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, 2007
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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
(State or other jurisdiction
of
incorporation or organization)
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94-1499887
(I.R.S. Employer
Identification No.)
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901 Marquette Avenue, Suite 3200
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55402-3232
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Minneapolis, Minnesota
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(Zip Code)
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(Address of principal executive
offices)
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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
Preferred Stock Purchase Rights
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New York Stock Exchange, Inc.
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. Yes þ No o
Indicate by check mark if the registrant is not required to file
report pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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):
Large Accelerated
Filer þ Accelerated
Filer o Non-Accelerated
Filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of March 31, 2007, the aggregate market value of the
registrants common stock held by non-affiliates of the
registrant was $1,480,955,703 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 16, 2007 was 50,299,240 (excluding
38,557,543 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 4, 2008.
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 of Part I, 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 2008.
1
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, improve and connect decisions to enhance business
performance. 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 80 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.
PRODUCTS
AND SERVICES
We help businesses automate, improve and connect 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 noncustomer 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
Machine®
Solutions. These are preconfigured EDM
applications designed for a specific type of business problem or
process, such as marketing, account origination, customer
management, fraud and insurance claims management. 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, and we also offer services that provide our
scores to clients 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 2007, 2006 and 2005 are set
forth in Note 17 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®
decision engine
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LiquidCredit®
service
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Capstone®
Decision Manager
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Capstone®
Decision Accelerator
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Customer Management
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TRIADTM
adaptive control system
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TRIADTM
Transaction Scores
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TelAdaptive®
account management service
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Fraud
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Falcontm
Fraud Manager
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Fraud Predictor with Merchant Profiles
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Falcontm
ID solution
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CardAlert Fraud Manager
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Fraud/Risk Analytics for Telecom (including Revenue and Network
Assurance)
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RoamEx®
Roamer Data Exchanger
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Collections & Recovery
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Debt
Managertm
solution
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Recovery Management
Systemtm
solution (RMS)
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ScoreNet®
network
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PlacementsPlus®
service
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Placement
OptimizerSM
service
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Insurance and Healthcare
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Fair Isaac
SmartAdvisor®
medical bill review
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Payment
Optimizer®
solution
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VeriComp®
Fraud Manager
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MIRAtm
Claims Advisor
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Consumer
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myFICO®
service
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Score
Watchtm
subscription
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Scoring Solutions
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FICO®
scores
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NextGen
FICO®
scores
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FICO®
Expansion®
scores
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Global
FICOtm
scores
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Marketing and bankruptcy scores
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Commercial credit risk scores
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Credit-based insurance scores
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Property
PredictRtm
scores
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FICO®
score delivery
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PreScore®
Service
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Professional Services
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Solution and technology consulting
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Data management services
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Industry consulting
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Analytic consulting
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Fraud consulting
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Medical bill review services
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Analytic Software Tools
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Blaze
Advisortm
business rules management system
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Model Builder for Predictive Analytics
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Model Builder for Decision Trees
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Decision Optimizer
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Vectus®
software
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3
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, insurance claims management, telecommunications
fraud prevention and others. Our Strategy Machine Solutions
primarily serve clients in the financial services, insurance,
healthcare, retail and telecommunications 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, capabilities and services 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 hospitality companies) to execute more efficient
and profitable customer interactions. Services offered under the
MarketSmart brand name include SmartLink customer data
integration 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 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®
decision engine and
LiquidCredit®
service, which are 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. We also offer Capstone
Decision Accelerator, which is a rules-based application based
on our Blaze
AdvisorTM
business rules management system. We also offer custom and
consortium-based credit risk and application fraud models.
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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
models (the term neural network is defined under
Technology later in this section) 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 service 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
Falcon®
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 credit and debit card accounts and is used in approximately
65% of all credit card transactions worldwide.
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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,
network 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
RoamExtm
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, 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 OptimizerSM 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.
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 solution in this area is the Fair Isaac
SmartAdvisor®
medical bill review software. This 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
6
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.
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.
Consumer
Strategy Machine Solutions
Through our
myFICO®
service, 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 manage 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 in partnership with the three major
U.S. credit reporting agencies: Equifax Inc.
(Equifax), TransUnion Corporation
(TransUnion) and Experian Information Solutions,
Inc. (Experian). The
myFICO®
products and subscription offerings are also available to
consumers through lenders, financial portals and numerous other
partners.
Scoring
Solutions
We develop the worlds leading scores based on third-party
data. Our
FICO®
credit scores are used in most U.S. credit decisions, by
most of the major financial service and 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 and Equifax. Users generally pay the credit
reporting agencies scoring fees based on usage, and the credit
reporting agencies share these fees with us.
In fiscal 2007, we released upgraded versions of the
FICO®
score in Canada that we deliver through Equifax and TransUnion
and provide credit grantors with additional predictive strength.
In addition, we completed work on a substantially upgraded
version of the
FICO®
score for U.S. lenders. This release will include
enhancements that increase its predictive power. It is expected
to be installed at the three major credit reporting agencies
beginning in fiscal 2008. We also offer the NextGen
FICO®
score to U.S. credit grantors desiring an even stronger
risk predictor than the classic
FICO®
scores.
FICO®
scores are also delivered through TransUnion ITC in South Africa
and CallCredit in the UK.
Our scoring portfolio also includes the
FICO®
Expansion®
score, which provides scores on U.S. consumers who do not
have traditional
FICO®
scores, generally because they have too few 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.
7
Outside of North America, we offer the Global
FICO®
score, which extends our thorough analysis of multiple-lender
credit data to countries around the world that have established
and emerging credit bureaus. Like
FICO®
scores in North America, Global
FICO®
scores help lenders in multiple countries leverage the
FICO®
scores predictive analysis to 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. Global
FICO®
scores are in use or being implemented in more than 16
different countries across four continents. In fiscal 2007 we
extended the score to Korea through a multi-year agreement with
Korea Credit Bureau.
In addition to the scoring noted above, we also offer marketing
and bankruptcy scores through the U.S. credit reporting
agencies; an application fraud, revenue and bankruptcy score
available in Canada; consumer risk scores 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 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. We also offer an
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.
We 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®
Network) for customer account management.
Professional
Services
We provide a variety of custom offerings, business solution and
technology consulting 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.
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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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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Industry consulting. We combine our knowledge
of EDM technology with our consultants experience to
address the specific needs of companies in the financial
services, retail, pharmaceuticals, telecommunications, insurance
and healthcare industries. Our industry consultants provide a
wide range of consulting services, including business strategy
consulting and custom solutions development. Another focus of
this work is helping companies comply with regulations, such as
the New Basel Capital Accord or Solvency II.
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Analytic consulting. 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. Most of this work falls under our
heading of Predictive Science engagements, which provide greater
insight into customer preferences and future customer behavior.
We also perform broader strategy optimization projects using our
Strategy Science technology and related
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advanced analytic methodologies. These projects apply data and
proprietary algorithms to the design of customer treatment
strategies.
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Fraud consulting. 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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Medical bill review services. Using Fair
Isaacs medical bill review software, we provide turnkey
insurance bill review 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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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 support the
addition of EDM capabilities to virtually any application or
operational system. These tools are sold as licensed software,
and can be used by themselves or together to advance a
clients Enterprise Decision Management. We use these tools
as common software components for our own EDM applications,
described above in the Strategy Machine Solutions section. They
are also key components of our EDM architecture, described in
the Technology section. We also partner with third-party
providers within given industry markets and with major software
companies to embed our tools within existing applications.
The principal products offered are software tools for:
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Rules Management. The Blaze
AdvisorTM
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. A related software
offering called SmartForms for Blaze Advisor system is used to
create and manage dynamic, web-based forms that improve the
completeness and accuracy of customer data collected online. The
Blaze Advisor system, available in six languages, 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, which improves the efficiency and speed with which
the Blaze Advisor system is able to process and execute complex,
high-volume business rules. The latest version of Blaze Advisor,
released in fiscal 2007, focuses on rules lifecycle management
to help customers uniquely address governance, proactively
detect errors and accelerate time-to-production. This version
also includes tight integration with Model Builder for
Predictive Analytics and support for PMML (Predictive Modeling
Markup Language).
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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 2007, includes several enhancements
to improve data import and sampling, as well as a scorecard
creation wizard that makes building a new scorecard faster.
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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
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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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Case
Management. Vectus®
software allows organizations to build and deliver
enterprise-class applications for handling complex case
management and relationships across customer, supplier and
partner chains. It supports many types of business solutions,
including account recruitment, customer servicing, complaints
management and legal process. Vectus software provides a
complete environment for developing, maintaining and executing
process-oriented solutions.
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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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business process management and business rules management
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, has the same expertise in predictive
analytics and their integration with decision management
software, and can offer the enhanced lifecycle management
capabilities we offer in areas like financial services. 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 Experian, CGI/AMS,
Equifax, Provenir and Lightbridge, 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 Fortent,
ID Analytics, Experian, SAS, Retail Decisions plc and ACI
Worldwide, a division of Transaction Systems Architects, in the
financial services market; ECtel,
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Hewlett-Packard, Subex Azure 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, Experian, 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 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 credit reporting agencies in the
U.S. and Canada, which are also our partners in offering
our scoring solutions; Experian and Experian-Scorex
(U.S. partner), TransUnion and TransUnion International,
Equifax, VantageScore (a joint partnership established by the
major U.S. credit reporting agencies), CRIF and other
credit reporting agencies outside the United States; and other
data providers like LexisNexis and ChoicePoint, some of which
also represent Fair Isaac partners.
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 2007, end users of our products included
90 of the 100 largest financial institutions in the United
States; approximately two-thirds of the largest 100 banks in the
world; and 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; more than 100 retailers and general merchandisers,
including about half of the top 50 U.S. retailers; more
than 100 government or public agencies; more than 100
telecommunications providers, including seven of the top ten
global providers; and more than 150 healthcare and
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pharmaceuticals companies, including eight of the worlds
top ten pharmaceuticals companies. Nine of the top ten companies
on the 2007 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 both in and outside the United States. We
also market our products through indirect channels, including
alliance partners and other resellers.
During fiscal 2007, 2006 and 2005, revenues generated from our
agreements with Equifax, TransUnion and Experian collectively
accounted for 19%, 18% and 17% 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 80 countries.
Revenues from international customers, including end users and
resellers, amounted to 29%, 28% and 25% of our total revenues in
fiscal 2007, 2006 and 2005, respectively. See Note 17 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.
In 2007, we began the development of an integrated technical
architecture for Enterprise Decision Management, which will
ensure interoperability across Fair Isaac systems. Our intention
is to bring greater flexibility, higher analytic performance and
better decisions across the lifecycle. Building on Fair
Isaacs broad and deep experience in developing EDM
applications, the architecture is service-oriented, designed for
easy standards-based integration with our clients core
systems and will support and deliver ever more powerful
analytics that operate both within specific stages of the
customer lifecycle and across them. This EDM architecture will
contain capabilities from existing Fair Isaac products, from new
and existing components and from third-party providers. Over the
next three years, we will develop the architectures
components while simultaneously migrating our software products
onto the architecture. This migration will take the form of
successive product releases that also provide immediate client
value through added functionality.
