e10vk
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
September 30, 2006
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
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For the transition period
from to
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Commission File Number 0-16439
Fair Isaac
Corporation
(Exact name of registrant as
specified in its charter)
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Delaware
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94-1499887
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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901 Marquette Avenue,
Suite 3200
Minneapolis, Minnesota
(Address of principal
executive offices)
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55402-3232
(Zip
Code)
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Registrants telephone number, including area code:
612-758-5200
Securities registered pursuant to Section 12(b) of the
Act:
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(Title of Class)
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(Name of each exchange on which registered)
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Common Stock, $0.01 par value
per share
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New York Stock Exchange, Inc.
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Preferred Stock Purchase Rights
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New York Stock Exchange, Inc.
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
þ Yes o
No
Indicate by check mark if the registrant is not required to file
report pursuant to Section 13 or Section 15(d) of the
Act.
o Yes þ
No
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 þ No o
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 registrants 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. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act (Check one):
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Large
Accelerated Filer þ
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Accelerated
Filer o
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Non-Accelerated
Filer o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act).
o Yes þ
No
As of March 31, 2006, the aggregate market value of the
registrants common stock held by non-affiliates of the
registrant was $2,081,480,123 based on the last transaction
price as reported on the New York Stock Exchange on such date.
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
November 30, 2006 was 57,788,824 (excluding
31,067,959 shares held by the Company as treasury stock).
Items 10, 11, 12, 13 and 14 of Part III
incorporate information by reference from the definitive proxy
statement for the Annual Meeting of Stockholders to be held on
February 12, 2007.
FORWARD
LOOKING STATEMENTS
Statements contained in this Report that are not statements
of historical fact should be considered forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (the Act). In
addition, certain statements in our future filings with the
Securities and Exchange Commission (SEC), in press
releases, and in oral and written statements made by us or with
our approval that are not statements of historical fact
constitute forward-looking statements within the meaning of the
Act. Examples of forward-looking statements include, but are not
limited to: (i) projections of revenue, income or loss,
earnings or loss per share, the payment or nonpayment of
dividends, capital structure and other statements concerning
future financial performance; (ii) statements of our plans
and objectives by our management or Board of Directors,
including those relating to products or services;
(iii) statements of assumptions underlying such statements;
(iv) statements regarding business relationships with
vendors, customers or collaborators; and (v) statements
regarding products, their characteristics, performance, sales
potential or effect in the hands of customers. Words such as
believes, anticipates,
expects, intends, targeted,
should, potential, goals,
strategy, and similar expressions are intended to
identify forward-looking statements, but are not the exclusive
means of identifying such statements. Forward-looking statements
involve risks and uncertainties that may cause actual results to
differ materially from those in such statements. Factors that
could cause actual results to differ from those discussed in the
forward-looking statements include, but are not limited to,
those described in Item 1A, Risk Factors, below. The
performance of our business and our securities may be adversely
affected by these factors and by other factors common to other
businesses and investments, or to the general economy.
Forward-looking statements are qualified by some or all of these
risk factors. Therefore, you should consider these risk factors
with caution and form your own critical and independent
conclusions about the likely effect of these risk factors on our
future performance. Such forward-looking statements speak only
as of the date on which statements are made, and we undertake no
obligation to update any forward-looking statement to reflect
events or circumstances after the date on which such statement
is made to reflect the occurrence of unanticipated events or
circumstances. Readers should carefully review the disclosures
and the risk factors described in this and other documents we
file from time to time with the SEC, including our reports on
Forms 10-Q
and 8-K to
be filed by the Company in fiscal 2007.
PART I
GENERAL
Fair Isaac Corporation (NYSE: FIC) (together with its
consolidated subsidiaries, the Company, which may
also be referred to in this report as we,
us, our, and Fair Isaac)
provides products and services that enable businesses to
automate and improve decisions. Our predictive analytics and
decision management systems power hundreds of billions of
customer decisions each year.
We were founded in 1956 on the premise that data, used
intelligently, can improve business decisions. Today, we help
thousands of companies in over 60 countries use our Enterprise
Decision Management technology to target and acquire customers
more efficiently, increase customer value, reduce fraud and
credit losses, lower operating expenses, and enter new markets
more profitably. Most leading banks and credit card issuers rely
on our solutions, as do insurers, retailers, telecommunications
providers, healthcare organizations, pharmaceutical companies
and government agencies. We also serve consumers through online
services that enable people to purchase and understand their
FICO®
scores, the standard measure in the United States of credit
risk, empowering them to manage their financial health.
More information about us can be found on our principal website,
www.fairisaac.com. We make our Annual Report on
Form 10-K,
our Quarterly Reports on
Form 10-Q
and our Current Reports on
Form 8-K,
as well as amendments to those reports, available free of charge
through our website as soon as reasonably practicable after we
electronically file them with the SEC. Information on our
website is not part of this report.
1
PRODUCTS
AND SERVICES
We help businesses automate and improve decisions across the
enterprise, an approach we commonly refer to as Enterprise
Decision Management, or EDM. Most of our solutions
address customer decisions, including customer targeting and
acquisition, account origination, customer management, fraud,
collections and recovery. We also help businesses improve
non-customer decisions such as transaction and claims
processing, and network integrity review. Our solutions enable
users to make decisions that are more precise, consistent and
agile, and that systematically advance business goals. This
helps our clients to reduce the cost of doing business, increase
revenues and profitability, reduce losses from risks and fraud,
and increase customer loyalty.
Our
Segments
We deliver EDM through products and services that we categorize
into the following four operating segments:
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Strategy
Machinetm
Solutions. These are pre-configured EDM
applications designed for a specific type of business problem or
process, such as marketing, account origination, customer
management, fraud and medical bill review. This segment also
includes our myFICO solutions for consumers.
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Scoring Solutions. Our scoring solutions give
our clients access to analytics that can be easily integrated
into their transaction streams and decision-making processes.
Our scoring solutions are distributed through major credit
reporting agencies, as well as services through which we provide
our scores to lenders directly.
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Professional Services. Through our
professional services, we tailor our EDM products to our
clients environments, and we design more effective
decisioning environments for our clients. This segment includes
revenues from custom engagements, business solution and
technical consulting services, systems integration services, and
data management services.
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Analytic Software Tools. This segment is
composed of software tools that clients can use to create their
own custom EDM applications.
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Comparative segment revenues, operating income and related
financial information for fiscal 2006, 2005 and 2004 are set
forth in Note 16 to the accompanying consolidated financial
statements.
2
Key
Products and Services by Operating Segment
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Operating Segment
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Key Products and Services
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Strategy Machine Solutions
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Marketing
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Fair Isaac MarketSmart Decision
System®
solution
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Originations
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LiquidCredit®
service
Capstone®
Decision Manager
Capstone®
Decision Accelerator
Capstone®
Intelligent Data Manager
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Customer Management
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TRIADtm
adaptive control system
TRIADtm
Transaction Scores
TelAdaptive®
service
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Fraud
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Falcontm
Fraud Manager
Fraud Predictor with Merchant Profiles
Falcontm
ID solution
CardAlert Fraud Manager
Fraud/Risk Analytics for Telecom (including Revenue and Network
Assurance)
RoamEx®
Roamer Data Exchanger
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Collections & Recovery
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Debt
Managertm
solution
Recovery Management
Systemtm
solution (RMS)
ScoreNet®
network
PlacementsPlus®
service
Placement
Optimizersm
service
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Mortgage Banking
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Diamondtm
loan origination solution
LSAMStm
loan servicing and account management solution
FORTRACS default management solution
LenStartm
default management communications network
TCLtm
(The Construction Lender) solution
ScoreNet®
network
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Insurance and Healthcare
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Fair Isaac
SmartAdvisortm
medical bill review
Insurance Service Bureau
Payment
Optimizer®
solution
VeriComp®
Fraud Manager
MIRAtm
Claims Advisor
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Consumer
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myFICO®
service
Score
Watchtm
subscription
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Scoring Solutions
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FICO®
scores
NextGen
FICO®
scores
FICO®
Expansiontm
scores
Fair
Isaac®
Qualifytm
scores
Global
FICO®
scores
Marketing and bankruptcy scores
Commercial credit risk scores
Credit-based insurance scores
Property
PredictRtm
scores
FICO®
score delivery
PreScore®
Service
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Operating Segment
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Key Products and Services
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Professional Services
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Solution and technology consulting
Systems integration services
Data management services
Business strategy consulting
Industry consulting
Strategy Science services
Predictive Science services
Fraud consulting services
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Analytic Software Tools
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Blaze
Advisortm
business rules management system
Model Builder for Predictive Analytics
Model Builder for Decision Trees
Decision Optimizer
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Our
Solutions
Our solutions involve three fundamental disciplines:
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Analytics to identify the risks and opportunities associated
with individual clients, prospects and transactions, in order to
detect patterns such as fraud, and to improve the design of
decision logic or strategies;
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Data management, profiling and text recognition that bring
extensive customer information to every decision; and
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Software such as rules management systems that implement
business rules, models and decision strategies, often in a
real-time environment.
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All of our solutions are designed to help businesses make
decisions that are faster, more precise, more consistent and
more agile, while reducing costs and risks incurred in making
decisions.
Strategy
Machine Solutions
We develop industry-tailored EDM applications, which we call
Strategy Machine Solutions, that apply analytics, data
management and decision management software to specific business
challenges and processes. These include credit offer
prescreening, medical bill review, telecommunications fraud
prevention and others. Our Strategy Machine Solutions serve
clients in the financial services, insurance, healthcare,
retail, telecommunications and government sectors.
Marketing
Strategy Machine Solutions
The chief Strategy Machine offering for marketing is our Fair
Isaac MarketSmart Decision
System®
solution (MarketSmart). The MarketSmart solution is
a suite of products and capabilities designed to integrate all
of the technology and analytic services needed to perform
context-sensitive customer acquisition, cross-selling and
retention programs. The MarketSmart solution enables companies
that offer multiple products and use multiple channels
(companies such as large financial institutions, consumer
branded goods companies, pharmaceutical companies, retail
merchants and telecommunications service providers) to execute
more efficient and profitable customer interactions. Services
offered under the MarketSmart brand name include customer data
integration (CDI) services; services that use
transaction analytics to identify customer patterns and help
clients target their marketing activities; services that enable
real-time marketing through direct consumer interaction
channels; campaign management and optimization services;
interactive tools that automate the design, execution and
collection of customer response data across multiple channels;
and customer data collection, management and profiling services.
A number of our marketing services are designed for specific
industries, such as retail and pharmaceuticals. For example, our
services for retailers include using analytics to help retailers
identify and market to their store shoppers; analyzing
transaction data to provide insights into store customer
activity and compare it with sales
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pattern activity across the marketplace; and analyzing a
retailers purchase transaction data to help them
understand buying patterns, sequences and contexts.
Originations
Strategy Machine Solutions
We provide solutions that enable banks, credit unions, finance
companies, installment lenders, telecommunications service
providers and other companies to automate and improve the
processing of requests for credit or service. These solutions
increase the speed and efficiency with which requests are
handled, reduce losses and increase approval rates through
analytics that assess applicant risk, and reduce the need for
manual review by loan officers.
Our solutions include the web-based
LiquidCredit®
service, which is primarily focused on the credit decision and
offered largely to mid-tier financial services institutions,
e-commerce
providers and telecommunications providers; and
Capstone®
Decision Manager, a complete end-user software solution for
application decisioning and processing. In fiscal 2005, we
introduced new components for the Capstone system that can be
used with multiple originations platforms and environments.
These components are Capstone Decision Accelerator, which is a
rules-based application based on our Blaze
Advisortm
system, and Capstone Intelligent Data Manager, which enables
lenders to access data from several consumer and small business
credit data sources. We also offer custom and consortium-based
credit risk and application fraud models.
Customer
Management Strategy Machine Solutions
Our customer management products and services enable businesses
to automate and improve decisions on their existing customers.
These solutions help businesses decide which customers to
cross-sell, what additional products and services to offer,
whether customer risk levels have increased or decreased, when
and how much to change a customers credit line, what
pricing adjustments to make in response to account performance
or promotional goals, and how to treat delinquent and high-risk
accounts.
We provide customer management solutions for:
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Financial Services. In financial services, our
leading account and customer management product is the
TRIADtm
adaptive control system. Our adaptive control systems are so
named because they enable businesses to rapidly adapt to
changing business and internal conditions by designing and
testing new strategies in a champion/challenger
environment. The TRIAD system is the worlds leading credit
account management system, and our adaptive control systems are
used by more than 250 issuers worldwide to manage
approximately 65% of the worlds credit card accounts. Our
latest version of the TRIAD system enables users to manage risk
and communications at both the account and borrower level from a
single platform. We also offer transaction-based neural network
(the term neural network is defined under Technology
later in this section) models called TRIAD Transaction Scores
that help card issuers identify high-risk behavior more quickly
and thus manage their credit card accounts more profitably. We
market and sell TRIAD end-user software licenses, maintenance,
consulting services, and strategy design and evaluation.
Additionally, we provide TRIAD services and similar credit
account management services through 12 third-party credit card
processors worldwide, including the two largest processors in
the U.S., First Data Resources, Inc. and Total System Services,
Inc. We also provide the TRIAD system as a hosted service in
Application Service Provider (ASP) mode.
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Telecommunications. The
TelAdaptive®
account management system offers telecommunications service
providers account management functionality similar to the TRIAD
system, including receivables risk management, account spending
limits, churn management and cross-sell communications.
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Insurance. We provide property and casualty
insurers with decision management solutions that enable them to
create, test and implement decision strategies for areas such as
cross-selling, pricing, claims handling, retention, prospecting
and underwriting.
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Fraud
Strategy Machine Solutions
Our fraud products improve our clients profitability by
predicting the likelihood that a customer account is
experiencing fraud. Our fraud products analyze customer
transactions in real time and generate recommendations for
immediate action, which is critical to stopping fraud and abuse.
These applications can also detect some organized fraud schemes
that are too complex and well-hidden to be identified by other
methods.
Our solutions are designed to detect and prevent a wide variety
of fraud and risk types across multiple industries, including
credit and debit payment card fraud; identity fraud;
telecommunications subscription fraud, technical fraud and bad
debt; healthcare fraud; Medicaid and Medicare fraud; and
property and casualty insurance fraud, including workers
compensation fraud. Fair Isaac fraud solutions protect
merchants, financial institutions, insurance companies,
telecommunications carriers, government agencies and employers
from losses and damaged customer relationships caused by fraud.
Our leading fraud detection solution is
Falcontm
Fraud Manager, recognized as the leader in global payment card
fraud detection. Falcon Fraud Managers neural network
predictive models and patented profiling technology, both
further described below in the Technology section,
examine transaction, cardholder and merchant data to detect a
wide range of credit and debit card fraud quickly and
accurately. Falcon Fraud Manager analyzes card transactions in
real time, assesses the risk of fraud, and takes the
user-defined steps to prevent fraud while expediting legitimate
transactions. Falcon Fraud Manager protects hundreds of millions
of active credit and debit card accounts, and is used in
approximately 65% of all credit card transactions worldwide.
Fraud Predictor with Merchant Profiles is used in conjunction
with Falcon Fraud Manager to improve fraud detection rates by
analyzing merchant profile data. The merchant profiles include
characteristics that reveal, for example, merchants that have a
history of higher fraud volumes, and which purchase types and
ticket sizes have most often been fraudulent at a particular
merchant.
Falcon ID solution enables lenders and telecommunications
service providers to control identity fraud across the customer
lifecycle. Falcon ID relies on multiple sources of data and
complex statistical modeling techniques to identify activity
that is at high risk of stemming from identity theft. It also
provides business rules management that companies can use to
identify and resolve cases that appear to involve identity theft.
In addition to the Falcon products for financial services
institutions, we offer CardAlert Fraud Manager. CardAlert Fraud
Manager is a solution for fighting debit and ATM fraud in the
U.S. The CardAlert service identifies and reports
counterfeit payment cards to issuers before the majority of them
incur fraud losses. The service analyzes daily transactions
across multiple financial institutions, and uses this data to
pinpoint multi-card fraud and identify common points of
compromise.
We also provide a set of Fraud/Risk Analytics for Telecom
solutions that are specifically designed to help
telecommunications service providers reduce losses in four key
areas. The bad debt solution is used to mitigate early-life and
ongoing bad debt. The fraud solution is used to reduce complex
types of fraud such as subscription fraud, technical fraud,
internal fraud, dealer/agent fraud, calling card fraud, cloning
and clip-on fraud. The revenue assurance solution predicts
revenue leakage in the switch data collection, data mediation
and billing/rating system phases. And the network assurance
solution predicts problems in a telecommunications network by
detecting intrusion, abuse or network integrity compromises. In
addition, we offer RoamEx Roamer Data Exchanger, which delivers
near real-time exchange of roamer call records that occur when
subscribers roam outside a carriers home network. RoamEx
Roamer Data Exchanger is used to exchange more than 90% of North
American wireless carriers roamer call detail records.
Collections &
Recovery Strategy Machine Solutions
Our leading solutions in this area are the Debt
Managertm
solution and the Recovery Management
Systemtm
(RMStm)
solution. The Debt Manager solution automates the full cycle of
collections and recovery, including early collections, late
collections, asset disposal, agency placement, recovery,
litigation, bankruptcy, asset management and residual balance
recovery. The RMS solution is focused on the later phases of
distressed debt management, including bankruptcy and agency
management. Companies using the Debt Manager and RMS solutions
can access partner services such as collection agencies and
attorneys via the
ScoreNet®
network (formerly
6
BridgeLinktm),
which provides web-based access to and from thousands of
third-party collections and recovery service providers, as well
as access to multiple data sources and Fair Isaac solutions
hosted in ASP mode.
Other solutions for collections and recovery include the
PlacementsPlus service, an account placement optimization and
management system; the Placement
Optimizer®
service, which uses artificial intelligence-based analytics used
to identify the agency that is likely to collect the most for
each account; and custom collection and recovery models
implemented in an ASP environment. Those analytic-based
solutions can also be delivered via the ScoreNet network.
Mortgage
Banking Strategy Machine Solutions
Fair Isaac provides
end-to-end
mortgage lending solutions that mortgage lenders can use to
improve their loan marketing, sourcing, originations, servicing
and default management. These solutions include the Diamond loan
origination solution, an internet-based solution that
streamlines the complete mortgage process; the
LSAMStm
loan servicing and account management system for the servicing
of mortgage and consumer loans; FORTRACS software for default
management; and the
LenStartm
default management communication network for attorney referrals.
This category also includes our
TCLtm
(The Construction Lender) solution, which enables lenders to
manage the entire construction lending process. All of the
mortgage solutions are integrated with Fair Isaacs
ScoreNet network (formerly BridgeLink), which provides real-time
connectivity to a broad range of third-party service providers,
business partners and external systems involved in the complex
process of mortgage lending.
Insurance
and Healthcare Strategy Machine Solutions
We provide software solutions and services that automate the
review and repricing of medical bills for workers
compensation and automobile medical injuries. Using these
solutions, property and casualty insurers can automatically
review and reprice a significant percentage of medical bills
without human intervention. This allows for greater consistency
and accuracy, which are important factors for regulatory
compliance.
Our principal solutions in this area are:
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Fair Isaac
SmartAdvisortm
medical bill review software. The Fair Isaac
SmartAdvisor solution provides medical bill review and repricing
for workers compensation and automobile medical injury
claims. It checks each bill against an extensive database of
state fee schedules, automated contracts and user-defined
policies to help insurers and others get the maximum savings on
every bill reviewed. The SmartAdvisor software uses our business
rules management technology to increase the speed, accuracy and
consistency of decisions and reduce labor costs. It is available
in both licensed client/server and ASP versions.
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Insurance Service Bureau. Utilizing Fair
Isaacs medical bill review software, we provide turnkey
insurance bill review administration services at selected
locations across the country. These service bureau operations
offer expert medical bill and preferred provider review for
workers compensation and auto medical insurance bills,
including the additional review of complex medical, hospital and
surgical bills.
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We also provide fraud solutions for different segments of the
insurance healthcare market. Our principal solutions in this
area are:
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Payment
Optimizer®
fraud detection system, which provides both prepayment claims
scoring and retrospective analysis to help payers reduce fraud
losses and ensure payment integrity.
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VeriComp®
Fraud Manager software, which uses neural networks and data
analysis to identify potentially fraudulent workers
compensation claims that need investigation or special handling.
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Additionally, we serve the insurance claims management market
through our
MIRAtm
Claims Advisor product which uses predictive models to forecast
appropriate claims reserves based on individual claim data. We
also provide services that help healthcare payers reduce claims
leakage and detect fraud, and that help hospitals determine
payment strategies for patients during the admission process.
7
Consumer
Strategy Machine Solutions
Through our
myFICO®
division, we provide solutions based on our analytics to
consumers, sold directly by us or through distribution partners.
Consumers can use the myFICO.com website to purchase their
FICO®
scores, the credit reports underlying the scores, explanations
of the factors affecting their scores, and customized advice on
how to improve their scores. Customers can also use the myFICO
service to simulate how taking specific actions would affect
their
FICO®
score. The myFICO.com website is the only source for consumers
to obtain their
FICO®
scores and credit reports from all three of the major
U.S. credit reporting agencies. Consumers can also purchase
Score
Watchtm
subscriptions, which deliver alerts via email and SMS or text
messages when the users scores or balances change. The
myFICO products and subscription offerings are available online
at www.myfico.com, through two of the credit reporting
agencies involved Equifax Inc. (Equifax)
and TransUnion Corporation (TransUnion)
and through lenders, financial portals and numerous other
partners.
Scoring
Solutions
We develop the worlds leading scores based on third-party
data. Our
FICO®
scores are used in most U.S. credit decisions, by most of
the major credit card organizations as well as by mortgage and
auto loan originators. These scores provide a consistent and
objective measure of an individuals credit risk. Credit
grantors use the
FICO®
scores to prescreen solicitation candidates, to evaluate
applicants for new credit and to review existing accounts. The
FICO®
scores are calculated based on proprietary scoring models. The
scores produced by these models are available through each of
the three major credit reporting agencies in the United States:
TransUnion, Experian Information Solutions, Inc.
(Experian), and Equifax. Users generally pay the
credit reporting agencies scoring fees based on usage, and the
credit reporting agencies share these fees with us.
The most powerful of our U.S. credit bureau products,
NextGen
FICO®
risk scores, are also available at all three major
credit-reporting agencies. NextGen
FICO®
risk scores provide a more refined risk assessment than the
classic
FICO®
risk scores.
We have expanded our scoring portfolio by analyzing data that is
unavailable through the three major U.S. credit reporting
agencies. The
FICO®
Expansiontm
score provides scores on U.S. consumers who do not have
traditional
FICO®
scores, generally because they do not have any credit accounts
being reported to the credit reporting agencies. The score
analyzes multiple sources of non-traditional credit data
accessed by our subsidiary, Fair Isaac Network, Inc., and the
score and associated reports are provided to lenders through a
subsidiary called Fair Isaac Credit Services, Inc. The Fair
Isaac®
Qualifytm
score helps marketers find prospects on their promotional
mailing lists who are most likely to respond and to be approved
for credit. This score is based on commercially available
sources of marketing data, and is delivered by Fair Isaac.
We also market a new score called the Global
FICO®
score that extends our thorough analysis of multiple-lender
credit data to countries around the world that have established
credit bureaus. These scores help lenders assess the risk of
prospects, applicants and borrowers, and are particularly
valuable in markets where there is not a dominant credit bureau
risk score available. So far lenders and credit bureaus in 13
countries across four continents are using or implementing the
Global
FICO®
score.
In addition to the scores noted above, we have developed
marketing and bankruptcy scores offered through the
U.S. credit reporting agencies; an application fraud and a
bankruptcy score available in Canada; consumer risk scores
offered through credit reporting agencies in Canada, South
Africa and the U.K.; commercial credit scores delivered by both
U.S. and U.K. credit reporting agencies; and a bankruptcy
scoring service offered through ISC, a subsidiary of Visa USA.
We have also developed scoring systems for insurance
underwriters and marketers. Such systems use the same underlying
statistical technology as our
FICO®
risk scores, but are designed to predict applicant or
policyholder insurance loss risk for automobile or
homeowners coverage. Our insurance scores are available in
the U.S. from TransUnion, Experian, Equifax and
ChoicePoint, Inc., and in Canada from Equifax. In fiscal 2005,
we introduced a new kind of insurance score called the Property
PredictRtm
score, which analyzes property inspection database data from an
insurance services provider, Millennium Information Services,
Inc., to calculate the loss risk of a property.
8
We also provide credit bureau scoring services and related
consulting directly to users in financial services through two
U.S.-based
services:
PreScore®
Service for prescreening solicitation candidates, and the
FICO®
Score Delivery service (formerly known as ScoreNet Service) for
customer account management.
Professional
Services
We provide a variety of custom offerings, business solution and
technical consulting services, systems integration services, and
data management services to clients worldwide. The focus is on
leveraging our industry experience and technical expertise,
typically on a custom basis, to help clients address unique
business challenges, to support the usage of our Strategy
Machine®
Solutions and our analytic software tools, and to create new
sales opportunities for our other offerings. This group also
performs consultative selling, developing customized solution
sets combining various products and capabilities to meet unique
client or industry opportunities. These services are generally
offered on an hourly or fixed fee basis.
In fiscal 2005, we acquired Braun Consulting, Inc.
(Braun), a marketing strategy and technology
consulting firm based in Chicago with offices in Boston and New
York. As a result of this acquisition, we now offer a wider
range of consulting services addressing business strategy,
operational excellence and marketing best practice. This
acquisition also increased our presence in the healthcare,
retail and pharmaceutical industries.
Our services include:
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Solution and technology consulting. We help
clients implement and use our solutions and technologies. These
projects draw on our product knowledge, industry expertise and
technical skills. Each project is delivered using our EDM
consulting methodology.
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Systems integration services. We help clients
manage customer relationships more successfully through
integrated customer systems and personalized content delivery.
To accomplish this, we create common web platforms that leverage
internet technologies such as portals (both internal and
external), enterprise content management, web services and
enterprise application integration.
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Data management services. We help clients gain
insight into their customers by enabling the access, analysis
and application of corporate data and information. This work
involves implementing enterprise-level data and decision
management systems, including data warehouses and marts,
campaign management tools, database marketing engines,
rules-based decision engines and analytical applications.
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Business strategy consulting. We help
companies improve business performance through the design and
implementation of customer-centric growth strategies. Using
qualitative and quantitative research techniques, we help
businesses determine which customer segments they should be
targeting, what the sales and service proposition should be for
each segment, and how to address organizational issues to ensure
project success. Another key focus is helping companies comply
with regulations such as the New Basel Capital Accord.
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Industry consulting. We combine our knowledge
of EDM technology with our consultants experience to
address the specific needs of companies in the retail,
pharmaceuticals, telecommunications, insurance, high-tech,
travel/media/entertainment and healthcare industries. Our
industry consultants provide a wide range of consulting
services, including business strategy consulting and custom
solutions development.
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Strategy Science services. Using our Strategy
Science technology and related advanced analytic methodologies,
we perform decision modeling and optimization projects for
customer acquisition, customer management, fraud, collections
and other areas. These projects apply data and proprietary
algorithms to the design of customer treatment strategies.
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Predictive Science services. We perform custom
predictive modeling and related analytic projects for clients in
multiple industries. This work leverages our analytic
methodologies and expertise to solve risk management and
marketing challenges for a single business, using that
businesss data and industry best practices to develop a
highly customized solution.
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Fraud consulting services. We complement our
fraud products with consulting engagements that help businesses
benchmark their performance, assess areas to improve and adopt
best practices and solutions aimed at reducing fraud losses.
These engagements draw on Fair Isaacs experience helping
lenders and other parties worldwide bring fraud losses under
control and implement more successful anti-fraud programs.
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Analytic
Software Tools
We provide end-user software products that businesses use to
build their own tailored EDM applications. In contrast to our
packaged Strategy Machine solutions developed for specific
industry applications, our analytic software tools perform a
single function such as management of the rules and
policies an enterprise uses to make decisions that
can be easily integrated within a variety of specialized
industry applications.
