only, unless otherwise determined by the
Committee. A participant may not make any additional
payments into such Account.
(c) A participant may discontinue his or her
participation in the Plan as provided in Section 10
hereof, or may decrease the rate of his or her
payroll deductions during the Offering Period, by
completing and filing with the Administrator a new
subscription agreement authorizing a change in
payroll deduction rate. Unless otherwise authorized
by the Committee, a participant may not change his or
her payroll deduction rate more than once during any
Offering Period. The change in rate shall be
effective with the first payroll period following 10
business days after the Administrator's receipt of
the new subscription agreement unless the Company
elects to process a given change in participation
more quickly. A participant's subscription agreement
shall remain in effect for successive Offering
Periods unless terminated as provided in Section 10
hereof.
(d) The foregoing notwithstanding, to the extent
necessary to comply with Section 423(b)(8) of the
Code and Section 3(b) hereof, a participant's payroll
deductions may be terminated at such time during any
Offering Period which is scheduled to end during the
current calendar year (the "Current Offering Period")
that the aggregate of all payroll deductions
accumulated with respect to the Current Offering
Period equal $21,250 (or such other limit as may
apply under Code Section 423(b)(8)). Payroll
deductions shall recommence at the rate provided in
such participant's subscription agreement (as
previously on file or as changed prior to the
recommencement date in accordance with Section 6(c))
at the beginning of the next Offering Period which is
scheduled to end in the following calendar year,
unless terminated by the participant as provided in
Section 10 hereof.
(e) The Company or any Designated Subsidiary is
authorized to withhold from any payment to be made to
a participant, including any payroll and other
payments not related to the Plan, amounts of
withholding and other taxes due in connection with
any transaction under the Plan, including any
disposition of shares acquired under the Plan, and a
participant's enrollment in the Plan will be deemed
to constitute his or her consent to such withholding.
At the time of a participant's exercise of an option
or disposition of shares acquired under the Plan, the
Company may require the participant to make other
arrangements to meet tax withholding obligations as a
condition to exercise of rights or distribution of
shares or cash from the participant's Account. In
addition, a Participant may be required to advise the
Company of sales and other
4
dispositions of Stock acquired under the Plan in
order to permit the Company to comply with tax laws
and to claim any tax deductions to which the Company
may be entitled with respect to the Plan.
7. Grant of Options. On the Enrollment Date of each Offering Period,
each eligible Employee participating in such Offering Period shall be granted an
option to purchase on the Exercise Date of such Offering Period, at the
applicable Purchase Price, up to a number of shares of Stock determined by
dividing such Employee's payroll deductions accumulated prior to such Exercise
Date and retained in the Participant's Account as of the Exercise Date by the
applicable Purchase Price; provided that such purchase shall be subject to the
limitations set forth in Sections 3(b) and 12 hereof. Exercise of the option
shall occur as provided in Section 8 hereof, unless the participant has
withdrawn pursuant to Section 10 hereof. To the extent not exercised, the option
shall expire on the last day of the Offering Period.
8. Exercise of Option. Participant's option for the purchase of shares
shall be exercised automatically on the Exercise Date, and the maximum number of
shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. Shares purchased shall include fractional shares calculated to at least
three decimal places, unless otherwise determined by the Committee. If
fractional shares are not to be purchased for a participant's Account, any
payroll deductions accumulated in a participant's account not sufficient to
purchase a full share shall be retained in the participant's account for the
subsequent Offering Period, subject to earlier withdrawal by the participant as
provided in Section 10 hereof. During a participant's lifetime, a participant's
option to purchase shares hereunder is exercisable only by him or her.
9. Delivery of Shares; Participant Accounts.
(a) At or as promptly as practicable after the Exercise
Date for an Offering Period, the Company will deliver
the shares of Stock purchased to the Custodian for
deposit into the participant's Account.
(b) Cash dividends on any Stock credited to a
participant's Account will be automatically
reinvested in additional shares of Stock; such
amounts will not be available in the form of cash to
participants. All cash dividends paid on Stock
credited to participants' Accounts will be paid over
by the Company to the Custodian at the dividend
payment date. The Custodian will aggregate all
purchases of Stock in connection with the Plan for a
given dividend payment date. Purchases of Stock for
purposes of dividend reinvestment will be made as
promptly as practicable (but not more than 30 days)
after a dividend payment date. The Custodian will
make such purchases, as directed by the Committee,
either (i) in transactions on any securities exchange
upon which Stock is traded, otherwise in the
over-the-counter market, or in negotiated
transactions, or (ii) directly from the Company at
100% of the Fair Market Value of a share of Stock on
the dividend payment date. Any shares of Stock
distributed as a dividend or distribution in respect
of shares of Stock or in connection with a split of
the Stock credited to a participant's Account will be
credited to such Account. In the event of any other
non-cash dividend or distribution in respect of Stock
credited to a participant's Account, the Custodian
will, if reasonably practicable and at the direction
of the Committee, sell any property received in
5
such dividend or distribution as promptly as
practicable and use the proceeds to purchase
additional shares of Common Stock in the same manner
as cash paid over to the Custodian for purposes of
dividend reinvestment.
(c) Each participant will be entitled to vote the number
of shares of Stock credited to his or her Account
(including any fractional shares credited to such
Account) on any matter as to which the approval of
the Company's stockholders is sought. If a
participant does not vote or grant a valid proxy with
respect to shares credited to his or her Account,
such shares will be voted by the Custodian in
accordance with any stock exchange or other rules
governing the Custodian in the voting of shares held
for customer accounts. Similar procedures will apply
in the case of any consent solicitation of Company
stockholders.
10. Withdrawal of Payroll Deductions or Shares; Termination of
Employment.
(a) If a participant decreases his or her payroll
deduction rate to zero during an Offering Period,
payroll deductions shall not resume at the beginning
of the succeeding Offering Period unless the
participant delivers to the Administrator a new
subscription agreement.
