<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 15, 1996
REGISTRATION NO. 333-14007
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
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>
================================================================================================================
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
================================================================================================================
</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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 NOVEMBER 15, 1996
PROSPECTUS
CREDIT MANAGEMENT SOLUTIONS, INC.
[CREDIT MANAGEMENT SOLUTIONS 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 "CRDT."
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.
<TABLE>
<CAPTION>
=================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO COMMISSIONS AND PROCEEDS TO THE THE SELLING
PUBLIC DISCOUNTS(1) COMPANY(2)(3) STOCKHOLDERS
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.................... $ $ $ $
- -------------------------------------------------------------------------------------------------
Total........................ $ $ $ $
=================================================================================================
</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 leading 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. Credit Connection has not generated any
significant revenues to date. The Company recently signed a nonbinding letter of
intent 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
3
<PAGE> 5
between points of origination and multiple funding sources. In pursuit of these
objectives, the Company has adopted the following key strategies: (i) expand
presence in the credit automation market; (ii) continue the rollout of Credit
Connection; (iii) increase transaction-based revenues as a percentage of total
revenues; (iv) leverage key relationships; and (v) extend technology leadership.
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 and marketing and customer
support organizations, capital expenditures
and other general corporate and working
capital purposes.
Proposed Nasdaq National Market symbol....... CRDT
</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."
4
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- --------------------------
1993 1994 1995 1996
---------- ---------- ----------- 1995 ----------
----------
(UNAUDITED)
<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 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. No significant revenues have been earned by the Company on
its Credit Connection service to date. 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, 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 a nonbinding letter of intent 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. Such license
agreements are generally co-terminous with annually renewable maintenance
agreements entered into by and between the Company and such customers. 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."
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
8
<PAGE> 10
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'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
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
9
<PAGE> 11
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."
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
10
<PAGE> 12
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. The source code for the Company's proprietary
software is protected both as a trade secret and as a copyrighted work. 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 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 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 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
11
<PAGE> 13
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."
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
12
<PAGE> 14
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."
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
13
<PAGE> 15
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 and 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 consumption 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 consummation of the Offering, 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."
15
<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."
16
<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 (60.6% 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) (230,537) (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 Connection became commercially available in July
1996 and has yet to generate any significant 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
substantially 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, respectively.
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 consummation of the
Offering, 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 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 were 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
25
<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 $0.2 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 (9.5% 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 $0.3
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.
26
<PAGE> 28
BUSINESS
GENERAL
CMSI is a leading 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. The Company is introducing 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. The Company
also has been pursuing remarketing arrangements for the Credit Connection
service with vendors that provide automated systems for dealership management
and operations. Credit Connection has not generated any significant revenues to
date. The Company recently signed a nonbinding letter of intent 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.
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.
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 process of 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.
27
<PAGE> 29
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 has increased in recent years. 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 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.
28
<PAGE> 30
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 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
29
<PAGE> 31
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
proposed 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 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
30
<PAGE> 32
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 proposed 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
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.
31
<PAGE> 33
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.
32
<PAGE> 34
The credit analysis, decisioning and funding process using CreditRevue is
illustrated in the following diagram:
[A flowchart will be provided that graphically illustrates the credit analysis,
decisioning and funding process from the entry of the credit application
through the return of the decision on the credit application utilizing
CreditRevue, as described in the preceding paragraph.]
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
33
<PAGE> 35
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.
34
<PAGE> 36
The following diagram illustrates the architecture of Credit Connection:
[A schematic diagram will be provided that graphically illustrates the
connectivity that Credit Connection provides between credit originators,
funding sources and credit bureaus, as described in the preceding paragraph].
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
35
<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 October 1996, the Company entered into a nonbinding letter of intent 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 proposed alliance, the Company
and ADP will work to integrate Credit Connection with ADP's automated dealership
management and operations systems. ADP proposes to cooperate with the Company to
remarket Credit Connection to ADP's automobile dealer customers. ADP proposes to
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
any proposed strategic alliance, ADP will have the ability to name one Director
to the Company's Board of Directors.
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.
36
<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
37
<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 proposed 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. 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. 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."
38
<PAGE> 40
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.
The source code for the Company's proprietary software is protected both as
a trade secret and as a copyrighted work. 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 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
39
<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.
