<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
--------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------- -------------------------------
Commission file number 000-21735
CREDIT MANAGEMENT SOLUTIONS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 52-1549401
- -----------------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
135 National Business Parkway, Annapolis Junction, MD 20701
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (301) 362-6000
------------------------------
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE
LAST REPORT.
Indicate by check _ whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 7,654,488 shares of the
Company's Common Stock, $.01 par value, were outstanding as of August 6, 1999
<PAGE> 2
CREDIT MANAGEMENT SOLUTIONS, INC.
Index to June 30, 1999 Form 10-Q
<TABLE>
<CAPTION>
Page
----
Part I -- Financial Information
<S> <C>
Item 1. Financial Statements (unaudited).....................................................3
Consolidated Balance Sheets --June 30, 1999 and December 31, 1998....................3
Consolidated Statements of Operations -- Three Months Ended
June 30, 1999 and 1998 and Six Months ended June 30, 1999 and 1998................4
Consolidated Statements of Cash Flows -- Six Months Ended June 30,
1999 and 1998.....................................................................5
Notes to Consolidated Financial Statements...........................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................................8
Part II -- Other Information
Item 1. Legal Proceedings...................................................................23
Item 2. Changes in Securities...............................................................23
Item 3. Defaults upon Senior Securities.....................................................23
Item 4. Submission of Matters to a Vote of Security Holders.................................23
Item 5. Other Information...................................................................23
Item 6. Exhibits and Reports on Form 8-K....................................................23
Signatures..........................................................................25
</TABLE>
2
<PAGE> 3
CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---------------------- ----------------------
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,463,160 $ 3,090,565
Investments available-for-sale 2,326,055 6,482,021
Accounts receivable, net of allowance of $315,389 and $352,644 in
1999 and 1998, respectively 5,764,126 5,487,202
Costs and estimated earnings in excess of billings on uncompleted contracts 558,109 246,831
Prepaid expenses and other current assets 551,702 280,515
Deferred income taxes 58,513 58,513
---------------------- ----------------------
Total current assets 12,721,665 15,645,647
---------------------- ----------------------
PROPERTY AND EQUIPMENT:
Computer equipment and software 7,576,494 7,306,811
Office furniture and equipment 1,600,255 1,657,294
Leasehold improvements 2,648,755 2,661,291
---------------------- ----------------------
11,825,504 11,625,396
Accumulated depreciation and amortization (3,379,892) (2,549,451)
---------------------- ----------------------
8,445,612 9,075,945
Software development costs, net of accumulated amortization of $358,164 and
$298,304 in 1999 and 1998, respectively 1,371,985 338,724
Other assets 49,647 49,360
---------------------- ----------------------
Total Assets $ 22,588,909 $ 25,109,676
====================== ======================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,734,227 $ 5,798,379
Accrued payroll and related expenses 1,180,692 668,630
Billings in excess of costs and estimated earnings on uncompleted contracts 798,776 1,044,015
Deferred revenue 2,329,486 2,921,923
Short term borrowings 798,000 -
Current portion of capital lease obligations 57,804 65,994
---------------------- ----------------------
Total current liabilities 8,898,985 10,498,941
LONG-TERM DEBT:
Capital lease obligations, less current portion 2,220 28,966
Other lease obligations, less current portion 397,579 732,126
---------------------- ----------------------
Total liabilities 9,298,784 11,260,033
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value; 1,000,000 share authorized; no shares issued or
outstanding - -
Common stock, $.01 par value; 40,000,000 shares authorized; 7,658,488 and
7,649,770 shares issued and outstanding at June 30, 1999 and December 31,
1998, respectively 76,585 76,497
Additional paid - in capital 26,885,496 26,853,194
Accumulated deficit (13,671,956) (13,080,048)
---------------------- ----------------------
Total shareholders' equity 13,290,125 13,849,643
---------------------- ----------------------
Total liabilities and shareholders' equity $ 22,588,909 $ 25,109,676
====================== ======================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
<PAGE> 4
CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED, SIX MONTHS ENDED,
JUNE 30 JUNE 30
------------------------------------- ------------------------------------
1999 1998 1999 1998
----------------- ------------------ ----------------- -----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
License and software development fees $ 3,759,727 $ 1,402,005 $ 7,312,826 $ 4,175,460
Maintenance fees 1,429,934 1,021,219 2,621,131 2,003,911
Computer hardware sales 282,298 216,929 1,061,125 391,071
Service bureau revenues 669,090 495,411 1,277,698 808,137
----------------- ------------------ ----------------- -----------------
