<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 5, 1996
REGISTRATION NO. 333-14007
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CREDIT MANAGEMENT SOLUTIONS, INC.
------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
MARYLAND 7371 52-1549401
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
</TABLE>
5950 SYMPHONY WOODS ROAD
COLUMBIA, MARYLAND 21044
(410)740-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL PLACE OF BUSINESS)
------------------------
JAMES R. DEFRANCESCO
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CREDIT MANAGEMENT SOLUTIONS, INC.
5950 SYMPHONY WOODS ROAD
COLUMBIA, MARYLAND 21044
(410) 740-6712
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
PETER R. GILBERT, ESQ.
MANATT, PHELPS & PHILLIPS, LLP
1501 M STREET, N.W.
WASHINGTON, D.C. 20005
ALEXANDER D. LYNCH, ESQ.
BROBECK, PHLEGER & HARRISON LLP
1301 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 of the Securities Act of
1933, check the following box: [ ]
------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
------------
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value................ 2,990,000 shares $13.00 $38,870,000.00 $11,779
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</TABLE>
(1) Includes 390,000 shares that may be purchased by the Underwriters to cover
over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
-----------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED DECEMBER 5, 1996
PROSPECTUS
CREDIT MANAGEMENT SOLUTIONS, INC.
[CMSI LOGO]
2,600,000 Shares of Common Stock
Of the 2,600,000 shares of Common Stock, $.01 par value per share (the
"Common Stock"), offered hereby, 2,200,000 shares are being sold by Credit
Management Solutions, Inc. ("CMSI" or the "Company") and 400,000 shares are
being sold by certain stockholders (collectively, the "Selling Stockholders") of
the Company (collectively, the "Shares"). The Company will not receive any of
the proceeds from the sale of the shares by the Selling Stockholders. See
"Principal and Selling Stockholders."
Prior to this offering (the "Offering"), there has been no public market
for the Common Stock, and there can be no assurance that an active public market
for the Common Stock will develop or be sustained after the Offering. It is
currently estimated that the initial public offering price will be between
$11.00 and $13.00 per share. See "Underwriting" for a discussion of the factors
to be considered in determining the initial public offering price.
The Company has applied to have the Common Stock approved for quotation on
the Nasdaq National Market under the symbol "CMSS."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES.
---------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO COMMISSIONS AND PROCEEDS TO THE THE SELLING
PUBLIC DISCOUNTS(1) COMPANY(2)(3) STOCKHOLDERS
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<S> <C> <C> <C> <C>
Per Share.................... $ $ $ $
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Total........................ $ $ $ $
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</TABLE>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $900,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an aggregate of 390,000 additional shares of Common Stock at the Price to
Public, less the Underwriting Commissions and Discounts, solely to cover
over-allotments, if any. If the Underwriters exercise such option in full,
the total Price to Public, Underwriting Commissions and Discounts and
Proceeds to the Company will be $ , $ and $ ,
respectively. See "Underwriting."
The Shares are offered subject to receipt and acceptance by the
Underwriters, to prior sale and to the Underwriters' right to reject any order
in whole or in part and to withdraw, cancel or modify the offer without notice.
It is expected that delivery of the Shares will be made at the office of
Friedman, Billings, Ramsey & Co., Inc., Arlington, Virginia, or through the
facilities of The Depository Trust Company, on or about , 1996.
---------------------------------------------
FRIEDMAN, BILLINGS, RAMSEY UNTERBERG HARRIS
& CO., INC.
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE> 3
[A SCHEMATIC DIAGRAM WILL BE PROVIDED THAT GRAPHICALLY ILLUSTRATES
THE UTILIZATION OF THE COMPANY'S CREDITREVUE
PRODUCT IN CONJUNCTION WITH THE COMPANY'S
CREDIT CONNECTION SERVICE]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET
(INCLUDING THE NASDAQ NATIONAL MARKET) OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE> 4
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE
NOTED, ALL INFORMATION IN THIS PROSPECTUS (I) ASSUMES THE FILING OF AN AMENDMENT
TO THE ARTICLES OF INCORPORATION OF THE COMPANY PRIOR TO THE CONSUMMATION OF THE
OFFERING WHICH, AMONG OTHER THINGS, WILL INCREASE THE NUMBER OF AUTHORIZED
SHARES OF COMMON STOCK, (II) ASSUMES THE REINCORPORATION OF THE COMPANY IN
DELAWARE PRIOR TO THE CONSUMMATION OF THE OFFERING, AND (III) ASSUMES NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. ALL SHARE TOTALS STATED
HEREIN REFLECT THE COMPANY'S 32,734-FOR-1 STOCK SPLIT EFFECTED IN OCTOBER 1996.
THE COMPANY
CMSI is a developer and provider of software solutions and services for
automating the consumer and small business credit analysis, decisioning and
funding process. Drawing upon over 10 years of experience in the credit
processing industry, the Company has developed and provides open-architecture
software products and services which manage volume-intensive credit operations
over wide-area networks. The Company's products and services allow its customers
to automate the entire credit application process by enabling the rapid
transmission of credit applications to multiple funding sources, expediting
credit application analysis and decisioning and facilitating compliance with
federal and state regulatory requirements. These products and services are
designed to enable credit originators, such as automobile dealerships and
retailers, and lenders, such as banks and finance companies, to improve
operating efficiencies by increasing productivity, enhance customer satisfaction
by reducing turnaround time on credit decisions, and decrease portfolio risk by
applying consistent underwriting standards.
The Company's core product, CreditRevue, analyzes credit applications by
automatically accessing third-party credit bureau reports, consulting the
lending institution's internal loan guidelines and incorporating the loan
"scorecards" used by lending institutions. Using CreditRevue, decision response
time generally ranges from a matter of seconds for automated decisions to
several minutes in cases where review by a credit analyst is required. The
Company's CreditRevue customers include some of the largest financial
institutions and finance companies in the United States, such as NationsBank
Corp., Banc One Corp., Wells Fargo Bank and The Associates Bancorp, Inc. In
addition, the Company has introduced CreditRevue to the telecommunications
industry through a joint venture between AirTouch Cellular, Inc. and US West New
Vector Group, Inc.
To further support the needs of the lending industry, the Company developed
Credit Connection, which became commercially available in July 1996. Credit
Connection, a software-based service, links sources of credit origination
through an online network that allows applications to be transmitted to multiple
funding sources and credit decisions to be delivered back to the point of origin
in a matter of minutes. The Company is introducing Credit Connection to the
marketplace through the Company's sales force, the sales forces of lending
institutions and various remarketers. To date, Credit Connection has generated
approximately $27,000 in revenues. The Company recently entered into an
agreement to form a strategic alliance with the Dealer Services Group of ADP,
Inc. ("ADP") to remarket Credit Connection. This division of ADP is one of the
largest providers of computing and consulting services for automobile and truck
dealers worldwide.
By facilitating the flow of applications to multiple funding sources
through Credit Connection, and by automating the credit application analysis,
decisioning and funding process through CreditRevue, the Company believes it is
well positioned to capitalize on the growth in the consumer and small business
credit markets. The Company's products have been designed to work together and
complement each other to provide a seamless credit application process. The
Company believes that its CreditRevue customer base and proposed strategic
alliance with ADP will enhance its marketing efforts for the Credit Connection
service. In addition, the Company believes that the implementation of Credit
Connection will create new marketing opportunities for CreditRevue. The
Company's objective is to be the leading provider of software solutions for
automating the credit analysis, decisioning and funding process and for
electronically transmitting credit related transactions between points of
origination and multiple funding sources.
3
<PAGE> 5
The Company was incorporated in 1987 as a Maryland corporation and intends
to reincorporate in Delaware prior to the consummation of the Offering. The
Company's principal executive offices are located at 5950 Symphony Woods Road,
Columbia, Maryland 21044 and its telephone number is (410) 740-1000.
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Risk factors that should be considered by prospective investors
include uncertainty of future results of operations, fluctuations in quarterly
results of operations, dependence on CreditRevue product line, lengthy sales and
implementation cycle, market acceptance of Credit Connection, transition to
transaction-based revenue, and reliance on certain relationships. See "Risk
Factors" for a discussion of these and other risks.
THE PUBLIC OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.......... 2,200,000 shares(1)
Common Stock offered by the Selling
Stockholders............................... 400,000 shares
Common Stock to be outstanding after the
Offering................................... 7,210,100 shares(2)
Use of Proceeds.............................. The Company intends to use the net proceeds
from the Offering for expansion of the
Company's sales, marketing and customer
support organizations, capital expenditures
and other general corporate and working
capital purposes.
Proposed Nasdaq National Market symbol....... CMSS
</TABLE>
- ---------------
(1) Excludes 390,000 shares of Common Stock subject to the Underwriters'
over-allotment option granted by the Company.
(2) Excludes (i) an aggregate of 2,447,800 shares of Common Stock issuable upon
exercise of stock options at a weighted-average exercise price of $5.35 per
share, of which options to purchase 560,760 shares of Common Stock will be
exercisable after the Offering, (ii) 202,200 additional shares of Common
Stock reserved for future issuance under the Company's Stock Option Plan,
(iii) 250,000 shares reserved for issuance under the Company's Employee
Stock Purchase Plan and (iv) 750,000 shares reserved for issuance under the
Company's Long-Term Incentive Plan. At November 14, 1996, an aggregate of
2,547,800 shares of Common Stock were issuable upon exercise of stock
options, of which options to purchase 100,000 shares will be exercised by
certain Selling Stockholders immediately prior to the consummation of the
Offering. See "Management -- Stock Option Plan," "-- Long-Term Incentive
Plan" and "-- Employee Stock Purchase Plan."
4
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- --------------------------
1993 1994 1995 1995 1996
---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................... $3,368,068 $3,951,456 $10,231,452 $6,728,859 $9,035,485
Income (loss) from operations.... 97,672 (408,371) 759,031 763,030 (200,273)
Historical net income (loss)..... 318,857 (144,931) 957,932 908,563 (52,923)
Pro forma net income(1).......... 737,314 45,005
Pro forma net income per share... $ 0.12 $ 0.01
Shares used in pro forma net
income per share
calculations................... 6,293,720 6,293,720
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1996
-------------------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA(1) ADJUSTED(2)
----------- ------------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).............................. $(1,690,612) $(1,561,671) $ 22,590,329
Total assets........................................... 5,188,599 5,392,540 29,544,540
Stockholder loans and capital lease obligations, less
current portion...................................... 469,145 469,145 469,145
Total stockholders' equity (deficit)................... (629,901) (835,387) 23,316,613
</TABLE>
- ---------------
(1) The Company has operated as a Subchapter S Corporation for federal and state
income tax purposes since its inception in 1987, and, therefore, the
historical financial statements do not include a provision for federal and
state income taxes for such periods. Pro forma net income (loss) has been
computed as if the Company had been subject to federal and state income
taxes based on the tax laws in effect during the respective periods. See
Note 2 of Notes to Consolidated Financial Statements.
(2) Adjusted to reflect (i) the sale by the Company of 2,200,000 shares of
Common Stock offered by the Company hereby, assuming an initial public
offering price of $12.00 per share, after deducting underwriting discounts
and commissions and estimated offering expenses payable by the Company, and
(ii) the exercise of options to purchase 100,000 shares of Common Stock by
certain Selling Stockholders immediately prior to the consummation of this
Offering resulting in proceeds to the Company of $500,000. See "Use of
Proceeds," "Capitalization" and "Underwriting."
------------------------
"CreditRevue," "Credit Connection" and "INCredit" are registered trademarks
of the Company. "CrossSell," "CreditRevue Service Bureau," "CreditRevue Data
Server," "Credit Connection for Windows," "Credit Connection Online," "Credit
Connection LenderLink" and the Company logo are trademarks of the Company. This
Prospectus also includes the trademarks and tradenames of companies other than
the Company.
5
<PAGE> 7
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE PURCHASING SHARES OF THE COMMON STOCK OFFERED HEREBY. THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO FUTURE EVENTS OR
FUTURE FINANCIAL PERFORMANCE OF THE COMPANY. PROSPECTIVE INVESTORS ARE CAUTIONED
THAT SUCH STATEMENTS ARE ONLY PREDICTIONS AND THAT EVENTS OR RESULTS MAY DIFFER
MATERIALLY. IN EVALUATING SUCH STATEMENTS, PROSPECTIVE INVESTORS SHOULD
SPECIFICALLY CONSIDER THE FOLLOWING FACTORS AND OTHER FACTORS SET FORTH IN THIS
PROSPECTUS WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
INDICATED BY SUCH FORWARD-LOOKING STATEMENTS.
UNCERTAINTY OF FUTURE RESULTS OF OPERATIONS; FLUCTUATIONS IN QUARTERLY RESULTS
OF OPERATIONS
Prior growth rates in the Company's revenue and net income should not be
considered indicative of future results of operations. Future results of
operations will depend upon many factors, including market acceptance of new
services, including the Company's Credit Connection and CreditRevue Service
Bureau, the demand for the Company's products and services, the successful
transition from predominantly license fee-based revenue to predominantly
transaction fee-based revenue, the timing of new product and service
introductions and software enhancements by the Company or its competitors, the
level of product, service and price competition, the length of the Company's
sales cycle, the size and timing of individual transactions, the delay or
deferral of customer implementations, the Company's success in expanding its
customer support organization, direct sales force and indirect distribution
channels, the nature and timing of significant marketing programs, the mix of
products and services sold, the timing of new hires, the ability of the Company
to develop and market new products and services and control costs, competitive
conditions in the industry and general economic conditions. In addition, the
decision to implement the Company's products or services typically involves a
significant commitment of customer resources and is subject to the budget cycles
of the Company's customers. Licenses of CreditRevue generally reflect a
relatively high amount of revenue per order. The loss or delay of individual
orders, therefore, would have a significant impact on the Company's revenue and
quarterly results of operations. The timing of revenue is difficult to predict
because of the length and variability of the Company's sales cycle, which has
ranged to date from two to 18 months from initial customer contact to the
execution of a license agreement. In addition, since a substantial portion of
the Company's revenue is recognized on a percentage-of-completion basis, the
timing of revenue recognition for its licenses may be materially and adversely
affected by delays or deferrals of customer implementations. Such delays or
deferrals may also increase expenses associated with such implementations which
would materially and adversely affect related operating margins. The Company's
operating expenses are based in part on planned product and service
introductions and anticipated revenue trends and, because a high percentage of
these expenses are relatively fixed, a delay in the recognition of revenue from
a limited number of transactions could cause significant variations in operating
results from quarter-to-quarter and could result in operating losses. To the
extent such expenses precede, or are not subsequently followed by, increased
revenues, the Company's results of operations would be materially and adversely
affected. As a result of these and other factors, revenues for any quarter are
subject to significant variation, and the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance. There can be no
assurance that the Company will be profitable in any future quarter or that such
fluctuations in results of operations will not result in volatility in the price
of the Company's Common Stock. Due to all of the foregoing factors, it is likely
that in some future quarter the Company's results of operations will be below
the expectations of public market analysts and investors. In such event, the
market price of the Company's Common Stock will be materially and adversely
affected. See "-- Market Acceptance of Credit Connection; Transition to
Transaction-Based Revenue" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Quarterly Information."
DEPENDENCE ON CREDITREVUE PRODUCT LINE
License fees, maintenance fees and third-party computer hardware sales
associated with licenses and installations of CreditRevue accounted for
virtually all of the Company's revenues through September 30, 1996. Although the
Company has recently introduced its Credit Connection service, the Company
expects that
6
<PAGE> 8
revenues generated from licenses and installations of CreditRevue will continue
to account for a significant portion of the Company's revenues for the
foreseeable future. To date, Credit Connection has generated approximately
$27,000 in revenues. The life cycles of the Company's products and services are
difficult to predict due to the effect of new product and service introductions
or software enhancements by the Company or its competitors, market acceptance of
new and enhanced versions of the Company's products and services, and
competition in the Company's marketplace. A decline in the demand for
CreditRevue, whether as a result of competition, technological change, price
reductions or otherwise, would have a material adverse effect on the Company's
business, results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
LENGTHY SALES AND IMPLEMENTATION CYCLE
The licensing of the Company's software products and services is often an
enterprise-wide decision by prospective customers and generally requires the
Company to provide a significant level of education to prospective customers
regarding the use and benefits of the Company's products and services. In
addition, the implementation of the Company's software products involves a
significant commitment of resources by prospective customers and is commonly
accompanied by substantial reengineering efforts and a review of the customer's
credit analysis, decisioning and funding processes. The cost to the customer of
the Company's products and services is typically only a portion of the related
hardware, software, development, training and integration costs associated with
implementing a large-scale automated credit origination information system. For
these and other reasons, the period between initial customer contact and the
implementation of the Company's products is often lengthy (ranging from between
two and 18 months) and is subject to a number of significant delays over which
the Company has little or no control. The Company's implementation cycle could
be lengthened by increases in the size and complexity of its license
transactions and by delays or deferrals in its customers' implementation of
appropriate interfaces and networking capabilities. Delays in the sale or
implementation of a limited number of license transactions could have a material
adverse effect on the Company's business, results of operations and financial
condition and cause the Company's results of operations to vary significantly
from quarter to quarter. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
MARKET ACCEPTANCE OF CREDIT CONNECTION; TRANSITION TO TRANSACTION-BASED REVENUE
The Company's Credit Connection service has recently been commercially
introduced and the Company's CreditRevue Service Bureau service is under
development and is expected to be introduced in late 1997. These services are
projected to account for a significant portion of the Company's revenues in the
future. As a result, demand and market acceptance for these services are subject
to a high level of uncertainty, and the Company will be heavily dependent on
their market acceptance. There can be no assurance that these services will be
commercially successful. The failure of the Company to generate demand for
Credit Connection or CreditRevue Service Bureau or the occurrence of any
significant technological problems with such services would have a material
adverse effect on the Company's business, results of operations and financial
condition. Historically, virtually all of the Company's revenues have been
derived from license fees, maintenance fees and hardware sales associated with
licenses and installations of CreditRevue. Under the terms of its license
agreements, a majority of the Company's revenues are realized during the
configuration and installation of CreditRevue. However, the Company anticipates
that a significant portion of the Company's future revenues will be derived from
per-usage transaction-based fees charged to credit originators and financial
institutions for transactions originated from the Credit Connection and
CreditRevue Service Bureau services. There can be no assurance that the Company
will successfully manage the transition of a significant portion of its revenues
from license-based revenue to transaction-based revenue. The failure of the
Company to successfully manage the transition to a transaction-based revenue
stream would have a material adverse effect on the Company's business, results
of operations and financial condition.
7
<PAGE> 9
RELIANCE ON CERTAIN RELATIONSHIPS
The Company has established relationships with a number of companies that
it believes are important to its sales, marketing and support activities, as
well as to its product, service and software development efforts. The Company
has relationships with automated scorecard companies, hardware vendors and
credit bureaus and has also entered into an agreement to form a strategic
alliance with ADP for remarketing Credit Connection. There can be no assurance
that these companies, most of which have significantly greater financial and
marketing resources than the Company, will not develop or market products and
services which will compete with the Company's products and services in the
future. Furthermore, since many of these relationships are informal in nature,
they are terminable by either party at will. Other relationships are terminable
by either party after a relatively short notice period. There can be no
assurance that these companies will not otherwise discontinue their
relationships with or support of the Company. The failure by the Company to
maintain its existing relationships or to establish new relationships in the
future, because of a divergence of interests, acquisition of one or more of
these third parties or other reasons, could have a material adverse effect on
the Company's business, results of operations and financial condition. See
"Business -- Strategic Alliance with ADP."
DEPENDENCE ON LARGE LICENSE FEE CONTRACTS AND CUSTOMER CONCENTRATION
A relatively small number of customers have accounted for a significant
percentage of the Company's revenues. License fees for CreditRevue are based on
a percentage-of-completion method on a cost-incurred basis with the final
installment being paid in full upon acceptance of the Company's software. The
Company receives continuing revenues on CreditRevue from annual maintenance
agreements which commence upon acceptance of the software by the customer.
Maintenance agreements are renewable annually by the customer, and the license
agreements are generally co-terminous with the maintenance agreements. Although
the Company has experienced a high degree of customer loyalty, the Company
cannot predict how many maintenance agreements will be renewed or the number of
years of renewal. Revenues generated by the Company's 10 largest customers
accounted for 77.4% and 73.4% of total revenues in 1995 and the first nine
months of 1996, respectively. Two of the Company's customers accounted for 19.9%
and 12.9% of total revenues, respectively, in 1995. The Company expects that a
limited number of customers will continue to account for a significant
percentage of revenue for the foreseeable future. The loss of any major customer
or any reduction or delay in orders by any such customer, delay or deferral in
configurations or enhancements by such customers or the failure of the Company
to successfully market its products or services to new customers, could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DEPENDENCE ON CONSUMER RETAIL LENDING INDUSTRY; CYCLICAL NATURE OF CONSUMER
LENDING
The Company's business is currently concentrated in the consumer lending
industry and is expected to be so concentrated for the foreseeable future,
thereby making the Company susceptible to a downturn in the consumer lending
industry. For example, a decrease in consumer lending could result in a smaller
overall market for the Company's products and services. Furthermore, banks in
the United States are continuing to consolidate, decreasing the overall
potential number of customers for the Company's products and services. In
addition, demand for consumer loans has been historically cyclical, in large
part based on general economic conditions and cycles in overall consumer
indebtedness levels. Changes in general economic conditions that adversely
affect the demand for consumer loans, the willingness of financial institutions
to provide funds for such loans, changes in interest rates and the overall
consumer indebtedness level, as well as other factors affecting the consumer
lending industry, could have a material adverse effect on the Company's
business, results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
8
<PAGE> 10
MANAGEMENT OF CHANGING BUSINESS
The Company has experienced significant changes in its business, such as an
expansion in the Company's staff and customer base and the development of new
products, services and enhancements to its software, including the recent
commercial release of Credit Connection. Such changes have placed and may
continue to place a significant strain upon the Company's management, systems
and resources. As of September 30, 1996, the Company had grown to 133 employees
from 106 employees at December 31, 1995. The Company's ability to compete
effectively and to manage future changes will require the Company to continue to
improve its financial and management controls, reporting systems and procedures
and budgeting and forecasting capabilities on a timely basis and expand its
sales and marketing work force, and train and manage its employee work force.
There can be no assurance that the Company will be able to manage such changes
successfully. The Company's failure to do so could have a material adverse
effect upon the Company's business, results of operations and financial
condition. See "Business -- Sales and Marketing."
DEPENDENCE ON KEY PERSONNEL
The Company's future performance depends in significant part upon the
continued service of its key technical, sales and senior management personnel,
particularly James R. DeFrancesco, President and Chief Executive Officer, and
Scott L. Freiman, Executive Vice President. The Company intends to acquire key-
person life insurance on the lives of each of Messrs. DeFrancesco and Freiman.
The loss of the services of one or more of the Company's executive officers
could have a material adverse effect on the Company's business, results of
operations and financial condition. The Company retains its key employees
through the use of equity incentive programs, including stock option plans,
employee stock purchase plans, and competitive compensation packages. The
Company has no employment agreements and does not intend to enter into any such
agreements in the foreseeable future. The Company's future success also depends
on its continuing ability to attract and retain highly qualified technical,
customer support, sales and managerial personnel. In particular, the Company has
encountered difficulties in hiring sufficient numbers of programmers and
technical personnel. Competition for qualified personnel is intense, and there
can be no assurance that the Company will be able to retain its key technical,
sales and managerial employees or that it can attract, assimilate or retain
other highly qualified technical, sales and managerial personnel in the future.
See "Management."
RAPID TECHNOLOGICAL CHANGE; RISK ASSOCIATED WITH NEW PRODUCTS, SERVICES OR
ENHANCEMENTS
The credit processing software products and services industry in which the
Company competes is characterized by rapid technological change, frequent
introductions of new products and services, changes in customer demands and
evolving industry standards. The introduction or announcement of new products,
services or enhancements by the Company or one or more of its competitors
embodying new technologies or changes in industry standards or customer
requirements could render the Company's existing products or services obsolete
or unmarketable. Accordingly, the life cycles of the Company's products are
difficult to estimate. The Company's future results of operations will depend,
in part, upon its ability to enhance its products and services and to develop
and introduce new products and services on a timely and cost-effective basis
that will keep pace with technological developments and evolving industry
standards, as well as address the increasingly sophisticated needs of the
Company's customers. There can be no assurance that these new products and
services will gain market acceptance or that the Company will be successful in
developing and marketing new products or services that respond to technological
change, evolving industry standards and changing customer requirements, that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of these products or
services, or that its new products or services will adequately meet the
requirements of the marketplace and achieve any significant degree of market
acceptance. In addition, a majority of the Company's current products operate in
the UNIX operating system. Although the Company's software is designed to work
with other operating environments, a requirement to port to a different
operating system could be costly and time consuming and could have a material
adverse effect on the Company's business, results of operations and financial
condition. Failure of the Company to develop and introduce, for technological or
other reasons, new products and services in a timely and cost-effective manner
could have a material adverse effect on the Company's business, results of
9
<PAGE> 11
operations and financial condition. Furthermore, the introduction or
announcement of new product or service offerings or enhancements by the Company
or the Company's competitors may cause customers to defer or forgo purchases of
the Company's products or services, which could have a material adverse effect
on the Company's business, results of operations and financial condition. See
"Business -- Product Development."
SYSTEM INTERRUPTION AND SECURITY RISKS; POTENTIAL LIABILITY; POSSIBLE LACK OF
ADEQUATE INSURANCE; AND SYSTEM INADEQUACY
The Company's operations are dependent, in part, on its ability to protect
its system from interruption by damage from fire, earthquake, power loss,
telecommunication failure, unauthorized entry or other events beyond the
Company's control. The Company's computer equipment constituting its central
computer system, including its processing operations, is located at a single
site. The Company is currently in the planning stages of acquiring and
implementing a back-up, off-site processing system capable of supporting its
operations in the event of system failure. The Company intends to have such
system operational by the second quarter of 1997. Prior to such implementation,
the Company's operations are subject to substantial risks, including temporary
interruptions resulting from damage caused by any one or more of the foregoing
factors or due to other causes including computer viruses, hackers or similar
disruptive problems. The Company has not purchased any business interruption
insurance to cover the risk of system failure or interruption. While the Company
maintains a $0.5 million property insurance policy, a $1.0 million errors and
omissions insurance policy and a $3.0 million umbrella insurance policy, such
insurance may not be adequate to compensate the Company for all losses that may
occur or to provide for costs associated with business interruption. Any damage
or failure that causes interruptions in the Company's operations could have a
material adverse effect on the Company's business, results of operations and
financial condition. Persistent problems continue to affect public and private
data networks. For example, in a number of networks, hackers have bypassed
firewalls and have appropriated confidential information. Such computer
break-ins and other disruptions may jeopardize the security of information
stored in and transmitted through the computer systems of the parties utilizing
the Company's services, which may result in significant liability to the Company
and also may deter potential customers from using the Company's services. In
addition, while the Company attempts to be careful with respect to the employees
it hires and maintain controls through software design, security systems and
accounting procedures to prevent unauthorized employee access, it is possible
that, despite such safeguards, an employee of the Company could obtain access,
which would also expose the Company to a risk of loss or litigation and possible
liability to users. The Company attempts to limit its liability to customers,
including liability arising from the failure of the security features contained
in the Company's system and services, through contractual provisions. However,
there can be no assurance that such limitations will be enforceable. There can
be no guarantee that the growth of the Company's customer base will not strain
or exceed the capacity of its computer and telecommunications systems and lead
to degradations in performance or system failure. Any damage, failure or delay
that causes interruptions in the Company's operations could have a material
adverse effect on the Company's business, results of operations and financial
condition.
RISK OF DEFECTS, DEVELOPMENT DELAYS AND LACK OF MARKET ACCEPTANCE
Software products and services as sophisticated as those offered by the
Company often encounter development delays and may contain defects or failures
when introduced or when new versions are released. The Company has in the past
and may in the future experience delays in the development of software and has
discovered, and may in the future discover, software defects in certain of its
products. Such delays and defects may result in lost revenues during the time
corrective measures are being taken. Although the Company has not experienced
material adverse effects resulting from any such defects to date, there can be
no assurance that, despite testing by the Company, errors will not be found in
its existing software in future releases or enhancements, or that the Company
will not experience development delays, resulting in delays in the commercial
release of new products and services, the loss of market share or the failure to
achieve market acceptance. Any such occurrence could have a material adverse
effect upon the Company's business, results of operations and financial
condition. See "Business -- Products and Services" and "-- Product Development."
10
<PAGE> 12
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
The Company currently anticipates that its available cash resources
combined with the net proceeds of this Offering, as well as anticipated funds
from operations, will be sufficient to meet its presently anticipated working
capital and capital expenditure requirements through 1997. Thereafter, the
Company may need to raise additional funds. The Company may need to raise
additional funds sooner in order to fund more rapid expansion, to develop new or
enhanced products and services, to respond to competitive pressures or to
acquire complementary businesses or technologies. If additional funds are raised
through the issuance of equity securities, the percentage ownership of the
stockholders of the Company will be reduced, stockholders may experience
additional dilution, or such equity securities may have rights, preferences or
privileges senior to those of the holders of the Company's Common Stock. There
can be no assurance that additional financing will be available when needed on
terms favorable to the Company or at all. If adequate funds are not available or
are not available on acceptable terms, the Company may be unable to develop or
enhance its products and services, take advantage of future opportunities or
respond to competitive pressures, which could have a material adverse effect on
the Company's business, results of operations and financial condition. See
"Dilution" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
DEPENDENCE ON PROPRIETARY RIGHTS; RISKS OF INFRINGEMENT
The Company's success is heavily dependent upon its proprietary technology.
The Company regards its software products and services as proprietary, and
relies primarily on a combination of contract, copyright and trademark law,
trade secrets, confidentiality agreements and contractual provisions to protect
its proprietary rights. The Company has no patents on its products currently in
commercial use, and existing trade secrets and copyright laws afford only
limited protection. The Company has applied for a United States patent on
portions of Credit Connection. There can be no assurance that a patent will be
granted pursuant to the Company's application or that, if granted, such patent
would survive a legal challenge to its validity or provide adequate protection.
Furthermore, there can be no assurance that others will not design around any
patents issued to the Company. It is the Company's policy to enter into
confidentiality and assignment agreements with its employees. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy or otherwise obtain and use the Company's products or technology
without authorization, to obtain and use information that the Company regards as
proprietary, or to develop similar or superior products or technology
independently. Policing unauthorized use of the Company's products is difficult,
and while the Company is unable to determine the extent to which piracy of its
software products exists, software piracy can be expected to be a persistent
problem, particularly in international markets and as a result of the growing
use of the Internet. The source code for the Company's proprietary software is
protected both as a trade secret and as a copyrighted work. The Company has in
the past and may in the future make source codes for one or more of its products
available to certain of its customers and strategic partners which may increase
the likelihood of misappropriation or other misuse of the Company's software. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States. There
can be no assurance that the steps taken by the Company to protect its
proprietary rights will be adequate or that the Company's competitors will not
independently develop technologies that are substantially equivalent or superior
to the Company's technologies. The Company is not aware that any of its
products, services, trademarks or other proprietary rights infringe the
proprietary rights of third parties. However, there can be no assurance that
third parties will not assert infringement claims against the Company in the
future with respect to current or future products or services. The Company has
obtained a perpetual, worldwide license for the use of the registered trademark
Credit Connection. As the number of software products and services in the
industry increases and the functionality of these products and services further
overlaps, the Company believes that software developers may become increasingly
subject to infringement claims. Furthermore, there can be no assurance that
former employers of the Company's present and future employees will not assert
claims that such employees have improperly disclosed confidential or proprietary
information to the Company. Any such claims, with or without merit, can be time
consuming and expensive to defend, cause product and service delays or require
the Company to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
the Company, or at all, which could have
11
<PAGE> 13
a material adverse effect on the Company's business, results of operations and
financial condition. See "Business -- Intellectual Property and Other
Proprietary Rights."
COMPETITION; FUTURE PRICE EROSION
The credit processing software and services industry is intensely
competitive and rapidly changing. The Company believes its ability to compete
depends upon many factors within and outside its control, including the timing
and market acceptance of new products and services and enhancements developed by
the Company and its competitors, including (i) application software companies,
(ii) management information systems departments of potential customers, (iii)
third party professional services organizations, and (iv) computer services
outsourcing providers which offer service bureau-based credit processing
solutions. Competitors for CreditRevue include American Management Systems,
Inc., Appro Systems, Inc., CFI ProServices, Inc., Fair, Isaac and Company, Inc.
and Affinity Technology Group, Inc. Competitors for Credit Connection include
The Reynolds & Reynolds Company and International Business Machines Corporation
("IBM"), which has recently announced a system for processing automobile loans
over the Internet in conjunction with The Chase Manhattan Bank. Many of the
Company's competitors are substantially larger than the Company and have
significantly greater financial, technical and marketing resources and
established, extensive direct and indirect channels of distribution. As a
result, they may be able to respond more quickly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to the
development, promotion and sale of their products and services than the Company.
As is typical in the software industry, many actual or potential customers of
the Company may become competitors by developing competitive technology
internally. Due to the relatively low barriers to entry in the software market,
the Company expects additional competition from other established and emerging
companies as the credit processing software market continues to develop and
expand. The Company also expects that competition will increase as a result of
software industry consolidations. The Company's competitors may develop or
acquire products or services that provide functionality that is similar to that
produced by the Company's products and services and such products and services
may be offered at a significantly lower price or bundled with other products and
services. In addition, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
increase the ability of their products to address the needs of the Company's
prospective customers. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share. Increased competition is likely to result in price reductions, reduced
gross margins and loss of market share, any of which would have a material
adverse effect on the Company's business, results of operations and financial
condition. There can be no assurance that the Company will be able to compete
successfully against current or future competitors or that competitive pressures
will not have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business -- Competition."
GOVERNMENT REGULATION AND UNCERTAINTIES OF FUTURE REGULATION
The Company's current and prospective customers, which consist of state and
federally chartered banks, saving and loan associations, credit unions, consumer
finance companies and other consumer lenders, as well as customers in the
industries that the Company may target in the future, operate in markets that
are subject to extensive and complex federal and state regulations. While the
Company is not itself directly subject to such regulations, the Company's
products and services must be designed to work within the extensive and evolving
regulatory constraints in which its customers operate. These constraints include
federal and state truth-in-lending disclosure rules, state usury laws, the Equal
Credit Opportunity Act, the Fair Credit Reporting Act and the Community
Reinvestment Act. Furthermore, some consumer groups have expressed concern
regarding the privacy and security of automated credit processing, the use of
automated credit scoring tools in credit underwriting, and whether electronic
lending is a desirable technological development in light of the current level
of consumer debt. The failure by the Company's products and services to support
customers' compliance with current regulations and to address changes in
customers' regulatory environment, or to adapt to such changes in an efficient
and cost-effective manner, could have a material adverse effect on the Company's
business, results of operations and financial condition. See
"Business -- Government Regulation."
12
<PAGE> 14
DISCRETION AS TO USE OF PROCEEDS
The primary purposes of this Offering are to create a public market for the
Company's Common Stock, to facilitate future access to public markets and to
obtain additional working capital. Prior to this Offering, there has been no
market for the Common Stock, and there can be no assurance that an active public
market for the Common Stock will develop or be sustained after the Offering. As
of the date of this Prospectus, the Company has no specific plans to use the net
proceeds from this Offering other than for expenses relating to the expansion of
the Company's sales, marketing, technical and customer support organizations,
capital expenditures and other general corporate and working capital purposes.
Accordingly, the Company's management will retain broad discretion as to the
allocation of the net proceeds from this Offering. Pending any such uses, the
Company plans to invest the net proceeds in investment-grade, interest-bearing
securities. See "Use of Proceeds."
CONTROL BY EXISTING STOCKHOLDERS
Upon completion of this Offering, assuming no exercise of outstanding
options, James R. DeFrancesco, the Company's President and Chief Executive
Officer, and Scott L. Freiman, the Company's Executive Vice President, will
collectively own 63.9% of the outstanding shares of Common Stock (60.6% if the
Underwriters' over-allotment option is exercised in full). As a result, these
stockholders will be able to exercise control over matters requiring stockholder
approval, including the election of directors, and the approval of mergers,
consolidations and sales of all or substantially all of the assets of the
Company. This may prevent or discourage tender offers for the Company's Common
Stock unless the terms are approved by such stockholders. See "Principal and
Selling Stockholders."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public
market following this Offering could adversely affect the market price of the
Common Stock. Upon completion of the Offering, the Company will have outstanding
an aggregate of 7,210,100 shares of Common Stock, assuming no exercise of the
Underwriters' over-allotment option. Of these shares, all of the shares sold in
this Offering will be freely tradeable without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"), unless such shares are purchased by "affiliates" of the Company, as that
term is defined in Rule 144 under the Securities Act ("Affiliates"). The
remaining 4,610,100 shares of Common Stock are held by Messrs. DeFrancesco and
Freiman and are "restricted securities" as that term is defined in Rule 144
under the Securities Act ("Restricted Shares"). Restricted Shares may be sold in
the public market only if registered or if they qualify for an exemption from
registration under Rules 144, 144(k) or 701 under the Securities Act. As a
result of contractual restrictions and subject to the provisions of Rules 144
and 701, additional shares will be available for sale in the public market as
follows: (i) no Restricted Shares will be eligible for immediate sale on the
date of this Prospectus, (ii) 1,536,700 Restricted Shares (plus shares of Common
Stock issuable to employees pursuant to stock options that are then vested) will
be eligible for sale upon expiration of the lock-up agreements 180 days after
the date of this Prospectus, (iii) an additional 1,536,700 Restricted Shares
will be eligible for sale pursuant to the terms of the lock-up agreements 360
days after the date of this Prospectus, and (iv) the remaining 1,536,700
Restricted Shares will be eligible for sale pursuant to the terms of the lock-up
agreements 540 days after the date of this Prospectus. The Company intends to
file a registration statement on Form S-8 following the date of this Prospectus
registering a total of 3,650,000 shares of Common Stock subject to outstanding
stock options, or reserved for issuance under the Company's stock option plan.
Shares issued after the effective date of the registration statement on Form S-8
will be eligible for resale by non-affiliates in the public market without
limitation, subject to contractual restrictions, and by Affiliates subject to
the requirements set forth in Rule 144, except for the holding period limitation
of Rule 144. See "Management -- Stock Option Plan," "-- Long-Term Incentive
Plan," "-- Employee Stock Purchase Plan," "Shares Eligible for Future Sale" and
"Underwriting."
13
<PAGE> 15
NO PRIOR PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market for the Common
Stock will develop or be sustained after the Offering. The initial public
offering price will be determined through negotiations between the Company, the
representatives of the Selling Stockholders and the Underwriters. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. The trading price of the Company's Common
Stock could be subject to significant fluctuations in response to variations in
quarterly operating results, the gain or loss of significant orders, changes in
earning estimates by analysts, announcements of technological innovations or new
products by the Company or its competitors, general conditions in the consumer
lending and software industries, credit processing software and services and
other events or factors. In addition, the stock market in general has
experienced extreme price and volume fluctuations which have affected the market
price for many companies in industries similar or related to that of the Company
and which have been unrelated to the operating performance of these companies.
These market fluctuations may adversely affect the market price of the Company's
Common Stock.
EFFECT OF CERTAIN CHARTER PROVISIONS; ANTITAKEOVER EFFECTS OF CERTIFICATE OF
INCORPORATION, BYLAWS AND DELAWARE LAW
Following the consummation of this Offering, the Company's Board of
Directors will have the authority to issue up to 1,000,000 shares of Preferred
Stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights of those shares without any further vote
or action by the stockholders. The Preferred Stock could be issued with voting,
liquidation, dividend and other rights superior to those of the Common Stock.
The rights of the holders of 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 could have the effect
of making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. Further, certain provisions of the
Company's Certificate of Incorporation, including provisions that create a
classified Board of Directors, and certain provisions of the Company's Bylaws
and of Delaware law could delay or make more difficult a merger, tender offer or
proxy contest involving the Company. See "Description of Capital Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION
New investors participating in this Offering will incur immediate and
substantial dilution of $8.79 per share from the initial public offering price.
To the extent outstanding options to purchase the Common Stock are exercised,
there will be further dilution. See "Dilution" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
ABSENCE OF DIVIDENDS
The Company has never paid or declared any cash dividends and does not
anticipate paying any cash dividends in the foreseeable future. The Company
currently intends to retain any future earnings for use in its business. In
addition, the Company's bank line of credit prohibits the payment of cash
dividends without the bank's prior written consent. See "Dividend Policy."
14
<PAGE> 16
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,200,000 shares of
the Common Stock offered by the Company hereby are estimated to be approximately
$23.7 million ($28.0 million if the Underwriters' over-allotment option is
exercised in full) after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company and assuming an initial
public offering price of $12.00 per share. The primary purposes of this Offering
are to create a public market for the Common Stock, to facilitate future access
by the Company to public markets and obtain additional working capital. Prior to
this Offering, there has been no market for the Common Stock, and there can be
no assurance that an active public market for the Common Stock will develop or
be sustained after the Offering. The Company will not receive any proceeds from
the sale of the shares of the Common Stock by the Selling Stockholders.
The Company expects to use the net proceeds for the expansion of the
Company's sales, marketing and customer support organizations, capital
expenditures (including purchases of test and development hardware and
installation of redundant systems) and other general corporate and working
capital purposes. The amounts actually expended by the Company will vary
significantly depending upon a number of factors, including future revenue
growth and the amount of cash generated by the Company's operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." Furthermore, the Company expects
from time to time to evaluate the acquisition of products, businesses and
technologies which complement the Company's business, for which a portion of the
net proceeds may be used. Currently, however, the Company does not have any
understandings, commitments or agreements and is not in any negotiations with
respect to any such acquisitions. Pending such uses, the Company intends to
invest the net proceeds in United States government securities and in
short-term, interest-bearing investment grade securities. In addition, the
Company will receive proceeds of $500,000 from the exercise of options to
purchase 100,000 shares of Common Stock by certain Selling Stockholders
immediately prior to the consummation of the Offering.
DIVIDEND POLICY
The Company has been a Subchapter S Corporation for federal and state
income tax purposes since its inception in 1987. As a result, the net income of
the Company for federal and state income tax purposes was reported by, and taxed
directly to, the Company's stockholders. The Company made distributions to its
current stockholders of $105,000 in 1994 and $52,500 in 1995 to fund stockholder
tax liabilities resulting from the Company's status as a Subchapter S
Corporation. In connection with the termination of the Company's Subchapter S
Corporation status upon the Company's reincorporation in Delaware, the Company
estimates that approximately $75,000 will be distributed to the current
stockholders for their estimated federal and state income tax liabilities. The
Company currently intends to retain its earnings following the Offering for use
in its business. Consequently, the Company currently does not anticipate paying
any cash dividends in the foreseeable future. In addition, the Company's bank
line of credit prohibits the payment of cash dividends without the bank's prior
written consent.
The Company expects to enter into an agreement (the "Tax Indemnification
Agreement") with certain persons who were stockholders of the Company while it
was a Subchapter S Corporation (the "Existing Stockholders") providing for,
among other things, the indemnification of the Company by such stockholders for
any federal and state income taxes (including interest) incurred by the Company
if for any reason the Company is deemed to be treated as a Subchapter C
Corporation during any period which it reported its taxable income as Subchapter
S Corporation. The Tax Indemnification Agreement further provides for the
cross-indemnification of the Company and of each Existing Stockholder for any
losses or liabilities with respect to certain additional taxes (including
interest and, in the case of Existing Stockholders, penalties) resulting from
the Company's operations during the period in which it was Subchapter S
Corporation. See "Certain Transactions."
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<PAGE> 17
CAPITALIZATION
The following table sets forth as of September 30, 1996 (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the Company
after giving effect to the termination of the Company's S Corporation status and
(iii) the capitalization of the Company as adjusted to give effect to the sale
of the shares of Common Stock offered by the Company hereby at an assumed
initial public offering price of $12.00 per share, the application of the
estimated net proceeds to the Company therefrom as described under "Use of
Proceeds," and the receipt of $500,000 from certain Selling Stockholders in
connection with the exercise of options to purchase 100,000 shares immediately
prior to the consummation of the Offering. This information is qualified in its
entirety by, and should be read in conjunction with, the consolidated financial
statements of the Company, and related notes thereto, appearing elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
-------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
--------- --------- -----------
<S> <C> <C> <C>
Current portion of long-term debt and capital lease
obligations............................................ $ 240,777 $ 240,777 $ 240,777
========== ========== ==========
Stockholder loans and capital lease obligations, less
current portion........................................ $ 469,145 $ 469,145 $ 469,145
Stockholders' equity (deficit):
Preferred Stock, par value $0.01:
1,000,000 shares authorized (as adjusted only); no
shares outstanding..................................... -- -- --
Common Stock, par value $0.01:
10,000,000 shares authorized, actual and pro forma,
40,000,000 shares authorized as adjusted; 4,910,100
shares outstanding, actual and pro forma; 7,210,100
shares outstanding, as adjusted(1)(2).................. 49,101 49,101 72,101
Additional paid-in capital............................... -- -- 24,129,000
Accumulated (deficit).................................... (679,002) (884,488) (884,488)
---------- ---------- ----------
Total stockholders' equity (deficit)................ (629,901) (835,387) 23,316,613
---------- ---------- ----------
Total capitalization........................... $(160,756) $(366,242) $23,785,758
========== ========== ==========
</TABLE>
- ---------------
(1) Excludes 390,000 shares of Common Stock subject to the Underwriters'
over-allotment option granted by the Company.
(2) Excludes (i) an aggregate of 2,447,800 shares of Common Stock issuable upon
exercise of stock options at a weighted-average exercise price of $5.35 per
share, of which options to purchase 560,760 shares of Common Stock will be
exercisable after the Offering, (ii) 202,200 additional shares of Common
Stock reserved for future issuance under the Company's stock option plan,
(iii) 250,000 shares reserved for issuance under the Employee Stock Purchase
Plan and (iv) 750,000 shares reserved for issuance under the Long-Term
Incentive Plan. At November 14, 1996, an aggregate of 2,547,800 shares of
Common Stock were issuable upon exercise of stock options, of which options
to purchase 100,000 shares will be exercised by certain Selling Stockholders
immediately prior to the consummation of the Offering. See
"Management -- Stock Option Plan," "-- Long-Term Incentive Plan" and
"-- Employee Stock Purchase Plan."
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<PAGE> 18
DILUTION
The net tangible book value (deficit) of the Company as of September 30,
1996 was $(832,156), or $(0.17) per share of Common Stock. Net tangible book
value (deficit) per share of Common Stock is determined by dividing the
Company's tangible net worth (deficit) by the number of shares of Common Stock
outstanding. The pro forma net tangible book value (deficit), after giving
effect to the net deferred income tax liability recorded as a result of the
termination of the Company's Subchapter S Corporation status, would be a deficit
of $(1,037,642) or $(0.21) per share. After giving effect to the sale by the
Company of 2,200,000 shares of Common Stock in this Offering (at an assumed
initial public offering price of $12.00 per share), the application of the
estimated net proceeds therefrom, and the receipt of $500,000 from certain
Selling Stockholders in connection with the exercise of options to purchase
100,000 shares immediately prior to the consummation of the Offering, the pro
forma net tangible book value of the Company as of September 30, 1996 would have
been $23,114,358 or $3.21 per share. This represents an immediate increase in
pro forma net tangible book value of $3.42 per share to existing stockholders
and an immediate dilution in pro forma net tangible book value of $8.79 per
share to new investors purchasing shares of Common Stock in the Offering. The
following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share of Common
Stock...................................................... $12.00
Net tangible book value (deficit) per share at September
30, 1996................................................ (0.17)
Pro forma adjustments (see above).......................... (0.04)
------
Pro forma net tangible book value (deficit) per share as of
September 30, 1996......................................... (0.21)
Increase in net tangible book value (deficit) per share of
Common Stock attributable to new investors................. 3.42
------
Pro forma net tangible book value per share of Common Stock
after the Offering......................................... 3.21
------
Dilution per share to new investors.......................... $ 8.79
======
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1996, the differences between existing stockholders and the new investors with
respect to the number of shares of Common Stock purchased from the Company, the
total consideration paid to the Company and the average price per share paid:
<TABLE>
<CAPTION>
SHARES OWNED
AFTER THE PUBLIC
OFFERING TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)............... 4,910,100 69.1% $ 2,500 -- $ 0.00
New investors(1)(2).................... 2,200,000 30.9% 26,400,000 100.0% 12.00
---------- ------ ----------- ------
Total........................ 7,110,100 100.0% $26,402,500 100.0%
========== ====== =========== ======
</TABLE>
- ---------------
(1) Sales by Selling Stockholders in this Offering will reduce the number of
shares held by existing stockholders to 4,610,100 or 63.9% of the total
number of shares of Common Stock outstanding after this Offering (60.7% if
the Underwriters' over-allotment option is exercised in full), and will
increase the number of shares held by new investors to 2,600,000 or 36.1% of
the total number of shares of Common Stock outstanding after the Offering
(39.4% if the Underwriters' over-allotment option is exercised in full). See
"Principal and Selling Stockholders."
(2) Excludes 100,000 shares of Common Stock sold by certain Selling Stockholders
in the Offering. These shares will be acquired by the certain Selling
Stockholders immediately prior to the consummation of the Offering through
the exercise of stock options that will result in $500,000 of cash proceeds
to the Company.
The foregoing tables exclude (i) an aggregate of 2,447,800 shares of Common
Stock issuable upon exercise of stock options at a weighted-average exercise
price of $5.35 per share, of which options to purchase 560,760 shares of Common
Stock will be exercisable after the Offering, (ii) 202,200 additional shares of
Common Stock reserved for future issuance under the Company's stock option plan,
(iii) 250,000 shares reserved for issuance under the Employee Stock Purchase
Plan and (iv) 750,000 shares reserved for issuance under the Long-Term Incentive
Plan. At November 14, 1996, an aggregate of 2,547,800 shares of Common Stock
were issuable upon exercise of stock options, which 100,000 shares will be
exercised by Selling Stockholders in connection with the Offering. See
"Management -- Stock Option Plan," "-- Long-Term Incentive Plan" and
"-- Employee Stock Purchase Plan." To the extent outstanding options are
exercised, there will be further dilution to new investors.
17
<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statement of operations data set forth below for the fiscal
years ended December 31, 1993, 1994 and 1995, and the nine months ended
September 30, 1996, and the consolidated balance sheet data at December 31,
1993, 1994 and 1995 and September 30, 1996 are derived from, and should be read
in conjunction with, the audited consolidated financial statements of the
Company, and the notes thereto, which are included elsewhere in this Prospectus.
The consolidated statements of operations data for the fiscal years ended
December 31, 1991 and 1992 and the consolidated balance sheet data at December
31, 1991 and 1992 are derived from unaudited consolidated financial statements
of the Company not included herein. The selected financial data at September 30,
1995 and for the nine months ended September 30, 1995 are derived from unaudited
consolidated financial statements included elsewhere in this Prospectus. The
unaudited consolidated financial statements include all adjustments (consisting
only of normal recurring adjustments and accruals) that in the opinion of
management are necessary for a fair presentation of the financial information
set forth therein. Operating results for the nine months ended September 30,
1996 are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 1996. The selected financial data set forth
below are qualified in their entirety by, and should be read in conjunction
with, the consolidated financial statements, the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------------- -------------------------
1991 1992 1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUES
License and software development
fees........................... $ 1,274,659 $ 1,781,619 $ 2,911,539 $ 2,934,450 $ 7,207,581 $ 4,778,059 $ 6,453,243
Maintenance fees................. 131,548 157,371 375,510 700,861 1,170,447 874,076 1,433,190
Computer hardware sales.......... 65,161 9,851 81,019 316,145 1,853,424 1,076,724 1,149,052
----------- ----------- ----------- ----------- ----------- ----------- -----------
1,471,368 1,948,841 3,368,068 3,951,456 10,231,452 6,728,859 9,035,485
COSTS AND EXPENSES
Cost of license and software
development fees............... 572,180 819,929 785,622 1,482,036 3,559,798 2,186,040 3,519,921
Cost of maintenance fees......... -- 32,347 40,776 151,346 280,176 214,320 324,387
Cost of computer hardware
sales.......................... 8,777 1,509 77,979 315,262 1,500,816 842,407 998,876
Selling, general and
administrative expenses........ 900,446 1,379,929 2,234,816 2,244,031 3,966,265 2,631,749 4,048,248
Research and development costs... -- -- 131,203 167,152 165,366 91,313 344,326
----------- ----------- ----------- ----------- ----------- ----------- -----------
1,481,403 2,233,714 3,270,396 4,359,827 9,472,421 5,965,829 9,235,758
Income (loss) from operations.... (10,035) (284,873) 97,672 (408,371) 759,031 763,030 (200,273)
OTHER INCOME (EXPENSE)
Interest expense................. (205,653) (80,034) (32,774) (41,310) (105,849) (83,029) (81,212)
Minority interest share of
loss........................... 115,451 181,676 -- -- -- -- --
Amortization of excess of
assigned value of identifiable
assets over cost of an acquired
interest....................... -- -- 253,959 304,750 304,750 228,562 228,562
----------- ----------- ----------- ----------- ----------- ----------- -----------
(90,202) 101,642 221,185 263,440 198,901 145,533 147,350
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)................ $ (100,237) $ (183,231) $ 318,857 $ (144,931) $ 957,932 $ 908,563 $ (52,923)
=========== =========== =========== =========== =========== =========== ===========
Pro forma data (unaudited)(1):
Historical income (loss)....... $ 957,932 $ (52,923)
Pro forma income tax expense
(benefit).................... 220,618 (97,928)
----------- -----------
Pro forma net income........... $ 737,314 $ 45,005
=========== ===========
Pro forma net income per
share........................ $ 0.12 $ 0.01
=========== ===========
Shares used in pro forma net
income per share
calculations................. 6,293,720 6,293,720
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
------------------------------------------------------------------- -------------------------
1991 1992 1993 1994 1995 1996 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
ACTUAL PRO
----------- FORMA(1)
-----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........ $ 46,516 $ 253,092 $ 108,554 $ 75,840 $ 120,255 $ 8,433 $ 8,433
Working capital (deficit)........ (15,508) (317,015) (246,748) (1,073,896) (1,181,894) (1,690,612) (1,561,671)
Total assets..................... 898,320 637,678 797,465 1,581,751 4,035,323 5,188,599 5,392,540
Long term debt, capital lease
obligations and stockholder
loans, less current portion.... 649,231 778,710 237,288 416,136 623,304 469,145 469,145
Stockholders' deficit............ (1,389,753) (1,551,336) (1,232,479) (1,482,410) (576,978) (629,901) (835,387)
</TABLE>
- ---------------
(1) The Company has operated as a Subchapter S Corporation for federal and state
income tax purposes since its inception in 1987, and, therefore, the
historical financial statements do not include a provision for federal and
state income taxes for such periods. Pro forma net income (loss) has been
computed as if the Company had been subject to federal and state income
taxes based on the tax laws in effect during the respective periods. See
Note 2 of Notes to Consolidated Financial Statements.