(b) Upon a participant's ceasing to be an Employee for
any reason (including upon the participant's death),
he or she shall be deemed to have elected to withdraw
from the Plan and the payroll deductions credited to
such participant's Account during the Offering Period
but not yet used to exercise the option shall be
returned to such participant or, in the case of his
or her death, to the person or persons entitled
thereto under Section 14 hereof, and such
participant's option shall be automatically
terminated.
(c) Following the completion of two years from the first
day of an Offering Period, a participant may elect to
withdraw shares of Stock acquired during such
Offering Period from his or her Account in
certificated form or to transfer such shares from his
or her Account to an account of the participant
maintained with a broker-dealer or financial
institution. During the first two years from the
first day of the Offering Period, all sales and
transfers shall only be effectuated by the Custodian
on the participant's behalf. If a participant elects
to withdraw shares, one or more certificates for
whole shares shall be issued in the name of, and
delivered to, the participant, with such participant
receiving cash in lieu of fractional shares based on
the Fair Market Value of a share of Stock on the date
of withdrawal. If shares of Stock are transferred
from a participant's Account to a broker-dealer or
financial institution that maintains an account for
the participant, only whole shares shall be
transferred and cash in lieu of any fractional share
shall be paid to such participant based on the Fair
Market Value of a share of Stock on the date of
transfer. A Participant seeking to withdraw or
transfer shares of Stock must give instructions to
the Custodian in such manner and form as may be
prescribed by the Committee and the Custodian, which
instructions will be acted upon as promptly as
practicable. Withdrawals and transfers will be
subject to any fees imposed in accordance with
Section 10(e) hereof.
6
(d) Upon termination of employment of a participant for
any reason, the Custodian will continue to maintain
the participant's Account until the earlier of such
time as the participant withdraws or transfers all
Stock in the Account or two years after the
participant ceases to be employed by the Company and
its Subsidiaries. At the expiration of such two-year
period, the assets in Participant's account shall be
withdrawn or transferred as elected by the
Participant or, in the absence of such election, as
determined by the Committee.
(e) Costs and expenses incurred in the administration of
the Plan and maintenance of Accounts will be paid by
the Company, including annual fees of the Custodian
and any brokerage fees and commissions for the
purchase of Stock upon reinvestment of dividends and
distributions. The foregoing notwithstanding, the
Custodian may impose or pass through a reasonable fee
for the withdrawal of Stock in the form of stock
certificates (as permitted under Section 10(c)), and
reasonable fees for other services unrelated to the
purchase of Stock under the Plan, to the extent
approved in writing by the Company and communicated
to participants. In no circumstance shall the Company
pay any brokerage fees and commissions for the sale
of Stock acquired under the Plan by a participant.
11. Interest. No interest shall accrue on the payroll deductions of a
participant in the Plan
12. Stock.
(a) The maximum number of shares of Stock which shall be
made available for sale under the Plan shall be 1.5
million shares, subject to adjustment as provided in
Section 18 hereof. If, on a given Exercise Date, the
number of shares with respect to which options are to
be exercised exceeds the number of shares then
available under the Plan, the Company shall make a
pro rata allocation of the shares remaining available
for purchase in as uniform a manner as shall be
practicable and as it shall determine to be
equitable. Any shares of Stock delivered by the
Company under the Plan may consist, in whole or in
part, of authorized and unissued shares or shares
acquired by the Company in the open market. Shares
acquired in the open market through dividend
reinvestment will not count against the Reserves.
(b) The participant shall have no interest or voting
right in shares purchasable upon exercise of his or
her option until such option has been exercised.
13. Administration.
(a) The Plan shall be administered by the Committee
except to the extent the Board elects to administer
the Plan, in which case references herein to the
"Committee" shall be deemed to include references to
the "Board." The Committee shall have full and final
authority to construe, interpret and apply the terms
of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan.
The Committee may, in its discretion, delegate
authority to the Administrator. Every finding,
decision and determination made by the Committee or
Administrator shall, to the full extent permitted by
law, be final
7
and binding upon all parties (except for any reserved
right of the Committee to review a finding, decision
or determination of the Administrator). The
Committee, Administrator, and each member thereof
shall be entitled to, in good faith, rely or act upon
any report or other information furnished to him or
her by any executive officer, other officer or
employee of the Company or any Designated Subsidiary,
the Company's independent auditors, consultants or
any other agents assisting in the administration of
the Plan. Members of the Committee or Administrator
and any officer or employee of the Company or any
Designated Subsidiary acting at the direction or on
behalf of the Committee shall not be personally
liable for any action or determination taken or made
in good faith with respect to the Plan, and shall, to
the extent permitted by law, be fully indemnified and
protected by the Company with respect to any such
action or determination.
(b) The Custodian will act as custodian under the Plan,
and will perform such duties as are set forth in the
Plan and in any agreement between the Company and the
Custodian. The Custodian will establish and maintain,
as agent for each Participant, an Account and any
subaccounts as may be necessary or desirable for the
administration of the Plan.
14. Designation of Beneficiary.
(a) A participant may file a written designation of a
beneficiary who is to receive any shares and cash, if
any, from the participant's Account under the Plan in
the event of (i) such participant's death subsequent
to an Exercise Date on which the option is exercised
but prior to a distribution to such participant of
shares or cash then held in the participant's Account
or (ii) such participant's death prior to exercise of
the option. If a participant is married and the
designated beneficiary is not the spouse, spousal
consent shall be required for such designation to be
effective.
(b) Such designation of beneficiary may be changed by the
participant at any time by written notice. In the
event of the death of a participant and in the
absence of a beneficiary validly designated under the
Plan who is living at the time of such participant's
death, any shares or cash otherwise deliverable under
Section 14(a) shall be delivered to the participant's
estate.
15. Transferability. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 14 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect.
16. Use of Funds. All payroll deductions received or held by the
Company under the Plan may be used by the Company for any corporate purpose, and
the Company shall not be obligated to segregate such payroll deductions.
