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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 March 31, 1997
-----------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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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<S> <C>
Delaware 52-1549401
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
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<S> <C>
5950 Symphony Woods Road, Columbia, Maryland 21044
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(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (410) 740-1000
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FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT.
Indicate by check x 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: 7,600,388
shares of the Company's Common Stock, $.01 par value, were outstanding as of
May 1, 1997.
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CREDIT MANAGEMENT SOLUTIONS, INC.
Index
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Page
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Part I -- Financial Information
<S> <C> <C>
Item 1. Financial Statements (unaudited).................................................................. 3
Consolidated Balance Sheets -- March 31, 1997 and December 31, 1996............................... 3
Consolidated Statements of Operations -- Three Months Ended
March 31, 1997 and 1996........................................................................ 4
Consolidated Statements of Cash Flows -- Three Months Ended March 31,
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
<CAPTION>
Part II -- Other Information
<S> <C>
Item 1. Legal Proceedings................................................................................. 17
Item 2. Changes in Securities............................................................................. 17
Item 3. Defaults upon Senior Securities................................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders............................................... 17
Item 5. Other Information................................................................................. 17
Item 6. Exhibits and Reports on Form 8-K.................................................................. 17
Signatures........................................................................................ 19
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2
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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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<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
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(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 24,341,396 $ 23,501,633
Accounts receivable, net of allowance of $113,537 and $168,590 in 1997
and 1996, respectively 3,363,113 1,948,420
Costs and estimated earnings in excess of billings on uncompleted
contracts 721,802 483,255
Prepaid expenses and other current assets 634,473 746,055
Deferred income taxes 58,513 58,513
Recoverable income taxes 148,040 0
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Total current assets 29,267,337 26,737,876
Property and equipment:
Computer equipment and software 2,332,273 1,919,160
Office furniture and equipment 599,596 397,185
Leasehold improvements 171,809 131,399
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3,103,678 2,447,744
Accumulated depreciation and amortization (1,149,000) (1,033,394)
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1,954,678 1,414,350
Software development costs, net of accumulated amortization of $89,791
and $58,861 in 1997 and 1996, respectively 269,374 299,304
----------- -----------
Total assets $31,491,389 $28,451,530
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,373,893 $ 2,730,015
Accrued payroll and related expenses 700,184 889,263
Billings in excess of costs and estimated earnings on uncompleted
contracts 350,998 124,364
Deferred revenue 870,038 1,379,695
Stockholder loans 233,530 229,513
Current portion of long-term debt and capital lease obligations 219,363 239,651
---------- ----------
Total current liabilities 4,748,006 5,592,501
LONG-TERM DEBT:
Capital lease obligations, less current portion 177,413 220,341
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 0 50,792
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Total liabilities 4,925,419 5,863,634
</TABLE>
3
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<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
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(UNAUDITED)
<S> <C> <C>
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; 7,600,100 and 7,210,100 shares issued and outstanding at March
31, 1997 and December 31, 1996, respectively 76,001 72,101
Additional paid-in capital 26,483,404 22,287,169
Retained earnings 6,565 228,626
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Total stockholders' equity 26,565,970 22,587,896
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Total liabilities and stockholders' equity $31,491,389 $28,451,530
=========== ===========
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
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CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
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<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------------------------
1997 1996
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(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues:
CreditRevue license and software development fees $ 2,447,629 $ 1,776,593
CreditRevue maintenance fees 564,688 418,237
CreditRevue computer hardware sales 823,472 404,388
Credit Connection revenues 116,956 0
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3,952,745 2,599,218
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Costs and expenses:
Costs of license and software development fees 1,455,038 1,071,257
Cost of maintenance fees 98,846 110,591
Cost of computer hardware sales 665,055 336,025
Credit Connection costs and expenses 281,862 0
Selling, general and administrative expenses 1,899,266 1,353,402
Research and development costs 284,404 90,667
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4,684,471 2,961,942
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Loss from operations (731,726) (362,724)
Other income (expense):
Interest expense 310,833 (31,147)
Amortization of excess of assigned value of identifiable
assets over cost of an acquired interest 50,792 76,187
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361,625 45,040
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Loss before income taxes (370,101) (317,684)
Income tax benefit 148,040 0
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Net loss (222,061) (317,684)
============= ============