18
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains forward-looking statements relating to future
events or the future financial performance of the Company. Prospective investors
are cautioned that such statements are only predictions and that events or
results may differ materially. In evaluating such statements, prospective
investors should specifically consider the various factors identified in this
Prospectus, including the matters set forth under the caption "Risk Factors,"
which could cause actual results to differ materially from those indicated by
such forward-looking statements.
GENERAL
Overview
The Company was incorporated in 1987 to commercialize an automated credit
processing system developed by James R. DeFrancesco, the Company's President and
Chief Executive Officer, and Scott L. Freiman, the Company's Executive Vice
President, while they were employed by American Financial Corporation ("AFC"),
an automobile finance servicing company owned by Mr. DeFrancesco. AFC was
acquired in October 1987 by Perpetual Savings Bank, FSB. Mr. DeFrancesco and Mr.
Freiman retained ownership of AFC's credit processing software which formed the
basis for CreditRevue. CreditRevue was initially released in 1988. Since its
initial release, the Company has continually enhanced CreditRevue in response to
the needs of its customers. Credit Connectionbecame commercially available in
July 1996 and, to date, has generated approximately $27,000 in revenues. Fees
from licenses of CreditRevue and related maintenance fees and resales of
third-party computer hardware and software associated with installations of
CreditRevue accounted for virtually all of the Company's revenue through
September 30, 1996. See "Risk Factors -- Dependence on CreditRevue Product
Line."
License fees for CreditRevue are recognized based on a
percentage-of-completion method, measured generally on a cost-incurred basis.
The Company typically charges a nonrefundable fee of 25% of the preliminary
estimate of the total license fee to develop an analysis of the customer's
credit operations and a plan for the configuration and implementation of
CreditRevue according to the customer's requirements. Costs consist primarily of
direct labor and temporary contract labor. Contracts in progress are reviewed
periodically, and revenues and earnings are adjusted based on revisions in
contract value and estimated time to completion. For a description of certain
risks associated with the lengthy implementation time associated with
installations of CreditRevue, see "Risk Factors -- Lengthy Sales and
Implementation Cycle." The Company recognizes revenue for maintenance fees pro
rata over the term of the related agreement, which is generally one year.
Maintenance fees received in advance of revenue recognition are included in
deferred maintenance fees. In addition, as a convenience to its customers, the
Company offers third-party computer hardware through various reseller
arrangements. However, neither third-party hardware nor third-party software
sales are a focus of the Company's overall marketing strategy. For the nine
months ended September 30, 1996, revenues from third-party hardware and software
sales accounted for 12.7% and 2.3% of total revenues, respectively. Revenues
from resales of third-party computer hardware and software are recognized at the
time of shipment and installation.
Certain of the Company's products and services, including Credit Connection
and CreditRevue Service Bureau, are, or will be, charged on a per transaction
basis. As a result, the Company anticipates that transaction-based revenue will
be an increasing proportion of the Company's revenue. The Company's sales and
marketing efforts will no longer be exclusively targeted at generating
license-based revenue but will be increasingly focused on generating
transaction-based revenue from prospective customers. The Company's anticipated
future growth is based, in large part, on the success of these products and
services and the transition to a transaction-based revenue stream. Accordingly,
the failure by the Company to generate demand for Credit Connection or
CreditRevue Service Bureau, the occurrence of any significant technological
problems, such as a system failure incurred prior to the implementation of a
back-up computer system, the Company's lack of systems failure or interruption
insurance, or the failure of the Company to successfully manage the transition
to a transaction-based revenue stream would have a material adverse effect on
the
19
<PAGE> 21
Company's business, results of operations and financial condition. See "Risk
Factors -- Market Acceptance of Credit Connection; Transition to
Transaction-Based Revenue" and "-- System Interruption and Security Risks;
Potential Liability; Possible Lack of Adequate Insurance; and System
Inadequacy."
Since 1987, the Company has continually invested in the development and
introduction of new products, services and enhancements to its software.
Research and development expenditures are expensed as incurred. Certain software
development costs are capitalized subsequent to the establishment of
technological feasibility in accordance with Statement of Financial Accounting
Standards No. 86, Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed. Based on the Company's current research and
development process, technological feasibility is established upon completion of
a working model. The Company intends to continue to expend substantial resources
on developing new products and services and enhancements to its software to
incorporate technological developments and satisfy evolving customer needs.
As of September 30, 1996, the Company had nine employees in its sales and
marketing organization. The Company intends to hire a significant number of
additional sales and marketing personnel in the future to help the Company
expand its market presence. Competition for such personnel is intense, and there
can be no assurance that the Company can retain its existing sales personnel or
that it can attract, assimilate or retain additional highly qualified sales
persons in the future. If the Company is unable to hire such personnel on a
timely basis, the Company's business, results of operations and financial
condition could be materially and adversely affected.
The Company operates as a Subchapter S Corporation and, therefore, does not
accrue federal corporate taxes on its earnings. Upon reincorporation in
Delaware, the Company's Subchapter S Corporation status will terminate and the
Company will be subject to federal and state income tax at the corporate level.
The Company does not expect this change in status to have a significant impact
on its cash flows as it previously made distributions to its stockholders for
the payment of income taxes. See Note 2 to the Consolidated Financial Statements
included elsewhere in this Prospectus.
20
<PAGE> 22
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
total revenues for the periods indicated (subtotals not adjusted for rounding):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Percentages of Total Revenues
Revenues
License and software development fees.............. 86.5% 74.3% 70.5% 71.0% 71.4%
Maintenance fees................................... 11.1 17.7 11.4 13.0 15.9
Computer hardware sales............................ 2.4 8.0 18.1 16.0 12.7
----- ----- ----- ----- -----
100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Costs and Expenses
Cost of license and software development fees...... 23.3 37.5 34.8 32.5 39.0
Cost of maintenance fees........................... 1.2 3.8 2.7 3.2 3.6
Cost of computer hardware sales.................... 2.3 8.0 14.7 12.5 11.1
Selling, general and administrative expenses....... 66.4 56.8 38.8 39.1 44.8
Research and development costs..................... 3.9 4.2 1.6 1.4 3.8
----- ----- ----- ----- -----
97.1 110.3 92.6 88.7 102.3
Income (loss) from operations........................... 2.9 (10.3) 7.4 11.3 (2.3)
Other income (expense)
Interest expense................................... (1.0) (1.0) (1.0) (1.2) (0.9)
Amortization of excess of assigned value of
identifiable assets over the cost of an acquired
interest......................................... 7.6 7.6 3.0 3.4 2.5
----- ----- ----- ----- -----
6.6 6.6 2.0 2.2 1.6
----- ----- ----- ----- -----
Net income (loss)....................................... 9.5% (3.7)% 9.4% 13.5% (0.7)%
===== ===== ===== ===== =====
Pro forma data (unaudited):
Historical income (loss).............................. 9.4% (0.7)%
Pro forma income tax expense (benefit)................ 2.2 (1.1)
----- -----
Pro forma net income.................................. 7.2% 0.6%
===== =====
</TABLE>
Total Revenues
Total revenues increased 34.3% from $6.7 million in the nine months ended
September 30, 1995 to $9.0 million in the nine months ended September 30, 1996.
Total revenues increased 17.3% from $3.4 million in 1993 to $4.0 million in 1994
and 158.9% to $10.2 million in 1995. The Company's revenues are derived from
three sources: license and software development fees, maintenance fees and
computer hardware sales. The Company's 10 largest customers accounted for 77.3%
and 73.4% of total revenues in 1995 and the first nine months of 1996,
respectively. One of the Company's customers accounted for 10.8% of total
revenues in the first nine months of 1996. Two of the Company's customers
accounted for 19.8% and 12.9% of total revenues, respectively, in 1995. Four of
the Company's customers accounted for 17.4%, 15.9%, 12.4% and 10.2% of total
revenues, respectively, in 1994. Six of the Company's customers accounted for
18.3%, 15.9%, 13.0%, 11.8%, 11.1% and 11.0% of total revenues, respectively, in
1993.
License and Software Development Fees
CreditRevue accounted for virtually all of the Company's license and
software development fee revenue through September 30, 1996. License and
software development fees increased 35.1% from $4.8 million in the nine months
ended September 30, 1995 to $6.5 million in the nine months ended September 30,
1996. License and software development fees remained constant at $2.9 million in
1993 and 1994 and increased 145.6% to $7.2 million in 1995. The increases during
these periods resulted from increased market acceptance of CreditRevue.
21
<PAGE> 23
Maintenance Fees
Maintenance fees include fees from software maintenance agreements.
Maintenance fees increased by 64.0% from $0.9 million in the nine months ended
September 30, 1995 to $1.4 million in the nine months ended September 30, 1996.
Maintenance fees increased 86.6% from $0.4 million in 1993 to $0.7 million in
1994 and 67.0% to $1.2 million in 1995. The growth in these revenues during the
periods presented was the result of increased maintenance fees associated with
the increased number of licenses of CreditRevue outstanding during such periods.
Computer Hardware Sales
Computer hardware sales revenue was virtually unchanged in the nine months
ended September 30, 1995 as compared to the nine months ended September 30,
1996. Computer hardware sales revenue increased 290.2% from $0.1 million in 1993
to $0.3 million in 1994 and 486.3% to $1.9 million in 1995. Computer hardware
sales revenue consists of revenues received from resales of third-party hardware
in connection with the license and installation of the Company's software. The
increase in such revenues during these periods reflects the increase in the
number of licenses and installations of the Company's CreditRevue software.
Cost of License and Software Development Fees
Cost of license and software development fees consist primarily of salaries
and benefits for in-house programmers and the cost of temporary contract labor.
Cost of license and software development fees increased by 61.0% from $2.2
million in the nine months ended September 30, 1995 to $3.5 million in the nine
months ended September 30, 1996. Cost of license and software development fees
increased by 88.6% from $0.8 million in 1993 to $1.5 million in 1994 and 140.2%
to $3.6 million in 1995. As a percentage of license fee and software development
revenue, cost of license and software development fees were 27.0%, 50.5%, 49.4%,
53.6%, 56.5%, 45.8% and 54.5% in 1993, 1994, 1995, the three months ended
September 30, 1995, the three months ended December 31, 1995, and the nine
months ended September 30, 1995 and 1996, respectively. The variability of the
cost of license and software fees as a percentage of license and software
development fees over these periods is primarily related to the fluctuation in
the Company's quarterly revenues and higher hourly labor costs associated with
temporary contractors during periods in which the Company experienced increased
demand for its products. The Company's costs on a full-time equivalent basis for
temporary contractors is generally twice the amount incurred by the Company for
its in-house technical personnel. In late 1995 and into 1996, the Company
increased internal staffing levels commensurate with the expected growth in
revenues. These increased staffing levels are expected to reduce the dependency
on temporary contractors upon the completion of their training in the Company's
proprietary products and services and technology, resulting in a corresponding
increase in the margins related to these revenues. Total labor costs as a
percentage of revenue are also expected to decrease as the Company and its
customers move to a greater level of product standardization.
Costs of Maintenance Fees
Cost of maintenance fees consists primarily of personnel and related costs
for customer maintenance and support. Cost of maintenance fees increased from
$0.2 million in the nine months ended September 30, 1995 to $0.3 million in the
nine months ended September 30, 1996. Cost of maintenance fees increased from
$0.1 million in 1993 to $0.2 million in 1994 to $0.3 million in 1995. As a
percentage of maintenance fee revenue, cost of maintenance fees was 10.9%,
21.6%, 23.9%, 24.5% and 22.6% in 1993, 1994, 1995 and the nine months ended
September 30, 1995 and 1996, respectively. The dollar increase in the cost of
maintenance fees reflects the growth in license fees for CreditRevue during the
periods presented and the resultant increase in the number of installations. The
decrease in the percentage of cost of maintenance fees to maintenance fee
revenue in the nine months ended September 30, 1996 as compared to September 30,
1995 resulted from better efficiencies in the utilization of maintenance
personnel as maintenance revenues have increased.
22
<PAGE> 24
Cost of Computer Hardware Sales
Cost of computer hardware sales consists of (i) the Company's cost of
computer hardware resold to the Company's customers that are licensing
CreditRevue and (ii) salaries and benefits for systems integration employees.
Cost of computer hardware sales increased by 18.6% from $0.8 million in the nine
months ended September 30, 1995 to $1.0 million in the nine months ended
September 30, 1996. Cost of computer hardware sales increased from $0.1 million
in 1993 to $0.3 million in 1994 and to $1.5 million in 1995. As a percentage of
computer hardware sales revenue, cost of computer hardware sales was 96.2%,
99.7%, 81.0%, 78.2% and 86.9% in 1993, 1994, 1995 and the nine months ended
September 30, 1995 and 1996, respectively. The dollar increase in the cost of
computer hardware sales reflects the increase in computer hardware sales during
the periods presented. The Company's margin on computer hardware sales
fluctuates based on changes in product sales mix, volume discounts to
significant customers, and negotiated mark-ups with customers.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 53.8% from $2.6
million in the nine months ended September 30, 1995 to $4.0 million in the nine
months ended September 30, 1996. Of this $1.4 million increase, approximately
$0.9 million related to payroll expenses which resulted primarily from an
increase in the Company's administrative staff, including $0.2 million of
expense related to severance payments made to a former officer of the Company,
and approximately $0.5 million of the increase related to non-salary based
administrative expenses. Selling, general and administrative expenses remained
relatively constant at $2.2 million in 1993 and 1994 and increased 76.7% to $4.0
million in 1995. Selling, general and administrative expenses includes (i)
salaries, commissions and bonuses paid to sales and marketing personnel, as well
as travel and promotional expenses, and (ii) salaries of administrative,
executive and financial personnel, and (iii) outside professional fees. The
increase in these expenses is attributable to several factors. The increase in
such expenses was a result of an increase in sales and marketing staff from
three in 1993 to eight at September 30, 1996. In addition, such expenses
increased due to an increase in administrative staff from 14 in 1993 to 30 at
September 30, 1996, and expenses associated with the growth of the Company and
an increase in legal fees associated with the protection of the Company's
proprietary intellectual property.
Research and Development Costs
Research and development costs consist primarily of salaries and benefits
of in-house programmers. These costs increased $0.3 million during the nine
months ended September 30, 1996 as compared to the nine months ended September
30, 1995 due primarily to the addition of four programmers in 1996 and the
commercial release of Credit Connection in July 1996. During the period from
September 1994 through June 1996, the direct payroll costs of certain
programmers were capitalized as software development costs. See Note 1 to Notes
to Consolidated Financial Statements. During the third quarter of 1996, the
direct payroll costs of these programmers were included in research and
development costs.
Amortization of Assigned Value Over Cost of an Acquired Interest
From September 1988 through March 1993, the Company was the sole general
partner of a limited partnership. In March 1993, the Company purchased the other
partner's limited partnership interest for $0.2 million. The acquisition was
accounted for as an acquisition of a minority interest using the purchase method
of accounting. The assigned value of the identifiable net assets acquired over
the cost of the acquired interest was $1.2 million. This amount is being
amortized into income using the straight-line method over four years.
Interest Expense
Interest expense was $0.1 million in the nine months ended September 30,
1995 and $0.1 million in the nine months ended September 30, 1996. Interest
expense was $32,774, $41,310 and $0.1 million in 1993, 1994 and 1995,
respectively. The increase in interest expense over such periods resulted from
increased borrowings under the Company's line of credit and an increase in
capital lease obligations.
23
<PAGE> 25
PRO FORMA ADJUSTMENTS FOR INCOME TAXES
From its inception in 1987, the Company has been treated for income tax
purposes as a corporation subject to federal and state taxation under Subchapter
S of the Internal Revenue Code of 1986, as amended (the "Code") and comparable
state laws. As a result, for federal and state income tax purposes, the
Company's earnings have been taxed directly to the Company's stockholders. The
pro forma adjustments for income taxes were calculated as if the Company were
subject to tax under the federal and state income tax laws in effect for the
respective periods using the criteria established under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." See Note 2 to
"Notes to Consolidated Financial Statements," included elsewhere in this
Prospectus.
24
<PAGE> 26
QUARTERLY INFORMATION
The following tables set forth certain unaudited quarterly consolidated
financial information for each of the four quarters in 1995 and for each of the
three quarters in the nine months ended September 30, 1996. The Company believes
that this information has been presented on the same basis as the audited
consolidated financial statements appearing elsewhere in this Prospectus and all
necessary adjustments (consisting only of normal recurring adjustments) have
been included in the amounts stated below to present fairly the unaudited
quarterly results when read in conjunction with the audited consolidated
financial statements of the Company and related notes thereto included elsewhere
in this Prospectus. The operating results for any quarter are not necessarily
indicative of the operating results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1995 1995 1995 1995 1996 1996 1996
---------- ---------- ------------- ------------ ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues
License and software
development fees......... $1,187,692 $1,762,835 $ 1,827,532 $2,429,522 $1,776,593 $2,233,388 $ 2,443,262
Maintenance fees........... 221,908 251,585 400,583 296,371 418,237 432,774 582,179
Computer hardware sales.... 288,971 392,521 395,232 776,700 404,388 5,074 739,590
---------- ---------- ----------- ---------- ---------- ---------- -----------
Total 1,698,571 2,406,941 2,623,347 3,502,593 2,599,218 2,671,236 3,765,031
---------- ---------- ----------- ---------- ---------- ---------- -----------
Costs and Expenses
Cost of license and
software development
fees..................... 755,404 451,718 978,918 1,373,758 1,071,257 1,276,823 1,171,841
Cost of maintenance fees... 74,176 70,046 70,098 65,856 110,591 97,993 115,803
Cost of computer hardware
sales.................... 181,292 244,098 417,017 658,409 336,025 35,186 627,665
Selling, general and
administrative
expenses................. 542,633 1,274,818 814,298 1,334,516 1,353,402 1,026,897 1,667,949
Research and development
costs.................... 20,160 14,053 57,100 74,053 90,667 90,681 162,978
---------- ---------- ----------- ---------- ---------- ---------- -----------
1,573,665 2,054,733 2,337,431 3,506,592 2,961,942 2,527,580 3,746,236
---------- ---------- ----------- ---------- ---------- ---------- -----------
Income (loss) from
operations................... 124,906 352,208 285,916 (3,999) (362,724) 143,656 18,795
Other income (expense)
Interest expense........... (20,810) (31,013) (31,206) (22,820) (31,147) (29,400) (20,665)
Amortization of excess of
assigned value of
identifiable assets over
cost of an acquired
interest................. 76,188 76,186 76,188 76,188 76,187 76,188 76,187
---------- ---------- ----------- ---------- ---------- ---------- -----------
55,378 45,173 44,982 53,368 45,040 46,788 55,522
---------- ---------- ----------- ---------- ---------- ---------- -----------
Net income (loss).............. $ 180,284 $ 397,381 $ 330,898 $ 49,369 $ (317,684) $ 190,444 $ 74,317
========== ========== =========== ========== ========== ========== ===========
Pro forma data (unaudited):
Historical income (loss)..... $ 180,284 $ 397,381 $ 330,898 $ 49,369 $ (317,684) $ 190,444 $ 74,317
Pro forma income tax expense
(benefit).................. 41,465 91,397 76,401 11,355 (263,678) 157,905 7,845
---------- ---------- ----------- ---------- ---------- ---------- -----------
Pro forma net income
(loss)..................... $ 138,819 $ 305,984 $ 254,497 $ 38,014 $ (54,006) $ 32,539 $ 66,472
========== ========== =========== ========== ========== ========== ===========
</TABLE>
Prior growth rates in the Company's revenue and net income should not be
considered indicative of future results of operations. Future results of
operations will depend upon many factors, including market acceptance of new
services, including the Company's Credit Connection and CreditRevue Service
Bureau, the demand for the Company's products and services, the successful
transition from predominantly license fee-based revenue to predominantly
transaction fee-based revenue, the timing of new product and service
introductions and software enhancements by the Company or its competitors, the
level of product, service and price competition, the length of the Company's
sales cycle, the size and timing of individual transactions, the delay or
deferral of customer implementations, the Company's success in expanding its
customer support organization, direct sales force and indirect distribution
channels, the nature and timing of significant marketing programs, the mix of
products and services sold, the timing of new hires, the ability of the Company
to develop and market new products and services and control costs, competitive
conditions in the industry and general economic conditions. In addition, the
decision to implement the Company's products or services typically involves a
significant commitment of customer resources and is subject to the budget cycles
of the Company's customers. Licenses of CreditRevue generally reflect a
relatively high amount of revenue per order. The loss or delay of individual
orders, therefore, would have a significant impact on the Company's revenue and
quarterly results of
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<PAGE> 27
operations. The timing of revenue is difficult to predict because of the length
and variability of the Company's sales cycle, which has ranged to date from two
to 18 months from initial customer contact to the execution of a license
agreement. In addition, since a substantial portion of the Company's revenue is
recognized on a percentage-of-completion basis, the timing of revenue
recognition for its licenses may be materially and adversely affected by delays
or deferrals of customer implementations. Such delays or deferrals may also
increase expenses associated with such implementations which would materially
and adversely affect related operating margins. The Company's operating expenses
are based in part on planned product and service introductions and anticipated
revenue trends and, because a high percentage of these expenses are relatively
fixed, a delay in the recognition of revenue from a limited number of
transactions could cause significant variations in operating results from
quarter-to-quarter and could result in operating losses. To the extent such
expenses precede, or are not subsequently followed by, increased revenues, the
Company's results of operations would be materially and adversely affected. As a
result of these and other factors, revenues for any quarter are subject to
significant variation, and the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance. There can be no
assurance that the Company will be profitable in any future quarter or that such
fluctuations in results of operations will not result in volatility in the price
of the Company's Common Stock. Due to all of the foregoing factors, it is likely
that in some future quarter of the Company's results of operations will be below
the expectations of public market analysts and investors. In such event, the
market price of the Company's Common Stock will be materially and adversely
affected. See "Risk Factors -- Uncertainty of Future Results of Operations;
Fluctuations in Quarterly Results of Operations."
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its working capital needs and
investments in property and equipment from operating cash flows. During the
years ended December 31, 1993, 1994 and 1995 the Company generated net cash from
operating activities of $0.3 million, $0.3 million and $0.8 million,
respectively. For the nine-month periods ended September 30, 1995 and 1996, net
cash provided by operating activities was $0.5 million and $0.4 million,
respectively. Despite these positive net cash flows from operating activities,
the Company reported a working capital deficiency of $1.2 million and $1.7
million at December 31, 1995 and September 30, 1996, respectively. This working
capital deficiency is primarily caused by the deferral for financial reporting
purposes of certain billings on contracts to develop software, and deferred
revenue related to maintenance contracts and computer hardware and software
sales. Net deferred revenue of these items at December 31, 1995 and September
30, 1996 was $0.9 million and $2.0 million, respectively.
The Company's cash used for investing activities consists principally of
investments in property and equipment and capitalized software development
costs. During the years ended December 31, 1993, 1994 and 1995, the Company
invested a total of $0.5 million, $0.3 million, and $0.7 million, respectively,
in property and equipment and capitalized software development costs. During the
nine-month periods ended September 30, 1995 and 1996 these investments totaled
$0.5 million and $0.4 million, respectively. These investments were directly
attributable to the Company's growth in operations. The Company does not have
any material commitments for the purchase of property and equipment at September
30, 1996.
The Company has historically relied principally on its bank line of credit
for its limited financing needs. The Company maintains a secured bank line of
credit in the amount of $0.5 million, $0.3 million of which was outstanding at
September 30, 1996. The line of credit bears interest at the bank's prime rate
plus 1% per annum (9.25% at September 30, 1996). Further, the bank's line of
credit requires the bank's written consent prior to, among other things, (i) the
payment of cash dividends, (ii) the Company's engagement in a substantially
different business activity, or (iii) the purchase by the Company of any
interest in another enterprise or entity. The Company is obligated to Mr. James
R. DeFrancesco, the Company's President and Chief Executive Officer, for $0.2
million of loans bearing interest at 7% per annum and due on demand after
October 1, 1997.
The Company currently anticipates that its available cash resources,
expected cash flows from operations, and its bank line of credit, combined with
the net proceeds of the Offering, will be sufficient to meet its presently
anticipated working capital, capital expenditure and debt repayment requirements
through 1997.
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<PAGE> 28
BUSINESS
GENERAL
CMSI is a developer and provider of software solutions and services for
automating the consumer and small business credit analysis, decisioning and
funding process. Drawing upon over 10 years of experience in the credit
processing industry, the Company has developed and provides open-architecture
software products and services which manage volume-intensive credit operations
over wide-area networks. The Company's products and services allow its customers
to automate the entire credit application process by enabling the rapid
transmission of credit applications to multiple funding sources, expediting
credit application analysis and decisioning and facilitating compliance with
federal and state regulatory requirements. These products and services are
designed to enable credit originators, such as automobile dealerships and
retailers, and lenders, such as banks and finance companies, to improve
operating efficiencies by increasing productivity, enhance customer satisfaction
by reducing turnaround time on credit decisions, and decrease portfolio risk by
applying consistent underwriting standards.
The Company's core product, CreditRevue, analyzes credit applications by
automatically accessing third-party credit bureau reports, consulting the
lending institution's internal loan guidelines and incorporating the loan
"scorecards" used by lending institutions. Using CreditRevue, decision response
time generally ranges from a matter of seconds for automated decisions to
several minutes in cases where review by a credit analyst is required. The
Company's CreditRevue customers include some of the largest financial
institutions and finance companies in the United States, such as NationsBank
Corp., BancOne Corp., Wells Fargo Bank and The Associates Bancorp, Inc. In
addition, the Company has introduced CreditRevue to the telecommunications
industry through a joint venture between AirTouch Cellular, Inc. and US West New
Vector Group, Inc.
To further support the needs of the lending industry, the Company developed
Credit Connection, which became commercially available in July 1996. Credit
Connection, a software-based service, links sources of credit origination
through an online network that allows applications to be transmitted to multiple
funding sources and credit decisions to be delivered back to the point of origin
in a matter of minutes. To date, Credit Connection has generated approximately
$27,000 in revenues.
The Company's strategy is to introduce Credit Connection to the marketplace
through the Company's sales force, the sales forces of lending institutions and
various remarketers. The Company's agreements with each lending institution that
subscribes to the Credit Connection service include a provision that the Company
and the lending institution develop and implement a marketing plan describing
how the lending institution will utilize its sales force to increase dealership
subscriptions to the Credit Connection service. Currently, NationsBank, First
Merchants and another sub-prime lender have executed such Credit Connection
lender agreements. The Company also has been pursuing remarketing arrangements
for the Credit Connection service with vendors that provide automated systems
for dealership management and operations. The Company recently signed an
agreement to form a strategic alliance with the Dealer Service Group of ADP to
remarket Credit Connection. This division of ADP is one of the largest providers
of computing and consulting services for automobile and truck dealers worldwide.
To date, ADP is the only remarketer to have entered into an agreement with the
Company.
The Company's agreements with lending institutions that are licensees of
CreditRevue require that the Credit Connection service be utilized as the
exclusive interface between CreditRevue software and applications transmitted
electronically from third parties. The ability of Credit Connection lending
institutions that are not CreditRevue licensees to receive applications
transmitted electronically from third parties by means other than the Credit
Connection service is not similarly restricted. Lending institutions benefit
from transactions transmitted over the Credit Connection primarily from
increased volumes of credit applications expected by this delivery method.
Remarketers benefit by sharing in a percentage of the transactions revenues
associated with their remarketing and dealership support efforts.
The agreement with ADP provides for ADP to offer the Credit Connection
service as its standard approach to establish electronic interfaces between
dealerships and financial institutions. Under certain limited circumstances, ADP
may provide an interface which is different from the Company's. ADP does not
currently remarket any third party products or services which compete with the
Credit Connection service. See "-- Strategic Alliance with ADP."
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<PAGE> 29
By facilitating the flow of applications to multiple funding sources
through Credit Connection, and by automating the credit application analysis,
decisioning and funding process through CreditRevue, the Company believes it is
well positioned to capitalize on the growth in the consumer and small business
credit markets. The Company's products have been designed to work together and
complement each other to provide a seamless credit application process. The
Company believes that its CreditRevue customer base and proposed strategic
alliance with ADP will enhance its marketing efforts for the Credit Connection
service. In addition, the Company believes that the implementation of Credit
Connection will create new marketing opportunities for CreditRevue.
INDUSTRY OVERVIEW
According to a study commissioned by the Federal Reserve Board, the dollar
volume of consumer credit transactions increased from $811 billion in 1990 to
$1.13 trillion in 1995. Consumer credit transactions include automobile loans,
small business loans, home equity loans, credit cards, cellular telephone
service activations, student loans and equipment and automobile leasing. The
funding sources in these transactions include banks, savings and loan
associations, finance companies, sub-prime lenders, leasing companies and
student lenders. Sources of credit origination include automobile dealers,
retailers and telecommunications companies as well as the branch networks of
banks and finance companies.
Several factors have influenced the growth in consumer credit. New types of
consumer credit have developed and gained widespread acceptance. For example,
automobile leasing has become an increasingly popular automobile financing
alternative, resulting in the introduction of automobile leasing programs by
many financial institutions and automobile dealers. In addition, the use of
credit analysis is spreading to new industries, such as telecommunications,
insurance, utilities and health care. Moreover, new types of credit providers
have entered the market, in particular, sub-prime finance companies that target
borrowers who are unable or unwilling to obtain credit from traditional sources.
Lastly, credit providers have established new access channels for credit,
designed to make credit more easily obtainable by consumers. Credit applications
can be received over the telephone, through kiosks that function like automated
teller machines and via computers through home banking software and the
Internet.
Each consumer credit transaction begins with the completion of a credit
application by a borrower. The credit application is sent from a branch office
of a lending institution or from the source of credit origination, such as an
automobile dealer or retailers, to a credit processing department. The
application is then assigned to a credit analyst who retrieves reports from one
or more credit bureaus, verifies employment and income and obtains a home
appraisal, as appropriate, and then examines the information and computes key
ratios, such as debt-to-income and loan-to-value. The information and ratios are
then compared to one or more scorecards developed by the lender or a third party
to determine if the applicant meets predetermined criteria. The credit
application is then compared to the lending institution's underwriting
guidelines. The analyst then approves or denies the request for credit and the
decision is communicated to the consumer. If approved, the credit analyst
produces and prints the loan documents, verifies such documents for completeness
and accuracy and has the applicant's information entered into the financial
institution's accounting or loan servicing system. This labor-intensive and
manual process, which may take up to several days depending on the complexity of
the loan request and the sophistication of the borrower, may be carried out
multiple times for a transaction as the applicant seeks credit from multiple
sources.
As the dollar volume of consumer credit transactions has increased,
competition among lenders has also increased. Accordingly, lenders are seeking
to shorten application processing time and lower the cost of credit processing
while maintaining their qualifying criteria and complying with the extensive
federal and state regulations applicable to credit transactions. Lenders are
also seeking to increase market share while decreasing overall portfolio risk.
As a result, lenders are moving from a manual credit application process to an
automated process. Through automation, a lender can reduce the overall time to
render a credit decision while reducing risk and improving customer service.
Automating the credit application process is both complex and difficult and
lending institutions must implement sophisticated systems which enhance
efficiency and cost effectiveness while providing adaptability
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<PAGE> 30
to continually evolving technologies. Existing software solutions are generally
mainframe-based or PC-based. Mainframe-based solutions are functionally limited,
expensive to maintain and not easily adaptable to new business requirements.
PC-based solutions are also functionally limited and impractical for large
volume credit operations. Furthermore, existing solutions may not be sufficient
to address emerging industry trends. These trends include cross-selling loan
products, sub-prime lending and rate-to-risk pricing, which involves the
adjustment of a loan's interest rate to reflect the relative credit risk.
Automobile dealers and retail establishments typically maintain
relationships with a number of lending institutions to service customers with
varying credit histories. The ability to send credit applications to those
multiple funding sources is critical to their business, especially during
non-bank hours, such as evenings and weekends. Many automobile
manufacturer-based credit companies (often referred to as "captive lenders") are
directly connected to their automobile dealerships. However, these proprietary
systems do not allow dealers to send credit applications to non-captive lenders.
This issue of connectivity is not limited to retail establishments. For example,
prime lenders often send their declined credit applications and receive credit
decisions from multiple sub-prime finance companies, a process which can
increase overhead to both types of institutions in the absence of an electronic
connection.
THE CMSI SOLUTION
CMSI provides software products and services for automating the credit
analysis, decisioning and funding process and for connecting credit originators
with multiple funding sources. The Company's original product, CreditRevue,
automates and streamlines the credit origination process and eliminates
paperwork by automatically accessing credit bureau reports and consulting the
lender's underwriting guidelines, incorporating one or more scorecards utilized
by the lender, analyzing and verifying the application and facilitating the
funding of the loan. Credit Connection links a credit originator with multiple
funding sources through an online network that transmits credit applications
which can then be evaluated using CreditRevue or another credit automation
system. The Company's 10 years of experience in developing information systems,
software and services for automating consumer credit transactions has provided
the Company with significant insight into the credit application process and the
needs of credit originators and lenders which is reflected in both the design of
its products and the quality of its customer service.
CMSI's family of products and services incorporates the following key
attributes:
- Streamlined Credit Decisioning and Funding Process
CreditRevue and Credit Connection reduce credit application
processing and decision time to a matter of minutes. In addition, they
facilitate the process for funding and initiating the servicing of the
loan. The Company believes that this results in greater consumer
satisfaction and increased productivity in the credit processing
departments of lenders. Customers utilizing CreditRevue and Credit
Connection can reduce the personnel and overhead costs of their credit
application processing departments while increasing the number of credit
applications that can be processed and funded.
- Extensive Connectivity
Credit Connection offers connectivity between any number of credit
originators and multiple funding sources. Using Credit Connection,
credit originators, such as automobile dealers and retailers, can route
a single credit application to multiple funding sources to increase the
likelihood that the credit application will be approved and to
accelerate the credit application process. Credit Connection also
provides connectivity between prime and sub-prime lending sources. A
single interface between the funding source and Credit Connection is
sufficient to communicate with any number and type of credit
originators.
- Enhanced Risk Management Capabilities
By automating credit application processing, CreditRevue enables
lenders to use specific, consistent criteria and scoring for evaluating
various types of credit applications. The software checks each
application for completeness and fraud. In addition, CreditRevue
automatically accesses reports from consumer and business credit bureaus
and utilizes vehicle valuation and identification data to
29
<PAGE> 31
further reduce the risk management profile of each transaction. The
credit score given each application can be used to determine the
recommended credit decision, qualify the customer for specific products
and apply a rate-to-risk pricing matrix.
- Sophisticated Tracking and Reporting Functionality
CreditRevue and Credit Connection track each stage of the credit
application process. CreditRevue routes applications to senior analysts
when the dollar amount of the loan exceeds the authority of the original
analyst or when the loan does not meet the lender's credit policy. Both
CreditRevue and Credit Connection incorporate extensive reporting
capabilities which enhance the customer's financial reporting functions
and support regulatory compliance.
- Targeted Solutions
CreditRevue can be configured to meet each lender's needs. The
Company offers versions of CreditRevue that are targeted at lending
institutions with higher volumes of credit applications that require a
full range of features and functionality. The Company is developing a
solution for small to medium lending institutions that do not require
the same degree of configuration as a large institution. The Company
also designs interfaces between CreditRevue and the lender's other
systems, including branch automation software, customer information
repositories and loan servicing software.
- Scalability and Interoperability
CreditRevue is designed to support any size financial institution
from a single location to multiple distributed locations with hundreds
of users. The underlying open architecture of CreditRevue is designed to
operate across multiple hardware and software platforms. In addition,
the open nature of CreditRevue also enables users to access information
regardless of the computing environment in which it resides. CreditRevue
is typically deployed in an enterprise which has heterogeneous computing
platforms.
STRATEGY
The Company's objective is to be the leading provider of software solutions
for automating the credit analysis, decisioning and funding process and for
electronically transmitting credit related transactions between points of
origination and multiple funding sources. In pursuit of these objectives, the
Company has adopted the following key strategies:
Expand Presence in the Credit Automation Market
The Company has established a presence with leading institutions in
the consumer lending market, including banks, finance companies, leasing
companies and other lenders. The Company intends to expand its sales and
marketing efforts to leverage and expand its established presence in these
market segments. The Company believes that its customer base of more than
25 financial services companies represents an important source of
references for new customers as the Company seeks to expand market
acceptance of its products and services in the telecommunications,
utilities and healthcare industries. The Company's next version of
CreditRevue, expected to be released in mid-1997, is being designed to
allow the Company to reduce configuration and installation time and provide
more flexible pricing and product options to appeal to a broader customer
base.
Continue the Rollout of Credit Connection
In July 1996, the Company commercially released Credit Connection to
its existing financial services clients as well as other financial
institutions and automobile dealers. The Company is introducing Credit
Connection to the marketplace through the Company's own sales force, the
sales forces of lending institutions and various remarketers. The Company's
strategic alliance with ADP will allow the Company to leverage ADP's
worldwide automobile and truck dealer customer base to complement the
Company's own marketing efforts in the rollout of Credit Connection. The
Company also intends to establish
30
<PAGE> 32
relationships with other dealer business systems vendors and the dealer
services sales divisions of lending institutions to expand the market
presence of Credit Connection.
Increase Transaction-Based Revenues as a Percentage of Total Revenue
Historically, the Company's revenues have been generated from license
fees and services. Credit Connection revenues are transaction-based. The
Company is developing CreditRevue Service Bureau which will allow customers
to access CreditRevue on a per transaction basis while minimizing the up-
front investment in hardware and software costs of an in-house system. As a
result of Credit Connection and CreditRevue Service Bureau, the Company
anticipates that transaction-based revenue will increase as a percentage of
total revenue.
Leverage Key Relationships
In addition to its strategic alliance with ADP, the Company has
developed relationships with automated scorecard companies, hardware
vendors and credit bureaus. The Company believes that these relationships
accelerate the introduction and market acceptance of its products and
services, extend its product and service offerings, increase the
functionality of its products and services, and facilitate the development
of new products and services. The Company intends to continually identify
potential strategic relationship opportunities in the future.
Extend Technology Leadership
The Company intends to continue to extend its position as a technology
leader in developing and marketing credit processing software and services.
CMSI's products and services are based on its software technology, which is
enhanced regularly to address the evolving needs of the consumer credit
industry. The Company has designed, developed and implemented an open
architecture programming interface and related software specifically to
enable the Company to provide flexible, fully integrated solutions to
customers with specialized needs and to interface with other software. The
Company is focused on continually upgrading its current products to enhance
their features, functionality and performance and to incorporate
technological developments to meet its customers' needs.
CUSTOMERS
The Company has over 25 customers, including banks, savings and loan
associations, finance companies, sub-prime lenders, leasing companies, student
lenders and a telecommunications company. The Company intends to continue to
focus on the financial services industry and to target the insurance, utilities
and healthcare industries. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a discussion of those
customers who have accounted for more than 10% of the Company's revenues in any
of the past three years.
The following representative list of the Company's customers with active
licenses or contracts as of September 30, 1996 consists of customers which have
generated over $50,000 of license and maintenance fee revenue since January 1,
1995:
AFSA Data Corp.
Airtouch/US West
The Associates Bancorp, Inc.
BancOne Corp.
Bank One Financial Services, Inc.
Boatmens Bancshares, Inc.
Circuit City Stores, Inc.
The CIT Group, Inc.
Citizens Bank (of Maryland)
Citizens Bank (of Rhode Island)
Comerica Bank
Dauphin Deposit Corp.
First Merchants Acceptance Corporation
NationsBank Corp.
Nellie Mae, Inc.
Oxford Resources Corp.
US Bancorp
Wachovia Corp.
Wells Fargo Bank
Western Financial Bank, FSB
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<PAGE> 33
The following examples illustrate how the Company's products are being
utilized by some of its customers. The benefits achieved by these customers will
not necessarily be achieved by every customer.
NationsBank, a large financial institution which processes over
100,000 credit applications per month, decided to replace its in-house
mainframe system with CreditRevue to address its need to more efficiently
deliver immediate and consistent credit application decisions. Since the
installation of CreditRevue, the bank has significantly increased the
number of credit applications processed and improved the efficiency of its
credit application process while handling an increase in NationsBank's
overall loan volume. The ease of use of CreditRevue also reduced the bank's
underwriter training time. In addition, the bank piloted Credit Connection
commencing in January 1996 until its commercial introduction in July 1996.
Banc One, a financial institution with a large consumer lending
business, required a centrally administered processing system for credit
automation of all of its consumer loans. The organization installed
CreditRevue which provided a centrally administered flexible solution which
was designed to allow Banc One to effectively and efficiently manage its
numerous remote affiliates and its high application processing volume.
AirTouch Cellular and US WEST NewVector Group, Inc. desired an
automated credit processing system for the cellular operations of their
domestic cellular joint venture, which could review up to 5,000 credit
applications per hour, including credit bureau retrieval, policy checking,
and setting of an appropriate deposit level. In response, the Company
developed a version of CreditRevue specifically designed for the
telecommunications industry and licensed this version to the
telecommunications company.
A sub-prime lender, which finances the purchase of automobiles from
multiple locations, selected CreditRevue to automate its national indirect
lending, underwriting, contract booking and funding operations. Recently,
this lender has agreed to use Credit Connection to receive sub-prime
applications from prime lending institutions.
PRODUCTS AND SERVICES
CreditRevue
The cornerstone of the Company's product line is CreditRevue, a UNIX-based
software solution designed to automate the entire credit application process
from the entry of the credit application to the credit decision and through the
transfer of the funding information to the lender's servicing system. Using
CreditRevue, a lender can automate the analysis of a wide range of consumer
lending products, including vehicle loans and leases, home equity loans and
credit cards. Before CreditRevue is installed, the Company completes a review of
the customer's credit application processing environment. CreditRevue is then
configured to address the lender's specifications, including the lender's
underwriting, approval and funding processes. The Company designs interfaces to
the lender's other related systems, such as their branch automation software,
customer information repository, and loan servicing software.
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<PAGE> 34
The credit analysis, decisioning and funding process using CreditRevue is
illustrated in the following diagram:
[CREDIT REVUE CHART]
Key features of CreditRevue include the following:
- Supports large credit operations with multiple products and lending
divisions
- Centralizes control over policies and procedures for each division or
product
- Facilitates a logical workflow for the entire application decisioning
process
- Automates the retrieval and analysis of consumer and business credit
bureau reports
- Provides built in fraud checks and tracks regulatory compliance
- Incorporates multiple scorecards and the lender's policies and
procedures
- Audits the contract administration and funding process
- Streamlines the retrieval and analysis of home appraisals, flood
insurance verifications, title reports and document preparation
- Interfaces with other lender systems such as branch automation
software, customer information repositories and loan servicing
software
- Generates a comprehensive set of standard and custom management
reports
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The Company markets the following supplemental CreditRevue products:
CrossSell adds call center management to the credit origination
process. With CrossSell, a lender can design in-bound or out-bound
telemarketing scripts for use by customer service representatives to market
a variety of products to potential customers.
INCredit automates credit origination for loans to small businesses.
With INCredit, application and credit details can be gathered, scored and
analyzed for both the business and its principals or guarantors.
CreditRevue Data Server enables the lender's other software
applications to communicate with CreditRevue. CreditRevue Data Server is
used by the Company's customers to connect CreditRevue to the Credit
Connection, as well as bank branches, order entry systems and voice
response units.
In addition to these products, the Company is developing CreditRevue
Service Bureau, which will allow lenders to connect multiple terminals or
personal computers to the Company's service bureau system to access CreditRevue.
CreditRevue Service Bureau will be targeted to small and medium sized financial
institutions seeking to minimize the up-front hardware and software costs of an
in-house system. The Company will charge an initial set up fee for CreditRevue
Service Bureau and transaction fees for each credit application processed.
Additional charges will be assessed for other value-added services, such as
reporting. CreditRevue Service Bureau is expected to be available in late 1997.
The Company is designing a new version of CreditRevue that will allow the
software to be configured without extensive coding. The Company believes this
will reduce the current implementation time from eight to 10 months to four to
six months. The new version will also allow the Company to improve the way its
existing products are leveraged to create new applications for other markets.
The Company expects that the new version will be completed in the third quarter
of 1997.
Credit Connection
Credit Connection offers connectivity between points of credit origination,
such as automobile dealers, and multiple funding sources. Credit Connection
allows a dealer to enter a credit application for a consumer loan or lease. The
dealer can request one or more credit bureaus which can then be reviewed in
several different formats. The dealer can select one or more lending
institutions to which the credit application should be sent and can specify
criteria which determines how the application is to be sequenced and
automatically forwarded to secondary sources (e.g., if the first lending
institution does not respond within 10 minutes). The dealer can then view the
credit decisions online. When the lending institution supports automated
funding, the dealer can have the funds for the loan transferred to the dealer's
bank account without having to wait for the actual contract to arrive at the
funding source. Credit Connection provides several other features to
dealerships, including online vehicle valuation guides and funding source news.
For the funding source, Credit Connection provides a single interface to
communicate with any number and type of credit originators.
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<PAGE> 36
The following diagram illustrates the architecture of Credit Connection:
[CONNECTION CHART]
Key features of Credit Connection include the following:
- Supports instantaneous transmission of credit applications from the
dealer to funding sources during normal or off hours, and immediate
online response to the dealer once the credit decision is made
- Allows for application data to be entered into the system only once
and routed to the appropriate funding sources as directed by the
dealer
- Automates application tracking and manages workflow
- Includes sophisticated credit analysis tools to aid a dealer in
reviewing consumer credit quality
- Expedites online funding provided by the lender to the dealer
- Integrates vehicle valuation guides and other third-party services
- Provides online news facility, allowing lenders to publish information
regarding rates, sales promotions and other pertinent data
The Company is also marketing Credit Connection LenderLink, which
facilitates the electronic transfer of credit applications and decisions between
lending institutions through the Credit Connection network. Using Credit
Connection LenderLink, a prime lender can automatically forward credit
applications which it has declined to a sub-prime lender. The sub-prime lender
can return a decision electronically to the prime lender, which then
communicates the decision to the credit originator. Credit Connection LenderLink
benefits all
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<PAGE> 37
three parties, the credit originator, the prime lender and the sub-prime lender.
The credit originator gets a higher rate of approvals since applications
declined by the prime lender have additional opportunities to be approved. The
prime lender gets a referral fee from the sub-prime lender, and the sub-prime
lender gets a source for additional customers.
In addition, the Company is developing the following Credit Connection
products and services:
Credit Connection for Windows is a graphical, client/server version of
the dealer software that connects to the Credit Connection host using the
Internet or a private network. This new software reduces communication
costs and provides easier deployment, an improved user interface and
additional functionality. The Company expects that Credit Connection for
Windows will become commercially available in the second quarter of 1997.
Credit Connection Online will allow consumers to use the World Wide
Web to apply for loans and receive online decisions from lenders
subscribing to Credit Connection. Consumers can enter applications at the
Company's Web site, a subscribing lender's Web site or a third-party
remarketer's Web site. Credit Connection Online will be used initially to
originate automobile loans from ADP's AutoConnect(TM) Web site and forward
those loans to NationsBank through Credit Connection. The Company expects
to release this service in the second quarter of 1997.
STRATEGIC ALLIANCE WITH ADP
In November 1996, the Company entered into an agreement to form a strategic
alliance with the Dealer Services Group of ADP. This division of ADP is one of
the largest providers of computing and consulting services for automobile and
truck dealers worldwide. Under the terms of the agreement, the Company and ADP
will work to integrate Credit Connection with ADP's automated dealership
management and operations systems. ADP will cooperate with the Company to
remarket Credit Connection to ADP's automobile dealer customers, and will
provide direct sales efforts to remarket Credit Connection as well as
installation, training and customer support services to its dealers. In exchange
for its services, ADP will be entitled to a percentage of the net revenues from
transactions generated by ADP's dealers. ADP has also proposed to promote Credit
Connection Online through its AutoConnect(TM) Web site. In addition, pursuant to
the agreement, ADP will have the right to name one Director to the Company's
Board of Directors. The agreement may be terminated by either party without
penalty.
PRODUCT DEVELOPMENT
Since its inception, the Company has made substantial investments in
product development and has a dedicated product development organization which
periodically releases new products and enhancements to existing products. The
Company believes that its future performance will depend in large part on the
Company's ability to enhance its current products and services and to develop
new products on a timely and cost-effective basis that will keep pace with
technological developments and evolving industry standards, as well as address
the increasingly sophisticated needs of the Company's customers. The Company
plans to introduce and market several new products and services and enhancements
to its existing products and services in 1997, including a new version of
CreditRevue, CreditRevue Service Bureau, Credit Connection for Windows and
Credit Connection Online. See "Business -- Products and Services." While the
Company anticipates that certain new products and services will be developed
internally, the Company may, based on timing and cost considerations, acquire or
license technology or software from third parties when appropriate.
There can be no assurance that the Company will be successful in developing
and marketing new products or services that respond to technological change,
evolving industry standards and changing customer requirements, that the Company
will not experience difficulties that could delay or prevent the successful
development, introduction and marketing of these products or services, or that
its new products or services will adequately meet the requirements of the
marketplace and achieve any significant degree of market acceptance. Failure of
the Company to develop and introduce, for technological or other reasons, new
products and services in a timely and cost-effective manner could have a
material adverse effect on the Company's business, results of operations and
financial condition.
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<PAGE> 38
Software products and services as sophisticated as those offered by the
Company often encounter development delays and may contain defects or failures
when introduced or when new versions are released. The Company has in the past
and may in the future experience delays in the development of software and has
discovered, and may in the future discover, software defects in certain of its
products. Such delays and defects may result in lost revenues during the time
corrective measures are being taken. Although the Company has not experienced
material adverse effects resulting from any such defects to date, there can be
no assurance that, despite testing by the Company, errors will not be found in
its existing software in future releases or enhancements, or that the Company
will not experience development delays, resulting in delays in the commercial
release of new products or services, the loss of market share or the failure to
achieve market acceptance, each of which could have a material adverse effect on
the Company's business, results of operations or financial condition.
As of September 30, 1996, the Company's product development staff consisted
of nine employees. The Company anticipates that it will continue to commit
resources to product development in the future.
CUSTOMER SERVICE AND SUPPORT
The Company believes that its success is dependent in part upon its ability
to provide customers with responsive, prompt and efficient support and training.
Each customer has a maintenance agreement, which is typically coterminous with
the license agreement, providing for service, support and product enhancements.
The Company offers its clients a wide range of support services to assist its
customers in deriving the most effective use of the Company's products and
services, including technical support, formalized training and a user hotline.
The Company's services also include implementation planning and assistance,
software installation, software operations training and software maintenance.
As of September 30, 1996, the Company's dedicated customer service and
support team included nine employees. CMSI's support personnel are available to
its customers 24 hours a day, seven days a week through a hotline. The Company
tracks each customer's service history to identify trends or problem areas and
to recommend solution strategies. Most customer support questions are answered
during the initial call. The Company can access a customer's system through a
modem to diagnose the situation and implement corrective measures, if necessary.
The Company also makes on-site visits for emergency or serious problem
situations.
The Company believes that its customers typically base their decisions to
purchase the Company's products and services partly on the support and
maintenance offered with such products and services. The Company intends to
continue to strengthen its support team and reputation by adding professional
personnel with significant experience in the financial services and software
industries.
SALES AND MARKETING
The Company sells its CreditRevue products through a direct sales
organization. The sales cycle begins with the generation of a sales lead or the
receipt of a request for proposals from a prospective customer. While the sales
cycle varies substantially from customer to customer, it typically requires six
to eight months.
The Company's sales and marketing organization consists of seven employees
based at the Company's corporate headquarters in Columbia, Maryland. To support
its sales force, the Company conducts comprehensive marketing programs, which
include direct mail, public relations, seminars, trade shows and ongoing
customer communications programs. The Company also sponsors an annual users'
group meeting for its CreditRevue customers.
The sales effort for Credit Connection comprises both direct and indirect
marketing activities. Direct sales efforts are concentrated on selling the
service to financial institutions, automobile superstores and finance and
insurance systems providers. Direct sales efforts are supported by participation
in both financial and automotive trade shows and conferences, financial press
relations and targeted mailings. The Company also supports the indirect sales
efforts of the sales organizations of certain financial institutions which have
well-established relationships with many of the automobile dealerships in the
United States. The Company
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<PAGE> 39
supports its indirect sales channels through a variety of marketing
communications efforts including the development of brochures and direct mail
pieces, production of sales videos, participation in trade shows and
conferences, support for bank dealer focus groups, advertising, press relations
and seminar support.
Through its strategic alliance with ADP, ADP will remarket Credit
Connection to ADP's customer base of automobile and truck dealers and to new
customers developed jointly by ADP and CMSI. While the Company has also
initiated discussions with other dealer system vendors and intends to establish
relationships with such vendors to expand the market presence of Credit
Connection, the Company has taken no material steps to establish such
relationships. See "-- Strategic Alliance with ADP."
BACKLOG
At September 30, 1996, the Company had entered into contracts for its
services for which $5.4 million of revenues will be recognized in future
periods. At September 30, 1995, this comparable amount was $7.0 million.
COMPETITION
The credit processing software and services industry is intensely
competitive and rapidly changing. The Company believes its ability to compete
depends upon many factors within and outside its control, including the timing
and market acceptance of new products and services and enhancements developed by
the Company and its competitors, including (i) application software companies,
(ii) management information systems departments of potential customers, (iii)
third-party professional services organizations, and (iv) computer services
outsourcing providers which offer service bureau-based credit processing
solutions. Competitors for CreditRevue include American Management Systems,
Inc., Appro Systems, Inc., CFI ProServices, Inc., Fair, Isaac and Company, Inc.
and Affinity Technology Group, Inc. Competitors for Credit Connection include
The Reynolds & Reynolds Company and IBM, which has recently announced a system
for processing automobile loans over the Internet in conjunction with The Chase
Manhattan Bank. Many of the Company's competitors are substantially larger than
the Company and have significantly greater financial, technical and marketing
resources and established, extensive direct and indirect channels of
distribution. As a result, they may be able to respond more quickly to new or
emerging technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products and services
than the Company.