6,141,049 3,135,564 12,272,780 7,378,579
----------------- ------------------ ----------------- -----------------
COSTS OF REVENUES:
Cost of license and software development fees 1,899,819 1,661,143 3,604,360 3,492,867
Cost of maintenance fees 300,562 287,143 571,042 548,776
Cost of computer hardware sales 433,912 253,738 1,218,752 500,744
Cost of service bureau 699,554 854,707 1,506,021 1,554,014
----------------- ------------------ ----------------- -----------------
3,333,847 3,056,731 6,900,175 6,096,401
----------------- ------------------ ----------------- -----------------
Gross Profit 2,807,202 78,833 5,372,605 1,282,178
OTHER OPERATING EXPENSES:
Selling, general and administrative expenses 2,546,015 2,276,915 5,445,587 4,599,216
Research and development costs 327,062 570,460 683,885 1,055,336
----------------- ------------------ ----------------- -----------------
2,873,077 2,847,375 6,129,472 5,654,552
----------------- ------------------ ----------------- -----------------
Loss from operations (65,875) (2,768,542) (756,867) (4,372,374)
OTHER INCOME (EXPENSE):
Interest expense 112 (9,816) (9,620) (17,276)
Interest income 119,460 221,215 174,579 474,771
----------------- ------------------ ----------------- -----------------
119,572 211,399 164,959 457,495
----------------- ------------------ ----------------- -----------------
Net income (loss) $ 53,697 $ (2,557,143) $ (591,908) $ (3,914,879)
================= ================== ================= =================
Basic earnings (loss) per common share $ 0.01 $ (0.33) $ (0.08) $ (0.51)
================= ================== ================= =================
Weighted average shares used in computation 7,658,119 7,634,778 7,655,841 7,627,240
================= ================== ================= =================
Diluted earnings (loss) per common share $ 0.01 $ (0.33) $ (0.08) $ (0.51)
================= ================== ================= =================
Weighted average shares used in computation 7,658,119 7,634,778 7,655,841 7,627,240
================= ================== ================= =================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
<PAGE> 5
CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------------
1999 1998
--------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss (591,908) (3,914,879)
ADJUSTMENTS:
Depreciation 881,412 513,425
Amortization of software development costs 59,860 59,861
Amortization of discount on debt securities included in interest income (4,726) (86,196)
Loss on disposal of property and equipment 23,826 -
Other lease obligations (334,547) -
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable, net (276,924) (190,386)
Prepaid expenses and other current assets (271,187) (13,645)
Accounts payable (2,064,152) (580,641)
Accrued payroll and related expenses 512,062 35,716
Net billings in excess of costs and estimated gross profit on uncompleted contracts (556,516) (660,616)
Deferred revenue (592,437) 637,544
--------------- ---------------
NET CASH USED IN OPERATING ACTIVITIES (3,215,238) (4,199,817)
INVESTING ACTIVITIES:
Proceeds from (purchase of) of investments available-for-sale 4,160,692 (10,057,354)
Proceeds from sale of property and equipment 29,458 -
Purchase of property and equipment (304,363) (1,141,731)
Capitalized software development costs (1,093,121) -
Increase in other assets (287) (635,447)
--------------- ---------------
NET CASH PROVIDED BY (USED) IN INVESTING ACTIVITIES 2,792,379 (11,834,532)
FINANCING ACTIVITIES:
Payments under capital lease obligations (34,936) (89,502)
Proceeds from credit line 798,000 -
Proceeds from exercise of stock options - 43,740
Proceeds from issuance of common stock 32,390 90,053
--------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 795,454 44,291
--------------- ---------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 372,595 (15,990,058)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,090,565 20,569,300
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,463,160 $ 4,579,242
=============== ===============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
<PAGE> 6
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 the 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 and six month periods ended June
30, 1999 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1999. For further information, refer to the
consolidated financial statements and footnotes thereof included in the
Company's annual report or Form 10-K, for the year ended December 31, 1998.
NOTE. 2. CASH EQUIVALENTS
The Company considers all highly liquid investment with a maturity of three
months or less when purchased to be cash equivalents. The cost of these
investments is equivalent to fair value.
NOTE 3. INVESTMENTS
Available-for-sale securities are carried at fair value, as measured on quoted
exchanges, with unrealized security holding gains and losses recognized in
comprehensive income. Realized gains and losses and declines in value judged to
be other than temporary on available-for-sale securities are included in
interest income. Unrealized security holding gains are recognized in
comprehensive income.
At June 30, 1999, available-for-sale securities consisted of municipal,
corporate and government agency obligations, the cost of which approximates fair
value. The Company has not had significant realized or unrealized gains or
losses on its investments during the periods presented. These investments are
classified as current as all maturities are less than one year.