We use these tools as common software components for our own EDM
applications, described above in the Strategy Machine Solutions
section. We also partner with third-party providers within given
industry markets and with major software companies to embed our
tools within existing applications. These tools are sold as
licensed software.
The principal products offered are software tools for:
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Rules Management. The Blaze Advisor
business rules management system is used to design, develop,
execute and maintain rules-based business applications. The
Blaze Advisor system enables businesses to more quickly develop
complex decision making applications, respond to changing
customer needs, implement regulatory compliance and reduce the
total cost of
day-to-day
operations. The Blaze Advisor system is sold as an end-user tool
and is also the rules engine within several of our Strategy
Machine solutions. In fiscal 2005, we introduced a software
offering called SmartForms for Blaze Advisor that is used to
create and manage dynamic, web-based forms that improve the
completeness and accuracy of customer data collected online. In
September 2005, we acquired certain assets of RulesPower, Inc.
(RulesPower), including its advanced rules execution
technology. The latest version of the Blaze Advisor system,
released in fiscal 2006, is available in six languages. It is a
multi-platform solution that supports Web Services and SOA, Java
2 Enterprise Edition (J2EE) platforms, Microsoft .NET and COBOL
for z/OS mainframes, and is the first rules engine to support
Java, .NET and COBOL deployment of the same rules. It also
incorporates the exclusive Rete III rules execution
technology acquired from RulesPower in fiscal 2005, which
improves the efficiency and speed with which the Blaze Advisor
system is able to process and execute complex, high-volume
business rules.
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Model Development. Model Builder for
Predictive Analytics enables the user to develop and deploy
sophisticated predictive models for use in automated decisions.
This software is based on the methodology and tools Fair Isaac
uses to build both client-level and industry-level predictive
models, and which we have evolved over nearly 40 years. The
predictive models produced can be embedded in custom production
applications or one of our Strategy Machine Solutions, and can
also be executed in Blaze Advisor. The latest version of Model
Builder, released in fiscal 2006, includes an optional
segmentation module that can improve the quality of predictions
by using Fair Isaac genetic algorithms to find segments of the
data population that can benefit from specialized predictive
models.
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Data-Driven Strategy Design. Model Builder for
Decision Trees enables the user to create empirical strategies,
augmenting the users expert judgment by applying
data-driven analytics to discover patterns empirically. In
designing the steps and criteria of a decision strategy, the
user can segment the customer base for targeted action based on
the results of different performance measures, and can simulate
the performance of the designed strategy. Decision Optimizer, a
key component in our Strategy Science offerings, uses an
optimization algorithm to deliver customer treatment strategies
or rule sets that improve results along one or more specified
business objectives, while meeting stated constraints. The
data-driven strategies produced by these tools can be executed
by Blaze Advisor or one of our Strategy Machine Solutions.
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10
COMPETITION
The market for our advanced solutions is intensely competitive
and is constantly changing. Our competitors vary in size and in
the scope of the products and services they offer. We encounter
competition from a number of sources, including:
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in-house analytic and systems developers;
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scoring model builders;
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enterprise resource planning (ERP) and customer
relationship management (CRM) packaged solutions
providers;
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business intelligence solutions providers;
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providers of credit reports and credit scores;
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providers of automated application processing services;
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data vendors;
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neural network developers and artificial intelligence system
builders;
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third-party professional services and consulting organizations;
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providers of account/workflow management software;
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managed care organizations; and
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software companies supplying modeling, rules, or analytic
development tools.
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We believe that none of our competitors offers the same mix of
products as we do, or has the same expertise in predictive
analytics and their integration with decision management
software. However, certain competitors may have larger shares of
particular geographic or product markets.
Strategy
Machine®
Solutions
The competition for our Strategy Machine Solutions varies by
both application and industry.
In the customer acquisition market, we compete with Acxiom,
Experian, SAS, SPSS, Epsilon,
Harte-Hanks,
and Oracle, among others. We also compete with traditional
advertising agencies and companies own internal
information technology and analytics departments.
In the origination market, we compete with CGI/AMS, Experian,
Provenir, Lightbridge, Appro Systems, and First American Credit
Management Solutions (CMSI), among others.
In the customer management market, we compete with CGI/AMS and
Experian, among others.
In the fraud solutions market, we mainly compete with
SearchSpace, ID Analytics, Experian, Retail Decisions plc and
ACI Worldwide, a division of Transaction Systems Architects, in
the financial services market; ECTel, Hewlett-Packard, Cerebrus
Solutions and Neural Technologies in the telecommunications
market; IBM and ViPS in the healthcare segment; and SAS,
Infoglide Software Corporation, NetMap Analytics and Magnify in
the property and casualty and workers compensation
insurance market.
In the collections and recovery solutions market, we mainly
compete with CGI/AMS, Columbia Ultimate, Ontario Systems, Austin
Logistics, Talgentra, Attentiv Systems and various boutique
firms for software and ASP servicing and in-house scoring and
computer science departments along with the three major
U.S. credit reporting agencies and Experian-Scorex for
scoring and optimization projects.
In the mortgage lending solutions market, we mainly compete with
Fidelity, Harland, Fiserv, 3T Systems, Gallagher, MortgageFlex
and GHR. In the construction lending market, our main
competitors are Harland and DataSelect.
11
In the insurance and healthcare solutions market, we mainly
compete with Ingenix, First Health, CorVel Corporation, SAS,
ISO, IBM, Mitchell International, Inc., and Concentra Managed
Care.
For our
direct-to-consumer
services that deliver credit scores, credit reports and consumer
credit education services, we compete with our credit reporting
agency partners and their affiliated companies, as well as with
Trilegiant, InterSections and others.
Scoring
Solutions
In this segment, we compete with both outside suppliers and
in-house analytics and computer systems departments for scoring
business. Major competitors among outside suppliers of scoring
models include the three major U.S. credit reporting
agencies, which are also our partners in offering our scoring
solutions; Experian-Scorex, TransUnion International, CRIF and
other credit reporting agencies outside the United States; and
other data providers like LexisNexis and ChoicePoint.
Professional
Services
We compete with a variety of organizations that offer consulting
services, primarily specialty technology and consulting firms.
In addition, a client may use its own resources rather than
engage an outside firm for these services. Our competitors
include information technology product and services vendors,
management and strategy consulting firms, smaller specialized
information technology consulting firms and analytical services
firms.
Analytic
Software Tools
Our primary competitors in this segment include SAS, SPSS,
Angoss, ILOG, Computer Associates International and Pegasystems.
Competitive
Factors
We believe the principal competitive factors affecting our
markets include: technical performance; access to unique
proprietary databases; availability in ASP format; product
attributes like adaptability, scalability, interoperability,
functionality and
ease-of-use;
product price; customer service and support; the effectiveness
of sales and marketing efforts; existing market penetration; and
our reputation. Although we believe our products and services
compete favorably with respect to these factors, we may not be
able to maintain our competitive position against current and
future competitors.
MARKETS
AND CUSTOMERS
Our products and services serve clients in multiple industries,
including financial services, insurance, retail,
telecommunications, healthcare, pharmaceuticals and governmental
agencies. During fiscal 2006, end users of our products included
more than 90 of the 100 largest financial institutions in the
United States; approximately two-thirds of the largest 100 banks
in the world; and more than 90 of the 100 largest
U.S. credit card issuers. Our clients also include more
than 300 insurers and healthcare payers, including the top 10
U.S. property and casualty insurers and more than half of
the state workers compensation funds in the U.S.; more
than 100 retailers and general merchandisers; more than 100
government or public agencies; more than 100 telecommunications
carriers, including nine of the top ten U.S. wireless
providers and eight of the top ten U.S. wireline providers;
and more than 150 healthcare and pharmaceuticals companies,
including eight of the worlds top ten pharmaceuticals
companies. Nine of the top ten companies on the 2006 Fortune
500 list use Fair Isaacs solutions.
In addition, our consumer services are marketed to an estimated
200 million U.S. consumers whose credit relationships
are reported to the three major credit reporting agencies.
In the United States, we market our products and services
primarily through our own direct sales organization that is
organized around Integrated Client Networks, or
ICNs, which are sales teams that focus on customer
segments typically aligned by vertical market and geography.
Sales groups are based in our headquarters and in field offices
strategically located
12
both in and outside the United States. We also market our
products through indirect channels, including alliance partners
and other resellers.
During fiscal 2006, 2005 and 2004, revenues generated from our
agreements with Equifax, TransUnion and Experian collectively
accounted for 18%, 17% and 16% of our total revenues,
respectively.
Outside the United States, we market our products and services
primarily through our subsidiary sales organizations. Our
subsidiaries license and support our products in their local
countries as well as within other foreign countries where we do
not operate through a direct sales subsidiary. We also market
our products through resellers and independent distributors in
international territories not covered by our subsidiaries
direct sales organizations.
Our largest market segments outside the United States are the
United Kingdom and Canada. In addition, we have delivered
products to users in over 60 countries.
Revenues from international customers, including end users and
resellers, amounted to 28%, 25% and 22% of our total revenues in
fiscal 2006, 2005 and 2004, respectively. See Note 16 to
the accompanying consolidated financial statements for a summary
of our operating segments and geographic information.
TECHNOLOGY
We specialize in analytics, software and data management
technologies that analyze data and drive business processes and
decision strategies. We maintain active research in a number of
fields for the purposes of deriving greater insight and
predictive value from data, making various forms of data more
usable and valuable to the model-building process, and
automating and applying analytics to the various processes
involved in making high-volume decisions in real time.
Because of our pioneering work in credit scoring and fraud
detection, we are widely recognized as the leader in predictive
analytics. In addition, our Blaze Advisor software is
consistently ranked as a leader in rules management systems. In
all our work, we believe that our tools and processes are among
the very best commercially available, and that we are uniquely
able to integrate advanced analytic, software and data
technologies into mission-critical business solutions that offer
superior returns on investment.
Principal
Areas of Expertise
Predictive Modeling. Predictive modeling
identifies and mathematically represents underlying
relationships in historical data in order to explain the data
and make predictions or classifications about future events. Our
models summarize large quantities of data to amplify its value.
Predictive models typically analyze current and historical data
on individuals to produce easily understood metrics such as
scores. These scores rank-order individuals by likely future
performance, e.g., their likelihood of making credit payments on
time, or of responding to a particular offer for services. We
also include in this category models that detect the likelihood
of a transaction being fraudulent. Our predictive models are
frequently operationalized in mission-critical transactional
systems and drive decisions and actions in near real time. A
number of analytic methodologies underlie our products in this
area. These include proprietary applications of both linear and
non-linear mathematical programming algorithms, in which one
objective is optimized within a set of constraints, and advanced
neural systems, which learn complex patterns from
large data sets to predict the probability that a new individual
will exhibit certain behaviors of business interest. We also
apply various related statistical techniques for analysis and
pattern detection within large datasets. For example, we
recently developed a proprietary technology we call
Peacock, which can analyze large-scale purchase
transaction data to reveal product relationships, purchase
patterns and sequences.
Decision Analysis and Optimization. Decision
analysis refers to the broad quantitative field that deals with
modeling, analyzing and optimizing decisions made by
individuals, groups and organizations. Whereas predictive models
analyze multiple aspects of individual behavior to forecast
future behavior, decision analysis analyzes multiple aspects of
a given decision to identify the most effective action to take
to reach a desired result. We have developed an integrated
approach to decision analysis that incorporates the development
of a decision model that mathematically maps the entire decision
structure; proprietary optimization technology that identifies
the most
13
effective strategies, given both the performance objective and
constraints; the development of designed testing required for
active, continuous learning; and the robust extrapolation of an
optimized strategy to a wider set of scenarios than historically
encountered. This technology is behind our Strategy Science
solutions.
Transaction Profiling. Transaction profiling
is a patent-protected technique used to extract meaningful
information and reduce the complexity of transaction data used
in modeling. Many of our products operate using transactional
data, such as credit card purchase transactions, or other types
of data that change over time. In its raw form, this data is
very difficult to use in predictive models for several reasons:
First, an isolated transaction contains very little information
about the behavior of the individual that generated the
transaction. In addition, transaction patterns change rapidly
over time. Finally, this type of data can often be highly
complex. To overcome these issues, we have developed a set of
proprietary techniques that transform raw transactional data
into a mathematical representation that reveals latent
information, and which make the data more usable by predictive
models. This profiling technology accumulates data across
multiple transactions of many types to create and update
profiles of transaction patterns. These profiles enable our
neural network models to efficiently and effectively make
accurate assessments of, for example, fraud risk and credit risk
within real-time transaction streams.
Customer Data Integration. Decisions made on
customers or prospects can benefit from data stored in multiple
sources, both inside and outside the enterprise. We have focused
on developing data integration processes that are able to
assemble and integrate those disparate data sources into a
unified view of the customer or household, through the
application of persistent keying technology.
Decision Management Software. In order to make
a decision strategy operational, the various steps and rules
need to be programmed or exported into the business
software infrastructure, where it can communicate with
front-end, customer-facing systems and back-end systems such as
billing systems. We have developed software systems, sometimes
known as decision engines and business rules management systems
that perform the necessary functions to execute a decision
strategy. Our software includes very efficient programs for
these functions, facilitating, for example, business user
definition of extremely complex decision strategies using
graphic user interfaces; simultaneous testing of hundreds of
decision strategies in champion/challenger
(test/control) mode; high-volume processing and analysis of
transactions in real time; integration of multiple data sources;
and execution of predictive models for improved behavior
forecasts and finer segmentation.
Research
and Development Activities
Our research and development expenses were $85.0 million,
$81.3 million, and $71.1 million in fiscal 2006, 2005
and 2004, respectively. We believe that our future success
depends on our ability to continually maintain and improve our
core technologies, enhance our existing products, and develop
new products and technologies that meet an expanding range of
markets and customer requirements. In the development of new
products and enhancements to existing products, we use our own
development tools extensively.
We have traditionally relied primarily on the internal
development of our products. Based on timing and cost
considerations, however, we have acquired, and in the future may
consider acquiring, technology or products from third parties.
PRODUCT
PROTECTION AND TRADEMARKS
We rely on a combination of patent, copyright, trademark and
trade secret laws and confidentiality agreements and procedures
to protect our proprietary rights.
We retain the title to and protect the suite of models and
software used to develop scoring models as a trade secret. We
also restrict access to our source code and limit access to and
distribution of our software, documentation and other
proprietary information. We have generally relied upon the laws
protecting trade secrets and upon contractual non-disclosure
safeguards and restrictions on transferability to protect our
software and proprietary interests in our product and service
methodology and know-how. Our confidentiality procedures include
invention assignment and proprietary information agreements with
our employees and independent contractors, and nondisclosure
agreements with our distributors, strategic partners and
customers. We also claim copyright protection for certain
proprietary software and documentation.
14
We have patents on many of our technologies and have patent
applications pending on other technologies. The patents we hold
may not be upheld as valid and may not prevent the development
of competitive products. In addition, patents may never be
issued on our pending patent applications or on any future
applications that we may submit. We currently hold 39 U.S. and
11 foreign patents with 105 applications pending.
Despite our precautions, it may be possible for competitors or
users to copy or reproduce aspects of our software or to obtain
information that we regard as trade secrets. In addition, the
laws of some foreign countries do not protect proprietary rights
to the same extent as do the laws of the United States. Patents
and other protections for our intellectual property are
important, but we believe our success and growth will depend
principally on such factors as the knowledge, ability,
experience and creative skills of our personnel, new products,
frequent product enhancements and name recognition.
We have developed technologies for research projects conducted
under agreements with various United States government agencies
or their subcontractors. Although we have acquired commercial
rights to these technologies, the United States government
typically retains ownership of intellectual property rights and
licenses in the technologies that we develop under these
contracts. In some cases, the United States government can
terminate our rights to these technologies if we fail to
commercialize them on a timely basis. In addition, under United
States government contracts, the government may make the results
of our research public, which could limit our competitive
advantage with respect to future products based on funded
research.
We have used, registered
and/or
applied to register certain trademarks and service marks for our
technologies, products and services. We currently have 36
trademarks registered in the U.S. and select foreign countries.
PERSONNEL
As of September 30, 2006, we employed 2,737 persons
worldwide. Of these, 403 full-time employees were located
in our Minneapolis and Arden Hills, Minnesota offices,
351 full-time employees were located in our
San Rafael, California office, 378 full-time employees
were located in our San Diego, California office, and
225 full-time employees were located in our United
Kingdom-based offices. None of our employees is covered by a
collective bargaining agreement and no work stoppages have been
experienced.
Information regarding our officers is included in
Executive Officers of the Registrant at the end of
Part I of this report.
Item 1A. Risk
Factors
RISK
FACTORS
Risks
Related to Our Business
We
have expanded the pursuit of our EDM strategy, and we may not be
successful.
We have expanded the pursuit of our business objective to become
a leader in helping businesses automate and improve decisions
across their enterprises, an approach that we commonly refer to
as Enterprise Decision Management, or EDM. Our EDM
strategy is designed to enable us to increase our business by
selling multiple products to clients, as well as to enable the
development of custom client solutions that may lead to
opportunities to develop new proprietary scores or other new
proprietary products. The market may be unreceptive to this
general EDM business approach, including being unreceptive to
purchasing multiple products from us or unreceptive to our
customized solutions. If our EDM strategy is not successful, we
may not be able to grow our business, growth may occur more
slowly than we anticipate or our revenues and profits may
decline.
We
recently restructured the method by which we sell our products
and services and if our new sales strategy is not successful,
our business will be harmed.
Previously, we sold our products and services in a
product-focused manner. As part of our expanded EDM strategy, we
now sell our products and services using a client-centric
approach which focuses on delivering
15
complete solutions involving multiple products or suites of
products for our customers through various means, including the
use of client teams called Integrated Client Networks (or
ICNs) that focus on customers by vertical market and
geography, and the use of an integrated consulting and sales
approach. If our employees are not able to adjust rapidly enough
to this ICN approach, then we may be unable to maintain or
increase our revenues. Further, there can be no assurance that
our customers and potential customers will react positively to
EDM or this new selling approach and, as a result, that we will
continue to maintain or increase revenues. If revenues
eventually increase as a result of this change, there is no
assurance that any increase will occur as quickly as we might
anticipate.
We
derive a substantial portion of our revenues from a small number
of products and services, and if the market does not continue to
accept these products and services, our revenues will
decline.
As we attempt to implement our EDM strategy, we expect that
revenues derived from our scoring solutions, account management
solutions, fraud solutions, originations, collections, and
insurance solutions products and services will continue to
account for a substantial portion of our total revenues for the
foreseeable future. Our revenues will decline if the market does
not continue to accept these products and services. Factors that
might affect the market acceptance of these products and
services include the following:
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changes in the business analytics industry;
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changes in technology;
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our inability to obtain or use state fee schedule or claims data
in our insurance products;
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saturation of market demand;
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loss of key customers;
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industry consolidation;
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failure to execute our client-centric selling approach; and
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inability to successfully sell our products in new vertical
markets.
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If we
are unable to access new markets or develop new distribution
channels, our business and growth prospects could
suffer.
We expect that part of the growth that we seek to achieve
through our EDM strategy will be derived from the sale of EDM
products and service solutions in industries and markets we do
not currently serve. We also expect to grow our business by
delivering our EDM solutions through additional distribution
channels. If we fail to penetrate these industries and markets
to the degree we anticipate utilizing our EDM strategy, or if we
fail to develop additional distribution channels, we may not be
able to grow our business, growth may occur more slowly than we
anticipate or our revenues and profits may decline.
If we
are unable to develop successful new products or if we
experience defects, failures and delays associated with the
introduction of new products, our business could suffer serious
harm.
Our growth and the success of our EDM strategy depends upon our
ability to develop and sell new products or suites of products.
If we are unable to develop new products, or if we are not
successful in introducing new products, we may not be able to
grow our business, or growth may occur more slowly than we
anticipate. In addition, significant undetected errors or delays
in new products or new versions of products may affect market
acceptance of our products and could harm our business,
financial condition or results of operations. In the past, we
have experienced delays while developing and introducing new
products and product enhancements, primarily due to difficulties
developing models, acquiring data and adapting to particular
operating environments. We have also experienced errors or
bugs in our software products, despite testing prior
to release of the products. Software errors in our products
could affect the ability of our products to work with other
hardware or software products, could delay the development or
release of new products or new versions of products and could
adversely affect market acceptance of our products. Errors or
defects in our products that are significant, or are perceived
to be
16
significant, could result in: rejection of our products, damage
to our reputation, loss of revenues, diversion of development
resources, increase in product liability claims, and increases
in service and support costs and warranty claims.
We
rely on relatively few customers, as well as our contracts with
the three major credit reporting agencies, for a significant
portion of our revenues and profits. If the terms of these
relationships change, our revenues and operating results could
decline.
Most of our customers are relatively large enterprises, such as
banks, credit card processors, insurance companies, healthcare
firms, retailers and telecommunications carriers. As a result,
many of our customers and potential customers are significantly
larger than we are and may have sufficient bargaining power to
demand reduced prices and favorable nonstandard terms.
We also derive a substantial portion of our revenues and
operating income from our contracts with the three major credit
reporting agencies, TransUnion, Equifax and Experian, and other
parties that distribute our products to certain markets. We are
also currently involved in litigation with TransUnion, Equifax
and Experian arising from their development and marketing of a
credit scoring product competitive with our products. We have
asserted various claims, including claims of unfair competition
and antitrust, against each of the credit reporting agencies and
their collective joint venture entity, VantageScore, LLC. This
litigation could have a material adverse effect on our
relationship with one or more of the major credit reporting
agencies, or with major customers.
The loss of or a significant change in a relationship with a
major customer, the loss of or a significant change in a
relationship with one of the major credit reporting agencies
with respect to their distribution of our products or with
respect to our myFICO offerings, the loss of or a significant
change in a relationship with a significant third-party
distributor or the delay of significant revenues from these
sources, could have a material adverse effect on our revenues
and results of operations.
We
rely on relationships with third parties for marketing and
distribution. If we experience difficulties in these
relationships, our future revenues may be adversely
affected.
Our Scoring Solutions segment and Strategy Machine Solutions
segment rely on distributors, and we intend to continue to
market and distribute our products through existing and future
distributor relationships. Our Scoring Solutions segment relies
on, among others, TransUnion, Equifax and Experian. Failure of
our existing and future distributors to generate significant
revenues, demands by such distributors to change the terms on
which they offer our products or our failure to establish
additional distribution or sales and marketing alliances could
have a material adverse effect on our business, operating
results and financial condition. In addition, certain of our
distributors presently compete with us and may compete with us
in the future either by developing competitive products
themselves or by distributing competitive offerings. For
example, TransUnion, Equifax and Experian have developed a
credit scoring product to compete directly with our products and
are collectively attempting to sell the product. Competition
from distributors or other sales and marketing partners could
significantly harm sales of our products.
If we
do not engage in acquisition activity to the extent we have in
the past, we may be unable to increase our revenues at
historical growth rates.
Our historical revenue growth has been augmented by numerous
acquisitions, and we anticipate that acquisitions will continue
to be an important part of our revenue growth. Our future
revenue growth rate may decline if we do not make acquisitions
of similar size and at a comparable rate as in the past.
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If we
engage in acquisitions, significant investments in new
businesses, or divestitures of existing businesses, we will
incur a variety of risks, any of which may adversely affect our
business.
We have made in the past, and may make in the future,
acquisitions of, or significant investments in, businesses that
offer complementary products, services and technologies. Any
acquisitions or investments will be accompanied by the risks
commonly encountered in acquisitions of businesses, which may
include:
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failure to achieve the financial and strategic goals for the
acquired and combined business;
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overpayment for the acquired companies or assets;
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difficulty assimilating the operations and personnel of the
acquired businesses;
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product liability exposure associated with acquired businesses
or the sale of their products;
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disruption of our ongoing business;
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dilution of our existing stockholders and earnings per share;
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unanticipated liabilities, legal risks and costs;
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retention of key personnel;
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distraction of management from our ongoing business; and
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impairment of relationships with employees and customers as a
result of integration of new management personnel.
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We have also divested ourselves of businesses in the past, and
may do so again in the future. Any divestitures will be
accompanied by the risks commonly encountered in the sale of
businesses, which may include:
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disruption of our ongoing business;
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dilution of our existing stockholders and earnings per share;
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unanticipated liabilities, legal risks and costs;
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retention of key personnel;
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distraction of management from our ongoing business; and
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impairment of relationships with employees and customers as a
result of migrating a business to new owners.
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These risks could harm our business, financial condition or
results of operations, particularly if they occur in the context
of a significant acquisition. Acquisitions of businesses having
a significant presence outside the U.S. will increase our
exposure to the risks of conducting operations in international
markets.
The
occurrence of certain negative events may cause fluctuations in
our stock price.
The market price of our common stock may be volatile and could
be subject to wide fluctuations due to a number of factors,
including variations in our revenues and operating results. We
believe that you should not rely on
period-to-period
comparisons of financial results as an indication of future
performance. Because many of our operating expenses are fixed
and will not be affected by short-term fluctuations in revenues,
short-term fluctuations in revenues may significantly impact
operating results. Additional factors that may cause our stock
price to fluctuate include the following:
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variability in demand from our existing customers;
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failure to meet the expectations of market analysts;
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changes in recommendations by market analysts;
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the lengthy and variable sales cycle of many products, combined
with the relatively large size of orders for our products,
increases the likelihood of short-term fluctuation in revenues;
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consumer dissatisfaction with, or problems caused by, the
performance of our products;
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the timing of new product announcements and introductions in
comparison with our competitors;
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the level of our operating expenses;
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changes in competitive conditions in the consumer credit,
financial services and insurance industries;
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fluctuations in domestic and international economic conditions;
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our ability to complete large installations on schedule and
within budget;
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acquisition-related expenses and charges; and
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timing of orders for and deliveries of software systems.
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In addition, the financial markets have experienced significant
price and volume fluctuations that have particularly affected
the stock prices of many technology companies, and these
fluctuations sometimes have been unrelated to the operating
performance of these companies. Broad market fluctuations, as
well as industry-specific and general economic conditions may
adversely affect the market price of our common stock.
Our
products have long and variable sales cycles. If we do not
accurately predict these cycles, we may not forecast our
financial results accurately and our stock price could be
adversely affected.
We experience difficulty in forecasting our revenues accurately
because the length of our sales cycles makes it difficult for us
to predict the quarter in which sales will occur. In addition,
our ICN selling approach is more complex than our prior sales
approach because it emphasizes the sale of complete EDM
solutions involving multiple products or services across our
customers organizations. This also makes forecasting of
revenues in any given period more difficult. As a result of our
ICN approach and lengthening sales cycles, revenues and
operating results may vary significantly from period to period.
For example, the sales cycle for licensing our products
typically ranges from 60 days to 18 months. Customers
are often cautious in making decisions to acquire our products,
because purchasing our products typically involves a significant
commitment of capital, and may involve shifts by the customer to
a new software
and/or
hardware platform or changes in the customers operational
procedures. Since our EDM strategy contemplates the sale of
multiple decision solutions to a customer, expenditures by any
given customer may be larger than with our prior sales approach.
This may cause customers to make purchasing decisions more
cautiously. Delays in completing sales can arise while customers
complete their internal procedures to approve large capital
expenditures and test and accept our applications. Consequently,
we face difficulty predicting the quarter in which sales to
expected customers will occur and experience fluctuations in our
revenues and operating results. If we are unable to accurately
forecast our revenues, our stock price could be adversely
affected.
We
typically have revenue-generating transactions concentrated in
the final weeks of a quarter which may prevent accurate
forecasting of our financial results and cause our stock price
to decline.
Large portions of our software license agreements are
consummated in the weeks immediately preceding quarter end.
Before these agreements are consummated we create and rely on
forecasted revenues for planning, modeling and earnings
guidance. Forecasts, however, are only estimates and actual
results may vary for a particular quarter or longer periods of
time. Consequently, significant discrepancies between actual and
forecasted results could limit our ability to plan, budget or
provide accurate guidance, which could adversely affect our
stock price. Any publicly-stated revenue or earnings projections
are subject to this risk.
The
failure to recruit and retain additional qualified personnel
could hinder our ability to successfully manage our
business.