The technologies listed below are all supported by the EDM
architecture, which will create tighter integration between our
Strategy Machine solutions, as well as our Analytic Software
Tools.
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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
nonlinear 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 PeacockTM, a technology, 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 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 who 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. Decision management software
is an integral part of our Strategy Machine solutions, described
earlier.
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Research
and Development Activities
Our research and development expenses were $70.6 million,
$85.0 million and $81.3 million in fiscal 2007, 2006
and 2005, 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 nondisclosure
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.
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 50
U.S. and 11 foreign patents with 146 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 41
trademarks registered in the U.S. and select foreign
countries.
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PERSONNEL
As of September 30, 2007, we employed 2,824 persons
worldwide. Of these, 444 full-time employees were located
in our Minneapolis and Arden Hills, Minnesota offices,
382 full-time employees were located in our
San Rafael, California office, 408 full-time employees
were located in our San Diego, California office,
250 full-time employees were located in our India-based
office and 235 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.
Risks
Related to Our Business
We
have expanded the pursuit of our EDM strategy, and we may not be
successful, which could cause our growth prospects and results
of operations to suffer.
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.
In
mid-2006, we restructured the method by which we sell our
products and services, and if this sales strategy is not
successful, our business will be harmed.
We previously sold our products and services in a
product-focused manner. As part of our expanded EDM strategy, in
mid-2006, we changed our sales model to sell our products and
services using a client-centric approach which focuses on
delivering 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 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 significant, could result in rejection of our products,
damage to our reputation, loss of revenues, diversion of
development resources, an 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 unfair competition,
antitrust, and trade secret misappropriation 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-
16
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,
distribution and certain services. 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 and services.
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 may 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.
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 and other 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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reductions of our revenues or earnings per share;
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unanticipated liabilities, legal risks and costs;
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the potential loss 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 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
18
given customer are expected to 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 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. Nonappreciation 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 with 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 data 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, and the development of new
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.
19
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 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.
We expect that products in the industry segments in which we
compete, including software products, will increasingly be
subject to claims of patent and other intellectual property
infringement as the number of products and competitors in our
industry segments grow. We may need to defend claims that our
products infringe intellectual property 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
noninfringing 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.
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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 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
21
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.
Legislation
that is enacted by the U.S. Congress, the states, Canadian
provinces, and other countries, and 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 laws and regulations require us to
change our current products and services, 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
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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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Use of data by creditors 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 and studies mandated by FACTA, under consideration;
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Laws and regulations that limit the use of credit scoring models
such as state mortgage trigger laws, state
inquiries laws, state insurance restrictions on the
use of credit based insurance scores, and the Consumer Credit
Directive in the European Union.
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Fair lending practices, such as the Equal Credit Opportunity Act
(ECOA) and Regulation B.
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Privacy and security laws and regulations that limit the use and
disclosure of personally identifiable information or require
security procedures, including but not limited to the provisions
of the Financial Services Modernization Act of 1999, also known
as the Gramm Leach Bliley Act (GLBA); FACTA; 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); identity
theft, file freezing, security breach notification and similar
state privacy laws;
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Extension of credit to consumers through the Electronic Fund
Transfers Act, as well as nongovernmental VISA and MasterCard
electronic payment standards;
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Regulations applicable to secondary market participants such as
Fannie Mae and Freddie Mac that could have an impact on our
products;
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Insurance laws and regulations applicable to our insurance
clients and their use of our insurance products and services;
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The application or extension of consumer protection laws,
including, laws governing the use of the Internet and
telemarketing, and credit repair;
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Laws and regulations applicable to operations in other
countries, for example, the European Unions Privacy
Directive and the Foreign Corrupt Practices Act; and
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Sarbanes-Oxley Act (SOX) requirements to maintain
and verify internal process controls, including controls for
material event awareness and notification.
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In making credit evaluations of consumers, or in performing
fraud screening or user authentication, our customers are
subject to requirements of multiple jurisdictions, which may
impose onerous and 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. These regulations and amendments to them
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 2007, 74% 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
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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.
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 2007, 29% 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 result in 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.
24
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 a
substantial portion 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
antitakeover 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.
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 245,000 square feet of office space in
San Rafael, California in two buildings under leases
expiring in 2012 or later; 47,000 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
|
25
|
|
|
|
|
an aggregate of approximately 518,000 square feet of office
and data center space in; Arlington, VA; Atlanta, GA; Austin,
TX; Bangalore, India; Beijing, China; Birmingham, United
Kingdom; Boston, MA; Chicago, IL; Coppell, TX; Cranbury, NJ;
Davis, CA; Emeryville, CA; Hong Kong, China; Gauteng, Malaysia;
Indianapolis, IN; Irvine, CA; London, United Kingdom; Madrid,
Spain; Melbourne, Australia; New Castle, DE; New York, NY;
Norcross, GA; Oakbrook Terrace, IL; San Jose, CA; Sao
Paulo, Brazil; Sarasota, FL; Seoul, Korea; Shanghai, China;
Sherborn, MA; Singapore, Singapore; Sydney, Australia; Tokyo,
Japan; Toronto, Canada; Tulsa, OK; Wellsbourne, United Kingdom;
Westminster, CO; and White Marsh, MD.
|
See Note 18 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 were a defendant in a lawsuit captioned as Robbie
Hillis v. Equifax Consumer Services, Inc. and Fair Isaac,
Inc., filed in the U.S. District Court for the Northern
District of Georgia. The plaintiff claimed that the defendants
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. On June 13, 2007, the Court granted final
approval of a settlement agreed to by the parties and directed
that final judgment be entered. An appeal was filed on
July 11, 2007. The appeal was dismissed, and the settlement
agreement is final.
We were a defendant in a lawsuit captioned as Christy
Slack v. Fair Isaac Corporation and MyFICO Consumer
Services, Inc., which was filed 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. This matter was
covered by the settlement agreement in the Robbie Hillis
lawsuit, as described above.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
Not applicable.
EXECUTIVE
OFFICERS OF THE REGISTRANT
Our current executive officers are as follows:
|
|
|
|
|
|
|
Name
|
|
Positions Held
|
|
Age
|
|
|
Mark N. Greene
|
|
February 2007-present, Chief Executive Officer of the Company.
1995-2007, various executive positions at IBM Corporation
including Vice President, Financial Services-Sales and
Distribution, General Manager, Global Banking Industry-Sales and
Distribution, Vice President, Financial Services Strategy and
Solutions-Sales and Distribution, Vice President,
SecureWay-Software Group, and Vice President, Electronic
Commerce-Software Group. 1993-1994, Vice President and Practice
Area Leader-Capital Markets, Technology Solutions Company.
1989-1992, Senior Vice President, Trading Products and
Consulting, Berkeley Investment Technologies. 1987-1989,
Director, Fixed Income Products, CitiCorp. 1982-1986, various
positions at the Federal Reserve Board.
|
|
|
53
|
|
Michael H. Campbell
|
|
August 2007-present, Executive Vice President, Chief Operating
Officer of the Company. July 2006-July 2007, 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.
|
|
|
46
|
|
26
|
|
|
|
|
|
|
Name
|
|
Positions Held
|
|
Age
|
|
|
Richard S. Deal
|
|
August 2007-present, Senior Vice President, Chief Human
Resources Officer of the Company. January 2001-July 2007, 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.
|
|
|
40
|
|
Andrew N. Jennings
|
|
October 2007--present, Senior Vice President, Chief Research
Officer of the Company. May 2007--September 2007, Vice
President, Analytic Research and Development of the Company.
May 2006 May 2007, Vice President, EDM Applications
of the Company. October 1994 May 2006, various
senior management positions of the Company including Vice
President of International Operations, Vice President European
Operations, Vice President Analytic, Customer Management and
Collections Business units. 1991-1994, Head of Credit Risk
Management, Abbey National plc. 1987 1991, Head of
Credit Risk, Barclaycard, Barclays Bank plc. 1980
1987, Lecturer Economic and Econometrics University of
Nottingham.
|
|
|
52
|
|
Bernhard Nann
|
|
August 2007-present, Senior Vice President, Chief Technology
Officer of the Company. March 2007-July 2007, Vice President,
Chief Technology Officer of the Company. May 2006-February
2007, Vice President, Product Development, Product Services, ASP
Operations and Technology Solutions and Infrastructure of the
Company. July 2003-April 2006, variety of senior management
positions with the Company including positions in Mortgage
Solutions, Collections and Recovery, Customer Management, and
Bill Review Services. 1995-June 2003, CEO and co-founder of
Narex Inc. (acquired by Fair Isaac). January 1990-January 1996,
various management positions at TRW, Inc., including Director of
International Operations.
|
|
|
45
|
|
Charles M. Osborne
|
|
August 2007-present, Executive Vice President, Chief Financial
Officer of the Company. March 2007-July 2007, Vice President,
Chief Financial Officer of the Company. November 2006-February
2007, 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.
|
|
|
54
|
|
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.
|
|
|
44
|
|
Mark R. Scadina
|
|
June 2007-present, Senior Vice President and General Counsel and
Corp Secretary of the Company. 2003-2007, various senior
positions including Executive Vice President, General Counsel
and Corporate Secretary of Liberate Technologies, Inc.
1999-2003, various senior positions including Vice President and
General Counsel of Intertrust Technologies Corporation.
1994-1999, Associate at Pennie and Edmonds LLP.
|
|
|
38
|
|
27
|
|
|
|
|
|
|
Name
|
|
Positions Held
|
|
Age
|
|
|
Tracey H. Stout
|
|
September 2007-present, Senior Vice President and Chief
Marketing Officer of the Company. 2003-2007, Vice President,
Worldwide Marketing at Autodesk, Inc. 1996-2002, executive
positions at Sun Microsystems Computer Company including Vice
President, Marketing Java and KML Software and Vice President,
Worldwide Brand Marketing. 1992-1996, Vice President, Account
Director at Saatchi and Saatchi Advertising. 1981-1991, various
Account Management positions at McCann-Erickson, Knoth &
Meads Advertising, and Batten, Barton, Durstine & Osborn.
|
|
|
50
|
|
|
|
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, 2007, we had 495 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 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
|
|
Fiscal 2007
|
|
|
|
|
|
|
|
|
October 1 December 31, 2006
|
|
$
|
42.97
|
|
|
$
|
35.61
|
|
January 1 March 31, 2007
|
|
$
|
41.84
|
|
|
$
|
37.45
|
|
April 1 June 30, 2007
|
|
$
|
40.83
|
|
|
$
|
34.98
|
|
July 1 September 30, 2007
|
|
$
|
40.60
|
|
|
$
|
35.33
|
|
Dividends
We paid quarterly dividends of two cents per share, or eight
cents per year, during each quarter of fiscal 2007, 2006 and
2005. 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.