NOTE 4. GAIN (LOSS) PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- ----------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Numerator for basic and diluted loss per common share:
Net gain (loss) $ 53,697 $ (2,557,143) $ (591,908) $ (3,914,879)
------------- ------------- ------------ -------------
Denominator:
Denominator for basic and diluted gain (loss) per
common
Share - weighted-average shares 7,658,119 7,634,778 7,655,841 7,627,240
------------- ------------- ------------ -------------
Basic and diluted gain (loss) per common share $ 0.01 $ (0.33) $ (0.08) $ (0.51)
------------- ------------- ------------ -------------
</TABLE>
6
<PAGE> 7
NOTE 5. COST AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Uncompleted contracts consist of the following components:
<TABLE>
<CAPTION>
BALANCE SHEET CAPTION
------------------------------------------------------
COSTS AND ESTIMATED BILLINGS IN EXCESS
EARNINGS IN OF COSTS AND
EXCESS OF BILLINGS ESTIMATED EARNINGS TOTAL
--------------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1998:
Cost and estimated earnings $ 1,573,861 $ 3,236,349 $ 4,810,210
Billings 1,327,030 4,280,364 5,607,394
------------------------ ------------------------- --------------------
$ 246,831 $ (1,044,015) $ (797,184)
======================== ========================= ====================
June 30, 1999:
Cost and estimated earnings $ 2,022,632 $ 3,030,553 $ 5,053,185
Billings 1,464,523 3,829,329 5,293,852
------------------------ ------------------------- --------------------
$ 558,109 $ (798,776) $ (240,667)
======================== ========================= ====================
</TABLE>
All receivables on contracts in progress are expected to be collected within
twelve months.
NOTE 6. SEGMENT REPORTING
Segment Reporting
<TABLE>
<CAPTION>
Three months ended June 30, 1999
---------------------------------------------------------------------------------------------------
CDS E-Commerce SBA Total
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues 5,471,959 442,716 226,374 6,141,049
---------------------------------------------------------------------------------------------------
Segment profit (loss) 2,711,194 (782,050) (337,297) 1,591,847
---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Three months ended June 30, 1998
---------------------------------------------------------------------------------------------------
CDS E-Commerce SBA Total
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues 2,694,374 392,650 48,540 3,135,564
---------------------------------------------------------------------------------------------------
Segment profit(loss) 257,679 (672,913) (357,303) (772,537)
---------------------------------------------------------------------------------------------------
</TABLE>
A reconciliation of segment profit for all segments to income before income
taxes is as follows:
<TABLE>
<CAPTION>
Three months ended June 30,
--------------------------------------------------------------------------------------
1999 1998
--------------------------------------------------------------------------------------
<S> <C> <C>
Total segment profit 1,591,847 (772,537)
--------------------------------------------------------------------------------------
Corporate, general and administrative expenses (1,203,397) (1,689,930)
--------------------------------------------------------------------------------------
Depreciation and amortization (454,325) (306,075)
--------------------------------------------------------------------------------------
Net interest income 119,572 211,399
--------------------------------------------------------------------------------------
Loss before income taxes 53,697 (2,557,143)
--------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30, 1999
--------------------------------------------------------------------------------------------------
CDS E-Commerce SBA Total
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues 10,995,082 814,613 463,085 12,272,780
--------------------------------------------------------------------------------------------------
Segment profit (loss) 5,171,778 (1,901,356) (619,801) 2,650,621
--------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30, 1998
--------------------------------------------------------------------------------------------------
CDS E-Commerce SBA Total
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues 6,622,112 611,353 145,114 7,378,579
--------------------------------------------------------------------------------------------------
Segment profit(loss) 1,496,399 (1,324,373) (614,456) (442,430)
--------------------------------------------------------------------------------------------------
</TABLE>
A reconciliation of segment profit for all segments to income before income
taxes is as follows:
7
<PAGE> 8
<TABLE>
<CAPTION>
Six months ended June 30,
------------------------------------------------------------------------------------------
1999 1998
------------------------------------------------------------------------------------------
<S> <C> <C>
Total segment profit 2,650,621 (442,430)
------------------------------------------------------------------------------------------
Corporate, general and administrative expenses (2,465,001) (3,355,681)
------------------------------------------------------------------------------------------
Depreciation and amortization (942,487) (574,263)
------------------------------------------------------------------------------------------
Net interest income 164,959 457,495
------------------------------------------------------------------------------------------
Loss before income taxes (591,908) 3,914,879
------------------------------------------------------------------------------------------
</TABLE>
Segment data for the six months ended June 30, 1998 reflects reclassifications
of revenues between segments resulting in corresponding changes in segment
profits (losses). In the aggregate reclassifications totaled less than $0.1
million.
Substantially all of the revenues and assets or the Company's reportable
segments are attributed to or located in the United States.
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, 1998. 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."
License fees for CreditRevue(R) are recognized based on a
percentage-of-completion method, measured generally on a cost-incurred basis.
The Company typically charges a nonrefundable fee of 25% of the preliminary
estimate of the total license fee to develop an analysis of the customer's
credit operations and a plan for the configuration and implementation of
CreditRevue(R) according to the customer's requirements. Costs consist primarily
of direct labor, temporary contract labor and office space. Contracts in
progress are reviewed periodically, and revenues and earnings are adjusted based
on revisions in contract value and estimated time to completion. The Company
recognizes revenue for maintenance fees pro rata over the term of the related
agreement, which is generally one year. Maintenance fees received in advance of
revenue recognition are included in deferred revenue. In addition, as a
convenience to its customers, the Company offers third-party computer hardware
through various reseller arrangements. However, neither third-party hardware nor
third-party software sales are a focus of the Company's overall marketing
strategy. For the six months ended June 30, 1999, revenues from third-party
hardware and software sales accounted for 8.6% and 4.6% of total revenues,
respectively. Revenues from resales of third-party computer hardware and
software are recognized at the time of shipment and installation.