As is typical in the software industry, many actual or potential customers
of the Company may become competitors by developing competitive technology
internally. Due to the relatively low barriers to entry in the software market,
the Company expects additional competition from other established and emerging
companies as the credit processing software market continues to develop and
expand. The Company also expects that competition will increase as a result of
software industry consolidations. The Company anticipates that its competitors
may develop or acquire products or services that provide functionality that is
similar to that produced by the Company's products and services, and that such
products and services may be offered at a significantly lower price or bundled
with other products and services. In addition, current and potential competitors
have established or may establish cooperative relationships among themselves or
with third parties to increase the ability of their products to address the
needs of the Company's prospective customers. Accordingly, it is possible that
new competitors or alliances among competitors may emerge and rapidly acquire
significant market share.
Increased competition is likely to result in price reductions, reduced
gross margins and loss of market share, any of which would have a material
adverse effect on the Company's business, results of operations and financial
condition. There can be no assurance that the Company will be able to compete
successfully against current or future competitors or that competitive pressures
will not have a material adverse effect on the Company's business, results of
operations and financial condition. See "Risk Factors -- Competition; Future
Price Erosion."
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INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company's success is heavily dependent upon its proprietary technology.
The Company regards its software products and services as proprietary, and
relies primarily on a combination of contract, copyright and trademark law,
trade secrets, confidentiality agreements and contractual provisions to protect
its proprietary rights. The Company has no patents on its products currently in
commercial use, and existing trade secrets and copyright laws afford only
limited protection. The Company has applied for a United States patent on
portions of Credit Connection. There can be no assurance that a patent will be
granted pursuant to the Company's application or that, if granted, such patent
would survive a legal challenge to its validity or provide adequate protection.
Furthermore, there can be no assurance that others will not design around any
patents issued to the Company.
It is the Company's policy to enter into confidentiality and assignment
agreements with its employees. Despite the Company's efforts to protect its
proprietary rights, unauthorized parties may attempt to copy or otherwise obtain
and use the Company's products or technology without authorization, to obtain
and use information that the Company regards as proprietary, or to develop
similar or superior products or technology independently. Policing unauthorized
use of the Company's products is difficult, and while the Company is unable to
determine the extent to which piracy of its software products exists, software
piracy can be expected to be a persistent problem, particularly in international
markets and as a result of the growing use of the Internet. The source code for
the Company's proprietary software is protected both as a trade secret and as a
copyrighted work. The Company has in the past and may in the future make source
code for one or more of its products available to certain of its customers and
strategic partners which may increase the likelihood of misappropriation or
other misuse of the Company's software. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to the same extent as
do the laws of the United States. There can be no assurance that the steps taken
by the Company to protect its proprietary rights will be adequate or that the
Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technologies.
The Company has obtained a perpetual worldwide license for the use of the
registered trademark Credit Connection. "CreditRevue" and "INCredit" are
registered trademarks of the Company. "Cross Sell," "CreditRevue Service
Bureau," "CreditRevue Data Server," "Credit Connection for Windows," "Credit
Connection Online," "Credit Connection LenderLink" and the Company logo are
trademarks of the Company. The Company is not aware that any of its products,
services, trademarks or other proprietary rights infringe the proprietary rights
of third parties. However, there can be no assurance that third parties will not
assert infringement claims against the Company in the future with respect to
current or future products or services. As the number of software products and
services in the industry increases and the functionality of these products and
services further overlaps, the Company believes that software developers may
become increasingly subject to infringement claims. Furthermore, there can be no
assurance that former employers of the Company's present and future employees
will not assert claims that such employees have improperly disclosed
confidential or proprietary information to the Company. Any such claims, with or
without merit, can be time consuming and expensive to defend, cause product and
service delays, or require the Company to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company, or at all, which could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Risk Factors -- Dependence on Proprietary Rights;
Risks of Infringement."
GOVERNMENT REGULATION
The Company's current and prospective customers, which consist of state and
federally chartered banks, saving and loan associations, credit unions, consumer
finance companies and other consumer lenders, as well as customers in the
industries that the Company may target in the future, operate in markets that
are subject to extensive and complex federal and state regulations. While the
Company is not itself directly subject to such regulations, the Company's
products and services must be designed to work within the extensive and evolving
regulatory constraints in which its customers operate. These constraints include
federal and state truth-in-lending disclosure rules, state usury laws, the Equal
Credit Opportunity Act, the Fair Credit
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<PAGE> 41
Reporting Act and the Community Reinvestment Act. Furthermore, some consumer
groups have expressed concern regarding the privacy and security of automated
credit processing, the use of automated credit scoring tools in credit
underwriting, and whether electronic lending is a desirable technological
development in light of the current level of consumer debt. The failure by the
Company's products and services to support customers' compliance with current
regulations and to address changes in customers' regulatory environment, or to
adapt to such changes in an efficient and cost-effective manner, could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Risk Factors -- Government Regulation and
Uncertainties of Future Regulation."
EMPLOYEES
As of September 30, 1996, the Company had 133 full time employees,
including nine in product development, 100 in technical operations, nine in
sales and marketing and 15 in finance and administration. The Company's
employees are not covered by any collective bargaining agreements. The Company
believes that its relations with its employees are good.
FACILITIES
The Company's principal executive offices are located in Columbia, Maryland
in a leased facility consisting of approximately 34,600 square feet of office
space under several leases that expire in 1998, subject to five and six year
renewal options, respectively. The Company has a right of first refusal on
additional office space in the same building. The Company believes that its
existing facilities are adequate to meet its current needs and that suitable
additional space will be available in the future, if necessary, on commercially
reasonable terms.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ------------------------------------------ --- --------------------------------
<S> <C> <C>
James R. DeFrancesco...................... 48 President, Chief Executive
Officer and Chairman of the
Board of Directors
Scott L. Freiman.......................... 34 Executive Vice President and
Director
James C. Alsobrook, Jr. .................. 41 Senior Vice President, Credit
Connection
Miles H. Grody............................ 40 Senior Vice President,
Secretary, General Counsel and
Director
Charles F. Riordan........................ 41 Senior Vice President, Software
Sales
Robert P. Vollono......................... 48 Senior Vice President,
Treasurer, Chief Financial
Officer and Director
Nancy L. Weil............................. 52 Senior Vice President, Marketing
Stephen X. Graham......................... 43 Director
John J. McDonnell, Jr. ................... 58 Director
Peter M. Leger............................ 45 Director
</TABLE>
James R. DeFrancesco, co-founder of the Company, has served as the
Company's President, Chief Executive Officer and Chairman of the Board of
Directors since 1987. From 1987 to 1992, Mr. DeFrancesco served as President of
Perpetual Leasing Services, Inc., the automobile leasing subsidiary of Perpetual
Savings Bank, FSB to which American Financial Corporation was sold. From 1976 to
1987, Mr. DeFrancesco founded and served as President and Chief Executive
Officer of American Financial Corporation, an automobile finance/leasing
company.
Scott L. Freiman, co-founder of the Company, has served as the Company's
Executive Vice President and a Director since 1987. From 1985 to 1987, Mr.
Freiman served as Technology Director of American Financial Corporation, an
automobile finance/leasing company, where he worked with Mr. DeFrancesco to
develop the Company's credit origination software. Prior to 1985, Mr. Freiman
served as a development engineer for IBM and AT&T Bell Laboratories.
James C. Alsobrook, Jr. has served as the Company's Senior Vice President,
Credit Connection since December 1994. From April 1994 to November 1994, Mr.
Alsobrook served as Director of Sales and Marketing of ILC Holding Corp., a
computer software company. From 1984 to February 1994, Mr. Alsobrook served in
several officer capacities for Disc Incorporated, a computer software company,
including Vice President North American Sales, Vice President Banking Sales and
Regional Manager, ACCESS Products Group. From 1979 to 1984, Mr. Alsobrook served
as Senior Account Manager for NCR Corporation, Data Processing Center Division.
Miles H. Grody has served as the Company's Senior Vice President and
General Counsel since June 1995, and as the Company's Secretary and a Director
since October 1996. From January 1993 to June 1995, Mr. Grody served as Chief
Operating Officer of Tomahawk II, Inc., a document imaging and conversion
services company. From January 1992 to January 1993, Mr. Grody was a partner in
the law firm of Rowan & Grody, P.C. From 1988 to January 1992, Mr. Grody served
as Corporate Counsel for Perot Systems Corporation.
Charles F. Riordan has served as the Company's Senior Vice President,
Software Sales since February 1989. From 1985 to February 1989, Mr. Riordan
served as Vice President, Sales Representative for MTech Corp/Electronic Data
System.
Robert P. Vollono has served as the Company's Senior Vice President and
Chief Financial Officer since April 1995 and as the Company's Treasurer and a
Director since October 1996. From 1988 to April 1995,
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<PAGE> 43
Mr. Vollono served as Vice President and Chief Financial Officer of Carey
International, Inc. a transportation services company. From 1986 to 1988, Mr.
Vollono served as Vice President and Chief Financial Officer of Commercial
Office Environments, Inc.
Nancy Weil has served as the Company's Senior Vice President, Marketing
since February 1994. From 1984 to February 1994, Ms. Weil served as Manager,
Product Marketing for Intelus Corp., a systems integration company. From 1981 to
1984, Ms. Weil served as Manager, Product Marketing Communications for the
Manufacturing Division of Martin Marietta Data Systems.
Stephen X. Graham has served as a Director since October 1996. Since 1988,
he has been the President and Chief Executive Officer of Graham, Hamilton &
Dwyer, Inc., a private investment banking firm. From 1982 to 1988, Mr. Graham
was a Vice President of Kidder, Peabody & Co.
John J. McDonnell, Jr. has served as a Director since November 1996. Mr.
McDonnell has served as President, Chief Executive Officer and a director of
Transaction Network Systems, Inc., a nationwide communications network company
specializing in transaction-oriented data services, since founding Transaction
Network Systems, Inc. in 1990. From 1987 to 1989, Mr. McDonnell served as
President and Chief Executive Officer of Digital Radio Networks, Inc., a local
access bypass carrier for point-of-sale transactions. Mr. McDonnell has
previously served as Group Vice President for the Information Technologies and
Telecommunications Group of the Electronic Industries Association (EIA); Vice
President, International Operations and Vice President, Sales, for Tymnet, Inc.
with responsibility for both private network sales and public network services;
and Director of Technology and Telecommunications for the National Commission on
Electronic Funds Transfer. Mr. McDonnell was one of the founding members and is
currently Chairman of the Executive Committee of the Board of Directors of the
Electronics Funds Transfer Association.
Peter M. Leger has served as a Director since December 1996. Since March
1992, Mr. Leger has served in various capacities with ADP, currently as
President of ADP's Dealer Service Group. Prior to joining ADP, Mr. Leger served
in various capacities with Reuters Limited PLC, a worldwide information provider
and systems integrator in computer solutions and services for the banking and
brokerage community, most recently as President of Reuters Systems Integration
Division. Mr. Leger was elected to the Board of Directors pursuant to the terms
of an agreement between the Company and ADP. See "Business -- Strategic Alliance
with ADP."
Each executive officer serves at the discretion of the Board of Directors.
Each of the Company's executive officers and employee Directors devotes
substantially all of his or her time to the affairs of the Company. The
Company's Bylaws permit the Board of Directors to establish by resolution the
authorized number of Directors, and the Company currently has seven Directors
authorized. There are no family relationships among any of the Directors or
executive officers of the Company.
At present, all Directors are elected annually and serve until the next
annual meeting of the stockholders or until the election and qualification of
their successors. Prior to the consummation of the Offering, the Company will be
reincorporated in Delaware and the Certificate of Incorporation will provide
that the Board of Directors will be divided into three classes with each class
of Directors serving for a staggered three-year term. Thereafter, at each annual
meeting of stockholders, Directors will be re-elected or elected for a full term
of three years to succeed those Directors whose terms are expiring. See
"Description of Capital Stock -- Delaware Law and Certain Charter and Bylaw
Provisions."
COMMITTEES OF THE BOARD OF DIRECTORS
Prior to the consummation of the Offering, the Board of Directors intends
to appoint a Compensation Committee and an Audit Committee. The Compensation
Committee will be responsible for recommending to the Board of Directors the
Company's executive compensation policies for senior officers. The Audit
Committee will be responsible for recommending independent auditors, reviewing
the audit plan, the adequacy of internal controls, the audit report and
management letter, and performing such other duties as the Board of Directors
may from time to time prescribe.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1995, the Company did not have a Compensation Committee or other
committee of the Board of Directors performing similar functions. Decisions
concerning executive officer compensation for 1995 were made by the Board of
Directors of the Company, consisting of Messrs. DeFrancesco and Freiman, each of
whom was and continues to be an executive officer of the Company. Prior to the
consummation of this Offering, the Board of Directors of the Company intends to
establish a Compensation Committee to address compensation issues relating to
executive officers of the Company. See "-- Committees of the Board of
Directors."
DIRECTOR COMPENSATION
Directors are not currently compensated by the Company for service as
Directors other than reimbursement for ordinary and necessary travel expenses
related to such Director's attendance at Board of Directors and committee
meetings. In the future, the Company intends to pay each nonemployee Director a
$2,000 fee for each meeting of the Board of Directors or any committee thereof
attended. In addition, such nonemployee Directors shall be granted a
non-qualified stock option to purchase 15,000 shares of Common Stock pursuant to
the Company's Stock Option Plan. Such options will vest ratably over a three
year period commencing on the date of grant .
EXECUTIVE COMPENSATION
The following table summarizes all the compensation paid by the Company
during the fiscal year ended December 31, 1995 to the Company's Chief Executive
Officer and the two other most highly compensated executive officers
(collectively, the "Named Executive Officers") whose salary and bonus for
services rendered in all capacities to the Company exceeded $100,000 during such
fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
FISCAL ------------ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION
- ---------------------------------------------------------- ------ ------------ ---------------
<S> <C> <C> <C>
James R. DeFrancesco...................................... 1995 $186,750 $45,741(1)
President, Chief Executive
Officer and Chairman of the Board
Scott L. Freiman.......................................... 1995 $187,300 $32,396(2)
Executive Vice President
and Director
Charles F. Riordan........................................ 1995 $157,376 $ 4,800(3)
Senior Vice President, Software Sales
</TABLE>
- ---------------
(1) Includes $35,000 distributed by the Company to Mr. DeFrancesco to fund the
payment of federal and state taxes owed by Mr. DeFrancesco by virtue of the
Company's status as a Subchapter S Corporation for federal and state income
tax purposes, $5,941 for premiums on health insurance for Mr. DeFrancesco's
benefit, and an automobile allowance of $4,800.
(2) Includes $17,500 distributed by the Company to Mr. Freiman to fund the
payment of federal and state taxes owed by Mr. Freiman by virtue of the
Company's status as a Subchapter S Corporation for federal and state income
tax purposes, $10,096 for premiums on health insurance for Mr. Freiman's
benefit, and an automobile allowance of $4,800.
(3) Consists of an automobile allowance of $4,800.
During 1995, no options or stock appreciation rights were granted to the
Named Executive Officers. In addition, the Named Executive Officers have not
exercised any options to date. For a discussion of options granted to the Named
Executive Officers, see "-- Stock Option Plan."
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<PAGE> 45
STOCK OPTION PLAN
In June 1996, the Company's Board of Directors and stockholders adopted a
Non-Qualified Stock Option Plan (the "Stock Option Plan"). The Company has
reserved for issuance 2,750,000 shares of Common Stock pursuant to the terms and
conditions of the Stock Option Plan (the "Options"). The purpose of the Stock
Option Plan is to provide incentives to Directors and employees through the
opportunity to acquire an ownership interest in the Company. The Stock Option
Plan has a term of 10 years, subject to early termination by the Board of
Directors. If Options should expire, become unexercisable or be forfeited for
any reason without having been exercised or having become vested in full, the
shares of Common Stock subject to such Options would be available for the grant
of additional Options under the Stock Option Plan.
The Stock Option Plan is being administered by a committee of at least two
Directors of the Company (the "Option Committee") which has the authority to
determine to whom Options are granted, the number of shares to be subject to
such Options, and the terms and conditions of such Options. The Option Committee
consists of Messrs. DeFrancesco and Freiman.
It is intended that Options granted under the Stock Option Plan will not
qualify for favorable tax treatment to recipients pursuant to Section 422 of the
Code.
In the case of non-qualified stock options, no income is generally
recognized by the optionee at the time of the grant of the option. Under present
law, the optionee will generally recognize ordinary income at the time the
nonqualified stock option is exercised equal to the aggregate fair market value
of the shares acquired less the option price. Ordinarily income from a
non-qualified stock option will constitute compensation for which reporting or
withholding is required under federal and state law. The Company will generally
be entitled to a deduction equal to the ordinary income (i.e., compensation)
portion of the gain recognized by the optionee in connection with the exercise
of a non-qualified stock option provided the Company complies with any reporting
or withholding requirements of federal and state law.
The exercise price for any particular Option may not be less than 100% of
the fair market value of a share of Common Stock on the date of the grant. The
Stock Option Plan permits the Option Committee to impose transfer restrictions,
such as a right of first refusal, on the Common Stock that optionees may
purchase. No Option shall be exercisable after the expiration of 10 years from
the date it is granted. An otherwise unexpired Option shall, unless otherwise
determined by the Option Committee, cease to be exercisable upon (i) an
employee's or Director's termination of employment or directorship for "just
cause" (as defined in the Stock Option Plan), (ii) the date three months after
an employee terminates service for a reason other than just cause, death or
disability, (iii) the date two years after an employee terminates service due to
disability, or (iv) the date two years after termination of such service due to
the employee's death. Options granted to Directors or employees at the time of
the implementation of the Stock Option Plan are expected to become exercisable
at the rate the Option Committee may provide. No Option is assignable or
transferable except by will or the laws of descent and distribution, or pursuant
to the terms of a "qualified domestic relations order" (within the meaning of
Section 414(p) of the Code and the regulations and rulings thereunder).
The Company will receive no monetary consideration for the granting of
Options under the Stock Option Plan, and will receive no monetary consideration
other than the Option exercise price for each share issued to optionees upon the
exercise of Options. The Option exercise price may be paid in cash or Common
Stock or a combination of cash and Common Stock or by promissory note. The
exercise of Options will be subject to such terms and conditions established by
the Option Committee as are set forth in a written agreement between the Option
Committee and the optionee. In June 1996, the Option Committee granted stock
options under the Stock Option Plan to purchase an aggregate of 2,362,540 shares
of Common Stock to certain of the Company's executive officers, including
Messrs. Alsobrook, Grody, Riordan and Vollono and Ms. Weil, and to certain
employees (the "June Options"). Of the June Options, 332,640 options vest at the
rate of 10% at the time of grant, 20% on each of the first, second, third and
fourth anniversaries of December 15, 1996, and 10% on the fifth anniversary of
December 15, 1996. The remaining June Options vest at the rate of 30% at the
time of grant, 20% on each of the first and second anniversaries of December 15,
1996 and 10% on each of the third, fourth and fifth anniversaries of December
15, 1996. The June Options have an exercise price of $5.00 per share. In October
and November 1996, the Option Committee granted 185,260 stock options under the
Stock
44
<PAGE> 46
Option Plan (the "Autumn Options"). The Autumn Options have an exercise price of
$9.60 per share and vest at a rate of 10% at the time of grant, 20% on each of
the second, third and fourth anniversaries of December 15, 1996 and 10% on the
fifth anniversary of December 15, 1996.
LONG-TERM INCENTIVE PLAN
In November 1996, the Company's Board of Directors and stockholders
approved the 1996 Long-Term Incentive Plan (the "LTIP" or "Plan"). 750,000
shares of the Company's Common Stock are authorized for issuance under the LTIP.
No awards will be made under the LTIP prior to completion of this Offering. The
LTIP was adopted to promote and advance the interests of the Company and its
stockholders by providing a means by which key employees of the Company and its
subsidiaries could be given an opportunity to acquire stock in the Company and
other incentive-based awards, to assist in attracting and retaining the services
of employees holding key positions, and to provide incentives for such key
employees to exert maximum efforts toward results that are in the best interest
of all stockholders.
The LTIP provides for the grant of incentive stock options intended to
qualify within the meaning of Section 422 of the Code. However, if an option
granted pursuant to the Plan fails to qualify as an incentive stock option for
any reason, it will be treated as a nonqualified stock option. The LTIP will be
administered by the Compensation Committee of the Board of Directors and options
granted thereunder are subject to final ratification of the full Board of
Directors of the Company. The Compensation Committee shall be composed solely of
individuals who are "outside directors" within the meaning of Section
162(m)(4)(C) of the Code and "disinterested persons" for securities law
purposes.
Incentive stock options may be granted under the LTIP only to key employees
(including Directors if they are also key employees) of the Company and its
subsidiaries. Such persons similarly are eligible to receive stock appreciation
rights, restricted awards, performance awards and other awards under the LTIP.
No option may be granted under the LTIP to any person who, at the time of the
grant, owns (or is deemed to own) stock possessing more than 10% of the total
combined voting power of the Company or any subsidiary of the Company, unless
the option exercise price is at least 110% of the fair market value of the stock
subject to the option on the date of the grant and the term of the option does
not exceed five years from the date of the grant. For incentive stock options
granted under the LTIP, the aggregate fair market value, determined at the time
of the grant, of the shares of Common Stock with respect to which such options
are exercisable for the first time by an optionee during any calendar year
(under all such plans of the Company and its subsidiaries) may not exceed
$100,000. As a result of enactment of Section 162(m) of the Code, and to give
the Compensation Committee flexibility in structuring awards, the LTIP states
that in the case of stock options and stock appreciation rights, no person may
receive in any year a stock option to purchase more than 100,000 shares or a
stock appreciation right measured by more than 100,000 shares.
The following is a description of the types of grants and awards and the
permissible terms under the LTIP. Individual option grants and share awards may
be more restrictive as to any or all of the permissible terms described below.
Stock options may be granted as incentive options, but any option that
fails to qualify as an incentive option will not be invalidated thereby,
but rather will be treated as a nonstatutory (nonqualified) option.
Stock appreciation rights ("SARs") may be granted specifying a period
of time for which increases in share price shall be measured, with the
grantee eligible to receive stock or cash at the end of such period based
upon increases in such share price.
Restricted awards may be granted specifying a period of time (the
"Restriction Period") applicable to such award, which shall be not less
than three (3) years, but may be more than that and may vary at the
discretion of the Compensation Committee. Common Stock awarded pursuant to
a restricted stock award shall entitle the holder to enjoy all the
stockholder rights during the restriction period except that certain
limitations with respect to dividends and to disposition of such stock
shall prevail. Other restricted awards may be paid out in cash upon
expiration of the Restriction Period.
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<PAGE> 47
Performance awards may be granted specifying a number of performance
shares or a monetary amount to be credited to an account on behalf of the
recipient. Such awards may be subject to both time and Company performance
objectives that are specified at the time of such award at the discretion
of the Compensation Committee.
Other awards may be granted under the Plan that are not in the categories
discussed above because the Plan gives the Compensation Committee flexibility in
designing compensation programs.
The exercise price of stock options under the LTIP may not be less than the
fair market value of the Common Stock subject to the option on the date of the
option grant and in some cases may not be less than 110% of such fair market
value. Similarly, stock appreciation rights are based upon the fair market value
of a share of Common Stock on the date of the grant compared with the fair
market value of a share at the end of the measuring period. The sole basis for
compensation under such awards is an increase in the stock's fair market value.
Restricted stock awards are payable in stock upon satisfaction of the
restrictions imposed with respect to the award. The Compensation Committee has
the discretion to pay other awards in cash, in shares of Common Stock or a
combination of both.
The Plan is structured so that the Compensation Committee may make awards
that qualify as "performance-based compensation" within the meaning of Section
162(m) of the Code, as such section was enacted in 1993. However, the Plan is
flexible so that the Compensation Committee also has the discretion to make
awards that are not described in that section. Section 162(m) provides a limit
of $1,000,000 on deductions for compensation paid to certain corporate
executives on a year-by-year basis. However, "performance-based compensation" is
excluded from that limitation. Whether any particular award under the Plan will
qualify as "performance-based compensation" will depend upon the terms of the
award and compliance with certain other procedural requirements under Section
162(m). The Compensation Committee will take into account the overall tax and
business objectives of the Company in structuring awards under the Plan.
Not every amount paid as compensation for services is currently deductible.
For example, depending upon the services rendered, some compensation payments
must be capitalized or added to inventory costs. Two restrictions potentially
applicable to deductions for executive compensation payments are the restriction
on deduction of so-called "excess parachute payments" and the deduction limit of
$1,000,000 per year for certain executive compensation. Whether any such
restrictions will apply to specific payments of compensation by the Company
cannot be predicted at this time.
The maximum term of the LTIP is ten (10) years, except that the Board may
terminate the Plan earlier. The Board may amend the LTIP at any time and from
time to time without stockholder approval, except that such amendment may not,
without stockholder approval, (a) increase the number of shares authorized for
issuance under the LTIP except as a result of an adjustment through merger,
consolidation, stock split or otherwise, or (b) materially modify the
requirements as to eligibility for participation in the Plan, or (c) materially
increase the benefits accruing to participants under the Plan.
EMPLOYEE STOCK PURCHASE PLAN
In November 1996, the Company's Board of Directors and stockholders
approved an Employee Stock Purchase Plan (the "ESP Plan"). The Company has
reserved for issuance 250,000 shares of Common Stock pursuant to the terms and
conditions of the ESP Plan. The purpose of the ESP Plan is to provide eligible
employees with the opportunity to acquire a proprietary interest in the Company
through a payroll-deduction based plan.
Any employee of the Company, or any subsidiary, who is expected to render
more than 20 hours of service per week for more than five months may elect to
participate in the ESP Plan after he or she has completed 90 days of service.
Employees can elect to deduct up to a maximum of fifteen percent (15%) of their
earnings to be used to purchase shares of the Company's Common Stock. Purchases
will be made on a quarterly basis on the last business day of each quarter, and
the purchase price will be equal to eighty-five
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<PAGE> 48
percent (85%) of the lower of (a) the fair market value per share of the
Company's Common Stock on the first day of the quarterly purchase period or (b)
the fair market value per share on the purchase date. The purchase price will be
paid directly to the Company in exchange for the issuance of shares under the
ESP Plan.
The ESP Plan is administered by a committee of at least two Directors of
the Company who have full authority to adopt rules and regulations and to
administer the ESP Plan. The ESP Plan will continue in effect for a term of 10
years unless terminated earlier in accordance with its provisions.
401(K) PLAN
The Company participates in a tax-qualified employee savings and retirement
plan (the "401(k) Plan") which covers all of the Company's employees with six
months of service. Pursuant to the 401(k) Plan, employees may elect to
contribute to the 401(k) Plan up to 15% of their current compensation, subject
to statutorily prescribed limitations. The 401(k) Plan also permits the Company
to provide a 20% matching contribution, up to the first $1,000 contributed by
such employees, subject to statutory limitations. The 401(k) Plan is intended to
qualify under Section 401(k) of the Code, so that contributions by employees or
by the Company and the income earned on plan contributions, are not taxable to
employees until withdrawn from the 401(k) Plan, and so that contributions by the
Company, if any, will be deductible by the Company when made. All employee
contributions to the 401(k) Plan are fully vested at all times and Company
contributions, if any, vest ratably over a six year period based on the
participant's years of service. Benefits under the 401(k) Plan are paid upon a
participant's retirement, death, disability or termination of employment and are
based upon the amount of participant contributions and vested employer
contributions, as adjusted for gains, losses and earnings.
CERTAIN TRANSACTIONS
On December 31, 1995, the Company borrowed $214,498 from James R.
DeFrancesco, the Company's President and Chief Executive Officer, pursuant to a
demand promissory note due on or after October 1, 1997. Interest on the note
accrues at the rate of 7% per annum. The Company believes that the interest rate
payable to Mr. DeFrancesco is comparable to the rate the Company would have
otherwise paid on comparable indebtedness from unaffiliated parties.
Mr. DeFrancesco owns 50% of the outstanding stock of Business Liner, Inc.,
a company which leases an airplane to the Company for business travel. The
Company pays an hourly fee for its use of the airplane and a portion of the
monthly cost of maintaining the airplane. The Company believes that the amounts
paid for the lease of the airplane are comparable to the amounts the Company
would have otherwise paid for comparable services from unaffiliated parties. For
the fiscal year ended December 31, 1995, the Company paid Business Liner, Inc.
$50,857 under this leasing arrangement.
Miles H. Grody, the Company's Senior Vice President and General Counsel,
performed legal services for the Company prior to his employment in June 1995.
The Company believes that the amounts paid to Mr. Grody are comparable to the
amounts the Company would have otherwise paid for comparable services from
unaffiliated parties. For the fiscal year ended December 31, 1995, fees paid to
Mr. Grody did not exceed 5% of his income during that year.
In August 1996, the Company entered into a settlement agreement and general
release with a former officer of the Company. The agreement provides that the
Company will pay the former officer his salary for a period of one year. In
addition, the agreement requires the Company to pay the former officer $240,000
if a change in control of the Company occurs before January 18, 1997 or $120,000
if a change in control occurs before July 18, 1997. If the Offering is
consummated prior to a change in control, the agreement provides that the
Company will pay the former officer $240,000 if the Offering is consummated
prior to January 18, 1997, or $120,000 if the Offering is consummated prior to
July 18, 1997. At the Company's discretion, any payments required to be made to
the former officer may be in the form of cash or stock.
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<PAGE> 49
The Company distributed $35,000 and $17,500 to each of Messrs. DeFrancesco
and Freiman, respectively, for the payment of federal and state income taxes
owed by each of them by virtue of the Company's status as a Subchapter S
Corporation in 1995 and $70,000 and $35,000 to each of Messrs. DeFrancesco and
Freiman, respectively, for such purposes in 1994.
The Company expects to enter into a Tax Indemnification Agreement prior to
the consummation of the Offering with its Existing Stockholders providing for,
among other things, the indemnification of the Company by such stockholders for
any federal and state income taxes (including interest) incurred by the Company
if for any reason the Company is deemed to be treated as a Subchapter C
Corporation during any period for which it reported its earnings to the taxing
authorities as a Subchapter S Corporation. The Tax Indemnification Agreement
further provides for the cross-indemnification of the Company and of each
Existing Stockholder for certain additional taxes (including interest and, in
the case of Existing Stockholders, penalties) resulting from the Company's
operations during the period in which it was a Subchapter S Corporation.
For information concerning stock options granted to certain of the
Company's executive officers, see "Management -- Stock Option Plan."
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<PAGE> 50
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of September 30, 1996, and as
adjusted to reflect the sale of the shares of Common Stock offered hereby,
assuming no exercise of the Underwriters' over-allotment option, (i) by each of
the Named Executive Officers, (ii) by each of the Company's directors, (iii) by
each Selling Stockholder, and (iv) by all current executive officers and
directors as a group. Other than as shown in the table, no person beneficially
owns 5% or more of the Common Stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING(1) OFFERING(1)
--------------------- SHARES BEING ---------------------
BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- -------------------------------------- --------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
NAMED EXECUTIVE OFFICERS AND DIRECTORS
James R. DeFrancesco................ 3,273,400 65.34% 200,000 3,073,400 42.63%
Scott L. Freiman.................... 1,636,700 32.67% 100,000 1,536,700 21.31%
Charles F. Riordan(2)............... 121,794 2.42% 20,000 101,794 1.39%
Miles H. Grody(3)................... 121,794 2.42% 20,000 101,794 1.39%
Robert P. Vollono(4)................ 121,794 2.42% 20,000 101,794 1.39%
Stephen X. Graham................... -- * -- -- *
John J. McDonnell, Jr. ............. -- * -- -- *
Peter M. Leger...................... -- * -- -- *
OTHER SELLING STOCKHOLDERS
James C. Alsobrook, Jr.(5).......... 121,794 2.42% 20,000 101,794 1.39%
Nancy L. Weil(6).................... 121,794 2.42% 20,000 101,794 1.39%
All executive officers and Directors
as a group (10 persons)(7).......... 5,519,070 100% 400,000 5,119,070 66.32%
</TABLE>
- ---------------
* Less than one percent.
(1) Gives effect to the shares of Common Stock issuable within 60 days of
September 30, 1996 upon the exercise of all options and other rights
beneficially owned by the indicated stockholders on that date. Unless
otherwise indicated, the persons named in the table have sole voting and
sole investment control with respect to all shares beneficially owned.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and investment power
with respect to shares.
(2) Consists of 121,794 shares of Common Stock issuable upon exercise of a stock
option.
(3) Consists of 121,794 shares of Common Stock issuable upon exercise of a stock
option.
(4) Consists of 121,794 shares of Common Stock issuable upon exercise of a stock
option.
(5) Consists of 121,794 shares of Common Stock issuable upon exercise of a stock
option.
(6) Consists of 121,794 shares of Common Stock issuable upon exercise of a stock
option.
(7) See Notes (2) through (6).
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<PAGE> 51
DESCRIPTION OF CAPITAL STOCK
GENERAL
The following description of the Company's capital stock does not purport
to be complete and is subject in all respects to applicable Delaware law and to
the provisions of the Company's Certificate of Incorporation and Bylaws, copies
of which have been filed as exhibits to the Registration Statement of which this
Prospectus is a part. Upon consummation of this Offering, the authorized capital
stock of the Company will consist of 40,000,000 shares of Common Stock and
1,000,000 shares of Preferred Stock, par value $0.01 per share.
COMMON STOCK
Holders of Common Stock are entitled to receive ratably such dividends as
may be declared by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." Each holder of Common Stock is entitled to one
vote for each share held of record by him or her. In the event of a liquidation,
dissolution or winding up of the Company, holders of Common Stock are entitled
to share ratably in all assets remaining after payment of liabilities. Holders
of Common Stock have no preemptive rights and have no rights to convert their
Common Stock into any other securities and there are no redemption provisions
with respect to such shares. All of the outstanding shares of Common Stock are
fully paid and non-assessable.
PREFERRED STOCK
The Company's Board of Directors has the authority to issue up to 1,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, without any further vote
or action by the Company's stockholders. The rights of the holders of the 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 desirable 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 a majority of the
outstanding voting stock of the Company. The Company has no current plans to
issue shares of Preferred Stock.
DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such stockholder
became an interested stockholder, unless: (i) prior to such date, the board of
directors of the corporation approved either the business combination or the
transaction that resulted in the stockholder becoming an interested stockholder;
(ii) upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned by persons who are directors and also
officers and by employee stock plans in which employee participants do not have
the right to determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer; or (iii) on or subsequent to
such date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock that is not owned by the interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
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<PAGE> 52
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
Certain provisions in the Certificate of Incorporation and the Bylaws could
have the effect of delaying, deferring or preventing changes in control of the
Company. Among other things, upon the Company's reincorporation in Delaware
prior to the consummation of the Offering, the Certificate of Incorporation will
divide the members of the Board of Directors into three different classes of
Directors who are elected by holders of the Common Stock and who serve
three-year staggered terms, require advance notice of stockholder proposals and
nominations of Directors and authorize the issuance of "blank check" Preferred
Stock. See "Risk Factors -- Effect of Certain Charter Provisions; Antitakeover
Effects of Certificate of Incorporation, Bylaws and Delaware Law."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer and Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public
market could adversely affect the market price of the Common Stock.
Upon completion of this Offering, the Company will have outstanding an
aggregate of 7,210,100 shares of Common Stock, assuming no exercise of the
Underwriters' over-allotment option. Of these shares, the 2,600,000 shares sold
in the Offering will be freely tradeable without restriction or further
registration under the Securities Act, except for any of such shares which may
be purchased by Affiliates.
The remaining 4,610,100 shares of Common Stock are held by Messrs.
DeFrancesco and Freiman and were issued and sold by the Company in reliance on
Section 4(2) of the Securities Act. All such outstanding shares will be subject
to the "lock-up" agreements described below on the date of this Prospectus. Upon
expiration of lock-up agreements 180 days, 360 days and 540 days after the date
of this Prospectus, 1,536,700, 1,536,700 and 1,536,700 shares will become
eligible for sale, respectively, subject to the limitations of Rule 144.
As of November 14, 1996, there were a total of 2,520,440 shares of Common
Stock subject to outstanding options, 660,760 of which were exercisable. Of
these 660,760 shares, options to purchase 100,000 shares will be exercised
immediately prior to the consummation of the Offering and an additional 511,706
shares underlying such options are subject to lock-up agreements.
In general, under Rule 144 as currently in effect, a person (or person
whose shares are aggregated) who has beneficially owned shares for at least two
years (including the holding period of any prior owner except an affiliate) is
entitled to sell in "broker's transactions" or to market makers, within any
three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of (i) 1% of the number of
shares of Common Stock then outstanding (approximately 72,101 shares immediately
after this Offering) or (ii) generally, the average weekly trading volume in the
Common Stock during the four calendar weeks preceding the required filing of a
Form 144 with respect to such sale. Sales under Rule 144 are generally subject
to the availability of current public information about the Company. Under Rule
144(k), a person who is deemed not to have been an Affiliate at any time during
the 90 days preceding a sale, and who has beneficially owned the shares proposed
to be sold for at least three years, is entitled to sell such shares without
having to comply with the manner of sale, public information, volume limitation
or notice filing provisions of Rule 144. Under Rule 701 under the Securities
Act, persons who purchase shares upon exercise of options granted prior to the
effective date of this Offering are entitled to sell such shares 90 days after
the effective date of this Offering in reliance on Rule 144, without having to
comply with the holding period and notice filing requirements of Rule 144 and,
in the case of non-affiliates, without having to comply with the public
information, volume limitation or notice filing provisions of Rule 144.
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<PAGE> 53
The Company intends to file a registration statement on Form S-8 after the
effective date of the Offering to register shares of Common Stock reserved for
issuance under the Stock Option Plan, thus permitting the resale of such shares
by non-affiliates and by Affiliates, subject to contractual restrictions and
Rule 144 volume limitations applicable thereto, in the public market without
restrictions under the Securities Act. Such registration statement will become
effective immediately upon filing.
All existing stockholders of the Company have agreed that they will not,
subject to certain limited exceptions, directly or indirectly, offer, sell or
otherwise dispose of a certain number of shares of Common Stock or any
securities convertible into or exchangeable or exercisable for any such shares
for a period of 180 days, 360 days and 540 days, respectively, from the date of
this Prospectus without the prior written consent of Friedman, Billings, Ramsey
& Co., Inc.
52
<PAGE> 54
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
between the Company, the Selling Stockholders and the Underwriters (the
"Underwriting Agreement"), the Company and the Selling Stockholders have agreed
to sell to each of the Underwriters named below, and the Underwriters, for whom
Friedman, Billings, Ramsey & Co., Inc. and Unterberg Harris are acting as
representatives (collectively, the "Representatives"), have severally agreed to
purchase from the Company and the Selling Stockholders, the respective number of
shares of Common Stock set forth opposite their respective name. Under the
Underwriting Agreement, the Underwriters are obligated to purchase all of the
2,600,000 shares of Common Stock offered hereby if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc.....................................
Unterberg Harris..........................................................
-------
=======
</TABLE>
The Underwriters have advised the Company and the Selling Stockholders that
the Underwriters propose to initially offer the shares of Common Stock to the
public at the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share. After the shares of Common Stock have been released for
sale to the public, the price to the public and such concessions may be changed.
The Company has granted the Underwriters an option, exercisable for 30 days
after the date on this Prospectus, to purchase up to 390,000 additional shares
of Common Stock solely to cover over-allotments, if any, at the initial public
offering price, less the underwriting discount and commission, shown on the
cover page of this Prospectus.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
The Company, its directors, officers and holders of its Common Stock, and
certain holders of options to purchase its Common Stock, have each agreed, not
to offer, sell, contract to sell or otherwise dispose of any shares of Common
Stock, or any security convertible into or exercisable for shares of Common
Stock, for a period of 180 days after the date of this Prospectus without the
prior written consent of the Representatives.
In the Underwriting Agreement, the Company has agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act. Each of the Underwriters may be deemed to be an "underwriter"
for purposes of the Securities Act in connection with the Offering. The Company
will reimburse the Underwriters for their reasonable out-of-pocket expenses,
including legal fees and expenses, incurred in connection with the Offering.
Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price will be determined by negotiation
between the Company, the representatives of the Selling Stockholders and the
Underwriters. Among the factors to be considered in determining the initial
public offering price will be prevailing market and economic conditions,
revenues and earnings of the Company, market valuations of other companies
engaged in activities similar to the Company, estimates of the business
potential and prospects of the Company, the present state of the Company's
business operations, the Company's management and other factors deemed relevant.
Additionally, consideration will be given to the status of the securities
markets, market conditions for new offerings of securities and the prices of
similar securities of comparable companies.
The Company intends to apply to include the Common Stock for quotation in
the Nasdaq National Market under the symbol "CMSS." In order to meet one of the
requirements for including the Common Stock on the Nasdaq National Market, the
Underwriters have undertaken to sell shares of Common Stock to a minimum of 400
beneficial holders. There can be no assurance, however, that the Company will be
able to
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<PAGE> 55
maintain the inclusion of the Common Stock in the Nasdaq National Market or that
an active trading market will develop.
The Company has also engaged Graham, Hamilton & Dwyer, Inc. ("Graham,
Hamilton") as its financial advisor in connection with this Offering and other
matters. As compensation, the Company has paid to Graham, Hamilton a
nonrefundable engagement fee of $50,000 and has agreed to pay Graham, Hamilton a
fee of 1% of the net proceeds of this Offering, such fee not to exceed $400,000.
The Company has also agreed to indemnify Graham, Hamilton against liabilities
resulting from the performance of its duties as financial advisor, except for
any liability resulting from Graham, Hamilton's gross negligence or willful
misconduct.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Manatt, Phelps & Phillips, LLP, Washington, D.C. Certain legal
matters in connection with this Offering will be passed upon for the
Underwriters by Brobeck, Phleger & Harrison LLP, New York, New York.
EXPERTS
The consolidated financial statements of the Company at December 31, 1994,
December 31, 1995, and September 30, 1996 and for each of the three years in the
period ended December 31, 1995 and the nine months ended September 30, 1996
appearing in this Prospectus and the Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act, of which this Prospectus is a part, with respect
to the Common Stock offered hereby. This Prospectus omits certain information
contained in the Registration Statement, and reference is made to the
Registration Statement for further information with respect to the Company and
the Common Stock offered hereby. Statements contained herein concerning the
provisions of documents are necessarily summaries of such documents and when any
such document is an exhibit to the Registration Statement, each such statement
is qualified in its entirety by reference to the copy of such document filed
with the Commission. The Registration Statement, including the exhibits and
schedules thereto, may be inspected without charge at the principal office of
the Commission at 450 Fifth Street, N.W., Washington D.C. 20549, and the
Commission's Regional Offices at 75 Park Place, Room 1288, New York, New York
10017, and Northwest Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60621-2511, and copies may be obtained at prescribed rates
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Registration Statement, including all exhibits and
schedules, and such reports and other information may also be accessed
electronically by means of the Commission's site on the World Wide Web, at
http://www.sec.gov.
54
<PAGE> 56
CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors........................................................ F-2
Consolidated Balance Sheets........................................................... F-3
Consolidated Statements of Operations................................................. F-4
Consolidated Statements of Stockholders' Deficit...................................... F-5
Consolidated Statements of Cash Flows................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 57
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Credit Management Solutions, Inc.
We have audited the accompanying consolidated balance sheets of Credit
Management Solutions, Inc. and subsidiary as of December 31, 1994 and 1995, and
September 30, 1996, and the related consolidated statements of operations,
stockholders' deficit and cash flows for each of the three years in the period
ended December 31, 1995 and the nine-month period ended September 30, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Credit
Management Solutions, Inc. and subsidiary at December 31, 1994 and 1995 and
September 30, 1996, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 1995 and
the nine-month period ended September 30, 1996, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Baltimore, Maryland
October 28, 1996
F-2
<PAGE> 58
CREDIT MANAGEMENT SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
---------------------------- SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1996 1996
------------ ------------ ------------- ------------------
(UNAUDITED--NOTE
2)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 75,840 $ 120,255 $ 8,433 $ 8,433
Accounts receivable, net of allowance of $0,
$98,095 and $100,000 in 1994, 1995 and
September 30, 1996, respectively............. 830,364 1,816,966 2,072,695 2,072,695
Costs and estimated earnings in excess of
billings on uncompleted contracts............ -- 263,365 592,081 592,081
Prepaid expenses and other current assets...... 7,634 250,976 738,555 738,555
Deferred income taxes.......................... -- -- -- 203,941
------------ ------------ ------------- ------------------
Total current assets................... 913,838 2,451,562 3,411,764 3,615,705
Property and equipment:
Computer equipment and software................ 804,318 1,464,421 1,751,439 1,751,439
Office furniture and equipment................. 170,101 360,319 396,098 396,098
Leasehold improvements......................... 23,933 96,504 102,249 102,249
------------ ------------ ------------- ------------------
998,352 1,921,244 2,249,786 2,249,786
Accumulated depreciation and amortization...... (390,662) (639,465) (913,098) (913,098)
------------ ------------ ------------- ------------------
607,690 1,281,779 1,336,688 1,336,688
Software development costs, net of accumulated
amortization of $0, $0 and $29,930 in 1994,
1995 and September 30, 1996, respectively.... 49,553 268,129 329,234 329,234
Other assets................................... 10,670 33,853 110,913 110,913
------------ ------------ ------------- ------------------
Total assets........................... $ 1,581,751 $4,035,323 $ 5,188,599 $5,392,540
============ ============ ============== ===================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable............................... $ 127,048 $1,372,616 $ 1,318,766 $1,393,766
Accrued payroll and related expenses........... 385,066 614,876 665,576 665,576
Billings in excess of costs and estimated
earnings on uncompleted contracts............ 841,537 592,457 884,468 884,468
Deferred revenue............................... 426,674 588,895 1,688,308 1,688,308
Short-term borrowings.......................... 130,000 250,000 304,481 304,481
Current portion of long-term debt and capital
lease obligations............................ 77,409 214,612 240,777 240,777
------------ ------------ ------------- ------------------
Total current liabilities.............. 1,987,734 3,633,456 5,102,376 5,177,376
Deferred income taxes.......................... -- -- -- 334,427
Stockholder loans.............................. 206,404 214,498 225,760 225,760
Capital lease obligations, less current
portion...................................... 180,241 397,011 243,385 243,385
Long-term debt, less current portion........... 29,491 11,795 -- --
Excess of assigned value of identifiable assets
over cost of an acquired interest, net of
accumulated amortization of $558,709,
$863,459 and $1,092,021 in 1994, 1995 and
September 30, 1996, respectively............. 660,291 355,541 126,979 126,979
Commitments and contingent liabilities......... -- -- 120,000 120,000
------------ ------------ ------------- ------------------
Total liabilities.............................. 3,064,161 4,612,301 5,818,500 6,227,927
Stockholders' deficit:
Common stock, $.01 par value; 10,000,000
shares authorized; 4,910,100 shares
issued and outstanding at December 31,
1994, December 31, 1995 and September 30,
1996, respectively....................... 49,101 49,101 49,101 49,101
Additional paid-in capital................. -- -- -- (884,488)
Accumulated deficit........................ (1,531,511) (626,079) (679,002) --
------------ ------------ ------------- ------------------
Total stockholders' deficit.................... (1,482,410) (576,978) (629,901) (835,387)
------------ ------------ ------------- ------------------
Total liabilities and stockholders' deficit.... $ 1,581,751 $4,035,323 $ 5,188,599 $5,392,540
============ ============ ============== ===================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 59
CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------------------------- --------------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
License and software
development fees............ $2,911,539 $2,934,450 $7,207,581 $ 4,778,059 $ 6,453,243
Maintenance fees.............. 375,510 700,861 1,170,447 874,076 1,433,190
Computer hardware sales....... 81,019 316,145 1,853,424 1,076,724 1,149,052
---------- ---------- ---------- ----------- -----------
3,368,068 3,951,456 10,231,452 6,728,859 9,035,485
---------- ---------- ---------- ----------- -----------
Costs and expenses:
Costs of license and software
development fees............ 785,622 1,482,036 3,559,798 2,186,040 3,519,921
Cost of maintenance fees...... 40,776 151,346 280,176 214,320 324,387
Cost of computer hardware
sales....................... 77,979 315,262 1,500,816 842,407 998,876
Selling, general and
administrative expenses..... 2,234,816 2,244,031 3,966,265 2,631,749 4,048,248
Research and development
costs....................... 131,203 167,152 165,366 91,313 344,326
---------- ---------- ---------- ----------- -----------
3,270,396 4,359,827 9,472,421 5,965,829 9,235,758
---------- ---------- ---------- ----------- -----------
Income (loss) from operations...... 97,672 (408,371) 759,031 763,030 (200,273)
Other income (expense):
Interest expense.............. (32,774) (41,310) (105,849) (83,029) (81,212)
Amortization of excess of
assigned value of
identifiable assets over
cost of an acquired
interest................. 253,959 304,750 304,750 228,562 228,562
---------- ---------- ---------- ----------- -----------
221,185 263,440 198,901 145,533 147,350
---------- ---------- ---------- ----------- -----------
Net income (loss).................. $ 318,857 $ (144,931) $ 957,932 $ 908,563 $ (52,923)
========== ========== ========== =========== ===========
Pro forma data (unaudited -- Note
2):
Historical income (loss)...... $ 957,932 $ (52,923)
Pro forma income tax expense
(benefit)................... 220,618 (97,928)
---------- -----------
Pro forma net income.......... $ 737,314 $ 45,005
========== ===========
Pro forma net income per
share....................... $ 0.12 $ 0.01
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 60
CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK
--------------------
NUMBER ACCUMULATED
OF SHARES AMOUNT DEFICIT TOTAL
--------- ------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1993...................... 4,910,100 $49,101 $(1,600,437) $(1,551,336)
Net income for 1993........................ -- -- 318,857 318,857
--------- ------- ----------- -----------
Balance at December 31, 1993.................... 4,910,100 49,101 (1,281,580) (1,232,479)
Net loss for 1994.......................... -- -- (144,931) (144,931)
Distributions to stockholders.............. -- -- (105,000) (105,000)
--------- ------- ----------- -----------
Balance at December 31, 1994.................... 4,910,100 49,101 (1,531,511) (1,482,410)
Net income for 1995........................ -- -- 957,932 957,932
Distributions to stockholders.............. -- -- (52,500) (52,500)
--------- ------- ----------- -----------
Balance at December 31, 1995.................... 4,910,100 49,101 (626,079) (576,978)
Net loss for the nine months ended
September 30, 1996....................... -- -- (52,923) (52,923)
--------- ------- ----------- -----------
Balance at September 30, 1996................... 4,910,100 $49,101 $ (679,002) $ (629,901)
========= ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 61
CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------ --------------------------
1993 1994 1995 1995 1996
--------- --------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss).................... $ 318,857 $(144,931) $ 957,932 $ 908,563 $ (52,923)
Adjustments:
Depreciation....................... 66,882 136,847 265,772 198,632 273,634
Amortization of excess of assigned
value of identifiable assets
over cost of an acquired
interest........................ (253,959) (304,750) (304,750) (228,562) (228,562)
Amortization of software
development costs............... -- -- -- -- 29,930
Loss on disposal of property and
equipment....................... -- 11,272 3,972 9,242 --
Changes in operating assets and
liabilities:
Accounts receivable, net........ (382,725) (358,251) (986,602) (541,549) (255,729)
Prepaid expenses and other
current assets................ 5,945 (7,434) (243,342) (186,475) (487,579)
Other assets.................... 15,850 (5,928) (23,183) (10,349) (77,060)
Accounts payable................ 150,600 (96,041) 1,245,568 514,020 (53,850)
Accrued payroll and related
expenses...................... 238,575 (7,443) 229,810 (36,713) 50,700
Net billings in excess of costs
and estimated gross profit on
uncompleted contracts......... 97,267 781,505 (512,445) (332,645) (36,705)
Deferred revenue................ 59,901 288,792 162,221 219,629 1,099,413
Accrued interest on stockholder
loans......................... 12,600 13,804 8,094 10,836 11,262
Accrued contingent liability.... -- -- -- -- 120,000
--------- --------- ---------- ---------- ----------
Net cash provided by operating
activities......................... 329,793 307,442 803,047 524,629 392,531
Investing activities:
Capitalized software development
costs.............................. -- (49,553) (218,576) (171,025) (91,035)
Proceeds from sale of property and
equipment.......................... -- 1,300 86,824 -- --
Purchases of property and
equipment.......................... (198,448) (236,016) (492,333) (298,140) (295,115)
Payment for acquired interest........ (150,000) -- -- -- --
--------- --------- ---------- ---------- ----------
Net cash used in investing
activities......................... (348,448) (284,269) (624,085) (469,165) (386,150)
Financing activities:
Net short-term borrowings............ -- 130,000 120,000 30,000 54,481
Repayments of stockholder loans...... (110,855) -- -- -- --
Payments under capital lease
obligations........................ -- (66,784) (184,013) (106,861) (160,439)
Repayments of long-term debt......... (15,028) (14,103) (18,034) (11,292) (12,245)
Distributions to stockholders........ -- (105,000) (52,500) -- --
--------- --------- ---------- ---------- ----------
Net cash used in financing
activities......................... (125,883) (55,887) (134,547) (88,153) (118,203)
--------- --------- ---------- ---------- ----------
Net change in cash and cash
equivalents........................ (144,538) (32,714) 44,415 (32,689) (111,822)
Cash and cash equivalents at
beginning of period................ 253,092 108,554 75,840 75,840 120,255
--------- --------- ---------- ---------- ----------
Cash and cash equivalents at end of
period............................. $ 108,554 $ 75,840 $ 120,255 $ 43,151 $ 8,433
========= ========= ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 62
CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 IS UNAUDITED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
Description of Business
Credit Management Solutions, Inc. (the "Company") develops and provides
software solutions and services for automating the consumer and small business
credit analysis, decisioning and funding process. The Company's customers are
primarily banks and other financial institutions located throughout the United
States.
Principles of Consolidation
The accompanying 1995 and 1996 consolidated financial statements include
the accounts of the Company and its subsidiary, Credit Connection LLC. The
subsidiary was established on January 5, 1995 to operate an automated service
bureau which electronically assembles and transmits between merchants and credit
grantors credit applications of the merchants' customers. All material
intercompany accounts and transactions have been eliminated upon consolidation.
The accompanying 1993 consolidated financial statements include the
accounts of the Company and CMSI Group Limited Partnership through March 4,
1993, the date the partnership was terminated upon the purchase of the minority
partnership interest (see Note 5).