8
17. Reports. An individual Account shall be maintained by the Custodian
for each participant in the Plan. Statements of Account shall be given to each
participant at least semi-annually, which statements shall set forth the amounts
of payroll deductions, the Purchase Price, the number of shares purchased, any
remaining cash balance, and other information deemed relevant by the Committee.
18. Adjustments Upon Changes in Capitalization, Dissolution,
Liquidation, Merger or Asset Sale.
(a) Changes in Capitalization. The Committee shall
proportionately adjust the Reserves, and the price
per share and the number of shares of Stock covered
by each option under the Plan which has not yet been
exercised, for any increase or decrease in the number
of issued shares of Stock resulting from a stock
split, reverse stock split, stock dividend,
combination or reclassification of the Stock, or
other extraordinary corporate event which affects the
Stock in order to prevent dilution or enlargement of
the rights of participants. The determination of the
Committee with respect to any such adjustment shall
be final, binding and conclusive.
(b) Dissolution or Liquidation. In the event of the
proposed dissolution or liquidation of the Company,
the Offering Period shall terminate immediately prior
to the consummation of such proposed action, unless
otherwise provided by the Committee.
(c) Asset Sale or Merger. In the event of a proposed sale
of all or substantially all of the assets of the
Company, or the merger of the Company with or into
another corporation, the Committee shall shorten the
Offering Period then in progress by setting a new
Exercise Date (the "New Exercise Date"). The New
Exercise Date shall be before the date of the
Company's proposed asset sale or merger. The
Committee shall notify each participant in writing,
at least ten business days prior to the New Exercise
Date, that the Exercise Date for the participant's
option has been changed to the New Exercise Date and
that the participant's option shall be exercised
automatically on the New Exercise Date, unless prior
to such date the participant has withdrawn from the
Offering Period as provided in Section 10 hereof.
19. Amendment or Termination.
(a) The Board may at any time and for any reason
terminate or amend the Plan. Except as provided in
Section 18 hereof, no such termination can affect
options previously granted, provided that an Offering
Period may be terminated by the Board of Directors by
shortening the Offering Period and accelerating the
Exercise Date to a date not prior to the date of such
Board action if the Board determines that termination
of the Plan is in the best interests of the Company
and its stockholders. Except as provided in Section
18 and this Section 19, no amendment may make any
change in any option theretofore granted which
materially adversely affects the rights of any
participant, and any amendment will be subject to the
approval of the Company's stockholders not later than
one year after Board approval of such amendment if
such stockholder approval is
9
required by any federal or state law or regulation or
the rules of any stock exchange or automated
quotation system on which the Stock may then be
listed or quoted, or if such stockholder approval is
necessary in order for the Plan to continue to meet
the requirements of Section 423 of the Code, and the
Board may otherwise, in its discretion, determine to
submit any amendment to stockholders for approval.
(b) Without stockholder consent and without regard to
whether any participant rights may be considered to
have been "adversely affected," the Committee shall
be entitled to change the Offering Periods, limit the
frequency and/or number of changes in the amount
withheld during an Offering Period, establish the
exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll
withholding in excess of the amount designated by a
participant in order to adjust for delays or mistakes
in the Company's processing of properly completed
withholding elections, establish reasonable waiting
and adjustment periods and/or accounting and
crediting procedures to ensure that amounts applied
toward the purchase of Stock for each participant
properly correspond with amounts withheld from the
participant's Compensation, and establish such other
limitations or procedures as the Committee determines
in its sole discretion are advisable and consistent
with the Plan.
20. Notices. All notices or other communications by a participant to
the Company under or in connection with the Plan shall be deemed to have been
duly given when received in the form specified by the Company at the location,
or by the person, designated by the Company for the receipt thereof.
21. Conditions. Upon Issuance of Shares. The Company shall not be
obligated to issue shares with respect to an option unless the exercise of such
option and the issuance and delivery of such shares pursuant thereto shall
comply with all applicable provisions of law, domestic or foreign, including,
without limitation, the Securities Act of 1933, as amended, the Securities
Exchange Act of 1934, as amended, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange or automated quotation
system upon which the shares may then be listed or quoted, and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
22. Plan Effective Date and Stockholder Approval. The Plan has been
adopted by the Board on November 19, 1999, but shall become effective upon
approval by the Company's stockholders by a vote sufficient to meet the
requirements of Section 423(b)(2) of the Code within 12 months after the date
the Plan was adopted and prior to the first Exercise Date. In the event
stockholders fail to so approve the Plan, all options granted under the Plan
shall be canceled, all payroll deductions shall be refunded, and the Plan shall
be terminated.
10
Amendment 3
FAIR, ISAAC AND COMPANY, INCORPORATED
1992 LONG-TERM INCENTIVE PLAN
(Effective November 19, 1999)
Effective as of November 19, 1999, the Fair, Isaac and Company,
Incorporated 1992 Long-Term Incentive Plan is hereby amended as follows:
1. A new Section 3.4 is added to Article 3 of the Plan as follows:
3.4 Outside Director Option Limitations. Notwithstanding the
limitations set forth in Section 3.1 above, effective February 1, 2000,
there shall be an additional 150,000 aggregate number of Options
available for awards under the Plan to Outside Directors as further
described in Section 4.2 below.
2. Section 4.2 of the Plan is amended in its entirety as follows:
4.2 Outside Directors. Any other provision of the Plan
notwithstanding, the participation of Outside Directors in the Plan
shall be subject to the following restrictions:
(a) Outside Directors shall receive no Awards other
than the NSOs described in this Section 4.2.
(b)(i) Each person who first becomes an Outside
Director on or after the date of the Company's 2000 annual
meeting of stockholders shall, upon becoming an Outside
Director, receive an NSO covering 20,000 Common Shares
(subject to adjustment under Article 10), hereinafter referred
to as an "Initial Grant". Such Initial Grant shall become
exercisable in increments of 4,000 shares (subject to
adjustment under Article 10) on each of the first through
fifth anniversaries of the date of grant.