Certain of the Company's products and services, including CreditConnection and
CreditRevue(R) Service Bureau, are charged on a per transaction basis. As a
result, the Company anticipates that transaction-based revenue will represent an
increasing proportion of the Company's revenue. The Company's sales and
marketing efforts will no longer be exclusively targeted at generating
license-based revenue but will be increasingly focused on generating
transaction-based revenue from prospective customers. The Company's anticipated
future growth is based, in large part, on the success of these products and
services and the transition to a transaction-based revenue stream. Accordingly,
the failure by the Company to generate demand for CreditConnection or
CreditRevue(R) Service Bureau, the occurrence of any significant technological
problems, such as a system failure incurred prior to the implementation of a
back-up computer system, any inadequacy of the Company's business interruption
insurance to cover costs associated with system failure or business
interruptions, or the failure of the Company to successfully manage the
transition to a transaction-based revenue stream would have a material adverse
effect on the Company's business, results of operations and financial condition.
Since 1987, the Company has continually invested in the development and
introduction of new products, services and enhancements to its software.
Research and development expenditures are expensed as incurred. Certain software
development costs are capitalized subsequent to the establishment of
technological feasibility in accordance with Statement of Financial Accounting
Standards No. 86, Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed. Based on the Company's current research and
development
8
<PAGE> 9
process, technological feasibility is established upon completion of a working
model. The Company intends to continue to expend substantial resources on
developing new products and services and enhancements to its software to
incorporate technological developments and satisfy evolving customer needs.
As of June 30, 1999, the Company had 19 employees in its sales and marketing
organization. The Company intends to hire additional sales and marketing
personnel in the future to help the Company expand its market presence.
Competition for such personnel is intense, and there can be no assurance that
the Company can retain its existing sales personnel or that it can attract,
assimilate or retain additional highly qualified sales persons in the future. If
the Company is unable to hire such personnel on a timely basis, the Company's
business, results of operations and financial condition could be materially and
adversely affected.
RESULTS OF OPERATIONS
Total Revenues. Total revenues increased 95.9% from $3.1 million in the three
months ended June 30, 1998 to $6.1 million in the three months ended June 30,
1999. The Company's revenues are derived from four sources: license and software
development fees, maintenance fees, computer hardware sales and service bureau
revenues.
Total revenues increased 66.3% from $7.4 million in the six months ended June
30, 1998 to $12.3 million in the six months ended June 30, 1999. Growth in all
revenue categories contributed to improved year to year performance.
License and Software Development Fees. CreditRevue(R) accounted for virtually
all of the Company's license and software development fee revenue through June
30, 1999. License and software development fees increased 168.2% from $1.4
million in the three months ended June 30, 1998 to $3.8 million in the three
months ended June 30, 1999. The increases during these periods resulted from
increased market acceptance of CreditRevue(R) and increased demand for the
Company's professional consulting services.
License and software development fees increased 75.1% from $4.2 million for the
six months ended June 30, 1998 to $7.3 million for the six months ended June 30,
1999. Year to year revenue growth is the result of strong demand for the
Company's CreditRevue(R) software and professional consulting services. In
addition, during early 1998 the Company experienced delays in signing new
CreditRevue(R) clients which contributed to the low revenue levels reported in
the first six months of 1998.
Maintenance Fees. Maintenance fees include fees from software maintenance
agreements. Maintenance fees increased 40.0% from $1.0 million in the three
months ended June 30, 1998 to $1.4 million in the three months ended June 30,
1999. 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(R) outstanding during such periods.
Maintenance fees increased 30.8% from $2.0 million in the six months ended June
30, 1998 to $2.6 million for the six months ended June 30, 1999. In addition to
a growing installed base of CreditRevue(R) systems, maintenance agreements
include annual increases for increases in the Consumer Price Index (CPI). The
Company increased maintenance fees to 18% from 15% for more CreditRevue(R)
systems installed after 1998. The increased system base, CPI and increases to
annual maintenance fees all contribute to the growth in maintenance fee revenue
on a year to year basis.
Computer Hardware Sales. Computer hardware sales revenue increased 30.1% from
$0.2 million in the three months ended June 30, 1998 to $0.3 million in the
three months ended June 30, 1999. 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 fluctuation in such
revenues during these periods is the result of customer purchase preferences for
computer hardware systems. In certain instances, CreditRevue(R) customers have
volume discount arrangements with hardware resellers making them eligible for
discounts greater than those offered by the Company.
Computer Hardware sales for the six months ended June 30, 1999 increased 171.3%
to $1.1 million compared to $0.4 million for the six months ended June 30, 1998.
Increased CreditRevue(R) systems sales during the first six months of 1999 had a
direct impact on the increase in hardware sales during the same period.
