<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED.
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box: [ ]
Preliminary proxy statement [ ]
Definitive proxy statement [X]
Definitive additional materials [ ]
Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12 [ ]
Credit Management Solutions, Inc.
- -------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- -------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction
applies:
- -------------------------------------------------------------------------------
(2) Aggregate number of securities to which transactions applies:
- -------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
was determined):
- -------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- -------------------------------------------------------------------------------
<PAGE> 2
(5) Total fee paid:
- -------------------------------------------------------------------------------
- - Fee paid previously with preliminary materials:
- -------------------------------------------------------------------------------
- - Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount Previously Paid:
- -------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- -------------------------------------------------------------------------------
(3) Filing Party:
- -------------------------------------------------------------------------------
(4) Date Filed:
- -------------------------------------------------------------------------------
2
<PAGE> 3
CREDIT MANAGEMENT SOLUTIONS, INC.
5950 Symphony Woods Road
Columbia, Maryland 21044
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
MAY 22, 1998
The Annual Meeting of Stockholders of Credit Management Solutions, Inc.
(the "Company") will be held at The Columbia Inn, 10207 Wincopin Circle,
Columbia, Maryland 21044, telephone number (410) 730-3900 on May 22, 1998 at
9:00 a.m. (eastern standard) time for the following purposes:
(1) To elect three Directors to serve until the 2001 Annual Meeting of
Stockholders or until their respective successors shall have been duly
elected and qualified;
(2) To ratify the selection of Ernst & Young LLP, independent public
accountants, as auditors of the Company for the fiscal year ending December
31, 1998; and
(3) To transact such other business as may properly come before the
Annual Meeting of Stockholders.
Only stockholders of record at the close of business on April 9, 1998 will
be entitled to notice of, and to vote at, the Annual Meeting of Stockholders. A
list of stockholders eligible to vote at the meeting will be available for
inspection at the meeting and for a period of ten days prior to the meeting
during regular business hours at the corporate headquarters at the address
above.
Whether or not you expect to attend the Annual Meeting, your proxy vote is
important. To assure your representation at the meeting, please sign and date
the enclosed proxy card and return it promptly in the enclosed envelope, which
requires no additional postage if mailed in the United States or Canada.
By Order of the Board of Directors
/s/ JAMES R. DEFRANCESCO
James R. DeFrancesco
President, Chief Executive Officer and
Chairman of the Board of Directors
April 20, 1998
IT IS IMPORTANT THAT THE ENCLOSED PROXY CARD
BE COMPLETED AND RETURNED PROMPTLY
<PAGE> 4
CREDIT MANAGEMENT SOLUTIONS, INC.
PROXY STATEMENT
APRIL 20, 1998
This Proxy Statement is furnished to stockholders of record of Credit
Management Solutions, Inc. (the "Company") as of April 9, 1998 in connection
with the solicitation of proxies by the Board of Directors of the Company (the
"Board of Directors" or the "Board") for use at the Annual Meeting of
Stockholders to be held on May 22, 1998 (the "Annual Meeting").
Shares cannot be voted at the meeting unless the owner is present in person
or by proxy. All properly executed and unrevoked proxies in the accompanying
form that are received in time for the meeting will be voted at the meeting or
any adjournment thereof in accordance with instructions thereon, or if no
instructions are given, will be voted "FOR" the election of the named nominees
as Directors of the Company and "FOR" the ratification of Ernst & Young LLP,
independent public accountants, as auditors of the Company for the fiscal year
ending December 31, 1998, and will be voted in accordance with the best judgment
of the persons appointed as proxies with respect to other matters which properly
come before the Annual Meeting. Any person giving a proxy may revoke it by
written notice to the Company at any time prior to exercise of the proxy. In
addition, although mere attendance at the Annual Meeting will not revoke the
proxy, a stockholder who attends the meeting may withdraw his or her proxy and
vote in person. Abstentions and broker non-votes will be counted for purposes of
determining the presence or absence of a quorum for the transaction of business
at the Annual Meeting. Abstentions will be counted in tabulations of the votes
cast on each of the proposals presented at the Annual Meeting, whereas broker
non-votes will not be counted for purposes of determining whether a proposal has
been approved.
The Annual Report of the Company (which does not form a part of the proxy
solicitation materials), including the Annual Report on Form 10-K with the
consolidated financial statements of the Company for the fiscal year ended
December 31, 1997, is being distributed concurrently herewith to stockholders.
The mailing address of the principal executive offices of the Company is
5950 Symphony Woods Road, Columbia, Maryland 21044. This Proxy Statement and the
accompanying form of proxy are being mailed to the stockholders of the Company
on or about April 20, 1998.
