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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO
----------------------- ----------------------------------
COMMISSION FILE NUMBER 000-21735
CREDIT MANAGEMENT SOLUTIONS, INC.
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(Exact name of registrant as specified in its charter)
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DELAWARE 52-1549401
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
5950 SYMPHONY WOODS ROAD, COLUMBIA, MARYLAND 21044
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(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code (410) 740-1000
---------------------------
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT.
Indicate by check _ whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 7,615,510 shares
of the Company's Common Stock, $.01 par value, were outstanding as of November
13, 1997.
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CREDIT MANAGEMENT SOLUTIONS, INC.
INDEX
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Page
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Part I -- Financial Information
Item 1. Financial Statements (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Balance Sheets -- September 30, 1997 and December 31, 1996 . . . . . . . . . . . . 3
Consolidated Statements of Operations -- Three Months Ended September 30, 1997
and 1996 and Nine Months Ended September 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows --Nine Months Ended September 30,
1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 3. Certain Factors That May Affect Future Results,
Financial Condition and the Market Price of Securities . . . . . . . . . . . . . . . . . . . 12
Part II -- Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 3. Defaults upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . 18
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
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SEPTEMBER 30, DECEMBER 31,
1997 1996
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(unaudited)
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ASSETS
Current assets:
Cash and cash equivalents $ 21,409,237 $ 23,501,633
Accounts receivable, net of allowance of $98,734 and $168,590 in 1997
and 1996, respectively 2,917,647 1,948,420
Costs and estimated earnings in excess of billings on uncompleted
contracts 770,660 483,255
Prepaid expenses and other current assets 475,873 746,055
Deferred income taxes 58,513 58,513
-------------- ---------------
Total current assets 25,631,930 26,737,876
Property and equipment:
Computer equipment and software 2,784,913 1,919,160
Office furniture and equipment 864,937 397,185
Leasehold improvements 469,300 131,399
-------------- ---------------
4,119,150 2,447,744
Accumulated depreciation and amortization (1,441,049) (1,033,394)
-------------- ---------------
2,678,101 1,414,350
Software development costs, net of accumulated amortization of $148,652
and $58,861 in 1997 and 1996, respectively 209,513 299,304
-------------- ---------------
Total assets $28,519,544 $28,451,530
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,035,491 $ 2,730,015
Accrued payroll and related expenses 703,899 889,263
Billings in excess of costs and estimated earnings on
Uncompleted contracts 132,876 124,364
Deferred revenue 1,819,320 1,379,695
Stockholder loans ---- 229,513
Current portion of long-term debt and capital lease obligations 171,545 239,651
-------------- ---------------
Total current liabilities 3,863,131 5,592,501
Capital lease obligations, less current portion 124,525 220,341
Excess of assigned value of identifiable assets over cost of an acquired
interest, net of accumulated amortization of $1,219,000 and $1,168,208
in 1997 and 1996, respectively ---- 50,792
-------------- ---------------
Total liabilities 3,987,656 5,863,634
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized;
no shares issued or outstanding ---- ----
Common stock, $.01 par value;
10,000,000 shares authorized; 7,610,500 and 7,210,100 shares issued and
outstanding at September 30, 1997 and December 31, 1996, respectively 76,105 72,101
Additional paid-in capital 26,591,896 22,287,169
Retained earnings (deficit) (2,136,113) 228,626
-------------- ---------------
Total stockholders' equity 24,531,888 22,587,896
-------------- ---------------
Total liabilities and stockholders' equity $28,519,544 $28,451,530
============== ===============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE FINANCIAL STATEMENTS.