Our EDM strategy and our future success will depend in large
part on our ability to attract and retain experienced sales,
consulting, research and development, marketing, technical
support and management personnel. The complexity of our products
requires highly trained customer service and technical support
personnel to assist customers with product installation and
deployment. The labor market for these individuals is very
competitive due
19
to the limited number of people available with the necessary
technical skills and understanding and may become more
competitive with general market and economic improvement. We
cannot be certain that our compensation strategies will be
perceived as competitive by current or prospective employees.
This could impair our ability to recruit and retain personnel.
We have experienced difficulty in recruiting qualified
personnel, especially technical, sales and consulting personnel,
and we may need additional staff to support new customers
and/or
increased customer needs. We may also recruit skilled technical
professionals from other countries to work in the United States.
Limitations imposed by immigration laws in the United States and
abroad and the availability of visas in the countries where we
do business could hinder our ability to attract necessary
qualified personnel and harm our business and future operating
results. There is a risk that even if we invest significant
resources in attempting to attract, train and retain qualified
personnel, we will not succeed in our efforts, and our business
could be harmed. Non-appreciation in the value of our stock may
adversely affect our ability to use equity and equity based
incentive plans to attract and retain personnel, and may require
us to use alternative and more expensive forms of compensation
for this purpose.
The
failure to obtain certain forms of model construction data from
our customers or others could harm our business.
We must develop or obtain a reliable source of sufficient
amounts of current and statistically relevant data to analyze
transactions and update our products. In most cases, these data
must be periodically updated and refreshed to enable our
products to continue to work effectively in a changing
environment. We do not own or control much of the data that we
require, most of which is collected privately and maintained in
proprietary databases. Customers and key business alliances
provide us the data we require to analyze transactions, report
results and build new models. Our EDM strategy depends in part
upon our ability to access new forms of data to develop custom
and proprietary analytic tools. If we fail to maintain
sufficient sourcing relationships with our customers and
business alliances, or if they decline to provide such data due
to legal privacy concerns, competition concerns, prohibitions or
a lack of permission from their customers, we could lose access
to required data and our products might become less effective.
In addition, certain of our insurance solutions products use
data from state workers compensation fee schedules adopted
by state regulatory agencies. Third parties have asserted
copyright interests in these data, and these assertions, if
successful, could prevent us from using these data. Any
interruption of our supply of data could seriously harm our
business, financial condition or results of operations.
We
will continue to rely upon proprietary technology rights, and if
we are unable to protect them, our business could be
harmed.
Our success depends, in part, upon our proprietary technology
and other intellectual property rights. To date, we have relied
primarily on a combination of copyright, patent, trade secret,
and trademark laws, and nondisclosure and other contractual
restrictions on copying and distribution to protect our
proprietary technology. This protection of our proprietary
technology is limited, and our proprietary technology could be
used by others without our consent. In addition, patents may not
be issued with respect to our pending or future patent
applications, and our patents may not be upheld as valid or may
not prevent the development of competitive products. Any
disclosure, loss, invalidity of, or failure to protect our
intellectual property could negatively impact our competitive
position, and ultimately, our business. There can be no
assurance that our protection of our intellectual property
rights in the United States or abroad will be adequate or that
others, including our competitors, will not use our proprietary
technology without our consent. Furthermore, litigation may be
necessary to enforce our intellectual property rights, to
protect our trade secrets, or to determine the validity and
scope of the proprietary rights of others. Such litigation could
result in substantial costs and diversion of resources and could
harm our business, financial condition or results of operations.
Some of our technologies were developed under research projects
conducted under agreements with various U.S. government
agencies or subcontractors. Although we have commercial rights
to these technologies, the U.S. government typically
retains ownership of intellectual property rights and licenses
in the technologies developed by us under these contracts, and
in some cases can terminate our rights in these technologies if
we fail to commercialize them on a timely basis. Under these
contracts with the U.S. government, the results of research
may
20
be made public by the government, limiting our competitive
advantage with respect to future products based on our research.
If we
are subject to infringement claims, it could harm our
business.
With recent developments in the law that permit patenting of
business methods, we expect that products in the industry
segments in which we compete, including software products, will
increasingly be subject to claims of patent infringement as the
number of products and competitors in our industry segments
grow. We may need to defend claims that our products infringe
patent, copyright or other rights, and as a result we may:
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incur significant defense costs or substantial damages;
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be required to cease the use or sale of infringing products;
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expend significant resources to develop or license a substitute
non-infringing technology;
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discontinue the use of some technology; or
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be required to obtain a license under the intellectual property
rights of the third party claiming infringement, which license
may not be available or might require substantial royalties or
license fees that would reduce our margins.
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Breaches
of security, or the perception that
e-commerce
is not secure, could harm our business.
Our business requires the appropriate and secure utilization of
consumer and other sensitive information. Internet-based,
electronic commerce requires the secure transmission of
confidential information over public networks, and several of
our products are accessed through the Internet, including our
consumer services accessible through the www.myFICO.com website.
Security breaches in connection with the delivery of our
products and services, including products and services utilizing
the Internet, or well-publicized security breaches, and the
trend toward broad consumer and general public notification of
such incidents, could significantly harm our business, financial
condition or results of operations. We cannot be certain that
advances in criminal capabilities, discovery of new
vulnerabilities, attempts to exploit vulnerabilities in our
systems, data thefts, physical system or network break-ins or
inappropriate access, or other developments will not compromise
or breach the technology protecting the networks that access our
net-sourced products, consumer services and proprietary database
information.
Protection
from system interruptions is important to our business. If we
experience a sustained interruption of our telecommunication
systems it could harm our business.
Systems or network interruptions could delay and disrupt our
ability to develop, deliver or maintain our products and
services, causing harm to our business and reputation and
resulting in loss of customers or revenue. These interruptions
can include fires, floods, earthquakes, power losses, equipment
failures and other events beyond our control.
Risks
Related to Our Industry
Our
ability to increase our revenues will depend to some extent upon
introducing new products and services. If the marketplace does
not accept these new products and services, our revenues may
decline.
We have a significant share of the available market in portions
of our Scoring Solutions segment and for certain services in our
Strategy Machine Solutions segment, specifically, the markets
for account management services at credit card processors and
credit card fraud detection software. To increase our revenues,
we must enhance and improve existing products and continue to
introduce new products and new versions of existing products
that keep pace with technological developments, satisfy
increasingly sophisticated customer requirements and achieve
market acceptance. We believe much of the future growth of our
business and the success of our EDM strategy will rest on our
ability to continue to expand into newer markets for our
products and services, such as direct marketing, healthcare,
insurance, small business lending, retail, telecommunications,
personal credit management, the design of business strategies
using Strategy Science technology and Internet services. These
areas are relatively new to our product development and sales
and marketing personnel. Products that we plan to market in the
future are in various
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stages of development. We cannot assure you that the marketplace
will accept these products. If our current or potential
customers are not willing to switch to or adopt our new products
and services, our revenues will decrease.
If we
fail to keep up with rapidly changing technologies, our products
could become less competitive or obsolete.
In our markets, technology changes rapidly, and there are
continuous improvements in computer hardware, network operating
systems, programming tools, programming languages, operating
systems, database technology and the use of the Internet. If we
fail to enhance our current products and develop new products in
response to changes in technology or industry standards, or if
we fail to bring product enhancements or new product
developments to market quickly enough, our products could
rapidly become less competitive or obsolete. For example, the
rapid growth of the Internet environment creates new
opportunities, risks and uncertainties for businesses, such as
ours, which develop software that must also be designed to
operate in Internet, intranet and other online environments. Our
future success will depend, in part, upon our ability to:
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innovate by internally developing new and competitive
technologies;
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use leading third-party technologies effectively;
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continue to develop our technical expertise;
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anticipate and effectively respond to changing customer needs;
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initiate new product introductions in a way that minimizes the
impact of customers delaying purchases of existing products in
anticipation of new product releases; and
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influence and respond to emerging industry standards and other
technological changes.
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If our
competitors introduce new products and pricing strategies, it
could decrease our product sales and market share, or could
pressure us to reduce our product prices in a manner that
reduces our margins.
We may not be able to compete successfully against our
competitors, and this inability could impair our capacity to
sell our products. The market for business analytics is new,
rapidly evolving and highly competitive, and we expect
competition in this market to persist and intensify. Our
regional and global competitors vary in size and in the scope of
the products and services they offer, and include:
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in-house analytic and systems developers;
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scoring model builders;
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enterprise resource planning (ERP) and customer relationship
management (CRM) packaged solutions providers;
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business intelligence solutions providers;
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credit report and credit score providers;
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business process management solution providers;
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process modeling tools providers;
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automated application processing services providers;
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data vendors;
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neural network developers and artificial intelligence system
builders;
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third-party professional services and consulting organizations;
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account/workflow management software providers;
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managed care organizations; and
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software tools companies supplying modeling, rules, or analytic
development tools.
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We expect to experience additional competition from other
established and emerging companies, as well as from other
technologies. For example, certain of our fraud solutions
products compete against other methods of preventing credit card
fraud, such as credit cards that contain the cardholders
photograph, smart cards, cardholder verification and
authentication solutions and other card authorization
techniques. Many of our anticipated competitors have greater
financial, technical, marketing, professional services and other
resources than we do and industry consolidation is creating even
larger competitors in many of our markets. As a result, our
competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements. They
may also be able to devote greater resources than we can to
develop, promote and sell their products. Many of these
companies have extensive customer relationships, including
relationships with many of our current and potential customers.
Furthermore, new competitors or alliances among competitors may
emerge and rapidly gain significant market share. For example,
TransUnion, Equifax and Experian have formed an alliance that
has developed a credit scoring product competitive with our
products. If we are unable to respond as quickly or effectively
to changes in customer requirements as our competition, our
ability to expand our business and sell our products will be
negatively affected.
Our competitors may be able to sell products competitive to ours
at lower prices individually or as part of integrated suites of
several related products. This ability may cause our customers
to purchase products that directly compete with our products
from our competitors. Price reductions by our competitors could
negatively impact our margins, and could also harm our ability
to obtain new long-term contracts and renewals of existing
long-term contracts on favorable terms.
Government
regulations that apply to us or to our customers may expose us
to liability, affect our ability to compete in certain markets,
limit the profitability of or demand for our products, or render
our products obsolete. If these regulations are applied or are
further developed in ways adverse to us, it could adversely
affect our business and results of operations.
Legislation and governmental regulation affect how our business
is conducted and, in some cases, subject us to the possibility
of future lawsuits arising from our products and services.
Globally, legislation and governmental regulation also influence
our current and prospective customers activities, as well
as their expectations and needs in relation to our products and
services. Both our core businesses and our newer initiatives are
affected globally by federal, regional, provincial, state and
other jurisdictional regulations, including those in the
following significant regulatory areas:
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Consumer report data and consumer reporting agencies. Examples
in the U.S. include: the Fair Credit Reporting Act
(FCRA), the Fair and Accurate Credit Transactions
Act (FACTA), which amends FCRA, and certain proposed
regulations under FACTA, presently under consideration;
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Identity theft and loss of data. Examples include FACTA and
other regulations modeled after the current California Security
Breach Notification Act, that require consumer notification of
security breach incidents and additional federal and state
legislative enactments in this area;
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Fair and non-discriminatory lending practices, such as the Equal
Credit Opportunity Act (ECOA);
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Privacy-related laws, including but not limited to the
provisions of the Financial Services Modernization Act of 1999,
also known as the Gramm Leach Bliley Act (GLBA), the
Health Insurance Portability and Accountability Act of 1996
(HIPAA), the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001 (USA Patriot Act) and similar
state privacy laws;
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Extension of credit to consumers through the Electronic Fund
Transfers Act, as well as non-governmental VISA and MasterCard
electronic payment standards;
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Quasi-governmental regulations, such as Fannie Mae and Freddie
Mac regulations for our mortgage services products;
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Insurance regulations related to our insurance products;
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The application or extension of consumer protection laws,
including, state and federal laws governing the use of the
Internet and telemarketing, and credit repair;
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Jurisdictional regulations applicable to international
operations, including the European Unions Privacy
Directive; and
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Sarbanes-Oxley Act (SOX) regulations to verify
internal process controls and require material event awareness
and notification.
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In making credit evaluations of consumers, performing fraud
screening or user authentication, our customers are subject to
requirements of multiple jurisdictions which may impose
contradictory requirements. Privacy legislation such as GLBA or
the European Unions Privacy Directive may also affect the
nature and extent of the products or services that we can
provide to customers, as well as our ability to collect, monitor
and disseminate information subject to privacy protection. In
addition to existing regulation, changes in legislative,
judicial, regulatory or consumer environments could harm our
business, financial condition or results of operations. For
example, the FACTA amendments to FCRA will result in new
regulation. These regulations or the interpretation of these
amendments could affect the demand for or profitability of some
of our products, including scoring and consumer products. New
regulations pertaining to financial institutions could cause
them to pursue new strategies, reducing the demand for our
products. In addition, legislative reforms of workers
compensation laws that aim to simplify this area of regulation
and curb abuses could diminish the need for, and the benefits
provided by, certain of our insurance solutions products and
services.
Our
revenues depend, to a great extent, upon conditions in the
consumer credit, financial services and insurance industries. If
any of our clients industries experiences a downturn, it
could harm our business, financial condition or results of
operations.
During fiscal 2006, 71% of our revenues were derived from sales
of products and services to the consumer credit, financial
services and insurance industries. A downturn in the consumer
credit, the financial services or the insurance industry,
including a downturn caused by increases in interest rates or a
tightening of credit, among other factors, could harm our
business, financial condition or results of operations. While
the rate of account growth in the U.S. bankcard industry
has been slowing and many of our large institutional customers
have merged and consolidated in recent years, we have generated
most of our revenue growth from our bankcard-related scoring and
account management businesses by selling and cross-selling our
products and services to large banks and other credit issuers.
As this industry continues to consolidate, we may have fewer
opportunities for revenue growth due to changing demand for our
products and services that support customer acquisition programs
of our customers. In addition, industry consolidation could
affect the base of recurring revenues derived from contracts in
which we are paid on a per-transaction basis if consolidated
customers combine their operations under one contract. There can
be no assurance that we will be able effectively to promote
future revenue growth in our businesses.
While we are expanding our sales of consumer credit, financial
services and insurance products and services into international
markets, the risks are greater as we are less well-known and
some of these markets are in their infancy.
Risk
Related to External Conditions
If any
of a number of material adverse developments occurs in general
economic conditions and world events, such developments could
affect demand for our products and services and harm our
business.
Purchases of technology products and services and decisioning
solutions are subject to adverse economic conditions. When an
economy is struggling, companies in many industries delay or
reduce technology purchases, and we experience softened demand
for our decisioning solutions and other products and services.
If the current improvement in global economic conditions slows
or reverses, or if there is an escalation in regional or
continued global conflicts or terrorism, we may experience
reductions in capital expenditures by our customers, longer
sales cycles, deferral or delay of purchase commitments for our
products and increased price competition, which may adversely
affect our business and results of operations.
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In
operations outside the United States, we are subject to unique
risks that may harm our business, financial condition or results
of operations.
A growing portion of our revenues is derived from international
sales. During fiscal 2006 28% of our revenues were derived from
business outside the United States. As part of our growth
strategy, we plan to continue to pursue opportunities outside
the United States, including opportunities in countries with
economic systems that are in early stages of development and
that may not mature sufficiently to yield growth for our
business. Accordingly, our future operating results could be
negatively affected by a variety of factors arising out of
international commerce, some of which are beyond our control.
These factors include:
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general economic and political conditions in countries where we
sell our products and services;
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difficulty in staffing and efficiently managing our operations
in multiple geographic locations and in various countries;
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effects of a variety of foreign laws and regulations, including
restrictions on access to personal information;
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import and export licensing requirements;
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longer payment cycles;
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reduced protection for intellectual property rights;
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currency fluctuations;
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changes in tariffs and other trade barriers; and
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difficulties and delays in translating products and related
documentation into foreign languages.
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There can be no assurance that we will be able to successfully
address each of these challenges in the near term. Additionally,
some of our business will be conducted in currencies other than
the U.S. dollar. Foreign currency transaction gains and
losses are not currently material to our cash flows, financial
position or results of operations. However, an increase in our
foreign revenues could subject us to increased foreign currency
transaction risks in the future.
In addition to the risk of depending on international sales, we
have risks incurred in having research and development personnel
located in various international locations. We currently have
approximately 20% of our product development staff in
international locations, some of which have political and
developmental risks. If such risks materialize, our business
could be damaged.
Our
anti-takeover defenses could make it difficult for another
company to acquire control of Fair Isaac, thereby limiting the
demand for our securities by certain types of purchasers or the
price investors are willing to pay for our stock.
Certain provisions of our Restated Certificate of Incorporation,
as amended, could make a merger, tender offer or proxy contest
involving us difficult, even if such events would be beneficial
to the interests of our stockholders. These provisions include
adopting a Shareholder Rights Agreement, commonly known as a
poison pill, and giving our board the ability to
issue preferred stock and determine the rights and designations
of the preferred stock at any time without stockholder approval.
The rights of the holders of our common stock will be subject
to, and may be adversely affected by, the rights of the holders
of any preferred stock that may be issued in the future. The
issuance of preferred stock, while providing flexibility in
connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for
a third party to acquire, or discouraging a third party from
acquiring, a majority of our outstanding voting stock. These
factors and certain provisions of the Delaware General
Corporation Law may have the effect of deterring hostile
takeovers or otherwise delaying or preventing changes in control
or changes in our management, including transactions in which
our stockholders might otherwise receive a premium over the fair
market value of our common stock.
25
If we
experience changes in tax laws or adverse outcomes resulting
from examination of our income tax returns, it could adversely
affect our results of operations.
We are subject to federal and state income taxes in the United
States and in certain foreign jurisdictions. Significant
judgment is required in determining our worldwide provision for
income taxes. Our future effective tax rates could be adversely
affected by changes in tax laws, by our ability to generate
taxable income in foreign jurisdictions in order to utilize
foreign tax losses, and by the valuation of our deferred tax
assets. In addition, we are subject to the examination of our
income tax returns by the Internal Revenue Service and other tax
authorities. We regularly assess the likelihood of adverse
outcomes resulting from such examinations to determine the
adequacy of our provision for income taxes. There can be no
assurance that the outcomes from such examinations will not have
an adverse effect on our operating results and financial
condition.
Item 1B. Unresolved
Staff Comments
Not applicable.
Our properties consist primarily of leased office facilities for
sales, data processing, research and development, consulting and
administrative personnel. Our principal office is located in
Minneapolis, Minnesota.
Our leased properties include:
|
|
|
|
|
approximately 243,000 square feet of office, data center,
and data processing space in Arden Hills and Minneapolis,
Minnesota in six buildings under leases expiring in 2011 or
later. 66,000 square feet of this space is subleased to a
third party;
|
|
|
|
approximately 199,000 square feet of office space in
San Rafael, California in two buildings under leases
expiring in 2012 or later. 20,000 square feet of this space
is subleased to a third party;
|
|
|
|
approximately 130,000 square feet of office space in
San Diego, California in one building under a lease
expiring in 2010; and
|
|
|
|
an aggregate of approximately 552,000 square feet of office
and data center space in Altamonte Springs, FL; Arlington, VA;
Atlanta, GA; Austin, TX; Boston, MA, Bangalore, India;
Birmingham, United Kingdom; Brookings, SD; Chicago, IL; Coppell,
TX; Cranbury, NJ; Davis, CA; Emeryville, CA; Gauteng, Malaysia;
Heathrow, FL; Indianapolis, IN; Irvine, CA; London, United
Kingdom; Madrid, Spain; Midlothian, VA; Mooresville, NC; New
Castle, DE; New York, NY; Norcross, GA; Oakbrook Terrace, IL;
Tulsa, OK; San Jose, CA; Sao Paulo, Brazil; Sarasota, FL;
Sherborn, MA; Singapore, Singapore; Tokyo, Japan; Toronto,
Canada; Wellsbourne, United Kingdom; Westminster, CO; and White
Marsh, MD.
|
See Note 17 to the accompanying consolidated financial
statements for information regarding our obligations under
leases. We believe that suitable additional space will be
available to accommodate future needs.
|
|
Item 3.
|
Legal
Proceedings
|
We are a defendant in a lawsuit captioned as Robbie
Hillis v. Equifax Consumer Services, Inc. and Fair Isaac,
Inc., which is pending in the U.S. District Court for
the Northern District of Georgia. The plaintiff claims that the
defendants have jointly sold the Score
Power®
credit score product in violation of certain procedural
requirements under the Credit Repair Organizations Act
(CROA), and in violation of the antifraud provisions
of that statute. The plaintiff also claims that the defendants
are credit repair organizations under CROA. The
plaintiff is seeking certification of a class on behalf of all
individuals who purchased products containing Score Power from
the defendants in the five year period prior to the filing of
the Complaint on November 14, 2004. The plaintiff is
seeking unspecified damages, attorneys fees and costs. We
believe that the claims in this lawsuit are without merit, and
we have denied any liability or wrongdoing and have denied that
class certification is appropriate. We are vigorously contesting
this matter. The plaintiff brought a motion for class
certification and a motion for summary judgment in his favor and
against the defendants. We opposed, and the Court denied, both
of the plaintiffs motions. The plaintiff has brought a
motion asking the Court to reconsider its prior ruling. That
motion is pending.
26
We are a defendant in a lawsuit captioned as Christy
Slack v. Fair Isaac Corporation and MyFICO Consumer
Services, Inc., which is pending in the United States
District Court for the Northern District of California. As in
the Hillis matter, the plaintiff is claiming that the defendants
violated certain procedural requirements of CROA, and violated
the antifraud provisions of CROA, with respect to the sale of
credit score products on our myFICO.com website. The plaintiff
also claims that the defendants violated the California Credit
Services Act (the CSA) and were unjustly enriched.
The plaintiff has sought certification of a class on behalf of
all individuals who purchased credit score products from us on
the myFICO.com website in the five year period prior to the
filing of the Complaint on January 18, 2005. Plaintiff
seeks unspecified damages, attorneys fees and costs. We
believe that the claims in this lawsuit are without merit and we
have denied any liability or wrongdoing and have denied that
class certification is appropriate. We are vigorously contesting
this matter. We brought a motion to dismiss the plaintiffs
claims. The Court granted our motion, in part, by dismissing
certain of the plaintiffs claims under the CSA. The
plaintiff has brought motions for summary judgment and for class
certification. We have opposed both motions. The Court has not
yet ruled on the plaintiffs motions
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
Not applicable.
27
EXECUTIVE
OFFICERS OF THE REGISTRANT
Our current executive officers are as follows:
|
|
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|
|
|
Name
|
|
Positions Held
|
|
Age
|
|
|
Charles M. Osborne
|
|
November 2006-present Interim
Chief Executive Officer and Vice President, Chief Financial
Officer of the Company. May 2004-November 2006, Vice President,
Chief Financial Officer of the Company. 1999-2003, partner and
investor, Gateway Alliance venture capital partnership.
July-December 2000, Executive Vice President and CFO, 21 North
Main, Inc. March 2000-present, Interim CFO and Vice President,
Finance, University of Minnesota Foundation. 1998-2000, various
executive positions with McLeod USA/Ovation Communications,
including Vice President, Corporate, General Manager and Chief
Financial Officer. April 1997-May 1998, President and Chief
Operating Officer, Graco Inc. 1981-1997, various senior
financial executive positions with Deluxe Corporation, including
Senior Vice President and CFO and Vice President, Finance.
1975-1981, various accounting positions with Deloitte &
Touche LLP.
|
|
|
53
|
|
Michael H. Campbell
|
|
July 2006-present, Vice
President ICN Leader Financial Services
of the Company. April 2005-July 2006, Vice President, Chief
Operating Officer, Products of the Company. 2003-2005, CEO of
TempoSoft, Inc. 1999-2001, held a variety of senior management
positions at SAP America, Inc., including Senior Vice President,
Solutions and Marketing Organization, Senior Vice President,
Solutions Management Organization, and Senior Vice President,
Professional Services Organization. 1989-1999, CEO and Chairman,
Campbell Software, Inc. Earlier, he was co-founder of General
Optimization, Inc., an optimization software developer.
|
|
|
45
|
|
Michael S. Chiappetta
|
|
July 2006-present, Vice
President EDM and Custom Solutions of the Company.
October 2003-July 2006, Vice President, Product Development of
the Company. 2002-2003, Vice President, Fraud Analytics and
Analytic Software Tools. 1993-2002, held various senior
positions, including Executive Vice President, Analytic
Solutions, HNC Software, Inc. (HNC).
|
|
|
42
|
|
Richard S. Deal
|
|
January 2001-present, Vice
President, Human Resources of the Company. 1998-2001, Vice
President, Human Resources, Arcadia Financial, Ltd.
1993-1998,
managed broad range of human resources corporate and line
consulting functions with U.S. Bancorp.
|
|
|
39
|
|
28
|
|
|
|
|
|
|
Name
|
|
Positions Held
|
|
Age
|
|
|
Eric J. Educate
|
|
July 2006-present, Chief Marketing
Officer of the Company. July 2000-July 2006, Vice President,
Sales and Marketing of the Company. 1999-2000, Vice President of
Global Sales, Imation Corporation. 1997-1999, sales executive,
EMC Corporation. 1987-1997, held various sales leadership
positions with Silicon Graphics.
|
|
|
54
|
|
Andrea M. Fike
|
|
February 2002-present, Vice
President, General Counsel and Secretary of the Company.
2001-2002, Vice President and General Counsel of the Company.
1999-2001, Senior Counsel of the Company. 1998-1999, Partner,
Faegre & Benson, LLP. 1989-1997, Associate,
Faegre & Benson.
|
|
|
46
|
|
James M. Kalustian
|
|
July 2006-present, Vice
President ICN Leader Healthcare, Pharma
and Government of the Company. November 2004 July
2006, Vice President Business Strategy and Operational
Excellence Consulting Group of the Company. May 2002-November
2004, COO of Braun Consulting, Inc. May
1999-May
2002 Executive Vice President of Braun Consulting, Inc. February
1994-May 1999 Co-founder and Partner of Vertex partners.
1989-1994,
Manager, Corporate Decisions Inc.
|
|
|
46
|
|
Michael J. Pung
|
|
August 2004-present, Vice
President, Finance of the Company. 2000-August 2004, Vice
President and Controller, Hubbard Media Group, LLC. 1999-2000,
Controller, Capella Education, Inc. 1998-1999, Controller,
U.S. Satellite Broadcasting, Inc. 1992-1998, various
financial management positions with Deluxe Corporation.
1985-1992, various audit positions, including audit manager, at
Deloitte & Touche LLP.
|
|
|
43
|
|
Larry E. Rosenberger
|
|
July 2006-present, Vice President,
EDM Applications and Research and Development of the Company.
December 1999-July 2006, Vice President, Research and
Development of the Company. 1991-1999, President and Chief
Executive Officer of the Company.
1983-1991,
various executive positions with the Company.
1983-1999, a
director of the Company. Joined the Company in 1974.
|
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|
60
|
|
29
|
|
|
|
|
|
|
Name
|
|
Positions Held
|
|
Age
|
|
|
Gregory M. Weitz
|
|
July 2006-present, Vice President,
Consulting and Emerging Industries ICN Leader of the Company.
November 2005-July 2006, Vice President, Consulting of the
Company. October 2003-November 2005, various executive positions
with the Company. 2002 -October 2003, Seurat Company, Executive
Vice President & General Manager of the Customer
Interaction Group. 1999-2002, held various executive positions
with the IBM New Ventures Group and with TradeMC, a joint
venture of IBM and the Royal Bank of Canada.
1998-1999,
Director of Solution Architecture, StorageTek. 1992-1997 various
senior positions with SHL Systemhouse.
1990-1992,
Director of Business Systems, PacTel Cellular.
1981-1990
Senior Manager, Accenture.
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47
|
|
30
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market
Information
Our common stock trades on the New York Stock Exchange under the
symbol: FIC. According to records of our transfer agent, at
September 30, 2006, we had 510 shareholders of record
of our common stock.