VOTING SECURITIES
The Company has only one class of voting securities issued and outstanding,
its common stock, par value $0.01 per share (the "Common Stock"). At the Annual
Meeting, each stockholder of record at the close of business on April 9, 1998
will be entitled to one vote for each share of Common Stock owned on that date
as to each matter presented at the Annual Meeting. On April 9, 1998, 7,627,688
shares of Common Stock were outstanding. A list of stockholders eligible to vote
at the Annual Meeting will be available for inspection at the Annual Meeting and
for a period of ten days prior to the Annual Meeting during regular business
hours at the principal executive offices of the Company at the address specified
above.
1
<PAGE> 5
PROPOSAL 1
ELECTION OF DIRECTORS
Three Directors are to be elected at the Annual Meeting to serve as Class
II Directors until the 2001 Annual Meeting of Stockholders or until their
respective successors are duly elected and qualified. Unless otherwise
instructed, the proxy holders will vote the proxies received by them "FOR" the
Company's nominees, Mr. Freiman, Mr. Graham and Mr. Grody. Each nominee is
currently a Director of the Company.
Pursuant to the Company's Certificate of Incorporation, the Board of
Directors has been divided into three classes, denominated Class I, Class II and
Class III, with members of each class holding office for staggered three-year
terms or until their respective successors are duly elected and qualified. Class
II consists of Directors Mr. Freiman, Mr. Graham and Mr. Grody whose terms
expire at the Annual Meeting. Class III consists of Directors Mr. DeFrancesco
and Mr. McDonnell whose terms expire at the 1999 Annual Meeting of Stockholders.
Class I consists of Directors Mr. Vollono and Mr. Leger whose terms expire at
the 2000 Annual Meeting of Stockholders. At each annual meeting, the successors
to the Directors whose terms have expired are elected to serve from the time of
their election and qualification until the third annual meeting of the
stockholders following the election or until a successor has been duly elected
and qualified. The Company's Certificate of Incorporation, as amended, restricts
the removal of Directors under certain circumstances. The number of Directors
may be increased to a maximum of 15 by resolution of the Directors then in
office.
If any nominee is unable to be a candidate when the election takes place,
the shares represented by valid proxies will be voted in favor of the remaining
nominees. The Board of Directors does not currently anticipate that any nominee
will be unable to be a candidate for election.
The affirmative vote of a plurality of the Company's outstanding Common
Stock present in person or by proxy at the Annual Meeting is required to elect
the Directors.
INFORMATION REGARDING NOMINEES FOR ELECTION AS DIRECTORS
The Board of Directors currently has seven members. The following
information with respect to the principal occupation or employment, other
affiliations and business experience of each of the two nominees during the last
five years has been furnished to the Company by such nominee. Except as
indicated, each of the two nominees for reelection has had the same principal
occupation for the last five years.
Scott L. Freiman, age 35, co-founder of the Company, has served as the
Company's Executive Vice President and a Director since 1987. From 1985 to 1987,
Mr. Freiman served as Technology Director of American Financial Corporation, an
automobile finance/leasing company, where he worked with Mr. DeFrancesco to
develop the Company's credit origination software. Prior to 1985, Mr. Freiman
served as a development engineer for IBM and AT&T Bell Laboratories.
Stephen X. Graham, age 45, has served as Director since October 1996. Since
1988, he has been the President and Chief Executive Officer of Graham, Hamilton
& Co., Inc., a private investment banking firm. From 1982 to 1988 Mr. Graham was
a Vice President of Kidder, Peabody & Co.
Miles H. Grody, age 41, has served as the Company's Senior Vice President
and General Counsel since June 1995, and as the Company's Secretary and a
Director since October 1996. From January 1993 to June 1995, Mr. Grody served as
Chief Operating Officer of Tomahawk II, Inc., a document imaging and conversion
services company. From January 1992 to January 1993, Mr. Grody was a partner in
the law firm of Rowan & Grody, P.C. From 1998 to January 1992, Mr. Grody served
as Corporate Counsel for Perot Systems Corporation.
INFORMATION REGARDING NON-EMPLOYEE DIRECTORS WHO ARE NOT NOMINEES FOR REELECTION
AS DIRECTORS
Peter M. Leger, age 46, has served as a Director since December 1996. Since
March 1992, Mr. Leger has served in various capacities with ADP, currently as
President of ADP's Dealer Service Group. Prior to joining ADP, Mr. Leger served
in various capacities with Reuters Limited PLC, a worldwide information provider
2
<PAGE> 6
and systems integrator in computer solutions and services for the banking and
brokerage community, most recently as President of Reuters Systems Integration
Division. Mr. Leger was originally elected to the Board of Directors pursuant to
the terms of an agreement between the Company and ADP.