(ii) Each Outside Director who was acting as
an Outside Director prior to the Company's 2000 annual meeting
of stockholders shall be entitled to receive an NSO grant of
Common Shares in an amount sufficient to increase his or her
Initial Grant to 20,000 Common Shares effective as of the date
of such annual meeting.
(iii) On the date of each annual meeting of
stockholders of the Company held on or after January 1, 2000,
each Outside Director who has been an Outside Director at
least since the prior annual meeting shall receive an NSO
covering 5,000 Common Shares (subject to adjustment under
Article 10), hereinafter referred to as an "Annual Grant."
Such Annual Grants shall be exercisable in full on the date of
grant.
(iv) On the date of each annual meeting of
stockholders of the Company held on or after January 1, 2000,
each Outside Director who chairs a standing committee at the
direction of the Chairman of the Board shall receive an NSO
covering an additional 1,000 Common Shares (subject to
Adjustment under Article 10) hereinafter referred to as a
"Committee Grant". Such Committee Grant shall be exercisable
in full on the date of grant.
EXHIBIT 10.8
(c) All NSOs granted to an Outside Director under
this Section 4.2 shall also become exercisable in full in the
event of the termination of such Outside Director's service
for any reason.
(d) The Exercise Price under all NSOs granted to an
Outside Director under this Section 4.2 shall be equal to 100%
of the Fair Market Value of a Common Share on the date of
grant, payable in one of the forms described in Sections 6.1,
6.2, 6.3 and 6.4.
(e) All Initial Grants granted to an Outside Director
under this Section 4.2 shall terminate on the earliest of (i)
the 10th anniversary of the date of grant or (ii) the date 12
months after the termination of such Outside Director's
service for any reason. All Annual Grants granted to an
Outside Director under this Section 4.2 shall terminate on the
earliest of (i) the fifth anniversary of the date of grant or
(ii) the date 12 months after the termination of such Outside
Director's service for any reason.
3. This Amendment 3 shall only become effective if approved by the
Company's stockholders at the Company's next annual meeting of stockholders. If
not approved, the provisions of Section 4.2 of the Plan in effect immediately
prior to November 19, 1999, shall remain in effect.
To record the adoption of this amendment to the Fair, Isaac and
Company, Incorporated Stock Option Plan for Non-Employee Directors by an
Executive Committee of the Board on November 19, 1999, the Corporation has
caused its authorized officers to affix the corporate name hereto.
Fair, Isaac and Company, Incorporated
By /s/ PETER L. MCCORKELL
-----------------------------------------
Peter L. McCorkell
Senior Vice President and Secretary
EXHIBIT 10.8
FIRST AMENDMENT TO PARTICIPATION AGREEMENT
THIS FIRST AMENDMENT TO PARTICIPATION AGREEMENT (this "Amendment"),
dated as of April 5, 1999, is entered into by and among:
(1) FAIR, ISAAC AND COMPANY, INC., a Delaware corporation
("Lessee");
(2) LEASE PLAN NORTH AMERICA, INC., an Illinois corporation
("Lessor");
(3) Each of the financial institutions listed in Schedule I to
the Participation Agreement referred to in Recital A below
(collectively, the "Participants"); and
(4) ABN AMRO BANK, N.V., acting through its San Francisco
International Branch, as agent for the Participants (in such capacity,
"Agent").
RECITALS
A. Lessee, Lessor, the Participants and Agent are parties to a
Participation Agreement dated as of May 15, 1998 (the "Participation
Agreement").
B. Lessee has requested Lessor, the Participants and Agent to amend the
Participation Agreement to change the covenant limiting Lessee's repurchase of
its Equity Securities.
C. Lessor, the Participants and Agent are willing so to amend the
Participation Agreement upon the terms and subject to the conditions set forth
below.
AGREEMENT
NOW, THEREFORE, in consideration of the above recitals and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Lessee, Lessor, the Participants and Agent hereby agree as
follows:
1. Definitions, Interpretation. All capitalized terms defined above and
elsewhere in this Amendment shall be used herein as so defined. Unless otherwise
defined herein, all other capitalized terms used herein shall have the
respective meanings given to those terms in the Participation Agreement, as
amended by this Amendment. The rules of construction set forth in Schedule 1.02
to the Participation Agreement shall, to the extent not inconsistent with the
terms of this Amendment, apply to this Amendment and are hereby incorporated by
reference.
2. Amendment to Participation Agreement. Subject to the satisfaction of
the conditions set forth in Paragraph 4 below, Clause (iii) of Subparagraph
5.02(f) of the Participation Agreement is hereby amended to read in full as
follows:
EXHIBIT 10.19
(iii) Lessee may repurchase its Equity Securities, provided
that the cost of any such repurchase, when added to the aggregate cost
of all other repurchases made pursuant to this clause (iii) since the
date of this Agreement, does not exceed the greater of $25 million or
five percent (5%) of Lessee's Tangible Net Worth on the last day of the
immediately preceding fiscal year.
3. Representations and Warranties. Lessee hereby represents and
warrants to Agent and the Participants that the following are true and correct
on the date of this Amendment and that, after giving effect to the amendment set
forth in Paragraph 2 above, the following will be true and correct on the
Effective Date (as defined below):
(a) The representations and warranties of Lessee set forth in
Paragraph 4.01 of the Participation Agreement and in the other
Operative Documents are true and correct in all material respects as if
made on such date (except for representations and warranties expressly
made as of a specified date, which shall be true as of such date);
(b) No Default has occurred and is continuing; and
(c) All of the Operative Documents are in full force and
effect.
(Without limiting the scope of the term "Operative Documents," Lessee expressly
acknowledges in making the representations and warranties set forth in this
Paragraph 3 that, on and after the date hereof, such term includes this
Amendment.)
4. Effective Date. The amendments effected by Paragraph 2 above shall
become effective April, 5, 1999 (the "Effective Date") so long as Lessor, Agent
and the Participants have received on or prior to the effective Date this
Amendment duly executed by Lessor, Lessee, each Participant and Agent.