Unaudited Interim Financial Statements
The consolidated financial statements for the nine months ended September
30, 1995 have been prepared by the Company pursuant to the rules and regulations
of the Securities and Exchange Commission for interim financial reporting. These
statements are unaudited but, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments and accruals)
necessary for a fair presentation of the financial information set forth herein.
The operating results for the nine months ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1996.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Property and Equipment
Property and equipment is stated at cost and depreciated using the
straight-line method based on estimated useful lives of between three and seven
years. Amortization of leasehold improvements is provided using the
straight-line method over the lesser of the life of the improvement or the
remaining term of the lease. Assets held under capital leases are stated at the
lesser of the present value of future minimum payments using the Company's
incremental borrowing rate at the inception of the lease or the fair value of
the property at the
F-7
<PAGE> 63
CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
inception of the lease. The assets recorded under capital leases are amortized
over the lesser of the lease term or the estimated useful life of the assets in
a manner consistent with the Company's depreciation policy for owned assets.
Software Development Costs
Software development costs consist of direct labor and applicable overhead
related to the development of a software product named "Credit Connection."
These costs were capitalized beginning in September 1994 upon the determination
that the software was technologically feasible. Credit Connection was
commercially released in July 1996 and amortization over the estimated useful
life of three years commenced at that date. Amortization is included in costs of
license and software development fees.
Revenue Recognition
Revenues from long-term software license contracts are recognized on the
percentage-of-completion method, measured generally on a cost incurred basis.
Costs consist primarily of direct labor and applicable overhead. Contracts in
progress are reviewed periodically as the work progresses, and revenues and
earnings are adjusted in current accounting periods based on revisions in
contract value and estimates to complete.
The Company recognizes revenue for software maintenance fees pro rata over
the term of the agreement, which generally have a one-year term. Revenues from
sales of hardware and software are recognized at time of shipment and when
collection of the receivable is probable. Payments received in advance of
revenue recognition for these services and product sales are included in
deferred revenue.
Advertising Costs
All advertising costs are expensed when incurred. Costs which are included
in selling, general and administrative expense for the years ended December 31,
1993, December 31, 1994 and December 31, 1995 and for the nine months ended
September 30, 1995 and September 30, 1996 are $64,242, $62,594, $101,741,
$116,152 and $102,191, respectively.
Income Taxes
The stockholders have elected under Subchapter S of the Internal Revenue
Code to include the Company's income in their personal income tax returns for
Federal and state income tax purposes. Accordingly, the Company was not subject
to Federal and state income taxes during the periods presented. The Company
currently anticipates completing an initial public offering of its common stock
in late 1996, which will result in the termination of the Company's Subchapter S
status.
2. PRO FORMA INFORMATION (UNAUDITED)
Pro Forma Balance Sheet
Upon completion of its initial public offering, the Company's S Corporation
status will terminate and the Company will be subject to income tax at the
corporate level. The pro forma balance sheet of the Company as of September 30,
1996 reflects the deferred tax asset and liability which would have been
recorded by the Company if its S Corporation status was terminated at that date
and a distribution payable to the stockholders for estimated personal income tax
obligations resulting from the Company's reported income for income tax purposes
(estimated at $75,000 as of September 30, 1996). The pro forma deferred tax
asset and liability represent the tax effect of the cumulative differences
between the financial reporting and income tax bases of certain assets and
liabilities as of September 30, 1996. The actual deferred tax asset and
liability recorded will be adjusted to reflect the effect of operations of the
Company for the period from October 1, 1996 through the date immediately
preceding the termination of its S Corporation status. The pro forma balance
sheet also
F-8
<PAGE> 64
CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
reflects the reclassification of the accumulated deficit to additional paid-in
capital, which will occur upon the termination of S Corporation status.
The significant items comprising the Company's pro forma net deferred tax
liability as of September 30, 1996 are as follows:
<TABLE>
<S> <C>
Pro forma deferred tax assets:
Revenue recognition......................................................... $ 112,920
Accrued vacation............................................................ 53,138
Provision for bad debts..................................................... 37,883
---------
Total pro forma deferred tax assets.............................................. 203,941
Pro forma deferred tax liabilities:
Capitalized software development costs...................................... (127,150)
Depreciation................................................................ (207,277)
---------
Total pro forma deferred tax liabilities......................................... (334,427)
---------
Pro forma net deferred tax liability............................................. $(130,486)
=========
</TABLE>
Pro Forma Statement of Operations Data
Upon the closing of the public offering, the Company will terminate its
status as an S Corporation and will be subject to federal and state income taxes
thereafter. Accordingly, for informational purposes, the accompanying statements
of operations data for the year ended December 31, 1995 and the nine months
ended September 30, 1996 include an unaudited pro forma adjustment for income
taxes which would have been recorded if the Company had not been an S
Corporation, based on the tax laws in effect during the respective periods.
Pro forma income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Current:
Federal........................................................ $ -- $ --
State.......................................................... -- --
------------ -------------
-- --
Deferred:
Federal........................................................ 180,630 (80,178)
State.......................................................... 39,988 (17,750)
------------ -------------
220,618 (97,928)
------------ -------------
Pro forma income tax expense (benefit).............................. $220,618 $ (97,928)
========== ==========
</TABLE>
F-9
<PAGE> 65
CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's pro forma expense (benefit) for income taxes would result in
effective tax rates that vary from the statutory federal income tax rate as
follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Expected federal income tax provision (benefit) at 34%.............. $325,697 $ (17,994)
Income not recognizable for tax purposes............................ (89,878) (68,219)
State income taxes, net of federal benefit.......................... (15,201) (11,715)
------------ -------------
$220,618 $ (97,928)
========== ==========
</TABLE>
Pro Forma Earnings Per Share
The following table summarizes the computations of share amounts used in
the computation of pro forma earnings per share presented in the accompanying
statements of operations:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Weighted average number of shares of common stock outstanding during
the period........................................................ 4,910,100 4,910,100
Effect of options to purchase common stock issued within one year of
registration statement............................................ 1,383,620 1,383,620
------------ -------------
Total common and common equivalent shares of stock considered
outstanding during the period..................................... 6,293,720 6,293,720
========== ==========
</TABLE>
Pro forma earnings per common and common equivalent share is based on the
average number of shares of common stock outstanding during each period. As
required by the Securities and Exchange Commission, all options to purchase
common stock issued by the Company at exercise prices below the expected initial
public offering price during the twelve-month period prior to the anticipated
offering date have been included in the computations as if they were outstanding
for all periods presented using the treasury stock method, even if the result is
anti-dilutive.
F-10
<PAGE> 66
CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. HISTORICAL EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
The following table summarizes the computations of historical earnings
(loss) per common and common equivalent share.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net income (loss)...................... $ 318,857 $(144,931) $ 957,932 $ 908,563 $ (52,923)
======== ========= ======== ======== ========
Weighted average number of shares
outstanding.......................... 4,910,100 4,910,100 4,910,100 4,910,100 4,910,100
Effect of options to purchase common
stock issued within one year of
registration statement............... 1,383,620 1,383,620 1,383,620 1,383,620 1,383,620
--------- --------- --------- --------- ---------
Total common and common equivalent
shares of stock considered
outstanding during the period........ 6,293,720 6,293,720 6,293,720 6,293,720 6,293,720
======== ========= ======== ======== ========
Earnings (loss) per common and common
equivalent share..................... $ 0.05 $ (0.02) $ 0.15 $ 0.14 $ (0.01)
======== ========= ======== ======== ========
</TABLE>
Earnings (loss) per common and common equivalent share is based on the
average number of shares of common stock outstanding during each period. As
required by the Securities and Exchange Commission, all options to purchase
common stock issued by the Company at exercise prices below the expected initial
public offering price during the twelve-month period prior to the anticipated
offering date have been included in the computations as if they were outstanding
for all periods presented using the treasury stock method, even if the result is
anti-dilutive.
4. SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
As discussed in Note 5, in 1993 the Company purchased a limited partner's
interest in a partnership for $225,000, of which $75,000 was financed through
the issuance of a note payable. In connection with the purchase, an excess of
assigned value of the identifiable net assets over the cost of an acquired
interest was recorded as follows:
<TABLE>
<S> <C>
Acquired interest............................................................... $ 758,000
Forgiveness of debt............................................................. 813,000
Reduction of noncurrent assets to zero.......................................... (127,000)
Issuance of note payable........................................................ (75,000)
Cash paid....................................................................... (150,000)
----------
Excess of assigned value of identifiable assets over cost of an acquired
interest...................................................................... $1,219,000
=========
</TABLE>
Capital lease obligations of $309,228, $538,324, $274,422 and $33,417 were
incurred when the Company entered into leases for new equipment during the years
ended December 31, 1994 and December 31, 1995 and the nine months ended
September 30, 1995 and September 30, 1996, respectively.
Interest paid for the years ended December 31, 1993, 1994 and 1995 was
$6,750, $40,313 and $105,576, respectively. Interest paid for the nine months
ended September 30, 1995 and September 30, 1996 totaled $86,126 and $79,855
respectively.
F-11
<PAGE> 67
CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PARTNERSHIP INTEREST IN CMSI GROUP LIMITED PARTNERSHIP
From September 1988 through March 4, 1993 the Company was the sole general
partner of CMSI Group Limited Partnership, a partnership which conducted what
are now the Company's principal operations. During this period, the Company's
ownership interest in the partnership varied between 49% and 67%, and it
accounted for the partnership as a consolidated subsidiary in its financial
statements.
In March 1993 the Company purchased the other partner's limited partnership
interest for $225,000. The Company accounted for the acquisition of the limited
partner's interest as the acquisition of a minority interest and used the
purchase method of accounting. The assigned value of the identifiable net assets
acquired over the cost of the acquired interest was $1,219,000, after reducing
intangible assets and property and equipment to zero for the portion of those
assets represented by the acquired interest. This amount is being amortized into
income using the straight-line method over four years.
6. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Uncompleted contracts consist of the following components:
<TABLE>
<CAPTION>
BALANCE SHEET CAPTION
------------------------
COSTS AND
ESTIMATED BILLINGS
EARNINGS IN
IN EXCESS OF
EXCESS COSTS AND
OF ESTIMATED
BILLINGS EARNINGS TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
December 31, 1994:
Costs and estimated earnings........................ $ -- $1,826,899 $1,826,899
Billings............................................ -- 2,668,436 2,668,405
========= ========= =========
$ -- $ (841,537) $ (841,537)
---------- ---------- ----------
December 31, 1995:
Costs and estimated earnings........................ $1,552,292 $2,044,454 $3,596,701
Billings............................................ 1,288,927 2,636,911 3,925,793
---------- ---------- ----------
$ 263,365 $ (592,457) $ (329,092)
========= ========= =========
September 30, 1996:
Costs and estimated earnings........................ $1,682,353 $2,880,568 $4,562,921
Billings............................................ 1,090,272 3,765,036 4,856,308
---------- ---------- ----------
$ 592,081 $ (884,468) $ (292,387)
========= ========= =========
</TABLE>
All receivables on contracts in-progress are expected to be collected
within twelve months.
7. SHORT-TERM BORROWINGS
At December 31, 1994, December 31, 1995 and September 30, 1996 the Company
maintained a short-term line of credit arrangement with a bank which allowed for
aggregate borrowings of $500,000. Borrowings under this arrangement, which are
personally guaranteed by the stockholders of the Company, are secured by
essentially all of the Company's assets and bear interest at the bank's prime
rate plus 1% per annum (weighted average borrowing rate of 9.4%, 9.8% and 9.3%
for the year ended December 31, 1994, 1995 and the nine months ended September
30, 1996, respectively). Under the terms of the credit arrangement, the Company
is required to comply with certain covenants including a restriction on the
payment of cash dividends without the prior written consent of the bank.
8. STOCKHOLDER LOANS
Amounts due to stockholders accrue interest at 7% per annum and are payable
on demand after October 1, 1997.
F-12
<PAGE> 68
CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. CAPITAL LEASE OBLIGATIONS
The Company leases equipment under capital leases. Property and equipment
includes the following amounts for leases that have been capitalized:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------- SEPTEMBER 30
1994 1995 1996
-------- -------- ------------
<S> <C> <C> <C>
Computer equipment.......................................... $227,240 $561,279 594,698
Office furniture and equipment.............................. 81,988 265,337 265,335
-------- -------- --------
309,228 826,616 860,033
Less: accumulated amortization.............................. 27,851 188,155 247,509
-------- -------- --------
$281,377 $638,461 $612,524
======== ======== ========
</TABLE>
Amortization of leased assets is included in depreciation expense.
Future minimum payments under capital lease obligations consist of the
following at September 30, 1996:
<TABLE>
<S> <C>
Three months ended December 31, 1996.............................. $ 68,151
1997.............................................................. 257,880
1998.............................................................. 139,546
1999.............................................................. 61,206
2000 and thereafter............................................... 25,754
--------
Total minimum lease payments...................................... $552,537
Less amounts representing interest................................ 84,303
--------
Present value of minimum capital lease payments (including current
portion of $224,849)............................................ $468,234
========
</TABLE>
10. STOCK OPTIONS
The Company has elected to record compensation expense for all stock-based
compensation plans using the intrinsic value method prescribed by APB Opinion
No. 25, Accounting for Stock Issued to Employees ("APB 25"). Under APB 25, if
the exercise price of the Company's employee stock options equals the estimated
fair value of the underlying stock on the date of grant, no compensation expense
is generally recognized. In October 1995, the Financial Accounting Standards
Board issued FASB Statement No. 123, Accounting for Stock-Based Compensation
("Statement 123"), which encourages, but does not require, companies to
recognize expense for stock-based awards based on their estimated fair value on
the date of grant. Under the provisions of Statement 123, companies are required
to supplementally disclose pro forma net income and earnings per share
information as if the fair value method had been adopted.
In 1996 the Company adopted the 1996 Credit Management Solutions, Inc.
Non-Qualified Stock Option Plan (the "Plan"). The Plan provides for the granting
of non-qualified options to purchase an aggregate of up to 2,750,000 shares of
common stock to employees and directors of the Company. In June 1996 the Company
granted options to purchase 2,362,540 shares of common stock for an exercise
price of $5.00 per share, the estimated fair value of a share of common stock on
the date of grant as determined by an independent appraisal. These options have
a term of 10 years, and at September 30, 1996, 642,234 options are vested and
exercisable. In October 1996 the Company granted options to purchase an
additional 27,360 shares of common stock for an exercise price of $9.60 per
share, the estimated fair value of a share of common stock at the date of grant.
All options granted under the Plan are subject to vesting provisions at the
discretion of the Board of Directors. Options granted through October 1996 vest
in varying percentages through 2001.
F-13
<PAGE> 69
CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pro forma net income and earnings per share information required by
Statement 123 has been determined using the minimum value method. The minimum
value method calculates the fair value of options as the excess of the estimated
fair value of the underlying stock at the date of grant over the present value
of both the exercise price and the expected dividend payments, each discounted
at the risk-free rate, over the expected life of the option. In determining the
estimated fair value of granted stock options under the minimum value method,
the risk-free interest rate was assumed to be 6%, the dividend yield was
estimated to be 0%, and the expected life of all granted options was assumed to
be 5 years. Because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the minimum value
method and other methods prescribed by Statement 123 do not necessarily provide
a single measure of the fair value of its employee stock options. For example,
if the expected life of the options was changed from 5 to 4 years, the amount of
total compensation expense recognized using the minimum value method would
decrease by approximately $600,000, or 18%.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma net loss for the nine months ended September 30, 1996 is $1,120,000
greater than the historical net loss of $52,923, or $1,172,923. Pro forma loss
per share is $(0.19).
11. PROFIT SHARING PLAN
The Company maintains a 401(k) profit sharing plan which covers all
employees with at least six months of service. In addition, the Company may make
a discretionary contribution based on each eligible participant's compensation.
Participant contributions vest immediately and employer contributions vest over
a six year period. In January 1996, the Company began matching 20% per annum of
the first $1,000 contributed to the plan by each employee. Contributions for the
nine months ended September 30, 1996 were $12,317.
12. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of accounts receivable and costs
and estimated earnings in excess of billings on uncompleted contracts.
To date, these financial instruments have been derived from revenues earned
primarily from banks and other financial institutions located in the United
States. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company maintains reserves for
potential credit losses; historically, such losses have been insignificant and
within management's expectations. At December 31, 1995, 31% of accounts
receivable was due from one customer and at September 30, 1996, 44% of accounts
receivable was due from three customers.
F-14
<PAGE> 70
CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the percentage contribution of revenues by
customer when sales to such customers exceeded 10% of net revenues.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ --------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Customer A........................................... 11% -- -- -- --
Customer B........................................... 13% -- -- -- --
Customer C........................................... 16% -- -- -- --
Customer D........................................... 11% -- -- -- --
Customer E........................................... 18% -- -- -- --
Customer F........................................... 12% -- -- -- 11%
Customer G........................................... -- 17% 20% 19% 10%
Customer H........................................... -- 10% -- -- --
Customer I........................................... -- 12% -- -- --
Customer J........................................... -- 17% -- -- --
Customer K........................................... -- -- 13% 16% 10%
Customer L........................................... -- -- -- -- 10%
</TABLE>
13. OPERATING LEASES
The Company leases certain office space and equipment under non-cancelable
operating lease agreements which expire through 2007. Future minimum lease
payments at September 30, 1996 for leases with initial terms of one year or more
consist of the following:
<TABLE>
<S> <C>
Three months ended December 31, 1996............................ $ 166,432
1997............................................................ 667,502
1998............................................................ 648,060
1999............................................................ 269,729
2000 and thereafter............................................. 207,489
----------
Total minimum lease payments.................................... $1,959,212
=========
</TABLE>
Rent expense under all operating leases for the years ended December 31,
1993, December 31, 1994 and December 31, 1995 and the nine months ended
September 30, 1995 and September 30, 1996 was $26,985, $171,346, $398,530,
$319,779 and $414,301, respectively.
14. COMMITMENT AND CONTINGENT LIABILITY
In August 1996, the Company entered into a settlement agreement and general
release with a former officer of the Company. The agreement provides that the
Company will pay the former officer as severance his monthly salary for a period
of one year. In addition, the agreement requires the Company to pay the former
officer a total of $240,000, including the aforementioned salary payments, if a
change in control of the Company occurs before January 18, 1997, or $120,000 if
a change in control occurs before July 18, 1997. If an initial public offering
of the Company's common stock is consummated prior to a change in control, the
agreement provides that the Company will pay the former officer a total of
$240,000 if the offering is consummated prior to January 18, 1997, or $120,000
if the offering occurs before July 18, 1997. At the Company's discretion, any
payments required to be made to the former officer may be in the form of cash or
stock. The Company has expensed $240,000 related to this arrangement, the amount
it is likely to ultimately pay the former officer. The Company has accrued
$120,000 as a contingent liability at September 30, 1996, based on an assessment
that it is probable that this contingent amount will be payable in the future to
this former officer. Included in accrued payroll and related taxes at September
30, 1996 is $86,461 for the unpaid portion of the monthly payments due through
August 1997.
F-15
<PAGE> 71
CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SUBSEQUENT EVENT
On October 10, 1996, the Board of Directors approved a 32,734 for 1 stock
split of the Company's common stock. All references in the accompanying
financial statements to share and per share amounts have been retroactively
restated to reflect the stock split.
F-16
<PAGE> 72
- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION
NOT CONTAINED IN THIS PROSPECTUS, AND ANY INFORMATION OR REPRESENTATIONS NOT
CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, ANY SELLING STOCKHOLDER OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 15
Dividend Policy....................... 15
Capitalization........................ 16
Dilution.............................. 17
Selected Consolidated Financial
Data................................ 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 27
Management............................ 41
Certain Transactions.................. 47
Principal and Selling Stockholders.... 49
Description of Capital Stock.......... 50
Shares Eligible for Future Sale....... 51
Underwriting.......................... 53
Legal Matters......................... 54
Experts............................... 54
Additional Information................ 54
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL
DEALERS EFFECTING TRANSACTIONS IN THE SHARES OF COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,600,000 SHARES
CREDIT MANAGEMENT
SOLUTIONS, INC.
[CMSI LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
FRIEDMAN, BILLINGS, RAMSEY
& CO., INC.
UNTERBERG HARRIS
, 1996
------------------------------------------------------
------------------------------------------------------
<PAGE> 73
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses and costs (other than
underwriting discounts and commissions) expected to be incurred in connection
with the issuance and distribution of the securities registered hereby. The
Company is responsible for the payment of all fees and expenses incurred by the
Selling Stockholders in connection with the sale of their respective shares in
this Offering. All the amounts shown are estimates except for the registration
fee, the NASD filing fee and the Nasdaq National Market application fee:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............... $ 11,779
NASD filing fee................................................... 4,387
Nasdaq National Market listing fee................................ 20,525
Commissions payable to Graham, Hamilton & Dwyer, Inc.............. 200,000
Legal fees and expenses........................................... 300,000
Blue Sky fees and expenses........................................ 25,000
Accounting fees and expenses...................................... 125,000
Printing and engraving fees....................................... 125,000
Transfer agent and registrar fees................................. 10,000
Miscellaneous..................................................... 78,309
--------
Total................................................... $900,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(a) The Articles of Incorporation of the Registrant, consistent with
Maryland law, provides that the Registrant shall indemnify its past, present and
future directors and officers from judgments, fines, penalties, settlements and
defense costs and expenses (including reasonable attorneys' fees) incurred in
threatened, pending or completed actions, suits or proceedings against him or
her, whether civil, criminal, administrative or investigative, to which such
person was or is a party or threatened to be made a party by reason of his or
her being or having been a director or officer of the Registrant or, at the
Registrant's request, or any other corporation, partnership or enterprise and
from which he or she is not otherwise entitled to be indemnified. The Registrant
shall advance expenses in the investigation and defense of any such proceeding,
provided the director or officer agrees to reimburse the Registrant if it is
found that the director or officer did not act in good faith, that the director
or officer did not reasonably believe that his or her acts or omissions were not
opposed to the best interests of the Registrant, that the acts or omissions of
the director or officer were not the result of active and deliberate dishonesty,
or that the acts or omissions of the director or officer did not result in the
receipt by him or her of an improper personal benefit. If the director or
officer is alleged to have defrauded the Registrant or to have derived an
improper personal benefit, no indemnification shall be afforded unless a
disinterested majority of the stockholders or of the Board of Directors
determines that such indemnification is appropriate or it is adjudged in the
proceeding that the director or officer did not defraud the Registrant or
receive an improper benefit.
(b) The Registrant intends to reincorporate in Delaware prior to the
consummation of this Offering. The Registrant's Certificate of Incorporation,
together with its Bylaws, will provide that the Registrant shall indemnify
officers and directors, and may indemnify its other employees and agents, to the
fullest extent permitted by law. The laws of the State of Delaware permit, and
in some cases require, corporations to indemnify officers, directors, agents and
employees who are or have been a party to or are threatened to be made a party
to litigation against judgments, fines, settlements and reasonable expenses
under certain circumstances.
II-1
<PAGE> 74
The Registrant's Certificate of Incorporation will limit the liability of
its directors and officers to the fullest extent permitted by the laws of the
State of Delaware. Under the Registrant's Certificate of Incorporation, and as
permitted by the laws of the State of Delaware, a director or officer will not
be liable to the Registrant or its stockholders for damages for breach of
fiduciary duty. Such limitations of liability will not affect liability for (i)
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of the law, (iii) any transaction from which the director
derived an improper personal benefit, or (iv) the payment of any unlawful
distribution.
Under the form of Underwriting Agreement, to be filed as Exhibit 1.1, the
Underwriters are obligated, under certain circumstances, to indemnify directors
and officers of the Registrant against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities Act").
The Registrant intends to purchase a general liability insurance policy
which covers certain liabilities of directors and officers of the Registrant
arising out of claims based on acts or omissions in their capacity as directors
or officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In June 1996, the Option Committee granted stock options to purchase an
aggregate of 2,362,540 shares of Common Stock to certain of the Company's
executive officers, including Messrs. Alsobrook, Grody, Riordan and Vollono and
Ms. Weil, and to certain employees, at an exercise price of $5.00 per share (the
"June Options"). Of the June Options, 332,640 options vest at the rate of 10% at
the time of grant, 20% on each of the first, second, third and fourth
anniversaries of December 15, 1996, and 10% on the fifth anniversary of December
15, 1996. The remaining June Options vest at a rate of 30% at the time of grant,
20% on each of the first and second anniversaries of December 15, 1996, and 10%
on each of the third, fourth and fifth anniversaries of December 15, 1996. In
October and November 1996, the Option Committee granted 185,260 stock options
under the Stock Option Plan (the "Autumn Options"). The Autumn Options have an
exercise price of $9.60 per share and vest at a rate of 10% at the time of
grant, 20% on each of the second, third and fourth anniversaries of December 15,
1996 and 10% on the fifth anniversary of December 15, 1996. The Options were
granted pursuant to exemption from registration by virtue of Section 4(2) of the
Securities Act and Rule 701 promulgated under the Securities Act. Certain
Selling Stockholders intend to exercise 100,000 of the Executive Options
immediately prior to the consummation of the Offering. Such exercise will result
in proceeds to the Company of $500,000.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The Exhibits filed as part of this Registration Statement are as
follows:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------------------------------------------------------------------
<C> <S>
1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of the Company
3.2 Bylaws of the Company
4 Specimen certificate for Common Stock of the Company
5 Opinion of Manatt, Phelps & Phillips, LLP regarding legality of the securities
being registered
10.1 Form of Project Commencement Agreement+
10.2 Form of Software License Agreement+
10.3 Form of Software Maintenance Agreement+
10.4 Form of Professional Services Agreement+
10.5 Form of Credit Connection Lender Agreement (for CreditRevue Licensees)+
10.6 Form of Credit Connection Lender Agreement (for non-CreditRevue Licensees)+
10.7 Form of Credit Connection Dealer Subscription Agreement+
10.8.1 Office Building Lease between Symphony Woods Limited Partnership and the Company
dated October 29, 1993+
10.8.2 Office Building Lease between Symphony Woods Limited Partnership and the Company
dated February 10, 1995+
10.8.3 First Amendment to Lease dated March 29, 1995+
</TABLE>
II-2
<PAGE> 75
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------------------------------------------------------------------
<S> <C>
10.8.4 Second Amendment to Lease dated August 12, 1996+
10.9 Promissory Note dated December 31, 1995 given by the Company to James R.
DeFrancesco+
10.10 Business Loan Agreement between The Columbia Bank and the Company dated June 10,
1994+
10.11 1996 Credit Management Solutions, Inc. Non-Qualified Stock Option Plan+
10.12 1996 Credit Management Solutions, Inc. Employee Stock Purchase Plan
10.13 1996 Credit Management Solutions, Inc. Long-Term Incentive Plan
10.14 Form of Tax Indemnification Agreement
10.15 1996 Credit Management Solutions, Inc. Non-Qualified Stock Option Plan
21 Subsidiaries of the Company+
23.1 Consent of Ernst & Young LLP
23.2 Consent of Manatt, Phelps & Phillips, LLP (included in Exhibit 5)
24 Power of Attorney+
27 Financial Data Schedule+
</TABLE>
- ---------------
+ Previously filed.
(b) Schedules have been omitted because of the absence of the conditions
under which they are required or because the required information is included in
the financial statements or notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed
as a part of this registration statement in reliance upon Rule
430A and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
II-3
<PAGE> 76
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 3 to the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Columbia, State of Maryland, on December 4, 1996.
CREDIT MANAGEMENT SOLUTIONS, INC.
By: /s/ SCOTT L. FREIMAN
------------------------------------
Scott L. Freiman
Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
* President, Chief Executive December 4, 1996
- --------------------------------------------- Officer and Chairman of the
James R. DeFrancesco Board of Directors
(Principal Executive
Officer)
/s/ SCOTT FREIMAN Executive Vice President and December 4, 1996
- --------------------------------------------- Director
Scott L. Freiman
* Senior Vice President, December 4, 1996
- --------------------------------------------- Secretary, General Counsel
Miles H. Grody and Director
/s/ ROBERT P. VOLLONO Senior Vice President, December 4, 1996
- --------------------------------------------- Treasurer, Chief Financial
Robert P. Vollono Officer and Director
(Principal Financial and
Accounting Officer)
* Director December 4, 1996
- ---------------------------------------------
Stephen X. Graham
* Director December 4, 1996
- ---------------------------------------------
John J. McDonnell, Jr.
*By: /s/ SCOTT L. FREIMAN
- ---------------------------------------------
Scott L. Freiman
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 77
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE AT
WHICH EXHIBIT
APPEARS IN
EXHIBIT SEQUENTIALLY
NUMBER DOCUMENT NUMBERED COPY
------- -------------------------------------------------------------------- -------------
<C> <S> <C>
1 Form of Underwriting Agreement......................................
3.1 Certificate of Incorporation of the Company.........................
3.2 Bylaws of the Company...............................................
4 Specimen certificate for Common Stock of the Company................
5 Opinion of Manatt, Phelps & Phillips, LLP regarding legality of the
securities being registered.........................................
10.1 Form of Project Commencement Agreement+.............................
10.2 Form of Software License Agreement+.................................
10.3 Form of Software Maintenance Agreement+.............................
10.4 Form of Professional Services Agreement+............................
10.5 Form of Credit Connection Lender Agreement (for CreditRevue
Licensees)+.........................................................
10.6 Form of Credit Connection Lender Agreement (for non-CreditRevue
Licensees)+.........................................................
10.7 Form of Credit Connection Dealer Subscription Agreement+............
10.8.1 Office Building Lease between Symphony Woods Limited Partnership and
the Company dated October 29, 1993+.................................
10.8.2 Office Building Lease between Symphony Woods Limited Partnership and
the Company dated February 10, 1995+................................
10.8.3 First Amendment to Lease dated March 29, 1995+......................
10.8.4 Second Amendment to Lease dated August 12, 1996+....................
10.9 Promissory Note dated December 31, 1995 given by the Company to
James R. DeFrancesco+...............................................
10.10 Business Loan Agreement between The Columbia Bank and the Company
dated June 10, 1994+................................................
10.11 1996 Credit Management Solutions, Inc. Non-Qualified Stock Option
Plan+...............................................................
10.12 1996 Credit Management Solutions, Inc. Employee Stock Purchase
Plan................................................................
10.13 1996 Credit Management Solutions, Inc. Long-Term Incentive Plan.....
10.14 Form of Tax Indemnification Agreement...............................
10.15 1996 Credit Management Solutions, Inc. Non-Qualified Stock Option
Plan................................................................
21 Subsidiaries of the Company+........................................
23.1 Consent of Ernst & Young LLP........................................
23.2 Consent of Manatt, Phelps & Phillips, LLP (included in Exhibit 5)...
24 Power of Attorney+..................................................
27 Financial Data Schedule+............................................
</TABLE>
- ---------------
+ Previously filed.
<PAGE> 1
EXHIBIT 1
CREDIT MANAGEMENT SOLUTIONS, INC.
2,600,000 SHARES(1)
COMMON STOCK
FORM OF UNDERWRITING AGREEMENT
December __, 1996
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
UNTERBERG HARRIS
as Representatives of the Several Underwriters
c/o Friedman, Billings, Ramsey & Co., Inc.
Potomac Tower
1001 Nineteenth Street North
Arlington, Virginia 22209
Ladies and Gentlemen:
Credit Management Solutions, Inc., a Delaware corporation (the
"Company"), and the stockholders of the Company named in Schedule II hereto
(collectively, the "Selling Securityholders"), hereby confirm their agreement
with the several underwriters named in Schedule I hereto (the "Underwriters"),
for whom you have been duly authorized to act as representatives (in such
capacity, the "Representatives"), as set forth below. If you are the only
Underwriters, all references herein to the Representatives shall be deemed to
be to the Underwriters.
1. Securities. Subject to the terms and conditions herein
contained, the Company proposes to issue and sell to the several Underwriters
an aggregate of 2,200,000 shares (the "Company Firm Securities") of the
Company's Common Stock, $0.01 par value per share (the "Common Stock"), and the
Selling Securityholders propose to sell to the several Underwriters an
aggregate of 400,000 shares of Common Stock (collectively with the Company Firm
Shares, the "Firm Securities"). The Company also proposes to grant to the
several Underwriters an option to purchase up to an aggregate of 390,000
additional shares of Common Stock (the "Option Securities" and collectively
with the Firm Securities, the "Securities") if requested by the Representatives
as provided in Section 3 of this Agreement. The Common Stock is more fully
described in the Registration Statement and the Prospectus hereinafter
mentioned.
2. Representations and Warranties of the Company and the Selling
Securityholders
(a) The Company hereby represents and warrants to, and
agrees with, each of the several Underwriters and the Selling Securityholders
that:
(i) A registration statement on Form S-1 (File
No. 333-14007) with respect to the Securities, including a prospectus
subject to completion, has been filed by the Company with the
Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Act"), and one or more
amendments to such registration statement have been so filed, if
applicable. Copies of such registration statement and of each
amendment thereto, if any, including the related preliminary
prospectus (meeting the requirements of Rule 430A under the Act)
heretofore filed by the Company with the Commission have been
delivered to you. After the execution of this Agreement, the Company
will file with the Commission either (i) if such registration
statement, as it may have been amended, has been declared by the
Commission to be effective under the Act, either (A) if the Company
relies on Rule 434 under the Act, a Term Sheet (as hereinafter defined)
relating to the Securities, that shall identify the Preliminary
Prospectus (as hereinafter defined) that it supplements containing
such information as is required or permitted by Rules 434, 430A and
424(b) under the Act, or (B) if the Company does not rely
- ---------------------
(1) Plus an option to purchase from the Company up to 390,000 additional
shares to cover over-allotments, if any.
<PAGE> 2
on Rule 434 under the Act, a prospectus in the form most recently
included in an amendment to such registration statement (or, if no
such amendment shall have been filed, in such registration statement),
with such changes or insertions as are required by Rule 430A under the
Act or permitted by Rule 424(b) under the Act, and in the case of
either clause (i)(A) or (i)(B) of this sentence, as have been provided
to and approved by the Representatives prior to the execution of this
Agreement, or (ii) if such registration statement, as it may have been
amended, has not been declared by the Commission to be effective under
the Act, an amendment to such registration statement, including a form
of prospectus, a copy of which amendment has been furnished to and
approved by the Representatives prior to the execution of this
Agreement. The Company may also file a related abbreviated
registration statement with the Commission pursuant to Rule 462(b)
under the Act for the purpose of registering certain additional
Securities, which registration statement shall be effective upon
filing with the Commission. If the Company has elected to rely on
Rule 462(b) under the Act and the Rule 462(b) Registration Statement
(as hereinafter defined) has not been declared effective: (i) the
Company has filed a Rule 462(b) Registration Statement in compliance
with the Act and the rules and regulations of the Commission
promulgated thereunder and that the Rule 462(b) Registration Statement
is effective upon filing pursuant to Rule 462(b) under the Act and the
Company has received confirmation of its receipt and (ii) the Company
has given irrevocable instructions for transmission of the applicable
filing fee in connection with the filing of the Rule 462(b)
Registration Statement, in compliance with Rule 111 promulgated under
the Act or the Commission has received payment of such filing fee. As
used in this Agreement, the term "Original Registration Statement"
means the registration statement initially filed relating to the
Securities, as amended at the time when it was or is declared
effective, including all financial schedules and exhibits thereto and
including any information omitted therefrom pursuant to Rule 430A
under the Act and included in the Prospectus (as hereinafter defined);
the term "Rule 462(b) Registration Statement" means any abbreviated
registration statement filed with the Commission pursuant to Rule
462(b) under the Act (including the Registration Statement and any
Preliminary Prospectus or Prospectus incorporated therein at the time
such Registration Statement becomes effective); the term "Registration
Statement" includes both the Original Registration Statement and any
Rule 462(b) Registration Statement; the term "Preliminary Prospectus"
means each prospectus subject to completion filed with such
registration statement or any amendment thereto (including the
prospectus subject to completion, if any, included in the Registration
Statement or any amendment thereto at the time it was or is declared
effective); the term "Prospectus" means: (A) if the Company relies on
Rule 434 under the Act, the Term Sheet relating to the Securities that
is first filed pursuant to Rule 424(b)(7) under the Act, together with
the Preliminary Prospectus identified therein that such Term Sheet
supplements; (B) if the Company does not rely on Rule 434 under the
Act, the prospectus first filed with the Commission pursuant to Rule
424(b) under the Act; or (C) if the Company does not rely on Rule 434
under the Act and if no prospectus is required to be filed pursuant to
Rule 424(b) under the Act, the prospectus included in the Registration
Statement; and the term "Term Sheet" means any term sheet that
satisfies the requirements of Rule 434 under the Act. Any reference
herein to the "date" of a Prospectus that includes a Term Sheet shall
mean the date of such Term Sheet.
(ii) The Commission has not issued any order
preventing or suspending the use of any Preliminary Prospectus or
instituted proceedings for such purpose. When any Preliminary
Prospectus was filed with the Commission it: (A) contained all
statements required to be stated therein in accordance with, and
complied in all material respects with the requirements of, the Act
and the rules and regulations of the Commission promulgated
thereunder, and (B) did not include any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading. When the Registration Statement or any
amendment thereto was or is declared effective, it (A) contained all
statements required to be stated therein in accordance with, and
complied in all material respects with the requirements of, the Act
and the rules and regulations of the Commission promulgated
thereunder, and (B) did not include any untrue statement of a material
fact or omit to state any material fact necessary to make the
statements therein not misleading. When the Prospectus or any Term
Sheet that is a part thereof or any amendment or supplement to the
Prospectus is filed with the Commission pursuant to Rule 424(b) (or,
if the Prospectus or any part thereof or such amendment or supplement
is not required to be so filed, when the Registration Statement or the
<PAGE> 3
amendment thereto containing such amendment or supplement to the
Prospectus was or is declared effective) and on the Firm Closing Date
and any Option Closing Date (both as hereinafter defined), the
Prospectus or any Term Sheet, if applicable, as amended or
supplemented at any such time, (A) contained all statements required
to be stated therein in accordance with, and complied in all material
respects with the requirements of, the Act and the rules and
regulations of the Commission promulgated thereunder and (B) did not
include any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading. The foregoing provisions of this paragraph (ii) do not
apply to statements in, or omissions from, any Preliminary Prospectus,
the Registration Statement or any amendment thereto or the Prospectus
or any amendment or supplement thereto in reliance upon and in
conformity with written information furnished to the Company by or on
behalf of the Underwriters specifically for use therein.
(iii) Each of the Company and its subsidiary has
been duly incorporated and is validly existing and in good standing
under the laws of its jurisdiction of organization and is duly
qualified to transact business as a foreign entity and is in good
standing under the laws of all other jurisdictions where the ownership
or leasing of its properties or the conduct of its businesses requires
such qualification, except where the failure to be so qualified would
not have a material adverse effect on the business, properties,
business prospects, financial condition or results of operations of
the Company and its subsidiary, taken as a whole.
(iv) Each of the Company and its subsidiary has
the power (corporate and other) and authority to own or lease its
properties and conduct its businesses as described in the Registration
Statement and the Prospectus; and the Company has the legal right,
power (corporate and other) and authority to enter into this Agreement
and to perform the transactions contemplated hereby.
(v) All issued and outstanding shares of the
Company's subsidiary have been duly authorized and validly issued, are
fully paid and nonassessable, and have not been issued in violation of
or subject to any preemptive right, co-sale right, registration right,
right of first refusal or other similar right and are owned by the
Company free and clear of any pledge, security interests, liens,
encumbrances, claims or equitable interests. The Company does not own
or control, directly or indirectly, any corporation, association or
other entity other than Credit Connection, Inc.
(vi) The Company has an authorized, issued and
outstanding capitalization as set forth in the Prospectus under the
caption "Capitalization." All of the issued and outstanding shares of
capital stock of the Company (including the Securities to be sold by
the Selling Securityholders) have been duly authorized and validly
issued and are fully paid and nonassessable, have been issued in
compliance with all Federal and state securities laws, and were not
issued in violation of or subject to any preemptive rights or other
rights to subscribe for or purchase securities. The Company Firm
Securities and the Option Securities have been duly authorized for
issuance and sale to the Underwriters pursuant to this Agreement, and
at the Firm Closing Date or the related Option Closing Date (as the
case may be), when issued and delivered by the Company after payment
therefor in accordance herewith, will be duly and validly issued,
fully paid and nonassessable, and will be sold free and clear of any
pledge, lien, security interest, encumbrance, claim or equitable
interest; and no preemptive right, co-sale right, registration right,
right of first refusal or other similar right of stockholders exists
with respect to any of the Common Stock hereunder or the issuance and
sale thereof other than those that have been expressly waived prior to
the date hereof and those that will automatically expire upon the
consummations of the transactions contemplated by this Agreement. No
further approval or authorization of any stockholder, the Board of
Directors of the Company or others is required for the issuance of the
Company Firm Securities or the Option Securities except as may be
required under the Act or state securities or Blue Sky laws.
3
<PAGE> 4
(vii) The capital stock of the Company conforms to
the description thereof and statements relating thereto contained in
the Prospectus (and such statements correctly state the substance of
the instruments defining the capitalization of the Company).
(viii) Except as disclosed in the Prospectus, there
are no outstanding (A) securities or obligations of the Company or its
subsidiary convertible into or exchangeable for any capital stock or
ownership interests of the Company or its subsidiary, (B) warrants,
rights or options to subscribe for or purchase from the Company or its
subsidiary any such capital stock or ownership interest or any such
convertible or exchangeable securities or obligations, or (C)
obligations of the Company or its subsidiary to issue any shares of
capital stock or any ownership interests, any such convertible or
exchangeable securities or obligations, or any such warrants, rights
or options. The description of the Company's stock option and
purchase plans, and the options or other rights granted and exercised
thereunder, set forth in the Prospectus accurately and fairly presents
the information required to be shown with respect to such plans,
arrangements, options and rights.
(ix) The audited consolidated financial statements
of the Company and its subsidiary, together with the related schedules
and notes, and the unaudited consolidated financial information,
included in the Registration Statement and the Prospectus present
fairly the financial position of the Company and its subsidiary, the
results of operations and changes in financial condition as of the
dates and periods therein specified. Such financial statements and
schedules have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods
involved (except as otherwise noted therein). The consolidated and
summary financial and statistical data included in the Registration
Statement present fairly the information included therein and have
been compiled on a basis consistent with the audited financial
statements presented therein. No other financial statements or
schedules are required to be included in the Registration Statement.
(x) Ernst & Young LLP, who have certified certain
consolidated financial statements of the Company and its subsidiary
and delivered their report with respect to the audited consolidated
financial statements, together with the related schedules and notes,
included in the Registration Statement and the Prospectus are
independent accountants within the meaning of the Act and the
applicable rules and regulations thereunder.
(xi) The execution and delivery of this Agreement
have been duly authorized by the Company, and this Agreement has been
duly executed and delivered by the Company and is the valid and
binding agreement of the Company, enforceable against the Company in
accordance with its terms, except as rights to indemnification and
contribution hereunder may be limited by applicable law and except as
the enforcement hereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating
to or affecting creditors' rights generally, or by general equitable
principles.
(xii) No legal or governmental action, suit, claim
or other proceedings are pending to which the Company or its
subsidiary is a party or to which the property of the Company or its
subsidiary is subject that would have a material adverse effect in the
business, properties, business prospects, financial condition or
results of operations of the Company and its subsidiary, taken as a
whole, and no such actions, suits or proceedings have been threatened
against the Company or its subsidiary or with respect to any of their
respective properties or is required to be described in the
Registration Statement or the Prospectus and is not so described; and
no contract or other document is required to be described in the
Registration Statement or the Prospectus or to be filed as an exhibit
to the Registration Statement that is not described therein or filed
as required and any such description of such contracts or agreements
conforms in all material respects to the terms of such contracts or
agreements.
4
<PAGE> 5
(xiii) Neither the Company nor its subsidiary is (i)
in violation of its certificate of incorporation or bylaws, or (ii) in
default in the performance or observance of any obligation, agreement,
covenant or condition contained in any bond, debenture, note or other
evidence of indebtedness, which default would have a material adverse
effect on the business, properties, business prospects, financial
condition or results of operations of the Company and its subsidiary,
taken as a whole, or (iii) in default in the performance or observance
of any contract, indenture, mortgage, loan agreement, joint venture or
other agreement or instrument to which it is a party or by which it or
any of its properties are bound, which default would have a material
adverse effect on the business, properties, business prospects,
financial condition or results of operations of the Company and its
subsidiary, taken as a whole, or (iv) in violation of any law, order,
rule, regulation, writ, injunction, judgment or decree of any court or
governmental agency or body to which the Company is subject.
(xiv) The issuance, offering and sale of the
Securities to the Underwriters by the Company pursuant to this
Agreement, the compliance and performance by the Company with the
other provisions of this Agreement and the consummation of the other
transactions herein contemplated do not and will not (A) require the
consent, approval, authorization, registration or qualification of or
with any governmental authority, domestic or foreign, except such as
have been obtained, or such as may be required under the Act, the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
under state securities or blue sky laws, all of which requirements
have been satisfied, or (B) result in a breach or violation of any of
the terms and provisions of, or constitute a default under the
certificate of incorporation or bylaws of the Company, or (C) result
in a breach or violation of any of the terms and provisions of, or
constitute a default under any obligation, agreement, covenant or
condition contained in any bond, debenture, note or other evidence of
indebtedness, which default would have a material adverse effect on
the business, properties, business prospects, financial condition or
results of operations of the Company and its subsidiary, taken as a
whole, or (D) result in a breach or violation of any of the terms and
provisions of, or constitute a default under any law, order, rule,
regulation, writ, injunction, judgment or decree of any court or
governmental agency or body to which the Company is subject.
(xv) Subsequent to the respective dates as of
which information is given in the Registration Statement and the
Prospectus, there has not been (a) any material adverse change in the
business, properties, business prospects, financial condition or
results of operations of the Company and its subsidiary, taken as a
whole, (b) any transaction that is material to the Company and its
subsidiary, taken as a whole, except transactions entered into in the
ordinary course of business, (c) any obligation, direct or contingent,
that is material to the Company and its subsidiary, taken as a whole,
incurred by the Company or its subsidiary, except obligations incurred
in the ordinary course of business, (d) any change in the capital
stock or outstanding indebtedness of the Company or its subsidiary
that is material to the Company and its subsidiary, taken as a whole,
(e) any dividend or distribution of any kind declared, paid or made on
the capital stock of the Company or its subsidiary, or (f) any loss or
damage (whether or not insured) to the property of the Company or its
subsidiary which has been sustained or will have been sustained which
has a material adverse effect on the business, properties, business
prospects, financial condition or results of operations of the Company
and its subsidiary, taken as a whole.
(xvi) The Company has not directly or indirectly,
(i) taken any action designed to cause or to result in, or that has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities, or (ii)
since the filing of the Registration Statement (A) other than amounts
to be paid to the Underwriters pursuant to the terms hereof, sold, bid
for, purchased, or paid anyone any compensation for soliciting
purchases of, the Securities, or (B) paid or agreed to pay to any
person any compensation for soliciting another to purchase any other
securities of the Company.
5
<PAGE> 6
(xvii) Neither the Company nor its subsidiary have
at any time during the last five (5) years (i) made any unlawful
contribution to any candidate for foreign office or failed to disclose
fully any contribution in violation of law, or (ii) made any payment
to any federal or state governmental officer or official, or other
person charged with similar public or quasi-public duties, other than
payments required or permitted by the laws of the United States or any
jurisdiction thereof.
(xviii) (a) The Company and its subsidiary possess
all certificates, authorizations, licenses, franchises and permits
issued by the appropriate Federal, state or foreign regulatory
authorities necessary to own, lease and operate their respective
properties and to conduct their respective businesses described in the
Prospectus, and (b) neither the Company nor its subsidiary has
received any notice of proceedings relating to, the revocation or
modification of any such certificate, authorization, license,
franchise or permit, except as described in the Prospectus. Except as
described in the Prospectus, none of the Company's or its subsidiary's
certificates, authorizations, licenses, franchises or permits contain
any restrictions that, if effective, would result in any material
adverse effect on the business, properties, business prospects,
financial condition or results of operations of the Company and its
subsidiary, taken as a whole.
(xix) The Company is familiar with the Investment
Company Act of 1940, as amended, and has in the past conducted its
affairs, and will in the future conduct its affairs, in such a manner
to ensure that the Company was not and will not be an "investment
company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940, as amended, and the
rules and regulations thereunder.
(xx) The Company and its subsidiary have timely
filed all foreign, Federal, state and local tax returns that are
required to be filed and have paid all taxes and assessments required
to be paid by them and any other assessment, fine or penalty levied
against them. Prior to its reincorporation in Delaware, the Company
had validly elected to be treated as a Subchapter S Corporation for
Federal and state income tax purposes since its inception and
continued to qualify as a Subchapter S Corporation until the
termination of its Subchapter S Corporation status for Federal and
state income tax purposes upon its reincorporation in Delaware.
(xxi) Except for the shares of its subsidiary owned
by the Company, neither the Company nor its subsidiary owns any shares
of stock or any other equity securities of any corporation or has any
equity interest in any firm, partnership, association or other entity.
(xxii) Each of the Company and its subsidiary
maintain a system of internal accounting controls sufficient to
provide reasonable assurance that: (A) transactions are executed in
accordance with management's general or specific authorizations; (B)
transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain asset accountability; (C) access to assets
is permitted only in accordance with management's general or specific
authorization; and (D) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(xxiii) Except as described in the Registration
Statement and the Prospectus, (i) the agreements to which the Company
or its subsidiary is a party described in the Registration Statement
and Prospectus are valid agreements, enforceable by the Company and
its subsidiary (as applicable), except as the enforcement thereof may
be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors'
rights generally or by general equitable principles and the other
contracting party or parties thereto are not in breach or default
under any of such agreements, and (ii) no default exists, and no event
has occurred which, with notice or lapse of time or both, would
constitute a default, in the due performance and observance of any
term, covenant or condition of any
6
<PAGE> 7
indenture, mortgage, deed of trust, lease, contract, loan agreement,
joint venture or other agreement or instrument to which the Company or
its subsidiary is a party or by which the Company or its subsidiary or
any of their respective properties is bound or may be affected, in any
respect which would result in any material adverse effect on the
business, properties, business prospects, financial condition or
results of operations of the Company and its subsidiary, taken as a
whole.
(xxiv) The Company has not distributed and will not
distribute, prior to the later of (A) the Firm Closing Date, or any
date on which the Option Securities are to be purchased, as the case
may be, and (B) the completion of the distribution of the Securities,
any offering material in connection with the offering and sale of the
Securities other than any Preliminary Prospectus, the Prospectus, the
Registration Statement or Term Sheet or any amendment or supplement
thereto, or other materials, if any, permitted by the Act.
(xxv) Except as set forth in the Registration
Statement and Prospectus, (i) each of the Company and its subsidiary
has good and marketable title to all properties and assets described
in the Registration Statement and Prospectus as owned by it, free and
clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest, other than such as would not have a material
adverse effect on the business, properties, business prospects,
financial condition or results of operations of the Company and its
subsidiary taken as a whole, and (iii) each of the Company and its
subsidiary has valid and enforceable leases for all properties
described in the Registration Statement and Prospectus as leased by
it, except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by
general equitable principles. Except as set forth in the Registration
Statement and Prospectus, the Company and its subsidiary owns or
leases all such properties as are necessary to its operations as now
conducted or as proposed to be conducted.
(xxvi) No labor dispute or disturbance with the
employees of the Company or its subsidiary exists or, to the Company's
knowledge, is threatened or imminent except as described in the
Prospectus; and the Company has no actual knowledge of any existing or
imminent labor disturbance by the employees of any of its principal
subcontractors or processors that might be expected to result in any
material adverse change in the business, properties, business
prospects, financial condition or results of operations of the Company
and its subsidiary, taken as a whole. No collective bargaining
agreement exists with any of the Company's or its subsidiary's
employees and no such agreement is imminent.
(xxvii) The Company and its subsidiary own or possess
adequate rights to use all material patents, patent rights, licenses,
inventions, copyrights, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks and
trade names currently employed by them in connection with the business
now operated by them; the expiration of any of the foregoing would not
have a material adverse effect on the business, properties, business
prospects, financial condition or results of operations of the Company
and its subsidiary, taken as a whole; and neither the Company nor its
subsidiary has received any notice of infringement of or conflict with
asserted rights of any third party with respect to any of the
foregoing which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would result in a material
adverse change in the business, properties, business prospects,
financial condition or results of operations of the Company and its
subsidiary, taken as a whole.
(xxviii) The Company and its subsidiary maintain
insurance with insurers of recognized financial responsibility against
such losses and risks and in such amounts as are prudent and customary
in the businesses in which they are engaged, including, but not
limited to, insurance covering real and personal property owned or
leased by the Company against theft, damage, destruction, errors and
omissions, system interruption and acts of vandalism; neither the
Company nor its subsidiary has been
7
<PAGE> 8
refused any insurance coverage sought or applied for; and neither the
Company nor its subsidiary has any reason to believe that it will not
be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business at a cost that would
result in any material adverse change in the business, properties,
business prospects, financial condition or results of operations of
the Company and its subsidiary, taken as a whole, except as described
in the Prospectus.
(xxix) Each certificate signed by any officer of the
Company and delivered to the Representatives or counsel for the
Underwriters shall be deemed to be a representation and warranty by
the Company and the Selling Securityholders to each Underwriter as to
the matters covered thereby.
(xxx) The Securities to be issued and sold by the
Company and the Securities to be transferred and sold by the Selling
Securityholders have been approved for quotation on the Nasdaq
National Market, subject to official notice of issuance.
(xxxi) Except as set forth in the Registration
Statement and Prospectus, (i) the Company and its subsidiary are in
material compliance with all rules, laws and regulations relating to
the use, treatment, storage and disposal of toxic substances and
protection of health or the environment ("Environmental Laws") which
are applicable to their respective businesses, (ii) the Company and
its subsidiary have received no notice from any governmental authority
or third party of an asserted claim under Environmental Laws, which
claim is required to be disclosed in the Registration Statement and
the Prospectus, (iii) the Company and its subsidiary have no reason to
believe that either of them will be required to make future material
capital expenditures to comply with Environmental Laws and (iv) no
property which is owned, leased or occupied by the Company or its
subsidiary has been designated as a Superfund site pursuant to the
Comprehensive Response, Compensation, and Liability Act of 1980, as
amended (42 U.S.C. Section 9601, et seq.), or otherwise designated as
a contaminated site under applicable state or local law.
(xxxii) The Company has complied with all provisions
of Section 517.075, Florida Statutes, relating to doing business with
the Government of Cuba or with any person or affiliate located in
Cuba.