John J. McDonnell, Jr., age 60, has served as a Director since November
1996. Mr. McDonnell has served as President, Chief Executive Officer and a
director of Transaction Network Systems, Inc., a nationwide communications
network company specializing in transaction-oriented data services, since
founding Transaction Network Systems, Inc. in 1990. From 1987 to 1989, Mr.
McDonnell served as President and Chief Executive Officer of Digital Radio
Networks, Inc., a local access bypass carrier for point-of-sale transactions.
Mr. McDonnell has previously served as Group Vice President for the Information
Technologies and Telecommunications Group of the Electronic Industries
Association (EIA); Vice President, International Operations and Vice President,
Sales, for Tymnet, Inc. with responsibility for both private network sales and
public network services; and Director of Technology and Telecommunications for
the National Commission on Electronic Funds Transfer. Mr. McDonnell was one of
the founding members and is currently Chairman of the Executive Committee of the
Board of Directors of the Electronics Funds Transfer Association.
COMMITTEES OF THE BOARD
The Audit Committee consists of Mr. Stephen X. Graham and Mr. John J.
McDonnell, Jr. and is responsible for recommending independent auditors,
reviewing the audit plan, the adequacy of internal controls, the audit report
and management letter, and performing such other duties as the Board of
Directors may from time to time prescribe.
The Compensation Committee consists of Mr. Stephen X. Graham and Mr. John
J. McDonnell, Jr. and is responsible for advising the Board of Directors on
issues concerning the Company's executive compensation policies for senior
officers. The Compensation Committee also administers various incentive
compensation, stock, and option plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Neither Mr. McDonnell nor Mr. Graham has been an officer or employee of the
Company at any time. Mr. Graham is President and Chief Executive Officer of
Graham, Hamilton & Co., Inc. In 1997, in connection with the Company's initial
public offering of securities and other matters, the Company paid Graham,
Hamilton & Co., Inc. financial advisory fees in an aggregate amount equal to
$147,000. The Company also agreed to indemnify Graham, Hamilton & Co., Inc.
against certain liabilities resulting from the performance of its duties as
financial advisor, subject to certain limitations.
ATTENDANCE AT BOARD AND COMMITTEE MEETINGS
During 1997, the Board of Directors held four meetings and acted by
unanimous written consent once. During 1997, each Director attended all meetings
of the Board of Directors. The Compensation Committee held four meetings during
1997 and acted by unanimous written consent once. The Audit Committee held one
meeting during 1997.
COMPLIANCE WITH REPORTING REQUIREMENTS
Under the securities laws of the United States, the Company's Directors,
executive officers, and any persons holding more than ten percent of the
Company's Common Stock are required to report their ownership of the Company's
Common Stock and any changes in that ownership to the Securities and Exchange
Commission and the Nasdaq National Market Surveillance Department. Specific due
dates for these reports have been established and the Company is required to
report in this Proxy Statement any failure to file by these dates during 1997.
Based solely on its review of such forms received by it from such persons for
their 1997 transactions, the Company believes that all Directors, officers and
beneficial owners of more than ten percent of the Company's Common Stock were in
compliance with all such filing requirements, except for the following: James R.
DeFrancesco, the Company's President and Chief Executive Officer, did not report
3
<PAGE> 7
his gift of 10,192 shares of the Company's Common Stock in December 1997 in a
timely manner on Form 5, Annual Statement of Changes in Beneficial Ownership.
COMPENSATION OF DIRECTORS
Cash Compensation. Employee Directors do not currently receive a fee for
attending Board of Directors or committee meetings, but are reimbursed for
ordinary and necessary travel expenses related to such Director's attendance at
Board of Directors and committee meetings. Each non-employee Director is paid
$2,000 for each meeting of the Board of Directors or any committee thereof
attended.
Stock Option Grant. Pursuant to the Company's 1997 Stock Incentive Plan
(the "1997 Plan"), each non-employee Director is automatically granted a
non-qualified stock option to purchase 5,000 shares of Common Stock upon such
Director's initial election to the Board of Directors and on each anniversary of
such election while still serving on the Board of Directors. Such options vest
50% six months from the date of grant and 50% one year from the date of grant.