5. Effect of this Amendment. On and after the Effective Date, each
reference in the Participation Agreement and the other Operative Documents to
the Participation Agreement shall mean the Participation Agreement as amended
hereby. Except as specifically amended above, (a) the Participation Agreement
and the other Operative Documents shall remain in full force and effect and are
hereby ratified and affirmed and (b) the execution, delivery and effectiveness
of this Amendment shall not, except as expressly provided herein, operate as a
waiver of any right, power, or remedy of the Participants or Agent, nor
constitute a waiver of any provision of the Participation Agreement or any other
Operative Document.
6. Miscellaneous.
(a) Counterparts. This Amendment may be executed in any number
of identical counterparts, any set of which signed by all the parties
hereto shall be deemed to constitute a complete, executed original for
all purposes.
(b) Headings. Headings in this Amendment are for convenience
of reference only and are not part of the substance hereof.
2
(c) Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of California
without reference to conflicts of law rules.
[Signature pages follow]
3
IN WITNESS WHEREOF, Lessee, Lessor, Agent and the Participants have
caused this Amendment to be executed as of the day and year first above written.
LESSEE: FAIR, ISAAC AND COMPANY, INC.
By: _____________________________________
Name: _______________________________
Title: ______________________________
LESSOR: LEASE PLAN NORTH AMERICA, INC.
By: _____________________________________
Name: _______________________________
Title: ______________________________
AGENT: ABN AMRO BANK N.V.
By: _____________________________________
Name: _______________________________
Title: ______________________________
By: _____________________________________
Name: _______________________________
Title: ______________________________
PARTICIPANTS: ABN AMRO BANK N.V.
By: _____________________________________
Name: _______________________________
Title: ______________________________
By: _____________________________________
Name: _______________________________
Title: ______________________________
4
KEYBANK NATIONAL ASSOCIATION
By: _____________________________________
Name: _______________________________
Title: ______________________________
BANQUE NATIONALE de PARIS
By: _____________________________________
Name: _______________________________
Title: ______________________________
By: _____________________________________
Name: _______________________________
Title: ______________________________
FLEET NATIONAL BANK
By: _____________________________________
Name: _______________________________
Title: ______________________________
THE DAI-ICHI KANGO BANK, LIMITED
Los Angeles Agency
By: _____________________________________
Name: _______________________________
Title: ______________________________
5
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into and effective
as of the 23rd day of August, 1999, (the "Effective Date") by and between Fair,
Isaac and Company, Inc., a Delaware Corporation, having its principal office at
120 North Redwood Drive, San Rafael, California 94903 (the "Company") and Thomas
G. Grudnowski ("Employee").
RECITALS
1. The Company provides customer and operational data management and
modeling, information analysis, strategy design and software to a
variety of industries, worldwide.
2. The Company desires to employ Employee and Employee desires to become
employed by the Company, pursuant to the terms and conditions of this
Agreement.
Section 1.0 EMPLOYMENT, DUTIES AND TERM
1.1 Employment. Upon the terms and conditions set forth in this Agreement, the
Company hereby employs Employee and Employee accepts such employment as Chief
Executive Officer of the Company.
1.2 Election to Board of Directors. Upon the Effective Date of this Agreement,
the Company's Board of Directors shall elect Employee to fill a position as a
member of the Company's Board of Directors as of December 2, 1999. Thereafter,
it is understood and agreed by the Company and Employee that the Board of
Directors of the Company shall thereafter, so long as Employee is the Chief
Executive Office of the Company, nominate the Employee for election to a
position on the Board of Directors of the Company.
1.3 Duties. During the term of this Agreement, and excluding any periods of
vacation, sick leave, disability leave, or other leave to which Employee is
entitled, the Employee shall have reporting responsibilities to the Board of
Directors of the Company and shall have such duties as are assigned by the Board
of Directors of the Company and agrees to devote reasonable attention and time
during normal business hours to the business and affairs of the Company and, to
such extent necessary, to discharge the responsibilities assigned to the
Employee hereunder as Chief Executive Officer of the Company.
1.4 Employment Relationship. Company and Employee agree that they have an "at
will" employment relationship, which means that either Party has the right to
terminate the employment relationship at any time and for any reason subject to
Section 1.6 and Section 3.0 of this Agreement.
1.5 Commencement of Employment. Employee shall make himself available to the
Company for the purposes of familiarization and orientation commencing no later
than October 8, 1999, and the term of employment shall commence on December 2,
1999, with compensation
EXHIBIT 10.42
and benefits payable to Employee as set forth in this Agreement due and owing
effective December 2, 1999, and thereafter.
1.6 Term of Agreement. This Agreement shall remain in force from the Effective
Date through December 1, 2003.
Section 2.0 COMPENSATION, BENEFITS AND EXPENSES
2.1 Compensation For December 2, 1999 to September 30, 2000. It is understood
and agreed by the Company and Employee that for the period December 2, 1999 to,
and including, September 30, 2000, ("First Year Employment"), that the Company
shall pay Employee a first year employment salary ("First Year Employment
Salary") of Six Hundred Sixty-six Thousand Six Hundred Sixty-six Dollars
($666,666.00), i.e. at the rate of Eight Hundred Thousand Dollars ($800,000.00)
per annum, which shall be payable in accordance with the Company's regular
payroll practices; but in any event, the Company shall pay the First Year
Employment Salary in at least ten (10) equal monthly installments.
2.2 One Time First Year Bonus. Company agrees to pay to Employee, in addition to
the compensation set forth at Section 2.1, a one time first year employment
bonus ("First Year Employment Bonus") in the amount of One Hundred Thirty Three
Thousand Three Hundred Thirty Three Dollars ($133,333.00) payable in full to
Employee on December 2, 1999.