The following table shows the high and low closing prices for
our stock, as listed on the New York Stock Exchange for each
quarter in the last two fiscal years:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Fiscal 2005
|
|
|
|
|
|
|
|
|
October 1
December 31, 2004
|
|
$
|
36.85
|
|
|
$
|
28.65
|
|
January 1
March 31, 2005
|
|
$
|
35.37
|
|
|
$
|
32.85
|
|
April 1 June 30,
2005
|
|
$
|
37.68
|
|
|
$
|
32.60
|
|
July 1
September 30, 2005
|
|
$
|
44.83
|
|
|
$
|
36.01
|
|
Fiscal 2006
|
|
|
|
|
|
|
|
|
October 1
December 31, 2005
|
|
$
|
48.21
|
|
|
$
|
40.21
|
|
January 1
March 31, 2006
|
|
$
|
47.77
|
|
|
$
|
38.77
|
|
April 1 June 30,
2006
|
|
$
|
41.11
|
|
|
$
|
34.30
|
|
July 1
September 30, 2006
|
|
$
|
37.20
|
|
|
$
|
33.25
|
|
Dividends
We paid quarterly dividends of two cents per share, or eight
cents per year, during each of fiscal 2006, 2005 and 2004. Our
dividend rate is set by the Board of Directors on a quarterly
basis taking into account a variety of factors, including among
others, our operating results and cash flows, general economic
and industry conditions, our obligations, changes in applicable
tax laws and other factors deemed relevant by the Board.
Although we expect to continue to pay dividends at the current
rate, our dividend rate is subject to change from time to time
based on the Boards business judgment with respect to
these and other relevant factors.
Issuer
Purchases of Equity Securities (1)
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Maximum Dollar
|
|
|
|
|
|
|
|
|
|
Shares Purchased as
|
|
|
Value of Shares
|
|
|
|
|
|
|
|
|
|
Part of Publicly
|
|
|
that May Yet Be
|
|
|
|
Total Number of
|
|
|
Average Price
|
|
|
Announced Plans
|
|
|
Purchased Under the
|
|
Period
|
|
Shares Purchased
|
|
|
Paid per Share
|
|
|
or Programs
|
|
|
Plans or Programs
|
|
|
July 1, 2006 through
July 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
250,000,000
|
|
August 1, 2006 through
August 31, 2006 (2)
|
|
|
1,678,328
|
|
|
$
|
34.64
|
|
|
|
1,678,328
|
|
|
$
|
238,903,268
|
|
September 1, 2006 through
September 30, 2006
|
|
|
2,055,700
|
|
|
$
|
36.11
|
|
|
|
2,055,700
|
|
|
$
|
164,665,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,734,028
|
|
|
$
|
35.45
|
|
|
|
3,734,028
|
|
|
$
|
164,665,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In August 2006, our Board of Directors canceled our stock
repurchase program originally approved in August 2005 for the
purchase of $200 million in common stock and approved a new
common stock repurchase program that allows us to purchase up to
an aggregate of $250 million in shares of our common stock.
In November 2006, our Board of Directors canceled the August
2006 repurchase program and approved a new repurchase program
that allows us to purchase up to an aggregate of
$500 million in shares of our common stock in the open
market or though negotiated transactions. |
|
(2) |
|
Approximately $47.0 million of the purchases made during
August 2006 were made under the repurchase program originally
approved in August 2005. The remaining purchases were made under
the new program approved in August 2006. |
31
|
|
Item 6.
|
Selected
Financial Data
|
We acquired Nykamp Consulting Group, Inc. (Nykamp)
in December 2001, HNC Software Inc. (HNC) in August
2002, Spectrum Managed Care, Inc. (Spectrum) in
December 2002, NAREX Inc. (NAREX) in July 2003,
Diversified HealthCare Services, Inc. (Diversified
HealthCare Services) in September 2003, Seurat Company
(Seurat) in October 2003, London Bridge Software
Holdings plc (London Bridge) in May 2004, Braun
Consulting, Inc. (Braun) in November 2004 and
RulesPower, Inc. (RulesPower) in September 2005.
Results of operations from these acquisitions are included
prospectively from the date of each acquisition. As a result of
these acquisitions, the comparability of the data below is
impacted.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended September 30,
|
|
|
|
2006(1)
|
|
|
2005
|
|
|
2004(2)
|
|
|
2003
|
|
|
2002(3)
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
Revenues
|
|
$
|
825,365
|
|
|
$
|
798,671
|
|
|
$
|
706,206
|
|
|
$
|
629,295
|
|
|
$
|
392,418
|
|
Operating income
|
|
|
152,723
|
|
|
|
193,011
|
|
|
|
179,866
|
|
|
|
174,194
|
|
|
|
47,112
|
|
Income before income taxes
|
|
|
159,192
|
|
|
|
194,088
|
|
|
|
168,815
|
|
|
|
172,140
|
|
|
|
53,098
|
|
Net income
|
|
|
103,486
|
|
|
|
134,548
|
|
|
|
102,788
|
|
|
|
107,157
|
|
|
|
17,884
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.63
|
|
|
$
|
2.02
|
|
|
$
|
1.47
|
|
|
$
|
1.48
|
|
|
$
|
0.33
|
|
Diluted
|
|
$
|
1.59
|
|
|
$
|
1.86
|
|
|
$
|
1.31
|
|
|
$
|
1.40
|
|
|
$
|
0.32
|
|
Dividends declared per share
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands)
|
|
|
Working capital (deficit)
|
|
$
|
(123,719
|
)
|
|
$
|
274,523
|
|
|
$
|
345,785
|
|
|
$
|
569,510
|
|
|
$
|
337,965
|
|
Total assets
|
|
|
1,321,205
|
|
|
|
1,351,061
|
|
|
|
1,444,779
|
|
|
|
1,495,173
|
|
|
|
1,217,800
|
|
Senior convertible notes
|
|
|
400,000
|
|
|
|
400,000
|
|
|
|
400,000
|
|
|
|
400,000
|
|
|
|
|
|
Convertible subordinated notes,
net of discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141,364
|
|
|
|
139,922
|
|
Stockholders equity
|
|
|
770,028
|
|
|
|
805,094
|
|
|
|
916,471
|
|
|
|
849,542
|
|
|
|
973,472
|
|
|
|
|
(1) |
|
Results of operations for fiscal 2006 include pre-tax
share-based compensation expense of $42.1 million after our
adoption of Statement of Financial Accounting Standards
No. 123(R), Share-Based Payment, on October 1,
2005. In addition, results of operations for fiscal 2006 include
$19.7 million in restructuring and other acquisition
related pre-tax charges. |
|
(2) |
|
Results of operations for fiscal 2004 include an
$11.1 million pre-tax loss on redemption of our convertible
subordinated notes. |
|
(3) |
|
Results of operations for fiscal 2002 include a
$40.2 million pre-tax charge associated with the write-off
of in-process research and development in connection with the
HNC acquisition and $7.2 million in restructuring and other
acquisition-related pre-tax charges. In addition, results of
operations for fiscal 2002 include amortization of goodwill
prior to our adoption of Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets,
on October 1, 2002. |
In February 2004, our Board of Directors authorized a
three-for-two
stock split, effected in the form of a stock dividend, with cash
paid in lieu of fractional shares. As a result, stockholders of
record at the close of business on February 18, 2004
received an additional share of Fair Isaac stock for every two
shares owned, which was distributed on March 10, 2004. All
share and earnings per share amounts have been adjusted to
reflect this stock split.
32
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
RESULTS
OF OPERATIONS
Overview
We are a leader in Enterprise Decision Management
(EDM) solutions that enable businesses to automate
and improve their decisions across the enterprise. Our
predictive analytics and decision management systems power
hundreds of billions of customer decisions each year. We help
companies acquire customers more efficiently, increase customer
value, reduce fraud and credit losses, lower operating expenses
and enter new markets more profitably. Most leading banks and
credit card issuers rely on our solutions, as do many insurers,
retailers, telecommunications providers, healthcare
organizations, pharmaceutical and government agencies. We also
serve consumers through online services that enable people to
purchase and understand their
FICO®
scores, the standard measure in the United States of credit
risk, empowering them to manage their financial health.
Most of our revenues are derived from the sale of products and
services within the consumer credit, financial services and
insurance industries, and during the year ended
September 30, 2006, 71% of our revenues were derived from
within these industries. A significant portion of our remaining
revenues is derived from the telecommunications, healthcare and
retail industries, as well as the government sector. Our clients
utilize our products and services to facilitate a variety of
business processes, including customer marketing and
acquisition, account origination, credit and underwriting risk
management, fraud loss prevention and control, and client
account and policyholder management. A significant portion of
our revenues is derived from transactional or unit-based
software license fees, annual license fees under long-term
software license arrangements, transactional fees derived under
scoring, network service or internal hosted software
arrangements, and annual software maintenance fees. The
recurrence of these revenues is, to a significant degree,
dependent upon our clients continued usage of our products
and services in their business activities. The more significant
activities underlying the use of our products in these areas
include: credit and debit card usage or active account levels;
lending acquisition, origination and customer management
activity; workers compensation and automobile medical
injury insurance claims; and wireless and wireline calls and
subscriber levels. Approximately 75% of our revenues during
fiscal 2006 were derived from arrangements with transactional or
unit-based pricing. We also derive revenues from other sources
which generally do not recur and include, but are not limited
to, perpetual or time-based licenses with upfront payment terms,
non-recurring professional service arrangements and gain-share
arrangements where revenue is derived based on percentages of
client revenue growth or cost reductions attributable to our
products.
Within a number of our sectors there has been a sizable amount
of industry consolidation. In addition, many of our sectors are
experiencing increased levels of competition. As a result of
these factors, we believe that future revenues in particular
sectors may decline. However, due to the long-term customer
arrangements we have with many of our customers, the near term
impact of these declines may be more limited in certain sectors.
One measure used by management as an indicator of our business
performance is the volume of new bookings achieved. We define a
new booking as estimated future contractual
revenues, including agreements with perpetual, multi-year and
annual terms. New bookings values may include:
(i) estimates of variable fee components such as hours to
be incurred under new professional services arrangements and
customer account or transaction activity for agreements with
transactional-based fee arrangements, (ii) additional or
expanded business from renewals of contracts, and (iii) to
a lesser extent, previous customers that have attrited and been
re-sold only as a result of a significant sales effort. In the
fourth quarter of fiscal 2006, we achieved new bookings of
$112.6 million, including nine deals with bookings values
of $3.0 million or more. In comparison, new bookings in the
fourth quarter of fiscal 2005 were $109.7 million,
including four deals with bookings values of $3.0 million
or more.
Management regards the volume of new bookings achieved, among
other factors, as an important indicator of future revenues, but
they are not comparable to, nor should they be substituted for,
an analysis of our revenues, and they are subject to a number of
risks and uncertainties, including those described in
Item 1A Risk Factors, above, concerning timing
and contingencies affecting product delivery and performance.
Although many of our contracts have fixed non-cancelable terms,
some of our contracts are terminable by the client on short
notice or without
33
notice. Accordingly, we do not believe it is appropriate to
characterize all of our new bookings as backlog that will
generate future revenue.
Our revenues derived from clients outside the United States
continue to grow, and may in the future grow more rapidly than
our revenues from domestic clients. International revenues
totaled $230.2 million, $201.5 million and
$152.5 million in fiscal 2006, 2005 and 2004, respectively,
representing 28%, 25% and 22% of total consolidated revenues in
each of these years. In addition to clients acquired via our
acquisitions, we believe that our international growth is a
product of successful relationships with third parties that
assist in international sales efforts and our own increased
sales focus internationally, and we expect that the percentage
of our revenues derived from international clients will increase
in the future.
We acquired London Bridge in May 2004, Braun in November 2004
and RulesPower in September 2005. Results of operations from
these acquisitions are included prospectively from the date of
acquisition. As a result of these acquisitions, our financial
results during the year ended September 30, 2006, are not
directly comparable to those during the years ended
September 30, 2005 and 2004, or other years prior to any of
these acquisitions.
Our reportable segments are: Strategy Machine Solutions, Scoring
Solutions, Professional Services and Analytic Software Tools.
Although we sell solutions and services into a large number of
end user product and industry markets and have recently
developed a more customer-centric focus, our reportable business
segments reflect the primary method in which management
organizes and evaluates internal financial information to make
operating decisions and assess performance. Comparative segment
revenues, operating income, and related financial information
for the years ended September 30, 2006, 2005 and 2004 are
set forth in Note 16 to the accompanying consolidated
financial statements.
Revenues
The following tables set forth certain summary information on a
segment basis related to our revenues for the fiscal years
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-to-Period
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Fiscal Year
|
|
|
to
|
|
|
to
|
|
Segment
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
(In thousands)
|
|
|
Strategy Machine Solutions
|
|
$
|
457,211
|
|
|
$
|
453,734
|
|
|
$
|
427,647
|
|
|
$
|
3,477
|
|
|
$
|
26,087
|
|
Scoring Solutions
|
|
|
177,152
|
|
|
|
167,270
|
|
|
|
142,834
|
|
|
|
9,882
|
|
|
|
24,436
|
|
Professional Services
|
|
|
145,271
|
|
|
|
129,636
|
|
|
|
96,715
|
|
|
|
15,635
|
|
|
|
32,921
|
|
Analytic Software Tools
|
|
|
45,731
|
|
|
|
48,031
|
|
|
|
39,010
|
|
|
|
(2,300
|
)
|
|
|
9,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
825,365
|
|
|
$
|
798,671
|
|
|
$
|
706,206
|
|
|
|
26,694
|
|
|
|
92,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-to-Period
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
Percentage of Revenues
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
|
|
to
|
|
|
to
|
|
Segment
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
Strategy Machine Solutions
|
|
|
55
|
%
|
|
|
57
|
%
|
|
|
61
|
%
|
|
|
1
|
%
|
|
|
6
|
%
|
Scoring Solutions
|
|
|
21
|
%
|
|
|
21
|
%
|
|
|
20
|
%
|
|
|
6
|
%
|
|
|
17
|
%
|
Professional Services
|
|
|
18
|
%
|
|
|
16
|
%
|
|
|
14
|
%
|
|
|
12
|
%
|
|
|
34
|
%
|
Analytic Software Tools
|
|
|
6
|
%
|
|
|
6
|
%
|
|
|
5
|
%
|
|
|
(5
|
)%
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
3
|
%
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
Fiscal
2006 Revenues Compared to Fiscal 2005 Revenues
Strategy Machine Solutions segment revenues increased
$3.5 million due to a $12.9 million increase in
revenues from our fraud solutions, a $8.9 million
increase in revenues from our consumer solutions, a
$5.2 million increase in revenues from our collections
and recovery solutions, and a $2.2 million increase in
revenues from our other strategy machine solutions, partially
offset by a $16.5 million decrease in revenues from our
marketing solutions and a $9.2 million decrease in
revenues from our insurance and healthcare solutions. The
increase in fraud solutions revenues was attributable to
an increase in license sales and an increase in transaction
volumes. The increase in consumer solutions revenues was
partially attributable to increases in revenues derived from
myFICO.com and our strategic alliance partners. The increase in
consumer solutions revenues was also the result of a
revision made during fiscal 2006 to the estimated period during
which revenue is earned on sales of certain products that
provide consumers access to multiple credit scores. The
revision, which increased revenues by $1.6 million in
fiscal 2006, resulted from the completion of a study that showed
that consumers were accessing their scores over a shorter period
of time than initially estimated. The increase in collections
and recovery solutions revenues was attributable primarily
to an increase in perpetual license sales revenues. This
increase was driven by higher international license sales due to
increased sales efforts. The decrease in marketing solutions
revenues was attributable primarily to the loss of two large
financial services customers during fiscal 2005, which resulted
from industry consolidation. The decrease in insurance and
healthcare solutions revenues was attributable primarily to
the loss of several customer accounts that primarily occurred in
fiscal 2005.
Scoring Solutions segment revenues increased
$9.9 million primarily due to an increase in revenues
derived from risk scoring services at the credit reporting
agencies, resulting from increased sales of scores for
prescreening activities, and an increase in revenues derived
from our own prescreening services directly to users. We also
achieved increased revenues from our FICO expansion score
product, which provides scores on U.S. consumers who do not
have traditional FICO scores because they do not have credit
accounts being reported to the credit reporting agencies.
During fiscal 2006 and 2005, revenues generated from our
agreements with Equifax, TransUnion and Experian, collectively
accounted for approximately 18% and 17%, respectively, of our
total revenues, including revenues from these customers that are
recorded in our other segments.
Professional Services segment revenues increased
$15.6 million from industry consulting services,
implementation services for our Blaze Advisor products and
predictive modeling services. The increase in industry
consulting services revenue resulted from initiatives to expand
our professional service offerings into additional industry
markets.
Analytic Software Tools segment revenues decreased
$2.3 million primarily due to a decline in sales of
perpetual licenses of Blaze Advisor. This decline reflects the
timing of Blaze Advisor sales, which includes large individual
contracts. The decline in revenues was partially offset by
higher maintenance revenues, which resulted from the overall
growth in our installed base of Blaze Advisor, and an increase
in sales of Model Builder software applications.
Fiscal
2005 Revenues Compared to Fiscal 2004 Revenues
The increase in total revenues from fiscal 2004 to fiscal 2005
included a $67.4 million increase in revenues that resulted
from our acquisitions in fiscal 2005 and 2004.
Strategy Machine Solutions segment revenues increased due
to a $21.5 million increase in revenues from our
collection and recovery solutions, a $16.6 million
increase in revenues from our fraud solutions, a
$14.4 million increase in revenues from our mortgage
banking solutions, a $7.9 million increase in revenues
from our consumer solutions and a $2.2 million
increase in revenues from our other strategy machine solutions,
partially offset by a $21.9 million decrease in revenues
from our marketing solutions and a $14.6 million
decrease in revenues from our insurance and healthcare
solutions. The increase in collections and recovery
solutions revenues was attributable primarily to increases
in license and maintenance revenues related to acquired London
Bridge solutions. The increase in fraud solutions
revenues was attributable to an increase in active accounts
and merchant transaction volumes with our existing customer
base, and to the cross-selling of additional fraud products. The
increase in
35
mortgage banking solutions revenues was attributable to
volumes associated with acquired London Bridge
transactional-based agreements. The increase in consumer
solutions revenues was attributable primarily to increases
in revenues derived from myFICO.com and our strategic alliance
partners due to increased customer volumes and higher average
selling prices. The decrease in marketing solutions
revenues was attributable primarily to the loss of two large
financial services customers, which resulted from industry
consolidation. The decrease in insurance and healthcare
solutions revenues was attributable primarily to a decline
in bill review volumes associated with our existing customer
base, lower claims volumes at some of our key customers and loss
of several customer accounts.
Scoring Solutions segment revenues increased primarily
due to an increase in revenues derived from risk scoring
services at the credit reporting agencies, resulting from
increased sales of scores for prescreening activities, and an
increase in revenues derived from our own prescreening services.
During fiscal 2005 and 2004, revenues generated from our
agreements with Equifax, TransUnion and Experian, collectively
accounted for approximately 17% and 16%, respectively, of our
total revenues, including revenues from these customers that are
recorded in our other segments.
Professional Services segment revenues increased
$29.2 million due to an increase in implementation and
precision marketing service revenues from our acquisitions of
London Bridge and Braun, and a net increase of $3.8 million
in revenues in various other professional service activities.
Analytic Software Tools segment revenues increased
primarily due to an increase in sales of perpetual licenses of
Blaze Advisor and Model Builder software applications.
Operating
Expenses and Other Income (Expense)
The following tables set forth certain summary information
related to our statements of income for the fiscal years
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-to-Period
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Fiscal Year
|
|
|
to
|
|
|
to
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
(In thousands)
|
|
|
Revenues
|
|
$
|
825,365
|
|
|
$
|
798,671
|
|
|
$
|
706,206
|
|
|
$
|
26,694
|
|
|
$
|
92,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
281,977
|
|
|
|
275,065
|
|
|
|
252,587
|
|
|
|
6,912
|
|
|
|
22,478
|
|
Research and development
|
|
|
84,967
|
|
|
|
81,295
|
|
|
|
71,088
|
|
|
|
3,672
|
|
|
|
10,207
|
|
Selling, general and administrative
|
|
|
260,845
|
|
|
|
223,400
|
|
|
|
182,374
|
|
|
|
37,445
|
|
|
|
41,026
|
|
Amortization of intangible assets
|
|
|
25,191
|
|
|
|
25,900
|
|
|
|
19,064
|
|
|
|
(709
|
)
|
|
|
6,836
|
|
Restructuring and
acquisition-related
|
|
|
19,662
|
|
|
|
|
|
|
|
1,227
|
|
|
|
19,662
|
|
|
|
(1,227
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
672,642
|
|
|
|
605,660
|
|
|
|
526,340
|
|
|
|
66,982
|
|
|
|
79,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
152,723
|
|
|
|
193,011
|
|
|
|
179,866
|
|
|
|
(40,288
|
)
|
|
|
13,145
|
|
Interest income
|
|
|
15,248
|
|
|
|
8,402
|
|
|
|
9,998
|
|
|
|
6,846
|
|
|
|
(1,596
|
)
|
Interest expense
|
|
|
(8,569
|
)
|
|
|
(8,347
|
)
|
|
|
(16,942
|
)
|
|
|
(222
|
)
|
|
|
8,595
|
|
Loss on redemption of convertible
subordinated notes
|
|
|
|
|
|
|
|
|
|
|
(11,137
|
)
|
|
|
|
|
|
|
11,137
|
|
Other income (expense), net
|
|
|
(210
|
)
|
|
|
1,022
|
|
|
|
7,030
|
|
|
|
(1,232
|
)
|
|
|
(6,008
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
159,192
|
|
|
|
194,088
|
|
|
|
168,815
|
|
|
|
(34,896
|
)
|
|
|
25,273
|
|
Provision for income taxes
|
|
|
55,706
|
|
|
|
59,540
|
|
|
|
66,027
|
|
|
|
(3,834
|
)
|
|
|
(6,487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
103,486
|
|
|
$
|
134,548
|
|
|
$
|
102,788
|
|
|
|
(31,062
|
)
|
|
|
31,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of employees at fiscal year
end
|
|
|
2,737
|
|
|
|
2,796
|
|
|
|
3,058
|
|
|
|
(59
|
)
|
|
|
(262
|
)
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-to-Period
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Change
|
|
|
|
Percentage of Revenues
|
|
|
2006
|
|
|
2005
|
|
|
|
Fiscal Year
|
|
|
To
|
|
|
To
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
Revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
3
|
%
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
34
|
%
|
|
|
35
|
%
|
|
|
36
|
%
|
|
|
3
|
%
|
|
|
9
|
%
|
Research and development
|
|
|
10
|
%
|
|
|
10
|
%
|
|
|
10
|
%
|
|
|
5
|
%
|
|
|
14
|
%
|
Selling, general and administrative
|
|
|
32
|
%
|
|
|
28
|
%
|
|
|
26
|
%
|
|
|
17
|
%
|
|
|
22
|
%
|
Amortization of intangible assets
|
|
|
3
|
%
|
|
|
3
|
%
|
|
|
3
|
%
|
|
|
(3
|
)%
|
|
|
36
|
%
|
Restructuring and
acquisition-related
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
81
|
%
|
|
|
76
|
%
|
|
|
75
|
%
|
|
|
11
|
%
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
19
|
%
|
|
|
24
|
%
|
|
|
25
|
%
|
|
|
(21
|
)%
|
|
|
7
|
%
|
Interest income
|
|
|
2
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
81
|
%
|
|
|
(16
|
)%
|
Interest expense
|
|
|
(1
|
)%
|
|
|
(1
|
)%
|
|
|
(2
|
)%
|
|
|
(3
|
)%
|
|
|
51
|
%
|
Loss on redemption of convertible
subordinated notes
|
|
|
|
|
|
|
|
|
|
|
(1
|
)%
|
|
|
|
|
|
|
100
|
%
|
Other income, net
|
|
|
|
|
|
|
|
|
|
|
1
|
%
|
|
|
|
|
|
|
(85
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
20
|
%
|
|
|
24
|
%
|
|
|
24
|
%
|
|
|
(18
|
)%
|
|
|
15
|
%
|
Provision for income taxes
|
|
|
7
|
%
|
|
|
7
|
%
|
|
|
9
|
%
|
|
|
(6
|
)%
|
|
|
(10
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
13
|
%
|
|
|
17
|
%
|
|
|
15
|
%
|
|
|
(23
|
)%
|
|
|
31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective October 1, 2005, we adopted Statement of
Financial Accounting Standards (SFAS)
No. 123(R), Share-Based Payment, using the modified
prospective transition method. Under this method, share-based
compensation expense that we recognized in fiscal 2006 included
expense associated with the fair value of all awards granted on
and after October 1, 2005, and expense for the unvested
portion of previously granted awards outstanding on
October 1, 2005. The fair value of the unvested options
outstanding as of October 1, 2005 was based on the fair
value estimated on the grant date in accordance with the
original provisions of SFAS No. 123. Results for prior
periods have not been restated.
In accordance with SFAS No. 123(R), we recorded
pre-tax share-based compensation expense of $42.1 million
in fiscal 2006. In comparison, we recorded pre-tax share-based
compensation expense of $2.9 million and $1.6 million
during fiscal 2005 and 2004, respectively. Share-based
compensation expense was recorded in cost of revenues, research
and development, and selling, general and administrative expense.
Cost
of Revenues
Cost of revenues consists primarily of employee salaries and
benefits for personnel directly involved in creating, installing
and supporting revenue products; travel and related overhead
costs; costs of computer service bureaus; internal network
hosting costs; amounts payable to credit reporting agencies for
scores; software costs; and expenses related to our consumer
score services through myFICO.com.
The fiscal 2006 over 2005 increase of $6.9 million in cost
of revenues resulted from a $15.5 million increase in
personnel and other labor-related costs, a $2.6 million
increase in travel expenses and a $0.6 million increase in
other costs. The increase was partially offset by an
$8.4 million decrease in facilities and infrastructure
costs and a $3.4 million decrease in third-party software
and data costs. The increase in personnel and other
labor-related costs was attributable partially to a
$10.3 million increase in share-based compensation expense
due to the adoption of SFAS No. 123(R) and the
remaining $5.2 million increase was primarily due to higher
outside consultant costs. The increase in travel costs reflects
the increase in professional service projects in the current
year and associated travel to client locations. The decrease in
facilities and infrastructure costs was attributable primarily
to a reduction in
37
depreciation expense, lower outside costs for information
systems and because fiscal 2005 included system integration
costs associated with our acquisition of London Bridge. The
decline in third-party software and data costs was attributable
to a decrease in insurance and healthcare solutions
costs, which was a result of lower revenues for these products.
The fiscal 2005 over 2004 increase of $22.5 million in cost
of revenues includes a $10.6 million increase in personnel
and other labor-related costs, a $5.4 million increase in
third-party software and data, a $4.9 million increase in
facilities and infrastructure costs, and a $1.6 million net
increase in various other expenditures. The increase in
personnel and other labor-related costs was attributable
primarily to an increase in personnel resulting from our London
Bridge and Braun acquisitions. The increase in third-party
software and data costs was attributable primarily to an
increase in consumer solutions revenues, partially offset
by a decrease in insurance and healthcare solutions
revenues, and the resulting variable cost impacts. The increase
in facilities and infrastructure costs was also attributable
primarily to our London Bridge and Braun acquisitions.
In fiscal 2007, we expect that cost of revenues as a percentage
of revenues will be consistent with, or slightly lower than, the
cost of revenues incurred during fiscal 2006.
Research
and Development
Research and development expenses include the personnel and
related overhead costs incurred in development of new products
and services, including primarily the research of mathematical
and statistical models and the development of new versions of
Strategy Machine Solutions and Analytic Software Tools.
The fiscal 2006 over 2005 increase of $3.7 million in
research and development expenditures was partially attributable
to an increase in personnel and related costs of
$2.4 million, which was driven by a $6.3 million
increase in share-based compensation expense due to the adoption
of SFAS No. 123(R). The increase in personnel costs
was partially offset by lower salary and benefit costs due to
staff reductions and the shift of employees to
non-U.S. locations.