28
Issuer
Purchases of Equity Securities (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Maximum Dollar Value
|
|
|
|
|
|
|
|
|
|
Shares Purchased as
|
|
|
of Shares
|
|
|
|
|
|
|
|
|
|
Part of Publicly
|
|
|
that May Yet Be
|
|
|
|
Total Number of
|
|
|
Average Price
|
|
|
Announced Plans
|
|
|
Purchased under
|
|
Period
|
|
Shares Purchased
|
|
|
Paid per Share
|
|
|
or Programs
|
|
|
the Plans or Programs
|
|
|
July 1, 2007 through July 31, 2007
|
|
|
316,500
|
|
|
$
|
39.29
|
|
|
|
316,500
|
|
|
$
|
205,455,495
|
|
August 1, 2007 through August 31, 2007
|
|
|
2,391,750
|
|
|
$
|
37.12
|
|
|
|
2,391,750
|
|
|
$
|
116,679,052
|
|
September 1, 2007 through September 30, 2007
|
|
|
1,802,900
|
|
|
$
|
37.42
|
|
|
|
1,802,900
|
|
|
$
|
49,210,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,511,150
|
|
|
$
|
37.39
|
|
|
|
4,511,150
|
|
|
$
|
49,210,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In November 2007, 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 $250.0 million in the open market or
through negotiated transactions. The November 2007 program does
not have a fixed expiration date. |
29
Performance
Graph
The follow graph shows the total stockholder return of an
investment of $100 in cash on September 30, 2002, in
(a) the Companys Common Stock, (b) the Research
Data Group Inc. indices for the Standard & Poors
500 Stocks (U.S. Companies), and (c) the
Standard & Poors 500 Application Software Index,
in each case with reinvestment of dividends. These indices
relate only to stock prices and do not purport to afford direct
comparison of the business or financial performance of the
companies. We do not believe there are any publicly traded
companies that compete with us across the full spectrum of our
product and service offerings.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Fair Issac Corporation, The S&P 500 Index
And the S&P Application Software Index
|
|
* |
$100 invested on 9/30/02 in stock or index-including
reinvestment of dividends. Fiscal year ending September 30.
|
Copyright©
2007, Standard & Poors, a division of The McGraw-Hill
Companies, Inc. All rights reserved.
www.researchdatagroup.com/S&P.htm
30
|
|
Item 6.
|
Selected
Financial Data
|
We acquired 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,
|
|
|
|
2007(1)(2)
|
|
|
2006(1)(3)
|
|
|
2005
|
|
|
2004(4)
|
|
|
2003
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
Revenues
|
|
$
|
822,236
|
|
|
$
|
825,365
|
|
|
$
|
798,671
|
|
|
$
|
706,206
|
|
|
$
|
629,295
|
|
Operating income
|
|
|
148,474
|
|
|
|
152,723
|
|
|
|
193,011
|
|
|
|
179,866
|
|
|
|
174,194
|
|
Income before income taxes
|
|
|
149,662
|
|
|
|
159,192
|
|
|
|
194,088
|
|
|
|
168,815
|
|
|
|
172,140
|
|
Net income
|
|
|
104,650
|
|
|
|
103,486
|
|
|
|
134,548
|
|
|
|
102,788
|
|
|
|
107,157
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.87
|
|
|
$
|
1.63
|
|
|
$
|
2.02
|
|
|
$
|
1.47
|
|
|
$
|
1.48
|
|
Diluted
|
|
$
|
1.82
|
|
|
$
|
1.59
|
|
|
$
|
1.86
|
|
|
$
|
1.31
|
|
|
$
|
1.40
|
|
Dividends declared per share
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Working capital (deficit)
|
|
$
|
(103,173
|
)
|
|
$
|
(123,719
|
)
|
|
$
|
274,523
|
|
|
$
|
345,785
|
|
|
$
|
569,510
|
|
Total assets
|
|
|
1,275,771
|
|
|
|
1,321,205
|
|
|
|
1,351,061
|
|
|
|
1,444,779
|
|
|
|
1,495,173
|
|
Senior convertible notes
|
|
|
390,963
|
|
|
|
400,000
|
|
|
|
400,000
|
|
|
|
400,000
|
|
|
|
400,000
|
|
Convertible subordinated notes, net of discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141,364
|
|
Revolving line of credit
|
|
|
170,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
566,314
|
|
|
|
770,028
|
|
|
|
805,094
|
|
|
|
916,471
|
|
|
|
849,542
|
|
|
|
|
(1) |
|
Results of operations for fiscal 2007 and 2006 include pre-tax
share-based compensation expense of $36.3 million and
$42.1 million respectively, after our adoption of Statement
of Financial Accounting Standards No. 123(R),
Share-Based Payment, on October 1, 2005. |
|
(2) |
|
Results of operations for fiscal 2007 include pre-tax charges of
$2.5 million in restructuring and acquisition-related
expenses and a $1.5 million gain on the sale of product
line assets. |
|
(3) |
|
Results of operations for fiscal 2006 include $19.7 million
in restructuring and other acquisition related pre-tax charges. |
|
(4) |
|
Results of operations for fiscal 2004 include an
$11.1 million pre-tax loss on redemption of our convertible
subordinated notes. |
31
|
|
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,
improve and connect decisions to enhance business performance.
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, 2007, 74% of our revenues were derived from
within these industries. A significant portion of our remaining
revenues is derived from the telecommunications, 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 2007 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 bookings achieved. We define a
booking as estimated future contractual revenues, including
agreements with perpetual, multi-year and annual terms. 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 resold only as a
result of a significant sales effort. In the fourth quarter of
fiscal 2007, we achieved bookings of $94.5 million,
including five deals with bookings values of $3.0 million
or more. In comparison, bookings in the fourth quarter of fiscal
2006 were $112.6 million, including nine deals with
bookings values of $3.0 million or more.
Management regards the volume of 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 noncancelable terms,
some of our contracts are terminable by the client on short
notice or without notice.
32
Accordingly, we do not believe it is appropriate to characterize
all of our 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 $240.5 million, $230.2 million and
$201.5 million in fiscal 2007, 2006 and 2005, respectively,
representing 29%, 28% and 25% 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.
In March 2007, we sold the assets and products associated with
our mortgage banking solutions product line, which was included
in the Strategy Machines Solutions segment, for
$15.8 million in cash. We recognized a $1.5 million
pre-tax gain, but a $0.4 million after-tax loss on the sale
due to goodwill associated with the product line that was not
deductible for income tax purposes. For fiscal 2007 and 2006, we
recorded revenues from the mortgage banking solutions product
line of $7.7 million and $19.9 million, respectively.
The earnings contribution from the mortgage banking solutions
product line was not significant to our fiscal 2007 or fiscal
2006 results of operations.
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, 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, 2007, 2006 and 2005 are
set forth in Note 17 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
|
|
|
|
Revenues
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Fiscal Year
|
|
|
|
|
|
to
|
|
|
to
|
|
Segment
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
Strategy Machine Solutions
|
|
$
|
439,273
|
|
|
$
|
453,232
|
|
|
$
|
449,139
|
|
|
$
|
(13,959
|
)
|
|
$
|
4,093
|
|
Scoring Solutions
|
|
|
180,444
|
|
|
|
177,152
|
|
|
|
167,270
|
|
|
|
3,292
|
|
|
|
9,882
|
|
Professional Services
|
|
|
151,086
|
|
|
|
149,250
|
|
|
|
134,231
|
|
|
|
1,836
|
|
|
|
15,019
|
|
Analytic Software Tools
|
|
|
51,433
|
|
|
|
45,731
|
|
|
|
48,031
|
|
|
|
5,702
|
|
|
|
(2,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
822,236
|
|
|
$
|
825,365
|
|
|
$
|
798,671
|
|
|
|
(3,129
|
)
|
|
|
26,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-to-Period
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
Percentage of Revenues
|
|
|
2007
|
|
|
2006
|
|
|
|
Fiscal Year
|
|
|
to
|
|
|
to
|
|
Segment
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Strategy Machine Solutions
|
|
|
54
|
%
|
|
|
55
|
%
|
|
|
56
|
%
|
|
|
(3
|
)%
|
|
|
1
|
%
|
Scoring Solutions
|
|
|
22
|
%
|
|
|
21
|
%
|
|
|
21
|
%
|
|
|
2
|
%
|
|
|
6
|
%
|
Professional Services
|
|
|
18
|
%
|
|
|
18
|
%
|
|
|
17
|
%
|
|
|
1
|
%
|
|
|
11
|
%
|
Analytic Software Tools
|
|
|
6
|
%
|
|
|
6
|
%
|
|
|
6
|
%
|
|
|
12
|
%
|
|
|
(5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
Fiscal
2007 Revenues Compared to Fiscal 2006 Revenues
Strategy Machine Solutions segment revenues decreased
$14.0 million due partially to the sale of our mortgage
banking solutions product line, which resulted in a
$10.9 million decline in segment revenues. In addition,
segment revenues declined due to a $5.5 million decrease in
revenues from our customer management solutions, a
$5.5 million decrease in revenues from our originations
solutions, a $4.0 million decrease in revenues from our
insurance and healthcare solutions and a
$0.5 million decrease in revenues from our other strategy
machine solutions. The revenue decrease was partially offset by
a $9.5 million increase in revenues from our collection
and recovery solutions, a $1.6 million increase in
revenues from our consumer solutions and a
$1.3 million increase in revenues from our fraud
solutions.
The decrease in customer management solutions revenues
was the result of a decline in transactional-based revenues due
to the loss of volumes from a significant customer, which
resulted from industry consolidation. The decrease in
originations solutions revenues was the result of a
decline in transactional-based revenues, unfavorable pricing on
a renewed customer contract and, to a lesser extent, a reduction
in sales of software licenses. The decrease in insurance and
healthcare solutions revenues was attributable primarily to
a decline in bill review volumes associated with our existing
customer base and loss of customer accounts. The increase in
collections and recovery solutions revenues was
attributable primarily to several large license sales and
increased volumes associated with transactional-based
agreements. The large license sales resulted from successful
international sales efforts. The increase in consumer
solutions revenues was attributable to increases in revenues
derived from myfico.com and our strategic alliance partners. The
increase in fraud solutions revenues was attributable
primarily due to increased volumes associated with
transactional-based agreements. However, we have experienced a
delay in a product upgrade, which impacted current year bookings
and revenues and may continue to impact fraud solutions
bookings and revenues in future periods.
Scoring Solutions segment revenues increased
$3.3 million primarily due an increase in revenues derived
from risk scoring services at the credit reporting agencies. We
also had an increase in revenues derived 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 a sufficient number of credit
accounts being reported to the credit reporting agencies. The
revenue increase was partially offset by a decline in revenues
derived from our own prescreening and account management
services sold directly to users, which resulted from increased
pricing pressures and an unfavorable impact on pricing from the
merger of two customers. We expect that continued pricing and
competitive pressures will adversely affect segment revenues in
fiscal 2008.
During fiscal 2007 and 2006, revenues generated from our
agreements with Equifax, TransUnion and Experian collectively
accounted for approximately 19% and 18%, respectively, of our
total revenues, including revenues from these customers that are
recorded in our other segments.