(xxxiii) There are no outstanding loans, advances
(except normal advances for business expenses in the ordinary course
of business) or guarantees of indebtedness by the Company to or for
the benefit of any of the officers or directors of the Company or
any of the members of the families of any of them, except as disclosed
in the Prospectus.
(b) Each of the Selling Securityholders hereby represents
and warrants to and agrees with each of the several Underwriters that:
(i) Such Selling Securityholder now has, and on
the Firm Closing Date will have, good and marketable title to all the
shares of Securities to be sold by such Selling Securityholder
hereunder, free and clear of all liens, encumbrances, equities,
security interests and claims whatsoever, with full right and
authority to deliver the same hereunder, subject, in the case of each
Selling Securityholder, to the rights of Manatt, Phelps & Phillips,
LLP, as Custodian (the "Custodian"), and that upon the delivery of and
payment for such shares of the Securities hereunder, the several
Underwriters will receive good and marketable title thereto, free and
clear of all liens, encumbrances, equities, security interests and
claims whatsoever.
(ii) Certificates in negotiable form for the
shares of the Securities to be sold by such Selling Securityholder
under this Agreement, together with a stock power or powers endorsed
in blank by
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<PAGE> 9
such Selling Securityholder, have been placed in custody under an
agreement (the "Custody Agreement") for delivery under this Agreement
with the Custodian, which Custody Agreement constitutes a valid and
binding agreement on the part of such Selling Securityholder,
enforceable in accordance with its terms, except as the enforcement
thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable
principles; such Selling Securityholder specifically agrees that the
shares of the Securities represented by the certificates so held in
custody for such Selling Securityholder are subject to the interests
of the several Underwriters and the Company, that the arrangements
made by such Selling Securityholder for such custody, including the
power of attorney provided for in such Custody Agreement (the "Power
of Attorney"), are to that extent irrevocable, and that the
obligations of such Selling Securityholder shall not be terminated by
any act of such Selling Securityholder or by operation of law, whether
by the death or incapacity of such Selling Securityholder or the
occurrence of any other event; if any such death, incapacity,
dissolution, liquidation or other such event should occur before the
delivery of such shares of the Securities hereunder, certificates for
such shares of the Securities shall be delivered by the Custodian in
accordance with the terms and conditions of this Agreement as if such
death, incapacity, dissolution, liquidation or other event had not
occurred, regardless of whether the Custodian shall have received
notice of such death, incapacity, dissolution, liquidation or other
event.
(iii) Each of the Selling Securityholders'
respective attorneys-in-fact (the "Attorneys") acting alone, is
authorized to execute and deliver this Agreement and the certificate
referred to in Section 3 hereof on behalf of the Selling
Securityholder, to determine the purchase price to be paid by the
several Underwriters to such Selling Securityholders as provided in
Section 3 hereof, to authorize the delivery of the Securities to be
sold by the Selling Securityholder under this Agreement and to duly
endorse (in blank or otherwise) the certificate or certificates
representing such Securities or a stock power or powers with respect
thereto, to accept payment therefor, and otherwise to act on behalf of
such Selling Securityholder in connection with this Agreement.
(iv) Such Selling Securityholder has reviewed the
Registration Statement and Prospectus and, on the Effective Date, the
Registration Statement did not contain and, on the Firm Closing Date
and any later date on which Option Securities are to be purchased will
not contain, any untrue statement of a material fact or did not omit
or will not omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading; and, on the Effective Date, the Prospectus did not contain
and, on the Firm Closing Date and any later date on which Option
Securities are to be purchased, will not contain any untrue statement
of a material fact or omitted or omits to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(v) All consents, approvals, authorizations and
orders required for the execution and delivery by such Selling
Securityholder of the Power of Attorney and the Custody Agreement, the
execution and delivery by or on behalf of such Selling Securityholder
of this Agreement and the sale and delivery of the Securities to be
sold by such Selling Securityholder under this Agreement, other than,
at the time of the execution hereof (if the Registration Statement has
not yet been declared effective by the Commission), the issuance of
the order of the Commission declaring the Registration Statement
effective and such consents, approvals, authorizations or orders as
may be necessary under state or other securities or Blue Sky laws have
been obtained and are in full force and effect; and such Selling
Securityholder has full legal right, power and authority to enter into
and perform its obligations under this Agreement and such Power of
Attorney and Custody Agreement, and to sell, assign, transfer and
deliver the Securities to be sold by such Selling Securityholder under
this Agreement.
(vi) Except for the Securities to be sold by such
Selling Securityholder to the Underwriters hereunder, such Selling
Securityholder will not, during the 180 day period following the date
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<PAGE> 10
of the Prospectus, other than with respect to Messrs. DeFrancesco and
Freiman who have agreed to lock-up certain percentages of their
holdings for a period extending to 540 days following the date of the
Prospectus (the "Lock-up Period"), directly or indirectly, sell,
offer, contract to sell, transfer the economic risk of ownership in,
make any short sale, pledge or otherwise dispose of any share of
Common Stock or any securities convertible into or exchangeable or
exercisable for or any other rights to purchase or acquire Common
Stock, without the prior written consent of the Representatives,
otherwise than as a bona fide gift or gifts, or by will or intestacy,
to such Selling Securityholder's immediate family, provided the
recipient thereof agrees in writing to be bound by this restriction.
The foregoing restriction is expressly agreed to preclude the holder
of the Securities from engaging in any hedging or other transaction
which is designed to or reasonably expected to lead to or result in a
disposition of Securities during the Lock-up Period, even if such
Securities would be disposed of by someone other than the Selling
Securityholder. Such prohibited hedging or other transactions would
include, without limitation, any short sale (whether or not against
the box) or any purchase, sale or grant of any right (including,
without limitation, any put or call option) with respect to any
Securities or with respect to any security (other than a broad-based
market basket or index) that includes, relates to or derives any
significant part of its value from Securities. Such Selling
Securityholder also agrees and consents to the entry of stop transfer
instructions with the Company's transfer agent against the transfer of
the securities held by such Selling Securityholder except in
compliance with this restriction.
(vii) This Agreement is a valid and binding
agreement of each Selling Securityholder, enforceable in accordance
with its terms, except as rights to indemnification hereunder may be
limited by applicable law and except as the enforcement hereof may be
limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally or
by general equitable principles; and the performance of this Agreement
and the consummation of the transactions contemplated hereby will not
result in a breach or violation of any of the terms and provisions of
or constitute a default under any bond, debenture, note or other
evidence of indebtedness, or under any lease, contract, indenture,
mortgage, deed of trust, loan agreement, joint venture or other
agreement or instrument to which such Selling Securityholder is a
party or by which such Selling Securityholder, or any Securities to be
sold by such Selling Securityholder hereunder, may be bound or result
in any violation of any law, order, rule, regulation, writ,
injunction, judgment or decree of any court, government or
governmental agency or body, domestic or foreign, having jurisdiction
over such Selling Securityholder or over the properties of such
Selling Securityholder.
(viii) All information furnished by or on behalf of
such Selling Securityholder relating to such Selling Securityholder
and the Securities that is contained in the representations and
warranties of such Selling Securityholder in such Selling
Securityholder's Power of Attorney is, and at the time the
Registration Statement became or becomes, as the case may be,
effective and at all times subsequent thereto up to and on the Firm
Closing Date, and on any later date on which Option Securities are to
be purchased, was or will be, true, correct and complete, and does
not, and at the time the Registration Statement became or becomes, as
the case may be, effective and at all times subsequent thereto up to
and on the Firm Closing Date, and on any later date on which Option
Securities are to be purchased, will not, contain any untrue statement
of a material fact or omit to state a material fact required to be
stated therein or necessary to make such information not misleading.
(ix) Such Selling Securityholder will review the
Prospectus and will comply with all agreements and satisfy all
conditions on its part to be complied with or satisfied pursuant to
this Agreement on or prior to the Firm Closing Date, or any later date
on which Option Securities are to be purchased, as the case may be,
and will advise one of its Attorneys and the Representatives prior to
the Firm Closing Date or such later date on which Option Securities
are to be purchased, as the case may be, if any statement to be made
on behalf of such Selling Securityholder in the certificate
contemplated by Section 7(f)
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<PAGE> 11
hereof would be inaccurate if made as of the Firm Closing Date or such
later date on which Option Securities are to be purchased, as the case
may be.
(x) Such Selling Securityholder is not aware
(without having conducted any investigation or inquiry) that any of
the representations and warranties of the Company set forth in Section
2(a) above is untrue or inaccurate in any material respect.
(xi) Such Selling Securityholder does not have, or
has waived prior to the date hereof, any preemptive right, co-sale
right or right of first refusal or other similar right to purchase any
of the Securities that are to be sold by the Company or any of the
other Selling Securityholders to the Underwriters pursuant to this
Agreement; such Selling Securityholder does not have, or has waived
prior to the date hereof, any registration right or other similar
right to participate in the offering made by the Prospectus, other
than such rights of participation as have been satisfied by the
participation of such Selling Securityholder in the transactions to
which this Agreement relates in accordance with the terms of this
Agreement; and such Selling Securityholder does not own any warrants,
options or similar rights to acquire, and does not have any right or
arrangement to acquire, any capital stock, rights, warrants, options
or other securities from the Company, other than those described in
the Registration Statement and the Prospectus.
(xii) The Selling Securityholders have not directly
or indirectly (i) taken any action designed to cause or to result in,
or that has constituted or which might reasonably be expected to
constitute, the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the
Securities, or (ii) since the filing of the Registration Statement (A)
sold, bid for, purchased, or paid anyone any compensation for
soliciting purchases of, the Securities, or (B) paid or agreed to pay
to any person any compensation for soliciting another to purchase any
other securities of the Company.
(xiii) The Selling Securityholders have not at any
time during the last five (5) years (i) made any unlawful contribution
to any candidate for foreign office or failed to disclose fully any
contribution in violation of law, or (ii) made any payment to any
federal or state governmental officer or official, or other person
charged with similar public or quasi-public duties, other than
payments required or permitted by the laws of the United States or any
jurisdiction thereof.
(xiv) The Selling Securityholders have not
distributed and will not distribute, prior to the later of (A) the
Firm Closing Date, or any date on which the Option Securities are to
be purchased, as the case may be, and (B) the completion of the
distribution of the Securities, any offering material in connection
with the offering and sale of the Securities other than any
Preliminary Prospectus, the Prospectus, the Registration Statement or
Term Sheet or any amendment or supplement thereto, or other materials,
if any, permitted by the Act.
3. Purchase, Sale and Delivery of the Securities.
(a) On the basis of the representations, warranties,
agreements and covenants herein contained and subject to the terms and
conditions herein set forth, the Company and each of the Selling
Securityholders agree, severally and not jointly, to sell to each of the
Underwriters, and each of the Underwriters, severally and not jointly, agrees
to purchase from the Company and from each of the Selling Securityholders, at a
purchase price of $____ per share, the number of Firm Securities set forth
opposite the name of such Underwriter in Schedule I hereto. One or more
certificates in definitive form for the Firm Securities that the several
Underwriters have agreed to purchase hereunder, and in such denomination or
denominations and registered in such name or names as the Representative
request upon notice to the Company at least 48 hours prior to the Firm Closing
Date, shall be delivered by or on behalf of the Company and the Selling
Securityholders to the Representatives for the respective accounts of the
Underwriters, against payment by or on behalf of the Underwriters of the
aggregate purchase price therefor by wire
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<PAGE> 12
transfer in same day funds to the respective accounts of the Company and the
Selling Securityholders. Such delivery of and payment for the Firm Securities
shall be made at the offices of Brobeck, Phleger & Harrison LLP, 1633 Broadway,
New York, New York 10019 at 9:30 a.m., New York City time, on ________, 1996,
or at such other place, time or date as the Representatives and the Company may
agree upon or as the Representatives may determine pursuant to Section 9
hereof, such time and date of delivery against payment being herein referred to
as the "Firm Closing Date." The Company and the Selling Securityholders will
make such certificate or certificates for the Firm Securities available for
checking and packaging by the Representatives at the offices in New York, New
York of the Company's transfer agent or registrar at least 24 hours prior to
the Firm Closing Date.
(b) For the purpose of covering any over-allotments in
connection with the distribution and sale of the Firm Securities as
contemplated by the Prospectus, the Company hereby grants to the several
Underwriters an option to purchase, severally and not jointly, the Option
Securities. The purchase price to be paid for any Option Securities shall be
the same price per share as the price per share for the Firm Securities set
forth above in paragraph (a) of this Section 3. The option granted hereby may
be exercised as to all or any part of the Option Securities from time to time
within thirty days after the date of the Prospectus (or, if such 30th day shall
be a Saturday or Sunday or a holiday, on the next business day thereafter when
the New York Stock Exchange is open for trading). The Underwriters shall not
be under any obligation to purchase any of the Option Securities prior to the
exercise of such option. The Representatives may from time to time exercise
the option granted hereby by giving notice in writing or by telephone
(confirmed in writing) to the Company setting forth the aggregate number of
Option Securities as to which the several Underwriters are then exercising the
option and the date and time for delivery of and payment for such Option
Securities. Any such date of delivery shall be determined by the
Representatives but shall not be earlier than two (2) business days or later
than five (5) business days after such exercise of the option and, in any
event, shall not be earlier than the Firm Closing Date. The time and date set
forth in such notice, or such other time on such other date as the
Representatives and the Company may agree upon or as the Representative may
determine pursuant to Section 9 hereof, is herein called the "Option Closing
Date" with respect to such Option Securities. Upon exercise of the option as
provided herein, the Company shall become obligated to sell to each of the
several Underwriters, and, subject to the terms and conditions herein set
forth, each of the Underwriters (severally and not jointly) shall become
obligated to purchase from the Company, the same percentage of the total number
of the Option Securities as to which the several Underwriters are then
exercising the option as such Underwriter is obligated to purchase of the
aggregate number of Firm Securities, as adjusted by the Representatives in such
manner as they deem advisable to avoid fractional shares. If the option is
exercised as to all or any portion of the Option Securities, one or more
certificates in definitive form for such Option Securities, and payment
therefor, shall be delivered on the related Option Closing Date in the manner,
and upon the terms and conditions, set forth in paragraph (a) of this Section
3, except that reference therein to the Firm Securities and the Firm Closing
Date shall be deemed, for purposes of this paragraph 3(b), to refer to such
Option Securities and Option Closing Date, respectively.
(c) It is understood that you, individually and not as
the Representatives, may (but shall not be obligated to) make payment on behalf
of any Underwriter or Underwriters for any of the Securities to be purchased by
such Underwriter or Underwriters. No such payment shall relieve such
Underwriter or Underwriters from any of its or their obligations hereunder.
(d) Each of the Company and the Selling Securityholders
hereby acknowledges that the wire transfer by or on behalf of the Underwriters
of the purchase price for any Securities does not constitute closing of a
purchase and sale of the Securities. Only execution and delivery of a receipt
for the Securities by the Underwriters indicates completion of the closing of a
purchase of the Securities from the Company or the Selling Securityholders, as
the case may be. Furthermore, in the event that the Underwriters wire funds to
the Company or the Selling Securityholders prior to the completion of the
closing of a purchase of Securities, each of the Company and the Selling
Securityholders hereby acknowledges that until the Underwriters execute and
deliver a receipt for the Securities, by facsimile or otherwise, the Company or
the Selling Securityholders, as the case may be, will not be entitled to the
wired funds and shall return the wired funds to the Underwriters as soon as
practicable
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<PAGE> 13
(by wire transfer of same-day funds) upon demand. In the event that the
closing of a purchase of Securities is not completed and the wire funds are not
returned by the Company or the Selling Securityholders, as the case may be, to
the Underwriters on the same day the wired funds were received by the Company
or the Selling Securityholders, as the case may be, each of the Company and the
Selling Securityholders agrees to pay to the Underwriters in respect of each
day the wire funds are not returned by it, in same-day funds, interest on the
amount of such wire funds in an amount representing the Underwriters' cost of
financing as reasonably determined by the Representatives.
4. Offering by the Underwriters. Upon your authorization of the
release of the Firm Securities, the several Underwriters propose to offer the
Firm Securities for sale to the public upon the terms set forth in the
Prospectus. The Underwriters may from time to time change the public offering
price after the closing of the initial public offering and increase or decrease
the concessions and discounts to dealers as they may determine.
5. Covenants of the Company and the Selling Securityholders. The
Company (with respect only to paragraphs 5(a) through and including 5(n) below)
and the Selling Securityholders (with respect only to paragraphs 5(o) and 5(p)
below) covenant and agree with each of the Underwriters that:
(a) The Company will use its best efforts to cause any
amendments to the Registration Statement to become effective as promptly as
possible. The Company will file the Prospectus or any Term Sheet and any
amendment or supplement thereto with the Commission in the manner and within
the time period required by Rules 424(b) and 434 under the Act. During any
time when a prospectus relating to the Securities is required to be delivered
under the Act, the Company (i) will comply with all requirements imposed upon
it by the Act and the rules and regulations of the Commission thereunder to the
extent necessary to permit the continuance of sales of or dealings in the
Securities in accordance with the provisions hereof and of the Prospectus, as
then amended or supplemented, and (ii) will not file with the Commission the
Prospectus, Term Sheet or the amendment referred to in the second sentence of
Section 2(a) hereof, any amendment or supplement to such Prospectus, Term Sheet
or any amendment to the Registration Statement or any Rule 462(b) Registration
Statement of which the Representatives shall not previously have been advised
and furnished with a copy for a reasonable period of time prior to the proposed
filing and as to which filing the Representatives shall not have given their
consent. The Company will prepare and file with the Commission, in accordance
with the rules and regulations of the Commission, promptly upon request by the
Representatives or counsel for the Underwriters, any amendments to the
Registration Statement or amendments or supplements to the Prospectus that may
be necessary or advisable in connection with the distribution of the Securities
by the several Underwriters, and will use its best efforts to cause any such
amendment to the Registration Statement to be declared effective by the
Commission as promptly as possible. The Company will advise the
Representatives, promptly after receiving notice thereof, of the time when the
Registration Statement or any amendment thereto has been filed or declared
effective or the Prospectus or any amendment or supplement thereto has been
filed and will provide to the Representative copies of each such filing.
(b) The Company will advise the Representatives, promptly
after receiving notice or obtaining knowledge thereof, of (i) the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement or any Rule 462(b) Registration Statement or any
amendment thereto or any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, (ii) the suspension of the qualification of the Securities for
offering or sale in any jurisdiction, (iii) the institution, threatening or
contemplation of any proceeding for any such purpose, or (iv) any request made
by the Commission for amending the Original Registration Statement or any Rule
462(b) Registration Statement, for amending or supplementing the Prospectus or
for additional information. The Company will use its best efforts to prevent
the issuance of any such stop order and, if any such stop order is issued, to
obtain the withdrawal thereof as promptly as possible.
(c) The Company will cooperate with you and your counsel
to qualify or register the Securities for offering and sale under the
securities or blue sky laws of such jurisdictions as the Representatives may
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<PAGE> 14
designate and will continue such qualifications in effect for as long as may be
necessary to complete the distribution of the Securities; provided, however,
that in connection therewith the Company shall not be required to qualify as a
foreign corporation or to execute a general consent to service of process in
any jurisdiction.
(d) If, at any time prior to the later of (i) the final
date when a prospectus relating to the Securities is required to be delivered
under the Act, or (ii) the Option Closing Date, any event occurs as a result of
which the Prospectus, as then amended or supplemented, would include any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if for any other reason it is
necessary at any time to amend or supplement the Prospectus to comply with the
Act or the rules or regulations of the Commission thereunder, the Company will
promptly notify the Representatives thereof and, subject to Section 5(a)
hereof, will prepare and file with the Commission, at the Company's expense, an
amendment to the Registration Statement or an amendment or supplement to the
Prospectus that corrects such statement or omission or effects such compliance.
(e) The Company will, without charge, provide (i) to the
Representatives and to counsel for the Underwriters a signed copy of the
Original Registration Statement filed with respect to the Securities and each
amendment thereto (in each case including exhibits thereto) and any Rule 462(b)
Registration Statement, (ii) to each other Underwriter, a conformed copy of
such registration statement and any Rule 462(b) Registration Statement and each
amendment thereto (in each case without exhibits thereto) and (iii) so long as
a prospectus relating to the Securities is required to be delivered under the
Act, as many copies of each Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto as the Representatives may reasonably request;
without limiting the application of clause (iii) of this sentence, the Company,
not later than (A) 6:00 p.m., New York City time, on the date of determination
of the initial public offering price, if such determination occurred at or
prior to 10:00 a.m., New York City time, on such date or (B) 12:00 noon, New
York City time, on the business day following the date of determination of the
initial public offering price, if such determination occurred after 10:00 a.m.,
New York City time, on such date, will deliver to the Underwriters, without
charge, as many copies of the Prospectus and any amendment or supplement
thereto as the Representatives may reasonably request for purposes of
confirming orders that are expected to settle on the Firm Closing Date. The
Company will provide or cause to be provided to each of the Representatives,
and to each Underwriter that so requests in writing, a copy of each report on
Form SR filed by the Company as required by Rule 463 under the Act.
(f) If the Company elects to rely on Rule 462(b), the
Company shall both file a Rule 462(b) Registration Statement with the
Commission in compliance with Rule 462(b) and pay the applicable fees in
accordance with Rule 111 promulgated under the Act by the earlier of (i) 10:00
p.m., New York City time, on the date of this Agreement and (ii) the time
confirmations are sent or given, as specified by Rule 462(b)(2).
(g) The Company, as soon as practicable, will make
generally available to its securityholders and to the Representatives a
consolidated earnings statement of the Company and its subsidiaries that
satisfies the provisions of Section 11(a) of the Act and Rule 158 thereunder.
(h) During a period of five (5) years after the date
hereof, the Company, within the periods prescribed by applicable law, will
furnish to its stockholders annual reports (including financial statements
audited by independent certified public accountants) and will furnish to its
stockholders unaudited quarterly reports of operations for each of the first
three quarters of the fiscal year as required of companies with a class of
securities registered under the Exchange Act, and will furnish to you and the
other several Underwriters hereunder (i) concurrently with making such reports
available to its stockholders, statements of operations of the Company for each
of the first three quarters in the form made available to the Company's
stockholders; (ii) concurrently with the furnishing thereof to its
stockholders, a balance sheet of the Company as of the end of such fiscal year,
together with statements of operations, of stockholders' equity and of cash
flow of the Company for such fiscal year, accompanied by a copy of the
certificate or report thereon of nationally recognized independent certified
public accountants; (iii) concurrently with the furnishing of such reports to
its stockholders, copies of all reports (financial
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<PAGE> 15
or other) mailed to stockholders; (iv) as soon as they are available, copies of
all reports and financial statements furnished to or filed with the Commission,
any securities exchange or the Nasdaq National Market by the Company (except
for documents for which confidential treatment is requested); and (v) every
material press release and every material news item or article in respect of
the Company or its affairs which was generally released to stockholders or
prepared for general release by the Company. During such five (5) year period,
if the Company shall have any active subsidiaries, the foregoing financial
statements shall be on a consolidated basis to the extent that the accounts of
the Company are consolidated with any subsidiaries, and shall be accompanied by
similar financial statements for any significant subsidiary that is not so
consolidated.
(i) The Company will apply the net proceeds from the sale
of the Company Firm Securities substantially as set forth under "Use of
Proceeds" in the Prospectus.
(j) The Company will not, directly or indirectly, without
the prior written consent of the Representatives, on behalf of the
Underwriters, offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase or otherwise sell or dispose (or announce any offer, sale,
offer of sale, contract of sale, pledge, grant of any option to purchase or
other sale or disposition) of any shares of Common Stock or any securities
convertible into, or exchangeable or exercisable for, shares of Common Stock
for a period of 180 days after the effective date of the Registration Statement
except pursuant to this Agreement and except for issuances pursuant to the
exercise of warrants or employee stock options outstanding on the date hereof,
or pursuant to the terms of convertible securities of the Company outstanding
on the date hereof.
(k) The Company will not, directly or indirectly, (i)
take any action designed to cause or to result in, or that has constituted or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Securities, or (ii)(A) sell, bid for, purchase, or pay anyone
any compensation for soliciting purchases of, the Securities or (B) pay or
agree to pay to any person any compensation for soliciting another to purchase
any other securities of the Company (except for the sale of Securities by the
Selling Securityholders under this Agreement).
(l) The Company will obtain the lockup agreements
described in Section 7(g) hereof prior to the Firm Closing Date.
(m) If at any time during the 25-day period after the
Registration Statement becomes effective or the period prior to the Option
Closing Date, any rumor, publication or event relating to or affecting the
Company shall occur as a result of which in your reasonable opinion the market
price of the Common Stock has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after written
notice from you advising the Company to the effect set forth above, and in
accordance with applicable law and the rules and policies of The Nasdaq Stock
Market, Inc., forthwith prepare, consult with you concerning the substance of,
and disseminate a press release or other public statement, reasonably
satisfactory to you, your counsel and counsel to the Company responding to or
commenting on such rumor, publication or event.
(n) The Company will cause the Securities to be duly
included for quotation on the Nasdaq National Market prior to the Firm Closing
Date. The Company will use its best efforts to ensure that the Securities
remain included for quotation on the Nasdaq National Market following the Firm
Closing Date.
(o) The Selling Securityholders will not, directly or
indirectly, without the prior written consent of the Representatives, on behalf
of the Underwriters, offer, sell, offer to sell, contract to sell, pledge,
grant any option to purchase or otherwise sell or dispose of (or announce any
offer, sale, offer of sale, contract of sale, pledge, grant of any option to
purchase or other sale or disposition) any Securities legally or beneficially
owned by
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<PAGE> 16
such Selling Securityholders or any securities convertible into, or
exchangeable or exercisable for, Securities during the Lock-Up Period.
(p) The Selling Securityholders will not, directly or
indirectly, (i) take any action designed to cause or result in, or that has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities or (ii) (A) sell, bid for,
purchase, or pay anyone any compensation for soliciting purchases of, the
Securities or (B) pay or agree to pay to any person any compensation for
soliciting another to purchase any other securities of the Company (except for
the sale of Securities by the Selling Securityholders under this Agreement).
6. Expenses. The Company will pay all costs and expenses
incident to the performance of its obligations under this Agreement, whether or
not the transactions contemplated herein are consummated or this Agreement is
terminated pursuant to Section 11 hereof, including all costs and expenses
incident to (i) the printing or other production of documents with respect to
the transactions, including any costs of printing the Registration Statement
originally filed with respect to the Securities and any amendment thereto, any
Rule 462(b) Registration Statement, any Preliminary Prospectus and the
Prospectus and any amendment or supplement thereto, this Agreement and any blue
sky memoranda and a reasonable quantity of prospectuses or offering circulars
as determined by the Representatives, (ii) all arrangements relating to the
delivery to the Underwriters of copies of the foregoing documents, (iii) the
fees and disbursements of its counsel, the accountants and any other experts or
advisors retained by the Company, (iv) the reasonable fees and disbursements of
the Underwriters' counsel, (v) the preparation, issuance and delivery to the
Underwriters of any certificates evidencing the Securities, including transfer
agent's and registrar's fees, (vi) the qualification of the Securities under
state securities and blue sky laws, including filing fees and reasonable fees
and disbursements of counsel for the Underwriters relating thereto, (vii) the
filing fees of the Commission and the National Association of Securities
Dealers, Inc. relating to the Securities, (viii) the filing and other fees of
securing quotation of the Securities on the Nasdaq National Market, (ix) any
meetings with prospective investors in the Securities (other than as shall have
been specifically approved by the Representatives to be paid for by the
Underwriters) and (x) advertising relating to the offering of the Securities
(other than as shall have been specifically approved by the Representatives to
be paid for by the Underwriters). If the sale of the Securities provided for
herein is not consummated because any condition to the obligations of the
Underwriters set forth in Section 7 hereof is not satisfied, because this
Agreement is terminated pursuant to Section 11 hereof or because of any
failure, refusal or inability on the part of the Company or the Selling
Securityholders to perform all obligations and satisfy all conditions on its
part to be performed or satisfied hereunder other than by reason of a default
by any of the Underwriters, the Company will reimburse the Underwriters
severally upon demand for their documented out-of-pocket expenses (not
including counsel fees) that shall have been incurred by them in connection
with the proposed purchase and sale of the Securities up to a maximum of
$100,000. The Company shall not in any event be liable to any of the
Underwriters for the loss of anticipated profits from the transactions covered
by this Agreement.
7. Conditions of the Underwriters' Obligations. The obligations
of the several Underwriters to purchase and pay for the Firm Securities shall
be subject, in the Representatives' sole discretion, to the accuracy of the
representations and warranties of the Company and the Selling Securityholders
contained herein as of the date hereof and as of the Firm Closing Date, as if
made on and as of the Firm Closing Date, to the accuracy of the statements of
the Company's officers made pursuant to the provisions hereof, to the
performance by the Company of its covenants and agreements hereunder and to the
following additional conditions:
(a) If the Original Registration Statement or any
amendment thereto filed prior to the Firm Closing Date has not been declared
effective as of the time of execution hereof, the Registration Statement or
such amendment, and if the Company has elected to rely upon Rule 462(b), the
Rule 462(b) Registration Statement, shall have been declared effective not
later than the earlier of: (i) 11:00 a.m., New York City time, on the date on
which the amendment to the Registration Statement originally filed with respect
to the Securities or to the Registration
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<PAGE> 17
Statement, as the case may be, containing information regarding the initial
public offering price of the Securities has been filed with the Commission, and
(ii) the time confirmations are sent or given as specified by Rule 462(b) or,
with respect to the Original Registration Statement, such later time and date
as shall have been consented to by Representative; if required, the Prospectus
or any Term Sheet that constitutes a part thereof and any amendment or
supplement thereto shall have been filed with the Commission in the manner and
within the time period required by Rules 434 and 424(b) under the Act; no stop
order suspending the effectiveness of the Registration Statement or any
amendment thereto shall have been issued, and no proceedings for that purpose
shall have been instituted or threatened or, to the knowledge of the Company or
the Selling Securityholders, shall be contemplated by the Commission; and the
Company shall have complied to the satisfaction of Underwriters' Counsel with
any request of the Commission for additional information (to be included in the
Registration Statement or the Prospectus or otherwise).
(b) The Representatives shall have received an opinion,
dated the Firm Closing Date, of Manatt, Phelps & Phillips, LLP, counsel for the
Company, to the effect that:
(i) each of the Company and its subsidiary,
Credit Connection, Inc. (the "Subsidiary"), has been duly incorporated
and is validly existing and in good standing under the laws of its
jurisdiction of organization and is duly qualified to transact
business as a foreign entity and is in good standing under the laws of
all other jurisdictions where the ownership or leasing of its
properties or the conduct of its businesses requires such
qualification, except where the failure to be so qualified would not
have a material adverse effect on the business, properties, business
prospects, financial condition or results of operations of the Company
and its subsidiary, taken as a whole;
(ii) each of the Company and the Subsidiary has
the power (corporate and other) and authority to own or lease its
properties and conduct its businesses as described in the Registration
Statement and the Prospectus; and the Company has the legal right,
power (corporate and other) and authority to enter into this Agreement
and to perform the transactions contemplated hereby;
(iii) the issued and outstanding shares of the
Subsidiary have been duly authorized and validly issued, are fully
paid and nonassessable, and have not been issued in violation of or
subject to any preemptive right, co-sale right, registration right,
right of first refusal or other similar right and are owned by the
Company free and clear of any pledge, security interests, liens,
encumbrances, claims or equitable interests. The Company does not own
or control, directly or indirectly, any corporation, association or
other entity other than the Subsidiary;
(iv) the Company has an authorized, issued and
outstanding capitalization as set forth in the Prospectus. All of the
issued and outstanding shares of capital stock of the Company
(including the Securities to be sold by the Selling Securityholders)
have been duly authorized and validly issued and are fully paid and
nonassessable, have been issued in compliance with all Federal and
state securities laws, and were not issued in violation of or subject
to any preemptive rights or other rights to subscribe for or purchase
securities. The Company Firm Securities and the Option Securities
have been duly authorized for issuance and sale to the Underwriters
pursuant to this Agreement, and at the Firm Closing Date, when issued
and delivered by the Company after payment therefor in accordance
herewith, will be duly and validly issued, fully paid and
nonassessable, and will be sold free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest; and no
preemptive right, co-sale right, registration right, right of first
refusal, registration rights, or other similar right of stockholders
exists with respect to any of the Common Stock hereunder or the
issuance and sale thereof other than those that have been expressly
waived prior to the date hereof and those that will automatically
expire upon the consummations of the transactions contemplated by this
Agreement. No further approval or authorization of any stockholder,
the Board of Directors of the Company or others is required for the
issuance of the Company Firm Securities
17
<PAGE> 18
or the Option Securities except as may be required under the Act or
state securities or Blue Sky laws; the Securities have been approved
for quotation on the Nasdaq National Market, subject to official
notice of issuance;
(v) the statements set forth under the heading
"Description of Capital Stock" in the Prospectus, insofar as such
statements purport to summarize certain provisions of the capital
stock and the stock option and purchase plans of the Company, provide
a fair summary of such provisions; and the statements set forth under
the heading "Business -- Intellectual Property and Other Proprietary
Rights," "Business -- Government Regulation," "Shares Eligible for
Future Sale" and "Certain Transactions" in the Prospectus, insofar as
such statements constitute a summary of the legal matters, documents
or proceedings referred to therein, provide a fair summary of such
legal matters, documents and proceedings in all material respects;
(vi) the execution and delivery of this Agreement
have been duly authorized by all necessary corporate action of the
Company and this Agreement has been duly executed and delivered by the
Company and, assuming due authorization, execution and delivery by
you, is a valid and binding agreement of the Company, enforceable in
accordance with its terms, except as rights to indemnification and
contribution hereunder may be limited by applicable law and except as
the enforcement hereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating
to or affecting creditors' rights generally, or by general equitable
principles;
(vii) to the best of such counsel's knowledge,
there are no legal or governmental actions, suits, claims or other
proceedings pending or threatened against or affecting the Company,
its subsidiary or any of their properties, which are required,
individually or in the aggregate, to be disclosed in the Registration
Statement or the Prospectus, other than those disclosed therein;
(viii) to the best of such counsel's knowledge,
there are no contracts, indentures, mortgages, agreements, notes,
leases or other instruments required to be described or referred to in
the Registration Statement or Prospectus or to be filed as exhibits to
the Registration Statement other than those described or referred to
therein or filed as exhibits thereto, and any description of or
reference to any such instrument in the Registration Statement or
Prospectus conforms in all material respects to the terms of such
instrument;
(ix) neither the Company nor its subsidiary is (i)
in violation of its certificate of incorporation or bylaws, or (ii) to
the best of such counsel's knowledge, in default in the performance or
observance of any obligation, agreement, covenant or condition
contained in any bond, debenture, note or other evidence of
indebtedness to which the Company or its subsidiary is a party or
pursuant to which the Company's or the subsidiary's properties are
bound, which default would have a material adverse effect on the
business, properties, business prospects, financial condition or
results of operations of the Company and its subsidiary, taken as a
whole, or, which default would have a material adverse effect on the
business, properties, business prospects, financial condition or
results of operations of the Company and its subsidiary, taken as a
whole, or (iii) in default in the performance or observance of any
contract, indenture, mortgage, loan agreement, joint venture or other
agreement or instrument to which the Company or its subsidiary is a
party or by which the Company's or its subsidiary's properties are
bound, which default would have a material adverse effect on the
business, properties, business prospects, financial condition or
results of operations of the Company and its subsidiary, taken as a
whole, or (iv) in violation of any law, order, rule, regulation, writ,
injunction, judgment or decree of any court or governmental agency or
body to which the Company is subject;
18
<PAGE> 19
(x) the issuance, offering and sale of the
Securities to the Underwriters by the Company pursuant to this
Agreement, the compliance and performance by the Company with the
other provisions of this Agreement and the consummation of the other
transactions herein contemplated do not and will not (A) require the
consent, approval, authorization, registration or qualification of or
with any governmental authority, domestic or foreign, except such as
have been obtained, such as may be required under the Act, the
Exchange Act, or under state securities or blue sky laws, all of which
requirements have been satisfied, or (B) result in a breach or
violation of any of the terms and provisions of, or constitute a
default under the certificate of incorporation or bylaws of the
Company, or (C) to the best of such counsel's knowledge, result in a
breach or violation of any of the terms and provisions of, or
constitute a default under any obligation, agreement, covenant or
condition contained in any bond, debenture, note or other evidence of
indebtedness to which the Company or its subsidiary is a party or
pursuant to which the Company's or the subsidiary's properties are
bound, which default would have a material adverse effect on the
business, properties, business prospects, financial condition or
results of operations of the Company and its subsidiary, taken as a
whole, or (D) result in a breach or violation of any of the terms and
provisions of, or constitute a default under any law, order, rule,
regulation, writ, injunction, judgment or decree of any court or
governmental agency or body to which the Company is subject;
(xi) (a) to the best of such counsel's knowledge,
the Company and its subsidiary possess all certificates,
authorizations, licenses, franchises and permits issued by the
appropriate Federal, state or foreign regulatory authorities necessary
to own, lease and operate their respective properties and to conduct
their respective businesses described in the Prospectus, and (b)
neither the Company nor its subsidiary has received any notice of
proceedings relating to, the revocation or modification of any such
certificate, authorization, license, franchise or permit, except as
described in the Prospectus, except for such certificates,
authorizations, licenses, franchises and permits, the loss of which
would not have a material adverse effect on the business, properties,
business prospects, financial condition or results of operations of
the Company and its subsidiary, taken as a whole. To the best of such
counsel's knowledge, except as described in the Prospectus, none of
the Company's or its subsidiary's certificates, authorizations,
licenses, franchises or permits contain any restrictions that, if
effective, would result in any material adverse effect on the
business, properties, business prospects, financial condition or
results of operations of the Company and its subsidiary, taken as a
whole;
(xii) the Registration Statement is effective under
the Act; any required filing of the Prospectus, or any Term Sheet that
constitutes a part thereof, pursuant to Rules 424(b) and 434 has been
made in the manner and within the time period required by Rules 424(b)
and 434; and no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued, and
no proceedings for that purpose have been instituted or to the best of
such counsel's knowledge, threatened by the Commission;
(xiii) the Registration Statement originally filed
with respect to the Securities and each amendment thereto, any Rule
462(b) Registration Statement and the Prospectus (in each case, other
than the financial statements and other financial and statistical
information contained therein, as to which such counsel need express
no opinion) comply as to form in all material respects with the
applicable requirements of the Act and the rules and regulations of
the Commission thereunder;
(xiv) if the Company elects to rely on Rule 434,
the Prospectus is not "materially different," as such term is used in
Rule 434, from the prospectus included in the Registration Statement
at the time of its effectiveness or an effective post-effective
amendment thereto (including such information that is permitted to be
omitted pursuant to Rule 430A);
19
<PAGE> 20
(xv) the issuances and sales by the Company of the
securities described in Item 15 of the Registration Statement were
exempt from the registration requirements of the Act, and, to such
counsel's knowledge, no event (including, without limitation, the
offering and sale of the Securities) has occurred or is contemplated
by the Company which has rendered or will render such exemptions
unavailable;
(xvi) the Company is not, and the transactions
contemplated by this Agreement will not cause the Company to become,
an investment company subject to registration under the Investment
Company Act of 1940, as amended; and
(xvii) the specimen stock certificate of the Company
filed as an exhibit to the Registration Statement is in due and proper
form to evidence shares of Common Stock, has been duly authorized and
approved by the Board of Directors of the Company and complies with
all legal requirements applicable under the corporate laws of the
State of Delaware;
Such counsel shall also state that they have no reason to believe that the
Registration Statement, as of its effective date and the date of such opinion,
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, or that the Prospectus, as of its date and the date of
such opinion, included or includes any untrue statement of a material fact or
omitted or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
In rendering any such opinion, such counsel may rely, as to
matters of fact, to the extent such counsel deem(s) proper, on certificates of
responsible officers of the Company and public officials.
References to the Registration Statement and the Prospectus in
this paragraph (b) shall include any amendment or supplement thereto at the
date of such opinion.
(c) The Representatives shall have received an opinion,
dated the Firm Closing Date, of Manatt, Phelps & Phillips, LLP, counsel to the
Selling Securityholders, to the effect that:
(i) each of the Selling Securityholders has full
power to enter into this Agreement, the Custody Agreement and the
Power-of-Attorney and to sell, transfer and deliver the Securities
being sold by such Selling Securityholder hereunder in the manner
provided in this Agreement and to perform their obligations under the
Custody Agreement; the execution and delivery of this Agreement, the
Custody Agreement and the Power-of-Attorney has been duly authorized
by all necessary action of each of the Selling Securityholders; this
Agreement, the Custody Agreement and the Power-of-Attorney have been
duly executed and delivered by each of the Selling Securityholders or
their respective Attorneys; assuming due authorization, execution and
delivery by the Custodian, the Custody Agreement and the
Power-of-Attorney are the legal, valid, binding and enforceable
instruments of each of the Selling Securityholders, except as the
enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating
to or affecting creditors' rights generally, or by general equitable
principles;
(ii) the delivery by each of the Selling
Securityholders to the several Underwriters of certificates for the
Securities being sold hereunder by the Selling Securityholders against
payment therefor as provided herein, will convey good and marketable
title to such Securities to the several Underwriters, free and clear
of any pledge, security interests, liens, encumbrances, claims or
equitable interests; and
20
<PAGE> 21
(iii) the sale of the Securities to the
Underwriters by each of the Selling Securityholders pursuant to this
Agreement, the compliance by each of the Selling Securityholders with
the other provisions of this Agreement and the Custody Agreement, and
the consummation of the other transactions herein contemplated do not
(a) require the consent, approval, authorization, registration or
qualification of or with any governmental authority, domestic or
foreign, except such as have been obtained, such as may be required
under the Act, the Exchange Act, or under state securities or blue sky
laws, all of which requirements have been satisfied, or (b) to the
best of such counsel's knowledge, result in a breach or violation of
any of the terms and provisions of, or constitute a default under any
obligation, agreement, covenant or condition contained in any bond,
debenture, note or other evidence of indebtedness to which any of the
Selling Securityholders are a party or by which any of the Selling
Securityholders or any of their respective properties are bound, or
any statute, judgment, decree, order, rule or regulation of any court
or other governmental authority or any arbitrator applicable to the
Selling Securityholders.
In rendering any such opinion, such counsel may rely, as to
matters of fact, to the extent such counsel deem(s) proper, on certificates of
the Selling Securityholders or of the Company and of the representations of the
Company and the Selling Securityholders contained herein, in the Custody
Agreement, or in the Power-of-Attorney..
References to the Registration Statement and the Prospectus in
this paragraph (c) shall include any amendment or supplement thereto at the
date of such opinion.
(d) The Representatives shall have received from Ernst &
Young LLP a letter or letters dated, respectively, the date hereof and the Firm
Closing Date, in form and substance satisfactory to the Representatives, to the
effect that:
(i) they are independent public accountants with
respect to the Company and its consolidated subsidiary within the
meaning of the Act and the applicable rules and regulations
thereunder;
(ii) in their opinion, the audited consolidated
financial statements and schedules examined by them and included in
the Registration Statement and the Prospectus comply in form in all
material respects with the applicable accounting requirements of the
Act and the related published rules and regulations;
(iii) on the basis of carrying out certain
specified procedures (which do not constitute an examination made in
accordance with generally accepted auditing standards) that would not
necessarily reveal matters of significance with respect to the
comments set forth in this paragraph (iii), a reading of the minute
books of the stockholders, the Board of Directors and any committees
thereof of the Company and its consolidated subsidiary, and inquiries
of certain officials of the Company and its consolidated subsidiary
who have responsibility for financial and accounting matters, nothing
came to their attention that caused them to believe that at a specific
date not more than five business days prior to the date of such
letter, there were any changes in the capital stock or long-term debt
of the Company and its consolidated subsidiary or any decreases in net
current assets or stockholders' equity of the Company and its
consolidated subsidiary, in each case compared with amounts shown on
the December 31, 1995 consolidated balance sheet included in the
Registration Statement and the Prospectus, or for the period from
January 1, 1996 to such specified date there are any decreases, as
compared to total revenues, net income or pro forma net income per
share, respectively, of the Company and its consolidated subsidiary,
except in all instances for changes, decreases or increases set forth
in such letter; and
(iv) they have carried out certain specified
procedures, not constituting an audit, with respect to certain
amounts, percentages and financial information that are derived from
the general
21
<PAGE> 22
accounting records of the Company and its consolidated subsidiary and
are included in the Registration Statement and the Prospectus, and
have compared such amounts, percentages and financial information with
such records of the Company and its consolidated subsidiary and with
information derived from such records and have found them to be in
agreement, excluding any questions of legal interpretation.
In the event that the letters referred to above set forth any
such changes, decreases or increases, it shall be a further condition to the
obligations of the Underwriters that (A) such letters shall be accompanied by a
written explanation of the Company as to the significance thereof, unless the
Representatives deem such explanation unnecessary, and (B) such changes,
decreases or increases do not, in the sole judgment of the Representatives,
make it impractical or inadvisable to proceed with the purchase and delivery of
the Securities as contemplated by the Registration Statement, as amended as of
the date hereof.
References to the Registration Statement and the Prospectus in
this paragraph (d) with respect to either letter referred to above shall
include any amendment or supplement thereto at the date of such letter.
(e) The Representatives shall have received a
certificate, dated the Firm Closing Date, of the principal executive officer,
the principal financial or accounting officer, respectively, of the Company to
the effect that:
(i) the representations and warranties of the
Company in this Agreement are true and correct as if made on and as of
the Firm Closing Date and the Company has performed all covenants and
agreements and satisfied all conditions on its part to be performed or
satisfied at or prior to the Firm Closing Date;
(ii) no stop order suspending the effectiveness of
the Registration Statement or any amendment thereto has been issued,
and no proceedings for that purpose have been instituted or threatened
or, to the best of the Company's knowledge, are contemplated by the
Commission; and
(iii) when the Registration Statement or any
amendment thereto was declared effective, and at all times subsequent
thereto up to the delivery of such certificate, the Registration
Statement and the Prospectus, and any amendments or supplements
thereto, contained all statements required to be stated therein in
accordance with, and complied in all material respects with the
requirements of, the Act and the rules and regulations of the
Commission promulgated thereunder, the Registration Statement, and any
amendment or supplement thereto, did not and does not include any
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading, the
Prospectus, and any amendment or supplement thereto, did not and does
not include any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not
misleading, and since the effective date of the Registration
Statement, there has occurred no event required to be set forth in an
amended or supplemented Prospectus which has not been so set forth;
and
(iv) subsequent to the respective dates as of
which information is given in the Registration Statement and the
Prospectus, there has not been (a) any material adverse change in the
business, properties, business prospects, financial condition or
results of operations of the Company and its subsidiary, taken as a
whole, (b) any transaction that is material to the Company and its
subsidiary, taken as a whole, except transactions entered into in the
ordinary course of business, (c) any obligation, direct or contingent,
that is material to the Company and its subsidiary, taken as a whole,
incurred by the Company or its subsidiary, except obligations incurred
in the ordinary course of business, (d) any change in the capital
stock or outstanding indebtedness of the Company or its subsidiary
that is material to the Company and its subsidiary, taken as a whole,
(e) any dividend or distribution of any kind declared, paid
22
<PAGE> 23
or made on the capital stock of the Company or its subsidiary, or (f)
any loss or damage (whether or not insured) the property of the
Company or its subsidiary which has been sustained or will have been
sustained which has a material adverse effect on the business,
properties, business prospects, financial condition or results of
operations of the Company and its subsidiary, taken as a whole.
(f) The Representatives shall have received a
certificate, dated the Firm Closing Date, of the Attorneys for each of the
Selling Securityholders to the effect that the representations and warranties
of such Selling Securityholder in this Agreement are true and correct as if
made on and as of the Firm Closing Date; the Registration Statement, as amended
as of the Firm Closing Date, does not include any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein not misleading, and the Prospectus, as amended or
supplemented as of the Firm Closing Date, does not include any untrue statement
of a material fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading; and such Selling Securityholder has performed all
covenants and agreements on his or her part to be performed or satisfied at or
prior to the Closing Date.
(g) The Representatives shall have received from each
person who is a director or officer of the Company an agreement to the effect
that such person will not, except to the extent otherwise specifically
permitted by the terms of each such person's agreement, directly or indirectly,
without the prior written consent of the Representatives, offer, sell, offer to
sell, contract to sell, pledge, grant any option to purchase or otherwise sell
or dispose (or announce any offer, sale, offer of sale, contract of sale,
pledge, grant of an option to purchase or other sale or disposition) of any
shares of Common Stock or any securities convertible into, or exchangeable or
exercisable for, shares of Common Stock during the Lock-Up Period.
(h) The Representatives shall have received from each of
Mr. James R. DeFrancesco and Mr. Scott L. Freiman tax indemnification
agreements providing that such individuals will indemnify the Company for any
taxes payable by the Company as a result of the Company's termination of its
Subchapter S Corporation status.
(i) The Representatives and counsel for the Underwriters
shall have received such further certificates, documents or other information
as they may have reasonably requested from the Company and the Selling
Securityholders.
(j) Prior to the commencement of the offering of the
Securities, the Securities shall have been approved for quotation on the Nasdaq
National Market, subject to official notice of issuance.
(k) The Representatives shall have received an opinion,
dated the Firm Closing Date, of Brobeck, Phleger & Harrison LLP, counsel for
the Underwriters, with respect to the issuance and sale of the Firm Securities,
the Registration Statement and Prospectus, and such other related matters as
the Representatives may reasonably require, and the Company shall have
furnished to such counsel such documents as they may reasonably request for the
purpose of enabling them to pass upon such matters.
All opinions, certificates, letters and documents delivered
pursuant to this Agreement will comply with the provisions hereof only if they
are reasonably satisfactory in all material respects to the Representatives and
counsel for the Underwriters. The Company shall furnish to the Representatives
such conformed copies of such opinions, certificates, letters and documents in
such quantities as the Representatives and counsel for the Underwriters shall
reasonably request.
The respective obligations of the several Underwriters to
purchase and pay for any Option Securities shall be subject, in their
discretion, to each of the foregoing conditions to purchase the Firm
Securities, except that all references to the Firm Securities and the Firm
Closing Date shall be deemed to refer to such Option Securities and the related
Option Closing Date, respectively.
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<PAGE> 24
8. Indemnification and Contribution.
(a) The Company and the Selling Securityholders, but in
the case of each Selling Securityholder only to the extent of the proceeds
received by such Selling Securityholder from the sale of his or her Securities
hereunder, jointly and severally agree to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act against any
losses, claims, damages or liabilities, joint or several, to which such
Underwriter or such controlling person may become subject under the Act and the
Exchange Act, or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon:
(i) any untrue statement or alleged untrue
statement made by the Company in Section 2(a) of this Agreement;
(ii) any untrue statement or alleged untrue
statement made by the Selling Securityholders in Section 2(b) of this
Agreement;
(iii) any untrue statement or alleged untrue
statement of any material fact contained in (A) the Registration
Statement or any amendment thereto, any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto and including any
Rule 462(b) Registration Statement, or (B) any application or other
document, or any amendment or supplement thereto, executed by the
Company or Selling Securityholders or based upon written information
furnished by or on behalf of the Company or Selling Securityholders
filed in any jurisdiction in order to qualify the Securities under the
securities or blue sky laws thereof or filed with the Commission or
any securities association or securities exchange (each an
"Application");
(iv) the omission or alleged omission to state in
the Registration Statement or any amendment thereto, a material fact
required to be stated therein or necessary to make the statements
therein not misleading, or any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, or any Application
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they
were made, not misleading; or
(v) any untrue statement or alleged untrue
statement of any material fact contained in any audio or visual
materials used in connection with the marketing of the Securities,
including without limitation, slides, videos, films, tape recordings,
and will reimburse, as incurred, each Underwriter and each such controlling
person for any legal or other expenses reasonably incurred by such Underwriter
or such controlling person in connection with investigating, defending against
or any other proceeding in connection with any such loss, claim, damage,
liability or action; provided, however, that the Company and Selling
Securityholders will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
such Registration Statement or any amendment thereto, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto or any
Application in reliance upon and in conformity with written information
furnished to the Company by such Underwriter through the Representative
specifically for use therein; and provided, further, that neither the Company
nor any of the Selling Securityholders will be liable to any Underwriter or any
person controlling such Underwriter with respect to any such untrue statement
or omission made in any Preliminary Prospectus that is corrected in the
Prospectus (or any amendment or supplement thereto) if the person asserting any
such loss, claim, damage or liability purchased Securities from such
Underwriter but was not sent or given a copy of the Prospectus (as amended or
supplemented) at or prior to the written confirmation of the sale of such
Securities to such person in any case where such delivery of the
24
<PAGE> 25
Prospectus (as amended or supplemented) is required by the Act, unless such
failure to deliver the Prospectus (as amended or supplemented) was a result of
noncompliance by the Company with this Agreement. This indemnity agreement
will be in addition to any liability which the Company and Selling
Securityholders may otherwise have. Neither the Company nor Selling
Securityholders will, without the prior written consent of the Underwriter or
Underwriters purchasing, in the aggregate, more than 50% of the Securities,
settle or compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not any such Underwriter or
any person who controls any such Underwriter within the meaning of Section 15
of the Act or Section 20 of the Exchange Act is a party to such claim, action,
suit or proceeding), unless such settlement, compromise or consent includes an
unconditional release of all of the Underwriters and such controlling persons
from all liability arising out of such claim, action, suit or proceeding.
(b) Each Underwriter, severally and not jointly, will
indemnify and hold harmless the Company, each of its directors, each of its
officers who signed the Registration Statement, each of the Selling
Securityholders and each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act against any
losses, claims, damages or liabilities to which the Company or any such
director, officer of the Company, Selling Securityholder or controlling person
of the Company may become subject under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon (i) any untrue statement or alleged untrue statement
of any material fact contained in the Registration Statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or any Application or (ii) the omission or the alleged
omission to state therein a material fact required to be stated in the
Registration Statement or any amendment thereto, any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or any Application or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by such
Underwriter through the Representative specifically for use therein; and,
subject to the limitation set forth immediately preceding this clause, will
reimburse, as incurred, any legal or other expenses reasonably incurred by the
Company or any such director, officer or controlling person or Selling
Securityholder in connection with investigating or defending any such loss,
claim, damage, liability or any action in respect thereof. This indemnity
agreement will be in addition to any liability which such Underwriter may
otherwise have.