2.3 Base Salary-October 1, 2000. Subject to Section 3.0 of this Agreement,
commencing October 1, 2000 and thereafter during the term of Employee's
employment under this Agreement and for as long thereafter as required pursuant
to Section 3.0 of this Agreement, the Company shall pay Employee a base salary
("Base Salary") at an annual rate of Four Hundred Thousand Dollars ($400,000.00)
which Base Salary shall be paid in accordance with the Company's regular payroll
practices, but in any event Company shall pay to Employee, Employee's Base
Salary in at least twelve (12) equal monthly installments. If Employee's Base
Salary is increased from time to time during the term of Employee's employment
under this Agreement, the increased amount shall become the Base Salary for the
remainder of the term of the Employee's employment under this Agreement, and for
as long thereafter as required pursuant to Section 3.0 subject to any subsequent
increases.
2.4 Incentive Awards. Commencing on October 1, 2000, and thereafter during the
term of Employee's employment under this Agreement, in addition to the Base
Salary payable pursuant to Section 2.1, Employee shall be eligible to receive an
annual bonus ("Incentive Award") with a target amount of Four Hundred Thousand
Dollars ($400,000.00) to be paid if Employee's achievements are "at plan." The
actual amount of such Incentive Award for each fiscal year may range from $0 to
$800,000, based on the achievement of certain strategic, business and financial
objectives that the Employee and the Company's Board of Directors will mutually
determine in good faith not later than ninety (90) days after the beginning of
each fiscal year of the Company.
Such Incentive Award shall be due and payable to Employee, in full, no later
than November 15th of each year of the term of Employee's employment and so long
as Employee is eligible for the Incentive Award and subject to Section 3.0 of
this Agreement.
2.5 Other Benefits. Health, Disability, and Group Term Life Insurance equal to
two (2) times Employee's annual Base Salary, up to a maximum coverage of Five
Hundred Thousand Dollars ($500,000.00), shall be provided by the Company to the
Employee and as provided generally to other employees of the Company, and
Employee shall be entitled to purchase participation in any other employee
benefit plan which exists as of December 2, 1999, or which may be established in
the future by the Company for its employees. In addition to the foregoing,
Employee shall be entitled to and the Company shall provide to Employee
Director's and Officer's ("D and O") indemnification insurance.
2.6 Business Expenses. The Company shall reimburse the Employee for any and all
ordinary, necessary and reasonable business expenses that Employee incurs in
connection with the performance of Employee's duties under this Agreement,
including entertainment, telephone, travel and miscellaneous expenses, provided
that Employee provides the Company with documentation for such expenses in a
form acceptable to the Company.
2.7 Vacation. For each fiscal year during the term of the Employee's employment
under this Agreement, Employee shall be entitled to four (4) weeks of paid
vacation.
2.8 Stock Options and Restricted Stock.
2.8.1 Grant of Options. The Company shall grant to Employee options
("Options") to acquire Four Hundred Twenty Thousand (420,000)
shares of the Company's Common Stock pursuant to the Stock
Option Agreement to be entered into between Employee and
Company simultaneously with the execution of this Agreement.
2.8.2 Vesting and Term of Options. When Employee completes one (1)
continuous year of employment with the Company after the date
of which the Options are granted, Employee may exercise the
Option for One Hundred Five Thousand (105,000) shares of the
Company's Common Stock. Thereafter, Options for Eight Thousand
Seven Hundred Fifty (8,750) shares of the Company's Common
Stock shall vest on the last day of each calendar month during
the term for which Employee is employed with the Company. (All
vesting dates hereinafter collectively "Vesting Date"). All of
the Options herein are subject to Section 3.0. All such
options shall expire ten (10) years after the Effective Date
of this Agreement (the "Expiration Date").
2.8.3 Exercise Price. The Exercise Price ("Exercise Price") for all
Options shall be equal to the closing price of the Company's
Common Stock as quoted by the New York Stock Exchange on the
Effective Date of this Agreement.
2.8.4 Restricted Stock. The Company hereby grants to employee Ten
Thousand (10,000) shares of restricted stock (the "Restricted
Stock") which shall vest on January 1, 2000, provided Employee
is employed by the Company on such date.
By law, the Employee must pay the par value of the stock ($.01
per share) in order to receive such Restricted Stock.
2.8.5 Vesting: Change of Control and Termination. The foregoing
Vesting Dates notwithstanding Employee's Restricted Stock and
Options shall vest and be fully exercisable on the following
dates:
a. Termination "Without Cause." In the event of
termination by the Company of Employee's employment
prior to the termination of this Agreement "without
cause" (other than by death or disability), those
shares of Restricted Stock and Options vesting within
twelve (12) months of the date of such termination
shall immediately vest, such Options shall become
exercisable in full, and Employee shall be required
to exercise the Options within ninety (90) days after
the effective date of the termination.
b. Termination Due to Disability or Death. In the event
of Employee's termination due to death or disability
while an employee or director of the Company, all of
Employee's Restricted Stock and Options shall
immediately vest, and such Options shall become
exercisable in full, and the Options shall be
exercised within twelve (12) months after the event
of death or disability.
c. Change in Control. In the event the Company is
subject to a "Change in Control" (as defined in
Section 3.3 below) during the term of this Agreement
and while Employee is an employee or director of the
Company, Employee's entire Restricted Stock and
Options shall immediately vest, and such Options
shall become fully exercisable up to the Expiration
Date of the Options.
Section 3.0 PAYMENTS UPON TERMINATION
3.1 Severance. If the Company terminates Employee's "at will" employment
"without cause," Employee shall be paid (i) a sum equal to two (2) times
Employee's then Base Salary or if termination occurs during the Employee's first
year of employment, Employee shall be paid the sum of One Million Six Hundred
Thousand Dollars ($1,600,000.00), either sum payable in one lump sum no later
than ninety (90) days after termination; (ii) Employee's accrued but unpaid
time-off (including but not limited to vacation for the year in which such
termination occurs, prorated to the date of such termination; (iii) any unpaid
business expense reimbursements; (iv) a sum equal to two (2) times Employee's
Incentive Award granted by the Company for the period immediately preceding the
date of termination, (v) Employee's other accrued benefits, if any, under any of
the Company's other employee benefit plans subject to the terms and conditions
of those plans, and (vi) Employee shall be entitled to the Restricted Stock and
to exercise the Options at the times and pursuant to Section 2.8.5(a).