Professional Services segment revenues increased
$1.8 million from consulting and implementation services
for customer management products, for services to develop
predictive models for a large customer and implementation
services for Blaze Advisor. The increase was partially offset by
a decline in implementation services for our collection and
recovery products and fraud products and a decline in industry
consulting services. The decline in implementation services for
fraud products was partially the result of a delay in a product
upgrade.
Analytic Software Tools segment revenues increased
$5.7 million primarily due to an increase in sales of
perpetual and term licenses of Blaze Advisor and to a lesser
extent sales of Model Builder software applications. This
increase reflects a larger number of Blaze Advisor license sales
that exceeded $1.0 million in the United States and EMEA
region. The increase in revenues was also partially the result
of higher maintenance revenues, which resulted from the overall
growth in our installed base of Blaze Advisor.
Fiscal
2006 Revenues Compared to Fiscal 2005 Revenues
Strategy Machine Solutions segment revenues increased
$4.1 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 $8.6 million decrease in
revenues from our insurance and healthcare solutions.
34
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.
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
$15.0 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 and an increase in sales of 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
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Fiscal Year
|
|
|
to
|
|
|
to
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
Revenues
|
|
$
|
822,236
|
|
|
$
|
825,365
|
|
|
$
|
798,671
|
|
|
$
|
(3,129
|
)
|
|
$
|
26,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
293,482
|
|
|
|
281,977
|
|
|
|
275,065
|
|
|
|
11,505
|
|
|
|
6,912
|
|
Research and development
|
|
|
70,599
|
|
|
|
84,967
|
|
|
|
81,295
|
|
|
|
(14,368
|
)
|
|
|
3,672
|
|
Selling, general and administrative
|
|
|
285,541
|
|
|
|
260,845
|
|
|
|
223,400
|
|
|
|
24,696
|
|
|
|
37,445
|
|
Amortization of intangible assets
|
|
|
23,226
|
|
|
|
25,191
|
|
|
|
25,900
|
|
|
|
(1,965
|
)
|
|
|
(709
|
)
|
Restructuring and acquisition-related
|
|
|
2,455
|
|
|
|
19,662
|
|
|
|
|
|
|
|
(17,207
|
)
|
|
|
19,662
|
|
Gain on sale of product line assets
|
|
|
(1,541
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
673,762
|
|
|
|
672,642
|
|
|
|
605,660
|
|
|
|
1,120
|
|
|
|
66,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
148,474
|
|
|
|
152,723
|
|
|
|
193,011
|
|
|
|
(4,249
|
)
|
|
|
(40,288
|
)
|
Interest income
|
|
|
13,527
|
|
|
|
15,248
|
|
|
|
8,402
|
|
|
|
(1,721
|
)
|
|
|
6,846
|
|
Interest expense
|
|
|
(12,766
|
)
|
|
|
(8,569
|
)
|
|
|
(8,347
|
)
|
|
|
(4,197
|
)
|
|
|
(222
|
)
|
Other income (expense), net
|
|
|
427
|
|
|
|
(210
|
)
|
|
|
1,022
|
|
|
|
637
|
|
|
|
(1,232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
149,662
|
|
|
|
159,192
|
|
|
|
194,088
|
|
|
|
(9,530
|
)
|
|
|
(34,896
|
)
|
Provision for income taxes
|
|
|
45,012
|
|
|
|
55,706
|
|
|
|
59,540
|
|
|
|
(10,694
|
)
|
|
|
(3,834
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
104,650
|
|
|
$
|
103,486
|
|
|
$
|
134,548
|
|
|
|
1,164
|
|
|
|
(31,062
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of employees at fiscal year end
|
|
|
2,824
|
|
|
|
2,737
|
|
|
|
2,796
|
|
|
|
87
|
|
|
|
(59
|
)
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-to-Period
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Change
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Percentage of Revenues Fiscal Year
|
|
|
to
|
|
|
to
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
35
|
%
|
|
|
34
|
%
|
|
|
35
|
%
|
|
|
4
|
%
|
|
|
3
|
%
|
Research and development
|
|
|
9
|
%
|
|
|
10
|
%
|
|
|
10
|
%
|
|
|
(17
|
)%
|
|
|
5
|
%
|
Selling, general and administrative
|
|
|
35
|
%
|
|
|
32
|
%
|
|
|
28
|
%
|
|
|
9
|
%
|
|
|
17
|
%
|
Amortization of intangible assets
|
|
|
3
|
%
|
|
|
3
|
%
|
|
|
3
|
%
|
|
|
(8
|
)%
|
|
|
(3
|
)%
|
Restructuring and acquisition-related
|
|
|
|
|
|
|
2
|
%
|
|
|
|
|
|
|
(88
|
)%
|
|
|
|
|
Gain on sale of product line assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
82
|
%
|
|
|
81
|
%
|
|
|
76
|
%
|
|
|
|
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
18
|
%
|
|
|
19
|
%
|
|
|
24
|
%
|
|
|
(3
|
)%
|
|
|
(21
|
)%
|
Interest income
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
1
|
%
|
|
|
(11
|
)%
|
|
|
81
|
%
|
Interest expense
|
|
|
(2
|
)%
|
|
|
(1
|
)%
|
|
|
(1
|
)%
|
|
|
(49
|
)%
|
|
|
(3
|
)%
|
Other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
18
|
%
|
|
|
20
|
%
|
|
|
24
|
%
|
|
|
(6
|
)%
|
|
|
(18
|
)%
|
Provision for income taxes
|
|
|
5
|
%
|
|
|
7
|
%
|
|
|
7
|
%
|
|
|
(19
|
)%
|
|
|
(6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
13
|
%
|
|
|
13
|
%
|
|
|
17
|
%
|
|
|
1
|
%
|
|
|
(23
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At the beginning of 2006, we adopted Statement of Financial
Accounting Standards (SFAS) No. 123(R),
Share-Based Payment, using the modified prospective
transition method. Under this method, results for prior periods
have not been restated to include share-based compensation
expense for stock options or our Employee Stock Purchase Plan.
In accordance with SFAS No. 123(R), we recorded
share-based compensation expense of $36.3 million and
$42.1 million in fiscal 2007 and 2006, respectively. In
comparison, we recorded share-based compensation expense of
$2.9 million during fiscal 2005. 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 2007 over 2006 increase of $11.5 million in cost
of revenues includes a $8.6 million increase in personnel
and other labor-related costs, a $2.2 million increase in
third-party software and data, a $1.8 million increase in
facilities and infrastructure costs, and a $1.1 million net
decrease in various other expenditures. The increase in
personnel and other labor-related costs was attributable
primarily to an increase in salary and related benefit costs and
an increase in outside consultant costs. The increase in
third-party software and data costs was due to an increase in
consumer solutions costs, which resulted from higher
revenues, and a change in product mix. The increase in
facilities and infrastructure costs was attributable to an
increase in allocated costs associated with an increase in
professional services activities.
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
36
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 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.
In fiscal 2008, we expect that cost of revenues as a percentage
of revenues will be consistent with the cost of revenues
incurred during fiscal 2007.
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 2007 over 2006 decrease of $14.4 million in
research and development expenditures was attributable primarily
to a decrease in personnel and related costs of
$11.1 million, a $2.9 million decrease in facilities
and infrastructure costs and a $0.4 million decrease in
other costs. The decrease in personnel and related costs was the
result of lower salary and benefit costs due to the shift of
employees to
non-U.S. locations
and staff reductions, which occurred in the prior year period.
The decrease in facilities and infrastructure costs was
attributable to the shift of employees to lower cost
non-U.S. locations
and a decline in allocated costs due to the staff reduction.
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.
In fiscal 2008, we expect that research and development
expenditures as a percentage of revenues will be consistent with
those incurred during fiscal 2007.
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 2007 over 2006 increase of $24.7 million in
selling, general and administrative expenses was attributable to
a $9.7 million increase in personnel and other
labor-related costs, an $8.7 million increase in legal fees
and the settlement of lawsuits associated with our insurance
solutions products, a $2.8 million increase in our
provision for doubtful accounts receivable and a
$3.5 million increase in other expenses. The increase in
personnel and labor-related costs resulted primarily from an
increase in sales staff and commissions, partially offset by a
decline in third party staffing costs and share-based
compensation expense. The decline in share-based compensation
expense was due to an overall decline in share-based grants and
an increase in forfeitures in fiscal 2007. The increase in
marketing costs was driven by programs to promote brand
awareness and drive sales growth. The increase in the provision
for doubtful accounts resulted from an overall increase in
accounts receivable and a related shift in aging of balances due
to internal process inefficiencies and slower collections
associated with certain international clients.
37
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.
In fiscal 2008, 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 2007.
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 2007 over 2006 decline of $2.0 million in
amortization expense was attributable to certain intangible
assets associated with our fiscal 2002 acquisition of HNC
Software Inc., becoming fully amortized during fiscal 2007.
In fiscal 2008, we expect amortization expense will be lower
than the amortization expense incurred in 2007 due to intangible
assets that were fully amortized during fiscal 2007.
Restructuring
and Acquisition-Related Expenses
The following table sets forth certain summary information on
restructuring and acquisition-related expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Severance costs
|
|
$
|
1,012
|
|
|
$
|
5,198
|
|
|
$
|
|
|
Vacating excess lease space
|
|
|
1,443
|
|
|
|
12,954
|
|
|
|
|
|
Abandoned acquisition
|
|
|
|
|
|
|
2,184
|
|
|
|
|
|
Restructuring plan adjustment-leased space
|
|
|
|
|
|
|
(674
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring and acquisition related expense
|
|
$
|
2,455
|
|
|
$
|
19,662
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In fiscal 2007, we recorded a charge of $1.0 million for
severance costs associated with the elimination of 13 management
positions. In addition, we recorded a charge of
$1.4 million to vacate excess leased space located in
California and Maryland. Included in the $1.4 million
charge was $0.2 million to write off fixed assets that were
abandoned as part of this action. The remaining charge of
$1.2 million was for future cash lease obligations, net of
estimated sublease income. Cash payments for the majority of
these costs will be paid in fiscal 2008. We expect these actions
to result in annualized savings of approximately
$4 million, which represents compensation costs for
terminated employees and a reduction in rent expense for the
vacated lease space.
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.
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 four years,
which represents the remaining term of the lease.
38
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.
Gain
on Sale of Product Line Assets
In March 2007, we completed the sale of the assets and products
associated with our mortgage banking solutions product
line for $15.8 million in cash. We recognized a
$1.5 million pre-tax gain on the sale.
Interest
Income
Interest income is derived primarily from the investment of
funds in excess of our immediate operating requirements.
The fiscal 2007 over 2006 decrease of $1.7 million in
interest income was attributable to lower average cash and
investment balances. The decrease in cash and investment
balances resulted principally from cash used to repurchase
common stock, partially offset by cash provided by operating
activities and proceeds received from the exercise of employee
stock options.
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.
Interest
Expense
Interest expense recorded in fiscal 2007 relates to our
1.5% Senior Convertible Notes (Senior Notes),
including the amortization of debt issuance costs, and interest
associated with borrowings under our revolving credit facility.
Interest expense recorded in fiscal 2006 was only related to the
Senior Notes. Accordingly, the increase in interest expense of
$4.2 million in fiscal 2007 resulted from interest
associated with borrowings under our revolving credit facility.