3
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CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
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THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- ---------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTMBER 30,
1997 1996 1997 1996
------------- ------------ ------------- ------------
(Unaudited) (Unaudited) (Unaudited)
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REVENUES:
CreditRevue license and software development
fees $ 3,131,084 $ 2,443,262 $ 8,049,264 $ 6,453,243
CreditRevue maintenance fees 974,698 582,179 2,258,198 1,433,190
CreditRevue computer hardware sales 98,466 739,590 948,155 1,149,052
Credit Connection revenues 179,023 ---- 414,310 ----
----------- ----------- ------------- ------------
4,383,271 3,765,031 11,669,927 9,035,485
COSTS AND EXPENSES:
Costs of license and software development fees 1,731,541 1,171,841 4,999,355 3,519,921
Cost of maintenance fees 330,535 115,803 586,435 324,387
Cost of computer hardware sales 137,306 627,665 863,463 998,876
Credit Connection costs and expenses 672,986 ---- 1,341,706 ----
Selling, general and administrative expenses 1,877,161 1,667,949 5,871,800 4,048,248
Research and development costs 682,004 162,978 1,327,054 344,326
----------- ----------- ------------- ------------
5,443,533 3,746,236 14,989,813 9,235,758
----------- ----------- ------------- ------------
INCOME (LOSS) FROM OPERATIONS (1,060,262) 18,795 (3,319,886) (200,273)
OTHER INCOME (EXPENSE):
Interest income (expense) 290,522 (20,665) 904,355 (81,212)
Amortization of excess of assigned value of
identifiable assets over cost of an acquired
interest ---- 76,187 50,792 228,562
----------- ----------- ------------- ------------
290,522 55,522 955,147 147,350
----------- ------------ ------------- ------------
INCOME (LOSS) BEFORE INCOME TAXES (769,740) 74,317 (2,364,739) (52,923)
Income tax expense ---- ---- ---- ----
----------- ------------ ------------- ------------
NET INCOME (LOSS) ($769,740) $ 74,317 ($2,364,739) ($52,923)
============ =========== ============= ============
Earnings (loss) per common and common
equivalent share ($0.10) $ 0.01 ($0.31) ($0.01)
============ =========== ============= ============
AVERAGE SHARES OUTSTANDING 7,610,484 6,293,720 7,591,299 6,293,720
============ =========== ============= ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
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NINE MONTHS ENDED SEPTEMBER 30
----------------------------------------------
1997 1996
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OPERATING ACTIVITIES:
Net loss ($2,364,739) ($52,923)
ADJUSTMENTS:
Depreciation 413,309 273,634
Amortization of excess of assigned value of identifiable assets
over costs of an acquired interest (50,792) (228,562)
Amortization of software development costs 89,791 29,930
Gain on disposal of property and equipment (6,431) ----
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable, net (969,227) (255,729)
Prepaid expenses and other current assets 270,182 (564,639)
Accounts payable (1,694,524) (53,850)
Accrued payroll and related expenses (185,364) 50,700
Net costs and estimated earnings in excess of billings on
uncompleted contracts (278,893) (36,705)
Deferred revenue 439,625 1,099,413
Accrued interest on stockholder loans 6,025 11,262
Accrued contingent liability ---- 120,000
-------------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (4,331,038) 392,531
INVESTING ACTIVITIES:
Capitalized software development costs ---- (91,035)
Proceeds from sale of property and equipment 7,995 ----
Purchases of property and equipment (1,652,058) (295,115)
-------------- -----------
NET CASH USED IN INVESTING ACTIVITIES (1,644,063) (386,150)
FINANCING ACTIVITIES:
Net short-term borrowings ---- 54,481
Repayments of stockholder loans (235,538) ----
Payments under capital lease obligations (178,796) (160,439)
Repayments of long-term debt (11,692) (12,245)
Proceeds from issuance of Common Stock 4,258,318 ----
Other 50,413 ----
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,882,705 (118,203)
NET CHANGE IN CASH AND CASH EQUIVALENTS (2,092,396) (111,822)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 23,501,633 120,255
-------------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 21,409,237 $ 8,433
============== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
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CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete consolidated
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Consolidated results of operations for the
three and nine month periods ended September 30, 1997 are not necessarily
indicative of the results that may be expected for the fiscal year ending
December 31, 1997. For further information, refer to the financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1996.
NOTE 2. INCOME TAXES
Prior to December 1996, stockholders 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 prior to December 1996. Upon
termination of the Company's Subchapter S status in December 1996, the Company
determined the differences between the financial reporting and income tax bases
of its assets and liabilities, and recorded at that date the resulting deferred
tax liability and income tax expense. Income tax amounts and balances are
accounted for in accordance with Statement of Financial Accounting Standards
No. 109 Accounting for Income Taxes.