(c) Promptly after receipt by an indemnified party under
this Section 8 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party of the
commencement thereof, but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under this Section 8. In case any such action is brought
against any indemnified party, and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party; provided, however, that if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be one or more legal defenses available to it and/or other
indemnified parties which are different from or additional to those available
to the indemnifying party, the indemnifying party shall not have the right to
direct the defense of such action on behalf of such indemnified party or
parties and such indemnified party or parties shall have the right to select
separate counsel to defend such action on behalf of such indemnified party or
parties. After notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof and approval by such indemnified
party of counsel appointed to defend such action, the indemnifying party will
not be liable to such indemnified party under this Section 8 for any legal or
other expenses, other than reasonable costs of investigation, subsequently
incurred by such indemnified party in connection with the defense thereof,
unless (i) the indemnified party shall have employed separate counsel
25
<PAGE> 26
in accordance with the proviso to the next preceding sentence (it being
understood, however, that in connection with such action the indemnifying party
shall not be liable for the expenses of more than one separate counsel (in
addition to local counsel) in any one action or separate but substantially
similar actions in the same jurisdiction arising out of the same general
allegations or circumstances, designated by the Representative in the case of
paragraph (a) of this Section 8, representing the indemnified parties under
such paragraph (a) who are parties to such action or actions) or (ii) the
indemnifying party does not promptly retain counsel satisfactory to the
indemnified party or (iii) the indemnifying party has authorized the employment
of counsel for the indemnified party at the expense of the indemnifying party.
After such notice from the indemnifying party to such indemnified party, the
indemnifying party will not be liable for the costs and expenses of any
settlement of such action effected by such indemnified party without the
consent of the indemnifying party.
(d) In circumstances in which the indemnity agreement
provided for in the preceding paragraphs of this Section 8 is unavailable or
insufficient, for any reason, to hold harmless an indemnified party in respect
of any losses, claims, damages or liabilities (or actions in respect thereof),
each indemnifying party, in order to provide for just and equitable
contribution, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities
(or actions in respect thereof) in such proportion as is appropriate to reflect
(i) the relative benefits received by the indemnifying party or parties on the
one hand and the indemnified party on the other from the offering of the
Securities or (ii) if the allocation provided by the foregoing clause (i) is
not permitted by applicable law, not only such relative benefits but also the
relative fault of the indemnifying party or parties on the one hand and the
indemnified party on the other in connection with the statements or omissions
or alleged statements or omissions that resulted in such losses, claims,
damages or liabilities (or actions in respect thereof), as well as any other
relevant equitable considerations. The relative benefits received by the
Company and Selling Securityholders on the one hand and the Underwriters on the
other shall be deemed to be in the same proportion as the total proceeds from
the offering (before deducting expenses) received by the Company and Selling
Securityholders bear to the total underwriting discounts and commissions
received by the Underwriters. The relative fault of the parties shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to
state a material fact relates to information supplied by the Company, Selling
Securityholders or the Underwriters, the parties' relative intents, knowledge,
access to information and opportunity to correct or prevent such statement or
omission, and any other equitable considerations appropriate in the
circumstances. The Company, Selling Securityholders and the Underwriters agree
that it would not be equitable if the amount of such contribution were
determined by pro rata or per capita allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
that does not take into account the equitable considerations referred to above
in this paragraph (d). Notwithstanding any other provision of this paragraph
(d), no Underwriter shall be obligated to make contributions hereunder that in
the aggregate exceed the total public offering price of the Securities
purchased by such Underwriter under this Agreement, less the aggregate amount
of any damages that such Underwriter has otherwise been required to pay in
respect of the same or any substantially similar claim, and no person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
hereunder are several in proportion to their respective underwriting
obligations and not joint, and contributions among Underwriters shall be
governed by the provisions of the Representative's Master Agreement Among
Underwriters. For the purposes of this paragraph 8(d), each person, if any,
who controls an Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act shall have the same rights to contribution as
such Underwriter, and each director of the Company, each officer of the Company
who signed the Registration Statement, and each person, if any, who controls
the Company or Selling Securityholders within the meaning of Section 15 of the
Act or Section 20 of the Exchange Act, shall have the same rights to
contribution as the Company or Selling Securityholders, as the case may be.
26
<PAGE> 27
(e) The liability of each of the Selling Securityholders
under this Section 8 shall not exceed an amount equal to the initial public
offering price of the stock sold by such Selling Securityholder to the
Underwriter.
9. Default of Underwriters. If one or more Underwriters default
in their obligations to purchase Firm Securities or Option Securities hereunder
and the aggregate number of such Securities that such defaulting Underwriter or
Underwriters agreed but failed to purchase is ten percent or less of the
aggregate number of Firm Securities or Option Securities to be purchased by all
of the Underwriters at such time hereunder, then the other Underwriters may
make arrangements satisfactory to the Representative for the purchase of such
Securities by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representative), but if no such arrangements are
made by the Firm Closing Date or the related Option Closing Date, as the case
may be, the other Underwriters shall be obligated severally in proportion to
their respective commitments hereunder to purchase the Firm Securities or
Option Securities that such defaulting Underwriter or Underwriters agreed but
failed to purchase. If one or more Underwriters so default with respect to an
aggregate number of Securities that is more than ten percent of the aggregate
number of Firm Securities or Option Securities, as the case may be, to be
purchased by all of the Underwriters at such time hereunder, and if
arrangements satisfactory to the Representative are not made within 36 hours
after such default for the purchase by other persons (who may include one or
more of the non-defaulting Underwriters, including the Representative) of the
Securities with respect to which such default occurs, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or
the Company other than as provided in Section 10 hereof. In the event of any
default by one or more Underwriters as described in this Section 9, the
Representative shall have the right to postpone the Firm Closing Date or the
Option Closing Date, as the case may be, established as provided in Section 3
hereof for not more than seven business days in order that any necessary
changes may be made in the arrangements or documents for the purchase and
delivery of the Firm Securities or Option Securities, as the case may be. As
used in this Agreement, the term "Underwriter" includes any person substituted
for an Underwriter under this Section 9. Nothing herein shall relieve any
defaulting Underwriter from liability for its default.
10. Survival. The respective representations, warranties,
agreements, covenants, indemnities and other statements of the Company, its
officers, Selling Securityholders and the several Underwriters set forth in
this Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement shall remain in full force and effect, regardless of (i) any
investigation made by or on behalf of the Company, any of its officers or
directors, Selling Securityholders, any Underwriter or any controlling person
referred to in Section 8 hereof and (ii) delivery of and payment for the
Securities. The respective agreements, covenants, indemnities and other
statements set forth in Sections 6 and 8 hereof shall remain in full force and
effect, regardless of any termination or cancellation of this Agreement.
11. Termination.
(a) This Agreement may be terminated with respect to the
Firm Securities or any Option Securities in the sole discretion of the
Representatives by notice to the Company given prior to the Firm Closing Date
or the related Option Closing Date, respectively, in the event that the Company
shall have failed, refused or been unable to perform all obligations and
satisfy all conditions on its part to be performed or satisfied hereunder at or
prior thereto or, if at or prior to the Firm Closing Date or, with respect to
the Company, such Option Closing Date, respectively:
(i) the Company or its subsidiary shall have, in
the sole judgment of the Representatives, sustained any material loss
or interference with their respective businesses or properties from
fire, flood, hurricane, accident or other calamity, whether or not
covered by insurance, or from any labor dispute or any legal or
governmental proceeding or there shall have been any material adverse
change, or any development involving a prospective material adverse
change (including without limitation
27
<PAGE> 28
a material change in management or control of the Company), in the
business, properties, business prospects, financial condition or
results of operations of the Company and its subsidiary, taken as a
whole, except in each case as described in or contemplated by the
Prospectus (exclusive of any amendment or supplement thereto);
(ii) trading in the Common Stock shall have been
suspended by the Commission or the Nasdaq National Market or trading
in securities generally on the New York Stock Exchange or Nasdaq
National Market shall have been suspended or minimum or maximum prices
shall have been established on either such exchange or market system;
(iii) a banking moratorium shall have been declared
by New York or United States authorities;
(iv) the enactment, publication, decree or other
promulgation of any Federal or state statute, regulation, rule or
order of, or commencement of any proceeding or investigation by, any
court, legislative body, agency or other government authority which in
the Underwriters' sole opinion materially and adversely affects or
will materially or adversely affect the business or operations of the
Company; or
(v) there shall have been (A) an outbreak or
escalation of hostilities between the United States and any foreign
power, (B) an outbreak or escalation of any other insurrection or
armed conflict involving the United States or (C) any other calamity
or crisis or material adverse change in general economic, political or
financial conditions having an effect on the U.S. financial markets
that, in the sole judgment of the Representatives, makes it
impractical or inadvisable to proceed with the public offering or the
delivery of the Securities as contemplated by the Registration
Statement, as amended as of the date hereof.
(b) Termination of this Agreement pursuant to this
Section 11 shall be without liability of any party to any other party except as
provided in Section 10 hereof.
12. Information Supplied by Underwriters. The statements set
forth (i) in the last paragraph on the front cover page, (ii) under the heading
"Underwriting" in any Preliminary Prospectus or the Prospectus and (iii) on
page 2 in any Preliminary Prospectus or the Prospectus pertaining to
stabilization (to the extent such statements relate to the Underwriters)
constitute the only information furnished by any Underwriter through the
Representative to the Company for the purposes of Sections 2(b) and 8 hereof.
The Underwriters confirm that such statements (to such extent) are correct.
13. Notices. All communications hereunder shall be in writing
and, if sent to any of the Underwriters, shall be delivered or sent by mail,
telex or facsimile transmission and confirmed in writing to Friedman, Billings,
Ramsey & Co., Inc., Potomac Tower, 1001 Nineteenth Street North, Arlington,
Virginia 22209, Attention: Mr. Robert Hartheimer, with a copy to Brobeck,
Phleger & Harrison LLP, 1633 Broadway, 47th Floor, New York, New York 10019,
Attention: Alexander D. Lynch, Esq.; and if sent to the Company, shall be
delivered or sent by mail, telex or facsimile transmission and confirmed in
writing to the Company at 5950 Symphony Woods Road, Suite 301, Columbia,
Maryland 21044, Attention: Chief Executive Officer with a copy to Manatt,
Phelps & Phillips, LLP, 1501 M Street, N.W., Suite 700, Washington, D.C. 20005,
Attention: Peter R. Gilbert, Esq.; and if sent to Selling Securityholders,
shall be delivered or sent by mail, telex or facsimile transmission and
confirmed in writing to Selling Securityholders at 5950 Symphony Woods Road,
Suite 301, Columbia, Maryland 21044, Attention: Chief Executive Officer, with
a copy to Manatt, Phelps & Phillips, LLP, 1501 M Street, N.W., Suite 300,
Washington, D.C. 20005, Attention: Peter R. Gilbert, Esq.
28
<PAGE> 29
14. Successors. This Agreement shall inure to the benefit of and
shall be binding upon the several Underwriters, the Company, Selling
Securityholders and their respective successors and legal representatives, and
nothing expressed or mentioned in this Agreement is intended or shall be
construed to give any other person any legal or equitable right, remedy or
claim under or in respect of this Agreement, or any provisions herein
contained, this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of such persons and
for the benefit of no other person except that (i) the indemnities of the
Company and Selling Securityholders contained in Section 8 of this Agreement
shall also be for the benefit of any person or persons who control any
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act and (ii) the indemnities of the Underwriters contained in Section
8 of this Agreement shall also be for the benefit of the directors of the
Company, the officers of the Company who have signed the Registration
Statement, Selling Securityholders and any person or persons who control the
Company or Selling Securityholders within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act. No purchaser of Securities from any
Underwriter shall be deemed a successor because of such purchase.
15. Applicable Law. The validity and interpretation of this
Agreement, and the terms and conditions set forth herein, shall be governed by
and construed in accordance with the laws of the State of Delaware, without
giving effect to any provisions relating to conflicts of laws.
16. Consent to Jurisdiction and Service of Process. All judicial
proceedings arising out of or relating to this Agreement may be brought in any
state or federal court of competent jurisdiction in the State of Delaware, and
by execution and delivery of this Agreement, the Company and Selling
Securityholders each accepts for itself and in connection with their respective
properties, generally and unconditionally, the nonexclusive jurisdiction of the
aforesaid courts and waives any defense of forum non conveniens and irrevocably
agree to be bound by any judgment rendered thereby in connection with this
Agreement. The Selling Securityholders designate and appoint Miles H. Grody,
and the Company designates and appoints Miles H. Grody and such other persons
as may hereafter be selected by the Company or Selling Securityholders
irrevocably agreeing in writing to so serve, as their respective agents to
receive on its behalf service of all process in any such proceedings in any
such court, such service being hereby acknowledged by the Company and Selling
Securityholders to be effective and binding service in every respect. A copy
of any such process so served shall be mailed by registered mail to the Company
and/or Selling Securityholders at their respective addresses provided in
Section 13 hereof; provided, however, that, unless otherwise provided by
applicable law, any failure to mail such copy shall not affect the validity of
service of such process. If any agent appointed by the Company or Selling
Securityholders refuses to accept service, the Company and Selling
Securityholders each hereby agrees that service of process sufficient for
personal jurisdiction in any action against the Company or Selling
Securityholders in the State of Delaware may be made by registered or certified
mail, return receipt requested, to the Company and/or Selling Securityholders,
as applicable, at their respective addresses provided in Section 13 hereof, and
Selling Securityholders and the Company each hereby acknowledge that such
service shall be effective and binding in every respect. Nothing herein shall
affect the right to serve process in any other manner permitted by law or shall
limit the right of any Underwriter to bring proceedings against the Company and
Selling Securityholders in the courts of any other jurisdiction.
17. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
29
<PAGE> 30
If the foregoing correctly sets forth our understanding please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter shall constitute an agreement binding the Company, the
Selling Securityholders and each of the several Underwriters.
Very truly yours,
CREDIT MANAGEMENT SOLUTIONS, INC.
By
--------------------------------------
James R. DeFrancesco
President and Chief Executive Officer
SELLING SECURITYHOLDERS
-----------------------------------------
[Attorney-in-Fact]
-----------------------------------------
[Attorney-in-Fact]
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
By:
By:
--------------------------------
Name:
Title:
For itself and as the Representative.
30
<PAGE> 31
Schedule I
UNDERWRITERS
<TABLE>
<CAPTION>
Underwriting Number of Firm Securities to be Purchased
- ------------ -----------------------------------------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc. . . . . . . . . . .
Unterberg Harris . . . . . . . . . . . . . . . . . . . . . _________
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,600,000
=========
</TABLE>
31
<PAGE> 32
Schedule II
SELLING SECURITYHOLDERS
<TABLE>
<CAPTION>
Name Number of Shares to be Sold
- ---- ---------------------------
<S> <C>
James R. DeFrancesco 200,000
Scott L. Freiman 100,000
Charles F. Riordan 20,000
Miles H. Grody 20,000
Robert P. Vollono 20,000
James C. Alsobrook, Jr. 20,000
Nancy L. Weil 20,000
-------
Total 400,000
</TABLE>
32
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
CREDIT MANAGEMENT SOLUTIONS, INC.
ARTICLE I
Name
The name of the corporation is Credit Management Solutions, Inc.
(herein the "Corporation").
ARTICLE II
Registered Office
The address of the Corporation's registered office in the State of
Delaware is 1013 Centre Road, City of Wilmington, County of New Castle 19805.
The name of the Corporation's registered agent at such address is Corporation
Service Company.
ARTICLE III
Powers
The purpose for which the Corporation is organized is to engage in any
lawful business for which corporations may be incorporated pursuant to the laws
of the State of Delaware. The Corporation shall have all the powers of a
corporation organized under the General Corporation Law of the State of
Delaware.
ARTICLE IV
Term
The Corporation is to have perpetual existence.
<PAGE> 2
ARTICLE V
Incorporator
The name and mailing address of the Incorporator are as follows:
Name Mailing Address
---- ---------------
Peter R. Gilbert 1501 M. Street, N.W.
Suite 700
Washington, D.C. 20005
ARTICLE VI
Initial Directors
The number of directors constituting the initial Board of Directors of
the Corporation is seven (7) and the names and addresses of the persons who are
to serve as directors until their successors are elected and qualified together
with the classes of directorships to which such persons have been assigned are:
<TABLE>
<CAPTION>
Name Address Class
---- ------- -----
<S> <C> <C>
James R. DeFrancesco 5950 Symphony Woods Road, Suite 301 III
Columbia, MD 21044
Stephen X. Graham 1700 K Street, N.W. II
Washington, D.C. 20006
Scott L. Freiman 5950 Symphony Woods Road, Suite 301 II
Columbia, MD 21044
Miles H. Grody 5950 Symphony Woods Road, Suite 301 II
Columbia, MD 21044
Robert P. Vollono 5950 Symphony Woods Road, Suite 301 I
Columbia, MD 21044
</TABLE>
2
<PAGE> 3
ARTICLE VII
Capital Stock
The aggregate number of shares of all classes of capital stock which
the Corporation has authority to issue is 41,000,000 of which 40,000,000 are to
be shares of common stock, $.01 par value per share, and of which 1,000,000
are to be shares of serial preferred stock, $.01 par value per share. The
shares may be issued by the Corporation from time to time as approved by the
Board of Directors of the Corporation without the approval of the stockholders
except as otherwise provided in this Article VII or the rules of a national
securities exchange if applicable. The consideration for the issuance of the
shares shall be paid to or received by the Corporation in full before their
issuance and shall not be less than the par value per share. The consideration
for the issuance of the shares shall be cash, services rendered, personal
property (tangible or intangible), real property, leases of real property or
any combination of the foregoing. In the absence of actual fraud in the
transaction, the judgment of the Board of Directors as to the value of such
consideration shall be conclusive. Upon payment of such consideration, such
shares shall be deemed to be fully paid and nonassessable. In the case of a
stock dividend, the part of the surplus of the Corporation which is transferred
to stated capital upon the issuance of shares as a stock dividend shall be
deemed to be the consideration for their issuance.
A description of the different classes and series (if any) of the
Corporation's capital stock, and a statement of the relative powers,
designations, preferences and rights of the shares of each class and series (if
any) of capital stock, and the qualifications, limitations or restrictions
thereof, are as follows:
A. Common Stock. Except as provided in this Certificate, the holders
of the common stock shall exclusively possess all voting power. Each holder of
shares of common stock shall be entitled to one vote for each share held by
such holder, except as otherwise expressly set forth in this Certificate.
Whenever there shall have been paid or declared and set aside for
payment to the holders of the outstanding shares of any class of stock having
preference over the common stock as to the payment of dividends, the full
amount of dividends and sinking fund or retirement fund or other retirement
payments, if any, in which such holders are respectively entitled in
preference to the common stock, then dividends may be paid on the common stock,
and on any class or series of stock entitled to participate therewith as to
dividends, out of any assets legally available for the payment of dividends,
but only when and as declared by the Board of Directors of the Corporation.
In the event of any liquidation, dissolution or winding up of the
Corporation, after there shall have been paid or declared and set aside for
payment, to the holders of the outstanding shares of any class having
preference over the common stock in any such event, the full preferential
amounts to which they are respectively entitled, the holders of the common
3
<PAGE> 4
stock and of any class or series of stock entitled to participate therewith, in
whole or in part, as to distribution of assets shall be entitled, after payment
or provision for payment of all debts and liabilities of the Corporation, to
receive the remaining assets of the Corporation available for distribution, in
cash or in kind.
Each share of common stock shall have the same relative powers,
preferences and rights as, and shall be identical in all respects with, all the
other shares of common stock of the Corporation, except as otherwise expressly
set forth in this Certificate.
B. Serial Preferred Stock. Except as provided in this Certificate, the
Board of Directors of the Corporation is authorized, by resolution or
resolutions from time to time adopted to provide for the issuance of serial
preferred stock in series and to fix and state the powers, designations,
preferences and relative, participating, optional or other special rights of
the shares of each such series, and the qualifications, limitations or
restrictions thereof, including, but not limited to determination of any of
the following;
(1) the distinctive serial designation and the number of shares
constituting such series;
(2) the dividend rates or the amount of dividends to be paid on the
shares of such series, whether dividends shall be cumulative and,
if so, from which date or dates, the payment date or dates for
dividends, and the participating or other special rights, if any,
with respect to dividends;
(3) the voting powers, full or limited, if any, of the shares of such
series;
(4) whether the shares of such series shall be redeemable and, if so,
the price or prices at which, and the terms and conditions upon
which such shares may be redeemed;
(5) the amount or amounts payable upon the shares of such series in the
event of voluntary or involuntary liquidation, dissolution or
winding up of the Corporation;
(6) whether the shares of such series shall be entitled to the benefits
of a sinking or retirement fund to be applied to the purchase or
redemption of such shares, and, if so entitled, the amount of such
fund and the manner of its application, including the price or
prices at which such shares may be redeemed or purchased through
the application of such funds;
(7) whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes or any other
series of the same or any other class or classes of stock of the
Corporation and, if so convertible or exchangeable, the conversion
price or prices, or the rate or rates of exchange,
4
<PAGE> 5
and the adjustments thereof, if any, at which such conversion or
exchange may be made, and any other terms and conditions of such
conversion or exchange;
(8) the subscription or purchase price and form of consideration for
which the shares of such series shall be issued; and
(9) whether the shares of such series which are redeemed or converted
shall have the status of authorized but unissued shares of serial
preferred stock and whether such shares may be reissued as shares of
the same or any other series of serial preferred stock.
Each share of each series of serial preferred stock shall have the same
relative powers, preferences and rights as and shall be identical in all
respects with all the other shares of the Corporation of the same series, except
as otherwise expressly set forth in this Certificate.
ARTICLE VIII
Preemptive Rights
No holder of any of the shares of any class or series of stock or of
options, warrants or other rights to purchase shares of any class or series of
stock or of other securities of the Corporation shall have any preemptive right
to purchase or subscribe for any unissued stock of any class or series, or any
unissued bonds, certificates or indebtedness, debentures or other securities
convertible into or exchangeable for stock of any class or series or carrying
any right to purchase stock of any class or series; but any such unissued
stock, bonds, certificates or indebtedness, debentures or other securities
convertible into or exchangeable for stock or carrying any right to purchase
stock may be issued pursuant to resolution of the Board of Directors of the
Corporation to such persons, firms, corporations or associations, whether or
not holders thereof, and upon such terms as may be deemed advisable by the
Board of Directors in the exercise of its sole discretion.
ARTICLE IX
Repurchase of Shares
The Corporation may from time to time, pursuant to authorization by
the Board of Directors of the Corporation and without action by the
stockholders, purchase or otherwise acquire shares of any class, bonds,
debenture, notes, script, warranties, obligations, evidences of indebtedness or
other securities of the Corporation in such manner, upon such terms, and in
such amounts as the Board of Directors shall determine: subject, however, to
such limitations or restrictions, if any, as are contained in the express terms
of any class of shares of the Corporation outstanding at the time of the
purchase or acquisition in question or as are imposed by law,
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ARTICLE X
Meetings of Stockholders; Cumulative Voting
A. Notwithstanding any other provision of this Certificate or the bylaws
of the Corporation, no action required to be taken or which may be taken at any
annual or special meeting of stockholders of the Corporation may be taken
without a meeting, and the power of stockholders to consent in writing, without
a meeting, to the taking of any action is specifically denied.
B. Special meetings of the stockholders of the Corporation for any
purpose or purposes may be called at any time by the Board of Directors of the
Corporation, or by a committee of the Board of Directors which has been duly
designated by the Board of Directors and whose powers and authorities, as
provided in a resolution of the Board of Directors or in the bylaws of the
Corporation, include the power and authority to call such meetings, but such
special meetings may not be called by any other person or persons.
C. There shall be no cumulative voting by stockholders of any class or
series in the election of directors of the Corporation.
D. Meetings of stockholders may be held at such place as the bylaws may
provide.
ARTICLE XI
Notice for Nominations and Proposals
A. Nominations for the election of directors and proposals for any new
business to be taken up at any annual or special meeting of stockholders may be
made by the Board of Directors of the Corporation or by any stockholder of the
Corporation entitled to vote generally in the election of directors. In order
for a stockholder of the Corporation to make any such nominations and/or
proposals, he or she shall give notice thereof in writing, delivered or mailed
by first class United States mail, postage prepaid, to the Secretary of the
Corporation not less than thirty days nor more than sixty days prior to the
date of any such meeting; provided, however, that if less than forty days
notice of the meeting is given to stockholders, such written notice shall be
delivered or mailed, as prescribed, to the Secretary of the Corporation not
later than the close of business on the tenth day following the day on which
notice of the meeting was mailed to stockholders. Each such notice given by a
stockholder with respect to nominations for the election of directors shall set
forth (i) the name, age, business address and, if known, residence address of
each nominee proposed in such notice; (ii) the principal occupation or
employment of such nominee; and (iii) the number of shares of stock of the
Corporation which are beneficially owned by each such nominee. In addition,
the stockholder making such nomination shall promptly provide any other
information reasonably requested by the Corporation.
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B. Each such notice given by a stockholder to the Secretary with respect
to business proposals to be brought before a meeting shall set forth in writing
as to each matter: (i) a brief description of the business desired to be
brought before the meeting and the reasons for conducting such business at the
meeting; (ii) the name and address, as they appear on the Corporation's books,
of the stockholder proposing such business; (iii) the class and number of
shares of the Corporation which are beneficially owned by the stockholder; and
(iv) any material interest of the stockholder in such business.
Notwithstanding anything in this Certificate to the contrary, no new business
shall be conducted at the meeting except in accordance with the procedures set
forth in this Article.
C. The Chairman of the annual or special meeting of stockholders may, if
the facts warrant, determine and declare to such meeting that a nomination or
proposal was not made in accordance with the foregoing procedure, and, if he
should so determine, he shall so declare to the meeting and the defective
nomination or proposal shall be disregarded and laid over for action at the
next succeeding special or annual meeting of the stockholders taking place
thirty days or more thereafter. This provision shall not require the holding
of any adjourned or special meeting of stockholders for the purpose of
considering such defective nomination or proposal.
ARTICLE XII
Directors
A. Number; Vacancies. The number of directors of the Corporation shall
be such number, not less than five (5) nor more than fifteen (15) (exclusive of
directors, if any, to be elected by holders of preferred stock of the
Corporation, voting separately as a class), as shall be set forth from time to
time in the bylaws, provided that no action shall be taken to decrease or
increase the number of directors unless at least two-thirds of the directors
then in office shall concur in said action. Vacancies in the Board of
Directors of the Corporation, however caused, and newly created directorships
shall be filled by a vote of two-thirds of the directors then in office,
whether or not a quorum, and any director so chosen shall hold office for a
term expiring at the annual meeting of stockholders at which the term of the
class to which the director has been chosen expires and when the director's
successor is elected and qualified.
B. Classified Board. The Board of Directors of the Corporation shall be
divided into three classes of directors which shall be designated Class I,
Class II and Class III. The members of each class shall be elected for a term
of three years and until their successors are elected and qualified. Such
classes shall be as nearly equal in number as the then total number of
directors constituting the entire Board of Directors shall permit, with the
terms of office of all members of one class expiring each year. Subject to the
provisions of this Article XII, should the number of directors not be equally
divisible by three, the excess director or directors shall be assigned to
Classes I or II as follows: (i) if there shall be an excess of one directorship
over a number equally divisible by three, such extra directorship shall be
classified in Class II; and (ii) if there shall be an excess of two
directorships over a number
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equally divisible by three, one shall be classified in Class I and the other in
Class II. At the first annual meeting of stockholders, directors of Class I
shall be elected to hold office for a term expiring at the third succeeding
annual meeting thereafter. At the second annual meeting of stockholders,
directors of Class II shall be elected to hold office for a term expiring at
the third succeeding annual meeting thereafter. At the third annual meeting of
stockholders, directors of Class III shall be elected to hold office for a term
expiring at the third succeeding annual meeting thereafter. Thereafter, at
each succeeding annual meeting, directors of each class shall be elected for
three year terms. Notwithstanding the foregoing, the director whose term shall
expire at any annual meeting shall continue to serve until such time as his
successor shall have been duly elected and shall have qualified unless his
position on the Board of Directors shall have been abolished by action taken to
reduce the size of the Board of Directors prior to said meeting.
Should the number of directors of the Corporation be reduced, the
directorship(s) eliminated shall be allocated among classes as appropriate so
that the number of directors in each class is as specified in the immediately
preceding paragraph. The Board of Directors shall designate, by the name of
the incumbent(s), the position(s) to be abolished. Notwithstanding the
foregoing, no decrease in the number of directors shall have the effect of
shortening the term of any incumbent director. Should the number of directors
of the Corporation be increased, the additional directorships shall be
allocated among the classes as appropriate so that the number of directors in
each class is as specified in the immediately preceding paragraph.
Whenever the holders of any one or more series of preferred stock of the
Corporation shall have the right, voting separately as a class, to elect one or
more directors of the Corporation, the Board of Directors shall consist of said
directors so elected in addition to the number of directors fixed as provided
in this Article XII. Notwithstanding the foregoing, and except as otherwise
may be required by law or by the terms and provisions of the preferred stock of
the Corporation, whenever the holders of any one or more series of preferred
stock of the Corporation shall have the right, voting separately as a class, to
elect one or more directors of the Corporation, the terms of the director or
directors elected by such holders shall expire at the next succeeding annual
meeting of stockholders.
ARTICLE XIII
Removal of Directors
Notwithstanding any other provisions of this Certificate or the bylaws of
the Corporation, any director or the entire Board of Directors of the
Corporation may be removed, at anytime, but only for cause and only by the
affirmative vote of the holders of not less than 66.67% of the outstanding
shares of capital stock of the Corporation entitled to vote generally in the
election of directors (considered for this purpose as one class) cast at a
meeting of the stockholders called for that purpose. Notwithstanding the
foregoing, whenever the holders of any one or more series of preferred stock of
the Corporation shall have the right, voting
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separately as a class, to elect one or more directors of the Corporation, the
preceding provisions of this Article XIII shall not apply with respect to the
director or directors elected by such holders of preferred stock.
ARTICLE XIV
Indemnification
The Corporation may, to the fullest extent permitted by Section 145 of the
General Corporation Law of Delaware, as amended from time to time, indemnify
each person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he is or
was, or has agreed to become, a director or officer of the Corporation, is or
was serving, or has agreed to serve, at the request of the Corporation, as a
director, officer or trustee of, or in a similar capacity with, another
corporation, partnership, joint venture, trust or other enterprise (including
any employee benefit plan) (all such persons being referred to hereafter as an
"Indemnitee"), or by reason of any action alleged to have been taken or omitted
in such capacity, against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by him or
on his behalf in connection with such action, suit or proceeding and any appeal
therefrom.
Indemnification may include payment by the Corporation of expenses in
defending an action or proceeding in advance of the final disposition of such
action or proceeding upon receipt of an undertaking by the Indemnitee to repay
such payment if it is ultimately determined that such person is not entitled to
indemnification under this Article XIV, which undertaking may be accepted
without reference to the financial ability of such person to make such
repayment.
The Corporation shall not indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person unless the initiation thereof was approved by the Board of
Directors of the Corporation.
The indemnification rights provided in this Article XIV (i) shall not be
deemed exclusive of any other rights to which Indemnitees may be entitled under
any law, agreement or vote of stockholders or disinterested directors or
otherwise, and (ii) shall inure to the benefit of the heirs, executors and
administrators of such persons. The Corporation may, to the extent authorized
from time to time by its Board of Directors, grant Indemnification rights to
other employees or agents of the Corporation or other persons serving the
corporation and such rights may be equivalent to, or greater than or less than,
those set forth in this Article XIV.
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<PAGE> 10
ARTICLE XV
Limitations on Directors' Liability
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except: (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions that
are not in good faith or that involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the General Corporation Law of the
State of Delaware, or (iv) for any transaction from which the director derived
any improper personal benefit. If the General Corporation Law of the State of
Delaware or other Delaware law is amended or enacted after the date of filing
of this Certificate to further eliminate or limit the personal liability of
directors, then the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the General
Corporation Law of the State of Delaware, as so amended, or such other Delaware
law. Any repeal or modification of the foregoing paragraph by the stockholders
of the Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or
modification.
ARTICLE XVI
Amendment of Bylaws
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors of the Corporation is expressly authorized to adopt,
repeal, alter, amend and rescind the bylaws of the Corporation.
ARTICLE XVII
Amendment of Certificate of Incorporation
The Corporation reserves the right to repeal, alter, amend or rescind any
provision contained in this Certificate in the manner now or hereafter
prescribed by law, and all rights conferred on stockholders herein are granted
subject to this reservation. Notwithstanding the foregoing, the provisions set
forth in Articles X, XI, XII, XIII, XIV, XV, XVI and this Article XVII may not
be repealed, altered, amended or rescinded in any respect unless the same is
approved by the affirmative vote of the holders of not less than 80% of the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as a single
class) cast at a meeting of the stockholders called for that purpose (provided
that notice of such proposed repeal, alteration, amendment or rescission is
included in the notice of such meeting); except that such repeal, alteration,
amendment or rescission may be made by the affirmative vote of the holders of a
majority of the outstanding shares of capital stock of the Corporation entitled
to vote generally in the election of directors
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(consideration for this purpose as a single class) if the same is first
approved by a majority of the directors of the Corporation.
I, THE UNDERSIGNED, being the incorporator hereinafter named, for the
purpose of forming a corporation pursuant to the General Corporation Law of the
State of Delaware, do make this Certificate, hereby declaring and certifying
that this is my act and deed and the facts herein stated are true, and
accordingly have hereunto set my hand this 6th day of November, 1996.
/s/ Peter R. Gilbert
--------------------
Peter R. Gilbert
Incorporator
City of Washington )
) ss:
District of Columbia )
BE IT REMEMBERED, that on the 6th day of November, 1996, before me, a
Notary Public duly authorized to take acknowledgements of deeds by the laws of
the place where the foregoing Certificate of Incorporation was signed,
personally appeared the undersigned, Peter R. Gilbert, the incorporator who
signed the foregoing Certificate of Incorporation, known to me personally to be
such, and who acknowledged the same to be his act and deed, and the facts
therein stated are true.
/s/Joseph Chalen
----------------------------
Notary Public
My Commission Expires
My Commission expires: 8-31-00
-----------------------
[SEAL]
11
<PAGE> 1
EXHIBIT 3.2
(A DELAWARE CORPORATION)
BYLAWS
OF
CREDIT MANAGEMENT SOLUTIONS, INC.
ARTICLE I
Principal Executive Office
The principal executive office of Credit Management Solutions, In. (the
"Corporation") shall be at 5950 Symphony Woods Road, Suite 301, Columbia,
Maryland 21044. The Corporation may also have offices at such other places
within or without the State of Maryland as the board of directors shall from
time to time determine.
ARTICLE II
Stockholders
SECTION 1. Place of Meetings. All annual and special meetings of
stockholders shall be held at the principal executive office of the Corporation
or at such other place within or without the State of Delaware as the board of
directors may determine and as designated in the notice of such meeting.
SECTION 2. Annual Meeting. A meeting of the stockholders of the
Corporation for the election of directors and for the transaction of any other
business of the Corporation shall be held annually at such date and time as the
board of directors may determine.
SECTION 3. Special Meeting. Special meetings of the stockholders for
any purpose or purposes may be called at any time by the board of directors or
by a committee of the board of directors in accordance with the provisions of
the Corporation's Certificate of Incorporation.
SECTION 4. Conduct of Meetings. Annual and special meetings shall be
conducted in accordance with these Bylaws or as otherwise prescribed by the
board of directors. The chairman or the chief executive officer of the
Corporation shall preside at such meetings.
SECTION 5. Notice of Meeting. Written notice stating the place, day
and hour of the meeting and the purpose or purposes for which the meeting is
called shall be mailed by the secretary or the officer performing his duties,
not less than ten days nor more than fifty days before the meeting to each
stockholder of record entitled to vote at such meeting. If mailed, such notice
shall be deemed to be delivered when deposited in the United States mail
addressed to the stockholder at his address as it appears on the stock transfer
books or records of the
<PAGE> 2
Corporation as of the record date prescribed in Section 6, with postage thereon
prepaid. If a stockholder is present at a meeting, or in writing waives notice
thereof before or after the meeting, notice of the meeting to such stockholder
shall be unnecessary. When any stockholders' meeting either annual or special
is adjourned for thirty days or more, notice of the adjourned meeting shall be
given as in the case of an original meeting. It shall not be necessary to give
any notice of the time and place of any meeting adjourned for less than thirty
days or of the business to be transacted at such adjourned meeting, other than
an announcement at the meeting at which such adjournment is taken.
SECTION 6. Fixing of Record Date. For the purpose of determining
stockholders entitled to notice of or to vote at any meeting of stockholders,
or any adjournment thereof, or stockholders entitled to receive payment of any
dividend, or in order to make a determination of stockholders for any other
proper purpose, the board of directors shall fix in advance a date as the
record date for any such determination of stockholders. Such date in any case
shall be not more than sixty days, and in case of a meeting of stockholders not
less than ten days, prior to the date on which the particular action requiring
such determination of stockholders, is to be taken. When a determination of
stockholders entitled to vote at any meeting of stockholders has been made as
provided in this section, such determination shall apply to any adjournment
thereof.
SECTION 7. Voting Lists. The officer or agent having charge of the stock
transfer books for shares of the Corporation shall make, at least ten days
before each meeting of stockholders, a complete record of the stockholders
entitled to vote at such meeting or any adjournment thereof, with the address
of and the number of shares held by each. The record, for a period of ten days
before such meeting, shall be kept on file at the principal office of the
Corporation whether within or outside the State of Michigan, and shall be
subject to inspection by any stockholder for any purpose germane to the meeting
at any time during usual business hours. Such record shall also be produced
and kept open at the time and place of the meeting, and shall be subject to the
inspection of any stockholder for any purpose germane to the meeting during the
whole time of the meeting. The original stock transfer books shall be prima
facie evidence as to who are the stockholders entitled to examine such record
or transfer books or to vote at any meeting of stockholders.
SECTION 8. Quorum. A majority of the outstanding shares of the
Corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of stockholders. If less than a majority of
the outstanding shares are represented at a meeting, a majority of the shares
so represented may adjourn the meeting from time to time without further
notice. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the meeting as originally notified. The stockholders present at a duly
organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum.
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SECTION 9. Proxies. At all meetings of stockholders, a stockholder
may vote by proxy executed in writing by the stockholder or by his duly
authorized attorney in fact. Proxies solicited on behalf of the management
shall be voted as directed by the stockholder or, in the absence of such
direction, as determined by a majority of the board of directors. No proxy
shall be valid after eleven months from the date of its execution unless
otherwise provided in the proxy.
SECTION 10. Voting. At each election for directors and for every
other matter requiring a vote to stockholders, every stockholder entitled to
vote at such election shall be entitled to one vote for each share of stock
held. Unless otherwise provided by the Certificate of Incorporation, by
statute, or by these Bylaws, a majority of those votes cast by stockholders at
a lawful meeting shall be sufficient to pass on a transaction or matter, except
in the election of directors, which election shall be determined by a plurality
of the votes of the shares present in person or by proxy at the meeting and
entitled to vote on the election of directors.
SECTION 11. Voting of Shares in the Name of Two or More Persons. When
ownership of stock stands in the name of two or more persons, in the absence of
written directions to the Corporation to the contrary, at any meeting of the
stockholders of the Corporation any one or more of such stockholders may cast,
in person or by proxy, all votes to which such ownership is entitled. In the
event an attempt is made to cast conflicting votes, in person or by proxy, by
the several persons in whose name shares of stock stand, the vote or votes to
which these persons are entitled shall be cast as directed by a majority of
those holding such stock and present in person or by proxy at such meeting,
but no votes shall be cast for such stock if a majority cannot agree.
SECTION 12. Voting of Shares by Certain Holders. Shares standing in
the name of another corporation may be voted by any officer, agent or proxy as
the bylaws of such corporation may prescribe, or, in the absence of such
provision, as the board of directors of such corporation may determine. Shares
held by an administrator, executor, guardian or conservator may be voted by
him, either in person or by proxy, without a transfer of such shares into his
name. Shares standing in the name of a trustee may be voted by him, either in
person or by proxy, but no trustee shall be entitled to vote shares held by
him without a transfer of such shares into his name. Shares standing in the
name of a receiver may be voted by such receiver, and shares held by or under
the control of a receiver may be voted by such receiver without the transfer
thereof into his name if authority to do so is contained in an appropriate
order of the court or other public authority by which such receiver was
appointed.
A stockholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the Corporation, nor
shares held by another corporation, if a majority of the shares entitled to
vote for the election of directors of such other corporation are held by the
Corporation, shall be voted at any meeting or counted in
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<PAGE> 4
determining the total number of outstanding shares at any given time for
purposes of any meeting.
SECTION 13. Inspectors of Election. In advance of any meeting of
stockholders, the chairman of the board or the board of directors may appoint
any persons, other than nominees for office, as inspectors of election to act
at such meeting or any adjournment thereof. The number of inspectors shall be
either one or three. If the board of directors so appoints either one or three
inspectors, that appointment shall not be altered at the meeting. If
inspectors of election are not so appointed, the chairman of the board may make
such appointment at the meeting. In case any person appointed as inspector
fails to appear or fails or refuses to act, the vacancy may be filled by
appointment in advance of the meeting or at the meeting by the chairman of the
board or the president.
Unless otherwise prescribed by applicable law, the duties of such
inspectors shall include: determining the number of shares of stock and the
voting power of each share, the shares of stock represented at the meeting, the
existence of a quorum, the authenticity, validity and effect of proxies;
receiving votes, ballots or consents, hearing and determining all challenges
and questions in any way arising in connection with the right to vote; counting
and tabulating all votes or consents; determining the result; and such acts as
may be proper to conduct the election or vote with fairness to all
stockholders.
SECTION 14. Nominating Committee. The board of directors or a
committee appointed by the board of directors shall act as a nominating
committee for selecting the management nominees for election as directors.
Except in the case of a nominee substituted as a result of the death or other
incapacity of a management nominee, the nominating committee shall deliver
written nominations to the secretary at least twenty days prior to the date of
the annual meeting. Provided such committee makes such nominations, no
nominations for directors except those made by the nominating committee shall
be voted upon at the annual meeting unless other nominations by stockholders
are made in writing and delivered to the secretary of the Corporation in
accordance with the provisions of the Corporation's Certificate of
Incorporation.
SECTION 15. New Business. Any new business to be taken up at the
annual meeting shall be stated in writing and filed with the secretary of the
Corporation in accordance with the provisions of the Corporation's Certificate
of Incorporation. This provision shall not prevent the consideration and
approval or disapproval at the annual meeting of reports of officers, directors
and committees, but in connection with such reports no new business shall be
acted upon at such annual meeting unless stated and filed as provided in the
Corporation's Certificate of Incorporation.
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<PAGE> 5
ARTICLE III
Board of Directors
SECTION 1. General Powers. The business and affairs of the
Corporation shall be under the direction of its board of directors. The
chairman shall preside at all meetings of the board of directors.
SECTION 2. Number, Term and Election. The board of directors shall
consist of not less than five (5) nor more than fifteen (15) members and the
number of directors constituting the whole board shall be established by
resolution of the Board of Directors. The board shall be divided into three
classes as nearly equal in number as possible. The members of each class shall
be elected for a term of three years and until their successors are elected or
qualified. The board of directors shall be classified in accordance with the
provisions of the Corporation's Certificate of Incorporation.
SECTION 3. Regular Meetings. A regular meeting of the board of
directors shall be held at such time and place as shall be determined by
resolution of the board of directors without other notice than such
resolution.
SECTION 4. Special Meetings. Special meetings of the board of
directors may be called by or at the request of the chairman, the chief
executive officer or one-third of the directors. The person calling the
special meeting of the board of directors may fix any place as the place for
holding any special meeting of the board of directors called by such person.
SECTION 5. Telephonic Meetings. Members of the board of directors may
participate in regular or special meetings by means of conference telephone or
similar communications equipment by which all persons participating in the
meeting can hear each other. Such participation shall constitute presence in
person.
SECTION 6. Notice. Written notice of any special meeting shall be
given to each director at least two days previous thereto delivered personally
or by telegram or at least seven days previous thereto delivered by mail at the
address at which the director is most likely to be reached. Such notice shall
be deemed to be delivered when deposited in the United States mail so
addressed, with postage thereon prepaid if mailed or when delivered to the
telegraph company if sent by telegram. Any director may waive notice of any
meeting by a writing filed with the secretary. The attendance of a director at
a meeting shall constitute a waiver of notice of such meeting, except where a
director attends a meeting for the express purpose of objecting to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, not the purpose of, any
meeting of the board of directors need be specified in the notice or waiver of
notice of such meeting.
SECTION 7. Quorum. A majority of the number of directors fixed by
Section 2 shall constitute a quorum for the transaction of business at any
meeting of the board of directors,
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but if less than such majority is present at a meeting, a majority of the
directors present may adjourn the meeting from time to time. Notice of any
adjourned meeting shall be given in the same manner as prescribed by Section 6
of this Article III.
SECTION 8. Manner of Acting. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the board
of directors, unless a greater number is prescribed by these Bylaws, the
Certificate of Incorporation, or the General Corporation Law of the State of
Delaware.
SECTION 9. Action Without a Meeting. Any action required or permitted to
be taken by the board of directors at a meeting may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the directors.
SECTION 10. Resignation. Any director may resign at any time by sending
a written notice of such resignation to the home office of the Corporation
addressed to the chairman. Unless otherwise specified therein such resignation
shall take effect upon receipt thereof by the chairman.
SECTION 11. Vacancies. Any vacancy occurring in the board of directors
and any directorship to be filled by reason of an increase in the number of
directors may be filled by the affirmative vote of two-thirds of the directors
then in office. The term of such director shall be in accordance with the
provisions of the Corporation's Certificate of Incorporation.
SECTION 12. Removal of Directors. Any director or the entire board of
directors may be removed only in accordance with the provisions of the
Corporation's Certificate of Incorporation.
SECTION 13. Compensation. Directors, as such, may receive compensation
for service on the board of directors. Members of either standing or special
committees may be allowed such compensation as the board of directors may
determine.
ARTICLE IV
Committees of the Board of Directors
The board of directors may, by resolution passed by a majority of the
whole board, designate one or more committees, as they may determine to be
necessary or appropriate for the conduct of the business of the Corporation,
and may prescribe the duties, constitution and procedures thereof. Each
committee shall consist of one or more directors of the Corporation appointed
by a majority of the whole board. The board may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee.
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The board shall have power at any time to change the members of, to fill
vacancies in, and to discharge any committee of the board. Any member of any
such committee may resign at any time by giving notice to the Corporation;
provided, however, that notice to the board, the chairman of the board, the
chief executive officer, the chairman of such committee, or the secretary shall
be deemed to constitute notice to the Corporation. Such resignation shall take
effect upon the receipt of such notice or at any later time specified therein;
and, unless otherwise specified therein, acceptance of such resignation shall
not be necessary to make it effective. Any member of any such committee may be
removed at any time, either with or without cause, by the affirmative vote of a
majority of the authorized number of directors at any meeting of the board
called for that purpose.
ARTICLE V
Officers
SECTION 1. Position. The officers of the Corporation shall be a
chairman, a president, one or more vice presidents, a secretary and a
treasurer, each of whom shall be elected by the board of directors. The board
of directors may designate one or more vice presidents as executive vice
president or senior vice president. The board of directors may also elect or
authorize the appointment of such other officers as the business of the
Corporation may require. The officers shall have such authority and perform
such duties as the board of directors may from time to time authorize or
determine. In the absence of action by the board of directors, the officers
shall have such powers and duties as generally pertain to their respective
offices.
SECTION 2. Election and Term of Office. The officers of the Corporation
shall be elected annually by the board of directors at the first meeting of the
board of directors held after each annual meeting of stockholders. If the
election of officers is not held at such meeting, such election shall be held
as soon thereafter as possible. Each officer shall hold office until his
successor shall have been duly elected and qualified or until his death or
until he shall resign or shall have been removed in the manner hereinafter
provided. Election or appointment of an officer, employee or agent shall not
of itself create contract rights. The board of directors may authorize the
Corporation to enter into an employment contract with any officer in accordance
with state laws, but no such contract shall impair the right of the board of
directors to remove any officer at any time in accordance with Section 3 of
this Article V.
SECTION 3. Removal. Any officer may be removed by vote of two-thirds of
the board of directors whenever, in its judgment, the best interests of the
Corporation will be served thereby, but such removal, other than for cause,
shall be without prejudice to the contract rights, if any, of the person so
removed.
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<PAGE> 8
SECTION 4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise, may be filled by the board
of directors for the unexpired portion of the term.
SECTION 5. Remuneration. The remuneration of the officers shall be fixed
from time to time by the board of directors, and no officer shall be prevented
from receiving such salary by reason of the fact that he is also a director of
the Corporation.
ARTICLE VI
Contracts, Loans, Checks and Deposits
SECTION 1. Contracts. To the extent permitted by applicable law, and
except as otherwise prescribed by the Corporation's Certificate of
Incorporation or these Bylaws with respect to certificates for shares, the
board of directors or the executive committee may authorize any officer,
employee or agent of the Corporation to enter into any contract or execute and
deliver any instrument in the name of and on behalf of the Corporation. Such
authority may be general or confined to specific instances.
SECTION 2. Loans. No loans shall be contracted on behalf of the
Corporation and no evidence of indebtedness shall be issued in its name unless
authorized by the board of directors. Such authority may be general or confined
to specific instances.
SECTION 3. Checks, Drafts, Etc. All checks, drafts, or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the Corporation shall be signed by one or more officers, employees or
agents of the Corporation in such manner, including in facsimile form, as shall
from time to time be determined by resolution of the board of directors.
SECTION 4. Deposits. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in any of
its duly authorized depositories as the board of directors may select.
ARTICLE VII
Certificates for Shares and Their Transfer
SECTION 1. Certificates for Shares. The shares of the Corporation shall
be represented by certificates signed by the chairman of the board of directors
or the president or a vice president and by the treasurer or an assistant
treasurer or the secretary or an assistant secretary of the Corporation, and
may be sealed with the seal of the Corporation or a facsimile thereof. Any or
all of the signatures upon a certificate may be facsimiles if the certificate
is countersigned by a transfer agent, or registered by a registrar, other than
the Corporation itself or an employee of the Corporation. If any officer who
has signed or whose facsimile signature
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<PAGE> 9
has been placed upon such certificate shall have ceased to be such officer
before the certificate is issued, it may be issued by the Corporation with the
same effect as if he were such officer at the date of its issue.
SECTION 2. Form of Share Certificates. All certificates representing
shares issued by the Corporation shall set forth upon the face or back that the
Corporation will furnish to any stockholder upon request and without charge a
full statement of the designations, preferences, limitations, and relative
rights of the shares of each class authorized to be issued, the variations in
the relative rights and preferences between the shares of each such series so
far as the same have been fixed and determined, and the authority of the board
of directors to fix and determine that relative rights and preferences of
subsequent series.
Each certificate representing shares shall state upon the face thereof:
That the Corporation is organized under the laws of the State of Delaware; the
name of the person to whom issued; the number and class of shares, the
designation of the series, if any, which such certificate represents; the par
value of each share represented by such certificate, or a statement that the
shares are without par value. Other matters in regard to the form of the
certificates shall be determined by the board of directors.
SECTION 3. Payment for Shares. No certificate shall be issued for any
share until such share is fully paid.
SECTION 4. Form of Payment for Shares. The consideration for the
issuance of shares shall be paid in accordance with the provisions of the
Corporation's Certificate of Incorporation.
SECTION 5. Transfer of Shares. Transfer of shares of capital stock of
the Corporation shall be made only on its stock transfer books. Authority for
such transfer shall be given only the holder of record thereof or by his legal
representative, who shall furnish proper evidence of such authority, or by his
attorney thereunto authorized by power of attorney duly executed and filed with
the Corporation. Such transfer shall be made only on surrender for
cancellation of the certificate for such shares. The person in whose name
shares of capital stock stand on the books of the Corporation shall be deemed by
the Corporation to be the owner thereof for all purposes.
SECTION 6. Lost Certificates. The board of directors may
direct a new certificate to be issued in place of any certificate theretofore
issued by the Corporation alleged to have been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the person claiming the certificate
of stock to be lost, stolen or destroyed. When authorizing such issue of a
new certificate, the board of directors may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificate, or his legal representative, to give the
Corporation a bond in such sum as it may direct as indemnity against any claim
that may be made against the Corporation with respect to the certificate
alleged to have been lost, stolen or destroyed.
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<PAGE> 10
ARTICLE VIII
Fiscal Year, Annual Audit
The fiscal year of the Corporation shall end on the last day of
December of each year. The Corporation shall be subject to an annual audit as
of the end of its fiscal year by independent public accountants appointed by
and responsible to the board of directors.
ARTICLE IX
Dividends
Dividends upon the stock of the Corporation, subject to the provisions
of the Certificate of Incorporation, if any, may be declared by the board of
directors at any regular or special meeting, pursuant to law. Dividends may be
paid in cash, in property or in the Corporation's own stock.
ARTICLE X
Corporate seal
The corporate seal of the Corporation shall be in such form as the
board of directors shall prescribe.
ARTICLE XI
Amendments
These Bylaws may be be repealed, altered, amended or rescinded by the
stockholders of the Corporation by vote of not less than 66.67% of the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as one
class) cast at a meeting of the stockholders called for that purpose (provided
that notice of such proposed repeal, alteration, amendment or rescission is
included in the notice of such meeting). In addition, in accordance with the
Corporation's Certificate of Incorporation the board of directors may repeal,
alter, amend or rescind these Bylaws by vote of two-thirds of the board of
directors at a legal meeting held in accordance with the provisions of these
Bylaws.
10
<PAGE> 1
EXHIBIT 4
================================================================================
COMMON STOCK CREDIT MANAGEMENT SOLUTIONS, INC. CUSIP
CERTIFICATE NO.
INCORPORATED UNDER THE
LAWS OF THE STATE OF DELAWARE SEE REVERSE FOR
CERTAIN DEFINITIONS
THIS CERTIFIES THAT:
IS THE OWNER OF:
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK,
$0.01 PAR VALUE PER SHARE OF
Credit Management Solutions, Inc.
The shares represented by this certificate are transferable only on
the stock transfer books of the corporation by the holder of record hereof in
person, or by his duly authorized attorney or legal representative, upon the
surrender of this certificate properly endorsed. This certificate and the
shares represented hereby are issued and shall be held subject to all the
provisions contained in the corporation's official corporate papers filed with
the Secretary of the State of Delaware (copies of which are on file with the
Transfer Agent), to all of the provisions the holder by acceptance hereof,
assents.
This certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar.