Interest expense recorded in fiscal 2006 relates to our 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.
Noteholders may require us to repurchase all or part of the
Senior Notes as of August 15, 2008. If the noteholders
require us to repurchase all or part of these notes, our
interest expense may increase substantially.
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 income, net was $0.4 million in fiscal 2007, compared
with other expense, net of $0.2 million in fiscal 2006. The
change was driven by fiscal 2007 dividend income of
$1.6 million, a decline in foreign exchange losses of
$0.2 million, a $0.5 million loss in fiscal 2007 from
the sale of company owned aircraft and gains totaling
$0.7 million that were recognized in fiscal 2006 from the
disposition of investments.
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.
39
Provision
for Income Taxes
Our effective tax rates were 30.1%, 35.0% and 30.7% in fiscal
2007, 2006 and 2005, respectively.
The decrease in our effective tax rate in fiscal 2007 compared
with fiscal 2006 was due to the recognition in fiscal 2007 of
$8.2 million of tax benefits. The tax benefits included
favorable settlements of the fiscal 1998 through 2001
U.S. federal examinations and the fiscal 1999 through 2002
California Franchise Tax Board examinations. Our effective tax
rate, however, was adversely impacted by the sale of our
mortgage banking solutions product line, due to
$3.3 million of goodwill associated with the product line
that was not deductible for income tax purposes. These items
reduced our effective tax rate in fiscal 2007 by 5.4%. Excluding
these tax benefits, the effective tax rate for fiscal 2007 would
have been 35.5%. In addition to the tax benefits, our effective
tax rate in fiscal 2007 was also affected by the repeal of the
Extraterritorial Income Exclusion (EIE), which was
effective December 31, 2006. The EIE deduction reduced
income tax expense by $0.5 million in fiscal 2007 compared
with $4.6 million in fiscal 2006.
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%.
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
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-to-Period Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
Fiscal Year
|
|
|
to
|
|
|
to
|
|
|
to
|
|
|
to
|
|
Segment
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Strategy Machine Solutions
|
|
$
|
62,205
|
|
|
$
|
85,578
|
|
|
$
|
63,443
|
|
|
$
|
(23,373
|
)
|
|
$
|
22,135
|
|
|
|
(27
|
)%
|
|
|
35
|
%
|
Scoring Solutions
|
|
|
115,317
|
|
|
|
112,413
|
|
|
|
100,520
|
|
|
|
2,904
|
|
|
|
11,893
|
|
|
|
3
|
%
|
|
|
12
|
%
|
Professional Services
|
|
|
7,056
|
|
|
|
13,730
|
|
|
|
18,856
|
|
|
|
(6,674
|
)
|
|
|
(5,126
|
)
|
|
|
(49
|
)%
|
|
|
(27
|
)%
|
Analytic Software
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tools
|
|
|
1,071
|
|
|
|
2,749
|
|
|
|
13,119
|
|
|
|
(1,678
|
)
|
|
|
(10,370
|
)
|
|
|
(61
|
)%
|
|
|
(79
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
|
185,649
|
|
|
|
214,470
|
|
|
|
195,938
|
|
|
|
(28,821
|
)
|
|
|
18,532
|
|
|
|
(13
|
)%
|
|
|
9
|
%
|
Unallocated share-based compensation expense
|
|
|
(36,261
|
)
|
|
|
(42,085
|
)
|
|
|
(2,927
|
)
|
|
|
5,824
|
|
|
|
(39,158
|
)
|
|
|
14
|
%
|
|
|
|
|
Unallocated restructuring and acquisition-related expense
|
|
|
(2,455
|
)
|
|
|
(19,662
|
)
|
|
|
|
|
|
|
17,207
|
|
|
|
(19,662
|
)
|
|
|
88
|
%
|
|
|
|
|
Unallocated gain on sale of product line assets
|
|
|
1,541
|
|
|
|
|
|
|
|
|
|
|
|
1,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
148,474
|
|
|
$
|
152,723
|
|
|
$
|
193,011
|
|
|
|
(4,249
|
)
|
|
|
(40,288
|
)
|
|
|
(3
|
)%
|
|
|
(21
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fiscal 2007 over fiscal 2006 decrease of $4.2 million
in operating income was attributable to an increase in segment
operating expenses, partially offset by the gain recognized on
the sale of the mortgage banking solutions product line, lower
share-based compensation expense and the impact of restructuring
and acquisition-related costs that were recognized in fiscal
2006. At the segment level, the decrease in segment operating
income was driven by decreases of $23.4 million,
$6.7 million and $1.7 million in segment operating
income within our Strategy Machine Solutions, Professional
Services and Analytic Software Tools segments, respectively. The
decline was partially offset by a $2.9 million increase in
segment operating income within our Scoring Solutions segment.
The decrease in Strategy Machine Solutions segment operating
income was attributable to a decline in sales of customer
40
management solutions and originations solutions
products and higher operating expenses. The operating
expense increase was driven by higher legal fees and settlement
costs, an increase in marketing costs and higher third party
data and software costs. The decrease in Professional Services
segment operating income was the result of higher personnel
costs to support increased professional services activities,
which more than offset the increase in segment revenues. In our
Analytic Software Tools segment, the decrease in segment
operating results was due to increased personnel costs,
partially offset by an increase in sales of licenses of our EDM
products. 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, partially offset by higher legal expenses.
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, 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.
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
$199.0 million in fiscal 2006 to $179.2 million in
fiscal 2007. Operating cash flows were negatively impacted by an
increase in trade receivables of $15.8 million and
unfavorable working capital changes. The increase in trade
receivables resulted from internal process inefficiencies,
slower collections associated with certain international clients
and longer payment terms on certain customer contracts.
Operating cash flows were also negatively impacted by
$6.1 million paid for restructuring-related liabilities.
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).
Cash
Flows from Investing Activities
Net cash provided by investing activities totaled
$37.4 million in fiscal 2007, compared to net cash used in
investing activities of $17.0 million in fiscal 2006. The
change in cash flows from investing activities was primarily
attributable to $15.8 million in cash received from the
sale of our mortgage banking solutions product line in fiscal
41
2007, a $40.2 million increase in proceeds from sales and
maturities of marketable securities, net of purchases, and an
$8.7 million decrease in property and equipment purchases.
In addition, cash flows from investing activities also reflect a
$10.0 million investment we made in a company that is
developing predictive analytics solutions for healthcare
providers.
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.
Cash
Flows from Financing Activities
Net cash used in financing activities totaled
$198.7 million in 2007, compared to $190.3 million in
fiscal 2006. The increase in cash flows used in financing
activities was primarily due to a $194.6 million increase
in common stock repurchased and $9.0 million to repurchase
Senior Notes. The increase in cash used in financing activities
was partially offset by a $170.0 million in cash proceeds
received from borrowings under a revolving credit facility, a
$19.9 million increase in proceeds from the issuance of
common stock under employee stock plans and a $5.5 million
increase in excess tax benefits from share-based arrangements.
We used cash provided by operations, borrowings under the
revolving credit facility and proceeds from stock issued under
employee stock plans to fund $451.1 million in common stock
repurchased in fiscal 2007.
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 in
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.
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 2007, 2006 and 2005, we expended
$451.1 million, $256.5 million and
$328.5 million, respectively, in connection with our
repurchase of common stock under such programs. In November
2007, 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 $250.0 million.
Dividends
We paid quarterly dividends of two cents per share, or eight
cents per year, during each of fiscal 2007, 2006 and 2005. 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
42
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 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 remaining Senior Notes outstanding on
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.
43
The first date noteholders could require us to repurchase the
Senior Notes was August 15, 2007. As a result, certain
noteholders exercised their repurchase option and we repurchased
$9.0 million of the Senior Notes. As of September 30,
2007, $391.0 million of the Senior Notes remain outstanding
and are classified as short-term debt in our consolidated
balance sheet, because noteholders may require us to repurchase
for cash all or part of the Senior Notes on August 15, 2008.
Credit
Agreement
In October 2006, we entered into a five-year unsecured revolving
credit facility with a syndicate of banks. In July 2007, we
entered into an amended and restated credit agreement that
increased the revolving credit facility from $300 million
to $600 million. Proceeds from the credit facility can be
used for working capital and general corporate purposes and may
also be used for the refinancing of existing debt, acquisitions,
and the repurchase of the Companys 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. As of
September 30, 2007, we had $170.0 million of
borrowings outstanding under the credit facility at an average
interest rate of 5.9%.
Capital
Resources and Liquidity Outlook
As of September 30, 2007, we had $234.4 million in
cash, cash equivalents and marketable security investments. We
believe that these balances, as well as borrowings from our
$600 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, including the possible retirement of our Senior
Notes, 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, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Senior Notes(1)
|
|
$
|
390,963
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
390,963
|
|
Revolving line of credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170,000
|
|
|
|
|
|
|
|
170,000
|
|
Operating lease obligations
|
|
|
23,601
|
|
|
|
22,671
|
|
|
|
20,852
|
|
|
|
15,469
|
|
|
|
11,923
|
|
|
|
29,143
|
|
|
|
123,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commitments
|
|
$
|
414,564
|
|
|
$
|
22,671
|
|
|
$
|
20,852
|
|
|
$
|
15,469
|
|
|
$
|
181,923
|
|
|
$
|
29,143
|
|
|
$
|
684,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
$391.0 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,
2007, 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 2008. Refer to
Note 9 to our accompanying consolidated financial
statements for more detailed information regarding the Senior
Notes. |
44
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 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 fixed or
determinable, 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, or 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.
45
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.
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.
46
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 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
47
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 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 2007,
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. We believe that the
assumptions and estimates utilized were appropriate based on the
information available to management. The timing and recognition
of impairment losses by us in the future, if any, may be highly
dependent upon our estimates and assumptions.
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 16 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
48
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 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 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.
49
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.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets & Financial
Liabilities Including an Amendment of
SFAS No. 115 (SFAS 159).
SFAS 159 permits companies to choose to measure certain
financial instruments and other items at fair value. The
standard requires that unrealized gains and losses are reported
in earnings for items measured using the fair value option.
SFAS 159 will become effective for fiscal years beginning
after November 15, 2007. We are in the process of
determining what effect, if any, the adoption of SFAS 159
will have on our consolidated financial statements.
In August 2007, the FASB proposed FASB Staff Position
(FSP) APB
14-a,
Accounting for Convertible Instruments That May Be Settled in
Cash upon Conversion (Including Partial Cash Settlement).
The proposed FSP would require the proceeds from the issuance of
such convertible debt instruments to be allocated between debt
(at a discount) and an equity component. The debt discount would
be amortized over the period the convertible debt is expected to
be outstanding as additional non-cash interest expense. The
proposed change in accounting treatment would be effective for
fiscal years beginning after December 15, 2007, and applied
retrospectively to prior periods. If adopted as proposed, this
FSP would change the accounting treatment for our Senior Notes,
which were issued in August 2003. The new accounting treatment
would require us to retrospectively record a significant amount
of non-cash interest as the discount on the debt is amortized.