9
<PAGE> 10
Service Bureau Fees. Service Bureau revenues originate from several sources
including: CreditConnection transaction and interface fees, Dun & Bradstreet
OneScore, Portfolio Management transaction and implementation fees and
CreditRevue(R) Service Bureau. Total Service Bureau revenues increased 35.1%
from $0.5 million for the quarter ended June 30, 1998 as compared to $0.7
million for the quarter ended June 30, 1999. The CreditConnection service
generated $443,000 of revenue in the quarter ended June 30, 1999 compared to
$393,000 for the period ended June 30, 1998, an increase of 12.7%. Dun &
Bradstreet OneScore was commercially released in the fourth quarter of 1997,
Portfolio Monitoring and CreditRevue(R) Service Bureau were commercially
released in the first quarter of 1998. These Service Bureau products account for
an aggregate revenue of $226,000 in the quarter ended June 30, 1999 representing
an increase of 119.4% over the $103,000 recorded in the quarter ended June 30,
1998.
Service Bureau fees increased 58.1% from $0.8 million for the six months ended
June 30, 1998 to $1.3 million for the six months ended June 30, 1999. Of the
total $1.3 million in 1999, CreditConnection(R) related revenues accounted for
$0.8 million up 39.1% from the $0.6 million reported for the first six months of
1998. The growth in CreditConnection(R) revenue related to the increased number
of dealers and lenders active on the system at June 30, 1999. The balance of
Service Bureau fees for the first six months of 1999, totaling $0.5 million,
represent revenues related to the CreditRevue(R) service bureau and the Dun &
Bradstreet OneScore and Portfolio monitoring services. These other service
bureau revenues increased 135.3% from $0.2 million to $0.5 million for the six
months ended June 30, 1998 and 1999, respectively. The increase in other service
bureau revenues is attributable to the addition of an additional account in the
CreditRevue(R) service bureau and growth in the number of clients and
transactions for the Dun & Bradstreet related services.
Cost of License and Software Development Fees. Cost of license and software
development fees consist primarily of salaries and benefits for in-house
programmers, the cost of temporary contract labor and costs for office space.
Cost of license and software development fees increased 14.4% from $1.7 million
in the three months ended June 30, 1998 to $1.9 million in the three months
ended June 30, 1999. As a percentage of license fee and software development
revenue, cost of license and software development fees were 118.5% and 50.5% in
the three months ended June 30, 1998 and 1999, respectively. The decrease in
cost of license and software fees as a percentage of license and software
development fees relates to the fluctuation in the Company's quarterly revenues
and the costs associated with in-house programmers and temporary contract labor.
The net increase in costs of $0.2 million is the result of higher costs for the
in-house programmers. Revenue fluctuations results in corresponding fluctuations
in the extent to which the Company employs temporary contractors. With respect
to temporary contractors, the Company's costs on a full-time equivalent basis
for these contractors is generally twice the amount incurred by the Company for
its in-house technical personnel.
The cost of license and software development fees increased 3.2% from $3.5
million for the six months ended June 30, 1998 to $3.6 million for the six
months ended June 30, 1999. As a percentage of license and software development
revenue, the cost of license and software development fees were 83.7% and 49.3%
for the six months ended June 30, 1998 and 1999 respectively. Several factors
contributed to the reduction in costs as a percentage of revenue. The Company
employs programmers and analysts with expertise in implementing CreditRevue(R)
systems. In order to ensure required skills and knowledge are available to
implement new systems the Company must retain a core pool of skilled employees
even when revenues decline. In the first six months of 1998, when there were
delays in signing new CreditRevue(R) clients, the costs of retaining skilled
employees caused costs of license and software development fees as a percentage
of license related revenues to be significantly higher than in prior periods.
During 1999 the Company has implemented a more disciplined focus on staff
utilization which has resulted in lowering costs of implementing CreditRevue(R)
systems. The improved staff utilization and growth in license and software
development revenues during the first six months of 1999 resulted in the
reduction of costs as a percentage of revenue.
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Costs of Maintenance Fees. Cost of maintenance fees consists primarily of
personnel and related costs for customer maintenance and support. Cost of
maintenance fees increased 4.7% from $0.3 million in the three months ended June
30, 1998 to $0.3 million in the three months ended June 30, 1999. As a
percentage of maintenance fee revenue, cost of maintenance fees was 28.1% and
21.0% in the three months ended June 30, 1998 and 1999, respectively. The dollar
increase in the cost of maintenance fees reflects the growth in license fees for
CreditRevue(R) during the periods presented and the resultant increase in the
number of installations. The fluctuation in the percentage of cost of
maintenance fees to maintenance fee revenues in 1998 and 1999 results from
incremental increases in office related expenses for maintenance personnel as
maintenance revenues have increased. Staffing utilization efficiencies will vary
based on the timing and training of additions to maintenance staff personnel.
Additionally, the cost of maintenance for third party software that is resold is
included in cost of maintenance fees for the period ended June 30, 1999.