4
<PAGE> 8
EXECUTIVE COMPENSATION AND OTHER INFORMATION
EXECUTIVE OFFICERS
The following individuals were serving as executive officers of the Company
on March 31, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
James R. DeFrancesco...... 49 President and Chief Executive Officer
Scott L. Freiman.......... 35 Executive Vice President
James C. Alsobrook, Jr.... 43 Senior Vice President, Credit Connection
Miles H. Grody............ 41 Senior Vice President, Secretary and General
Counsel
Charles F. Riordan........ 42 Senior Vice President, Software Sales
Robert P. Vollono......... 49 Senior Vice President, Chief Financial Officer
Nancy L. Weil............. 53 Senior Vice President, Marketing
</TABLE>
INFORMATION CONCERNING EXECUTIVE OFFICERS WHO ARE NOT NOMINEES FOR REELECTION AS
DIRECTORS
James R. DeFrancesco, co-founder of the Company, has served as the
Company's President, Chief Executive Officer and Chairman of the Board of
Directors since 1987. From 1987 to 1992, Mr. DeFrancesco served as President of
Perpetual Leasing Services, Inc., the automobile leasing subsidiary of Perpetual
Savings Bank, FSB to which American Financial Corporation was sold. From 1976 to
1987, Mr. DeFrancesco founded and served as President and Chief Executive
Officer of American Financial Corporation, an automobile finance/leasing
company.
James C. Alsobrook, Jr. has served as the Company's Senior Vice President,
Credit Connection since December 1994. From April 1994 to November 1994, Mr.
Alsobrook served as Director of Sales and Marketing of ILC Holding Corp., a
computer software company. From 1984 to February 1994, Mr. Alsobrook served in
several officer capacities for Disc Incorporated, a computer software company,
including Vice President North American Sales, Vice President Banking Sales and
Regional Manager, ACCESS Products Group. From 1979 to 1984, Mr. Alsobrook served
as Senior Account Manager for NCR Corporation, Data Processing Center Division.
Charles F. Riordan has served as the Company's Senior Vice President,
Software Sales since February 1989. From 1985 to February 1989, Mr. Riordan
served as Vice President, Sales Representative for MTech Corp/Electronic Data
System.
Nancy Weil has served as the Company's Senior Vice President, Marketing
since February 1994. From 1984 to February 1994, Ms. Weil served as Manager,
Product Marketing for Intelus Corp., a systems integration company. From 1981 to
1984, Ms. Weil served as Manager, Product Marketing Communications for the
Manufacturing Division of Martin Marietta Data Systems.
5
<PAGE> 9
SUMMARY COMPENSATION TABLE
The following table sets forth the annual and long-term compensation paid
by the Company during 1997, 1996 and 1995 to the Company's Chief Executive
Officer and the four other executive officers of the Company whose total
compensation during 1997 exceeded $100,000 (collectively, the "Named Executive
Officers"):
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL ------------
COMPENSATION AWARDS
----------------------- ------------
OTHER SECURITIES ALL
ANNUAL UNDERLYING OTHER
FISCAL SALARY COMPENSATION OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($)(1) (#)(2) ($)
--------------------------- ------ -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
James R. DeFrancesco................. 1997 $169,654 $ -- -- $ 5,500(3)
President and Chief Executive 1996 160,000 -- -- 27,992(4)
Officer 1995 186,750 35,000(5) -- 10,741(6)
Scott L. Freiman..................... 1997 169,654 -- -- 5,500(3)
Executive Vice President 1996 160,000 -- -- 108,881(7)
1995 187,300 17,500(8) -- 14,896(9)
Charles F. Riordan................... 1997 233,340 -- -- 4,000(3)
Senior Vice President, Software 1996 183,536 -- 121,794 4,800(3)
Sales 1995 157,376 -- -- 4,800(3)
Robert P. Vollono.................... 1997 133,731 -- -- --
Senior Vice President and Treasurer 1996 117,231 -- 121,794 --
and Chief Financial Officer 1995 -- -- -- --
Miles H. Grody....................... 1997 133,731 -- -- --
Senior Vice President and Secretary 1996 114,923 -- 121,794 --
General Counsel 1995 -- -- -- --
</TABLE>
- ---------------
(1) Other compensation in the form of perquisites and other personal benefits
has been omitted as the aggregate amount of such perquisites and other
personal benefits constituted the lesser of $50,000 or 10% of the total
annual salary and bonus for the executive officer for such year.
(2) The Company did not grant any stock appreciation rights or make any
long-term incentive plan payments to any Named Executive Officers in 1997,
1996 or 1995.
(3) Consists of an automobile allowance.