40
<PAGE> 42
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
</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, Mr. Vollono served as Vice
President and Chief Financial Officer of Carey International, Inc. a
transportation
41
<PAGE> 43
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.
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 five 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.
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."
42
<PAGE> 44
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."
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
43
<PAGE> 45
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 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
44
<PAGE> 46
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.
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
45
<PAGE> 47
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 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.
46
<PAGE> 48
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.
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.
47
<PAGE> 49
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."
48
<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................... -- * -- -- *
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 (8 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).
49
<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,
50
<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.
However, these shares are subject to lock-up agreements. All shares issuable
upon exercise of outstanding options are subject to a 180 day lock-up agreement
with the Representatives.
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.
51
<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 "CRDT." 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
53
<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
Accumulated deficit........................ (1,531,511) (626,079) (679,002) (884,488)
------------ ------------ ----------- -----------
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 1996
--------- --------- ---------- 1995 -----------
-----------
(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 and 1996 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.
F-8
<PAGE> 64
CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
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>
F-9
<PAGE> 65
CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-10
<PAGE> 66
CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-11
<PAGE> 67
CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 (unaudited):
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.
[CREDIT MANAGEMENT SOLUTIONS, INC. 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
------ ----------------------------------------------------------------------------------
<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+
</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*
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>
- ---------------
* To be filed by amendment.
+ 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. 2 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 November 14, 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 November 14, 1996
- --------------------------------------------- Officer and Chairman of the
James R. DeFrancesco Board of Directors
(Principal Executive
Officer)
/s/ SCOTT FREIMAN Executive Vice President and November 14, 1996
- --------------------------------------------- Director
Scott L. Freiman
* Senior Vice President, November 14, 1996
- --------------------------------------------- Secretary, General Counsel
Miles H. Grody and Director
/s/ ROBERT P. VOLLONO Senior Vice President, November 14, 1996
- --------------------------------------------- Treasurer, Chief Financial
Robert P. Vollono Officer and Director
(Principal Financial and
Accounting Officer)
* Director November 14, 1996
- ---------------------------------------------
Stephen X. Graham
* Director November 14, 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*..............................
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>
- ---------------
* To be filed by amendment.
+ Previously filed.
<PAGE> 1
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. 2 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
November 14, 1996
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
John J. McDonnell, Jr., whose signature appears below, constitutes and appoints
James R. DeFrancesco and Scott L. Freiman, and each of them acting individually
or together, as his true and lawful attorney-in-fact and agent, with full power
of substitution for him and in his name, in any and all capacities, to sign any
and all amendments to Credit Management Solutions Inc.'s Registration Statement
(including post-effective amendments), and any registration statement filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each
and every act and thing necessary or advisable to be done in connection
therewith, as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitutes, may lawfully do or cause to be done by virtue
hereof. This Power of Attorney may be executed in counterparts.
/s/JOHN J. MCDONNELL, JR. Director November 14, 1996
- -------------------------
John J. McDonnell, Jr.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONSOLIDATED FINANCIAL STATEMENTS OF CREDIT MANAGEMENT SOLUTIONS, INC. AND
SUBSIDIARY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> SEP-30-1996 DEC-31-1995
<CASH> 8,433 120,255
<SECURITIES> 0 0
<RECEIVABLES> 2,072,695 1,816,966
<ALLOWANCES> 100,000 98,095
<INVENTORY> 0 0
<CURRENT-ASSETS> 3,411,764 2,451,562
<PP&E> 2,249,786 1,921,244
<DEPRECIATION> 913,098 639,465
<TOTAL-ASSETS> 5,188,599 4,035,323
<CURRENT-LIABILITIES> 5,102,376 3,633,456
<BONDS> 0 0
0 0
0 0
<COMMON> 49,101 49,101
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 5,188,599 4,035,323
<SALES> 1,149,052 1,853,424
<TOTAL-REVENUES> 9,035,485 10,231,452
<CGS> 4,843,184 5,340,790
<TOTAL-COSTS> 9,235,758 9,472,421
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 81,212 105,849
<INCOME-PRETAX> (52,923) 957,932
<INCOME-TAX> (97,928) 220,618
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 45,005 737,314
<EPS-PRIMARY> 0 0
<EPS-DILUTED> .01 .12
</TABLE>