In Witness Whereof, Credit Management Solutions, Inc. has caused this
certificate to be executed by the facsimile signatures of its duly authorized
officers and has caused a facsimile of its corporate seal to be hereunto
affixed.
DATED:
- ------------------------------- -----------------------------
PRESIDENT SECRETARY
SEAL
Incorporated 1996
================================================================================
<PAGE> 2
CREDIT MANAGEMENT SOLUTIONS, INC.
The Board of Directors of the corporation is authorized by
resolution(s), from time to time adopted, to provide for the issuance of serial
preferred stock in series and to fix and state the voting powers, designations,
preferences, and relative, participating, optional, or other special rights of
the shares of each such series and the qualifications, limitations, and
restrictions thereof. The corporation will furnish to any shareholder upon
request and without charge a full description of each class of stock and any
series thereof.
The shares represented by this certificate may not be cumulatively
voted in the election of directors of the corporation. The affirmative vote of
not less than 80% of the corporation's voting stock is required to amend the
provisions of the Certificate of Incorporation.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT -
Custodian
--------------- ---------------
(Cus) (Minor)
under Uniform Gifts to Minors Act
-----------------------
(State)
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of
survivorship and not as tenants
in common
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED ________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
shares of the common stock represented by the within certificate and do hereby
irrevocably constitute and appoint
- -------------------------------------------------------------------------------
Attorney to transfer the said shares on the books of the within named
corporation with full power of substitution in the premises.
Dated X
--------------------- -----------------------------------------
X
-----------------------------------------
NOTICE: The signatures to this assignment must correspond with the
name(s) as written upon the face of the certificate in every particular,
without alteration or enlargement or any change whatever.
SIGNATURE(S) GUARANTEED:
---------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS,
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM) PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE> 3
Countersigned and Registered:
Transfer Agent and Registrar
- ------------------------------
Authorized Signature
<PAGE> 1
EXHIBIT 5
MANATT
PHELPS
PHILLIPS
A T T O R N E Y S A T L A W A Professional Corporation
December 4, 1996
Board of Directors
Credit Management Solutions, Inc.
5950 Symphony Woods Road
Suite 301
Columbia, Maryland 21044
Re: Registration Statement Under the Securities Act of 1933
Ladies and Gentlemen:
We have acted as counsel for Credit Management Solutions, Inc., a
Delaware corporation (the "Company"), in connection with the proposed offer and
sale by the Company of up to 2,990,000 shares of the Company's common stock,
$0.01 par value per share (the "Common Stock"), by means of a Registration
Statement on Form S-1 (Registration No. 333-14007).
We have examined such documents, records, and matters of law as we
have deemed necessary for purposes of this opinion. We have also obtained from
officers of the Company such advice as we considered necessary for the purposes
of this opinion and insofar as our opinion is based on matters of fact upon
which conclusions of law are expressed, we have relied upon such advice.
Based on the foregoing, we are of the opinion that the shares of
Common Stock of the Company covered by the aforesaid Registration Statement
will, when issued in accordance with the terms of the offering against full
payment therefor, be validly issued, fully paid, and non-assessable shares of
Common Stock of the Company.
This opinion is given as of the date hereof and we assume no
obligation to advise you of changes that may hereafter be brought to our
attention.
We hereby consent to the filing of this opinion as an exhibit to the
aforementioned Registration Statement on Form S-1 which is being filed by the
Company in connection with the registration of the Common Stock under the
Securities Act of 1933, as amended. We also consent to the reference to this
firm and this opinion under the heading "Legal Matters" and in the prospectus
comprising a part of such Registration Statement and any amendment thereto.
Very Truly Yours,
/s/ MANATT, PHELPS, & PHILLIPS, LLP
-----------------------------------
Manatt, Phelps, & Phillips, LLP
M A N A T T , P H E L P S & P H I L L I P S , L L P
1501 M Street N.W., Suite 700 Washington, D.C.
20005-1702 - 202-463-4300 - FAX 202-463-4394
L o s A n g e l e s - W a s h i n g t o n , D . C . - N a s h v i l l e
<PAGE> 1
EXHIBIT 10.12
1996 CREDIT MANAGEMENT SOLUTIONS, INC.
EMPLOYEE STOCK PURCHASE PLAN
I. PURPOSE OF THE PLAN
This Employee Stock Purchase Plan is intended to promote the interests of
Credit Management Solutions, Inc. (the "Corporation") by providing eligible
employees with the opportunity to acquire a proprietary interest in the
Corporation through participation in a payroll-deduction based employee stock
purchase plan designed to qualify under Section 423 of the Code.
Capitalized terms herein shall have the meanings assigned to such terms in
the attached Appendix.
II. ADMINISTRATION OF THE PLAN
The Plan Administrator shall have full authority to interpret and construe
any provision of the Plan and to adopt such rules and regulations for
administering the Plan as it may deem necessary in order to comply with the
requirements of Code Section 423. Decisions of the Plan Administrator shall be
final and binding on all parties having an interest in the Plan.
III. STOCK SUBJECT TO PLAN
A. Number of Shares Subject to Purchase. The stock purchaseable
under the Plan shall be shares of the Corporation's authorized but unissued or
reacquired Common Stock, including shares of Common Stock purchased on the open
market. The maximum number of shares of Common Stock which may be issued over
the term of the Plan shall not exceed 250,000 shares.
B. Adjustments Upon Changes in Capitalization. Should any change
be made to the Common Stock by reason of any stock split, stock dividend,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration, appropriate adjustments shall be made to (i) the
maximum number and class of securities issuable under the Plan, and (ii) the
number and class of securities and the price per share in effect under each
outstanding purchase right in order to prevent the dilution or enlargement of
benefits thereunder.
IV. PURCHASE PERIODS
A. General. Shares of Common Stock shall be offered for purchase
under the Plan through a series of successive purchase periods until such time
as (i) the maximum number of shares of Common Stock available for issuance
under the Plan shall have been purchased or (ii) the Plan shall have been
sooner terminated.
<PAGE> 2
B. Quarterly Purchase Periods. Each purchase period shall have a
duration of three (3) months. Purchase periods shall run from the first day of
each calendar quarter to the last day of that calendar quarter. The first
purchase period shall begin on January 1, 1997, and end on the last business day
in March 31, 1997.
V. ELIGIBILITY
A. As of the Effective Date. Each individual who is an Eligible
Employee as of the Effective Date shall be eligible to participate in the Plan
for the initial purchase period.
B. Following Effective Date. Each individual who becomes an
Eligible Employee after the Effective Date shall be eligible to participate in
the Plan as of the purchase period beginning on the January 1 or July 1
immediately following the individual's completion of ninety (90) days of
Service.
C. Enrollment Procedure. To participate in the Plan for a
particular purchase period, an Eligible Employee must complete the enrollment
forms prescribed by the Plan Administrator (including a stock subscription
agreement and a payroll deduction authorization form) and file such forms with
the Plan Administrator (or its designate) on or before the start date of the
purchase period.
VI. PAYROLL DEDUCTIONS
A. Maximum Deductions/Change in Rate of Deductions. The payroll
deduction authorized by the Participant for purposes of acquiring shares of
Common Stock under the Plan may be any multiple of one percent (1%) of the
Eligible Earnings paid to the Participant during each purchase period, up to a
maximum of fifteen percent (15%). Payroll deductions will be made in whole
percentages only. The deduction rate so authorized shall continue in effect
for the entire purchase period and each successive purchase period unless and
until terminated or changed by the Participant. The Participant may not
increase his or her rate of payroll deduction during a purchase period.
However, the Participant may, at any time during the purchase period, reduce
his or her rate of payroll deduction to become effective as soon as possible
after filing the appropriate form with the Plan Administrator. The Participant
may not, however, effect more than one (1) such reduction per purchase period.
B. Holding of Deductions. Payroll deductions shall begin on the
first pay day following the start date of the purchase period and shall (unless
sooner terminated by the Participant) continue through the pay day ending with
or immediately prior to the last day of the purchase period. The amounts so
collected shall be credited to the Participant's book account under the Plan,
but no interest shall be paid on the balance from time to time outstanding in
such account. The amounts collected from the Participant shall not be held in
any segregated account or trust fund and may be commingled with the general
assets of the Corporation and used for general corporate purposes. A
Participant may not make any additional payments into his account.
2
<PAGE> 3
C. Cessation of Payroll Deductions. Payroll deductions shall
automatically cease upon the termination of the Participant's purchase right in
accordance with the provisions of the Plan.
D. Effect on Future Participation. The Participant's acquisition of
Common Stock under the Plan on any Purchase Date shall neither limit nor
require the Participant's acquisition of Common Stock on any subsequent
Purchase Date.
VII. PURCHASE RIGHTS
A. Grant of Purchase Right. A Participant shall be granted a separate
purchase right on the start date of each purchase period in which he or she
participates. The purchase right shall provide the Participant with the right
to purchase shares of Common Stock on the Purchase Date upon the terms set
forth below. The Participant shall execute a stock subscription agreement
embodying such terms and such other provisions (not inconsistent with the Plan)
as the Plan Administrator may deem advisable.
Under no circumstances shall purchase rights be granted under the Plan
to any Eligible Employee if such individual would, immediately after the grant,
own (taking into account stock owned by any person whose stock would be
attributed to such Eligible Employee within the meaning of Code Section 424(d))
or hold outstanding options or other rights to purchase, stock possessing five
percent (5%) or more of the total combined voting power or value of all classes
of stock of the Corporation or any Corporate Affiliate.
B. Exercise of the Purchase Right. Each purchase right shall be
automatically exercised on the Purchase Date, and shares of Common Stock shall
accordingly be purchased on behalf of each Participant (other than any
Participant whose payroll deductions have previously been refunded in
accordance with the Termination of Purchase Right provisions below) on such
date. The purchase shall be effected by applying the Participant's payroll
deductions for the purchase period ending on such Purchase Date to the purchase
of shares of Common Stock at the purchase price in effect for that purchase
period, and the shares will be held by the Corporation for the benefit of the
Participant, unless delivery of the shares is requested by the Participant. No
fractional shares will be purchased.
C. Purchase Price. The purchase price per share at which Common Stock
will be purchased on the Participant's behalf on each Purchase Date shall be
equal to eighty-five percent (85%) of the lower of (i) the Fair Market Value
per share of Common Stock on the start date of the purchase period or (ii) the
Fair Market Value per share of Common Stock on that Purchase Date.
D. Delivery. Upon receipt of a request from a Participant after each
Purchase Date on which a purchase of shares occurs, the Corporation shall
arrange for the delivery to each Participant, as appropriate, of a certificate
representing the shares purchased on behalf of the
3
<PAGE> 4
Participant for such purchase period. Shares to be delivered to a Participant
under the Plan shall be registered in the name of the Participant or in the
name of the Participant and the Participant's spouse.
E. Number of Purchasable Shares. The number of shares of Common Stock
purchasable by a Participant on each Purchase Date shall be the number of
shares obtained by dividing the amount collected from the Participant through
payroll deductions during the purchase period ending with that Purchase Date by
the purchase price in effect for that Purchase Date.
F. Excess Payroll Deductions. Any payroll deductions accumulated in a
Participant's account which are not sufficient to purchase a full share shall be
carried over to the next purchase period, if the Participant elects to
participate in the next purchase period, or returned to the Participant if he
terminates participation. Any amount remaining in the Participant's account at
the close of any Purchase Date caused by any reason other than a surplus due to
fractional shares shall be refunded to the Participant in cash.
G. Exercise of Purchase Right During Participant's Life. During an
Participant's lifetime, the Participant's right to purchase shares under the
Plan is exercisable only by the Participant.
H. Termination of Purchase Right. The following provisions shall
govern the termination of outstanding purchase rights:
1. A Participant may, at any time prior to the last day of the
purchase period, terminate his or her outstanding purchase right by
filing the appropriate form with the Plan Administrator (or its
designate), and no further payroll deductions shall be collected from
the Participant with respect to the terminated purchase right. Any
payroll deductions collected during the purchase period in which such
termination occurs shall be refunded as soon as practicable.
2. The termination of a purchase right shall be irrevocable,
and a Participant may not subsequently rejoin the purchase period for
which the terminated purchase right was granted. In order to resume
participation in any subsequent purchase period, such individual must
re-enroll in the Plan (by making a timely filing of the prescribed
enrollment forms) on or before the start date of the new purchase
period.
3. Should a Participant cease to remain an Eligible Employee
for any reason (other than death or disability) while his or her
purchase right remains outstanding, then that purchase right shall
immediately terminate, and all of the Participant's payroll deductions
for the purchase period in which the purchase right so terminates
shall be refunded to the Participant as soon as practicable. Should
the Participant cease to remain an Eligible Employee by reason of death
or disability while his or her purchase right remains outstanding,
then that purchase right shall
4
<PAGE> 5
immediately terminate and the Participant (or, in the event of
the Participant's death, the personal representative of the
Participant's estate) shall have the right to (a) withdraw the payroll
deductions collected during such purchase period or (b) have such
funds held for the purchase of shares at the next scheduled Purchase
Date. If no such election is made prior to the next Purchase Date,
then the payroll deductions collected with respect to the terminated
right shall be refunded to the Participant or to the personal
representative of the Participant's estate in the event of the
Participant's death as soon as practicable.
4. Should the Participant cease to remain in active service by
reason of an approved unpaid leave of absence, then the Participant
shall have the right, exercisable up until the last business day of the
purchase period in which such leave commences, to (a) withdraw the
payroll deductions collected during such purchase period or (b) have
such funds held for the purchase of shares at the next scheduled
Purchase Date. In no event, however, shall any additional payroll
deductions be collected on the Participant's behalf during such leave.
Upon the Participant's return to active service, his or her payroll
deductions under the Plan shall automatically resume at the rate in
effect at the time the leave began.
I. Corporate Transaction. Each outstanding purchase right shall
automatically be exercised, immediately prior to the effective date of any
Corporate Transaction, by applying the payroll deductions of each Participant
for the purchase period in which such Corporate Transaction occurs to the
purchase of shares of Common Stock at a purchase price per share equal to
eighty-five percent (85%) of the lower of (i) the Fair Market Value per share of
Common Stock on the start date of the purchase period in which such Corporate
Transaction occurs or (ii) the Fair Market Value per share of Common Stock
immediately prior to the effective date of such Corporate Transaction.
The Corporation shall use its best efforts to provide at least ten (10)
days' prior written notice of the occurrence of any Corporate Transaction, and
Participants shall, following the receipt of such notice, have the right to
terminate their outstanding purchase rights prior to the effective date of the
Corporate Transaction.
J. Proration of Purchase Rights. Should the total number of shares of
Common Stock which are to be purchased pursuant to outstanding purchase rights
on any particular date exceed the number of shares then available for issuance
under the Plan, the Plan Administrator shall make a pro-rata allocation of the
available shares on a uniform and nondiscriminatory basis, and the payroll
deductions of each Participant, to the extent in excess of the aggregate
purchase price payable for the Common Stock pro-rated to such individual, shall
be refunded.
K. Assignability. The purchase right shall be exercisable only by the
Participant and shall not be assignable or transferable by the Participant.
5
<PAGE> 6
I. Stockholder Rights. A Participant shall have no stockholder
rights with respect to the shares subject to his or her outstanding purchase
right until the shares are purchased on the Participant's behalf in accordance
with the provisions of the Plan and the Participant has become a holder of
record of the purchased shares.
VIII. ACCRUAL LIMITATIONS
A. General Rule-$25,000 Limitation. No Participant shall be
entitled to accrue rights to acquire Common Stock pursuant to any purchase
right outstanding under this Plan if and to the extent such accrual, when
aggregated with (i) rights to purchase Common Stock accrued under any other
purchase right granted under this Plan and (ii) similar rights accrued under
other employee stock purchase plans (within the meaning of Code Section 423) of
the Corporation or any Corporate Affiliate, would otherwise permit such
Participant to purchase more than Twenty-Five Thousand Dollars ($25,000) worth
of stock of the Corporation or any Corporate Affiliate (determined on the basis
of the Fair Market Value of such stock on the date or dates such rights are
granted) for each calendar year such rights are at any time outstanding.
B. Specific Application. For purposes of applying such accrual
limitations, the following provisions shall be in effect:
(i) The right to acquire Common Stock under each outstanding
purchase right shall accrue on the Purchase Date in effect for the purchase
period for which such right is granted.
(ii) No right to acquire Common Stock under any outstanding
purchase right shall accrue to the extent a Participant has already accrued
in the same calendar year the right to acquire Common Stock under one (1)
or more other purchase rights at a rate equal to Twenty-Five Thousand
Dollars ($25,000) worth of Common Stock (determined on the basis of the Fair
Market Value per share on the date or dates of grant) for each calendar year
such rights were at any time outstanding.
C. Refund to Participant. If by reason of such accrual limitations,
any purchase right of a Participant does not accrue for a particular purchase
period, then the payroll deductions which the Participant made during that
purchase period with respect to such purchase right shall be refunded to the
Participant as soon as practicable.
D. Effect of Conflicting Terms in Plan. In the event there is any
conflict between the provisions of this Article and one or more provisions of
the Plan or any instrument issued thereunder, the provisions of this Article
shall be controlling.
IX. ADMINISTRATION
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<PAGE> 7
A. Administrative Body. The Plan shall be administered by the Plan
Administrator, which shall have full and exclusive discretionary authority to
construe, interpret and apply the terms of the Plan, to determine eligibility
and to adjudicate all disputed claims filed under the Plan. Every finding,
shall, to the full extent permitted by law, be final and binding upon all
parties.
X. DESIGNATION OF BENEFICIARY
A. General Rule. Each Participant will file a written designation
of a beneficiary who is to receive any shares and cash, if any, from the
Participant's account under the Plan in the event of such Participant's death
subsequent to a Purchase Date on which the purchase right is exercised but
prior to delivery to such Participant of such shares and cash. In addition, a
Participant may file a written designation of a beneficiary who is to receive
any cash from the Participant's account under the Plan in the event of such
Participant's death prior to exercise of the option. If a Participant is
married and the designated beneficiary is not the spouse, written spousal
consent shall be required for such designation to be effective.
B. Change of Beneficiary. A Participant may change his or her
designation of beneficiary at anytime by written notice, subject to the written
consent of the Participant's spouse if the new beneficiary is someone other
than the Participant's spouse. In the event of the death of a Participant and
in the absence of a beneficiary validly designated under the Plan who is living
at the time of such Participant's death the Corporation shall deliver such
shares and/or cash to the executor or administrator of the estate of the
Participant, or if no such executor or administrator has been appointed (to the
knowledge of the Corporation), the Corporation, in its discretion, may deliver
such shares and/or cash to the spouse or to any one or more dependents or
relatives of the Participant, or if no spouse, dependent or relative is known
to the Corporation, then to such other person as the Corporation may
designate.
XI. AMENDMENT OR TERMINATION
A. Termination. The Board of Directors may at any time and for
any reason terminate or amend the Plan. No such termination can affect
purchase rights previously granted, provided that a purchase period may be
terminated by the Board on any Purchase Date if the Board determines that the
termination of the Plan is in the best interests of the Corporation and its
shareholders. Except as provided in Section III.B, no amendment may make any
change in any purchase right theretofore granted which adversely affects the
rights of any Participant. To the extent necessary to comply with Rule 16b-3
promulgated under the Securities Exchange Act of 1934, as amended ("Rule
16b-3") or Section 423 of the Code (or any successor rule or provision or any
other applicable law or regulation), the Corporation shall obtain shareholder
approval in such a manner and to such a degree as required.
B. Amendment. Without shareholder consent and without regard to
whether any Participant rights may be considered to have been adversely
affected, the Board of Directors shall be entitled to change the purchase
periods, limit the frequency and/or number of changes in the
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<PAGE> 8
amount withheld during purchase periods, establish the exchange ratio
applicable to amounts withheld in a currency other than U.S. dollars, permit
payroll withholding in excess of the amount designated by a Participant in
order to adjust for delays or mistakes in the Corporation's processing of
properly completed withholding elections, establish reasonable waiting and
adjustment periods and/or accounting and crediting procedures to ensure that
amounts applied toward the purchase of Common Stock for each Participant
properly correspond with amounts withheld from the Participant's Eligible
Earnings, and establish such other limitations or procedures as the Board (or
its committee) determines in its sole discretion advisable which are consistent
with the Plan.
XII. GENERAL PROVISIONS
A. Transferability. Neither payroll deductions credited to a
Participant's account nor any rights with regard to the exercise of a purchase
right or to receive shares under the Plan may be assigned, transferred, pledged
or otherwise disposed of in any way (other than by will, the laws of descent
and distribution or as provided in Section X hereof) by the Participant. Any
such attempt at assignment, transfer, pledge or other disposition shall be
without effect, except that the Corporation may treat such act as an election
to terminate participation in accordance with Section VII.H.
B. Annual Statement. Individual accounts will be maintained for each
Participant in the Plan. Statements of account will be given to each
Participant at least annually, which statements will set forth the Purchase
Price, the number of shares purchased and the remaining cash balance, if any.
C. Conditions Upon Issuance of Shares. Shares shall not be issued
with respect to a purchase right unless the exercise of such right and the
issuance and delivery of such shares pursuant thereto shall comply with all
applicable provisions of law, domestic or foreign, including, without
limitation, the Securities Act of 1933, as amended, the Securities Exchange Act
of 1934, as amended, the rules and regulations promulgated thereunder, and the
requirements of any stock exchange upon which the shares may then be listed,
and shall be further subject to the approval of counsel for the Corporation
with respect to such compliance. As a condition to the exercise of purchase
rights, the Corporation may require the person exercising such option to
represent and warrant at the time of any such exercise that the shares are
being purchased only for investment and without any present intention to sell
or distribute such shares if, in the opinion of counsel for the Corporation,
such a representation is required by any of the aforementioned applicable
provisions of law.
D. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Corporation. It shall continue in effect for a term of ten
(10) years unless sooner terminated under Section XI.A.
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<PAGE> 9
E. Additional Restrictions Of Rule 16b-3. The terms and
conditions of purchase rights granted hereunder to, and the purchase of shares
by, persons subject to Section 16 of the Exchange Act shall comply with the
applicable provisions of Rule 16b-3. This Plan shall be deemed to contain, and
such purchase rights shall contain, and the shares issued upon exercise thereof
shall be subject to, such additional conditions and restrictions as may be
required by Rule 16b-3 to qualify for the maximum exemption from Section 16 of
the Exchange Act with respect to Plan transactions.
F. Shareholder Approval. Continuance of the Plan shall be subject
to approval by the shareholders of the Corporation within twelve (12) months
before or after the date the Plan is adopted. If such shareholder approval is
obtained at a duly held shareholders' meeting, the Plan must be approved by a
majority of the votes cast at such shareholders' meeting at which is a quorum
representing a majority of all outstanding voting stock of the Corporation is,
either in person or by proxy, present and voting on the plan, or, if such
shareholder approval is obtained by written consent, it must be obtained by the
written consent of the holders of a majority of all outstanding voting stock of
the Corporation; provided, however, that approval at a meeting or by written
consent may be obtained by a lesser degree of shareholder approval if the Board
determines, in its discretion after consultation with the Corporation's legal
counsel, that such a lesser degree of shareholder approval will comply with all
applicable laws and will not adversely affect the qualification of the Plan
under Section 423 of the Code.
G. No Employment Rights. The Plan does not, directly or
indirectly, create any right for the benefit of any employee or class of
employees to purchase any shares under the Plan, or create in any employee or
class of employees any right with respect to continuation of employment by the
Corporation, and it shall not be deemed to interfere in any way with the
Corporation's right to terminate, or otherwise modify, an employee's employment
at any time.
H. Effect of Plan. The provisions of the Plan shall, in
accordance with its terms, be binding upon, and inure to the benefit of, all
successors of each employee participating in the Plan, including, without
limitation, such employee's estate and the executors, administrators or
trustees thereof, heirs and legatees, and any receiver, trustee in bankruptcy
or representative of creditors of such employee.
I. Notices. All notices or other communications by a Participant
to the Corporation under or in connection with the Plan shall be deemed to have
been duly given when received in the form specified by the Corporation at the
location, or by the person, designated by the Corporation for the receipt
thereof.
J. Expenses. All costs and expenses incurred in the
administration of the Plan shall be paid by the Corporation.
K. Governing Law. The laws of the State of Delaware will govern
all matters relating to this Plan.
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<PAGE> 10
APPENDIX
The following definitions shall be in effect under the Plan:
A. Board shall mean the Corporation's Board of Directors.
B. Code shall mean the Internal Revenue Code of 1986, as amended.
C. Common Stock shall mean the Corporation's common stock.
D. Corporate Affiliate shall mean any parent or subsidiary corporation
of the Corporation (as determined in accordance with Code Section 424, whether
now existing or subsequently established.
E. Corporate Transaction shall mean either of the following
stockholder approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete liquidation
or dissolution of the Corporation.
F. Corporation shall mean Credit Management Solutions, Inc., a
Delaware corporation, and any corporate successor to all or substantially all
of the assets or voting stock of Credit Management Solutions, Inc. which shall
by appropriate action adopt the Plan.
G. Effective Date shall mean the earlier to occur of the Plan's
adoption by the Corporation's Board of Directors or the Plan's approval by the
shareholders. Any Corporate Affiliate which becomes a Participating
Corporation after such Effective Date shall designate a subsequent Effective
Date with respect to its employee-Participants.
H. Eligible Earnings shall mean the (i) regular base salary paid to a
Participant by one or more Participating Corporations during such individual's
period of participation in the Plan, plus (ii) any pre-tax contributions made
by the Participant to any Code Section 401(k) salary deferral plan or any code
Section 125 cafeteria benefit program now or hereafter established by the
Corporation or any Corporate Affiliate, plus (iii) all of the following
amounts to the extent paid in cash overtime payments, bonuses, commissions,
profit-sharing distributions and other incentive-type payments. However,
Eligible Earnings shall not include any contributions (other than Code Section
401(k) or Code Section 125 contributions) made on the Participant's behalf by
the Corporation or
A-1
<PAGE> 11
any Corporate Affiliate to any deferred compensation plan or welfare benefit
program now or hereafter established.
L. Eligible Employee shall mean any person, including members of the
Board of Directors, who is employed by the Corporation's Participating
Corporation on a basis under which he or she is regularly expected to render
more than twenty (20) hours of service per week for more than five (5) months
per calendar year for earnings considered wages under Code Section 3401(a).
J. Fair Market Value per share of Common stock on any relevant date
shall be determined in accordance with the following provisions:
(i) If the Common stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question, as
such price is reported by the National Association of Securities
Dealers on the Nasdaq National Market or any successor system. If
there is no closing selling price for the Common Stock on the date in
question, then the Fair Market Value shall be the closing selling price
on the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any
Stock Exchange, the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question
on the Stock Exchange determined by the Plan Administrator to be
the primary market for the Common Stock, as such price is officially
quoted in the composite tape of transactions on such exchange. If
there is no closing selling price for the Common Stock on the date
in question, then the Fair Market Value shall be the closing selling
price on the last preceding date for which such quotation exists.
(iii) For purposes of the initial purchase period which
begins at the Effective Date, the Fair Market Value shall be deemed
to be equal to the price per share at which the Common Stock is sold
in the initial public offering pursuant to the Underwriting
Agreement.
K. 1933 Act shall mean the Securities Act of 1933, as amended.
L. Participant shall mean any Eligible Employee of a Participating
Corporation who is actively participating in the Plan.
M. Participating Corporation shall mean the Corporation and such
Corporate Affiliate or Affiliates as may be authorized form time to time by the
Board to extend the benefits of the Plan to their Eligible Employees. The
Participating Corporations in the Plan as of the Effective Date are listed in
attached Schedule A.
A-2
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N. Plan shall mean the Corporation's Employee Stock Purchase Plan, as
set forth in this document.
O. Plan Administrator shall mean the committee of two (2) or more
members of the Board of Directors appointed by the Board to administer the
Plan.
P. Purchase Date shall mean the last business day of each purchase
period.
Q. Reserves shall mean the number of shares of Common Stock covered by
each purchase right under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under purchase.
R. Service shall mean an individual's performance of services for the
Corporation or any Corporate Affiliate as an employee, subject to the control
and direction of the employer entity as to both the work to be performed and
the manner and method of performance.
S. Stock Exchange shall mean either the American Stock Exchange or the
New York Stock Exchange.
A-3
<PAGE> 13
SCHEDULE A
CORPORATIONS PARTICIPATING IN
EMPLOYEE STOCK PURCHASE PLAN
AS OF THE EFFECTIVE DATE
------------------------
Credit Management Solutions, Inc.
Credit Connection, Inc.
<PAGE> 1
EXHIBIT 10.13
1996 CREDIT MANAGEMENT SOLUTIONS, INC.
LONG-TERM INCENTIVE PLAN
Credit Management Solutions, Inc., a Delaware corporation (the
"Company"), by action of both its Compensation Committee and its Board as a
whole, hereby adopts the 1996 Long-Term Incentive Plan (the "Plan") with the
following provisions:
1. PURPOSE. The purpose of the Plan is to promote and advance the
interests of the Company and its shareholders by enabling the Company and its
Subsidiaries to attract, retain and reward managerial and other key employees,
and to strengthen the mutuality of interests between such employees and the
Company's shareholders. The Plan is designed to meet this intent by offering
performance-based stock and cash incentives and other equity-based incentive
awards, thereby providing a proprietary interest in pursuing the long-term
growth, profitability and financial success of the Company.
2. DEFINITIONS. For purposes of this Plan, the following terms
shall have the meanings set forth below:
(a) "Award" or "Awards" means an award or grant made to a
Participant under Sections 6 through 10, inclusive, of the Plan.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as in
effect from time to time or any successor thereto, together with rules,
regulations and authoritative interpretations promulgated thereunder.
(d) "Committee" means the Compensation Committee of the
Board that is provided for in Section 3 of the Plan.
(e) "Common Stock" means the Common Stock of the Company or
any security of the Company issued in substitution, exchange or lieu thereof.
(f) "Company " means Credit Management Solutions, Inc., a
Delaware corporation, or a Subsidiary or successor corporation, within the
meaning of Code Section 424(e).
(g) "Date of Grant" means the date the Committee (or the
Board, as the case may be) takes formal action designating that a Participant
shall receive an Award, notwithstanding the date the Participant accepts the
Award, the date the Company and the Participant enter into a written agreement
with respect to the Award, or any other date.
<PAGE> 2
(h) "Disability" means permanent and total disability as
determined by the Committee in accordance with the standards under Section
22(e)(3) of the Code.
(i) "Effective Date" means the date the Plan is approved by
the holders of a majority of the shares of Common Stock represented and voting
and entitled to vote at a meeting of the shareholders of the Company or by
written consent of a majority of the outstanding shares of Common Stock,
provided such approval of the shareholders of the Company occurs within twelve
(12) months before or after the Committee and the Board both adopt the Plan.
Awards may be granted prior to the Effective Date, but payment under such Awards
is contingent upon shareholder approval as provided above in this definition. In
the event the Company does not obtain shareholder approval of the Plan, any
Awards granted pursuant to the Plan shall be rescinded automatically.
(j) "34 Act" means the Securities Exchange Act of 1934, as
amended and in effect from time to time, or any successor statute.
(k) "Fair Market Value" means on any given date, the closing
price for the Common Stock on such date, or, if the Common Stock was not traded
on such date, on the next preceding day on which the Common Stock was traded,
determined in accordance with the following rules.
(i) If the Common Stock is admitted to trading or
listing on a national securities exchange registered under the '34 Act,
the closing price for any day shall be the last reported sale price
regular way, or in the case no such reported sale takes place on such
date, the average of the last reported bid and ask prices regular way,
in either case on the principal national securities exchange on which
the Common Stock is admitted to trading or listed, or
(ii) If not listed or admitted to trading on any
national securities exchange, the last sale price of the Common Stock
on the National Association of Securities Dealers Automated Quotation
National Market System ("NMS") or, in case no such reported sale takes
place, the average of the closing bid and ask prices on such date, or
(iii) If not quoted on the NMS, the average of the
closing bid and ask prices of the Common Stock on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ")
or any comparable system, or
(iv) If the Common Stock is not listed on NASDAQ or
any comparable system, the closing bid and ask prices as furnished by
any member of the National Association of Securities Dealers, Inc.,
selected from time to time by the Company for that purpose.
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<PAGE> 3
(l) "Incentive Stock Option" means any Stock Option granted
pursuant to the provisions of Section 6 of the Plan that is intended to be and
is specifically designated as an "incentive stock option" within the meaning of
Section 422 of the Code.
(m) "Participant" means a salaried senior executive of
the Company or a Subsidiary who is granted an Award under the Plan.
(n) "Performance Award" means an Award granted pursuant to the
provisions of Section 9 of the Plan, the vesting of which is contingent on the
attainment of specified performance criteria.
(o) "Performance Share Grant" means an Award of units
representing shares of Common Stock granted pursuant to the provisions of
Section 9 of the Plan.
(p) "Performance Unit Grant" means an Award of monetary units
granted pursuant to the provisions of Section 9 of the Plan.
(q) "Plan" means this 1996 Credit Management Solutions,
Inc. Long-Term Incentive Plan, as set forth herein and as it may be hereafter
amended and from time to time in effect.
(r) "Restricted Award" means an Award granted pursuant to
the provisions of Section 8 of the Plan.
(s) "Restricted Stock Grant" means an Award of shares of
Common Stock granted pursuant to the provisions of Section 8 of the Plan.
(t) "Restricted Unit Grant" means an Award of units
representing shares of Common Stock granted pursuant to the provisions of
Section 8 of the Plan.
(u) "Retirement" means retirement from active employment with
the Company and its Subsidiaries on or after the normal retirement date
specified in the Company's retirement plan or such earlier retirement date as
approved by the Committee for purposes of this Plan.
(v) "Stock Appreciation Right" means an Award to benefit from
the appreciation of Common Stock granted pursuant to the provisions of Section 7
of the Plan.
(w) "Stock Option" means an Award to purchase shares of Common
Stock granted pursuant to the provisions of Section 6 of the Plan.
(x) "Subsidiary" means any corporation or entity which is a
subsidiary of the Company within the meaning of Section 424(f) of the Code (or
successor sections).
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<PAGE> 4
(y) "Ten Percent Shareholder" means a person who owns (after
taking into account the constructive ownership rules of Section 424(d) of the
Code or successor sections) more than ten percent (1 0 %) of the stock of the
Company.
3. ADMINISTRATION.
(a) The Plan is being established and shall be administered by
the Compensation Committee to be appointed from time to time by the Board. The
Committee shall be comprised solely of not less than two persons who are
"outside directors" within the meaning of Section 162(m)(4)(C) of the Code and
not less than the minimum number (if any) of members of the Board required by
Rule 16b-3 of the '34 Act (or any successor rule). All Committee members must
also be "disinterested persons" for securities law purposes. Members of the
Committee shall serve at the pleasure of the Board and the Board may from time
to time remove members from, or add members to, the Committee. No person who is
not an "outside director" within the meaning of Section 162(m)(4)(C) of the Code
and a "disinterested person" may serve on the Committee. Appointment to the
Committee of any person who is not an "outside director" and a "disinterested
person" shall automatically be null and void, and any person on the Committee
who ceases to be an "outside director" for purposes of Section 162(m)(4)(C) of
the Code and a "disinterested person" shall automatically and without further
action cease to be a member of the Committee.
(b) A majority of the members of the Committee shall
constitute a quorum for the transaction of business. Action approved in writing
by a majority of the members of the Committee then serving shall be as effective
as if the action had been taken by unanimous vote at a meeting duly called and
held. Two Committee members have signed the original Plan document below
signifying that the Committee, as well as the Board as a whole, has adopted and
established this Plan.
(c) The Committee is authorized to construe and interpret the
Plan, to promulgate, amend, and rescind rules and procedures relating to the
implementation of the Plan, and to make all other determinations necessary or
advisable for the administration of the Plan. Any determination, decision, or
action of the Committee in connection with the construction, interpretation,
administration, or application of the Plan shall be binding upon all
Participants and any person claiming under or through any Participant. Although
the Committee is anticipated to make certain Awards that constitute
"performance-based compensation" within the meaning of Section 162(m)(4)(C) of
the Code, the Committee is also expressly authorized to make Awards that do not
constitute "performance-based compensation" within the meaning of that
provision. By way of example, and not by way of limitation, the Committee, in
its sole and absolute discretion, may issue an Award that is not based on a
performance goal, as set forth in (g) below, but is based solely on continued
service to the Company.
(d) The Committee may employ or retain persons other than
members of the Committee to assist the Committee to carry out its
responsibilities under such conditions and limitations as it may prescribe,
except that the Committee may not delegate its authority with regard to
selection for participation of and the granting of Awards to persons subject to
Section 16 of the
4
<PAGE> 5
'34 Act or with regard to any of the duties of the Committee under Section
162(m) of the Code necessary for awards under this Plan to qualify as
"performance-based compensation" for purposes of Section 162(m)(4)(C) of the
Code.
(e) The Committee is expressly authorized to make such
modifications to the Plan as are necessary to effectuate the intent of the Plan
as a result of any changes in the income tax, accounting, or securities law
treatment of Participants and the Plan.
(f) The Company shall effect the granting of Awards under the
Plan in accordance with the determinations made by the Committee, by execution
of instruments in writing in such form as approved by the Committee.
(g) The Committee, in the case of each Award, shall establish
in writing at the time of making the Award the business criterion or criteria
(if any) that must be satisfied for payment pursuant to the Award and the amount
payable upon satisfaction of those standards. Those standards are also referred
to herein as performance goals. Such criterion or criteria (if any) shall be
established prior to the Participant rendering the services to which they relate
and while the outcome is substantially uncertain. In carrying out these duties,
the Committee shall use objective written standards for establishing both the
performance goal and the amount of compensation such that a third party with
knowledge of the relevant facts would be able to determine whether and to what
extent the goal has been satisfied and the amount of compensation payable. The
Committee shall provide a copy of the document setting forth such standards to
the affected Participant and shall retain such written material in its permanent
books and records.
(h) The Committee may not increase an Award once granted,
although it may grant additional Awards to the same Participant.
(i) The Committee shall keep the Board informed as to its
actions and make available to the Board its books and records. Although the
Compensation Committee has the authority to establish and administer the Plan,
the Board reserves the right at any time to abolish the Committee and administer
the Plan itself.
(j) In the case of remuneration that is intended to qualify as
performance-based compensation for purposes of Code Section 162(m)(4)(C), the
Committee and the Board shall disclose to the shareholders of the Company the
material terms under which such remuneration is to be paid under the Plan, and
shall seek approval of the shareholders by a majority vote in a separate
shareholder vote before payment of such remuneration. For these purposes, the
material terms include the individuals (or class of individuals) eligible to
receive such compensation, a description of the business criterion or criteria
on which the performance goal is based, either the maximum amount of the
compensation to be paid thereunder or the formula used to calculate the amount
of compensation if the performance goal is attained, and such other terms as
required under Code Section 162(m)(4)(C) and the Treasury Regulations thereunder
determined from time to time. The foregoing actions shall be undertaken in
conformity with the rules of Code Section 162(m)(4)(C)(ii)
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<PAGE> 6
and Treasury Regulations promulgated thereunder. Such remuneration shall not be
payable under this Plan in the absence of such an approving shareholder vote. In
the case of remuneration that is not intended to qualify as performance-based
compensation under Code Section 162(m)(4)(C), the Committee and the Board shall
make such disclosures to and seek such approval from the shareholders of the
Company as they reasonably determine are required by law.
(k) To the extent required under Code Section 162(m)(4)(C),
before any payment of remuneration under this Plan, the Committee must certify
in writing that the performance goals and any other material terms of the Award
were in fact satisfied. Such certification shall be kept with the permanent
books and records of the Committee, and the Committee shall provide the affected
Participant with a copy of such certification.
(l) The Committee shall use its good faith best efforts to
comply with the requirements of Section 162(m)(4)(C) of the Code for Awards that
are intended to qualify under that section as "performance-based compensation, "
but shall have no liability to the Company or any recipient in the event one or
more Awards do not so qualify.
4. DURATION OF AND COMMON STOCK SUBJECT TO THE PLAN.
(a) TERM. The Plan shall terminate automatically on the tenth
(10th) anniversary date of the date of adoption of the Plan by the Committee,
the date of adoption of the Plan by the Board, or the tenth (10th) anniversary
date of the date of shareholder approval of the Plan, whichever is earlier
(subject to earlier termination by action of the Board), except with respect to
Awards then outstanding.
(b) SHARES OF COMMON STOCK SUBJECT TO THE PLAN. The maximum
total number of shares of Common Stock with respect to which aggregate stock
Awards may be granted under the Plan shall be Seven Hundred and Fifty Thousand
(750,000).
(i) In no event shall more than Seven Hundred and
Fifty Thousand (750,000) shares of Common Stock be available for Awards
of Incentive Stock Options under the Plan.
(ii) All of the amounts stated in this Paragraph (b)
are subject to adjustment as provided in Section 15 below and are
subject to the rules of Section 6(g).
(iii) For the purpose of computing the total number
of shares of Common Stock available for Awards under the Plan, there
shall be counted against the foregoing limitations the number of shares
of Common Stock subject to issuance upon exercise or used for payment
or settlement of Awards.
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<PAGE> 7
(iv) If any Awards are forfeited, terminated, expire
unexercised, settled or paid in cash in lieu of stock or exchanged for
other Awards, the shares of Common Stock which were theretofore subject
to such Awards shall again be available for Awards under the Plan to
the extent of such forfeiture or expiration of such Awards.
(v) Any shares of Common Stock which are used as full
or partial payment to the Company by a Participant of the purchase
price of shares of Common Stock upon exercise of a Stock Option shall
again be available for Awards under the Plan, as shall any shares
covered by Stock Appreciation Rights which are not issued as payment
upon exercise.
(c) SOURCE OF COMMON STOCK. Common Stock which may be issued
under the plan may be either authorized and unissued shares or issued shares
which have been reacquired by the Company. No fractional shares of Common Stock
shall be issued under the Plan.
5. ELIGIBILITY. Persons eligible for Awards under the Plan shall
consist of salaried senior executives of the Company or its Subsidiaries, who
hold positions of significant responsibilities or whose performance or potential
contribution, in the judgment of the Committee, will benefit the Company.
6. STOCK OPTIONS. Stock Options granted under the Plan shall be in the
form of Incentive Stock Options (referred to as "Stock Options"). Stock Options
shall be subject to the terms and conditions set forth below. Each written Stock
Option agreement shall contain such additional terms and conditions, not
inconsistent with the express provisions of the Plan, as the Committee shall
deem desirable.
(a) GRANT. Stock Options shall be granted under the Plan on
such terms and conditions not inconsistent with the provisions of the Plan and
pursuant to written agreements with the optionee in such form as the Committee
may from time to time approve in its sole and absolute discretion. The terms of
individual Stock Option agreements need not be identical. Each Stock Option
agreement shall state specifically that it is intended to be an Incentive Stock
Option agreement. Stock Options may be granted alone or in addition to other
Awards under the Plan. Only common law employees may receive grants of Incentive
Stock Options. No person may be granted (in any calendar year) options to
purchase more than one hundred thousand (100,000) shares of Common Stock
(subject to adjustment pursuant to Section 15). The foregoing sentence is an
annual limitation on grants and not a cumulative limitation. Any Stock Options
repriced during a year shall count against this annual limitation.
(b) STOCK OPTION PRICE. The exercise price per share of Common
Stock purchasable under a Stock Option shall be determined by the Committee at
the time of grant. In no event shall the exercise price of a Stock Option be
less than one hundred percent (100%) of the Fair Market Value of the Common
Stock on the date of the grant of such Stock Option. In the case of
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<PAGE> 8
a Ten Percent Shareholder, the exercise price shall be not less than one hundred
ten percent (110%) of the Fair Market Value of the Common Stock on the date of
its grant.
(c) OPTION TERM. The term of each Stock Option shall be fixed
by the Committee. However, the term of any Stock Option shall not exceed ten
(10) years after the date such Stock Option is granted. Furthermore, the term of
an Incentive Stock Option granted to a Ten Percent Shareholder shall not exceed
five (5) years after the date of its grant.
(d) EXERCISABILITY. A Stock Option shall be exercisable at
such time or times and subject to such terms and conditions as shall be
determined by the Committee at the date of grant and set forth in the written
Stock Option agreement. However, no Stock Option shall be exercisable during the
first six (6) months after the date such Stock Option is granted. A written
Stock Option agreement may, if permitted pursuant to its terms, become
exercisable in full upon the occurrence of events selected by the Committee that
are beyond the control of the Participant (including, but not limited to, a
Change in Control of the Company as set forth in Section 16 below).
(e) METHOD OF EXERCISE. A Stock Option may be exercised, in
whole or in part, by giving written notice of exercise to the Company specifying
the number of shares to be purchased. Such notice shall be accompanied by
payment in full of the purchase price (i) in cash or (ii) if acceptable to the
Committee, in shares of Common Stock already owned by the Participant or a
combination thereof. The Committee may also permit Participants, either on a
selective or aggregate basis, to simultaneously exercise Options and sell the
shares of Common Stock thereby acquired, pursuant to a brokerage or similar
arrangement, approved in advance by the Committee, and use the proceeds from
such sale as payment of part or all of the purchase price of such shares.
(f) SPECIAL RULE FOR INCENTIVE STOCK OPTIONS. With respect to
Incentive Stock Options granted under the Plan, the aggregate Fair Market Value
(determined as of the date the Incentive Stock Option is granted) of the number
of shares with respect to which Incentive Stock Options are exercisable for the
first time by a Participant during any calendar year (under this Plan and all
other incentive stock option plans of this Company or its Subsidiaries) shall
not exceed one hundred thousand dollars ($100,000) or such other limit as may be
required by the Code.
(g) SPECIAL REGULATORY RESTRICTIONS FOR STOCK OPTIONS. In
conformity to certain guidelines issued by the Commissioner with respect to
stock options, the following rules apply and override any rules in the Plan
relating to Stock Options that otherwise may be deemed inconsistent herewith:
(i) The maximum number of shares issuable under all
stock option plans of the Company shall not exceed twenty percent (20%)
of the Company's total outstanding shares, as determined from time to
time.
(ii) No Stock Options may be issued to a
non-employee director.
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(iii) Any resolution of the Board of Directors or the
Compensation Committee (as the case may be) establishing the number of
Stock Options to be granted to a particular employee director shall not
be voted upon by that director.
(iv) The maximum number of shares subject to options
that may be granted to any one individual pursuant to all stock option
plans of the Company is ten percent (10%) of the total outstanding
shares of the Company, as determined from time to time.
(v) For purposes of valuing shares subject to options
on the date of grant, Fair Market Value is defined in Section 2(k), but
may not be less than eighty-five percent (85 %) of the book value of a
share of Common Stock, or if the shares of Common Stock are traded on a
national exchange or over the counter, Fair Market Value shall be no
less than the price of a share of Common Stock as of the close of
business on the day prior to the date of grant of the option.
(vi) A director shall not be entitled to vote on any
resolution fixing the Fair Market Value of the Common Stock subject to
his or her option or used as the exercise consideration for such
option.
(vii) Section 15 of the Plan shall be administered in
order to prevent dilution or enlargement of the rights granted to an
optionee in the case of a stock split, stock dividend,
recapitalization, reorganization, merger, consolidation, combination or
similar transaction.
(viii) A Stock Option is not assignable or
transferable except in the event of the death of the optionee.
(ix) In the case of Stock Options, the restrictions
in this Section 6(g) apply in addition to any other restrictions under
the terms of the Plan, not in substitution for them.
7. STOCK APPRECIATION RIGHTS. The grant of Stock Appreciation Rights
under the Plan shall be subject to the following terms and conditions.
Furthermore, the Stock Appreciation Rights shall contain such additional terms
and conditions, not inconsistent with the express terms of the Plan, as the
Committee shall deem desirable. The terms of each Stock Appreciation Right
granted shall be set forth in a written agreement between the Company and the
Participant receiving such grant.
The terms of such agreements need not be identical.
(a) STOCK APPRECIATION RIGHTS. A Stock Appreciation Right is
an Award determined by the Committee entitling a Participant to receive an
amount equal to the excess of the Fair Market Value of a share of Common Stock
on a fixed date, which shall be the date concluding a measuring period set by
the Committee upon granting the Stock Appreciation Right, over the Fair
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Market Value of a share of Common Stock on the date of grant of the Stock
Appreciation Right, multiplied by the number of shares of Common Stock subject
to the Stock Appreciation Right. No Stock Appreciation Rights granted in any
year to any person may be measured by an amount of shares of Common Stock in
excess of one hundred thousand (100,000) shares, subject to adjustment under
Section 15 below. The foregoing sentence is an annual limitation on grants and
not a cumulative limitation.
(b) GRANT. A Stock Appreciation Right may be granted in
addition to or completely independent of a Stock Option or any other Award under
the Plan. Upon grant of a Stock Appreciation Right, the Committee shall select
and inform the Participant regarding the number of shares of Common Stock
subject to the Stock Appreciation Right and the date that constitutes the close
of the measuring period.
(c) MEASURING PERIOD. A Stock Appreciation Right shall accrue
in value from the date of grant over a time period established by the Committee,
except that in no event shall a Stock Appreciation Right be payable within the
first six (6) months after the date of grant. In the written Stock Appreciation
Right agreement, the Committee may also provide (but is not required to provide)
that a Stock Appreciation Right shall be automatically payable on one or more
specified dates prior to the normal end of the measuring period upon the
occurrence of events selected by the Committee (including, but not limited to, a
Change in Control of the Company as set forth in Section 16 below) that are
beyond the control of the Participant. The Committee may provide (but is not
required to provide) in the Stock Appreciation Right agreement that in the case
of a cash payment such acceleration in payment shall also be subject to
discounting of the payment to reasonably reflect the time value of money using
any reasonable discount rate selected by the Committee in accordance with
Treasury Regulations under Code Section 162(m).
(d) FORM OF PAYMENT. Payment pursuant to a Stock Appreciation
Right may be made (i) in cash, (ii) in shares of Common Stock, or (iii) in any
combination of the above, as the Committee shall determine in its sole and
absolute discretion. The Committee may elect to make this determination either
at the time the Stock Appreciation Right is granted, at the time of payment or
at any time in between such dates. However, any Stock Appreciation Right paid
upon or subsequent to the occurrence of a Change in Control (as defined in
Section 16) shall be paid in cash.
8. RESTRICTED AWARDS. Restricted Awards granted under the Plan may be
in the form of either Restricted Stock Grants or Restricted Unit Grants.
Restricted Awards shall be subject to the following terms and conditions.
Furthermore, the Restricted Awards shall be pursuant to a written agreement
executed both by the Company and the Participant, which agreement shall contain
such additional terms and conditions, not inconsistent with the express
provisions of the Plan, as the Committee shall deem desirable in its sole and
absolute discretion. The terms of such written agreements need not be identical.
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(a) RESTRICTED STOCK GRANTS. A Restricted Stock Grant is
an Award of shares of Common Stock transferred to a Participant subject to such
terms and conditions as the Committee deems appropriate, as set forth in
Paragraph (d) below.
(b) RESTRICTED UNIT GRANTS. A Restricted Unit Grant is an
Award of units (with each unit having a value equivalent to one share of Common
Stock) granted to a Participant subject to such terms and conditions as the
Committee deems appropriate, including, without limitation, the requirement that
the Participant forfeit all or a portion of such units upon termination of
employment for specified reasons within a specified period of time, and
restrictions on the sale, assignment, transfer or other disposition of such
units.
(c) GRANTS OF AWARDS. Restricted Awards may be granted under
the Plan in such form and on such terms and conditions as the Committee may from
time to time approve. Restricted Awards may be granted alone or in addition to
other Awards under the Plan. Subject to the terms of the Plan, the Committee
shall determine the number of Restricted Awards to be granted to a Participant
and the Committee may impose different terms and conditions (including
performance goals) on any particular Restricted Award made to any Participant.
Each Participant receiving a Restricted Stock Grant shall be issued a stock
certificate in respect of such shares of Common Stock. Such certificate shall be
registered in the name of such Participant, shall be accompanied by a stock
power duly executed by such Participant, and shall bear an appropriate legend
referring to the terms, conditions and restrictions applicable to such Award.
The certificate evidencing the shares shall be held in custody by the Company
until the restrictions imposed thereon shall have lapsed or been removed.
(d) RESTRICTION PERIOD. Restricted Awards shall provide that
in order for a Participant to vest in such Awards, the Participant must
continuously provide services to the Company or its Subsidiaries, subject to
relief for specified reasons, for a period of not less than three (3) years
commencing on the date of the Award and ending on such later date or dates,
subject to the three (3) year minimum, as the Committee may designate at the
time of the Award ("Restriction Period"). If the Committee so provides in the
written agreement with the Participant, a Restricted Award may also be subject
to satisfaction of such performance goals as are set forth in such agreement.
During the Restriction Period, a Participant may not sell, assign, transfer,
pledge, encumber, or otherwise dispose of shares of Common Stock received under
a Restricted Stock Grant. The Committee, in its sole discretion, may provide for
the lapse of restrictions during the Restriction Period upon the occurrence of
events selected by the Committee that are beyond the control of the Participant
(including, but not limited to, a Change in Control of the Company under Section
16). The Committee may provide (but is not required to provide) in the written
agreement with the recipient that in the case of a cash payment such
acceleration in payment shall also be subject to discounting of the payment to
reasonably reflect the time value of money using any reasonable discount rate
selected by the Committee in accordance with Treasury Regulations under Code
Section 162(m). Upon expiration of the applicable Restriction Period (or lapse
of restrictions during the Restriction Period where the restrictions lapse in
installments or by action of the Committee), the
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Participant shall be entitled to receive his or her Restricted Award or portion
thereof, as the case may be.
(e) PAYMENT OF AWARDS. A Participant who receives a Restricted
Stock Grant shall be paid solely by release of the restricted shares at the
termination of the Restriction Period (whether in one payment, in installments
or otherwise). A Participant shall be entitled to receive payment for a
Restricted Unit Grant (or portion thereof) in an amount equal to the aggregate
Fair Market Value of the shares of Common Stock covered by such Award upon the
expiration of the applicable Restriction Period. Payment in settlement of a
Restricted Unit Grant shall be made as soon as practicable following the
conclusion of the specified Restriction Period (i) in cash, (ii) in shares of
Common Stock equal to the number of units granted under the Restricted Unit
Grant with respect to which such payment is made, or (iii) in any combination of
the above, as the Committee shall determine in its sole and absolute discretion.
The Committee may elect to make this determination either at the time the Award
is granted, at the time of payment or at any time in between such dates.