Cost of maintenance fees increased 4.1% from $0.5 million for the six months
ended June 30, 1998 to $0.6 million for the six months ended June 30, 1999. This
increase in costs relates directly to the corresponding 30.8% increase in
revenues. Cost of maintenance as a percentage of maintenance revenues were 27.4%
and 21.8% for the six months ended June 30, 1998 and 1999 respectively.
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(R) and (ii) salaries and benefits for systems
integration employees. Cost of computer hardware sales increased 71.0% from $0.3
million in the three months ended June 30, 1998 to $0.4 million in the three
months ended June 30, 1999. As a percentage of computer hardware sales revenue,
cost of computer hardware sales was 117.0% and 153.7% in the three months ended
June 30, 1998 and 1999, respectively. The increase in the cost of computer
hardware sales as a percent of revenue is the result of decreased hardware
margins, while fixed expenses, primarily personnel-related in nature, remained
constant during the same period.
Cost of computer hardware sales increased 143.4% from $0.5 million for the six
months ended June 30, 1998 to $1.2 million for the six months ended June 30,
1999. As a percentage of hardware revenues costs were 128.3% and 114.9% for the
six months ended June 30, 1998 and 1999 respectively. During the period that
costs increased 143.4%, corresponding revenues increased 171.3%. Costs actually
exceed revenues because the Company has certain fixed costs for salaries and
benefits for the systems integration staff required to support hardware sales
activities. As hardware margins decline increasing sales levels are necessary to
recover the fixed costs of supporting these revenue streams.
Cost of Service Bureau Revenues. Cost of service bureau fees consist primarily
of personnel costs associated with the operation and support of the service
bureau. Other costs of service bureau revenues include equipment rental
expenses, communications network costs from third parties and hardware and
software pass through expenses. Service bureau costs for the three months ended
June 30, 1998 and 1999 were $0.9 million and $0.7 million, respectively. Cost of
service bureau revenues during the three months ended June 30, 1998 and 1999
exceeded service bureau revenues because of start up costs associated with
establishing the service bureau. As these new services continue to gain market
acceptance, corresponding costs of service bureau fees are expected to decrease
as a percent of service bureau revenues.
Cost of service bureau revenues declined 3.1% from $1.6 million for the six
months ended June 30 1998 to $1.5 million for the six months ended June 30,
1999. As a percentage of revenues, costs of service bureau were 192.3% and
117.9% for the six months ended June 30, 1998 and 1999 respectively. While costs
declined 3.1% corresponding revenues increased 58.1%. The slight reduction in
costs relates to improved staff utilization during 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 11.8% from $2.3 million in the three months
ended June 30, 1998 to $2.5 million in the three months ended June 30, 1999.
This $0.2 million increase relates to increased payroll expenses associated with
increased sales commissions and incentives (approximately $0.2 million),
increased depreciation expenses associated with the Company's facilities at
Annapolis Junction (approximately $0.4 million) offset by reductions in
recruiting expenses (approximately $0.1 million), and rent expense
(approximately $0.3 million). The rent expense reduction relates to subleases
for previously abandoned office space for which reserves had been accrued in
1998.
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Selling general and administrative expenses increased 18.4% from $4.6 million
for the six months ended June 30, 1998 to $5.4 million for the six months ended
June 30, 1999. As a percentage of total revenues, selling, general and
administrative expenses were 62.3% and 44.4% for the six months ended June 30,
1998 and 1999 respectively. The net increase in selling, general and
administrative expenses of $0.8 million on a year to year basis relates to
increases in sales commissions and incentives (approximately $0.4 million),
increases in, increases in rent expenses associated with new offices
(approximately $0.4 million) and increased depreciation expenses (approximately
$0.4 million) associated with the new offices and data center at Annapolis
Junction, Maryland offset by approximately $0.3 million related to the
subleasing of previously vacated office space.
Research and Development Costs. Research and development costs consist primarily
of salaries and benefits of in-house programmers. These costs decreased $0.2
million during the three months ended June 30, 1999 as compared to the three
months ended June 30, 1998 due primarily the capitalization of certain
development costs associated with the Company's CreditRevue(R) Maestro product.
The CreditRevue(R) Maestro product is a robust automated analysis engine for
evaluating and decisioning consumer and small business credit applications.
Technological feasibility of CreditRevue(R) maestro was deemed to have occurred
November 1, 1998 at which point capitalization of certain expenses commenced.
During the three months ended June 30, 1999, approximately $0.6 million of
expenses related to the development of CreditRevue(R) Maestro were capitalized.
All development activities during the three months ended June 30, 1998 were
expensed. During the period from September 1994, the direct payroll costs of
certain programmers were capitalized as software development costs. See Note 1
to Notes to Consolidated Financial Statements in the Company's 10-K or Annual
Report for the year ended December 31, 1998.
Research and development costs decreased 35.2% from $1.1 million for the six
months ended June 30, 1998 to $0.7 million for the six months ended June 30,
1999. During the first six months of 1999 approximately $1.1 million of research
and development expenses related to CreditRevue(R) Maestro were capitalized in
accordance with FASB 86. The capitalization of CreditRevue(R) Maestro
development expenses result in the reduction in research and development expense
on a year to year basis.