3.2 With/Without Cause. For the purposes of this Agreement, "without cause"
shall be any reason other than "cause" and "cause" for the purposes of this
Agreement shall mean: (i) an act
or acts of personal dishonesty taken by Employee and intended to result in
substantial personal enrichment of Employee at the expense of the Company; (ii)
Employee's material breach of any of Employee's obligations under this Agreement
or Employee's repeated failure or refusal to perform or observe Employee's
duties, responsibilities and obligations as an Employee of the Company for
reasons other than disability or incapacity; (iii) the existence of any Court
Order or settlement agreement prohibiting Employee's continued employment with
the Company; (iv) if Employee has signed and/or entered into a written or oral
non-competition agreement, confidentiality agreement, proprietorial information
agreement, trade secret agreement or any other agreement which would prevent
Employee from working for the Company and/or from performing Employee's duties
at the Company; or (v) the willful engaging by Employee in illegal conduct that
is materially and demonstrably injurious to the Company. For the purposes of
this Section 3.2(v), no act or failure to act on Employee's part shall be
considered "dishonest," "willful" or "deliberate" unless done or omitted to be
done by Employee in bad faith and without reasonable belief that Employee's
action or omission was in, or not opposed, to the best interests of the Company.
Any act, or failure to act, based upon authority given pursuant to a resolution
duly adopted by the Board of Directors of the Company or based upon the advice
of counsel for the Company shall be conclusively presumed to be done, or omitted
to be done, by Employee in good faith and in the best interests of the Company.
3.3 Change of Control. For purposes of this Agreement, a "Change of Control"
shall be deemed to occur upon the occurrence of both (A): (i) the sale, lease,
conveyance or other disposition of all or substantially all of the Company's
assets as an entirety or substantially as an entirety to any person, entity or
group of persons acting in concert; (ii) any "person" (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended)
becoming the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Company representing 50% or more of
the total voting power represented by the Company's then outstanding voting
securities; or (iii) a merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would result in the
voting securities of the company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) at least 50% of the total voting
power represented by the voting securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation; and (B): (i)
a material adverse change in the Employee's position with the Company which
materially reduces his responsibility, without "cause" and without his written
consent; (ii) a material reduction in the Employee's compensation without his
written consent; or (iii) a relocation of Employee's place of employment outside
of the seven (7) San Francisco Bay Area counties, without his written consent.
Section 4.0 CONFIDENTIAL INFORMATION
4.1 Confidential Information Obtained During Employment. As an employee of the
Company, Employee will have access to certain confidential information of the
Company and its clients; and, Employee may, during the course of his employment,
develop certain information or inventions that will be the property of the
Company. In order to protect the interest of the Company, Employee shall,
contemporaneously with the execution of this Agreement, execute the Company's
Standard Employee confidentiality and Inventions Agreement.
4.2 Information Obtained from Prior Employment. In addition to the foregoing
Section 4.1, Employee shall not provide to the company nor use confidential or
proprietary information of any former employer or clients in violation of any
obligation Employee may have to such former employer or clients.
Section 5.0 RELOCATION BENEFITS
In addition to all other compensation specified herein, the Company
agrees that upon the execution of this Agreement and thereafter it will
reimburse the Employee for all reasonable costs of relocating Employee's family
and household to the San Francisco, California, Bay Area from Deephaven,
Minnesota. The relocation benefits shall include the costs of moving household
goods and personal and recreational vehicles. It shall also include travel
expenses, to include food and lodging, for up to five (5) round trips by
Employee and Employee's spouse to San Francisco, California, Bay Area from
Minnesota prior to actual relocation; and real estate commissions and other
out-of-pocket costs of selling Employee's current residence, together with
temporary living expenses up to six (6) months in the event Employee reports for
employment with the Company prior to relocation of employee's family and
household.
Section 6.0 GENERAL PROVISIONS
6.1 Disputes. In the event of any dispute, controversy, or claim for damages
arising under or in connection with this Agreement, including, but not limited
to, claims for wages or compensation due; claims for breach of any contract or
covenant (expressed or implied); tort claims; claims for discrimination; claims
for benefits (except where an employee benefit or profit sharing plan specifies
that its claims procedures shall culminate in an arbitration procedure) and
claims for violation of any Federal, State or other governmental law, statute,
regulation, or ordinance, except claims for workers' compensation or
unemployment compensation benefits, Employee and Company mutually agree to in
good faith consider the use of forms of alternative dispute resolution,
including, but not limited to, arbitration and/or mediation.
6.2 Remedies. Any remedies which the Parties hereto may have pursuant to this
Agreement or by law shall be cumulative. The Parties hereto agree that if a
Party fails to comply with the terms and conditions hereof, the harm to the
other Party may not be fully compensable in money damages, and accordingly, the
Parties hereby agree that either Party may seek specific performance of any and
all provisions hereafter to the full extent lawfully warranted or the enjoining
of the breaching Party from continuing to commit any breach of the terms and
conditions contained herein.
6.3 Successors and Assigns. This Agreement shall be binding upon and inure to
the benefit of any successor of the Company ("Successor") and any such successor
shall absolutely and unconditionally assume all of the Company's obligations
hereunder. On Employee's written request, the Company will seek to have any
Successor, by agreement in form and substance satisfactory to Employee, assent
to fulfillment by the such Successor of its obligations under this Agreement.
6.4 No Offsets. In no event shall any amount payable to Employee pursuant to
this Agreement be reduced for purposes of offsetting either directly or
indirectly any indebtedness or liability of Employee to the Company.
6.5 Severability. To the extent a provision of this Agreement shall be invalid
or unenforceable, it shall be considered deleted from this Agreement and the
remainder of this Agreement shall be unaffected and shall continue in full force
and effect. Notwithstanding the foregoing, in the event that a provision of this
Agreement is unenforceable, because it is overbroad, then such provision shall
be limited to the extent necessary to make it enforceable under applicable law
and enforced as so limited. Employee acknowledges the uncertainty of the law in
this respect and expressly stipulates that this Agreement be given the
construction which renders its provisions valid and enforceable to the maximum
extent (not exceeding its express terms) possible under applicable law.