NOTE 3. INCOME (LOSS) PER SHARE
The following table summarizes the computations of income (loss) per share:
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THREE MONTHS ENDED NINE MONTHS ENDED
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SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
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Net income (loss) ($769,740) $ 74,317 ($2,364,739) ($52,923)
============== =============== ============== =============
Weighted average number of shares
of common stock outstanding 7,610,484 4,910,100 7,591,299 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 7,610,484 6,293,720 7,591,299 6,293,720
-------------- --------------- -------------- -------------
Income (loss) per share ($0.10) $ 0.01 ($0.31) ($0.01)
-------------- --------------- -------------- -------------
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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 initial public offering price
during the twelve-month period prior to the offering date have been included in
the earnings per share computations for such prior periods as if they were
outstanding for all periods included in the registration statement using the
treasury stock method, even if the result is anti-dilutive. For the three and
nine month periods ended September 30, 1996, the dilutive effect of outstanding
stock options was determined using the treasury stock method.
In February 1997, the Financial Accounting Standard Board issued Statement No.
128, Earnings per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. The impact of
Statement 128 on the calculation of income (loss) per share for the three and
nine month periods ended September 30, 1997 and 1996 is not expected to be
material.
NOTE 4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Uncompleted contracts consist of the following components:
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BALANCE SHEET CAPTION
--------------------------------------------------------
BILLINGS IN
EXCESS OF
COSTS AND ESTIMATED COSTS AND
EARNINGS IN EXCESS ESTIMATED
OF BILLINGS EARNINGS TOTAL
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December 31, 1996:
Costs and estimated earnings $ 3,972,143 $ 2,205,872 $ 6,178,015
Billings 3,488,888 2,330,236 5,819,124
------------------- --------------- -------------
$ 483,255 ($124,364) $ 358,891
------------------- --------------- -------------
September 30, 1997:
Costs and estimated earnings $ 4,622,645 $ 808,021 $ 5,430,666
Billings 3,851,985 940,897 4,792,882
------------------- --------------- -------------
$ 770,660 ($132,876) $ 637,784
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All receivables on contracts in-progress are expected to be collected within
twelve months.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's
interim results of operations and financial condition. This discussion should
be read in conjunction with the Management's Discussion and Analysis of
Financial Condition and Results of Operations included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996. This report
contains certain statements of a forward-looking nature relating to future
events or the future financial performance of the Company. Investors are
cautioned that such statements are only predictions and that actual events or
results may differ materially. In evaluating such statements, investors should
carefully consider the various factors identified in this Report which could
cause actual results to differ materially from those indicated by such
forward-looking statements, including the matters set forth in "--Certain
Factors That May Affect Future Results, Financial Condition and the Market
Price of Securities."
RESULTS OF OPERATIONS
Total Revenues. Total revenues increased 16.4% from $3.8 million in the three
months ended September 30, 1996 to $4.4 million in the three months ended
September 30, 1997. The Company's revenues are derived from four sources:
license and software development fees, maintenance fees, computer hardware
sales and Credit Connection service fees.
7
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Total revenues increased 29.2% from $9.0 million in the nine months ended
September 30, 1996 to $11.7 million in the nine months ended September 30,
1997.
License and Software Development Fees. CreditRevue has accounted for
substantially all of the Company's license and software development fee revenue
through September 30, 1997. License and software development fees increased
28.2% from $2.4 million in the three months ended September 30, 1996 to $3.1
million in the three months ended September 30, 1997. The increases during
these periods resulted primarily from increased market acceptance of
CreditRevue.
License and software development fees increased 24.7% from $6.5 million in the
nine months ended September 30, 1996 to $8.0 million in the nine months ended
September 30, 1997.
Maintenance Fees. Maintenance fees include fees from software maintenance
agreements. Maintenance fees increased 67.4% from $.6 million in the three
months ended September 30, 1996 to $1.0 million in the three months ended
September 30, 1997. The growth in these revenues during these periods was the
result of increased maintenance fees associated with the increased number of
licenses of CreditRevue outstanding during such periods and the renewal of
annual maintenance agreements on third party software products.