(4) Consists of deferred compensation of $21,583, an automobile allowance of
$6,000 and $409 for non-cash fringe benefits.
(5) Consists of $35,000 distributed by the Company to Mr. DeFrancesco to fund
the payment of federal and state taxes owed by Mr. DeFrancesco in virtue of
the Company's status as a Subchapter S Corporation for federal and state
income tax purposes during 1995.
(6) Consists of an automobile allowance of $4,800 and $5,941 for premiums on
health insurance for Mr. DeFrancesco's benefit.
(7) Consists of deferred compensation of $100,750, an automobile allowance of
$6,000 and $2,131 for non-cash fringe benefits.
(8) Consists of $17,500 distributed by the Company to Mr. Freiman to fund the
payment of federal and state taxes owned by Mr. Freiman by virtue of the
Company's status as a Subchapter S Corporation for federal and state income
tax purposes during 1995.
(9) Consists of an automobile allowance of $4,800 and $10,096 for premiums on
health insurance for Mr. Freiman's benefit.
STOCK OPTION PLAN
The 1997 Plan was originally adopted by the Board of Directors in April
1997 and approved by the Company's stockholders in May 1997. The Company has
reserved for issuance 3,476,155 shares of Common Stock pursuant to the terms and
conditions of the 1997 Plan. The 1997 Plan is being administered by the
6
<PAGE> 10
Compensation Committee which has the authority to determine to whom options are
granted, the number of shares to be subject to such options, and the terms and
conditions of such options.
OPTION GRANTS IN LAST FISCAL YEAR
No stock options were granted to any Named Executive Officer during 1997.
No stock appreciation rights were granted during 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information with respect to the
Named Executive Officers regarding stock option holdings as of December 31,
1997. No stock options were exercised by any Named Executive Officer during
1997. No stock appreciation rights were exercised by any Named Executive Officer
during 1997 and no stock appreciation rights were outstanding as of December 31,
1997.
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR-END (#) FISCAL YEAR END(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
James R. DeFrancesco...................... -- -- $ -- $ --
Scott L. Freiman.......................... -- -- -- --
Charles F. Riordan........................ 182,990 202,990 1,463,920 1,623,920
Robert P. Vollono......................... 182,990 202,990 1,463,920 1,623,920
Miles H. Grody............................ 182,990 202,990 1,463,920 1,623,920
</TABLE>
- ---------------
(1) Amounts calculated by subtracting the exercise price of the options from the
market value of the underlying Common Stock using the closing selling price
as reported on the Nasdaq National Market of $13.00 per share of Common
Stock on December 31, 1997.
7
<PAGE> 11
COMPENSATION COMMITTEE REPORT
The Compensation Committee advises the Board of Directors on issues
concerning the Company's compensation philosophy and the compensation of
executive officers and other individuals compensated by the Company. The
Compensation Committee is responsible for the administration of the 1997 Plan
under which option grants, stock appreciation rights, restricted awards and
performance awards may be made to directors, executive officers and employees of
the Company and its subsidiaries.
The Compensation Committee believes that the compensation programs for the
Company's executive officers should reflect the Company's performance and the
value created for the Company's stockholders. In addition, the compensation
programs should support the short-term and long-term strategic goals and values
of the Company and should reward individual contribution to the Company's
success. The Company is engaged in a very competitive industry, and the
Company's success depends upon its ability to attract and retain qualified
executives through the competitive compensation packages if offers of such
individuals.
GENERAL COMPENSATION POLICY. The fundamental policy of the Compensation
Committee is to advise the Board of Directors on information which will aid the
Board of Directors in providing the Company's executive officers with
competitive compensation opportunities based upon their contribution to the
development and financial success of the Company and their personal performance.
It is the Compensation Committee's philosophy to advise the Board of Directors
that a portion of each executive officer's compensation should be contingent
upon the Company's performance as well as upon such executive officer's own
level of performance. Accordingly, the compensation package for each executive
officer should be comprised of two elements: (i) base salary which reflects
individual performance and is designed primarily to be competitive with salary
levels in the industry and (ii) long-term stock-based incentive awards which
strengthen the mutuality of interests between the executive officers and the
Company's stockholders.
FACTORS. The principal factors which the Compensation Committee considered
in reviewing the components of each executive officer's compensation package for
1997 are summarized below. The Compensation Committee may, however, in its
discretion apply entirely different factors in advising the Board of Directors
with respect to executive compensation for future years.