Loss per common and common equivalent share ($0.03) ($0.05)
============= ============
Average shares outstanding 7,556,767 6,293,720
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
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CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
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<CAPTION>
THREE MONTHS ENDED MARCH 31,
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1997 1996
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(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Operating activities:
Net loss $ (222,061) $ (317,684)
Adjustments:
Depreciation 115,605 88,096
Recoverable income taxes (148,040) 0
Amortization of excess of assigned value of identifiable assets over
cost of an acquired interest (50,792) (76,187)
Amortization of software development costs 29,930 0
Changes in operating assets and liabilities:
Accounts receivable, net (1,414,693) 923,935
Prepaid expenses and other current assets 111,582 (3,822)
Accounts payable (356,122) (334,735)
Accrued payroll and related expenses (189,079) 49,976
Net billings in excess of costs and estimated earnings on
uncompleted contracts (11,913) (26,653)
Deferred revenue (509,657) 80,368
Accrued interest on stockholder loans 4,017 3,754
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Net cash provided by (used in) operating activities (2,641,223) 387,048
Investing activities:
Purchases of property and equipment (655,933) (154,835)
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Net cash used in investing activities (655,933) (154,835)
Financing activities:
Net short-term repayments 0 (250,000)
Payments under capital lease obligations (58,900) (48,682)
Repayments of long-term debt (4,316) (4,005)
Proceeds from issuance of common stock 4,171,050 0
Other 29,085 0
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Net cash provided by (used in) financing activities 4,136,919 (302,687)
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Net change in cash and cash equivalents 839,763 (70,474)
Cash and cash equivalents at beginning of period 23,501,633 120,255
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Cash and cash equivalents at end of period $ 24,341,396 $ 49,781
============= =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
6
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CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated 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
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31, 1997 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1997. For further information, refer to the financial
statements and footnotes thereof 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. The income tax benefit for the three
months ended March 31, 1997, was computed by multiplying the Company's pre-tax
loss by the estimated annual effective tax rate of 40%.
NOTE 3. LOSS PER SHARE
The following table summarizes the computations of loss per share:
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<CAPTION>
THREE MONTHS ENDED MARCH 31,
1997 1996
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<S> <C> <C>
Net loss $ (222,061) $ (317,684)
====================================================
Weighted average number of shares of
common stock outstanding 7,556,767 4,910,100
Effect of options to purchase common stock
issued within one year of registration statement - 1,383,620
----------------------------------------------------
Total common and common equivalent shares of 7,556,767 6,293,720
stock considered outstanding during the period
----------------------------------------------------
Loss per share $ (0.03) $ (0.05)
====================================================
</TABLE>
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 computations as if they were outstanding for all periods included in the
registration statement using the
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treasury stock method, even if the result is anti-dilutive. For the quarter
ended March 31, 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 loss per share for the first quarter of
1996 and 1997 will not be material.
NOTE 4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Uncompleted contracts consist of the following components:
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<CAPTION>
BALANCE SHEET CAPTION
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COSTS AND BILLINGS IN EXCESS
ESTIMATED OF COSTS AND
EARNINGS IN ESTIMATED
EXCESS OF BILLINGS EARNINGS TOTAL
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<S> <C> <C> <C>
December 31, 1996:
Cost and estimated earnings $3,972,143 $2,205,872 $6,178,015
Billings 3,488,888 2,330,236 5,819,124
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$ 483,255 $ (124,364) $ 358,891
==============================================================================
March 31, 1997:
Costs and estimated earnings $4,833,913 $ 817,883 $5,651,796
Billings 4,112,111 1,168,881 5,280,992
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$ 721,802 $ (350,998) $ 370,804
==============================================================================
</TABLE>
All receivables on contracts in-progress are expected to be collected within
twelve months.
NOTE 5. STOCKHOLDERS' EQUITY
On January 10, 1997, the Company's underwriters exercised their over-allotment
option available as part of the Company's initial public offering to purchase
390,000 shares of the Company's common stock. The transaction resulted in
additional proceeds to the Company of approximately $4.2 million and increased
the number of shares outstanding to 7,600,100.
8
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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 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."
9
<PAGE> 10
RESULTS OF OPERATIONS
Total Revenues. Total revenues increased 52.1% from $2.6 million in the three
months ended March 31, 1996 to $4.0 million in the three months ended March 31,
1997. The Company's revenues are derived from four sources: license and
software development fees, maintenance fees, computer hardware sales and
Credit Connection services.
License and Software Development Fees. CreditRevue accounted for virtually all
of the Company's license and software development fee revenue through March 31,
1997. License and software development fees increased 37.8% from $1.8 million
in the three months ended March 31, 1996 to $2.4 million in the three months
ended March 31, 1997. The increases during these periods resulted from
increased market acceptance of CreditRevue.
Maintenance Fees. Maintenance fees include fees from software maintenance
agreements. Maintenance fees increased 35.0% from $0.4 million in the three
months ended March 31, 1996 to $0.6 million in the three months ended March 31,
1997. 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.