Maintenance fees increased 57.6% from $1.4 million in the nine months ended
September 30, 1996 to $2.3 million in the nine months ended September 30, 1997.
This increase is the result of an increased number of CreditRevue licenses
under maintenance agreements as compared to the same period in 1996.
Computer Hardware Sales. Computer hardware sales revenue decreased 86.7% from
$.7 million in the three months ended September 30, 1996 to $.1 million in the
three months ended September 30, 1997. 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.
Computer hardware sales revenue decreased 17.5% from $1.1 million in the nine
months ended September 30, 1996 to $0.9 million in the nine months ended
September 30, 1997. The decrease in such revenues during these periods reflects
the decrease in the number of CreditRevue-related hardware installations during
the first nine months of 1997 as compared to the same period in 1996.
Credit Connection Service Fees. Credit Connection service fees consist of
interface development and related hardware fees and service bureau transaction
and communication fees. For the three months ended September 30, 1997,
approximately $93,600 of Credit Connection service revenues related to interface
development, and approximately $85,400 related to service bureau transaction
and communication fees. The Company commenced reporting Credit Connection
revenues in 1997 with the commercial introduction of Credit Connection. Credit
Connection service fees are recognized at the time services are performed.
For the nine months ended September 30, 1997, approximately $196,500 of Credit
Connection service revenues relate to interface development, and approximately
$217,800 related to service bureau transaction and communication fees.
Cost of License and Software Development Fees. Cost of license and software
development fees consist primarily of salaries and benefits and allocations of
office space expense for in-house programmers and the cost of temporary
contract labor. Cost of license and software development fees increased 48.8%
from $1.2 million in the three months ended September 30, 1996 to $1.7 million
in the three months ended September 30, 1997. As a percentage of license fee
and software development revenue, cost of license and software development fees
were 48.0% and 55.7% in the three months ended September 30, 1996 and the three
months ended September 30, 1997, respectively. During this period the Company
increased staffing levels primarily in preparation of the commercial release of
its new CreditRevue 2000 product. This increased staffing resulted in, and is
expected to result in for, the foreseeable future, an incremental duplication
of certain personnel while the Company transitions from its legacy CreditRevue
product , now referred to as
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CreditRevue Classic, to its new CreditRevue 2000 product. This transition will
extend into 1998 as client projects currently in process are completed and new
projects using CreditRevue 2000 commence. Additionally, cost of license and
software fees as a percentage of license and software development fees over
these periods was related to the fluctuation in the Company's quarterly
revenues and hourly labor costs associated with temporary contractors. 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. The 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, however due to the amount of
revenues received during the three months ended September 30, 1997, costs as a
percentage of revenues increased at a disproportionate rate. The Company
anticipates that total labor costs as a percentage of revenue will decrease as
the Company and its customers move to a greater level of product
standardization with the transition to CreditRevue 2000.
Cost of license and software development fees increased 42.0% from $3.5 million
in the nine months ended September 30, 1996 to $5.0 million in the nine months
ended September 30, 1997. As a percentage of license fee and software
development revenue, cost of license and software development fees were 54.5%
and 62.1% in the nine months ended September 30, 1996 and the nine months ended
September 30, 1997, respectively. The increased costs as a percent of revenues
relate to increased staffing associated with the transition to CreditRevue
2000.
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 185.4% from $.1 million in the three months ended
September 30, 1996 to $.3 million in the three months ended September 30, 1997.
As a percentage of maintenance fee revenue, cost of maintenance fees was 19.9%
and 33.9% in the three months ended September 30, 1996 and the three months
ended September 30, 1997, respectively. The dollar increase in the cost of
maintenance fees reflects the increase in maintenance staff associated with
the increase of CreditRevue customers whose implementation projects were
successfully completed during the second quarter and commenced maintenance
coverage during the third quarter. The increase in the percentage of cost of
maintenance fees to maintenance fee revenue in the three months ended September
30, 1997 as compared to the three months ended September 30, 1996 resulted from
increased staffing and related expenses of maintenance personnel.