We are in the process of determining the effect the adoption of
the proposed FSP 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, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
September 30, 2006
|
|
|
|
Cost
|
|
|
Carrying
|
|
|
Average
|
|
|
Cost
|
|
|
Carrying
|
|
|
Average
|
|
|
|
Basis
|
|
|
Amount
|
|
|
Yield
|
|
|
Basis
|
|
|
Amount
|
|
|
Yield
|
|
|
|
(In thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
95,286
|
|
|
$
|
95,284
|
|
|
|
4.43
|
%
|
|
$
|
75,178
|
|
|
$
|
75,154
|
|
|
|
2.85
|
%
|
Short-term investments
|
|
|
125,293
|
|
|
|
125,327
|
|
|
|
5.21
|
%
|
|
|
152,446
|
|
|
|
152,141
|
|
|
|
4.79
|
%
|
Long-term investments
|
|
|
7,517
|
|
|
|
7,530
|
|
|
|
5.33
|
%
|
|
|
33,306
|
|
|
|
33,254
|
|
|
|
5.10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
228,096
|
|
|
$
|
228,141
|
|
|
|
4.89
|
%
|
|
$
|
260,930
|
|
|
$
|
260,549
|
|
|
|
4.27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
September 30, 2006
|
|
|
|
|
Carrying
|
|
Fair
|
|
|
|
Carrying
|
|
Fair
|
|
|
Principal
|
|
Amount
|
|
Value
|
|
Principal
|
|
Amount
|
|
Value
|
|
|
(In thousands)
|
|
Senior Notes
|
|
$
|
390,963
|
|
|
$
|
390,963
|
|
|
$
|
391,452
|
|
|
$
|
400,000
|
|
|
$
|
400,000
|
|
|
$
|
407,000
|
|
50
We have interest rate risk with respect to our five-year
$600 million unsecured revolving credit facility. Interest
rates are applied to amounts outstanding under this facility at
variable rates based on Federal Funds rate plus 0.50% or LIBOR
plus margins that range from 0.30% to 0.55% based on our
consolidated leverage ratio. A change in interest rates on this
variable rate debt impacts the interest incurred and cash flows,
but does not impact the fair value of the instrument. As of
September 30, 2007 we had $170.0 million of borrowings
outstanding on this facility and we had no borrowings
outstanding as of September 30, 2006.
Forward
Foreign Currency Contracts
We maintain a program to manage our foreign currency exchange
rate risk on existing foreign currency receivable and bank
balances by entering into forward contracts to sell or buy
foreign currency. At period end, foreign-denominated receivables
and cash balances held by our U.S. reporting entities are
remeasured into the U.S. dollar functional currency at
current market rates. The change in value from this
remeasurement is then reported as a foreign exchange gain or
loss for that period in our accompanying consolidated statements
of income and the resulting gain or loss on the forward contract
mitigates the exchange rate risk of the associated assets. All
of our forward foreign currency contracts have maturity periods
of less than three months. Such derivative financial instruments
are subject to market risk.
The following table summarizes our outstanding forward foreign
currency contracts, by currency at September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Amount
|
|
|
|
|
Foreign
|
|
|
|
Fair Value
|
|
|
Currency
|
|
US$
|
|
US$
|
|
|
(In thousands)
|
|
Sell foreign currency:
|
|
|
|
|
|
|
|
|
|
|
|
|
EURO (EUR)
|
|
EUR
|
6,800
|
|
|
$
|
9,659
|
|
|
$
|
|
|
Japanese Yen (YEN)
|
|
YEN
|
110,000
|
|
|
|
957
|
|
|
|
|
|
Buy foreign currency:
|
|
|
|
|
|
|
|
|
|
|
|
|
British Pound (GBP)
|
|
GBP
|
1,034
|
|
|
|
2,100
|
|
|
|
|
|
The forward foreign currency contracts were all entered into on
September 30, 2007, therefore, the fair value was $0 on
that date.
51
|
|
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, 2007 and 2006, and
the related consolidated statements of income,
stockholders equity and comprehensive income and cash
flows for each of the three years in the period ended
September 30, 2007. We have also audited the Companys
internal control over financial reporting as of
September 30, 2007 based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for
these financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting,
included in the accompanying Managements Report on
Internal Control Over Financial Reporting.
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 and whether effective internal
control over financial reporting was maintained in all material
respects. Our audit of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
52
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of the Company as of September 30, 2007 and 2006,
and the results of their operations and their cash flows for
each of the three years in the period ended September 30,
2007, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion,
the Company maintained, in all material respects, effective
internal control over financial reporting as of
September 30, 2007, based on the criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
As discussed in Note 16 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.
Minneapolis, Minnesota
November 28, 2007
53
FAIR
ISAAC CORPORATION
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except par value data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
95,284
|
|
|
$
|
75,154
|
|
Marketable securities available for sale, current portion
|
|
|
125,327
|
|
|
|
152,141
|
|
Accounts receivable, net
|
|
|
177,402
|
|
|
|
165,806
|
|
Prepaid expenses and other current assets
|
|
|
24,738
|
|
|
|
17,998
|
|
Deferred income taxes
|
|
|
|
|
|
|
2,211
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
422,751
|
|
|
|
413,310
|
|
Marketable securities available for sale, less current portion
|
|
|
13,776
|
|
|
|
38,318
|
|
Other investments
|
|
|
12,374
|
|
|
|
2,161
|
|
Property and equipment, net
|
|
|
52,157
|
|
|
|
56,611
|
|
Goodwill
|
|
|
692,922
|
|
|
|
695,162
|
|
Intangible assets, net
|
|
|
62,923
|
|
|
|
90,900
|
|
Deferred income taxes
|
|
|
14,828
|
|
|
|
20,010
|
|
Other assets
|
|
|
4,040
|
|
|
|
4,733
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,275,771
|
|
|
$
|
1,321,205
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
16,300
|
|
|
$
|
12,162
|
|
Senior convertible notes
|
|
|
390,963
|
|
|
|
400,000
|
|
Accrued compensation and employee benefits
|
|
|
44,202
|
|
|
|
34,936
|
|
Other accrued liabilities
|
|
|
31,887
|
|
|
|
41,647
|
|
Deferred revenue
|
|
|
42,572
|
|
|
|
48,284
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
525,924
|
|
|
|
537,029
|
|
Revolving line of credit
|
|
|
170,000
|
|
|
|
|
|
Other liabilities
|
|
|
13,533
|
|
|
|
14,148
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
709,457
|
|
|
|
551,177
|
|
|
|
|
|
|
|
|
|
|
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 51,064 and
59,369 shares outstanding at September 30, 2007 and
2006, respectively)
|
|
|
511
|
|
|
|
594
|
|
Paid-in-capital
|
|
|
1,097,327
|
|
|
|
1,073,886
|
|
Treasury stock, at cost (37,793 and 29,488 shares at
September 30, 2007 and 2006, respectively)
|
|
|
(1,290,393
|
)
|
|
|
(952,979
|
)
|
Retained earnings
|
|
|
745,054
|
|
|
|
644,836
|
|
Accumulated other comprehensive income
|
|
|
13,815
|
|
|
|
3,691
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
566,314
|
|
|
|
770,028
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,275,771
|
|
|
$
|
1,321,205
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
54
FAIR
ISAAC CORPORATION
CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues
|
|
$
|
822,236
|
|
|
$
|
825,365
|
|
|
$
|
798,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues(1)
|
|
|
293,482
|
|
|
|
281,977
|
|
|
|
275,065
|
|
Research and development
|
|
|
70,599
|
|
|
|
84,967
|
|
|
|
81,295
|
|
Selling, general and administrative(1)
|
|
|
285,541
|
|
|
|
260,845
|
|
|
|
223,400
|
|
Amortization of intangible assets(1)
|
|
|
23,226
|
|
|
|
25,191
|
|
|
|
25,900
|
|
Restructuring and acquisition-related
|
|
|
2,455
|
|
|
|
19,662
|
|
|
|
|
|
Gain on sale of product line assets
|
|
|
(1,541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
673,762
|
|
|
|
672,642
|
|
|
|
605,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
148,474
|
|
|
|
152,723
|
|
|
|
193,011
|
|
Interest income
|
|
|
13,527
|
|
|
|
15,248
|
|
|
|
8,402
|
|
Interest expense
|
|
|
(12,766
|
)
|
|
|
(8,569
|
)
|
|
|
(8,347
|
)
|
Other income (expense), net
|
|
|
427
|
|
|
|
(210
|
)
|
|
|
1,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
149,662
|
|
|
|
159,192
|
|
|
|
194,088
|
|
Provision for income taxes
|
|
|
45,012
|
|
|
|
55,706
|
|
|
|
59,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
104,650
|
|
|
$
|
103,486
|
|
|
$
|
134,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.87
|
|
|
$
|
1.63
|
|
|
$
|
2.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.82
|
|
|
$
|
1.59
|
|
|
$
|
1.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
56,054
|
|
|
|
63,579
|
|
|
|
66,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
57,548
|
|
|
|
65,125
|
|
|
|
73,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
55
FAIR
ISAAC CORPORATION
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE
INCOME
Years
Ended September 30, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Par
|
|
|
Paid-In-
|
|
|
Treasury
|
|
|
Unearned
|
|
|
Retained
|
|
|
Income
|
|
|
Stockholders
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Stock
|
|
|
Compensation
|
|
|
Earnings
|
|
|
(Loss)
|
|
|
Equity
|
|
|
Income
|
|
|
|
(In thousands)
|
|
|
Balance at September 30, 2004
|
|
|
69,579
|
|
|
$
|
697
|
|
|
$
|
1,054,437
|
|
|
$
|
(551,977
|
)
|
|
$
|
(1,814
|
)
|
|
$
|
417,218
|
|
|
$
|
(2,090
|
)
|
|
$
|
916,471
|
|
|
|
|
|
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
|
|
|
(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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
36,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,261
|
|
|
|
|
|
Exercise of stock options
|
|
|
3,137
|
|
|
|
31
|
|
|
|
(29,262
|
)
|
|
|
104,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,126
|
|
|
|
|
|
Tax benefit from exercised stock options
|
|
|
|
|
|
|
|
|
|
|
16,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,684
|
|
|
|
|
|
Forfeitures of restricted stock
|
|
|
(23
|
)
|
|
|
|
|
|
|
732
|
|
|
|
(732
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchases of common stock
|
|
|
(11,716
|
)
|
|
|
(117
|
)
|
|
|
|
|
|
|
(450,971
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(451,088
|
)
|
|
|
|
|
Issuance of ESPP shares from treasury
|
|
|
277
|
|
|
|
3
|
|
|
|
(328
|
)
|
|
|
9,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,961
|
|
|
|
|
|
Issuance of restricted stock to employees from treasury
|
|
|
20
|
|
|
|
|
|
|
|
(646
|
)
|
|
|
646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,432
|
)
|
|
|
|
|
|
|
(4,432
|
)
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104,650
|
|
|
|
|
|
|
|
104,650
|
|
|
$
|
104,650
|
|
Unrealized gains on investments, net of tax of $165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
261
|
|
|
|
261
|
|
|
|
261
|
|
Cumulative translation adjustments, net of tax of $6,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,863
|
|
|
|
9,863
|
|
|
|
9,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
|
51,064
|
|
|
$
|
511
|
|
|
$
|
1,097,327
|
|
|
$
|
(1,290,393
|
)
|
|
$
|
|
|
|
$
|
745,054
|
|
|
$
|
13,815
|
|
|
$
|
566,314
|
|
|
$
|
114,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
56
FAIR
ISAAC CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
104,650
|
|
|
$
|
103,486
|
|
|
$
|
134,548
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
50,224
|
|
|
|
48,805
|
|
|
|
51,517
|
|
Share-based compensation
|
|
|
36,261
|
|
|
|
42,085
|
|
|
|
2,927
|
|
Deferred income taxes
|
|
|
3,800
|
|
|
|
1,125
|
|
|
|
13,279
|
|
Tax benefit from exercised stock options
|
|
|
16,684
|
|
|
|
10,571
|
|
|
|
12,711
|
|
Excess tax benefits from share-based payment arrangements
|
|
|
(12,623
|
)
|
|
|
(7,094
|
)
|
|
|
|
|
Net amortization (accretion) of premium (discount) on marketable
securities
|
|
|
(1,098
|
)
|
|
|
(110
|
)
|
|
|
420
|
|
Provision for doubtful accounts
|
|
|
4,972
|
|
|
|
2,200
|
|
|
|
3,691
|
|
Gain on sale of product line assets
|
|
|
(1,541
|
)
|
|
|
|
|
|
|
|
|
Net loss on sales of property and equipment
|
|
|
693
|
|
|
|
70
|
|
|
|
71
|
|
Changes in operating assets and liabilities, net of acquisition
and disposition effects:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(15,837
|
)
|
|
|
(9,686
|
)
|
|
|
(7,527
|
)
|
Prepaid expenses and other assets
|
|
|
(3,400
|
)
|
|
|
4,489
|
|
|
|
(2,485
|
)
|
Accounts payable
|
|
|
1,584
|
|
|
|
126
|
|
|
|
(1,773
|
)
|
Accrued compensation and employee benefits
|
|
|
8,864
|
|
|
|
3,326
|
|
|
|
(2,395
|
)
|
Other liabilities
|
|
|
(9,492
|
)
|
|
|
7,686
|
|
|
|
(8,665
|
)
|
Deferred revenue
|
|
|
(4,578
|
)
|
|
|
(8,037
|
)
|
|
|
17,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
179,163
|
|
|
|
199,042
|
|
|
|
214,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(22,735
|
)
|
|
|
(31,409
|
)
|
|
|
(16,414
|
)
|
Cash proceeds from sales of property and equipment
|
|
|
566
|
|
|
|
|
|
|
|
|
|
Cash proceeds from sales of product line assets
|
|
|
15,758
|
|
|
|
500
|
|
|
|
750
|
|
Cash paid for acquisitions, net of cash acquired
|
|
|
|
|
|
|
|
|
|
|
(41,312
|
)
|
Cash proceeds from disposition of London Bridge Phoenix
Software, Inc.