- BASE SALARY. The suggested base salary for each executive officer is
determined on the basis of the following factors: experience, personal
performance, the salary levels in effect for comparable positions within and
without the industry and internal base salary comparability considerations. The
weight given to each of these factors shall differ from individual to
individual, as the Compensation Committee deems appropriate.
While it is the general policy of the Compensation Committee to advise the
Board of Directors not to award performance-based cash bonuses, from time to
time, the Compensation Committee may advocate cash bonuses when such bonuses are
deemed to be in the best interest of the Company.
- LONG-TERM INCENTIVE COMPENSATION. Long-term incentives are provided
primarily through grants of stock options. The grants are designed to align the
interests of each executive officer with those of the stockholders and provide
each individual with a significant incentive to manage the Company from the
perspective of an owner with an equity stake in the Company. Each option grant
allows the individual to acquire shares of the Company's Common Stock at a fixed
price per share over a specified period of time. Each option generally becomes
exercisable in installments over a fixed period, contingent upon the executive
officer's continued employment with the Company. Accordingly, the option grant
will provide a return to the executive officer only if the executive officer
remains employed by the Company during the vesting period, and then only if the
market price of the underlying shares appreciates.
The number of shares subject to each option grant is set at a level
intended to create a meaningful opportunity for stock ownership based on the
executive officer's current position with the Company, the base salary
associated with that position, the size of comparable awards made to individuals
in similar positions within the industry, the individual's potential for
increased responsibility and promotion over the option term and the individual's
personal performance in recent periods. The Compensation Committee also intends
to consider the number of unvested options held by the executive officer in
order to maintain an appropriate level of equity incentive for that individual.
However, the Compensation Committee has not and will not adhere to
8
<PAGE> 12
any specific guidelines as to the relative option holdings of the Company's
executive officers. There were no stock options granted to executive officers in
1997 by the Board of Directors.
Through the Company's Employee Stock Purchase Plan, the Company offers
additional opportunities for equity ownership to executive officers under
certain circumstances.
CEO COMPENSATION. Regulations of the Securities and Exchange Commission
require the Board of Directors to disclose their basis for compensation reported
for Mr. DeFrancesco in 1997 and to discuss the relationship between the
Company's performance during the last fiscal year and Mr. DeFrancesco's
performance. In advising the Board of Directors with respect to the compensation
payable to the Company's Chief Executive Officer, the Compensation Committee
seeks to establish a level of base salary competitive with that paid by
companies within the industry which are of comparable size to the Company and by
companies outside of the industry with which the Company competes for executive
talent.
In reviewing Mr. DeFrancesco's base salary in 1997, the suggested base
salary established for Mr. DeFrancesco on the basis of the foregoing criteria
was intended to provide a level of stability and certainty. Accordingly, Mr.
DeFrancesco's compensation was not affected to any significant degree by Company
performance factors.
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(m). As a result of
Section 162(m) of the Internal Revenue Code of 1986, as amended, which was
enacted into law in 1993, the Company will not be allowed a federal income tax
deduction for compensation paid to certain executive officers, to the extent
that compensation exceeds $1 million per officer in any one year. This
limitation will apply to all compensation paid to the covered executive officers
which is not considered to be performance based. Compensation which does qualify
as performance-based compensation will not have to be taken into account for
purposes of this limitation. The 1997 Plans contain certain provisions which are
intended to assure that any compensation deemed paid in connection with the
exercise of stock options granted under that plan with an exercise price equal
to the market price of the option shares on the grant date will qualify as
performance-based compensation.
The Compensation Committee does not expect that the compensation to be paid
to the Company's executive officers for 1998 will exceed the $1 million limit
per officer. Further, in accordance with issued Treasury Regulations relating to
the new $1 million limitation, the Committee may in the future determine to
restructure one or more components of the compensation paid to the executive
officers so as to qualify those components as performance-based compensation
that will not be subject to the $1 million limitation.
THE COMPENSATION COMMITTEE
MR. STEPHEN X. GRAHAM
MR. JOHN J. MCDONNELL, JR.
9
<PAGE> 13
PERFORMANCE GRAPH
Set forth below is a graph comparing the annual percentage change in the
Company's cumulative total stockholder return on its Common Stock from December
31, 1996 to the last day of the Company's last completed fiscal year (as
measured by dividing (i) the sum of (A) the cumulative amount of dividends for
the measurement period, assuming dividend reinvestment, and (B) the excess of
the Company's share price at the end over the price at the beginning of the
measurement period, by (ii) the share price at the beginning of the measurement
period) with the cumulative total return so calculated of the Nasdaq Stock
Market-US Index and a line-of-business index consisting of the Nasdaq Computer
and Date Processing Services companies index (SIC Code 737).