Cost of maintenance fees increased 80.8% from $0.3 million in the nine months
ended September 30, 1996 to $0.6 million in the nine months ended September 30,
1997. As a percentage of maintenance fee revenue, cost of maintenance fees was
22.6% and 26.0% in the nine months ended September 30, 1996 and the nine
months ended September 30, 1997, respectively.
Cost of Computer Hardware Sales. Cost of computer hardware sales consists of
(i) a variable expense component represented by the Company's cost of computer
hardware resold to the Company's customers that are licensing CreditRevue and
(ii) a fixed expense component represented by salaries and benefits for systems
integration employees. Cost of computer hardware sales decreased 78.1% from
$.6 million in the three months ended September 30, 1996 to $.1 million in the
three months ended September 30, 1997. This decrease related directly to the
decrease in hardware revenues during the same periods. As a percentage of
computer hardware sales revenue, cost of computer hardware sales was 84.9% and
139.4% in the three months ended September 30, 1996 and the three months ended
September 30, 1997, respectively. The increase in the cost of computer
hardware sales as a percent of revenue is the result of lower hardware
revenues, while fixed expenses, primarily personnel related in nature,
increased during the same period.
Cost of computer hardware sales decreased 13.6% from $1.0 million in the nine
months ended September 30, 1996 to $.9 million in the nine months ended
September 30, 1997. As a percentage of computer hardware sales revenue, cost
of computer hardware sales was 86.9% and 91.1% in the nine months ended
September 30, 1996 and the nine months ended September 30, 1997, respectively.
The dollar increase in the cost of computer hardware sales reflects the
increase in computer hardware sales during the periods presented and a slight
increase in the fixed expenses associated with the sale of computer hardware.
Additionally, the Company's margin on computer
9
<PAGE> 10
hardware sales fluctuates based on changes in product sales mix, volume
discounts to significant customers, and negotiated mark-ups with customers.
Credit Connection Cost and Expenses. Credit Connection cost and expenses
consist primarily of salaries and benefits and allocations of office space
expense for in-house personnel dedicated to the sales, marketing, deployment
and support of the Credit Connection service. Additionally, these costs
reflect the third party costs associated with hardware related to development
and deployment of bank interfaces and third party communication costs. These
costs were not reported separately prior to the commercial release of Credit
Connection in 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 12.5% from $1.7 million in the three months
ended September 30, 1996 to $1.9 million in the three months ended September
30, 1997. This increase resulted primarily from an increase in the Company's
administrative, sales and marketing staff and increases related to non-salary
based administrative expenses, consisting of outside services, legal,
accounting and insurance fees and travel expenses. Selling, general and
administrative expenses includes (i) salaries and commissions 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 was attributable to
several factors. In addition, such expenses increased due to an increase in
expenses associated with the growth of the Company and an increase in legal and
insurance fees associated with the protection of the Company's proprietary
intellectual property.
Selling, general and administrative expenses increased 45.0% from $4.0 million
in the nine months ended September 30, 1996 to $5.9 million in the nine months
ended September 30, 1997. Virtually all of this $1.9 million increase related
to non-salary based administrative expenses, including recruiting, outside
services, legal, accounting and insurance fees and advertising expenses.
Certain of these expenses increased due to an increase in expenses associated
with the growth of the Company and an increase in legal and insurance 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 $0.5million during the three months ended September 30, 1997 as
compared to the three months ended September 30, 1996 due primarily to the
addition of 16 employees in 1996 and early 1997.
Research and development costs increased $1.0 million during the nine months
ended September 30, 1997 as compared to the nine months ended September 30,
1996 due primarily to the addition of 16 employees in 1996 and early 1997.
Approximately $91,000 was capitalized during the nine months ended September
30, 1996. There were no research and development expenses capitalized during
1997.
Interest Income (Expense). Interest income increased to $0.3 million in the
three months ended September 30, 1997 from an expense of $20,665 for the three
month period ended September 30, 1996. The increase in interest income over
such periods relates primarily to interest earned on the proceeds from the
Company's initial public offering.