The increase in research and development expenditures was also
the result of a $1.5 million increase in facilities and
infrastructure costs.
The fiscal 2005 over 2004 increase of $10.2 million in
research and development expenditures was attributable primarily
to an increase in personnel and related costs of
$8.4 million, primarily as a result of our acquisition of
London Bridge.
In fiscal 2007, we expect that research and development
expenditures as a percentage of revenues will be consistent with
those incurred during fiscal 2006.
Selling,
General and Administrative
Selling, general and administrative expenses consist principally
of employee salaries and benefits, travel, overhead, advertising
and other promotional expenses, corporate facilities expenses,
legal expenses, business development expenses, and the cost of
operating computer systems.
The fiscal 2006 over 2005 increase of $37.4 million in
selling, general and administrative expenses was attributable to
a $32.1 million increase in personnel and other
labor-related costs and a $5.9 million increase in
facilities and infrastructure costs, slightly offset by a
$0.6 million net decrease in other expenses. The increase
in personnel and labor-related costs resulted from a
$22.6 million increase in share-based compensation expense
due to the adoption of SFAS No. 123(R) and the
remaining $9.5 million increase was primarily due to higher
salary and commission costs. The increase in facilities and
infrastructure was due to higher information systems costs.
The fiscal 2005 over 2004 increase of $41.0 million in
selling, general and administrative expenses was attributable to
a $35.0 million increase in personnel and other
labor-related costs, a $2.6 million increase in travel
costs, a $2.3 million increase in our provision for
doubtful accounts, a $0.6 million increase in legal and
accounting fees and a $0.5 million net increase in other
expenses. The increase in personnel and labor-related costs and
travel costs resulted primarily from our London Bridge and Braun
acquisitions. Legal and accounting fees were impacted by higher
professional fees that resulted from our assessment of internal
controls over financial reporting as
38
required by the Sarbanes-Oxley Act and tax planning projects,
partially offset by the impact of a $3.0 million charge
recorded in fiscal 2004 in connection with a legal settlement.
In fiscal 2007, we expect that selling, general and
administrative expenses as a percentage of revenues will be
consistent with, or slightly lower than, those incurred during
fiscal 2006.
Amortization
of Intangible Assets
Amortization of intangible assets consists of amortization
expense related to intangible assets recorded in connection with
acquisitions accounted for by the purchase method of accounting.
Our definite-lived intangible assets, consisting primarily of
completed technology and customer contracts and relationships,
are being amortized using the straight-line method or based on
forecasted cash flows associated with the assets over periods
ranging from two to fifteen years.
The fiscal 2006 over 2005 decline of $0.7 million in
amortization expense was attributable to certain intangible
assets becoming fully amortized.
The fiscal 2005 over 2004 increase in amortization expense was
attributable to incremental amortization associated with our
acquisitions of London Bridge and Braun in May 2004 and November
2004, respectively.
In fiscal 2007, we expect amortization expenses as a percentage
of revenues will be slightly lower than the amortization expense
incurred in 2006.
Restructuring
and Acquisition-Related Expenses
The following table sets forth certain summary information on
restructuring and acquisition-related expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Restructuring initiative,
principally severance costs
|
|
$
|
5,198
|
|
|
$
|
|
|
|
$
|
|
|
Vacating excess lease space
|
|
|
12,954
|
|
|
|
|
|
|
|
460
|
|
Abandoned acquisition
|
|
|
2,184
|
|
|
|
|
|
|
|
767
|
|
Restructuring plan
adjustment-leased space
|
|
|
(674
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring and
acquisition related expense
|
|
$
|
19,662
|
|
|
$
|
|
|
|
$
|
1,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with a restructuring initiative in fiscal 2006, we
incurred charges of $5.1 million for severance costs
associated with a reduction of 190 employees primarily in
product management, delivery and development functions. Cash
payments for the majority of these severance costs were paid in
fiscal 2006. As part of this restructuring initiative, we also
recognized a $0.1 million charge associated with the
abandonment of leased office space representing future cash
obligations under the lease. These actions are forecasted to
result in annualized savings of approximately $22 million,
which represents compensation costs for terminated employees.
However, as part of the restructuring initiative, we expect that
the cost savings will be partially offset by additional staff
required to support our new customer-centric approach to
marketing our products.
As a result of vacating excess leased space located in
California in fiscal 2006, we incurred a charge of
$13.0 million, representing future cash lease obligations,
net of estimated sublease income. We expect that the future
lease obligations will be paid out over the next five years,
which represents the remaining term of the lease. We expect this
action to result in an annualized reduction of rent expense of
approximately $3.6 million to $4.3 million through the
remaining lease period.
In fiscal 2006, we recorded costs of $2.2 million in
connection with an abandoned acquisition, consisting of
third-party legal, accounting and other professional fees.
We recorded a $0.7 million gain in fiscal 2006 due to the
sublease of office space that we had exited in fiscal 2002. The
gain resulted from an adjustment to the liability established
for the exit of the lease space and a refund received for past
rent paid to the landlord.
39
During fiscal 2004, we wrote off deferred acquisition costs
totaling $0.8 million in connection with an abandoned
acquisition, consisting principally of third-party legal,
accounting and other professional fees. In addition, we recorded
a $0.5 million charge in fiscal 2004 related to the closure
of a Fair Isaac office facility upon relocating its operations
into an acquired London Bridge office facility.
Interest
Income
Interest income is derived primarily from the investment of
funds in excess of our immediate operating requirements.
The fiscal 2006 over 2005 increase of $6.8 million in
interest income was attributable to higher interest and
investment income yields due to market conditions and to a
lesser extent higher average cash and investment balances. The
increase in cash and investment balances resulted principally
from cash provided by operating activities and proceeds received
from the exercise of employee stock options.
The fiscal 2005 over 2004 decrease of $1.6 million in
interest income was attributable to lower average cash and
investment balances, partially offset by higher interest and
investment income yields due to market conditions. The decrease
in cash and investment balances resulted principally from cash
used in investing and financing activities, including cash used
for the redemption of our 5.25% Convertible Subordinated
Notes (Subordinated Notes) in the fourth quarter of
fiscal 2004, repurchases of common stock and acquisitions,
partially offset by increases in net cash provided by operating
activities.
Interest
Expense
Interest expense recorded in fiscal 2006 relates to our
$400.0 million of 1.5% Senior Convertible Notes
(Senior Notes), including the amortization of debt
issuance costs, and was consistent with the interest expense
related to the Senior Notes recorded by us during fiscal 2005.
The fiscal 2005 over 2004 decrease of $8.6 million in
interest expense was attributable to the redemption of our
$150.0 million of Subordinated Notes in September 2004.
Interest expense recorded during fiscal 2005 relates to our
$400.0 million of Senior Notes, including the amortization
of debt issuance costs, and is consistent with the interest
expense related to the Senior Notes recorded by us in fiscal
2004.
Loss
on Redemption of Convertible Subordinated Notes
In July 2004, our Board of Directors approved the cash
redemption of all of the outstanding Subordinated Notes at a
redemption price equal to 102.625% of the $150.0 million
principal amount of the Subordinated Notes, pursuant to the
redemption criteria in the indenture. In September 2004, we
redeemed all of the outstanding Subordinated Notes with a cash
outlay of $153.9 million, which resulted in the recognition
of a loss on redemption of $11.1 million, representing the
excess of the redemption cost over the carrying amount of the
notes upon redemption.
Other
Income (Expense), Net
Other income (expense), net consists primarily of realized
investment gains/losses, exchange rate gains/losses resulting
from re-measurement of foreign-denominated receivable and cash
balances held by our U.S. reporting entities into the
U.S. dollar functional currency at period-end market rates,
net of the impact of offsetting forward exchange contracts, and
other non-operating items.
Other expense, net was $0.2 million in fiscal 2006,
compared with other income, net of $1.0 million in fiscal
2005. The change in other income (expense), net was primarily
due to net foreign exchange losses of $0.9 million
recognized in fiscal 2006, compared with a net foreign currency
gain of $0.4 million recognized in fiscal 2005. The foreign
exchange losses in fiscal 2006 were the result of unfavorable
currency positions.
The fiscal 2005 over 2004 decrease of $6.0 million in other
income was due to a decline in realized gains on sales of our
marketable securities of $7.6 million, including a
$6.6 million gain recognized in fiscal 2004 on the sale of
our investment in Open Solutions, Inc. (OSI). The
decline in other income was partially offset by foreign
40
exchange gains of $0.4 million recognized in fiscal 2005,
compared with a net foreign currency loss of $0.9 million
recorded in fiscal 2004. The foreign exchange loss in fiscal
2004 resulted from a $1.3 million net foreign exchange loss
recorded in connection with our London Bridge acquisition. This
net foreign exchange loss represented the excess of a loss
recorded on a forward foreign exchange contract entered into in
connection with this transaction over exchange rate gains
resulting from the re-measurement of British pound-sterling cash
balances held by one of our U.S. dollar functional currency
entities for the purpose of funding the acquisition.
Provision
for Income Taxes
Our effective tax rates were 35.0%, 30.7% and 39.1% in fiscal
2006, 2005 and 2004, respectively.
The increase in our effective tax rate in fiscal 2006 compared
with fiscal 2005 was due to the recognition in fiscal 2005 of
$10.6 million of tax benefits. These benefits were
determined in conjunction with tax studies we performed with
outside advisors that identified additional U.S. federal
and state tax credits and other deductions related to prior
years tax returns. The tax benefits recognized reflect our
estimate of the effect of amended tax returns filed for fiscal
1998 through 2004. These tax benefits reduced our effective tax
rate in fiscal 2005 by 5.5%. Excluding these tax benefits, the
effective tax rate for fiscal 2005 would have been 36.2%.
Our effective tax rate in fiscal 2004 was adversely impacted by
the inability to recognize research and development credits in
the fourth quarter of fiscal 2004 due to the temporary
expiration of this credit and from the inability to recognize a
tax benefit on certain foreign losses.
Operating
Income
The following table sets forth certain summary information on a
segment basis related to our operating income for the fiscal
years indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-to-Period
|
|
|
|
|
|
|
Period-to-Period
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
Fiscal Year
|
|
|
to
|
|
|
to
|
|
|
to
|
|
|
to
|
|
Segment
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Strategy Machine Solutions
|
|
$
|
85,975
|
|
|
$
|
63,903
|
|
|
$
|
86,635
|
|
|
$
|
22,072
|
|
|
$
|
(22,732
|
)
|
|
|
35
|
%
|
|
|
(26
|
)%
|
Scoring Solutions
|
|
|
112,413
|
|
|
|
100,520
|
|
|
|
76,774
|
|
|
|
11,893
|
|
|
|
23,746
|
|
|
|
12
|
%
|
|
|
31
|
%
|
Professional Services
|
|
|
13,333
|
|
|
|
18,396
|
|
|
|
9,077
|
|
|
|
(5,063
|
)
|
|
|
9,319
|
|
|
|
(28
|
)%
|
|
|
103
|
%
|
Analytic Software Tools
|
|
|
2,749
|
|
|
|
13,119
|
|
|
|
10,176
|
|
|
|
(10,370
|
)
|
|
|
2,943
|
|
|
|
(79
|
)%
|
|
|
29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
|
214,470
|
|
|
|
195,938
|
|
|
|
182,662
|
|
|
|
18,532
|
|
|
|
13,276
|
|
|
|
9
|
%
|
|
|
7
|
%
|
Unallocated share-based compensation
|
|
|
(42,085
|
)
|
|
|
(2,927
|
)
|
|
|
(1,569
|
)
|
|
|
(39,158
|
)
|
|
|
(1,358
|
)
|
|
|
|
|
|
|
(87
|
)%
|
Unallocated restructuring and
acquisition-related expense
|
|
|
(19,662
|
)
|
|
|
|
|
|
|
(1,227
|
)
|
|
|
(19,662
|
)
|
|
|
1,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
152,723
|
|
|
$
|
193,011
|
|
|
$
|
179,866
|
|
|
|
(40,288
|
)
|
|
|
13,145
|
|
|
|
(21
|
)%
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fiscal 2006 over fiscal 2005 decrease of $40.3 million
in operating income was attributable primarily to an increase in
share-based compensation expense due to the adoption of
SFAS No. 123(R) and restructuring and
acquisition-related charges. The decrease in operating income
was partially offset by an increase in segment revenues. At the
segment level, the increase in segment operating income was
driven by increases of $22.1 million and $11.9 million
in segment operating income within our Strategy Machine
Solutions and Scoring Solutions segments, respectively,
partially offset by a $10.4 million and $5.1 million
decrease in segment operating income within our Analytic
Software Tools and Professional Services segments. The increase
in Strategy Machine Solutions segment operating income was
attributable to increases in sales of higher margin product
offerings and a decline in operating expenses, partially offset
by the impact of revenue declines we experienced in marketing
solutions and insurance and healthcare solutions. The
increase in Scoring Solutions segment operating income was
attributable primarily to an increase in revenues derived from
risk scoring services at the credit reporting agencies and an
increase in revenues derived from our own prescreening services.
In our Analytic Software Tools segment,
41
the decline in segment operating income was due to a decrease in
sales of perpetual licenses as well as increased product
development and sales costs. The decrease in Professional
Services segment operating income was the result of higher
personnel and outside consultant costs.
The fiscal 2005 over fiscal 2004 increase in operating income
was attributable primarily to an increase in segment revenues,
which included a $67.4 million increase in revenues that
resulted from our acquisitions in fiscal 2005 and 2004. The
increase was partially offset by an increase of
$6.8 million in the amortization of intangible assets that
resulted from our acquisitions in fiscal 2004 and 2005. At the
segment level, the increase in segment operating income was
driven by increases of $23.7 million, $9.3 million and
$2.9 million in segment operating income within our Scoring
Solutions, Professional Services and Analytic Software Tools
segments, respectively, partially offset by a $22.7 million
decrease in segment operating income within our Strategy Machine
Solutions segment. The increase in Scoring Solutions segment
operating income was attributable primarily to an increase in
revenues derived from risk scoring services at the credit
reporting agencies, resulting from increased sales of scores for
prescreening activities, and an increase in revenues derived
from our own prescreening services. The increase in Professional
Services segment operating income was the result of an increase
in Precision Marketing service revenues and implementations of
EDM products. In our Analytic Software Tools segment, higher
segment operating income was due to an increase in sales of
perpetual licenses for our EDM products. The decrease in
Strategy Machine Solutions segment operating income was
attributable to revenue declines we experienced in insurance and
healthcare solutions and marketing solutions, the impact of
negative operating margins associated with London Bridge product
offerings, partially offset by increases in sales of higher
margin product offerings.
Capital
Resources and Liquidity
Cash
Flows from Operating Activities
Our primary method for funding operations and growth has been
through cash flows generated from operating activities. Net cash
provided by operating activities decreased from
$214.1 million in fiscal 2005 to $199.0 million in
fiscal 2006. The comparison of fiscal 2006 to fiscal 2005
operating cash flows was impacted by a $20.8 million
prepayment received in fiscal 2005 from a single customer for
future services. Operating cash flows in fiscal 2006 were also
negatively affected by payments of $11.3 million for
restructuring and acquisition-related activities and the
increase of $9.7 million in receivables, which reflects the
increase in revenues and longer payment terms in certain
customer contracts. In addition, prior to the adoption of
SFAS No. 123(R), we presented all tax benefits for
deductions resulting from the exercise of stock options as
operating cash flows within our consolidated statements of cash
flows. SFAS No. 123(R) requires the cash flows
resulting from the tax benefits for tax deductions in excess of
the compensation expense recorded for those options (excess tax
benefits) to be classified as financing cash flows. Accordingly,
the $7.1 million excess tax benefit that is classified as a
financing cash inflow on the accompanying consolidated
statements of cash flows in fiscal 2006 was classified as an
operating cash inflow prior to the adoption of
SFAS No. 123(R).
Net cash provided by operating activities increased from
$199.1 million in fiscal 2004 to $214.1 million in
fiscal 2005. The increase in fiscal 2005 operating cash flows
was driven by the $31.8 million increase in net income and
a $20.8 million prepayment received from a single customer
for future services. Operating cash flows were negatively
impacted by an increase in trade receivables of
$8.2 million, which was the result of higher sales volumes
and slower collections. In addition, operating cash flows were
negatively affected by payments of $8.3 million for
acquisition-related restructuring activities.
Cash
Flows from Investing Activities
Net cash used in investing activities totaled $17.0 million
in fiscal 2006 compared to $2.9 million in fiscal 2005. The
change in cash flows from investing activities was attributable
to a $41.3 million decrease in cash paid for acquisitions,
due to our acquisitions of Braun and RulesPower in fiscal 2005,
$22.7 million decrease in cash proceeds from a business
disposition due to the sale in fiscal 2005 of London Bridge
Phoenix Software, and an $18.1 million decline in proceeds
from sales and maturities of marketable securities, net of
purchases. In addition, capital expenditures increased by
$15.0 million in fiscal 2006, which included spending on a
new information systems data center.
42
Net cash used in investing activities totaled $2.9 million
in fiscal 2005, compared to net cash provided by investing
activities of $7.4 million in fiscal 2004. The change in
cash flows from investing activities was attributable to a
$281.1 million decline in proceeds from sales and
maturities of marketable securities, net of purchases, a
$243.4 million decrease in cash paid for acquisitions, due
to our acquisition of London Bridge in fiscal 2004, and
$22.7 million in cash proceeds related to our disposition
of London Bridge Phoenix Software in fiscal 2005.
Cash
Flows from Financing Activities
Net cash used in financing activities totaled
$190.3 million in fiscal 2006, compared to
$262.0 million in fiscal 2005. The decrease in cash used
for financing activities was due to a $72.1 million decline
in common stock repurchased. In addition, prior to the adoption
of SFAS No. 123(R), we presented all tax benefits for
deductions resulting from the exercise of stock options as
operating cash flows within our consolidated statements of cash
flows. SFAS No. 123(R) requires the cash flows
resulting from the tax benefits for tax deductions in excess of
the compensation expense recorded for those options (excess tax
benefits) to be classified as financing cash flows. Accordingly,
the $7.1 million excess tax benefit that is classified as a
financing cash inflow on the accompanying consolidated
statements of cash flows in fiscal 2006 was classified as an
operating cash inflow prior to the adoption of
SFAS No. 123(R). The decrease in cash used in
financing activities was partially offset by a $7.7 million
decline in proceeds from issuances of common stock under
employee stock option and purchase plans.
Net cash used in financing activities totaled
$262.0 million in fiscal 2005, compared to net cash used in
financing activities of $206.4 million in fiscal 2004. The
increase in cash used for financing activities was due to a
$227.4 million increase in common stock repurchased. The
increase was partially offset by $153.9 million of cash
used in fiscal 2004 in connection with the September 2004
redemption of our Subordinated Notes and an $18.3 million
increase in cash proceeds from common stock issued under
employee stock option and purchase plans.
Repurchases
of Common Stock
From time to time, we repurchase our common stock in the open
market pursuant to programs approved by our Board of Directors.
During fiscal 2006, 2005 and 2004, we expended
$256.5 million, $328.5 million and
$101.1 million, respectively, in connection with our
repurchase of common stock under such programs. In November
2006, our Board of Directors approved a new common stock
repurchase program that replaces our previous program and allows
us to purchase shares of our common stock up to an aggregate
cost of $500.0 million. During the period October 1,
2006, through December 1, 2006, we repurchased
3,342,500 shares of our common stock for an aggregate cost
of $138.5 million.
Dividends
We paid quarterly dividends of two cents per share, or eight
cents per year, during each of fiscal 2006, 2005 and 2004. Our
dividend rate is set by the Board of Directors on a quarterly
basis taking into account a variety of factors, including among
others, our operating results and cash flows, general economic
and industry conditions, our obligations, changes in applicable
tax laws and other factors deemed relevant by the Board.
Although we expect to continue to pay dividends at the current
rate, our dividend rate is subject to change from time to time
based on the Boards business judgment with respect to
these and other relevant factors.
1.5% Senior
Convertible Notes
In August 2003, we issued $400.0 million of Senior Notes
that mature on August 15, 2023. The Senior Notes become
convertible into shares of Fair Isaac common stock, subject to
the conditions described below, at an initial conversion price
of $43.9525 per share, subject to adjustments for certain
events. The initial conversion price is equivalent to a
conversion rate of approximately 22.7518 shares of Fair
Isaac common stock per $1,000 principal amount of the Senior
Notes. Holders may surrender their Senior Notes for conversion,
if any of the following conditions is satisfied: (i) prior
to August 15, 2021, during any fiscal quarter, if the
closing price of our common stock for at least 20 trading days
in the 30 consecutive trading day period ending on the last day
of the immediately preceding fiscal quarter is more than 120% of
the conversion price per share of our common stock on the
43
corresponding trading day; (ii) at any time after the
closing sale price of our common stock on any date after
August 15, 2021 is more than 120% of the then current
conversion price; (iii) during the five consecutive
business day period following any 10 consecutive trading day
period in which the average trading price of a Senior Note was
less than 98% of the average sale price of our common stock
during such 10 trading day period multiplied by the applicable
conversion rate; provided, however, if, on the day before the
conversion date, the closing price of our common stock is
greater than 100% of the conversion price but less than or equal
to 120% of the conversion price, then holders converting their
notes may receive, in lieu of our common stock based on the
applicable conversion rate, at our option, cash or common stock
with a value equal to 100% of the principal amount of the notes
on the conversion date; (iv) if we have called the Senior
Notes for redemption; or (v) if we make certain
distributions to holders of our common stock or we enter into
specified corporate transactions. The conversion price of the
Senior Notes will be adjusted upon the occurrence of certain
dilutive events as described in the indenture, which include but
are not limited to: (i) dividends, distributions,
subdivisions, or combinations of our common stock;
(ii) issuance of rights or warrants for the purchase of our
common stock under certain circumstances; (iii) the
distribution to all or substantially all holders of our common
stock of shares of our capital stock, evidences of indebtedness,
or other non-cash assets, or rights or warrants; (iv) the
cash dividend or distribution to all or substantially all
holders of our common stock in excess of certain levels; and
(v) certain tender offer activities by us or any of our
subsidiaries.
The Senior Notes are senior unsecured obligations of Fair Isaac
and rank equal in right of payment with all of our unsecured and
unsubordinated indebtedness. The Senior Notes are effectively
subordinated to all of our existing and future secured
indebtedness and existing and future indebtedness and other
liabilities of our subsidiaries. The Senior Notes bear regular
interest at an annual rate of 1.5%, payable on August 15 and
February 15 of each year until August 15, 2008. Beginning
August 15, 2008, regular interest will accrue at the rate
of 1.5%, and be due and payable upon the earlier to occur of
redemption, repurchase, or final maturity. In addition, the
Senior Notes bear contingent interest during any six-month
period from August 15 to February 14 and from February 15 to
August 14, commencing with the six-month period beginning
August 15, 2008, if the average trading price of the Senior
Notes for the five trading day period immediately preceding the
first day of the applicable six-month period equals 120% or more
of the sum of the principal amount of, plus accrued and unpaid
regular interest on, the Senior Notes. The amount of contingent
interest payable on the Senior Notes in respect to any six-month
period will equal 0.25% per annum of the average trading
price of the Senior Notes for the five trading day period
immediately preceding such six-month period.
We may redeem for cash all or part of the Senior Notes on and
after August 15, 2008, at a price equal to 100% of the
principal amount of the Senior Notes, plus accrued and unpaid
interest. Holders may require us to repurchase for cash all or
part of the $400 million of Senior Notes on August 15,
2007, August 15, 2008, August 15, 2013 and
August 15, 2018, or upon a change in control, at a price
equal to 100% of the principal amount of the Senior Notes being
repurchased, plus accrued and unpaid interest.
On March 31, 2005, we completed an exchange offer for the
Senior Notes, whereby holders of approximately 99.9% of the
total principal amount of our Senior Notes exchanged their
existing securities for new 1.5% Senior Convertible Notes,
Series B (New Notes). The terms of the New
Notes are similar to the terms of the Senior Notes described
above, except that: (i) upon conversion, we will pay
holders cash in an amount equal to the lesser of the principal
amount of such notes and the conversion value of such notes, and
to the extent such conversion value exceeds the principal amount
of the notes, the remainder of the conversion obligation in cash
or common shares or combination thereof; (ii) in the event
of a change of control, we may be required in certain
circumstances to pay a make-whole premium on the New Notes
converted in connection with the change of control and
(iii) if the conversion condition in the first
clause (iii) in the third paragraph preceding this
paragraph is triggered and the closing price of our common stock
is greater than 100% of the conversion price but less than or
equal to 120% of the conversion price, the holders converting
New Notes shall receive cash with a value equal to 100% of the
principal amount of New Notes on the conversion date.
Credit
Agreement
In October 2006, we entered into a five-year $300 million
unsecured revolving credit facility with a syndicate of banks.
The credit facility may be increased to $500 million
subject to certain terms and conditions. Proceeds from the
credit facility can be used for capital requirements and general
business purposes and may be used for the
44
refinancing of existing debt, acquisitions and repurchases of
our common stock. Interest on amounts borrowed under the credit
facility is based on (i) a base rate, which is the greater
of (a) the prime rate and (b) the Federal Funds rate
plus 0.50% or (ii) LIBOR plus an applicable margin. The
margin on LIBOR borrowings ranges from 0.30% to 0.55% and is
determined based on our consolidated leverage ratio. In
addition, we must pay utilization fees if borrowings and
commitments under the credit facility exceed 50% of the total
credit facility commitment, as well as facility fees. The credit
facility contains certain restrictive covenants, including
maintenance of consolidated leverage and fixed charge coverage
ratios. The credit facility also contains covenants typical of
unsecured facilities.
Capital
Resources and Liquidity Outlook
As of September 30, 2006, we had $265.6 million in
cash, cash equivalents and marketable security investments. We
believe that these balances, as well as borrowings from our
$300 million revolving credit facility and anticipated cash
flows from operating activities, will be sufficient to fund our
working and other capital requirements and any repayment of
existing debt over the course of the next twelve months and for
the foreseeable future. In the normal course of business, we
evaluate the merits of acquiring technology or businesses, or
establishing strategic relationships with or investing in these
businesses. We may elect to use available cash and cash
equivalents and marketable security investments to fund such
activities in the future. In the event additional needs for cash
arise, we may raise additional funds from a combination of
sources, including the potential issuance of debt or equity
securities. Additional financing might not be available on terms
favorable to us, or at all. If adequate funds were not available
or were not available on acceptable terms, our ability to take
advantage of unanticipated opportunities or respond to
competitive pressures could be limited.
Contractual
Obligations
The following is a summary of our contractual obligations at
September 30, 2006:
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|
|
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|
|
|
|
|
|
Fiscal Year
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|
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2007
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2008
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2009
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2010
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2011
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Thereafter
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Total
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|
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|
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|
|
(In thousands)
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|
|
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|
|
|
|
|
|
Senior Notes (1)
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|
$
|
400,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
400,000
|
|
Operating lease obligations
|
|
|
25,088
|
|
|
|
24,295
|
|
|
|
21,529
|
|
|
|
19,141
|
|
|
|
13,748
|
|
|
|
24,467
|
|
|
|
128,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
Total commitments
|
|
$
|
425,088
|
|
|
$
|
24,295
|
|
|
$
|
21,529
|
|
|
$
|
19,141
|
|
|
$
|
13,748
|
|
|
$
|
24,467
|
|
|
$
|
528,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
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|
|
|
|
|
|
|
|
(1) |
|
$400.0 million represents the aggregate principal amount of
the Senior Notes. Our Senior Notes are classified in short-term
debt in our consolidated balance sheet at September 30,
2006 because holders may require us to purchase the Senior Notes
upon delivery of a written purchase notice on specific dates,
the earliest of which is August 2007. Refer to Note 9 to
our accompanying consolidated financial statements for more
detailed information regarding the Senior Notes. |
Off-Balance
Sheet Arrangements
We do not have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future material
effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations,
liquidity, capital expenditures, or capital resources.