10
<PAGE> 11
Computer Hardware Sales. Computer hardware sales revenue increased 103.6% from
$0.4 million in the three months ended March 31, 1996 to $0.8 million in the
three months ended March 31, 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. The increase in such
revenues during these periods reflects the increase in the number of licenses
and installations of the Company's CreditRevue software.
Credit Connection Services. Credit Connection services consist of interface
development and related hardware fees and service bureau transaction and
communication fees. For the three months ended March 31, 1997, approximately
$70,000 of Credit Connection service revenues relate to interface development,
approximately $47,000 relate to service bureau fees. The Company has not
previously reported revenues for Credit Connection Services. Revenue is
recognized at the time that the services are performed.
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 35.8% from $1.1 million in the three months
ended March 31, 1996 to $1.5 million in the three months ended March 31, 1997.
As a percentage of license fee and software development revenue, cost of
license and software development fees were 60.3% and 59.5% in the three months
ended March 31, 1996 and the three months ended March 31, 1997, respectively.
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 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 decreased 10.6% from $0.1 million in the three months ended
March 31, 1996 to $0.1 million in the three months ended March 31, 1997. As a
percentage of maintenance fee revenue, cost of maintenance fees was 26.4% and
17.5% in the three months ended March 31, 1996 and 1997, respectively. The
dollar decrease in the cost of maintenance fees reflects the reassignment of
several maintenance staff to Credit Connection operations. The decrease in the
percentage of cost of maintenance fees to maintenance fee revenue in the three
months ended March 31, 1996 as compared to the three months ended March 31,
1997 resulted from improved efficiencies in the utilization of maintenance
personnel as maintenance revenues have increased.
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 94.9% from
$0.3 million in the three months ended March 31, 1996 to $0.7 million in the
three months ended March 31, 1997. As a percentage of computer hardware sales
revenue, cost of computer hardware sales was 83.1% and 80.1% in the three
months ended March 31, 1996 and the three months ended March 31, 1997,
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
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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 40.3% from $1.4 million in the three months
ended March 31, 1996 to $1.9 million in the three months ended March 31, 1997.
Of this $0.5 million increase, approximately $0.1 million related to payroll
expenses which resulted primarily from an increase in the Company's
administrative staff and approximately $0.4 million of the increase related to
non- salary based administrative expenses, consisting of primarily recruiting
and advertising expenses. 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 6
in the three months ended March 31, 1996 to 9 in the three months ended March
31, 1997. 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.
Research and Development Costs. Research and development costs consist
primarily of salaries and benefits of in-house programmers. These costs
increased $0.2 million during the three months ended March 31, 1997 as compared
to the three months ended March 31, 1996 due primarily to the addition of
sixteen employees in 1996 and early 1997. In addition, during the first and
second quarters of 1996, certain development expenses related to the
development of Credit Connection were being capitalized. Approximately $71,000
was capitalized during the three months ended March 31, 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 $0.2 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 Income (Expense). Interest income increased to $0.3 million in the
three months ended March 31, 1997 from an expense of $31,147 in the first three
months ended March 31, 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.
12
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LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its working capital needs and investments in property
and equipment from operating cash flows and approximately $22.6 million of net
proceeds from the Company's initial public offering completed in December 1996
and January 1997, including approximately $4.2 million in net proceeds received
by the Company on January 10, 1997 from the exercise by the underwriters of the
underwriter's over-allotment option issued in connection with the Company's
initial public offering. During the three months ended March 31, 1996, the
Company generated net cash from operating activities of $0.4 million. During
the three months ended March 31, 1997, the Company consumed $2.6 million of
cash for operations. The primary use of cash for operations was the growth in
accounts receivable of approximately $1.4 million. This working capital
deficiency is further 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 at December 31, 1996 and March 31, 1997 was $1.4 million and
$0.9 million, respectively.
The Company's cash used for investing activities consists principally of
investments in property and equipment. During the three months ended March 31,
1996 and 1997, the Company invested a total of $0.2 and $0.7 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 March
31, 1997.
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 $0.5 million, of which there was no balance outstanding at March
31, 1997. The line of credit bears interest at the bank's prime rate plus 1%
per annum (9.25% at March 31, 1997). Further, the bank's line of credit
requires the bank's written consent prior to, among other things, (i) the
payment of cash dividends, (ii) the Company's engagement in a substantially
different business activity, or (iii) the purchase by the Company of any
interest in another enterprise or entity. The Company is obligated to Mr. James
R. DeFrancesco, the Company's President and Chief Executive Officer, for $0.2
million of loans bearing interest at 7% per annum and due on demand after
October 1, 1997.
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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 1997.
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.