Interest income increased to $0.9 million in the nine months ended September
30, 1997 from an expense of $81,212 for the nine month period ended September
30, 1996. The increase in interest income over such periods relates primarily
to interest earned on the proceeds from the Company's initial public offering
in December 1996.
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 $0.3 million. The acquisition was
accounted for as an acquisition of a minority interest using the purchase
method of accounting.
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<PAGE> 11
The assigned value of the identifiable net assets acquired over the cost of the
acquired interest was $1.2 million. This amount was being amortized into
income using the straight-line method over four years.
INCOME TAX EXPENSE
From its inception in 1987 until its reincorporation in Delaware in December
1996, the Company had 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 had
been taxed directly to the Company's stockholders. Upon termination of the
Company's Subchapter S status in December 1996, the Company determined the
differences between the financial reporting and income tax bases of its assets
and liabilities, and recorded at that date the resulting deferred tax liability
and income tax expense. Income tax amounts and balances are accounted for in
accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." The Company's income tax expense for the year
ended December 31, 1996 approximates the income tax expense that would have
been recognized had the Company terminated its Subchapter S status at January
1, 1996. During the month of December 1996, the Company incurred a loss for
federal income tax purposes of approximately $756,000, caused principally by a
tax deduction of $650,000 related to the exercise of certain nonqualified stock
options by officers of the Company. This net operating loss carry forward will
expire in 2011.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its working capital needs and investments in property
and equipment from operating cash flows and approximately $27.0 million of net
proceeds from the Company's initial public offering completed in December 1996
and January 1997. During the nine months ended September 30, 1997, the Company
consumed net cash from operating activities of $4.3 million. The primary use of
cash for operations was the reduction in accounts payable of approximately $1.7
million, the funding of losses from operations of approximately $2.4 million,
and the growth in accounts receivables of approximately $1.0 million
The Company's cash used in investing activities consists principally of
investments in property and equipment. During the nine months ended September
30, 1996 and 1997, the Company invested a total of $0.3 and $1.7 million,
respectively, in property and equipment. 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, 1997.
In addition, on January 10, 1997 the Company received approximately $4.2
million in net proceeds from the exercise by its underwriters of the
underwriters' over-allotment option issued in conjunction with the Company's
initial public offering in December 1996.
The Company has historically relied principally on its bank line of credit and
proceeds from its initial public offering completed in December 1996 for its
financing needs. The Company received $22.6 million of net proceeds from its
initial public offering. The Company maintains a secured bank line of credit
in the amount of $1.5 million, of which there was no balance outstanding at
September 30, 1997. The line of credit bears interest at the bank's prime rate
(8.50% at September 30, 1997). Further, the bank's line of credit requires the
bank's written consent prior to, among other things, (i) the Company's
engagement in a substantially different business activity, or (ii) the purchase
by the Company of any interest in another enterprise or entity.
The Company currently anticipates that its available cash resources, expected
cash flows from operations, and its bank line of credit will be sufficient to
meet its presently anticipated working capital, capital expenditure and debt
repayment requirements through mid 1998.
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<PAGE> 12
ITEM 3. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS, FINANCIAL CONDITION
AND THE MARKET PRICE OF SECURITIES.
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.
Dependence on CreditRevue Product Line. License fees, maintenance fees and
third-party computer hardware sales associated with licenses and installations
of CreditRevue accounted for substantially all of the Company's revenues
through September 30, 1997. Although the Company has recently introduced its
Credit Connection service, the Company expects that revenues generated from
licenses and installations of CreditRevue will continue to account for a
significant portion of the Company's revenues for the foreseeable future. To
date, Credit Connection has generated approximately $414,000 in revenues. The
life cycles of the Company's products and services are difficult to predict due
to the effect of new product and service introductions or software enhancements
by the Company or its competitors, market acceptance of new and enhanced
versions of the Company's products and services, and competition in the
Company's marketplace. A decline in the demand for CreditRevue, whether as a
result of competition, technological change, price reductions or otherwise,
would have a material adverse effect on the Company's business, results of
operations and financial condition.
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
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<PAGE> 13
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.
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, substantially 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.
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 formed 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.