(f) RIGHTS AS A SHAREHOLDER. A Participant shall have, with
respect to the shares of Common Stock received under a Restricted Stock Grant,
all of the rights of a shareholder of the Company, including the right to vote
the shares, and the right to receive any cash dividends. Such cash dividends
shall be withheld, however, until their release upon lapse of the restrictions
under the Restricted Award. Stock dividends issued with respect to the shares
covered by a Restricted Grant shall be treated as additional shares under the
Restricted Grant and shall be subject to the same restrictions and other terms
and conditions that apply to shares under the Restricted Grant with respect to
which the dividends are issued.
9. PERFORMANCE AWARDS. Performance Awards granted under the Plan may be
in the form of either Performance Share Grants or Performance Unit Grants.
Performance Awards shall be subject to the terms and conditions set forth below.
Furthermore, the Performance Awards shall be subject to written agreements which
shall contain such additional terms and conditions, not inconsistent with the
express provisions of the Plan, as the Committee shall deem desirable in its
sole and absolute discretion. Such agreements need not be identical.
(a) PERFORMANCE SHARE GRANTS. A Performance Share Grant is an
Award of units (with each unit equivalent in value to one share of Common Stock)
granted to a Participant subject to such terms and conditions as the Committee
deems appropriate, including, without limitation, the requirement that the
Participant forfeit such units (or a portion of such units) in the event certain
performance criteria are not met within a designated period of time.
(b) PERFORMANCE UNIT GRANTS. A Performance Unit Grant is an
Award of units (with each unit representing such monetary amount as designated
by the Committee) granted to a Participant subject to such terms and conditions
as the Committee deems appropriate, including, without limitation, the
requirement that the Participant forfeit such units (or a portion of such units)
in the event certain performance criteria are not met within a designated period
of time.
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(c) GRANTS OF AWARDS. Performance Awards shall be granted
under the Plan pursuant to written agreements with the Participant in such form
as the Committee may from time to time approve. Performance Awards may be
granted alone or in addition to other Awards under the Plan. Subject to the
terms of the Plan, the Committee shall determine the number of Performance
Awards to be granted to a Participant and the Committee may impose different
terms and conditions on any particular Performance Award made to any
Participant.
(d) PERFORMANCE GOALS AND PERFORMANCE PERIODS. Performance
Awards shall provide that, in order for a Participant to vest in such Awards,
the Company must achieve certain performance goals ("Performance Goals") over a
designated performance period ("Performance Period") having a minimum duration
of three (3) years. The Performance Goals and Performance Period shall be
established by the Committee, in its sole and absolute discretion. The Committee
shall establish Performance Goals for each Performance Period before the
commencement of the Performance Period and while the outcome is substantially
uncertain. The Committee shall also establish a schedule or schedules for such
Performance Period setting forth the portion of the Performance Award which will
be earned or forfeited based on the degree of achievement of the Performance
Goals actually achieved or exceeded. In setting Performance Goals, the Committee
may use such measures as return on equity, earnings growth, revenue growth,
comparisons to peer companies, or such other measure or measures of performance
in such manner as it deems appropriate.
(e) PAYMENT OF AWARDS. In the case of a Performance Share
Grant, the Participant shall be entitled to receive payment for each unit earned
in an amount equal to the aggregate Fair Market Value of the shares of Common
Stock covered by such Award as of the end of the Performance Period. In the case
of a Performance Unit Grant, the Participant shall be entitled to receive
payment for each unit earned in an amount equal to the dollar value of each unit
times the number of units earned. The Committee, pursuant to the written
agreement with the Participant, may make such Performance Awards payable in
whole or in part upon the occurrence of events selected by the Committee that
are beyond the control of the Participant (including, but not limited to, a
Change in Control of the Company as set forth in Section 16 below). The
Committee may provide (but is not required to provide) in the written agreement
with the recipient that, in the case of a cash payment, acceleration in payment
of a Performance Award shall also be subject to discounting to reasonably
reflect the time value of money using any reasonable discount rate selected by
the Committee in accordance with Treasury Regulations under Code Section 162(m).
Payment in settlement of a Performance Award shall be made as soon as
practicable following the conclusion of the Performance Period (i) in cash, (ii)
in shares of Common Stock, or (iii) in any combination of the above, as the
Committee may determine in its sole and absolute discretion. The Committee may
elect to make this determination either at the time the Award is granted, at the
time of payment, or at any time in between such dates.
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10. OTHER STOCK-BASED AND COMBINATION AWARD.
(a) The Committee may grant other Awards under the Plan
pursuant to which Common Stock is or may in the future be acquired, or Awards
denominated in stock units, including ones valued using measures other than
market value. Such other stock-based grants may be granted either alone or in
addition to any other type of Award granted under the Plan.
(b) The Committee may also grant Awards under the Plan in
combination with other Awards or in exchange of Awards, or in combination with
or as alternatives to grants or rights under any other employee plan of the
Company, including the plan of any acquired entity.
(c) Subject to the provisions of the Plan, the Committee shall
have authority to determine the individuals to whom and the time or times at
which the Awards shall be made, the number of shares of Common Stock to be
granted or covered pursuant to such Awards, and any and all other conditions
and/or terms of the Awards.
11. DEFERRAL ELECTIONS. The Committee may permit a Participant to elect
to defer his or her receipt of the payment of cash or the delivery of shares of
Common Stock that would otherwise be due to such Participant by virtue of the
exercise, earn out or vesting of an Award made under the Plan. If any such
election is permitted, the Committee shall establish rules and procedures for
such payment deferrals, including the possible (a) payment or crediting of
reasonable interest on such deferred amounts credited in cash, and (b) the
payment or crediting of dividend equivalents in respect of deferrals credited in
units of Common Stock. The Company and the Committee shall not be responsible to
any person in the event that the payment deferral does not result in deferral of
income for tax purposes.
12. DIVIDEND EQUIVALENTS. Awards of Stock Options, Stock Appreciation
Rights, Restricted Unit Grants, Performance Share Grants, and other Stock-Based
Awards may, in the sole and absolute discretion of the Committee, earn dividend
equivalents. In respect of any such Award which is outstanding on a dividend
record date for Common Stock, the Participant may be credited with an amount
equal to the amount of cash or stock dividends that would have been paid on the
shares of Common Stock covered by such Award had such shares been issued and
outstanding on such dividend record date. The Committee shall establish such
rules and procedures governing the crediting of dividend equivalents, including
the timing, form of payment, and payment contingencies of such dividend
equivalents, as it deems appropriate or necessary.
13. TERMINATION OF EMPLOYMENT. The terms and conditions under which an
Award may be exercised after a Participant's termination of employment shall be
determined by the Committee and reflected in the written agreement with the
Participant concerning the Award, except that in the event a Participant's
employment with the Company or a Subsidiary terminates for any reason within six
(6) months of the date of grant of any Award held by the Participant, the Award
shall expire as of the date of such termination of employment and the
Participant and the Participant's legal representative or beneficiary shall
forfeit any and all rights pertaining to such Award.
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14. NON-TRANSFERABILITY OF AWARDS. No Award under the Plan, and no
rights or interest therein, shall be assignable or transferable by a Participant
except by will or the laws of descent and distribution. During the lifetime of a
Participant, Awards are exercisable only by, and payments in settlement of
Awards will be payable only to, the Participant or his or her legal
representative.
15. ADJUSTMENTS UPON CHANGE IN CAPITALIZATION, ETC.
(a) The existence of the Plan and the Awards granted hereunder
shall not affect or restrict in any way the right or power of the Board or the
shareholders of the Company to make or authorize any adjustment,
recapitalization, reorganization or other change in the Company's capital
structure or its business, any merger or consolidation of the Company, any issue
of bonds, debentures, preferred or prior preference stocks ahead of or affecting
the Company's Common Stock or the rights thereof, the dissolution or liquidation
of the Company, or any sale or transfer of all or any part of its assets or
business, or any other corporate act or proceeding.
(b) In the event of any change in capitalization affecting the
Common Stock of the Company after the Effective Date, such as a stock dividend,
stock split, recapitalization, merger, consolidation, split-up, combination,
exchange of shares, other form of reorganization, or any other change affecting
the Common Stock, such proportionate adjustments, if any, as the Board in its
discretion may deem appropriate to reflect such change shall be made with
respect to (i) the aggregate number of shares of Common Stock for which Awards
in respect thereof may be granted under the Plan, (ii) the maximum number of
shares of Common Stock which may be sold or awarded to any Participant, (iii)
the number of shares of Common Stock covered by each outstanding Award, and (iv)
the price per share in respect of outstanding Awards.
(c) The Committee may also make such adjustments in the number
of shares covered by, and the price or other value of any outstanding Awards in
the event of a spin-off or other distribution (other than normal cash dividends)
of Company assets to shareholders. In the event that another corporation or
business entity is being acquired by the Company, and the Company agrees to
assume outstanding employee stock options and/or stock appreciation rights
and/or the obligation to make future grants of options or rights to employees of
the acquired entity, the aggregate number of shares of Common Stock available
for Awards under Section 4 of the Plan may be increased accordingly, except that
no change shall be made to the maximum number of shares eligible for Incentive
Stock Options under Section 4(b)(i) based solely upon such an event.
16. CHANGE IN CONTROL.
(a) In the event of a Change in Control (as defined in
Paragraph (b) below) of the Company, and except as otherwise provided in Award
agreements:
(i) All Stock Options or Stock Appreciation Rights
then outstanding shall become fully exercisable as of the date of the
Change in Control (and shall terminate at such time as specified in the
Award agreement);
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(ii) All restrictions and conditions of all
Restricted Stock Grants and Restricted Unit Grants then outstanding
shall be deemed satisfied as of the date of the Change in Control; and
(iii) All Performance Share Grants and Performance
Unit Grants shall be deemed to have been fully earned as of the date of
the Change in Control;
subject to the limitation that any Award which has been outstanding less than
six (6) months on the date of the Change in Control shall not be afforded such
treatment.
(b) A "Change in Control" shall be deemed to have
occurred upon the occurrence of any one (or more) of the following events:
(i) Any person, including a group as defined in
Section 13(d)(3) of the '34 Act, becomes the beneficial owner of shares
of the Company with respect to which 25 % or more of the total number
of votes for the election of the Board may be cast;
(ii) As a result of, or in connection with, any cash
tender offer, exchange offer, merger or other business combination,
sale of assets or contested election, or combination of the foregoing,
persons who were directors of the Company just prior to such event
shall cease to constitute a majority of the Board;
(iii) The shareholders of the Company shall approve
an agreement providing either for a transaction in which the Company
will cease to be an independent publicly owned corporation or for a
sale or other disposition of all or substantially all the assets of the
Company; or
(iv) A tender offer or exchange offer is made for
shares of the Company's Common Stock (other than one made by the
Company) and shares of Common Stock are acquired thereunder ("Offer").
However, the acceleration of the exercisability of outstanding options
upon the occurrence of an Offer shall be within the discretion of the
Committee.
(v) Formation of a holding company for the Company in
which the shareholdings of the holding company after its formation are
substantially the same as for the Company prior to the holding company
formation does not constitute a Change in Control for purposes of this
Plan.
(c) In the event that any payment under this Plan (alone or in
conjunction with other payments) would otherwise constitute an "excess parachute
payment" under Section 28OG of the Code (in the sole judgment of the Company),
such payment shall be reduced or eliminated to the extent the Company determines
necessary to avoid deduction disallowance under Section 28OG of
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the Code or the imposition of excise tax under Section 4999 of the Code. The
Company may consult with a Participant regarding the application of Section 28OG
and/or Section 4999 to payments otherwise due to such Participant under the
Plan, but the judgment of the Company as to applicability of those provisions,
the degree to which a payment must be reduced to avoid those provisions, and
which Awards shall be reduced, is final. The Compensation Committee shall act on
behalf of the Company in interpreting and administering this limitation.
17. AMENDMENT AND TERMINATION. Without further approval of the
shareholders, the Board may at any time terminate the Plan, or may amend it from
time to time in such respects as the Board may deem advisable. However, the
Board may not, without approval of the shareholders, make any amendment which
would (a) increase the aggregate number of shares of Common Stock which may be
issued under the Plan (except for adjustments pursuant to Section 15 of the
Plan), (b) materially modify the requirements as to eligibility for
participation in the Plan, or (c) materially increase the benefits accruing to
Participants under the Plan. Notwithstanding the above, the Board may amend the
Plan to take into account changes in applicable securities laws, federal income
tax laws and other applicable laws. Further, should the provisions of Rule
16b-3, or any successor rule, under the '34 Act be amended, the Board may amend
the Plan in accordance with any modifications to that rule without the need for
shareholder approval. Notwithstanding the foregoing, the provisions of Section 1
1 may not be amended more than once every six months other than to comply with
the changes in the Code or the Employee Retirement Income Security Act of 1974
("ERISA").
18. MISCELLANEOUS MATTERS.
(a) TAX WITHHOLDING. The Company shall have the right to
deduct from any payment, including the delivery of shares, made under the Plan
any federal, state, or local taxes of any kind required by law to be withheld
with respect to such payments or to take such other action as may be necessary
in the opinion of the Company to satisfy all obligation for the payment of such
taxes. If Common Stock is used to satisfy tax withholding, such stock shall be
valued based on the Fair Market Value when the tax withholding is required to be
made.
(b) NO RIGHT TO EMPLOYMENT. Neither the adoption of the Plan
nor the granting of any Award shall confer upon any employee of the Company or
any Subsidiary any right to continued employment with the Company or any
Subsidiary, as the case may be, nor shall it interfere in any way with the right
of the Company or a Subsidiary to terminate the employment of any of its
employees at any time, with or without cause.
(c) UNFUNDED PLAN. The Plan shall be unfunded and the Company
shall not be required to segregate any assets that may at any time be
represented by Awards under the Plan. Any liability of the Company to any person
with respect to any Award under the Plan shall be based solely upon any written
contractual obligations that may be effected pursuant to the Plan. No such
obligation of the Company shall be deemed to be secured by any pledge of, or
other encumbrance on, any property of the Company.
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(d) ANNULMENT OF AWARDS. The grant of any Award under the Plan
payable in cash is provisional until cash is paid in settlement thereof. The
grant of any Award payable in Common Stock is provisional until the Participant
becomes entitled to the certificate in settlement thereof. Payment under any
Awards granted pursuant to the Plan is wholly contingent upon shareholder
approval of the Plan as well as Commissioner approval of the Plan and issuance
of a permit as set forth in Section 2(i) above. Where approval for an award
sought pursuant to Section 162(m)(4)(C)(ii) is not granted by the Company's
shareholders, the Award shall be annulled automatically. In the event the
employment of a Participant is terminated for cause (as defined below), any
Award which is provisional shall be annulled as of the date of such termination
for cause. For purposes of the Plan, the term "terminated for cause" means any
discharge because of personal dishonesty, willful misconduct, breach of
fiduciary duty involving personal profit, continuing intentional or habitual
failure to perform stated duties, violation of any law (other than minor traffic
violations or similar misdemeanor offenses not involving moral turpitude), or
rule or regulation adopted by the Office of Thrift Supervision, California
Department of Savings and Loan or Federal Deposit Insurance Corporation, or
material breach of any provision of an employment agreement with the Company.
(e) OTHER COMPANY BENEFIT AND COMPENSATION PROGRAMS. Payments
and other benefits received by a Participant under an Award made pursuant to the
Plan shall not be deemed a part of a Participant's regular, recurring
compensation for purposes of the termination indemnity or severance pay law of
any state. Furthermore, such benefits shall not be included in, nor have any
effect on, the determination of benefits under any other employee benefit plan
or similar arrangement provided by the Company or a Subsidiary unless expressly
so provided by such other plan or arrangement, or except where the Committee
expressly determines that inclusion of an Award or portion of an Award should be
included. Awards under the Plan may be made in combination with or in addition
to, or as alternatives to, grants, awards or payments under any other Company or
Subsidiary plans. The Company or any Subsidiary may adopt such other
compensation programs and additional compensation arrangements (in addition to
this Plan) as it deems necessary to attract, retain, and reward employees for
their service with the Company and its Subsidiaries.
(f) SECURITIES LAW RESTRICTIONS. No shares of Common Stock
shall be issued under the Plan unless counsel for the Company shall be satisfied
that such issuance will be in compliance with applicable federal and state
securities laws. Certificates for shares of Common Stock delivered under the
Plan may be subject to such stock-transfer orders and other restrictions as the
Committee may deem advisable under the rules, regulations, and other
requirements of the Securities and Exchange Commission, any stock exchange upon
which the Common Stock is then listed, and any applicable federal or state
securities law. The Committee may cause a legend or legends to be put on any
such certificates to make appropriate reference to such restrictions.
(g) AWARD AGREEMENT. Each Participant receiving an Award under
the Plan shall enter into a written agreement with the Company in a form
specified by the Committee agreeing to the terms and conditions of the Award and
such related matters as the Committee shall, in its sole and absolute
discretion, determine.
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(h) COSTS OF PLAN. The costs and expenses of
administering the Plan shall be borne by the Company.
(i) GOVERNING LAW. The Plan and all actions taken
thereunder shall be governed by and construed in accordance with the laws of the
State of Delaware.
CREDIT MANAGEMENT SOLUTIONS, INC.,
a Delaware Corporation
Date: , 1996 By:
----------- -----------------------------------
James R. DeFrancesco, Chairman
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CERTIFICATE OF COMPENSATION COMMITTEE
The undersigned two persons, being members of the Compensation
Committee and "outside directors" within the meaning of Section 162(m)(4)(C)(i)
of the Internal Revenue Code of 1986, hereby certify that the foregoing 1996
Credit Management Solutions, Inc. Long-Term Incentive Plan was adopted and
established by the Compensation Committee on __________, 1996.
Date: , 1996
----------------- -----------------------------------
Compensation Committee Member
Date: , 1996
----------------- -----------------------------------
Compensation Committee Member
CERTIFICATE OF SECRETARY
The undersigned, being the Corporate Secretary of Credit Management
Solutions, Inc., a Delaware corporation, hereby certifies that the
foregoing 1996 Credit Management Solutions, Inc. Long-Term Incentive
Plan (the "Plan") was, pursuant to the Articles and Bylaws of the
Corporation, duly adopted by the Compensation Committee on __________,
1996 and by the Board of Directors as a whole on __________, 1996. The
Plan was approved by the sole shareholder of the Corporation on
_________ 1996.
Date:
----------------- ----------------------------------
Miles H. Grody, Corporate Secretary
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<PAGE> 1
EXHIBIT 10.14
TAX INDEMNIFICATION AGREEMENT
This TAX INDEMNIFICATION AGREEMENT (the "Agreement") is
entered into as of December __, 1996 between Credit Management Solutions, Inc.,
a Delaware corporation (the "Company"), and the persons listed on Schedule A
attached hereto (individually a "Stockholder" and collectively the
"Stockholders"). Capitalized terms not otherwise defined have the meanings
ascribed to them in Section 1.1.
WHEREAS, the Company and the Stockholders have entered into
this Agreement as a condition to the Public Offering;
WHEREAS, the Company has been an "S corporation" (as defined
in Section 1361(a)(1) of the Code) for federal tax purposes since its inception
in 1987;
WHEREAS, the Company's election to be treated as an S
corporation terminated upon the reincorporation of the Company in Delaware (the
"Termination Date"), and as a result the Company has been a "C corporation" (as
defined in Section 1361(a)(2) of the Code) since the Termination Date;
WHEREAS, the Company will declare the AAA Dividend, a portion
of which will be payable on the Closing Date and the balance of which will be
payable on or before the Balance Payment Date;
WHEREAS, the Company and the Stockholders wish to provide for
certain tax related payments in connection with the Company's status as an S
corporation and for the adjustment of the amount of the AAA Dividend in certain
events; and
WHEREAS, the Company and the Stockholders wish to terminate
this Agreement such that it has no effect should the Pubic Offering not occur.
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
DEFINITIONS
1.1 Definitions. the following terms, as used herein,
have the following meanings:
"AAA" means the Company's "Accumulated adjustments
account," as defined in Section 1368(e)(1) of the Code, as of the close of
business on the day before the Termination Date.
<PAGE> 2
"AAA Dividend" means the dividend to be declared by
the Company in an amount equal to the Company's undistributed S corporation
earnings to the stockholders of record one day prior to the Termination Date.
"AAA Settlement Date" means the last day of one of
the following periods, whichever is applicable: (i) the "post-termination
transition period," as defined in Section 1377(b) of the Code, of the Company,
in the case where the AAA is determined to be greater than determined on the
Balance Payment Date, or (ii) the calendar year of the Closing Date, in the
case where the AAA is determined to be less than determined on the Balance
Payment Date.
"Adjustment Amount" means the net increase in taxable
income of one or more of the Stockholders or the Company based on a Final
Determination and which gives rise to a payment pursuant to Section 3.3 or
Section 3.4 hereof.
"Affected Stockholder" means a stockholder whose tax
returns are adjusted in a manner which gives rise to an obligation of the
Company pursuant to Section 3.3 hereof.
"Balance AAA Dividend" means the portion of the AAA
Dividend payable to the Stockholders of record as of one day prior to the
Termination Date in an amount equal to the balance of the AAA on the
Termination Date minus the Initial AAA Dividend.
"Balance Payment Date" means January 15, 1997.
"Blended Rate" means a percentage which equals the
sum of the maximum marginal federal and state individual income tax rates for
an individual residing in Maryland (after giving effect to the full
deductibility of state income taxes for federal income tax purposes) in effect
for the year of the adjustment to a tax return of the Company or such
Stockholder that gives rise to a correlative adjustment to a tax return of such
Stockholder or the Company, respectively. For example, if an adjustment that
results in an amount due from the Stockholders hereunder, the year of the
Company's return that was adjusted shall determine the Blended Rate to be used
in computing the amount due.
"Closing Date" means the date on which the Public
Offering closes.
"Code" means the Internal Revenue Code of 1986, as
amended.
"C Short Year" means that portion of the S
Termination Year of the Company beginning on the Termination Date and ending on
the last day of the S Termination Year.
"C Taxable Year" means any taxable year (or portion
thereof) of the Company during which it is a C corporation, including the C
Short Year.
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<PAGE> 3
"Final Determination" means the earliest to occur of
(i) the execution of a closing agreement between a Stockholder and a Taxing
Authority or between the Company and a Taxing Authority, (ii) a decision of a
court of law that is either nonappealable or with respect to which no appeal is
taken, or (iii) any other event or agreement which establishes the tax
treatment of an item to the reasonable satisfaction of both parties.
"Initial AAA Dividend" means the portion of the AAA
Dividend to be paid to the Stockholders of record as of one on or immediately
after the Closing Date.
"Public Offering" means the initial public offering
of the Company's Common Stock pursuant to the Registration Statement on Form
S-1 originally filed by the Company with the Securities and Exchange Commission
on October 11, 1996.
"S Short Year" means the portion of the S Termination
Year beginning on the first day of such taxable year and ending on the day
immediately preceding the Termination Date.
"S Taxable Year" means any taxable year (or portion
thereof) of the Company during which the Company was an S corporation for the
entire year, including the S Short Year.
"S Termination Year" shall mean the fiscal year of
the Company that includes the Termination Date.
"Taxing Authority" means the United States Internal
Revenue Service and any comparable state or foreign taxing authority.
ARTICLE II
TERMINATION OF S CORPORATION STATUS, ALLOCATION
OF INCOME AND ADJUSTMENT OF AAA DIVIDEND
2.1 Termination of S Corporation Status. Termination of
the Company's S corporation status occurred upon the reincorporation of the
Company in Delaware.
2.2 Declaration of AAA Dividend. On December 1, 1996 the
Company shall declare the AAA Dividend. The AAA Dividend (including the
Initial AAA Dividend and the Balance AAA Dividend and any adjustments thereto)
shall be payable based upon the Stockholders ownership of common stock as of
one day prior to the Termination Date.
2.3 Allocation Election. The Company shall be required
to elect to allocate the items described in Section 1362(e) (2) (A) of the Code
pursuant to Section 1362(e) (3) of the Code under "normal tax accounting
rules," and the Stockholders agree to consent to such
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<PAGE> 4
election and to provide the Company with the statement of consent of all
Stockholders described in Section 1.1362-6(b) of the Treasury Regulations.
2.4 Adjustment to AAA Dividend.
(a) The parties acknowledge that the amount of the
Initial AAA Dividend and the Balance AAA Dividend will be based on good faith
determinations by the Company of the amount of AAA.
(b) The parties agree that if the Company determines
after the Termination Date and on or before the AAA Settlement Date that the
amount of the AAA as of December 15, 1996 does not equal the amount of the sum
of the Initial AAA Dividend and the Balance AAA Dividend, then:
(i) if the amount of the sum of the Initial AAA
Dividend and the Balance AAA Dividend exceeds the amount of
the AAA as of December 15, 1996, the Stockholders who received
the Initial AAA Dividend and the Balance AAA Dividend shall
immediately thereafter remit to the Company their pro-rata
share of such excess; and
(ii) if the amount of the AAA as of December 15,
1996 exceeds the amount of the sum of the Initial AAA Dividend
and the Balance AAA Dividend, the Company shall immediately
thereafter distribute to the Stockholders of record as of one
day prior to the Termination Date their pro-rata share of such
excess.
(c) The Company shall notify the Stockholders no later
than five (5) days prior to the AAA Settlement Date in the event the
Stockholders are required to remit any amount to the Company pursuant to this
Section 2.4
(d) No payment shall be due, and no party shall have a
claim against the other party, under this Agreement if the relevant
determination of the AAA occurs after the applicable AAA Settlement Date.
ARTICLE III
OBLIGATIONS
3.1 Liability for Taxes Incurred During S Short Year.
Each Stockholder covenants and agrees that: (i) the Stockholder will duly
include, in his own federal and state income tax returns, all items of income,
gain, loss, deduction, or credit attributable to the S Short Year in a manner
consistent with the Form 1120S and the schedules thereto (and the corresponding
state income tax forms and schedules) to be filed by the Company with respect
to such period; (ii) such returns shall be filed no later than the due date
(including extensions,
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<PAGE> 5
if any) for filing such returns; and (iii) each Stockholder shall pay any and
all taxes required to be paid for its taxable year that includes the S Short
Year.
3.2 Liability for Taxes Incurred During S Short Year and
C Short Year. The Company covenants and agrees that: (i) the Company shall be
responsible for and shall effect the filing of all federal and state income tax
returns for the Company with respect to the S Short Year and the C Short Year;
(ii) such Company returns shall be accurately prepared and timely filed; and
(iii) the Company shall pay any and all taxes required to be paid by the
Company for the periods covered by such returns as required by applicable law.
3.3 Company's Indemnification for Tax Liabilities. In
the event of an adjustment to one or more tax returns of the Company for an S
Taxable Year based on a Final Determination which results in a net increase in
taxable income of a Stockholder and a corresponding adjustment to one or more
tax returns of the Company for a C Taxable Year based on a Final Determination
which results in a net decrease in taxable income of the Company, the Company
shall pay to the Affected Stockholder an amount equal to the Adjustment Amount
multiplied by the Blended Rate. In the event the Adjustment Amount differs
from the adjustment to the income of the Company for a C Taxable Year, the
Company shall be required to pay an amount to the Affected Stockholder equal to
the lesser of the Adjusted Amount or the net decrease in the income of the
Company for the C Taxable Year, multiplied by the Blended Rate. In addition,
provided the Affected Stockholder originally reported its distributive share of
income and other items of the Company from an S Taxable Year consistently with
the Schedule K-1 provided to him by the Company, the Company shall pay to the
Affected Stockholder any penalties or interest actually paid by the Affected
Stockholder as a result of the adjustment to such items giving rise to the
Company's liability hereunder. The Company shall pay the amount due to the
Affected Stockholder within ten (10) business days of the later of (i) the
later of the two Final Determinations referred to in this Section 3.3 or (ii)
the date on which the Affected Stockholder provides proof reasonably
satisfactory to the Company that it has paid the taxes arising from the
Adjustment Amount.
3.4 Stockholders Indemnification for Tax Liabilities.
(a) In the event of an adjustment to one or more tax
returns of the Company for a C taxable year based on a Final Determination
which results in a net increase in taxable income of the Company for a C
Taxable Year and a corresponding adjustment to one or more tax returns of the
Company for an S Taxable Year based on a Final Determination which results in a
net decrease in taxable income of the Company for the S Taxable Year, the
Stockholders agree to contribute to the capital of the Company an amount equal
to the Adjustment Amount multiplied by the Blended Rate. In the event the
Adjustment Amount differs from the adjustments to the income of the Company for
the S Taxable year, the Stockholder shall be required to contribute to the
capital of the Company an amount equal to the lesser of the Adjustment Amount
or net decrease in the income of the Stockholder, multiplied by the Blended
Rate. In addition, each Stockholder shall contribute to the capital of the
Company an amount
5
<PAGE> 6
equal to interest actually paid by the Company as a result of the adjustment
giving rise to the Stockholder's liability hereunder.
(b) If based on a Final Determination the Company is
deemed to have been a C corporation for federal, state or local income tax
purposes during any period in which it reported (or intends to report) its
taxable income as S corporation or is subject to the tax imposed by Section
1374 of the Code, each Stockholder agrees to contribute to the capital of the
Company an amount necessary to hold the Company harmless from any taxes and
interest arising from such Final Determination. The obligations of the
Stockholders under this subsection (b) shall include all taxes and interest
incurred by the Company as a C Corporation for periods ending before the
Termination Date, other than any obligation arising from an adjustment to the
Company's tax return for a period ending before the Termination Date which, if
the Company had been an S corporation for such period, would have given rise to
an obligation of the Company to the stockholders under Section 3.3 hereof.
Each Stockholder's obligation under this Section 3.4(b) shall be limited to
that percentage of the tax and interest due by the Company equal to the
fraction, expressed as a percentage, the numerator of which is the total
distributions to such Stockholder made by the Company from July 1, 1987 through
and including December 15, 1996, plus the AAA Dividend and any adjustment
thereto pursuant to this Agreement, and the denominator of which is the total
distributions made by the Company to all Stockholders from July 1, 1987 through
and including December 15, 1996, plus the AAA Dividend and any adjustment
thereto pursuant to this Agreement.
(c) The Stockholders shall contribute to the capital of
the Company amounts set forth in this Section 3.4 within twenty-five (25)
business days of the later of (i) the later of the two final Determinations
referred to in Section 3.4(a) or the Final Determination referred to in Section
3.4(b), whichever is applicable, or (ii) the date on which the Company provides
proof reasonably satisfactory to the Stockholder that it has paid the amounts
given rise to such liability.
3.5 Limitation on Amended Returns and Claims for Refund.
The parties acknowledge that the intent of this Agreement is to allocate the
approximate cost of adjustments to the tax returns of the parties based on one
or more examinations by a Taxing Authority and penalties and interest relating
thereto. As a result, this Agreement will not apply to adjustments resulting
from an amended tax return, claim for refund or similar action ("Unilateral
Action") that is not reasonably necessary in order to effectuate an adjustment
based on a Final Determination and resulting directly from an examination by a
Taxing Authority, unless and to the extent both parties consent to such
Unilateral Action. All calculations hereunder shall be made as if such
Unilateral Action had not occurred, unless and to the extent both parties
consented to the Unilateral Action.
3.6 Computational Rules.
(a) The following rules shall apply in making the
computations set forth in Section 3.3, and 3.4, and 3.8:
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<PAGE> 7
(i) In determining a net increase in the income
of a Stockholder or the Company pursuant to Sections 3.3 and 3.4, effect shall
be given to any reduction in taxable income of such party resulting from a
Final Determination with respect to prior or future years arising from or
directly relating to the item giving rise to the increase, provided that such
increase or reduction can reasonably be anticipated to be realized within three
taxable years of the corresponding adjustment.
(ii) Capital gains and losses shall be treated the
same as ordinary income. An increase or decrease in tax basis of any property
owned by a party or an increase or decrease in a net operating or capital loss
carryforward of a party shall be treated as an expense or income, respectively,
of such party in the amount of such increase or decrease in the taxable year of
such increase or decrease.
(iii) There will be no increase or decrease in any
payment based on time value of money or similar concepts, and no effect shall
be given to the timing of the decrease in a party's taxable income in
determining the amount of such decrease.
(b) Notwithstanding subsection (a), the parties shall
endeavor to agree to payments under Sections 3.3 and 3.4(a) that, to the extent
reasonable in light of the complexities involved, place the parties in the same
position that they would have been in had there been no Adjustment Amount, with
a view toward minimizing the overall tax burden of the parties and minimizing,
to the extent of a tax cost to another party, the amount of any benefit
realized by a party as a result of an Adjustment Amount.
3.7 Contest/Cooperation.
(a) Contests. Each of the Company and the
Stockholders agree that (i) in the event that any of them receives notice,
whether orally or in writing, of any federal, state, local or foreign tax
examinations, claims, settlements, proposed adjustments or related matters that
may affect in any way the liability of a party under this Agreement, it shall
within ten days notify the other parties in writing thereof (provided that any
failure to give such notice shall not reduce a party's right to indemnification
under this Agreement except to the extent of actual damage incurred by the
other parties as a result of such failure), and (ii) the party or parties (the
"Indemnifying Party") who would be required to indemnify the other party or
parties (the "Indemnified Party") shall be entitled at its reasonable
discretion and sole expense to handle, control and compromise or settle the
defense of any matter which may give rise to a liability under this Agreement,
provided that the Indemnifying Party from time to time provides assurances
reasonably satisfactory to the Indemnified Party that (1) the Indemnifying
Party is financially capable of pursuing such defense to its conclusion, and
(2) such defense is actually being pursued in a reasonable manner.
(b) Cooperation. the parties will make available
to one another, as reasonably requested, and to any taxing authority, all
information, records or documents relating to the liability for taxes covered
by this Agreement and will preserve such information, records
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<PAGE> 8
or documents until the expiration of any applicable statute of limitations or
extensions thereof. The party requesting such information shall reimburse the
other party for all reasonable out-of-pocket costs incurred in producing
information.
3.8 Indemnification for Taxes on Payments. The parties
agree that amounts paid or contributed hereunder (including pursuant to this
Section 3.8) shall be net of any federal and state income tax imposed on the
receipt of such amounts, but only to the extent of the federal and state income
tax benefit to the Indemnifying Party from the payment to the Indemnified
Party. The parties will determine by mutual agreement whether and the extent
to which any amounts paid or contributed hereunder will be subject to tax, the
amount of benefit received by a party, and the appropriate increase in such
amount required by this Section 3.8. In the event the parties are unable to
agree on any matter described in this Section 3.8, they shall select a firm of
certified public accountants mutually acceptable to both parties to determine
such matters, whose decisions shall be final and binding on the parties.
3.9 Cost. Except to the extent otherwise provided
herein, each party shall bear its own costs in administering this Agreement.
3.10 Interest on Overdue Payments. Any payment pursuant
to this Agreement not made when due under this Agreement shall bear interest at
the rate of 10% per annum until paid.
3.11 Correction of a Final Determination. In the event a
party makes a payment pursuant to this Agreement based on the expected outcome
of a Final Determination which subsequently is determined to have been
incorrect, the parties shall adjust the payments hereunder in order to reflect
the subsequent determination as if it was the Final Determination upon which
the original payment was based.
ARTICLE IV
MISCELLANEOUS
4.1 Counterparts. This Agreement may be executed in
several counterparts, each of which shall be deemed an original, but all of
which counterparts collectively shall constitute an instrument representing the
Agreement between the parties hereto.
4.2 Construction of Terms. Nothing herein expressed or
implied is intended, or shall be construed, to confer upon or give any person,
firm or corporation, other than the parties hereto or their respective
successors and assigns, any rights or remedies under or by reason of this
Agreement.
4.3 Governing Law. This Agreement and the legal
relations between the parties hereto shall be governed by and construed in
accordance with the substantive laws of the State of Delaware without regard to
Delaware choice of law rules.
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4.4 Amendment and Modification. This Agreement may be
amended, modified or supplemented only by a written agreement executed by the
parties.
4.5 Assignment. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and permitted assigns, but neither this Agreement
nor any of the rights, interests or obligations hereunder shall be assigned by
any of the parties hereto without the prior written consent of the other
parties, nor is this Agreement intended to confer upon any other person except
the parties any rights or remedies hereunder.
4.6 Interpretation. The title, article and section
headings contained in this Agreement are solely for the purpose of reference,
are not part of the agreement of the parties and shall not in any way affect
the meaning or interpretation of this Agreement.
4.7 Severability. In the event that any one or more of
the provisions of this Agreement shall be held to be illegal, invalid or
unenforceable in any respect, the same shall not in any respect affect the
validity, legality or enforceability of the remainder of this Agreement, and
the parties shall use their best efforts to replace such illegal, invalid or
unenforceable provisions with an enforceable provision approximating, to the
extent possible, the original intent of the parties.
4.8 Entire Agreement. This Agreement embodies the entire
agreement and understanding of the parties hereto in respect to the subject
matter contained herein. There are no representations, promises, warranties,
covenants, or undertakings, other than those expressly set forth or referred to
herein. This Agreement supersedes all prior agreements and the understandings
between the parties with respect to such subject matter.
4.9 Fees. In any action or proceeding brought to enforce
or interpret any provision of this Agreement (except with respect to matters
described in Section 3.8 hereof) the successful party shall be entitled to
reasonable fees of attorneys, accountants and other professionals as well as
other costs incurred in connection with such action or proceeding.
4.10 Termination of Agreement. This Agreement shall
terminate and be void, as if it never had been executed, if the Closing Date
shall occur after January 15, 1997.
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IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above.
CREDIT MANAGEMENT SOLUTIONS, INC.
----------------------------------------
By:
Name:
Title:
----------------------------------------
James R. DeFrancesco
----------------------------------------
Scott L. Freiman
10
<PAGE> 11
SCHEDULE A
STOCKHOLDERS
James R. DeFrancesco
Scott L. Freiman
11
<PAGE> 1
EXHIBIT 10.15
1996 CREDIT MANAGEMENT SOLUTIONS, INC.
NON-QUALIFIED STOCK OPTION PLAN
1. PURPOSE OF THE PLAN.
The purpose of this 1996 Credit Management Solutions, Inc.
Non-Qualified Stock Option Plan (the "Plan") is to advance the interests of
Credit Management Solutions, Inc., a Delaware corporation (the "Company"), by
attracting and retaining non-Employee Directors and Employees who have
significantly contributed, and will significantly contribute, to the growth and
earnings of the Company by providing them with the opportunity to acquire
Shares. By encouraging such stock ownership, the Company seeks to attract,
retain and motivate the best available personnel for positions of substantial
responsibility and to provide additional incentive to non-Employee Directors
and Employees of the Company or any Affiliate to promote the success of the
business.
2. DEFINITIONS.
As used herein, the following definitions shall apply.
(a) "Affiliate" shall mean any "parent corporation" or "subsidiary
corporation" of the Company, as such terms are defined in Section 424(e) and
(f), respectively, of the Code, and any other subsidiary corporations of a
parent corporation of the Company.
(b) "Agreement" shall mean a written agreement entered into in
accordance with Paragraph 5(c) hereof.
(c) "Board" shall mean the Board of Directors of the Company.
(d) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) "Committee" shall mean the Stock Option Committee appointed by
the Board in accordance with Paragraph 5(a) hereof.
(f) "Common Stock" shall mean the common stock, par value $.01 per
share, of the Company.
(g) "Company" shall mean Credit Management Solutions, Inc.
(h) "Continuous Service" shall mean the absence of any
interruption or termination of service as an Employee or Director of the
Company or an Affiliate. Continuous Service shall not be considered
interrupted in the case of sick leave, military leave or any other leave of
absence approved by the Company or in the case of transfers between payroll
locations of the Company or between the Company, an Affiliate or a successor.
(i) "Director" shall mean any member of the Board, and any member
of the board of directors of any Affiliate that the Board has by resolution
designated as being eligible for participation in this Plan.
(j) "Effective Date" shall mean the date specified in Paragraph 12
hereof.
<PAGE> 2
(k) "Employee" shall mean any person employed by the Company or an
Affiliate who is an employee for federal tax purposes.
(l) "Exercise Price" shall mean the price per Optioned Share at
which an Option may be exercised.
(m) "Market Value" shall mean the fair market value of the Common
Stock, as determined under Paragraph 7(b) hereof.
(n) "Option" means an option to purchase Common Stock.
(o) "Optioned Shares" shall mean Shares granted pursuant to this
Plan.
(p) "Participant" shall mean any Employee or other person who
receives an Option pursuant to the Plan.
(q) "Share" shall mean one share of Common Stock.
3. TERM OF THE PLAN AND OPTIONS.
(a) Term of the Plan. The Plan shall continue in effect for a
term of 10 years from the Effective Date or the date the Plan is adopted by the
Board (whichever period ends earlier), unless sooner terminated pursuant to
Paragraph 14 hereof. No Option shall be granted under the Plan after such ten
year term.
(b) Term of Options. The term of each Option granted under the
Plan shall be established by the Committee, but shall not exceed 10 years.
4. SHARES SUBJECT TO THE PLAN.
Except as otherwise required by the provisions of Paragraph 9 hereof,
the aggregate number of Shares deliverable pursuant to Options shall not exceed
2,750,000 Shares. Such Shares may either be authorized but unissued Shares or
Shares held in treasury. If any Options should expire, become unexercisable,
or be forfeited for any reason without having been exercised or become vested
in full, the Optioned Shares shall, unless the Plan shall have been terminated,
be available for the grant of additional Options under the Plan.
5. ADMINISTRATION OF THE PLAN.
(a) Composition of the Committee. The Plan shall be administered
by the Committee, which shall consist of not less than two (2) members of the
Board. Members of the Committee shall serve at the pleasure of the Board.
(b) Powers of the Committee. Except as limited by the express
provisions of the Plan or by resolutions adopted by the Board, the Committee
shall have sole and complete authority and discretion (i) to select
Participants and grant Options, (ii) to determine the form and content of
Options to be issued and the form of Agreements under the Plan, (iii) to
interpret the Plan, (iv) to prescribe, amend and rescind rules and regulations
relating to the Plan, and (v) to make other determinations necessary or
advisable for the administration of the Plan. The Committee shall have and may
exercise such other power and authority as may be delegated to it by the Board
from time to time. A majority of the entire Committee shall constitute a
quorum and the action of a majority of the members present at any meeting at
which a quorum is present, or acts approved in writing by a majority of the
Committee without a meeting, shall be deemed the action of the Committee.
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(c) Agreement. Each Option shall be evidenced by a written
agreement containing such provisions as may be approved by the Committee. Each
such Agreement shall constitute a binding contract between the Company and the
Participant, and every Participant, upon acceptance of such Agreement, shall be
bound by the terms and restrictions of the Plan and of such Agreement. The
terms of each such Agreement shall be in accordance with the Plan, but each
Agreement may include such additional provisions and restrictions determined by
the Committee, in its discretion, provided that such additional provisions and
restrictions are not inconsistent with the terms of the Plan. In particular,
the Committee shall set forth in each Agreement (i) the Exercise Price of an
Option, (ii) the number of Shares subject to, and the expiration date of, the
Option, (iii) the manner, time and rate (cumulative or otherwise) of exercise
or vesting of such Option, and (iv) the restrictions, if any, to be placed upon
such Option, or upon Shares which may be issued upon exercise of such Option.
The Chairman of the Committee and such other Directors and officers of
the Company as shall be designated by the Committee are hereby authorized to
execute Agreements on behalf of the Company and to cause them to be delivered
to the recipients of Options.
(d) Effect of the Committee's Decisions. All decisions,
determinations and interpretations of the Committee shall be final and
conclusive on all persons affected thereby.
(e) Indemnification. In addition to such other rights of
indemnification as they may have, the members of the Committee shall be
indemnified by the Company in connection with any claim, action, suit or
proceeding relating to any action taken or failure to act under or in
connection with the Plan or any Option, granted hereunder to the full extent
provided for under the Company's governing instruments with respect to the
indemnification of Directors.
6. GRANT OF OPTIONS.
(a) Employees shall be eligible to receive discretionary grants of
Options pursuant to the Plan.
(b) Non-Employee Directors shall each receive an Option for 5,000
Option Shares at the commencement of each year of such person's directorship.
7. EXERCISE PRICE FOR OPTIONS.
(a) Limits on Committee Discretion. The Exercise Price as to any
particular Option shall not be less than 100% of the Market Value of the
Optioned Shares on the date of grant.
(b) Standards for Determining Exercise Price or Measurement Price.
If the Common Stock is listed on a national securities exchange (including the
NASDAQ National Market or Small Cap System) on the date in question, then the
Market Value per Share shall be the average of the highest and lowest selling
price on such exchange on such date, or if there were no sales on such date,
then the Exercise Price shall be the mean between the bid and asked price on
such date. If the Common Stock is traded otherwise than on a national
securities exchange on the date in question, then the Market value per Share
shall be the mean between the bid and asked price on such date, or, if there is
no bid and asked price on such date, then on the next prior business day on
which there was a bid and asked price. If no such bid and asked price is
available, then the Market Value per Share shall be its fair market value as
determined by the Committee, in its sole and absolute discretion.
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8. EXERCISE OF OPTIONS.
(a) Generally. Subject to (e) below, any Option granted hereunder
shall be exercisable at such times and under such conditions as shall be
permissible under the terms of the Plan and of the Agreement granted to a
Participant. An Option may not be exercised for a fractional Share.
(b) Procedure for Exercise. A Participant may exercise Options,
subject to provisions relative to its termination and limitations on its
exercise, only by (1) written notice of intent to exercise the option with
respect to a specified number of Shares, and (2) payment to the Company
(contemporaneously with delivery of such notice) in cash, in Common Stock, or a
combination of cash and Common Stock, or in the sole discretion of the
Committee, Participant's promissory note, for the amount of the Exercise Price
for the number of Shares with respect to which the option is then being
exercised. Each such notice (and payment where required) shall be delivered,
or mailed by prepaid registered or certified mail, addressed to the Treasurer
of the Company at the Company's executive offices. Common Stock utilized in
full or partial payment of the Exercise Price for options shall be valued at
its Market Value at the date of exercise.
(c) Period of Exercisability. Except to the extent otherwise
provided in more restrictive terms of an Agreement, an Option may be exercised
by a Participant only with respect to the vested portion of such Option and
only while he is an Employee or Director and has maintained Continuous Service
from the date of the grant of the Option, or within three months after
termination of such Continuous Service (but not later than the date on which
the Option would otherwise expire), except if the Employee's or Director's
Continuous Service terminates by reason of:
(1) "Just Cause" which for purposes hereof shall have the
meaning set forth in any unexpired employment agreement between the
Participant and the Company (and, in the absence of any such
agreement, shall mean termination because of the Employee's or
Director's personal dishonesty, incompetence, willful misconduct,
breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule
or regulation, other than traffic violations or similar offenses) then
the Participant's rights to exercise such Option shall expire on the
date of such termination;
(2) death, then all Options of the deceased Participant
which have vested and which vest within two years of the date of death
may be exercised within two years from the date of his death (but not
later than the date on which the Option would otherwise expire) by the
personal representatives of his estate or person or persons to whom
his rights under such Option shall have passed by will or by laws of
descent and distribution;
(3) Permanent and Total Disability (as such term is
defined in Section 22(e)(3) of the Code), then all Options of the
disabled Participant which have vested and which vest within two years
of the date of such disability may be exercised within one year from
the date of such Permanent and Total Disability, but not later than
the date on which the Option would otherwise expire.
(d) Effect of the Committee's Decisions. The Committee's
determination whether a Participant's Continuous Service has ceased, and the
effective date thereof, shall be final and conclusive on all persons affected
thereby.
(e) Options shall vest and be exercisable as determined by the
Committee subject to the foregoing.
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9. EFFECT OF CHANGES IN COMMON STOCK SUBJECT TO THE PLAN.
(a) Recapitalizations; Stock Splits, Etc. The number and kind of
shares reserved for issuance under the Plan, and the number and kind of shares
subject to outstanding Options (and the Exercise Price thereof) shall be
proportionately adjusted for any increase, decrease, change or exchange of
Shares for a different number or kind of shares or other securities of the
Company which results from a merger, consolidation, recapitalization,
reorganization, reclassification, stock dividend, split-up, combination of
shares, or similar event in which the number or kind of shares is changed
without the receipt or payment of consideration by the Company.
(b) Transactions in which the Company Is Not the Surviving Entity.
In the event of (i) the liquidation or dissolution of the Company, (ii) a
merger or consolidation in which the Company is not the surviving entity, or
(iii) the sale or disposition of all or substantially all of the Company's
assets (any of the foregoing to be referred to herein as a "Transaction"), all
outstanding Options shall be surrendered. With respect to each Option so
surrendered as to which the holder has become vested, the Committee shall in
its sole and absolute discretion, determine whether the holder of the vested
surrendered Option shall receive:
(1) for each Share then subject to an outstanding Option
the number and kind of shares into which each outstanding Share (other
than Shares held by dissenting stockholders) is changed or exchanged,
together with an appropriate adjustment to the Exercise Price; or
(2) a cash payment (from the Company or the successor
corporation), in an amount equal to the Market Value of the Shares
subject to the Option on the date of the Transaction, less the
Exercise Price of the Option.
(c) Conditions and Restrictions on New, Additional or Different
Shares or Securities. If, by reason of any adjustment made pursuant to this
Paragraph, a Participant becomes entitled to new, additional or different
shares of stock or securities, such new, additional or different shares of
stock or securities shall thereupon be subject to all of the conditions and
restrictions which were applicable to the Shares pursuant to the Option before
the adjustment was made.
(d) Other Issuances. Except as expressly provided in this
Paragraph, the issuance by the Company or an Affiliate of shares of stock of
any class, or of securities convertible into Shares or stock of another class,
for cash or property or for labor or services either upon direct sale or upon
the exercise of rights or warrants to subscribe therefor, shall not affect, and
no adjustment shall be made with respect to, the number, class or Exercise
Price of Shares then subject to Options or reserved for issuance under the
Plan.
10. NON-TRANSFERABILITY OF OPTIONS.
Options may not be sold, pledged, assigned, hypothecated, transferred
or disposed of in any manner other than by will or by the laws of descent and
distribution, or pursuant to the terms of a "qualified domestic relations
order" (within the meaning of Section 414(p) of the Code and the regulations
and rulings thereunder). An Option may be exercised only by a Participant, the
Participant's personal representative or a permitted transferee.
11. TIME OF GRANTING OPTIONS.
The date of grant of an Option shall, for all purposes, be the later
of the date on which the Committee makes the determination of granting such
Option, and the Effective Date. Notice of the determination shall be given to
each Participant to whom an Option is so granted within a reasonable time after
the date of such grant.
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12. EFFECTIVE DATE.
The Plan shall become effective as of June 27, 1996, the date it was
authorized and established by the Board of Directors and stockholders of the
Company.
13. MODIFICATION OF OPTIONS.
At any time, and from time to time, the Board may authorize the
Committee to direct execution of an instrument providing for the modification
of any outstanding Option, provided no such modification shall confer on the
holder of said Option any right or benefit which could not be conferred on him
by the grant of a new Option at such time, or impair the Option without the
consent of the holder of the Option.
14. AMENDMENT AND TERMINATION OF THE PLAN.
The Board may from time to time amend the terms of the Plan and, with
respect to any Shares at the time not subject to Options, suspend or terminate
the Plan.
Shareholder approval must be obtained for any amendment of the Plan
that would change the number of Shares subject to the Plan (except in
accordance with Section 9 above), change the category of persons eligible to be
Participants, or materially increase the benefits under the Plan.
No amendment, suspension or termination of the Plan shall, without the
consent of any affected holders of an Option, alter or impair any rights or
obligations under any Option theretofore granted.
15. CONDITIONS UPON ISSUANCE OF SHARES.
(a) Compliance with Securities Laws. Shares of Common Stock shall
not be issued with respect to any Option unless the issuance and delivery of
such Shares shall comply with all relevant provisions of law, including,
without limitation, the Securities Act of 1933, as amended, the rules and
regulations promulgated thereunder, any applicable state securities law, and
the requirements of any stock exchange upon which the Shares may then be
listed.
(b) Special Circumstances. The inability of the Company to obtain
approval from any regulatory body or authority deemed by the Company's counsel
to be necessary to the lawful issuance and sale of any Shares hereunder shall
relieve the Company of any liability in respect of the non-issuance or sale of
such Shares. As a condition to the exercise of an option, the Company may
require the person exercising the Option to make such representations and
warranties as may be necessary to assure the availability of an exemption from
the registration requirements of federal or state securities law.
(c) Committee Discretion. The Committee shall have the
discretionary authority to impose in Agreements such restrictions on Shares as
it may deem appropriate or desirable, including but not limited to the
authority to impose a right of first refusal or to establish repurchase rights
or both of these restrictions.
(d) Restriction on Sale of Optioned Shares. For a period of 180 days
commencing on the date of the Prospectus used in connection with the initial
public offering of the Company's Shares pursuant to a Registration Statement on
Form S-1 filed with the Securities and Exchange Commission, no Participant will
directly or indirectly, sell, offer, contract to sell, transfer the economic
risk of ownership in, make any short sale, pledge or otherwise dispose of any
Option Shares without the prior written consent of the managing underwriter of
such initial public offering or pursuant to the terms and conditions of that
certain underwriting agreement to be entered into by and between the Company
and the underwriters of such initial public offering.
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16. RESERVATION OF SHARES.
The Company, during the term of the Plan, will reserve and keep
available a number of Shares sufficient to satisfy the requirements of the
Plan.
17. WITHHOLDING TAX.
The Company's obligation to deliver Shares upon exercise of Options
shall be subject to the Participant's satisfaction of all applicable federal,
state and local income and employment tax withholding obligations. The
Committee, in its discretion, may permit the Participant to satisfy the
obligation, in whole or in part, by irrevocably electing to have the Company
withhold Shares, or to deliver to the Company Shares that he already owns,
having a value equal to the amount required to be withheld. The value of
Shares to be withheld, or delivered to the Company, shall be based on the
Market Value of the Shares on the date the amount of tax to be withheld is to
be determined. As an alternative, the Company may retain, or sell without
notice, a number of such Shares sufficient to cover the amount required to be
withheld.
18. NO EMPLOYMENT OR OTHER RIGHTS.
In no event shall an Employee's or Director's eligibility to
participate or participation in the Plan create or be deemed to create any
legal or equitable right of the Employee, Director, or any other party to
continue service with the Company or any Affiliate of such corporations.
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EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated October 28, 1996, in the Amendment No. 3 to the
Registration Statement (Form S-1 No. 333-14007) and related Prospectus of
Credit Management Solutions, Inc. for the registration of 2,600,000 shares of
its common stock.
/s/ Ernst & Young LLP
Baltimore, Maryland
December 5, 1996