Critical
Accounting Policies and Estimates
We prepare our consolidated financial statements in conformity
with U.S. generally accepted accounting principles. These
accounting principles require management to make certain
judgments and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets
and liabilities as of the date of the financial statements, and
the reported amounts of revenues and expenses during the
reporting period. We periodically evaluate our estimates
including those relating to revenue recognition, the allowance
for doubtful accounts, goodwill and other intangible assets
resulting from business acquisitions, internal-use software,
income taxes and contingencies and litigation. We base our
estimates on historical experience and various other
45
assumptions that we believe to be reasonable based on the
specific circumstances, the results of which form the basis for
making judgments about the carrying value of certain assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates.
We believe the following critical accounting policies involve
the most significant judgments and estimates used in the
preparation of our consolidated financial statements:
Revenue
Recognition
Software license fee revenue is recognized when persuasive
evidence of an arrangement exists, delivery of the product has
occurred at our customers location, the fee is fixed or
determinable and collection is probable. We use the residual
method to recognize revenue when an arrangement includes one or
more elements to be delivered at a future date and
vendor-specific objective evidence (VSOE) of the
fair value of all undelivered elements exists. VSOE of fair
value is based on the normal pricing practices for those
products and services when sold separately by us and customer
renewal rates for post-contract customer support services. Under
the residual method, the fair value of the undelivered elements
is deferred and the remaining portion of the arrangement fee is
recognized as revenue. If evidence of the fair value of one or
more undelivered elements does not exist, the revenue is
deferred and recognized when delivery of those elements occurs
or when fair value can be established. The determination of
whether fees are fixed or determinable and collection is
probable involves the use of assumptions. We evaluate contract
terms and customer information to ensure that these criteria are
met prior to our recognition of license fee revenue. Changes to
the elements in a software arrangement, the ability to identify
VSOE for those elements, the fair value of the respective
elements, and change to a products estimated life cycle
could materially impact the amount of earned and unearned
revenue.
When software licenses are sold together with implementation or
consulting services, license fees are recognized upon delivery
provided that the above criteria are met, payment of the license
fees is not dependent upon the performance of the services, and
the services do not provide significant customization or
modification of the software products and are not essential to
the functionality of the software that was delivered. For
arrangements with services that are essential to the
functionality of the software, the license and related service
revenues are recognized using contract accounting as described
below.
If at the outset of an arrangement we determine that the
arrangement fee is not fixed or determinable, revenue is
deferred until the arrangement fee becomes due, assuming all
other revenue recognition criteria have been met. If at the
outset of an arrangement we determine that collectibility is not
probable, revenue is deferred until the earlier of when
collectibility becomes probable or the receipt of payment. If
there is uncertainty as to the customers acceptance of our
deliverables, revenue is not recognized until the earlier of
receipt of customer acceptance, expiration of the acceptance
period when we can demonstrate we meet the acceptance criteria.
Revenues from post-contract customer support services, such as
software maintenance, are recognized on a straight-line basis
over the term of the support period. The majority of our
software maintenance agreements provide technical support as
well as unspecified software product upgrades and releases when
and if made available by us during the term of the support
period.
Revenues recognized from our credit scoring, data processing,
data management and internet delivery services are recognized as
these services are performed, provided persuasive evidence of an
arrangement exists, fees are fixed or determinable, and
collection is reasonably assured. The determination of certain
of our credit scoring and data processing revenues requires the
use of estimates, principally related to transaction volumes in
instances where these volumes are reported to us by our clients
on a monthly or quarterly basis in arrears. In these instances,
we estimate transaction volumes based on preliminary customer
transaction information, if available, or based on average
actual reported volumes for an immediate trailing period.
Differences between our estimates and actual final volumes
reported are recorded in the period in which actual volumes are
reported. We have not experienced significant variances between
our estimates and actual reported volumes in the past and
anticipate that we will be able to continue to make reasonable
estimates in the future. If for some reason we were unable to
reasonably estimate transaction volumes in the future, revenue
may be deferred until actual customer data was received, and
this could have a material impact on our results of operations
during the period of time that we changed accounting methods.
46
Transactional or unit-based license fees under software license
arrangements, network service and internally-hosted software
agreements are recognized as revenue based on system usage or
when fees based on system usage exceed monthly minimum license
fees, provided persuasive evidence of an arrangement exists,
fees are fixed or determinable and collection is probable. The
determination of certain of our transactional or unit-based
license fee revenues requires the use of estimates, principally
related to transaction usage or active account volumes in
instances where this information is reported to us by our
clients on a monthly or quarterly basis in arrears. In these
instances, we estimate transaction volumes based on preliminary
customer transaction information, if available, or based on
average actual reported volumes for an immediate trailing
period. Differences between our estimates and actual final
volumes reported are recorded in the period in which actual
volumes are reported. We have not experienced significant
variances between our estimates and actual reported volumes in
the past and anticipate that we will be able to continue to make
reasonable estimates in the future. If for some reason we were
unable to reasonably estimate customer account or transaction
volumes in the future, revenue would be deferred until actual
customer data was received, and this could have a material
impact on our consolidated results of operations.
We provide consulting, training, model development and software
integration services under both hourly-based time and materials
and fixed-priced contracts. Revenues from these services are
generally recognized as the services are performed. For
fixed-price service contracts, we apply the
percentage-of-completion
method of contract accounting to determine progress towards
completion, which requires the use of estimates. In such
instances, management is required to estimate the input
measures, generally based on hours incurred to date compared to
total estimated hours of the project, with consideration also
given to output measures, such as contract milestones, when
applicable. Adjustments to estimates are made in the period in
which the facts requiring such revisions become known and,
accordingly, recognized revenues and profits are subject to
revisions as the contract progresses to completion. Estimated
losses, if any, are recorded in the period in which current
estimates of total contract revenue and contract costs indicate
a loss. If substantive uncertainty related to customer
acceptance of services exists, we apply the completed contract
method of accounting and defer the associated revenue until the
contract is completed. If we are unable to accurately estimate
the input measures used for
percentage-of-completion
accounting, revenue would be deferred until the contract is
complete, and this could have a material impact on our
consolidated results of operations.
Revenue recognized under the
percentage-of-completion
method in excess of contract billings is recorded as an unbilled
receivable. Such amounts are generally billable upon reaching
certain performance milestones as defined by individual
contracts. Billings collected in advance of performance and
recognition of revenue under contracts are recorded as deferred
revenue.
In certain of our non-software arrangements, we enter into
contracts that include the delivery of a combination of two or
more of our service offerings. Typically, such multiple element
arrangements incorporate the design and development of data
management tools or systems and an ongoing obligation to manage,
host or otherwise run solutions for our customer. Such
arrangements are divided into separate units of accounting
provided that the delivered item has stand-alone value and there
is objective and reliable evidence of the fair value of the
undelivered items. The total arrangement fee is allocated to the
undelivered elements based on their fair values and to the
initial delivered elements using the residual method. Revenue is
recognized separately, and in accordance with our revenue
recognition policy, for each element.
As described above, sometimes our customer arrangements have
multiple deliverables, including service elements. Generally,
our multiple element arrangements fall within the scope of
specific accounting standards that provide guidance regarding
the separation of elements in multiple-deliverable arrangements
and the allocation of consideration among those elements (e.g.,
American Institute of Certified Public Accountants Statement of
Position (SOP)
No. 97-2,
Software Revenue Recognition, as amended). If not, we
apply the separation provisions of Emerging Issues Task Force
(EITF) Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables. The
provisions of EITF Issue
No. 00-21
require us to unbundle multiple element arrangements into
separate units of accounting when the delivered element(s) has
stand-alone value and fair value of the undelivered element(s)
exists. When we are able to unbundle the arrangement into
separate units of accounting, we apply one of the accounting
policies described above to each unit. If we are unable to
unbundle the arrangement into separate units of accounting, we
apply one of the accounting policies described above to the
entire arrangement. Sometimes this results in recognizing the
entire arrangement fee when delivery of the last element in a
multiple element
47
arrangement occurs. For example, if the last undelivered element
is a service, we recognize revenue for the entire arrangement
fee as the service is performed, or if no pattern of performance
is discernable, we recognize revenue on a straight-line basis
over the term of the arrangement.
We record revenue on a net basis for those sales in which we
have in substance acted as an agent or broker in the transaction.
Allowance
for Doubtful Accounts
We make estimates regarding the collectibility of our accounts
receivable. When we evaluate the adequacy of our allowance for
doubtful accounts, we analyze specific accounts receivable
balances, historical bad debts, customer creditworthiness,
current economic trends and changes in our customer payment
cycles. Material differences may result in the amount and timing
of expense for any period if we were to make different judgments
or utilize different estimates. If the financial condition of
our customers deteriorates resulting in an impairment of their
ability to make payments, additional allowances might be
required. We have not experienced significant variances in the
past between our estimated and actual doubtful accounts and
anticipate that we will be able to continue to make reasonable
estimates in the future. If for some reason we did not
reasonably estimate the amount of our doubtful accounts in the
future, it could have a material impact on our consolidated
results of operations.
Business
Acquisitions; Valuation of Goodwill and Other Intangible
Assets
Our business acquisitions typically result in the recognition of
goodwill and other intangible assets, and in certain cases
non-recurring charges associated with the write-off of
in-process research and development (IPR&D),
which affect the amount of current and future period charges and
amortization expense. Goodwill represents the excess of the
purchase price over the fair value of net assets acquired,
including identified intangible assets, in connection with our
business combinations accounted for by the purchase method of
accounting. We amortize our definite-lived intangible assets
using the straight-line method or based on forecasted cash flows
associated with the assets over the estimated useful lives,
while IPR&D is recorded as a non-recurring charge on the
acquisition date. Goodwill is not amortized, but rather is
periodically assessed for impairment.
The determination of the value of these components of a business
combination, as well as associated asset useful lives, requires
management to make various estimates and assumptions. Critical
estimates in valuing certain of the intangible assets include
but are not limited to: future expected cash flows from product
sales and services, maintenance agreements, consulting
contracts, customer contracts, and acquired developed
technologies and patents or trademarks; expected costs to
develop the IPR&D into commercially viable products and
estimating cash flows from the projects when completed; the
acquired companys brand awareness and market position, as
well as assumptions about the period of time the acquired
products and services will continue to be used in our product
portfolio; and discount rates. Managements estimates of
fair value and useful lives are based upon assumptions believed
to be reasonable, but which are inherently uncertain and
unpredictable. Unanticipated events and circumstances may occur
and assumptions may change. Estimates using different
assumptions could also produce significantly different results.
We continually review the events and circumstances related to
our financial performance and economic environment for factors
that would provide evidence of the impairment of our intangible
assets. When impairment indicators are identified with respect
to our previously recorded intangible assets, then we test for
impairment using undiscounted cash flows. If such tests indicate
impairment, then we measure the impairment as the difference
between the carrying value of the asset and the fair value of
the asset, which is measured using discounted cash flows.
Significant management judgment is required in forecasting of
future operating results, which are used in the preparation of
the projected discounted cash flows and should different
conditions prevail, material write downs of net intangible
assets and other long-lived assets could occur. We periodically
review the estimated remaining useful lives of our acquired
intangible assets. A reduction in our estimate of remaining
useful lives, if any, could result in increased amortization
expense in future periods.
We test goodwill for impairment at the reporting unit level at
least annually during the fourth quarter of each fiscal year and
more frequently if impairment indicators are identified. We have
determined that our reporting units are the same as our
reportable segments. The first step of the goodwill impairment
test is a comparison of the fair
48
value of a reporting unit to its carrying value. We estimate the
fair values of our reporting units using discounted cash flow
valuation models and by comparing our reporting units to
guideline publicly-traded companies. These methods require
estimates of our future revenues, profits, capital expenditures,
working capital, and other relevant factors, as well as
selecting appropriate guideline publicly-traded companies for
each reporting unit. We estimate these amounts by evaluating
historical trends, current budgets, operating plans, industry
data, and other relevant factors. The estimated fair value of
each of our reporting units exceeded its respective carrying
value in fiscal 2006, indicating the underlying goodwill of each
reporting unit was not impaired as of our most recent testing
date. Accordingly, we were not required to complete the second
step of the goodwill impairment test. The timing and frequency
of our goodwill impairment test is based on an ongoing
assessment of events and circumstances that would more than
likely reduce the fair value of a reporting unit below its
carrying value. We will continue to monitor our goodwill balance
and conduct formal tests on at least an annual basis or earlier
when impairment indicators are present. There are various
assumptions and estimates underlying the determination of an
impairment loss, and estimates using different, but each
reasonable, assumptions could produce significantly different
results and materially affect the determination of fair value
and/or
goodwill impairment for each reporting unit. Therefore, the
timing and recognition of impairment losses by us in the future,
if any, may be highly dependent upon our estimates and
assumptions. We believe that the assumptions and estimates
utilized were appropriate based on the information available to
management.
Share-Based
Compensation
Prior to October 1, 2005, we accounted for our share-based
employee compensation plans under the measurement and
recognition provisions of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related Interpretations, as
permitted by Financial Accounting Standards Board
(FASB) SFAS No. 123, Accounting for
Stock-Based Compensation. We generally recorded no employee
compensation expense for options granted prior to
October 1, 2005 as options granted generally had exercise
prices equal to the fair market value of our common stock on the
date of grant. We also recorded no compensation expense in
connection with our 1999 Employee Stock Purchase Plan as the
purchase price of the stock was not less than 85% of the lower
of the fair market value of our common stock at the beginning of
each offering period or at the end of each offering period. In
accordance with SFAS No. 123, we disclosed our net
income and earnings per share as if we had applied the fair
value-based method in measuring compensation expense for our
share-based incentive awards.
Effective October 1, 2005, we adopted the fair value
recognition provisions of SFAS No. 123(R),
Share-Based Payment, using the modified prospective
transition method. Under that transition method, compensation
expense that we recognize beginning on that date includes
expense associated with the fair value of all awards granted on
and after October 1, 2005, and expense for the unvested
portion of previously granted awards outstanding on
October 1, 2005. Results for prior periods have not been
restated.
We estimate the fair value of options granted using the
Black-Scholes option valuation model and the assumptions shown
in Note 15 to the accompanying consolidated financial
statements. We estimate the volatility of our common stock at
the date of grant based on a combination of the implied
volatility of publicly traded options on our common stock and
our historical volatility rate, consistent with
SFAS No. 123(R) and Securities and Exchange Commission
Staff Accounting Bulletin No. 107
(SAB 107). Our decision to use implied
volatility was based upon the availability of actively traded
options on our common stock and our assessment that implied
volatility is more representative of future stock price trends
than historical volatility. We estimate expected term consistent
with the simplified method identified in SAB 107 for
share-based awards. We elected to use the simplified method as
we changed the contractual life for share-based awards from ten
to seven years starting in fiscal 2006. The simplified method
calculates the expected term as the average of the vesting and
contractual terms of the award. Previously, we estimated
expected term based on historical exercise patterns. The
dividend yield assumption is based on historical dividend
payouts. The risk-free interest rate assumption is based on
observed interest rates appropriate for the term of our employee
options. We use historical data to estimate pre-vesting option
forfeitures and record share-based compensation expense only for
those awards that are expected to vest. For options granted, we
amortize the fair value on a straight-line basis. All options
are amortized over the requisite service periods of the awards,
which are generally the vesting periods. If factors change we
may decide to use different assumptions under the Black-Scholes
49
option valuation model in the future, which could materially
affect our share-based compensation expense, net income and
earnings per share.
Income
Taxes
We use the asset and liability approach to account for income
taxes. This methodology recognizes deferred tax assets and
liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and the tax
base of assets and liabilities and operating loss and tax credit
carryforwards. We then record a valuation allowance to reduce
deferred tax assets to an amount that more likely than not will
be realized. We consider future taxable income and ongoing
prudent and feasible tax planning strategies in assessing the
need for the valuation allowance, which requires the use of
estimates. If we determine during any period that we could
realize a larger net deferred tax asset than the recorded
amount, we would adjust the deferred tax asset to increase
income for the period or reduce goodwill if such deferred tax
asset relates to an acquisition. Conversely, if we determine
that we would be unable to realize a portion of our recorded
deferred tax asset, we would adjust the deferred tax asset to
record a charge to income for the period or increase goodwill if
such deferred tax asset relates to an acquisition. Although we
believe that our estimates are reasonable, there is no assurance
that our the valuation allowance will not need to be increased
to cover additional deferred tax assets that may not be
realizable, and such an increase could have a material adverse
impact on our income tax provision and results of operations in
the period in which such determination is made. In addition, the
calculation of tax liabilities also involves significant
judgment in estimating the impact of uncertainties in the
application of complex tax laws. Resolution of these
uncertainties in a manner inconsistent with managements
expectations could also have a material impact on our income tax
provision and results of operations in the period in which such
determination is made.
Contingencies
and Litigation
We are subject to various proceedings, lawsuits and claims
relating to products and services, technology, labor,
shareholder and other matters. We are required to assess the
likelihood of any adverse outcomes and the potential range of
probable losses in these matters. If the potential loss is
considered probable and the amount can be reasonably estimated,
we accrue a liability for the estimated loss. If the potential
loss is considered less than probable or the amount cannot be
reasonably estimated, disclosure of the matter is considered.
The amount of loss accrual or disclosure, if any, is determined
after analysis of each matter, and is subject to adjustment if
warranted by new developments or revised strategies. Due to
uncertainties related to these matters, accruals or disclosures
are based on the best information available at the time.
Significant judgment is required in both the assessment of
likelihood and in the determination of a range of potential
losses. Revisions in the estimates of the potential liabilities
could have a material impact on our consolidated financial
position or consolidated results of operations.
New
Accounting Pronouncements Not Yet Adopted
In July 2006, the FASB issued FASB Interpretation No. 48
(FIN 48), Accounting for Uncertainty in
Income Taxes, which prescribes a recognition threshold and
measurement process for recording in the financial statements
uncertain tax positions taken or expected to be taken in a tax
return. Additionally, FIN 48 provides guidance on the
derecognition, classification, accounting in interim periods and
disclosure requirements for uncertain tax positions. The
accounting provisions of FIN 48 will be effective for the
Company beginning October 1, 2007. We are in the process of
determining what effect, if any, the adoption of FIN 48
will have on our consolidated financial statements.
In September 2006, the Securities and Exchange Commission
(SEC) released Staff Accounting Bulletin
(SAB) No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements, which provided the
Staffs view regarding the process of quantifying financial
statement misstatements. SAB 108 requires an entity to
quantify misstatements using both a balance sheet and income
statement approach to determine if a misstatement is material.
The evaluation requirements of SAB No. 108 are
effective for years ending after November 15, 2006. We are
in the process of determining what effect, if any, the adoption
of SAB No. 108 will have on our consolidated financial
statements.
50
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measures, which defines fair value,
establishes a framework for measuring fair value and expands
disclosures about assets and liabilities measured at fair value.
The statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007. We are in
the process of determining what effect, if any, the adoption of
SFAS No. 157 will have on our consolidated financial
statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Market
Risk Disclosures
We are exposed to market risk related to changes in interest
rates, equity market prices, and foreign currency exchange
rates. We do not use derivative financial instruments for
speculative or trading purposes.
Interest
Rate Risk
We maintain an investment portfolio consisting mainly of income
securities with an average maturity of three years or less.
These
available-for-sale
securities are subject to interest rate risk and will fall in
value if market interest rates increase. We have the ability to
hold our fixed income investments until maturity, and therefore
we would not expect our operating results or cash flows to be
affected to any significant degree by the effect of a sudden
change in market interest rates on our securities portfolio. The
following table presents the principal amounts and related
weighted-average yields for our investments with interest rate
risk at September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006
|
|
|
September 30, 2005
|
|
|
|
Cost
|
|
|
Carrying
|
|
|
Average
|
|
|
Cost
|
|
|
Carrying
|
|
|
Average
|
|
|
|
Basis
|
|
|
Amount
|
|
|
Yield
|
|
|
Basis
|
|
|
Amount
|
|
|
Yield
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
75,178
|
|
|
$
|
75,154
|
|
|
|
2.85
|
%
|
|
$
|
82,883
|
|
|
$
|
82,880
|
|
|
|
3.27
|
%
|
Short-term investments
|
|
|
152,446
|
|
|
|
152,141
|
|
|
|
4.79
|
%
|
|
|
146,543
|
|
|
|
146,088
|
|
|
|
3.26
|
%
|
Long-term investments
|
|
|
33,306
|
|
|
|
33,254
|
|
|
|
5.10
|
%
|
|
|
53,002
|
|
|
|
52,503
|
|
|
|
3.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
260,930
|
|
|
$
|
260,549
|
|
|
|
4.27
|
%
|
|
$
|
282,428
|
|
|
$
|
281,471
|
|
|
|
3.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We are the issuer of 1.5% Senior Convertible Notes
(Senior Notes) that mature in August 2023. The fair
value of our Senior Notes, including the New Notes issued in the
exchange offer completed on March 31, 2005, as determined
based on quoted market prices, may increase or decrease due to
various factors, including fluctuations in the market price of
our common stock, fluctuations in market interest rates and
fluctuations in general economic conditions. See
Managements Discussion and Analysis of Financial Condition
and Results of Operations Capital Resources and
Liquidity, above, for additional information on these notes. The
following table presents the principal amounts, carrying
amounts, and fair values for our Senior Notes at
September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006
|
|
|
September 30, 2005
|
|
|
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Principal
|
|
|
Amount
|
|
|
Value
|
|
|
Principal
|
|
|
Amount
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Senior Notes
|
|
$
|
400,000
|
|
|
$
|
400,000
|
|
|
$
|
407,000
|
|
|
$
|
400,000
|
|
|
$
|
400,000
|
|
|
$
|
446,497
|
|
Forward
Foreign Currency Contracts
We maintain a program to manage our foreign currency exchange
rate risk on existing foreign currency receivable and bank
balances by entering into forward contracts to sell or buy
foreign currency. At period end, foreign-denominated receivables
and cash balances held by our U.S. reporting entities are
remeasured into the U.S. dollar functional currency at
current market rates. The change in value from this
remeasurement is then reported as a foreign exchange gain or
loss for that period in our accompanying consolidated statements
of income and the resulting gain or loss on the forward contract
mitigates the exchange rate risk of the associated assets. All
of our forward foreign currency contracts have maturity periods
of less than three months. Such derivative financial instruments
are subject to market risk.
51
The following table summarizes our outstanding forward foreign
currency contracts, by currency at September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Amount
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
Fair Value
|
|
|
|
Currency
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Sell foreign currency:
|
|
|
|
|
|
|
|
|
|
|
|
|
EURO (EUR)
|
|
|
EUR 6,650
|
|
|
$
|
8,468
|
|
|
$
|
|
|
Japanese Yen (YEN)
|
|
|
YEN 100,000
|
|
|
|
854
|
|
|
|
|
|
Buy foreign currency:
|
|
|
|
|
|
|
|
|
|
|
|
|
British Pound (GBP)
|
|
|
GBP 3,174
|
|
|
$
|
6,000
|
|
|
$
|
|
|
The forward foreign currency contracts were all entered into on
September 30, 2006, therefore, the fair value was $0 on
that date.
52
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Fair Isaac Corporation
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of
Fair Isaac Corporation and subsidiaries (the
Company) as of September 30, 2006 and 2005, and
the related consolidated statements of income,
stockholders equity and comprehensive income and cash
flows for each of the two years in the period ended
September 30, 2006. These consolidated financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits. The consolidated
financial statements of the Company for the year ended
September 30, 2004 were audited by other auditors whose
report, dated November 10, 2004 (except as to the fifth
paragraph of Note 1, which is as of February 24,
2005), expressed an unqualified opinion on those statements.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). 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, such fiscal 2006 and 2005 consolidated financial
statements present fairly, in all material respects, the
financial position of the Company as of September 30, 2006
and 2005, and the results of its operations and its cash flows
for each of the two years in the period ended September 30,
2006 in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Note 15 to the consolidated financial
statements, the Company changed its method of accounting for
share-based payments to conform to Statement of Financial
Accounting Standards No. 123(R), Share-Based
Payment, as of October 1, 2005.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of September 30, 2006, based on the
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
December 8, 2006 expressed an unqualified opinion on
managements assessment of the effectiveness of the
Companys internal control over financial reporting and an
unqualified opinion on the effectiveness of the Companys
internal control over financial reporting.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
December 8, 2006
53
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Fair Isaac Corporation:
We have audited the accompanying consolidated statements of
income, stockholders equity and comprehensive income, and
cash flows of Fair Isaac Corporation and subsidiaries (the
Company) for the year ended September 30, 2004.
These consolidated financial statements are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements
based on our audits.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects the results of
operations and cash flows of the Company for the year ended
September 30, 2004, in conformity with U.S. generally
accepted accounting principles.
/s/ KPMG LLP
San Diego, California
November 10, 2004, except as to the fifth
paragraph of Note 1, which is as of
February 24, 2005
54
FAIR
ISAAC CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value data)
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
Assets
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
75,154
|
|
|
$
|
82,880
|
|
Marketable securities available
for sale, current portion
|
|
|
152,141
|
|
|
|
146,088
|
|
Receivables, net
|
|
|
165,806
|
|
|
|
156,375
|
|
Prepaid expenses and other current
assets
|
|
|
17,998
|
|
|
|
20,249
|
|
Deferred income taxes
|
|
|
2,211
|
|
|
|
7,088
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
413,310
|
|
|
|
412,680
|
|
Marketable securities available
for sale, less current portion
|
|
|
38,318
|
|
|
|
56,926
|
|
Other investments
|
|
|
2,161
|
|
|
|
2,161
|
|
Property and equipment, net
|
|
|
56,611
|
|
|
|
48,436
|
|
Goodwill
|
|
|
695,162
|
|
|
|
688,683
|
|
Intangible assets, net
|
|
|
90,900
|
|
|
|
114,623
|
|
Deferred income taxes
|
|
|
20,010
|
|
|
|
19,902
|
|
Other assets
|
|
|
4,733
|
|
|
|
7,650
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,321,205
|
|
|
$
|
1,351,061
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Stockholders Equity
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
12,162
|
|
|
$
|
11,579
|
|
Senior convertible notes
|
|
|
400,000
|
|
|
|
|
|
Accrued compensation and employee
benefits
|
|
|
34,936
|
|
|
|
31,373
|
|
Other accrued liabilities
|
|
|
41,647
|
|
|
|
39,368
|
|
Deferred revenue
|
|
|
48,284
|
|
|
|
55,837
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
537,029
|
|
|
|
138,157
|
|
Senior convertible notes
|
|
|
|
|
|
|
400,000
|
|
Other liabilities
|
|
|
14,148
|
|
|
|
7,810
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
551,177
|
|
|
|
545,967
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock ($0.01 par
value; 1,000 shares authorized; none issued and outstanding)
|
|
|
|
|
|
|
|
|
Common stock ($0.01 par
value; 200,000 shares authorized, 88,857 shares issued
and 59,369 and 63,836 shares outstanding at
September 30, 2006 and 2005, respectively)
|
|
|
594
|
|
|
|
638
|
|
Paid-in-capital
|
|
|
1,073,886
|
|
|
|
1,037,524
|
|
Treasury stock, at cost (29,488
and 25,021 shares at September 30, 2006 and 2005,
respectively)
|
|
|
(952,979
|
)
|
|
|
(775,746
|
)
|
Unearned compensation
|
|
|
|
|
|
|
(1,284
|
)
|
Retained earnings
|
|
|
644,836
|
|
|
|
546,450
|
|
Accumulated other comprehensive
income (loss)
|
|
|
3,691
|
|
|
|
(2,488
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
770,028
|
|
|
|
805,094
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,321,205
|
|
|
$
|
1,351,061
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
55
FAIR
ISAAC CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Revenues
|
|
$
|
825,365
|
|
|
$
|
798,671
|
|
|
$
|
706,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (1)
|
|
|
281,977
|
|
|
|
275,065
|
|
|
|
252,587
|
|
Research and development
|
|
|
84,967
|
|
|
|
81,295
|
|
|
|
71,088
|
|
Selling, general and
administrative (1)
|
|
|
260,845
|
|
|
|
223,400
|
|
|
|
182,374
|
|
Amortization of intangible assets
(1)
|
|
|
25,191
|
|
|
|
25,900
|
|
|
|
19,064
|
|
Restructuring and
acquisition-related
|
|
|
19,662
|
|
|
|
|
|
|
|
1,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
672,642
|
|
|
|
605,660
|
|
|
|
526,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
152,723
|
|
|
|
193,011
|
|
|
|
179,866
|
|
Interest income
|
|
|
15,248
|
|
|
|
8,402
|
|
|
|
9,998
|
|
Interest expense
|
|
|
(8,569
|
)
|
|
|
(8,347
|
)
|
|
|
(16,942
|
)
|
Loss on redemption of convertible
subordinated notes
|
|
|
|
|
|
|
|
|
|
|
(11,137
|
)
|
Other income (expense), net
|
|
|
(210
|
)
|
|
|
1,022
|
|
|
|
7,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
159,192
|
|
|
|
194,088
|
|
|
|
168,815
|
|
Provision for income taxes
|
|
|
55,706
|
|
|
|
59,540
|
|
|
|
66,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
103,486
|
|
|
$
|
134,548
|
|
|
$
|
102,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.63
|
|
|
$
|
2.02
|
|
|
$
|
1.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.59
|
|
|
$
|
1.86
|
|
|
$
|
1.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
63,579
|
|
|
|
66,556
|
|
|
|
69,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
65,125
|
|
|
|
73,584
|
|
|
|
82,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Cost of revenues and selling, general and administrative
expenses exclude the amortization of intangible assets. See
Note 7 to consolidated financial statements. |
See accompanying notes to consolidated financial statements.