6.6 Governing Law. The validity, interpretation, construction, performance,
enforcement and remedies of or relating to this Agreement, and the rights and
obligations of the Parties hereunder shall be governed by the substantive laws
of the State of California (without regard to the conflict-of-laws rules or
statutes of any jurisdiction), and any and every legal proceeding arising out of
or in connection with this Agreement shall be brought in the appropriate courts
of the State of California if the parties are unable to agree to alternative
dispute resolution as set forth at Section 6.1. Each of the Parties hereby
consents to the exclusive jurisdiction of said courts for this purpose.
6.7 Waivers. No failure on the part of either Party to exercise, and no delay in
exercising a right or remedy hereunder shall operate as a waiver thereof; nor
shall any single or partial exercise of any right or remedy hereunder preclude
any other or further exercise thereof or the exercise of the right of any remedy
granted hereby or by any related document or by law.
6.8 Modification. This Agreement may not be modified or amended except by
written instruments signed by the Parties hereto.
6.9 Entire Agreement This Agreement constitutes the entire Agreement and
understanding between the Parties hereto with respect to all the matters herein
referenced and agreed upon.
6.10 Survival. The Parties expressly acknowledge and agree that the provisions
of this Agreement which by their expressed or implied terms extend beyond the
termination of Employee's employment hereunder, including, but without
limitation, the obligations incurred under Sections 2.0, 3.0 and 4.0, shall
continue in full force and effect notwithstanding the Employee's termination of
employment hereunder or the termination of this Agreement respectively.
6.11 Counterparts. This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original, but which together shall constitute
one and the same Agreement.
IN WITNESS WHEREOF the Company has caused this Agreement to be executed
by its duly authorized Officer and Employee has executed this Agreement as of
the day and year first above written:
FAIR, ISAAC AND COMPANY, INC.
BY: __________________________________
ITS: ______________________________
EMPLOYEE
______________________________________
Thomas G. Grudnowski
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
This First Amendment to Employment Agreement (the "Amendment") is
entered into effective as of December 3, 1999, by and between Fair, Isaac and
Company, Inc. ("Company") and Thomas G. Grudnowski ("Employee").
WHEREAS, Company and Employee entered into an Employment Agreement
dated August 23, 1999 (the "Agreement"); and
WHEREAS, pursuant to the Agreement, Company has issued 10,000 shares of
its Common Stock to Employee subject to certain restrictions (the "Restricted
Stock"), and
WHEREAS, Company and Employee desire to amend the Agreement as set
forth herein;
THEREFORE they have agreed as follows:
1. Section 2.8.4 of the Agreement is hereby amended to read as follows:
Additional Option Grant. The Company hereby grants Employee options to
acquire an additional 40,000 shares of the Company's Common Stock pursuant to a
Stock Option Agreement to be entered into between Company and Employee
simultaneously with the execution of this Amendment. The Exercise Price for the
options granted pursuant to this Paragraph shall be equal to the closing price
of the Company's Common Stock as quoted by the New York Stock Exchange on the
date of this Amendment, i.e. December 3, 1999. All such options shall vest on
January 1, 2000, and shall expire on December 3, 2009.
2. The Restricted Stock previously issued by the Company to Employee shall be
cancelled. Employee shall not be liable for the par value of such Restricted
Stock and no dividends have been or shall be paid on such Restricted Stock.
Except as expressly amended hereby, the Agreement shall remain in full
force and effect.
EXHIBIT 10.43
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT Page 2 of 2
IN WITNESS WHEREOF, the Company has caused this Amendment to be
executed by its duly authorized officer and Employee has executed this Amendment
as of the day and year first above written:
FAIR, ISAAC AND COMPANY, INC.
By: ____________________________________
Its: Senior Vice President and Secretary
EMPLOYEE:
________________________________________
Thomas G. Grudnowski
Subsidiaries of
Fair, Isaac and Company, Incorporated
Effective 10-1-99
Name of Company and Jurisdiction of
Name under which it Incorporation or
Does Business Organization
- ---------------------------------------- ----------------
Fair, Isaac International
Corporation(1) California
Data Research Technologies(1) Minnesota
Risk Management Technologies(1) California
Lindaro Office Park, Inc. (1) California
Fair, Isaac International
Germany Corporation(2) California
Fair, Isaac International
Canada Corporation(2) California
Fair, Isaac International
UK Corporation(2) California
Fair, Isaac International
Japan Corporation(2) California
Fair, Isaac International Ltd(2) England
Fair, Isaac International
France Corporation(2) California
Fair, Isaac International
Mexico Corporation(2) California
Fair, Isaac International
Spain Corporation(2) California
Fair, Isaac Brazil, LLC(2) Delaware
Radar International, Inc. (3) Virgin Islands
Fair, Isaac Do Brasil Ltda. (4) Brazil
Footnotes:
(1) 100% owned by Fair, Isaac and Company, Incorporated.
(2) 100% owned by Fair, Isaac International Corporation.
EXHIBIT 21.1
(3) 100% owned by Risk Management Technologies
(4) 99% owned by Fair, Isaac International Corporation and 1% owned by Fair, Isaac Brazil, LLC
The 3 organizations listed below are former subsidiaries of Fair, Isaac, which
were merged into the Company as of 9-30-99:
DynaMark, Inc.(1) Minnesota
Credit & Risk Management Associates, Inc. (1) Delaware
Prevision, Inc.(1) Oregon
5
1,000
12-MOS
SEP-30-1999
OCT-01-1998
SEP-30-1999
20,715
5,216
37,281
1,274
0
101,327
89,778
50,425
210,353
45,442
364
0
0
143
156,356
210,353
0
276,931
0
105,454
42,549
123
184
50,600
20,620
29,980
0
0
0
29,980
2.13
2.09