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
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<PAGE> 14
basis with the final installment being paid in full upon acceptance of the
Company's software. The Company receives continuing revenues on CreditRevue
from annual maintenance agreements which commence upon acceptance of the
software by the customer. Maintenance agreements are renewable annually by the
customer, and the license agreements are generally co-terminous with the
maintenance agreements. Although the Company has experienced a high degree of
customer loyalty, the Company cannot predict how many maintenance agreements
will be renewed or the number of years of renewal. Revenues generated by the
Company's 10 largest customers accounted for 65.1% and 77.4% of total revenues
in 1996 and 1995, respectively. Two of the Company's customers accounted for
19.9% and 12.9% of total revenues, respectively, in 1995. None of the
Company's customers accounted for 10% or more of total revenues in 1996. 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.
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.
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, 1997, the
Company had grown to 207 employees from 140 employees at December 31, 1996.
The Company's ability to compete effectively and to manage future changes will
require the Company to continue to improve its financial and management
controls, reporting systems and procedures and budgeting and forecasting
capabilities on a timely basis and expand its sales and marketing work force,
and train and manage its employee work force. There can be no assurance that
the Company will be able to manage such changes successfully. The Company's
failure to do so could have a material adverse effect upon the Company's
business, results of operations and financial condition.
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 has obtained for key-person life insurance on the lives of each of
Messrs. DeFrancesco and Freiman. The loss of the services of one or more of
the Company's executive officers could have a material adverse effect on the
Company's business, results of operations and financial condition. The Company
retains its key employees through the use of equity incentive programs,
including stock option plans, employee stock purchase plans, and competitive
compensation packages. The Company has no employment agreements and does not
intend to enter into any such agreements in the foreseeable future. The
Company's future success also depends on its continuing ability to attract and
retain highly qualified technical, customer support, sales and managerial
personnel. In particular, the Company has encountered difficulties in hiring
sufficient numbers of programmers and technical personnel. Competition for
qualified personnel is intense, and there can be no assurance that the Company
will be able to retain its key technical, sales and managerial employees or
that it can attract, assimilate or retain other highly
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<PAGE> 15
qualified technical, sales and managerial personnel in the future.
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.
System Interruption and Security Risks; Potential Liability; Possible Lack of
Adequate Insurance; and System Inadequacy. The Company's operations are
dependent, in part, on its ability to protect its system from interruption by
damage from fire, earthquake, power loss, telecommunication failure,
unauthorized entry or other events beyond the Company's control. The
Company's computer equipment constituting its central computer system,
including its processing operations, is located at a single site. The Company
is currently in the planning stages of acquiring and implementing a back-up,
off-site processing system capable of supporting its operations in the event of
system failure. While the Company maintains $1.84 million of property insurance
policies, a business interruption insurance policy, a $3.0 million errors and
omissions insurance policy and a $10.0 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 system failure or 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
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<PAGE> 16
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.
Future Capital Needs; Uncertainty of Additional Financing. The Company
currently anticipates that its available cash resources combined with
anticipated funds from operations will be sufficient to meet its presently
anticipated working capital and capital expenditure requirements through mid
1998. Thereafter, the Company may need to raise additional funds.
The Company may need to raise additional funds sooner in order to fund more
rapid expansion, to develop new or enhanced products and services, to respond
to competitive pressures or to acquire complementary businesses or
technologies. If additional funds are raised through the issuance of equity
securities, the percentage ownership of the stockholders of the Company will be
reduced, stockholders may experience additional dilution, or such equity
securities may have rights, preferences or privileges senior to those of the
holders of the Company's Common Stock. There can be no assurance that
additional financing will be available when needed on terms favorable to the
Company or at all. If adequate funds are not available or are not available on
acceptable terms, the Company may be unable to develop or enhance its products
and services, take advantage of future opportunities or respond to competitive
pressures, which could have a material adverse effect on the Company's
business, results of operations and financial condition.
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.
Control by Existing Stockholders. 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, collectively
beneficially own approximately 64% of the outstanding shares of Common Stock.
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
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<PAGE> 17
are approved by such stockholders.