|
|
|
|
|
|
|
|
|
|
|
22,672
|
|
Purchases of marketable securities
|
|
|
(180,951
|
)
|
|
|
(176,251
|
)
|
|
|
(241,273
|
)
|
Proceeds from sales of marketable securities
|
|
|
14,250
|
|
|
|
53,390
|
|
|
|
118,472
|
|
Proceeds from maturities of marketable securities
|
|
|
220,763
|
|
|
|
136,743
|
|
|
|
154,804
|
|
Investment in cost-method investees
|
|
|
(10,213
|
)
|
|
|
|
|
|
|
(600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
37,438
|
|
|
|
(17,027
|
)
|
|
|
(2,901
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from revolving line of credit
|
|
|
170,000
|
|
|
|
|
|
|
|
|
|
Payments for repurchases of senior convertible notes
|
|
|
(9,037
|
)
|
|
|
|
|
|
|
|
|
Debt issuance costs
|
|
|
(858
|
)
|
|
|
|
|
|
|
|
|
Proceeds from issuances of common stock under employee stock
option and purchase plans
|
|
|
84,087
|
|
|
|
64,200
|
|
|
|
71,867
|
|
Dividends paid
|
|
|
(4,432
|
)
|
|
|
(5,100
|
)
|
|
|
(5,316
|
)
|
Repurchases of common stock
|
|
|
(451,088
|
)
|
|
|
(256,487
|
)
|
|
|
(328,537
|
)
|
Excess tax benefits from share-based payment arrangements
|
|
|
12,623
|
|
|
|
7,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(198,705
|
)
|
|
|
(190,293
|
)
|
|
|
(261,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
2,234
|
|
|
|
552
|
|
|
|
(385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
20,130
|
|
|
|
(7,726
|
)
|
|
|
(51,190
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
75,154
|
|
|
|
82,880
|
|
|
|
134,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
95,284
|
|
|
$
|
75,154
|
|
|
$
|
82,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes, net of refunds of $30, $2,378 and
$2,951 during the years ended September 30, 2007, 2006 and
2005, respectively
|
|
$
|
38,127
|
|
|
$
|
37,586
|
|
|
$
|
23,932
|
|
Cash paid for interest
|
|
$
|
9,580
|
|
|
$
|
6,000
|
|
|
$
|
6,000
|
|
See accompanying notes to consolidated financial statements.
57
FAIR
ISAAC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended September 30, 2007, 2006 and 2005
|
|
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, improve and connect 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.
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, other accrued liabilities and amounts
outstanding under our revolving line of credit, 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 investments
approximate their recorded value. The fair value of our senior
convertible notes is disclosed in Note 9.
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
58
FAIR
ISAAC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended September 30, 2007, 2006 and
2005 (Continued)
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 $27.0 million, $23.6 million and
$24.3 million during fiscal 2007, 2006 and 2005,
respectively.
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.
59
FAIR
ISAAC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended September 30, 2007, 2006 and
2005 (Continued)
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 $0.2 million, $0.8 million and
$1.1 million in fiscal 2007, 2006 and 2005, respectively.
Amortization expense related to internal-use software was
$2.0 million, $2.5 million and $3.0 million in
fiscal 2007, 2006 and 2005, 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, 2007 and 2006, and
are included in other long-term assets in the accompanying
consolidated balance sheets. Amortization expense related to
capitalized software development costs totaled $0, $0 and
$1.3 million during fiscal 2007, 2006 and 2005,
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 2007, 2006 or 2005.
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).
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
|
|
60
FAIR
ISAAC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended September 30, 2007, 2006 and
2005 (Continued)
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 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.
61
FAIR
ISAAC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended September 30, 2007, 2006 and
2005 (Continued)
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 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
62
FAIR
ISAAC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended September 30, 2007, 2006 and
2005 (Continued)
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.
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.
63
FAIR
ISAAC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended September 30, 2007, 2006 and
2005 (Continued)
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 16 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, 2007,
2006 or 2005. 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 $1.2 million,
$4.3 million and $5.3 million in fiscal 2007, 2006 and
2005, respectively, and are included in selling, general and
administrative expenses in the accompanying consolidated
statements of income.
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 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
64
FAIR
ISAAC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended September 30, 2007, 2006 and
2005 (Continued)
in the process of determining what effect, if any, the adoption
of SFAS No. 157 will have on our consolidated
financial statements.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets & Financial
Liabilities Including an Amendment of
SFAS No. 115 (SFAS 159).
SFAS 159 permits companies to choose to measure certain
financial instruments and other items at fair value. The
standard requires that unrealized gains and losses are reported
in earnings for items measured using the fair value option.
SFAS 159 will become effective for fiscal years beginning
after November 15, 2007. We are in the process of
determining what effect, if any, the adoption of SFAS 159
will have on our consolidated financial statements.
In August 2007, the FASB proposed FASB Staff Position
(FSP) APB
14-a,
Accounting for Convertible Instruments That May Be Settled in
Cash upon Conversion (Including Partial Cash Settlement).
The proposed FSP would require the proceeds from the issuance of
such convertible debt instruments to be allocated between debt
(at a discount) and an equity component. The debt discount would
be amortized over the period the convertible debt is expected to
be outstanding as additional non-cash interest expense. The
proposed change in accounting treatment would be effective for
fiscal years beginning after December 15, 2007, and applied
retrospectively to prior periods. If adopted as proposed, this
FSP would change the accounting treatment for our Senior Notes,
which were issued in August 2003. The new accounting treatment
would require us to retrospectively record a significant amount
of non-cash interest as the discount on the debt is amortized.
We are in the process of determining the effect the adoption of
the proposed FSP 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 and, accordingly, no contingent cash
consideration was paid. 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 included in the Professional Services
operating segment. The results of operations of Braun have been
included in our results prospectively from November 10,
2004.
65
FAIR
ISAAC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended September 30, 2007, 2006 and
2005 (Continued)
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.
|
|
3.
|
Sales of
Product Line Assets
|
In March 2007, we sold the assets and products associated with
our mortgage banking solutions product line for
$15.8 million in cash. The assets sold include accounts
receivable, certain identifiable intangible assets and goodwill.
We recognized a $1.5 million pre-tax gain, but a
$0.4 million after-tax loss on the sale due to goodwill
associated with the mortgage banking solutions product line that
was not deductible for income tax purposes. We acquired the
mortgage banking solutions through our May 2004 acquisition of
London Bridge Software Holdings
66
FAIR
ISAAC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended September 30, 2007, 2006 and
2005 (Continued)
plc (London Bridge). The product line sold includes
software and
e-commerce
services used in the origination processing, underwriting,
pricing, product definition, closing, secondary marketing,
servicing, and default management of mortgage and construction
loans, and BridgeLinkTM
e-Services
for the mortgage industry. Revenues attributable to the mortgage
banking solutions product line for the years ended
September 30, 2007, 2006 and 2005 were $7.7 million,
$19.9 million and $20.5 million, respectively.