56
FAIR
ISAAC CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME
Years Ended September 30, 2006, 2005 and 2004
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Par
|
|
|
Paid-In-
|
|
|
Treasury
|
|
|
Unearned
|
|
|
Retained
|
|
|
Income
|
|
|
Stockholders
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Stock
|
|
|
Compensation
|
|
|
Earnings
|
|
|
(Loss)
|
|
|
Equity
|
|
|
Income
|
|
|
|
|
|
Balance at September 30,
2003
|
|
|
69,868
|
|
|
$
|
699
|
|
|
$
|
1,019,614
|
|
|
$
|
(486,477
|
)
|
|
$
|
(3,710
|
)
|
|
$
|
319,341
|
|
|
$
|
75
|
|
|
$
|
849,542
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
2,472
|
|
|
|
25
|
|
|
|
17,799
|
|
|
|
28,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,099
|
|
|
|
|
|
|
|
|
|
Tax benefit from exercised stock
options
|
|
|
|
|
|
|
|
|
|
|
15,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,927
|
|
|
|
|
|
|
|
|
|
Amortization of unearned
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,569
|
|
|
|
|
|
|
|
|
|
|
|
1,569
|
|
|
|
|
|
|
|
|
|
Options exchanged in London Bridge
acquisition
|
|
|
|
|
|
|
|
|
|
|
1,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,320
|
|
|
|
|
|
|
|
|
|
Forfeitures of restricted stock and
stock options
|
|
|
(12
|
)
|
|
|
|
|
|
|
(65
|
)
|
|
|
(262
|
)
|
|
|
327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchases of common stock
|
|
|
(3,011
|
)
|
|
|
(30
|
)
|
|
|
(1
|
)
|
|
|
(101,094
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(101,125
|
)
|
|
|
|
|
|
|
|
|
Issuance of ESPP shares from
treasury
|
|
|
268
|
|
|
|
3
|
|
|
|
(157
|
)
|
|
|
7,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,427
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,669
|
)
|
|
|
|
|
|
|
(4,669
|
)
|
|
|
|
|
|
|
|
|
Cash paid in lieu of fractional
shares in effecting stock split
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(242
|
)
|
|
|
|
|
|
|
(242
|
)
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102,788
|
|
|
|
|
|
|
|
102,788
|
|
|
$
|
102,788
|
|
|
|
|
|
Unrealized losses on investments,
net of tax of $568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(932
|
)
|
|
|
(932
|
)
|
|
|
(932
|
)
|
|
|
|
|
Cumulative translation adjustments
net of tax of $1,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,233
|
)
|
|
|
(1,233
|
)
|
|
|
(1,233
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30,
2004
|
|
|
69,579
|
|
|
|
697
|
|
|
|
1,054,437
|
|
|
|
(551,977
|
)
|
|
|
(1,814
|
)
|
|
|
417,218
|
|
|
|
(2,090
|
)
|
|
|
916,471
|
|
|
$
|
100,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
3,299
|
|
|
|
33
|
|
|
|
(35,145
|
)
|
|
|
98,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,188
|
|
|
|
|
|
|
|
|
|
Tax benefit from exercised stock
options
|
|
|
|
|
|
|
|
|
|
|
12,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,711
|
|
|
|
|
|
|
|
|
|
Amortization of unearned
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,927
|
|
|
|
|
|
|
|
|
|
|
|
2,927
|
|
|
|
|
|
|
|
|
|
Options exchanged in Braun
acquisition
|
|
|
|
|
|
|
|
|
|
|
2,417
|
|
|
|
|
|
|
|
(394
|
)
|
|
|
|
|
|
|
|
|
|
|
2,023
|
|
|
|
|
|
|
|
|
|
Forfeitures of restricted stock and
stock options
|
|
|
(13
|
)
|
|
|
|
|
|
|
35
|
|
|
|
(291
|
)
|
|
|
256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Release of common stock from escrow
|
|
|
(102
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
(2,201
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,202
|
)
|
|
|
|
|
|
|
|
|
Repurchases of common stock
|
|
|
(9,225
|
)
|
|
|
(94
|
)
|
|
|
|
|
|
|
(328,443
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(328,537
|
)
|
|
|
|
|
|
|
|
|
Issuance of ESPP shares from
treasury
|
|
|
298
|
|
|
|
3
|
|
|
|
(190
|
)
|
|
|
8,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,679
|
|
|
|
|
|
|
|
|
|
Senior convertible notes exchange
offer premium
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,316
|
)
|
|
|
|
|
|
|
(5,316
|
)
|
|
|
|
|
|
|
|
|
Stock-based unearned compensation
|
|
|
|
|
|
|
|
|
|
|
2,259
|
|
|
|
|
|
|
|
(2,259
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134,548
|
|
|
|
|
|
|
|
134,548
|
|
|
$
|
134,548
|
|
|
|
|
|
Unrealized losses on investments,
net of tax of $97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(172
|
)
|
|
|
(172
|
)
|
|
|
(172
|
)
|
|
|
|
|
Cumulative translation adjustments,
net of tax of $134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(226
|
)
|
|
|
(226
|
)
|
|
|
(226
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30,
2005
|
|
|
63,836
|
|
|
|
638
|
|
|
|
1,037,524
|
|
|
|
(775,746
|
)
|
|
|
(1,284
|
)
|
|
|
546,450
|
|
|
|
(2,488
|
)
|
|
|
805,094
|
|
|
$
|
134,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
42,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,085
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
2,104
|
|
|
|
21
|
|
|
|
(10,993
|
)
|
|
|
65,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,916
|
|
|
|
|
|
|
|
|
|
Tax benefit from exercised stock
options
|
|
|
|
|
|
|
|
|
|
|
10,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,571
|
|
|
|
|
|
|
|
|
|
Reclassification due to the
adoption of SFAS No. 123(R)
|
|
|
|
|
|
|
|
|
|
|
(1,284
|
)
|
|
|
|
|
|
|
1,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeitures of restricted stock and
stock options
|
|
|
(22
|
)
|
|
|
|
|
|
|
51
|
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchases of common stock
|
|
|
(6,971
|
)
|
|
|
(69
|
)
|
|
|
|
|
|
|
(256,418
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(256,487
|
)
|
|
|
|
|
|
|
|
|
Issuance of ESPP shares from
treasury
|
|
|
300
|
|
|
|
3
|
|
|
|
(185
|
)
|
|
|
9,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,284
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock to
employees from treasury
|
|
|
122
|
|
|
|
1
|
|
|
|
(3,883
|
)
|
|
|
3,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,100
|
)
|
|
|
|
|
|
|
(5,100
|
)
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,486
|
|
|
|
|
|
|
|
103,486
|
|
|
$
|
103,486
|
|
|
|
|
|
Unrealized gains on investments,
net of tax of $206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
368
|
|
|
|
368
|
|
|
|
368
|
|
|
|
|
|
Cumulative translation adjustments,
net of tax of $3,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,811
|
|
|
|
5,811
|
|
|
|
5,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30,
2006
|
|
|
59,369
|
|
|
$
|
594
|
|
|
$
|
1,073,886
|
|
|
$
|
(952,979
|
)
|
|
$
|
|
|
|
$
|
644,836
|
|
|
$
|
3,691
|
|
|
$
|
770,028
|
|
|
$
|
109,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
57
FAIR
ISAAC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
103,486
|
|
|
$
|
134,548
|
|
|
$
|
102,788
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
48,805
|
|
|
|
51,517
|
|
|
|
46,881
|
|
Share-based compensation
|
|
|
42,085
|
|
|
|
2,927
|
|
|
|
1,569
|
|
Loss on redemption of convertible
subordinated notes
|
|
|
|
|
|
|
|
|
|
|
11,137
|
|
Amortization of discount on
convertible subordinated notes
|
|
|
|
|
|
|
|
|
|
|
1,437
|
|
Share of equity in loss of
investments
|
|
|
|
|
|
|
|
|
|
|
19
|
|
Gain on sales of marketable
securities
|
|
|
|
|
|
|
|
|
|
|
(7,590
|
)
|
Deferred income taxes
|
|
|
1,125
|
|
|
|
13,279
|
|
|
|
11,911
|
|
Tax benefit from exercised stock
options
|
|
|
10,571
|
|
|
|
12,711
|
|
|
|
15,927
|
|
Excess tax benefits from
share-based payment arrangements
|
|
|
(7,094
|
)
|
|
|
|
|
|
|
|
|
Net amortization (accretion) of
premium (discount) on marketable securities
|
|
|
(110
|
)
|
|
|
420
|
|
|
|
(932
|
)
|
Provision for doubtful accounts
|
|
|
2,200
|
|
|
|
3,691
|
|
|
|
1,367
|
|
Net loss on sales of property and
equipment
|
|
|
70
|
|
|
|
71
|
|
|
|
185
|
|
Changes in operating assets and
liabilities, net of acquisition effects:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(9,686
|
)
|
|
|
(7,527
|
)
|
|
|
11,294
|
|
Prepaid expenses and other assets
|
|
|
4,489
|
|
|
|
(2,485
|
)
|
|
|
5,320
|
|
Accounts payable
|
|
|
126
|
|
|
|
(1,773
|
)
|
|
|
(5,305
|
)
|
Accrued compensation and employee
benefits
|
|
|
3,326
|
|
|
|
(2,395
|
)
|
|
|
4,079
|
|
Other liabilities
|
|
|
7,686
|
|
|
|
(8,665
|
)
|
|
|
(5,254
|
)
|
Deferred revenue
|
|
|
(8,037
|
)
|
|
|
17,763
|
|
|
|
4,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
199,042
|
|
|
|
214,082
|
|
|
|
199,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(31,409
|
)
|
|
|
(16,414
|
)
|
|
|
(23,204
|
)
|
Collections of notes receivable
from sale of product lines
|
|
|
500
|
|
|
|
750
|
|
|
|
2,700
|
|
Cash paid for acquisitions, net of
cash acquired
|
|
|
|
|
|
|
(41,312
|
)
|
|
|
(284,731
|
)
|
Cash proceeds from disposition of
London Bridge Phoenix Software, Inc.
|
|
|
|
|
|
|
22,672
|
|
|
|
|
|
Purchases of marketable securities
|
|
|
(176,251
|
)
|
|
|
(241,273
|
)
|
|
|
(738,241
|
)
|
Proceeds from sales of marketable
securities
|
|
|
53,390
|
|
|
|
118,472
|
|
|
|
883,852
|
|
Proceeds from maturities of
marketable securities
|
|
|
136,743
|
|
|
|
154,804
|
|
|
|
167,508
|
|
Investment in cost-method investee
|
|
|
|
|
|
|
(600
|
)
|
|
|
(466
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
investing activities
|
|
|
(17,027
|
)
|
|
|
(2,901
|
)
|
|
|
7,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments for redemption of
convertible subordinated notes
|
|
|
|
|
|
|
|
|
|
|
(153,938
|
)
|
Proceeds from issuances of common
stock under employee stock option and purchase plans
|
|
|
64,200
|
|
|
|
71,867
|
|
|
|
53,526
|
|
Dividends paid
|
|
|
(5,100
|
)
|
|
|
(5,316
|
)
|
|
|
(4,669
|
)
|
Repurchases of common stock
|
|
|
(256,487
|
)
|
|
|
(328,537
|
)
|
|
|
(101,125
|
)
|
Excess tax benefits from
share-based payment arrangements
|
|
|
7,094
|
|
|
|
|
|
|
|
|
|
Cash paid in lieu of fractional
shares in effecting stock split
|
|
|
|
|
|
|
|
|
|
|
(242
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing
activities
|
|
|
(190,293
|
)
|
|
|
(261,986
|
)
|
|
|
(206,448
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes
on cash
|
|
|
552
|
|
|
|
(385
|
)
|
|
|
568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and
cash equivalents
|
|
|
(7,726
|
)
|
|
|
(51,190
|
)
|
|
|
687
|
|
Cash and cash equivalents,
beginning of year
|
|
|
82,880
|
|
|
|
134,070
|
|
|
|
133,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
year
|
|
$
|
75,154
|
|
|
$
|
82,880
|
|
|
$
|
134,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash
flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes, net of
refunds of $2,378, $2,951 and $4,351 during the years ended
September 30, 2006, 2005 and 2004, respectively
|
|
$
|
37,586
|
|
|
$
|
23,932
|
|
|
$
|
41,323
|
|
Cash paid for interest
|
|
$
|
6,000
|
|
|
$
|
6,000
|
|
|
$
|
14,178
|
|
See accompanying notes to consolidated financial statements.
58
FAIR
ISAAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2006, 2005 and 2004
|
|
1.
|
Nature of
Business and Summary of Significant Accounting
Policies
|
Fair
Isaac Corporation
Incorporated under the laws of the State of Delaware, Fair Isaac
Corporation is a provider of analytic, software and data
management products and services that enable businesses to
automate and improve decisions. Fair Isaac Corporation provides
a range of analytical solutions, credit scoring and credit
account management products and services to banks, credit
reporting agencies, credit card processing agencies, insurers,
retailers, telecommunications providers, healthcare
organizations and government agencies.
In these consolidated financial statements, Fair Isaac
Corporation is referred to as we, us,
our, and Fair Isaac.
Principles
of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of
Fair Isaac and its subsidiaries. All intercompany accounts and
transactions have been eliminated.
Use of
Estimates
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from
those estimates. These estimates and assumptions include, but
are not limited to, assessing the following: the recoverability
of accounts receivable, goodwill and other intangible assets,
software development costs and deferred tax assets; the ability
to estimate hours in connection with fixed-fee service
contracts, the ability to estimate transactional-based revenues
for which actual transaction volumes have not yet been received,
and the determination of whether fees are fixed or determinable
and collection is probable or reasonably assured.
Adoption
of Accounting Pronouncement
We adopted the Emerging Issues Task Force (EITF)
consensus with respect to Issue
No. 04-8,
The Effect of Contingently Convertible Instruments on Diluted
Earnings Per Share, during fiscal 2005. This consensus
requires us to consider all instruments with contingent
conversion features that are based on the market price of our
own stock in our diluted earnings per share calculation,
regardless of whether the market price conversion triggers are
met. As required by the consensus, we have restated our diluted
earnings per share calculations for fiscal 2004 to include the
shares of our common stock issuable upon conversion of our
Senior Convertible Notes (Senior Notes) using the
if converted method.
Cash
and Cash Equivalents
Cash and cash equivalents consist of cash in banks and
investments with a maturity of 90 days or less at time of
purchase.
Fair
Value of Financial Instruments
The fair value of certain of our financial instruments,
including cash and cash equivalents, receivables, and other
current assets, accounts payable, accrued compensation and
employee benefits, and other accrued liabilities, approximate
their carrying amounts because of the short-term maturity of
these instruments. The fair values of our cash and cash
equivalents, marketable security investments are disclosed in
Note 4. The fair value of our cost-method investment
approximates its recorded value. The fair value of our senior
convertible notes is disclosed in Note 9.
59
FAIR
ISAAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended September 30, 2006, 2005 and 2004
Investments
Management determines the appropriate classification of our
investments in marketable debt and equity securities at the time
of purchase, and re-evaluates this designation at each balance
sheet date. While it is our intent to hold debt securities to
maturity, our investments in U.S. government obligations
and marketable equity and debt securities that have readily
determinable fair values are classified as
available-for-sale,
as the sale of such securities may be required prior to maturity
to implement management strategies. Therefore, such securities
are carried at fair value with unrealized gains or losses
related to these securities included in comprehensive income
(loss). Realized gains and losses are included in other income
(expense), net. The cost of investments sold is based on the
specific identification method. Losses resulting from other than
temporary declines in fair value are charged to operations.
Investments with remaining maturities over one year are
classified as long-term investments.
Our investments in equity securities of companies over which we
do not have significant influence are accounted for under the
cost method. Investments in which we own 20% to 50% and exercise
significant influence over operating and financial policies are
accounted for using the equity method. Under the equity method,
the investment is originally recorded at cost and adjusted to
recognize our share of net earnings or losses of the investee,
limited to the extent of our investment in, advances to, and
financial guarantees for the investee. Under the cost method,
the investment is originally recorded at cost and adjusted for
additional contributions or distributions. Management
periodically reviews equity-method and cost-method investments
for instances where fair value is less than the carrying amount
and the decline in value is determined to be other than
temporary. If the decline in value is judged to be other than
temporary, the carrying amount of the security is written down
to fair value and the resulting loss is charged to operations.
Concentration
of Risk
Financial instruments that potentially expose us to
concentrations of risk consist primarily of cash and cash
equivalents, marketable securities and accounts receivable,
which are generally not collateralized. Our policy is to place
our cash, cash equivalents, and marketable securities with high
credit quality financial institutions, commercial corporations
and government agencies in order to limit the amount of credit
exposure. We have established guidelines relative to
diversification and maturities for maintaining safety and
liquidity. We generally do not require collateral from our
customers, but our credit extension and collection policies
include analyzing the financial condition of potential
customers, establishing credit limits, monitoring payments, and
aggressively pursuing delinquent accounts. We maintain
allowances for potential credit losses.
Property
and Equipment
Property and equipment are recorded at cost less accumulated
depreciation and amortization. Major renewals and improvements
are capitalized, while repair and maintenance costs are expensed
as incurred. Depreciation and amortization charges are
calculated using the straight-line method over the following
estimated useful lives:
|
|
|
|
|
Estimated Useful Life
|
|
Data processing equipment and
software
|
|
2 to 3 years
|
Office furniture, vehicles and
equipment
|
|
3 to 7 years
|
Leasehold improvements
|
|
Shorter of estimated
useful life or lease term
|
The cost and accumulated depreciation for property and equipment
sold, retired or otherwise disposed of are removed from the
accounts and resulting gains or losses are recorded in
operations. Depreciation and amortization on property and
equipment totaled $23.6 million, $24.3 million and
$26.1 million during fiscal 2006, 2005 and 2004,
respectively.
60
FAIR
ISAAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended September 30, 2006, 2005 and 2004
Internal-use
Software
Costs incurred to develop internal-use software during the
application development stage are capitalized and reported at
cost, subject to an impairment test as described below.
Application development stage costs generally include costs
associated with internal-use software configuration, coding,
installation and testing. Costs of significant upgrades and
enhancements that result in additional functionality are also
capitalized whereas costs incurred for maintenance and minor
upgrades and enhancements are expensed as incurred. Capitalized
costs are amortized using the straight-line method over two to
three years.
We assess potential impairment of capitalized internal-use
software whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the future
undiscounted net cash flows that are expected to be generated by
the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. We
capitalized $0.8 million, $1.1 million and
$4.8 million in fiscal 2006, 2005 and 2004, respectively.
Amortization expense related to internal-use software was
$2.5 million, $3.0 million and $2.8 million in
fiscal 2006, 2005 and 2004, respectively.
Capitalized
Software Development Costs
All costs incurred prior to the resolution of unproven
functionality and features, including new technologies, are
expensed as research and development. After the uncertainties
have been tested and the development issues have been resolved
and technological feasibility is achieved, subsequent direct
costs such as coding, debugging and testing are capitalized.
Capitalized software development costs are amortized using the
greater of the amount computed using (a) the ratio that
current gross revenues for a product bear to the total of
current and anticipated future gross revenues for that product
or (b) the straight-line method over the remaining
estimated economic life of the product. Capitalized software
development costs were $0, net of accumulated amortization of
$3.4 million as of September 30, 2006 and 2005, and
are included in other long-term assets in the accompanying
consolidated balance sheets. Amortization expense related to
capitalized software development costs totaled $0,
$1.3 million and $1.7 million during fiscal 2006, 2005
and 2004, respectively.
At each balance sheet date, we compare a products
unamortized capitalized cost to the products estimated net
realizable value. To the extent unamortized capitalized costs
exceed net realizable value based on the products
estimated future gross revenues, reduced by the estimated future
costs of completing and disposing of the product, the excess is
written off. This analysis requires us to estimate future gross
revenues associated with certain products, and the future costs
of completing and disposing of certain products. If these
estimates change, reductions or write-offs of capitalized
software development costs could result. No write-offs were
recorded during fiscal 2006, 2005 or 2004.
Goodwill
and Intangible Assets
Goodwill and intangible assets with indefinite lives are tested
for impairment at least annually or more frequently if
impairment indicators arise. Goodwill represents the excess of
the purchase price over the fair value of net assets acquired,
including identified intangible assets, in connection with our
business combinations accounted for by the purchase method of
accounting (see Note 2).
61
FAIR
ISAAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended September 30, 2006, 2005 and 2004
We amortize our intangible assets, which result from our
acquisitions accounted for under the purchase method of
accounting, using the straight-line method or based on the
forecasted cash flows associated with the assets over the
following estimated useful lives:
|
|
|
|
|
|
|
Estimated Useful Life
|
|
Completed technology
|
|
|
5 to 6 years
|
|
Customer contracts and
relationships
|
|
|
2 to 15 years
|
|
Trade names
|
|
|
5 years
|
|
Other
|
|
|
3 years
|
|
Revenue
Recognition
Software license fee revenue is recognized when persuasive
evidence of an arrangement exists, delivery of the product has
occurred at our customers location, the fee is fixed or
determinable and collection is probable. We use the residual
method to recognize revenue when an arrangement includes one or
more elements to be delivered at a future date and
vendor-specific objective evidence (VSOE) of the
fair value of all undelivered elements exists. VSOE of fair
value is based on the normal pricing practices for those
products and services when sold separately by us and customer
renewal rates for post-contract customer support services. Under
the residual method, the fair value of the undelivered elements
is deferred and the remaining portion of the arrangement fee is
recognized as revenue. If evidence of the fair value of one or
more undelivered elements does not exist, the revenue is
deferred and recognized when delivery of those elements occurs
or when fair value can be established. The determination of
whether fees are fixed or determinable and collection is
probable involves the use of assumptions. We evaluate contract
terms and customer information to ensure that these criteria are
met prior to our recognition of license fee revenue.
When software licenses are sold together with implementation or
consulting services, license fees are recognized upon delivery
provided that the above criteria are met, payment of the license
fees is not dependent upon the performance of the services, and
the services do not provide significant customization or
modification of the software products and are not essential to
the functionality of the software that was delivered. For
arrangements with services that are essential to the
functionality of the software, the license and related service
revenues are recognized using contract accounting as described
below.
If at the outset of an arrangement we determine that the
arrangement fee is not fixed or determinable, revenue is
deferred until the arrangement fee becomes due assuming all
other revenue recognition criteria have been met. If at the
outset of an arrangement we determine that collectibility is not
probable, revenue is deferred until the earlier of when
collectibility becomes probable or the receipt of payment. If
there is uncertainty to the customers acceptance of our
deliverables, revenue is not recognized until the earlier of
receipt of customer acceptance, expiration of the acceptance
period or where we can demonstrate we meet the acceptance
criteria.
Revenues from post-contract customer support services, such as
software maintenance, are recognized on a straight-line basis
over the term of the support period. The majority of our
software maintenance agreements provide technical support as
well as unspecified software product upgrades and releases when
and if made available by us during the term of the support
period.
Revenues recognized from our credit scoring, data processing,
data management and internet delivery services are recognized as
these services are performed, provided persuasive evidence of an
arrangement exists, fees are fixed or determinable, and
collection is reasonably assured. The determination of certain
of our credit scoring and data processing revenues requires the
use of estimates, principally related to transaction volumes in
instances where these volumes are reported to us by our clients
on a monthly or quarterly basis in arrears. In these instances,
we estimate transaction volumes based on preliminary customer
transaction information, if available, or based on
62
FAIR
ISAAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended September 30, 2006, 2005 and 2004
average actual reported volumes for an immediate trailing
period. Differences between our estimates and actual final
volumes reported are recorded in the period in which actual
volumes are reported.
Transactional or unit-based license fees under software license
arrangements, network service and internally-hosted software
agreements are recognized as revenue based on system usage or
when fees based on system usage exceed monthly minimum license
fees, provided persuasive evidence of an arrangement exists,
fees are fixed or determinable and collection is probable. The
determination of certain of our transactional or unit-based
license fee revenues requires the use of estimates, principally
related to transaction usage or active account volumes in
instances where this information is reported to us by our
clients on a monthly or quarterly basis in arrears. In these
instances, we estimate transaction volumes based on preliminary
customer transaction information, if available, or based on
average actual reported volumes for an immediate trailing
period. Differences between our estimates and actual final
volumes reported are recorded in the period in which actual
volumes are reported.
We provide consulting, training, model development and software
integration services under both hourly-based time and materials
and fixed-priced contracts. Revenues from these services are
generally recognized as the services are performed. For
fixed-price service contracts, we apply the
percentage-of-completion
method of contract accounting to determine progress towards
completion, which requires the use of estimates. In such
instances, management is required to estimate the input
measures, generally based on hours incurred to date compared to
total estimated hours of the project, with consideration also
given to output measures, such as contract milestones, when
applicable. Adjustments to estimates are made in the period in
which the facts requiring such revisions become known and,
accordingly, recognized revenues and profits are subject to
revisions as the contract progresses to completion. Estimated
losses, if any, are recorded in the period in which current
estimates of total contract revenue and contract costs indicate
a loss. If substantive uncertainty related to customer
acceptance of services exists, we apply the completed contract
method of accounting and defer the associated revenue until the
contract is completed.
Revenue recognized under the
percentage-of-completion
method in excess of contract billings is recorded as an unbilled
receivable. Such amounts are generally billable upon reaching
certain performance milestones as defined by individual
contracts. Billings collected in advance of performance and
recognition of revenue under contracts are recorded as deferred
revenue.
In certain of our non-software arrangements, we enter into
contracts that include the delivery of a combination of two or
more of our service offerings. Typically, such multiple element
arrangements incorporate the design and development of data
management tools or systems and an ongoing obligation to manage,
host or otherwise run solutions for our customer. Such
arrangements are divided into separate units of accounting
provided that the delivered item has stand-alone value and there
is objective and reliable evidence of the fair value of the
undelivered items. The total arrangement fee is allocated to the
undelivered elements based on their fair values and to the
initial delivered elements using the residual method. Revenue is
recognized separately, and in accordance with our revenue
recognition policy, for each element.