Possible Volatility of Stock Price. The trading price of the Company's Common
Stock could be subject to significant fluctuations in response to variations in
quarterly operating results, the gain or loss of significant orders, changes in
earning estimates by analysts, announcements of technological innovations or
new products by the Company or its competitors, general conditions in the
consumer lending and software industries, credit processing software and
services and other events or factors. In addition, the stock market in general
has experienced extreme price and volume fluctuations which have affected the
market price for many companies in industries similar or related to that of the
Company and which have been unrelated to the operating performance of these
companies. These market fluctuations may adversely affect the market price of
the Company's Common Stock.
Effect of Certain Charter Provisions; Antitakeover Effects of Certificate of
Incorporation, Bylaws and Delaware Law. 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 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.
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<PAGE> 18
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
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<PAGE> 19
3.1 Certificate of Incorporation*
3.2 Bylaws of the Company*
4.1 Specimen certificate for Common Stock of the Company*
4.2 See Exhibits 3.1 and 3.2 for provisions of the Certificate of
Incorporation and Bylaws of the Company defining rights of
holders of Common Stock of the Company
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*
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<PAGE> 20
10.15 1996 Credit Management Solutions, Inc. Non-Qualified Stock Option
Plan*
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the quarter for which
this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CREDIT MANAGEMENT SOLUTIONS, INC.
---------------------------------
(Registrant)
Date: November __, 1997 /s/ James R. DeFrancesco
----------------------------------------------------
James R. DeFrancesco
President, Chief Executive Officer and Chairman of
the Board of Directors
(Principal Executive Officer)
Date: November __, 1997 /s/ Robert P. Vollono
----------------------------------------------------
Robert P. Vollono
Senior Vice President, Treasurer, Chief Financial
Officer and Director (Principal
Financial and Accounting Officer)
- ------------------------------
* Incorporated by reference to the Exhibits filed with the Company's
Registration Statement on Form S-1, File NO. 333-14007.
20
<PAGE> 21
CREDIT MANAGEMENT SOLUTIONS, INC.
EXHIBIT INDEX
Exhibit No. Description Page
- ------------ ----------- ----
3.1 Certificate of Incorporation*
3.2 Bylaws of the Company*
4.1 Specimen certificate for Common Stock of the Company*
4.2 See Exhibits 3.1 and 3.2 for provisions of the Certificate
of Incorporation and Bylaws of the Company defining rights
of holders of Common Stock of the Company*
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*
21
<PAGE> 22
10.10 Business Loan Agreement between The Columbia Bank and the Company
dated June 10, 1994*
10.11 1996 Credit Management Solutions, Inc. Non-Qualified Stock Option
Plan*
10.12 1996 Credit Management Solutions, Inc. Employee Stock Purchase
Plan*
10.13 1996 Credit Management Solutions, Inc. Long-Term Incentive Plan*
10.14 Form of Tax Indemnification Agreement*
10.15 1996 Credit Management Solutions, Inc. Non-Qualified Stock Option
Plan*
27 Financial Data Schedule
- ---------------
* Incorporated by reference to the Exhibits filed with the Company's
Registration Statement on Form S-1, File No. 333-14007.
22
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001024339
<NAME> CREDIT MANAGEMENT SOLUTIONS, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 21,409,237
<SECURITIES> 0
<RECEIVABLES> 3,016,381
<ALLOWANCES> 98,734
<INVENTORY> 0
<CURRENT-ASSETS> 25,631,930
<PP&E> 4,119,150
<DEPRECIATION> 1,441,049
<TOTAL-ASSETS> 28,519,544
<CURRENT-LIABILITIES> 3,863,131
<BONDS> 0
0
0
<COMMON> 76,105
<OTHER-SE> 24,531,888
<TOTAL-LIABILITY-AND-EQUITY> 28,519,544
<SALES> 948,155
<TOTAL-REVENUES> 11,669,927
<CGS> 863,463
<TOTAL-COSTS> 7,790,959
<OTHER-EXPENSES> 7,198,854
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 904,355
<INCOME-PRETAX> (2,364,739)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,364,739)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,364,739)
<EPS-PRIMARY> (.31)
<EPS-DILUTED> (.31)
</TABLE>