COMPARISON OF 12 MONTH CUMULATIVE TOTAL RETURN*
AMONG CREDIT MANAGEMENT SOLUTIONS, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE NASDAQ COMPUTER & DATA PROCESSING INDEX
<TABLE>
<CAPTION>
CREDIT NASDAQ NASDAQ
MANAGEMENT STOCK COMPUTER &
MEASUREMENT PERIOD SOLUTIONS, MARKET DATA
(FISCAL YEAR COVERED) INC. (U.S.) PROCESSING
<S> <C> <C> <C>
12/18/96 100 100 100
12/96 126 100 100
12/97 113 123 122
</TABLE>
* $100 invested on 12/18/96 in stock or index - including reinvestment of
dividends. Fiscal year ending December 31.
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, which might incorporate future filings made by
the Company under those statutes, the preceding Compensation Committee Report on
Executive Compensation and the Company Stock Performance Graph will not be
incorporated by reference into any of those prior filings, nor will such report
or graph be incorporated by reference into any future filings made by the
Company under those statutes.
10
<PAGE> 14
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of February 25, 1998 by (i) each
Director and nominee for Director, (ii) each of the Named Executive Officers and
(iii) all executive officers and Directors as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF PERCENTAGE OF
COMMON STOCK SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OUTSTANDING(1)(2)
------------------------ --------------------- -----------------
<S> <C> <C>
James R. DeFrancesco...................................... 2,963,583 38.9%
Scott L. Freiman(3)....................................... 1,516,380 19.9
Charles F. Riordan(4)..................................... 182,990 2.3
Miles H. Grody(5)......................................... 182,990 2.3
Robert P. Vollono(6)...................................... 186,015 2.3
Stephen X. Graham(7)...................................... 5,000 *
John J. McDonnell, Jr.(8)................................. 6,000 *
Peter M. Leger(9)......................................... 5,000 *
James C. Alsobrook, Jr.(10)............................... 182,990 2.3
Nancy L. Weil(11)......................................... 182,990 2.3
All executive officers and Directors as a group (10
persons)(12)............................................ 5,413,938 70.3
</TABLE>
- ---------------
* Represents beneficial ownership of less than one percent of the Common
Stock.
(1) Gives effect to the shares of Common Stock issuable within 60 days of
February 25, 1998 upon the exercise of all options and other rights
beneficially owned by the indicated stockholders on that date. Unless
otherwise indicated, the persons named in the table have sole voting and
sole investment control with respect to all shares beneficially owned.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and investment power
with respect to shares.
(2) Percent ownership is based upon 7,619,312 shares of Common Stock issued and
outstanding as of February 25, 1998.
(3) Includes an aggregate of 63,540 shares held by Mr. Freiman's spouse and
child.
(4) Consists of 182,990 shares of Common Stock issuable upon exercise of a
stock option.
(5) Consists of 182,990 shares of Common Stock issuable upon exercise of a
stock option.
(6) Includes 25 shares held by Mr. Vollono's spouse and 182,990 shares of
Common Stock issuable upon exercise of a stock option.
(7) Consists of 5,000 shares of Common Stock issuable upon exercise of a stock
option.
(8) Consists of 5,000 shares of Common Stock issuable upon exercise of stock
option.
(9) Consists of 5,000 shares of Common Stock issuable upon exercise of a stock
option.
(10) Consists of 182,990 shares of Common Stock issuable upon exercise of a
stock option.
(11) Consists of 182,990 shares of Common Stock issuable upon exercise of a
stock option.
(12) See Notes (3) through (11).
11
<PAGE> 15
CERTAIN TRANSACTIONS
Mr. DeFrancesco owns 50% of the outstanding stock of Business Liner, Inc.
and 50% of the outstanding stock of D&R Investments, L.L.C. These companies
lease airplanes to the Company for business travel. The Company pays an hourly
fee for its use of the airplane and a portion of the monthly cost of maintaining
the airplane. The Company believes that the amounts paid for the lease of the
airplane are comparable to the amounts the Company would have otherwise paid for
comparable services from unaffiliated parties. For the fiscal year ended
December 31, 1997, the Company paid Business Liner, Inc. and D&R Investments,
L.L.C. $167,169 under this leasing arrangement.
Mr. Graham is President and Chief Executive Officer of Graham, Hamilton &
Co., Inc. In 1997, in connection with the Company's initial public offering of
securities and other matters, the Company paid Graham, Hamilton & Co., Inc.
financial advisory fees in an aggregate amount equal to $147,000. The Company
also agreed to indemnify Graham, Hamilton & Co., Inc. against certain
liabilities resulting from the performance of its duties as financial advisor,
subject to certain limitations.