Interest Income (Expense). Net interest income decreased to $0.1 million in the
three months June 30, 1999 from $0.2 million in the three months ended June 30,
1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its working capital needs, operating losses and
investments in property and equipment from the net proceeds from the Company's
initial public offering completed in December 1996. During the six months ended
June 30, 1998, the Company consumed net cash in operating activities of $4.2
million. During the six months ended June 30, 1999, the Company consumed $3.2
million of cash in operating activities. The primary use of cash in operations
during the six months ended June 30, 1999, was the reduction of accounts payable
of approximately $2.0 million and increases in prepaids, deferred revenue and
net billings in excess of costs and estimated gross profit on uncompleted
contracts totaling approximately $1.4 million in the aggregate.
The Company's cash used in investing activities consists principally of
investments in property and equipment. During the six months ended June 30, 1998
and 1999, the Company invested a total of $1.1 and $0.3 million in property and
equipment, respectively. These investments were directly attributable to the
Company's growth in operations. The Company does not have any material
commitments for the purchase of property and equipment at June 30, 1999.
The Company has historically relied principally on its bank line of credit and
proceeds from its initial public offering completed in December 1996 for its
financing needs. The Company received $22.6 million of net proceeds from its
initial public offering. The Company maintains a secured bank line of credit in
the amount of $1.5 million, of which the balance outstanding at June 30, 1999
was approximately $0.8 million. The line of credit bears interest at the bank's
prime rate per annum (8.5% at June 30, 1999). 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
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interest in another enterprise or entity
The Company currently anticipates that its available cash resources, expected
cash flows from operations, and its bank line of credit will be sufficient to
meet its presently anticipated working capital, capital expenditure and debt
repayment requirements through 1999.
YEAR 2000 COMPLIANCE
Year 2000 Issue
The Year 2000 issue is a result of computer programs which store or process
date-related information using only two digits to represent the year. These
programs may not be able to properly distinguish between a year in the 1900's
and a year in the 2000's. Failure of these programs to distinguish between the
two centuries could cause the programs to yield erroneous results or even to
fail.
STATE OF READINESS
The Company recognizes the significance of the year 2000 issue and has
implemented a formal year 2000 program to minimize the impact of the year 2000
on the Company and its customers ("Year 2000 Program"). The Year 2000 Program
addresses both information technology ("IT") and non-IT systems, for systems
used by the Company as well as those provided by the Company to its customers.
Non-IT systems are primarily used by the Company in the operation of its
facilities. The Year 2000 Program is implemented by a Year 2000 Team which
includes members from all levels of management and all functional areas of the
Company, as follows:
- Executive Sponsor - The Executive Sponsor works with the Senior
Technology Executive on budgeting and resources management and other
major year 2000 issues, and reports on Year 2000 Program status to
the Executive Management of the Company as well as the Board of
Directors.
- Senior Technology Executive - The Senior Technology Executive
manages the Project Managers-Company Wide. Issues relating to
budgeting and resources are escalated to the Senior Technology
Executive. The Senior Technology Executive also has the authority to
prioritize Year 2000 tasks over other project tasks.
- Project Managers-Company Wide - The Project Managers-Company Wide
share responsibility for determining the Year 2000 tasks that need
to be completed, and monitoring the completion of the tasks on
schedule. The Project Managers-Company Wide are responsible for
collecting, coordinating and disseminating information within the
Company about the Year 2000 Program and its status.
- System Project Managers - A project manager is assigned to each of
the primary areas of the Company. Each System Project Manager is
responsible for ensuring that the Year 2000 tasks relating to
his/her area are completed on schedule.
- Product Project Managers - A project manager is assigned to each
specific product. Each Product Project Manager is responsible for
ensuring that the Year 2000 tasks relating to that specific product
are completed on schedule.
- System Analysts - System Analysts review individual products to
identify Year 2000 issues. Developers - Developers perform coding
modifications to address year 2000 issues.
- Testers - Testing is performed under the guidance of the Quality
Services department to ensure that any Year 2000 issues have been
properly addressed.
Individual members of the Year 2000 Team communicate frequently with respect to
Year 2000 issues. The Year 2000 Team meets as a group and reports status
bi-weekly. Subgroups of the Year 2000 Team meet as needed to address specific
issues.
The Company is using employees of the Company to identify and address Year 2000
issues. The Year 2000 Program involves six basic stages: (1) inventory of all
potentially affected software products and software-related services, (2)
analysis of such products and services to identify any areas that require change
or
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replacement, (3) change or replacement of the identified areas, (4) testing,
(5) implementation of the changes or replacements, and (6) contingency plans.
Because the Company is not only a user of software products and software-related
services, but also provides software products and software-related services to
its customers, the Company's Year 2000 Program addresses both software products
and software-related services used by the Company and those provided by the
Company to its customers.