As described above, sometimes our customer arrangements have
multiple deliverables, including service elements. Generally,
our multiple element arrangements fall within the scope of
specific accounting standards that provide guidance regarding
the separation of elements in multiple-deliverable arrangements
and the allocation of consideration among those elements (e.g.,
American Institute of Certified Public Accountants Statement of
Position (SOP)
No. 97-2,
Software Revenue Recognition, as amended). If not, we
apply the separation provisions of Emerging Issues Task Force
(EITF) Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables. The
provisions of EITF Issue
No. 00-21
require us to unbundle multiple element arrangements into
separate units of accounting when the delivered element(s) has
stand-alone value and fair value of the undelivered element(s)
exists. When we are able to unbundle the arrangement into
separate units of accounting, we apply one of the accounting
policies described above to each unit. If we are unable to
unbundle the arrangement into separate units of
63
FAIR
ISAAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended September 30, 2006, 2005 and 2004
accounting, we apply one of the accounting policies described
above to the entire arrangement. Sometimes this results in
recognizing the entire arrangement fee when delivery of the last
element in a multiple element arrangement occurs. For example,
if the last undelivered element is a service, we recognize
revenue for the entire arrangement fee as the service is
performed, or if no pattern of performance is discernable, we
recognize revenue on a straight-line basis over the term of the
arrangement.
We record revenue on a net basis for those sales in which we
have in substance acted as an agent or broker in the transaction.
Allowance
for Doubtful Accounts
We make estimates regarding the collectibility of our accounts
receivable. When we evaluate the adequacy of our allowance for
doubtful accounts, we analyze specific accounts receivable
balances, historical bad debts, customer creditworthiness,
current economic trends and changes in our customer payment
cycles. Material differences may result in the amount and timing
of expense for any period if we were to make different judgments
or utilize different estimates. If the financial condition of
our customers deteriorates resulting in an impairment of their
ability to make payments, additional allowances might be
required.
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. A deferred income tax asset or liability is computed for
the expected future impact of differences between the financial
reporting and tax bases of assets and liabilities as well as the
expected future tax benefit to be derived from tax loss and tax
credit carryforwards. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount
more likely than not to be realized in future tax
returns. Tax rate changes are reflected in income during the
period the changes are enacted.
Earnings
per Share
Diluted earnings per share are based on the weighted-average
number of common shares outstanding and potential common shares.
Potential common shares result from the assumed exercise of
outstanding stock options or other potentially dilutive equity
instruments, including our outstanding senior convertible notes,
when they are dilutive under the treasury stock method or the
if-converted method. Basic earnings per share are computed on
the basis of the weighted-average number of common shares
outstanding.
Comprehensive
Income
Comprehensive income is the change in our equity (net assets)
during each period from transactions and other events and
circumstances from non-owner sources. It includes net income,
foreign currency translation adjustments and unrealized gains
and losses, net of tax, on our investments in marketable
securities.
Foreign
Currency
We have determined that the functional currency of each foreign
operation is the local currency. Assets and liabilities
denominated in their local foreign currencies are translated
into U.S. dollars at the exchange rate on the balance sheet
date. 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.
64
FAIR
ISAAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended September 30, 2006, 2005 and 2004
From time to time, we utilize forward contract instruments to
manage market risks associated with fluctuations in certain
foreign currency exchange rates as they relate to specific
balances of accounts receivable and cash denominated in foreign
currencies. It is our policy to use derivative financial
instruments to protect against market risks arising in the
normal course of business. Our policies prohibit the use of
derivative instruments for the sole purpose of trading for
profit on price fluctuations or to enter into contracts that
intentionally increase our underlying exposure. All of our
forward foreign currency contracts have maturity periods of less
than three months.
At the end of the reporting period, foreign currency denominated
receivable and cash balances are remeasured into the functional
currency of the reporting entities at current market rates. The
change in value from this remeasurement is reported as a foreign
exchange gain or loss for that period in other income (expense)
in the accompanying consolidated statements of income. The
resulting gains or losses from the forward foreign currency
contracts described above, which are also included in other
income (expense), mitigate the exchange rate risk of the
associated assets.
Share-Based
Compensation
Prior to October 1, 2005, we accounted for our share-based
employee compensation plans under the measurement and
recognition provisions of Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to
Employees, and related Interpretations, as permitted by
Financial Accounting Standards Board Statement of Financial
Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation. We generally
recorded no employee compensation expense for options granted
prior to October 1, 2005 as options granted generally had
exercise prices equal to the fair market value of our common
stock on the date of grant. We also recorded no compensation
expense in connection with our 1999 Employee Stock Purchase Plan
(Purchase Plan) as the purchase price of the stock
was not less than 85% of the lower of the fair market value of
our common stock at the beginning of each offering period or at
the end of each offering period. In accordance with
SFAS No. 123, we disclosed our net income and earnings
per share as if we had applied the fair value-based method in
measuring compensation expense for our share-based incentive
awards.
Effective October 1, 2005, we adopted the fair value
recognition provisions of SFAS No. 123(R),
Share-Based Payment, using the modified prospective
transition method. Under that transition method, compensation
expense that we recognize beginning on that date includes
expense associated with the fair value of all awards granted on
and after October 1, 2005, and expense for the unvested
portion of previously granted awards outstanding on
October 1, 2005. Results for prior periods have not been
restated. See Note 15 for further discussion of the impact
of the adoption of SFAS No. 123(R).
Impairment
of Long-lived Assets
We assess potential impairment to long-lived assets and certain
identifiable intangible assets whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset
to the future undiscounted net cash flows that are expected to
be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the
fair value of the assets. We determined that our long-lived
intangible assets were not impaired at September 30, 2006,
2005 or 2004. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell.
Advertising
and Promotion Costs
Advertising and promotion costs are expensed as incurred.
Advertising and promotion costs totaled $4.3 million,
$5.3 million and $6.5 million in fiscal 2006, 2005 and
2004, respectively, and are included in selling, general and
administrative expenses in the accompanying consolidated
statements of income.
65
FAIR
ISAAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended September 30, 2006, 2005 and 2004
New
Accounting Pronouncements Not Yet Adopted
In July 2006, the FASB issued FASB Interpretation No. 48
(FIN 48), Accounting for Uncertainty in
Income Taxes, which prescribes a recognition threshold and
measurement process for recording in the financial statements
uncertain tax positions taken or expected to be taken in a tax
return. Additionally, FIN 48 provides guidance on the
derecognition, classification, accounting in interim periods and
disclosure requirements for uncertain tax positions. The
accounting provisions of FIN 48 will be effective for the
Company beginning October 1, 2007. We are in the process of
determining what effect, if any, the adoption of FIN 48
will have on our consolidated financial statements.
In September 2006, the Securities and Exchange Commission
(SEC) released Staff Accounting Bulletin
(SAB) No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements, which provided the
Staffs view regarding the process of quantifying financial
statement misstatements. SAB 108 requires an entity to
quantify misstatements using both a balance sheet and income
statement approach to determine if a misstatement is material.
The evaluation requirements of SAB No. 108 are
effective for years ending after November 15, 2006. We are
in the process of determining what effect, if any, the adoption
of SAB No. 108 will have on our consolidated financial
statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measures, which defines fair value,
establishes a framework for measuring fair value and expands
disclosures about assets and liabilities measured at fair value.
The statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007. We are in
the process of determining what effect, if any, the adoption of
SFAS No. 157 will have on our consolidated financial
statements.
RulesPower,
Inc.
On September 23, 2005, we acquired certain assets of
RulesPower, Inc. (RulesPower), a leading provider of
analytics and decision management technology, in exchange for
cash consideration of $6.5 million. The purpose of this
acquisition was to acquire RulesPowers high-performance
business rules management systems. These systems utilize
proprietary execution engines that help users manage large
amounts of data by executing rules faster and more efficiently.
We intend to integrate this technology into Blaze Advisor
systems existing performance optimization capabilities,
rules repository, developer tools, templates for business user
rules management and other Fair Isaac products in which the
Blaze Advisor system is embedded. We accounted for this
transaction using the purchase method of accounting. Our
allocation of the purchase price included $5.3 million for
goodwill and $1.2 million for intangible assets, consisting
of core technology. The acquired intangible assets have an
estimated useful life of five years and are being amortized over
this period using the straight-line method. The goodwill was
allocated entirely to our Analytical Software Tools operating
segment and will be deductible for tax purposes.
Braun
Consulting, Inc.
On November 10, 2004, we acquired all of the issued and
outstanding stock of Braun Consulting, Inc. (Braun),
a marketing strategy and technology consulting firm, in exchange
for cash consideration of $37.1 million and contingent cash
consideration of $3.3 million payable to a former Braun
shareholder if certain revenue parameters are achieved during
either the fiscal year ended September 30, 2005, the two
fiscal years ended September 30, 2006, or the three fiscal
years ended September 30, 2007. These revenue parameters
were not achieved during fiscal 2006 or 2005. The acquisition of
Braun was consummated principally to complement our marketing
solutions and services related to marketing strategy and
customer management technologies, as well as to expand our
capabilities in markets targeted for growth, including
healthcare, retail and pharmaceuticals. Braun is
66
FAIR
ISAAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended September 30, 2006, 2005 and 2004
included in the Professional Services operating segment. The
results of operations of Braun have been included in our results
prospectively from November 10, 2004.
The total purchase price, excluding contingent consideration, is
summarized as follows (in thousands):
|
|
|
|
|
Total cash consideration
|
|
$
|
37,093
|
|
Acquisition-related costs
|
|
|
615
|
|
Fair value of options to purchase
Fair Isaac common stock, less $0.4 million representing the
portion of the intrinsic value of unvested options allocated to
unearned compensation
|
|
|
2,023
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
39,731
|
|
|
|
|
|
|
In connection with the acquisition, we issued 182,000 options to
purchase Fair Isaac common stock in exchange for outstanding
Braun options. The table above reflects the total fair value of
these options based on application of the Black-Scholes option
pricing model, less the portion of the intrinsic value related
to unvested options, which was allocated to unearned
compensation.
Our allocation of the purchase price was as follows (in
thousands):
|
|
|
|
|
Assets:
|
|
|
|
|
Cash, cash equivalents and
marketable securities available for sale
|
|
$
|
9,643
|
|
Receivables, net
|
|
|
7,196
|
|
Prepaid expenses and other current
assets
|
|
|
645
|
|
Deferred income taxes, current
portion
|
|
|
1,907
|
|
Property and equipment
|
|
|
3,405
|
|
Goodwill
|
|
|
9,374
|
|
Intangible assets:
|
|
|
|
|
Customer contracts and
relationships
|
|
|
3,580
|
|
Deferred income taxes, less
current portion
|
|
|
15,326
|
|
Other assets
|
|
|
56
|
|
|
|
|
|
|
Total assets
|
|
|
51,132
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Current liabilities
|
|
|
7,781
|
|
Non-current liabilities
|
|
|
3,620
|
|
|
|
|
|
|
Total liabilities
|
|
|
11,401
|
|
|
|
|
|
|
Net assets
|
|
$
|
39,731
|
|
|
|
|
|
|
The acquired customer contracts and relationships, which include
backlog, have a weighted average useful life of approximately
4.5 years and are being amortized over their estimated
useful lives using the straight-line method. The goodwill was
allocated to our Professional Services operating segment, and
will not be deductible for tax purposes.
London
Bridge Software Holdings plc
On April 26, 2004, our Board of Directors, together with
the Board of Directors of London Bridge Software Holdings plc
(London Bridge), a provider of intelligent business
software, announced that they had reached
67
FAIR
ISAAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended September 30, 2006, 2005 and 2004
agreement on the terms of a recommended cash offer (the
Offer) to be made by us and by Hawkpoint Partners
Limited on our behalf outside of the United States for the
entire issued and to be issued ordinary share capital of London
Bridge. The Offer was made on April 30, 2004.
On May 28, 2004, we announced that valid acceptances of the
Offer had been received in respect of a total of approximately
159.6 million London Bridge shares, representing
approximately 93.4% of the issued share capital of London
Bridge. Accordingly, all conditions related to the Offer were
deemed to have been satisfied, and the Offer was declared
unconditional by us in all respects. As of June 30, 2004,
acceptances in respect of approximately 96% of the issued London
Bridge share capital had been received, and during our fourth
quarter ended September 30, 2004, we acquired all remaining
outstanding London Bridge shares through compulsory acquisition
procedures under U.K. law. Accordingly, as of September 30,
2004, we owned 100% of London Bridges issued share capital.
London Bridge delivers solutions for the management of retail
debt and deposit origination, collection and recovery and the
provision of core banking systems to its target markets. These
markets include retail financial services and range from
telecommunications, utilities and governmental agencies to other
service providers and to the debt collection industry. Our
acquisition of London Bridge was consummated principally to
incorporate London Bridges software and systems for
collections and recovery into our existing portfolio, and extend
our ability to deliver analytics-driven strategies across the
entire credit customer lifecycle. This acquisition was also made
to enhance our presence and growth opportunities internationally.
We accounted for this transaction using the purchase method of
accounting. The results of operations of London Bridge have been
included in our results prospectively from May 28, 2004.
The total purchase price is summarized as follows (in thousands):
|
|
|
|
|
Total cash consideration for share
capital
|
|
$
|
303,025
|
|
Acquisition-related costs
|
|
|
5,865
|
|
Fair value of options to purchase
Fair Isaac common stock
|
|
|
1,320
|
|
|
|
|
|
|
Total purchase price of acquisition
|
|
$
|
310,210
|
|
|
|
|
|
|
In connection with the acquisition, we issued 99,096 options to
purchase Fair Isaac common stock in exchange for certain London
Bridge options. The table above reflects the total fair value of
these options based on application of the Black-Scholes option
pricing model. All of these exchanged options were issued
out-of-the
money (zero intrinsic value) commensurate with that of the
London Bridge options that were replaced. Accordingly, no
portion of the fair value was allocated to unearned future
compensation.
68
FAIR
ISAAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended September 30, 2006, 2005 and 2004
Our allocation of the purchase price was as follows (in
thousands):
|
|
|
|
|
Assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
28,858
|
|
Receivables
|
|
|
20,181
|
|
Prepaid expenses and other current
assets
|
|
|
1,802
|
|
Property and equipment
|
|
|
4,522
|
|
Goodwill
|
|
|
216,135
|
|
Intangible assets:
|
|
|
|
|
Completed technology
|
|
|
33,780
|
|
Customer contracts and
relationships
|
|
|
26,400
|
|
Other assets
|
|
|
3,621
|
|
|
|
|
|
|
Total assets
|
|
|
335,299
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Current liabilities
|
|
|
17,414
|
|
Deferred revenue
|
|
|
5,816
|
|
Non-current liabilities
|
|
|
1,859
|
|
|
|
|
|
|
Total liabilities
|
|
|
25,089
|
|
|
|
|
|
|
Net assets
|
|
$
|
310,210
|
|
|
|
|
|
|
The acquired intangible assets have a weighted average useful
life of approximately 7.3 years and are being amortized
using the straight-line method over their estimated useful lives
as follows: completed technology, six years; and customer
contracts and relationships, nine years. In addition, no value
was recorded to in-process research and development. The
goodwill was allocated to our Strategy Machine Solutions and
Analytic Software Tools operating segments in the amounts of
$181.5 million and $34.7 million, respectively. None
of this goodwill is deductible for tax purposes.
During the quarter ended June 30, 2004, in connection with
our acquisition of London Bridge, we entered into a forward
foreign currency contract to sell £170.0 million for
$300.1 million. This contract was entered into to offset
exchange rate transaction gains or losses on British Pounds cash
balances that were held by our wholly-owned acquiring
subsidiary, whose functional currency is that of the
U.S. Dollar, for the purpose of funding the London Bridge
acquisition. We reduced the notional amount of the forward
currency contract in connection with the payment of
consideration to the selling shareholders, and settled the
contract in the fourth quarter of fiscal 2004. During fiscal
2004, we recorded realized losses on this contract totaling
$10.4 million, which is included in other income, net in
the accompanying consolidated statements of income. These losses
were principally offset by foreign currency transaction gains of
$9.0 million, which are also included in other income, net.
Seurat
Company
On October 1, 2003, we acquired substantially all of the
assets of Seurat Company (Seurat) for cash
consideration of $5.0 million. Seurat is a provider of
solutions and services that help companies target, acquire and
retain customers through creative marketing strategies. We
accounted for this transaction using the purchase method of
accounting. The results of operations of Seurat have been
included in our results prospectively from October 1, 2003.
Our allocation of the purchase price, including
$0.1 million in acquisition costs, was as follows:
(i) $3.6 million was allocated to net tangible assets,
consisting principally of receivables and property and
69
FAIR
ISAAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended September 30, 2006, 2005 and 2004
equipment, (ii) $1.4 million was allocated to
intangible assets, consisting of acquired customer contracts and
relationships, and (iii) $0.1 million was allocated to
goodwill. The acquired intangible assets have an estimated
useful life of five years and are being amortized over this
period using the straight-line method. The goodwill was
allocated entirely to our Strategy Machine Solutions operating
segment, all of which is deductible for tax purposes.
|
|
3.
|
Sales of
Product Line Assets
|
In November 2004, we sold all of the issued and outstanding
stock of London Bridge Phoenix Software, Inc.
(Phoenix) to Harland Financial Solutions, Inc.
(Harland). In connection with this disposition, we
sold all of the Phoenix related assets, including all Phoenix
bank processing solutions, the associated customer base,
intellectual property rights and other related assets to Harland
in exchange for cash consideration of $22.7 million and the
assumption of substantially all Phoenix liabilities by Harland.
Phoenix was an indirectly wholly-owned subsidiary that we
acquired in connection with our acquisition of London Bridge in
May 2004. As this disposition occurred shortly after the London
Bridge acquisition and the fair value of Phoenix did not change
significantly from the date of the London Bridge acquisition, no
gain or loss was recorded in connection with this transaction.
The excess of the consideration received over the book value of
the net assets sold in this disposition, amounting to
$15.1 million, was recorded as a decrease to goodwill in
the Strategy Machines Solutions segment.
|
|
4.
|
Cash,
Cash Equivalents and Marketable Securities Available for
Sale
|
The following is a summary of cash, cash equivalents and
marketable securities available for sale at September 30,
2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Cash and Cash
Equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
33,944
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
33,944
|
|
|
$
|
6,626
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,626
|
|
|
|
|
|
Money market funds
|
|
|
17,045
|
|
|
|
|
|
|
|
|
|
|
|
17,045
|
|
|
|
23,715
|
|
|
|
|
|
|
|
|
|
|
|
23,715
|
|
|
|
|
|
Commercial paper
|
|
|
24,189
|
|
|
|
|
|
|
|
(24
|
)
|
|
|
24,165
|
|
|
|
26,927
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
26,921
|
|
|
|
|
|
Repurchase agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,183
|
|
|
|
|
|
|
|
|
|
|
|
10,183
|
|
|
|
|
|
U.S. government obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,433
|
|
|
|
2
|
|
|
|
|
|
|
|
15,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
75,178
|
|
|
$
|
|
|
|
$
|
(24
|
)
|
|
$
|
75,154
|
|
|
$
|
82,884
|
|
|
$
|
2
|
|
|
$
|
(6
|
)
|
|
$
|
82,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term Marketable
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
|
$
|
105,512
|
|
|
$
|
6
|
|
|
$
|
(211
|
)
|
|
$
|
105,307
|
|
|
$
|
93,945
|
|
|
$
|
|
|
|
$
|
(389
|
)
|
|
$
|
93,556
|
|
|
|
|
|
Corporate debt
|
|
|
32,684
|
|
|
|
|
|
|
|
(100
|
)
|
|
|
32,584
|
|
|
|
9,548
|
|
|
|
|
|
|
|
(66
|
)
|
|
|
9,482
|
|
|
|
|
|
Other debt securities
|
|
|
14,250
|
|
|
|
|
|
|
|
|
|
|
|
14,250
|
|
|
|
43,050
|
|
|
|
|
|
|
|
|
|
|
|
43,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
152,446
|
|
|
$
|
6
|
|
|
$
|
(311
|
)
|
|
$
|
152,141
|
|
|
$
|
146,543
|
|
|
$
|
|
|
|
$
|
(455
|
)
|
|
$
|
146,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term Marketable
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
|
$
|
25,490
|
|
|
$
|
23
|
|
|
$
|
(49
|
)
|
|
$
|
25,464
|
|
|
$
|
34,876
|
|
|
$
|
|
|
|
$
|
(288
|
)
|
|
$
|
34,588
|
|
|
|
|
|
U.S. corporate debt
|
|
|
7,817
|
|
|
|
6
|
|
|
|
(32
|
)
|
|
|
7,791
|
|
|
|
18,126
|
|
|
|
|
|
|
|
(211
|
)
|
|
|
17,915
|
|
|
|
|
|
Marketable equity securities
|
|
|
4,894
|
|
|
|
169
|
|
|
|
|
|
|
|
5,063
|
|
|
|
4,463
|
|
|
|
|
|
|
|
(40
|
)
|
|
|
4,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
38,201
|
|
|
$
|
198
|
|
|
$
|
(81
|
)
|
|
$
|
38,318
|
|
|
$
|
57,465
|
|
|
$
|
|
|
|
$
|
(539
|
)
|
|
$
|
56,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term marketable securities mature at various dates over
the course of the next twelve months. Our long-term
U.S. government obligations and U.S. corporate debt
investments mature at various dates over the next one to
70
FAIR
ISAAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended September 30, 2006, 2005 and 2004
three years. During fiscal 2004, we recognized gross realized
gains on the sale of investments of $7.6 million, which is
included in other income, net in the accompanying consolidated
statements of income. During fiscal 2006 and 2005, we recognized
no realized gains or losses on investments.
The long-term marketable equity securities represent securities
held under a supplemental retirement and savings plan for
certain officers and senior management employees, which are
distributed upon termination or retirement of the employees.
The following table shows the gross unrealized losses and fair
value of our investments with unrealized losses that are not
deemed to be
other-than-temporarily
impaired, aggregated by investment category and length of time
that individual securities have been in a continuous unrealized
loss position, at September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
Less than 12 months
|
|
|
12 months or Greater
|
|
|
Total
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
|
(In thousands)
|
|
|
Description of
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
24,165
|
|
|
$
|
(24
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
24,165
|
|
|
$
|
(24
|
)
|
U.S. government obligations
|
|
|
49,678
|
|
|
|
(45
|
)
|
|
|
34,678
|
|
|
|
(215
|
)
|
|
|
84,356
|
|
|
|
(260
|
)
|
U.S. corporate debt
|
|
|
20,944
|
|
|
|
(32
|
)
|
|
|
15,625
|
|
|
|
(100
|
)
|
|
|
36,569
|
|
|
|
(132
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
94,787
|
|
|
$
|
(101
|
)
|
|
$
|
50,303
|
|
|
$
|
(315
|
)
|
|
$
|
145,090
|
|
|
$
|
(416
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
Less than 12 months
|
|
|
12 months or Greater
|
|
|
Total
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
|
(In thousands)
|
|
|
Description of
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
26,921
|
|
|
$
|
(6
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
26,921
|
|
|
$
|
(6
|
)
|
U.S. government obligations
|
|
|
85,842
|
|
|
|
(339
|
)
|
|
|
41,302
|
|
|
|
(338
|
)
|
|
|
127,144
|
|
|
|
(677
|
)
|
U.S. corporate debt
|
|
|
17,803
|
|
|
|
(146
|
)
|
|
|
9,594
|
|
|
|
(131
|
)
|
|
|
27,397
|
|
|
|
(277
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
130,566
|
|
|
$
|
(491
|
)
|
|
$
|
50,896
|
|
|
$
|
(469
|
)
|
|
$
|
181,462
|
|
|
$
|
(960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unrealized losses from our fixed income securities at
September 30, 2006 are primarily attributable to changes in
interest rates. Because we have the ability and intent to hold
these fixed income securities until a recovery of fair value,
which may be maturity, we do not consider these securities to be
other-than temporarily impaired at September 30, 2006.
71
FAIR
ISAAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended September 30, 2006, 2005 and 2004
Receivables at September 30, 2006 and 2005 consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Billed
|
|
$
|
118,144
|
|
|
$
|
122,314
|
|
Unbilled
|
|
|
53,668
|
|
|
|
41,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
171,812
|
|
|
|
163,597
|
|
Less allowance for doubtful
accounts
|
|
|
(6,006
|
)
|
|
|
(7,222
|
)
|
|
|
|
|
|
|
|
|
|
Receivables, net
|
|
$
|
165,806
|
|
|
$
|
156,375
|
|
|
|
|
|
|
|
|
|
|
Unbilled receivables represent revenue recorded in excess of
amounts billable pursuant to contract provisions and generally
become billable at contractually specified dates or upon the
attainment of milestones. Unbilled amounts are expected to be
realized within one year. During fiscal 2006, 2005 and 2004, we
increased our allowance for the provision for doubtful accounts
by $2.2 million, $3.7 million and $1.4 million,
respectively, recorded an allowance for doubtful accounts on
acquired receivables of $0, $0.5 million and
$8.9 million, respectively, and wrote off receivables (net
of recoveries) of $3.4 million, $5.7 million and
$0.3 million, respectively. In addition, we recorded a
$5.9 million decrease in the allowance in fiscal 2005 from
the completion of the purchase price allocation for the London
Bridge acquisition, the disposition of Phoenix and currency
translation.
As a result of our acquisition of HNC Software, Inc.
(HNC) in August 2002, we obtained investments
accounted for using the cost method including an approximate
6.0% ownership interest in Open Solutions, Inc.
(OSI), a developer of client/server core data
processing solutions for community banks and credit unions. In
November 2003, OSI completed an initial public offering of its
common stock, at which time we began accounting for it as a
marketable equity security. In May 2004, we sold our investment
in OSI for net proceeds of $14.1 million, which included a
realized gain of $6.6 million ($4.0 million net of
tax) that was included in other income, net, within the
accompanying consolidated statement of income for fiscal 2004.
|
|
7.
|
Goodwill
and Intangible Assets
|
Goodwill and intangible assets with indefinite lives are tested
for impairment at least annually or more frequently if
impairment indicators arise. Our other intangible assets have
definite lives and are being amortized using the straight-line
method or based on the forecasted cash flows associated with the
assets over their estimated useful lives.
As prescribed by SFAS No. 142, Goodwill and Other
Intangible Assets, we have determined that our reporting
units are the same as our reportable segments (see
Note 16). We selected the fourth quarter to perform our
annual goodwill impairment test, and determined that goodwill
was not impaired as of July 1, 2006 and 2005.
72
FAIR
ISAAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended September 30, 2006, 2005 and 2004
Intangible assets that are subject to amortization consisted of
the following at September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Completed technology
|
|
$
|
79,980
|
|
|
$
|
80,000
|
|
Customer contracts and
relationships
|
|
|
85,346
|
|
|
|
85,038
|
|
Trade names
|
|
|
8,600
|
|
|
|
8,600
|
|
Other
|
|
|
|
|
|
|
100
|
|
Foreign currency translation
adjustments
|
|
|
1,458
|
|
|
|
(188
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
175,384
|
|
|
|
173,550
|
|
Less accumulated amortization
|
|
|
(84,484
|
)
|
|
|
(58,927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
90,900
|
|
|
$
|
114,623
|
|
|
|
|
|
|
|
|
|
|
Amortization expense associated with our intangible assets,
which has been reflected as a separate operating expense caption
within the accompanying consolidated statements of income,
consisted of the following during fiscal 2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Cost of revenues
|
|
$
|
14,928
|
|
|
$
|
14,815
|
|
|
$
|
10,986
|
|
Selling, general and
administrative expenses
|
|
|
10,263
|
|
|
|
11,085
|
|
|
|
8,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,191
|
|
|
$
|
25,900
|
|
|
$
|
19,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the table above, cost of revenues reflects our amortization
of completed technology, and selling, general and administrative
expenses reflect our amortization of other intangible assets.
Estimated future intangible asset amortization expense
associated with intangible assets existing at September 30,
2006, was as follows (in thousands):
|
|
|
|
|
Fiscal Year
|
|
|
|
|
2007
|
|
$
|
23,744
|
|
2008
|
|
|
14,996
|
|
2009
|
|
|
13,825
|
|
2010
|
|
|
11,305
|
|
2011
|
|
|
6,068
|
|
Thereafter
|
|
|
20,962
|
|
|
|
|
|
|
|
|
$
|
90,900
|
|
|
|
|
|
|
73
FAIR
ISAAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years Ended September 30, 2006, 2005 and 2004
The following table summarizes changes to goodwill during fiscal
2006 and 2005, both in total and as allocated to our operating
segments.