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,
2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
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
|
|
$
|
50,260
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
50,260
|
|
|
$
|
33,944
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
33,944
|
|
Money market funds
|
|
|
40,029
|
|
|
|
|
|
|
|
|
|
|
|
40,029
|
|
|
|
17,045
|
|
|
|
|
|
|
|
|
|
|
|
17,045
|
|
Commercial paper
|
|
|
4,997
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
4,995
|
|
|
|
24,189
|
|
|
|
|
|
|
|
(24
|
)
|
|
|
24,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
95,286
|
|
|
$
|
|
|
|
$
|
(2
|
)
|
|
$
|
95,284
|
|
|
$
|
75,178
|
|
|
$
|
|
|
|
$
|
(24
|
)
|
|
$
|
75,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term Marketable Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
|
$
|
93,054
|
|
|
$
|
32
|
|
|
$
|
(5
|
)
|
|
$
|
93,081
|
|
|
$
|
105,512
|
|
|
$
|
6
|
|
|
$
|
(211
|
)
|
|
$
|
105,307
|
|
Corporate debt
|
|
|
32,239
|
|
|
|
15
|
|
|
|
(8
|
)
|
|
|
32,246
|
|
|
|
32,684
|
|
|
|
|
|
|
|
(100
|
)
|
|
|
32,584
|
|
Other debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,250
|
|
|
|
|
|
|
|
|
|
|
|
14,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
125,293
|
|
|
$
|
47
|
|
|
$
|
(13
|
)
|
|
$
|
125,327
|
|
|
$
|
152,446
|
|
|
$
|
6
|
|
|
$
|
(311
|
)
|
|
$
|
152,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term Marketable Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
|
$
|
5,999
|
|
|
$
|
13
|
|
|
$
|
|
|
|
$
|
6,012
|
|
|
$
|
25,490
|
|
|
$
|
23
|
|
|
$
|
(49
|
)
|
|
$
|
25,464
|
|
Corporate debt
|
|
|
1,517
|
|
|
|
|
|
|
|
|
|
|
|
1,517
|
|
|
|
7,817
|
|
|
|
6
|
|
|
|
(32
|
)
|
|
|
7,791
|
|
Marketable equity securities
|
|
|
5,581
|
|
|
|
666
|
|
|
|
|
|
|
|
6,247
|
|
|
|
4,894
|
|
|
|
169
|
|
|
|
|
|
|
|
5,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,097
|
|
|
$
|
679
|
|
|
$
|
|
|
|
$
|
13,776
|
|
|
$
|
38,201
|
|
|
$
|
198
|
|
|
$
|
(81
|
)
|
|
$
|
38,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
FAIR
ISAAC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended September 30, 2007, 2006 and
2005 (Continued)
Short-term marketable securities mature at various dates over
the course of the next twelve months. Our long-term
U.S. government obligations and corporate debt investments
mature at various dates over the next one to three years. During
fiscal 2007, 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, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
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
|
|
$
|
4,995
|
|
|
$
|
(2
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,995
|
|
|
$
|
(2
|
)
|
U.S. government obligations
|
|
|
|
|
|
|
|
|
|
|
5,494
|
|
|
|
(5
|
)
|
|
|
5,494
|
|
|
|
(5
|
)
|
Corporate debt
|
|
|
1,982
|
|
|
|
(3
|
)
|
|
|
3,488
|
|
|
|
(5
|
)
|
|
|
5,470
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,977
|
|
|
$
|
(5
|
)
|
|
$
|
8,982
|
|
|
$
|
(10
|
)
|
|
$
|
15,959
|
|
|
$
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
Corporate debt
|
|
|
20,944
|
|
|
|
(32
|
)
|
|
|
15,625
|
|
|
|
(100
|
)
|
|
|
36,569
|
|
|
|
(132
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
94,787
|
|
|
$
|
(101
|
)
|
|
$
|
50,303
|
|
|
$
|
(315
|
)
|
|
$
|
145,090
|
|
|
$
|
(416
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables at September 30, 2007 and 2006 consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Billed
|
|
$
|
127,965
|
|
|
$
|
118,144
|
|
Unbilled
|
|
|
57,506
|
|
|
|
53,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
185,471
|
|
|
|
171,812
|
|
Less allowance for doubtful accounts
|
|
|
(8,069
|
)
|
|
|
(6,006
|
)
|
|
|
|
|
|
|
|
|
|
Receivables, net
|
|
$
|
177,402
|
|
|
$
|
165,806
|
|
|
|
|
|
|
|
|
|
|
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 2007, 2006 and 2005, we
increased our allowance
68
FAIR
ISAAC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended September 30, 2007, 2006 and
2005 (Continued)
for the provision for doubtful accounts by $5.0 million,
$2.2 million and $3.7 million, respectively, recorded
an allowance for doubtful accounts on acquired receivables of
$0, $0 and $0.5 million, respectively, and wrote off
receivables (net of recoveries) of $2.9 million,
$3.4 million and $5.7 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.
In May 2007, we made a $10 million investment in
convertible preferred stock in a private company. The company is
developing a range of products focused on revenue cycle
activities for hospitals and other healthcare providers. Our
interest is accounted for using the cost-method.
|
|
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 17). We selected the fourth quarter to perform our
annual goodwill impairment test, and determined that goodwill
was not impaired as of July 1, 2007 and 2006.
Intangible assets that are subject to amortization consisted of
the following at September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Completed technology
|
|
$
|
74,720
|
|
|
$
|
79,980
|
|
Customer contracts and relationships
|
|
|
80,194
|
|
|
|
85,346
|
|
Trade names
|
|
|
8,600
|
|
|
|
8,600
|
|
Foreign currency translation adjustments
|
|
|
4,023
|
|
|
|
1,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167,537
|
|
|
|
175,384
|
|
Less accumulated amortization
|
|
|
(104,614
|
)
|
|
|
(84,484
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
62,923
|
|
|
$
|
90,900
|
|
|
|
|
|
|
|
|
|
|
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 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cost of revenues
|
|
$
|
13,388
|
|
|
$
|
14,928
|
|
|
$
|
14,815
|
|
Selling, general and administrative expenses
|
|
|
9,838
|
|
|
|
10,263
|
|
|
|
11,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,226
|
|
|
$
|
25,191
|
|
|
$
|
25,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
69
FAIR
ISAAC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended September 30, 2007, 2006 and
2005 (Continued)
Estimated future intangible asset amortization expense
associated with intangible assets existing at September 30,
2007, was as follows (in thousands):
|
|
|
|
|
Fiscal Year
|
|
|
|
|
2008
|
|
$
|
13,916
|
|
2009
|
|
|
12,737
|
|
2010
|
|
|
10,431
|
|
2011
|
|
|
5,621
|
|
2012
|
|
|
5,602
|
|
Thereafter
|
|
|
14,616
|
|
|
|
|
|
|
|
|
$
|
62,923
|
|
|
|
|
|
|
The following table summarizes changes to goodwill during fiscal
2007 and 2006, both in total and as allocated to our operating
segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strategy
|
|
|
|
|
|
|
|
|
Analytic
|
|
|
|
|
|
|
Machine
|
|
|
Scoring
|
|
|
Professional
|
|
|
Software
|
|
|
|
|
|
|
Solutions
|
|
|
Solutions
|
|
|
Services
|
|
|
Tools
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance at September 30, 2005
|
|
$
|
537,116
|
|
|
$
|
88,254
|
|
|
$
|
12,451
|
|
|
$
|
50,862
|
|
|
$
|
688,683
|
|
Purchase accounting adjustments
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
80
|
|
Foreign currency translation adjustments
|
|
|
5,373
|
|
|
|
|
|
|
|
|
|
|
|
1,026
|
|
|
|
6,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006
|
|
|
542,549
|
|
|
|
88,254
|
|
|
|
12,451
|
|
|
|
51,908
|
|
|
|
695,162
|
|
Purchase accounting adjustments
|
|
|
(4,895
|
)
|
|
|
(140
|
)
|
|
|
494
|
|
|
|
(851
|
)
|
|
|
(5,392
|
)
|
Disposition of mortgage product line assets
|
|
|
(7,221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,221
|
)
|
Foreign currency translation adjustments
|
|
|
8,709
|
|
|
|
|
|
|
|
|
|
|
|
1,664
|
|
|
|
10,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
$
|
539,142
|
|
|
$
|
88,114
|
|
|
$
|
12,945
|
|
|
$
|
52,721
|
|
|
$
|
692,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During fiscal 2007, we reduced goodwill related to the London
Bridge and HNC Software Inc. acquisition due to the realization
of certain deferred tax benefits that had valuation allowances
recorded on them and other adjustments to deferred income taxes
on acquired entities.
70
FAIR
ISAAC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended September 30, 2007, 2006 and
2005 (Continued)
|
|
8.
|
Composition
of Certain Financial Statement Captions
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Data processing equipment and software
|
|
$
|
139,906
|
|
|
$
|
123,692
|
|
Office furniture, vehicles and equipment
|
|
|
23,672
|
|
|
|
28,324
|
|
Leasehold improvements
|
|
|
31,667
|
|
|
|
29,330
|
|
Less accumulated depreciation and amortization
|
|
|
(143,088
|
)
|
|
|
(124,735
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
52,157
|
|
|
$
|
56,611
|
|
|
|
|
|
|
|
|
|
|
Other accrued liabilities:
|
|
|
|
|
|
|
|
|
Income taxes payable
|
|
$
|
|
|
|
$
|
18,498
|
|
Other
|
|
|
31,887
|
|
|
|
23,149
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31,887
|
|
|
$
|
41,647
|
|
|
|
|
|
|
|
|
|
|
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
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
71
FAIR
ISAAC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended September 30, 2007, 2006 and
2005 (Continued)
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 of 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 remaining Senior Notes outstanding on
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.
The first date noteholders could require us to repurchase the
Senior Notes was August 15, 2007. As a result, certain
noteholders exercised their repurchase option and we repurchased
$9.0 million of the Senior Notes. As of September 30,
2007, $391.0 million of the Senior Notes remain outstanding
and are classified as short-term debt in our consolidated
balance sheet, because noteholders may require us to repurchase
for cash all or part of the Senior Notes on August 15, 2008.
The fair value of the Senior Notes at September 30, 2007
and 2006, as determined based upon quoted market prices, was
$391.5 million and $407.0 million, respectively.
In October 2006, we entered into a five-year unsecured revolving
credit facility with a syndicate of banks. In July 2007, we
entered into an amended and restated credit agreement that
increased the revolving credit facility from $300 million
to $600 million. Proceeds from the credit facility can be
used for working capital and general corporate purposes and may
also be used for the refinancing of existing debt, acquisitions,
and the repurchase of the Companys 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
72
FAIR
ISAAC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended September 30, 2007, 2006 and
2005 (Continued)
credit facility also contains covenants typical of unsecured
facilities. As of September 30, 2007, we had
$170.0 million of borrowings outstanding under the credit
facility at an average interest rate of 5.9%.
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11.
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Restructuring
and Acquisition-Related Expenses
|
During fiscal 2007, we vacated excess lease space located in
California and Maryland and recorded a lease exit accrual of
$1.2 million, representing future cash lease obligations
net of estimated sublease income, and a $0.2 million write
off of fixed assets abandoned as a part of this action. We also
recorded a $1.0 million charge for severance costs
associated with the elimination of certain management positions.
Cash payments for the majority of these severance costs will be
paid in fiscal 2008.
During fiscal 2006, we vacated excess lease space primarily
located in California and recorded a lease exit accrual of
$13.0 million, representing future cash lease obligations,
net of estimated sublease income. In connection with a
restructuring initiative, 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. We
also recorded a $0.2 million gain in fiscal 2006 due to the
adjustment of liabilities established for the exit of certain
leased spaces.
During fiscal 2006, we also recorded a $0.5 million gain
from past rent paid that was refunded to us from the landlord
and we wrote off deferred acquisition costs totaling
$2.2 million in connection with abandoned acquisitions,
consisting principally of third-party legal, accounting and
other professional fees. These amounts are recorded in
restructuring and acquisition-related expenses in the
accompanying consolidated statements of income, but are