12
<PAGE> 16
PROPOSAL 2
INDEPENDENT PUBLIC ACCOUNTANTS
Upon the recommendation of the Audit Committee, the Board of Directors
appointed Ernst & Young LLP, independent public accountants and auditors of the
Company since the Company's inception, as auditors of the Company to serve for
the fiscal year ending December 31, 1998, subject to the ratification of such
appointment by the stockholders at the Annual Meeting. The affirmative vote of a
plurality of the Company's outstanding Common Stock present in person or by
proxy is required to ratify the appointment of the auditors. Unless otherwise
instructed, the proxy holders will vote the proxies received by them "FOR" the
ratification of Ernst & Young LLP to serve as the Company's auditors for the
fiscal year ending December 31, 1998. A representative of Ernst & Young LLP will
attend the Annual Meeting with the opportunity to make a statement if he or she
so desires and will also be available to answer inquiries.
STOCKHOLDER PROPOSALS
In accordance with regulations issued by the Securities and Exchange
Commission by, certified mail-return receipt requested, stockholder proposals
intended for presentation at the 1999 Annual Meeting of Stockholders must be
received by the Secretary of the Company no later than December 9, 1998 if such
proposals are to be considered for inclusion in the Company's Proxy Statement
for the 1999 Annual Meeting of Stockholders.
OTHER MATTERS
Management knows of no matters that are to be presented for action at the
meeting other than those set forth above. If any other matters properly come
before the meeting, the persons named in the enclosed form of proxy will vote
the shares represented by proxies in accordance with their best judgment on such
matters.
Proxies will be solicited by mail and may also be solicited in person or by
telephone by some regular employees of the Company. The Company may also
consider the engagement of a proxy solicitation firm. Costs of the solicitation
will be borne by the Company.
By Order of the Board of Directors
/s/ JAMES R. DEFRANCESCO
James R. DeFrancesco
Chief Executive Officer and President
Columbia, Maryland
April 20, 1998
13
<PAGE> 17
(Form of Proxy)
CREDIT MANAGEMENT SOLUTIONS, INC.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS - MAY 22 1998
(THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF THE COMPANY)
The undersigned stockholder of Credit Management Solutions, Inc. hereby appoints
James R. DeFrancesco, President and Chief Executive Officer, and Robert P.
Vollono, Senior Vice President, Treasurer and Chief Financial Officer, and each
of them, with full power of substitution in each, proxies to vote the shares of
stock, in accordance with the undersigned's specifications, which the
undersigned could vote if personally present at the Annual Meeting of
Stockholders of Credit Management Solutions, Inc. to be held at The Columbia
Inn, 10207 Wincopin Circle, Columbia, Maryland 21044, telephone number (410)
730-3900 on May 22, 1998, at 9:00 a.m. eastern standard time, or any adjournment
thereof.
1. ELECTION OF DIRECTORS (for terms as described in the Proxy Statement)
<TABLE>
<S> <C>
[ ] FOR all nominees below [ ] WITHHOLD AUTHORITY
(EXCEPT AS MARKED TO THE CONTRARY) to vote for all nominees below
</TABLE>
Scott L. Freiman, Stephen X. Graham, and
Miles H. Grody
INSTRUCTION: To withhold authority to vote for an individual nominee,
write the nominee's name in the space provided below.
2. RATIFICATION OF ACCOUNTANTS
[ ] FOR [ ] AGAINST [ ] ABSTAIN WITH RESPECT TO
proposal to ratify the selection of Ernst & Young LLP, independent
public accountants, as auditors of the Company as described in the
Proxy Statement.
3. IN THEIR DISCRETION UPON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE
MEETING
UNLESS OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED "FOR" THE ELECTION
OF THE PERSONS NOMINATED BY MANAGEMENT AS DIRECTORS, "FOR" PROPOSAL 2
AND "FOR" PROPOSAL 3.
<PAGE> 18
Please date and sign exactly as your name appears on the envelope in
which this material was mailed. If shares are held jointly, each
stockholder should sign. Executors, administrators, trustees, etc.
should use full title and, if more than one, all should sign. If the
stockholder is a corporation, please sign full corporate name by an
authorized officer. If the stockholder is a partnership, please sign
full partnership name by an authorized person.
---------------------------------------------
---------------------------------------------
Signature(s) of Stockholder
Dated:
--------------------
2