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Dependence on CreditRevue Product Line. License fees, maintenance fees and
third-party computer hardware sales associated with licenses and installations
of CreditRevue accounted for virtually all of the Company's revenues through
March 31, 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 $165,000 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 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, virtually all of the Company's revenues
have been derived from license fees, maintenance fees and hardware sales
associated with licenses and installations of CreditRevue. Under the terms of
its license agreements, a
15
<PAGE> 16
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 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.
16
<PAGE> 17
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 March 31, 1997, the Company had grown
to 182 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 qualified technical,
sales and managerial personnel in the future.
17
<PAGE> 18
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. 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.
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
18
<PAGE> 19
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.
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 1997.
Thereafter, the Company may need to raise additional funds.
The Company may need to raise additional funds sooner in order to fund more
rapid expansion, to develop new or enhanced products and services, to respond
to competitive pressures or to acquire complementary businesses or
technologies. If additional funds are raised through the issuance of equity
securities, the percentage ownership of the stockholders of the Company will be
reduced, stockholders may experience additional dilution, or such equity
securities may have rights, preferences or privileges senior to those of the
holders of the Company's Common Stock. There can be no assurance that
additional financing will be available when needed on terms favorable to the
Company or at all. If adequate funds are not available or are not available on
acceptable terms, the Company may be unable to develop or
19
<PAGE> 20
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 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
20
<PAGE> 21
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.
21
<PAGE> 22
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.
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*
22
<PAGE> 23
10.4 Form of Professional Services Agreement*
10.5 Form of Credit Connection Lender Agreement (for CreditRevue
Licensees)*
10.6 Form of Credit Connection Lender Agreement (for non-
CreditRevue Licensees)*
10.7 Form of Credit Connection Dealer Subscription Agreement*
10.8.1 Office Building Lease between Symphony Woods Limited
Partnership and the Company dated October 29, 1993*
10.8.2 Office Building Lease between Symphony Woods Limited
Partnership and the Company dated February 10, 1995*
10.8.3 First Amendment to Lease dated March 29, 1995*
10.8.4 Second Amendment to Lease dated August 12, 1996*
10.9 Promissory Note dated December 31, 1995 given by the Company
to James R. DeFrancesco*
10.10 Business Loan Agreement between The Columbia Bank and the
Company dated June 10, 1994*
10.11 1996 Credit Management Solutions, Inc. Non-Qualified Stock
Option Plan*
10.12 1996 Credit Management Solutions, Inc. Employee Stock
Purchase Plan*
10.13 1996 Credit Management Solutions, Inc. Long-Term incentive
Plan*
10.14 Form of Tax Indemnification Agreement*
10.15 1996 Credit Management Solutions, Inc. Non-Qualified Stock
Option Plan*
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.
- -----------------
* Incorporated by reference to the Exhibits filed with the Company's
Registration Statement on Form S-1, File No. 333-14007.
23
<PAGE> 24
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: May , 1997 /s/ James R. DeFrancesco
--- ---------------------------------------------------------
James R. DeFrancesco
President, Chief Executive Officer and Chairman
of the Board of Directors (Principal Executive
Officer)
Date: May , 1997 /s/ Robert P. Vollono
--- ---------------------------------------------------------
Robert P. Vollono
Senior Vice President, Treasurer, Chief Financial
Officer and Director (Principal Financial and
Accounting Officer)
24
<PAGE> 25
CREDIT MANAGEMENT SOLUTIONS, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ----------- ----------- ----
<S> <C>
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*
</TABLE>
<PAGE> 26
<TABLE>
<S> <C>
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
</TABLE>
- -------------------
* Incorporated by reference to the Exhibits filed with the Company's
Registration Statement on Form S-1, File No. 333-14007.
<TABLE> <S> <C>
<ARTICLE> 5
<NAME> CREDIT MANAGEMENT SOLUTIONS, INC.
<CIK> 0001024339
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 24,341,396
<SECURITIES> 0
<RECEIVABLES> 3,476,650
<ALLOWANCES> (113,537)
<INVENTORY> 0
<CURRENT-ASSETS> 29,267,337
<PP&E> 3,103,678
<DEPRECIATION> (1,149,000)
<TOTAL-ASSETS> 31,491,389
<CURRENT-LIABILITIES> 4,925,419
<BONDS> 0
0
0
<COMMON> 76,001
<OTHER-SE> 26,489,969
<TOTAL-LIABILITY-AND-EQUITY> 31,491,389
<SALES> 823,472
<TOTAL-REVENUES> 3,952,745
<CGS> 665,055
<TOTAL-COSTS> 2,500,801
<OTHER-EXPENSES> 2,183,670
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 310,833
<INCOME-PRETAX> (370,101)
<INCOME-TAX> 148,040
<INCOME-CONTINUING> (222,061)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (222,061)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