The Company has established written Year 2000 coding standards which have been
distributed to the Company's system analysts, developers and testers. The
Company has also conducted training for its system analysts, developers and
testers to ensure that they are familiar with the Company's Year 2000 coding
standards.
For purposes of the Year 2000 Program, the Company has classified into the
following three major categories the software products and software-related
services provided by the Company to its customers: credit decisioning systems
(existing systems and new systems), e-commerce systems, and service bureau
systems.
CREDIT DECISIONING SYSTEMS (EXISTING). For existing credit decisioning systems
(i.e., systems which customers were using in production at the time the Year
2000 Program was applied to the system), the Company performs the following
activities:
1. The customer's credit decisioning system is analyzed to identify any
Year 2000 issues and to determine whether any modifications to the
code are required. The analysis is conducted in accordance with
detailed procedures which were developed internally by the Company
for Year 2000 analysis of its credit decisioning systems.
2. The Year 2000 modifications are made.
3. The modifications are tested. The customer also has an opportunity
to test the modifications.
4. Following the testing, the modifications are installed in the
customer's system.
5. Any enhancements to the customers' credit decisioning system since
the completion of the procedures described in items 1-4 above were
developed and implemented by the Company under its Year 2000 Coding
Standards. As an extra safeguard, however, the Company conducts a
follow-up Year 2000 analysis of these enhancements.
CREDIT DECISIONING SYSTEMS (NEW). For new credit decisioning systems (i.e.,
systems which were not used by customers until after the Year 2000 Program was
applied to the system), the Company performs the following activities:
1. Each new credit decisioning system starts with a "base" system. The
base system is analyzed for Year 2000 issues.
2. Enhancements are made to the base system based on the functional
specifications agreed to between the Company and the customer, and
the enhanced system is delivered to the customer for user acceptance
testing.
3. Before or concurrent with the user acceptance testing, the Company
reviews the code enhancements for compliance with the Company's Year
2000 coding standards.
4. The Company implements required modifications on the test system at
the Company's site, and tests the modifications.
5. Upon completion of testing of the changes by the Company, the
software changes are reported to the customer and installed in the
customer's system for further testing by the customer.
6. With respect to any enhancements to the credit decisioning system
after acceptance by the customer of the system, the Company performs
the enhancements in a test environment. The enhancements are then
analyzed and tested for Year 2000 issues following the above
approach.
E-COMMERCE SYSTEMS. For e-commerce systems, the Company performs the following
activities:
1. The Company analyzes the software programs supporting the
e-commerce system to identify any Year 2000 issues and
determines whether any modifications are required. The Company
also coordinates with the vendor of any hardware and other
equipment supporting the e-commerce
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system to request Year 2000 information regarding the applicable
product and to determine whether any patches, upgrades or
replacements are necessary. The Company also tests the third party
product where necessary, appropriate and feasible.
2. Any necessary modifications are made to the software programs
supporting the e-commerce system. In addition, any necessary patches
or upgrades to, or replacements of, third party products are
installed.
3. The Company analyzes and tests the modifications, patches, upgrades
and replacements. The Company makes the Year 2000 version of the
software programs supporting the e-commerce system available to its
customers in a Year 2000 environment for testing of the
modifications. The customer schedules the testing with the Company.
4. The modifications, patches, upgrades and replacements are placed
into production.
5. With respect to any subsequent enhancements to the e-commerce
system, the enhancements are performed in a test environment. The
enhancements are then analyzed and tested for Year 2000 issues
following the above approach prior to being placed into production.
SERVICE BUREAU SYSTEMS. For service bureau systems, the Company performs the
following activities:
1. The "base" service bureau system is analyzed for compliance with the
Company's Year 2000 coding standards.
2. The Year 2000 modifications are made.
3. The modifications are tested.
4. For any subsequent releases, the Company analyzes the changes for
compliance with the Company's Year 2000 coding standards. The
Company makes any required modifications to the code.
5. The Company tests the modifications.
6. Following the testing, the release is ready to be delivered to the
customer.
INFRASTRUCTURE. For products and systems used by the Company internally, the
Company performs one or more of the following activities:
1. The Company contacts the provider of the product or system in
writing to request information regarding the Year 2000 readiness of
its product or system, and evaluates the response for reasonableness
and acceptability, based on CMSI's knowledge of the product or
system.
2. The Company obtains Year 2000 compliance information from the third
party's web site and evaluates the response for reasonableness and
acceptability based on the Company's knowledge of the product or
system.
3. The Company tests the product or system where appropriate and
possible.
4. For any third party products or systems that require modifications,
the Company works with the vendor to ensure that the modifications
are completed in an acceptable time frame.
As the Company does not have any control over the third party providers of
products and systems, the Company cannot guarantee that such third party
products and systems will not suffer any adverse effects due to the Year 2000.
As of June 30, 1999, approximately 90% of the analysis, remediation and testing
had been completed, collectively, for the Company's customers' credit
decisioning systems. A substantial portion of the remaining tasks to be
completed relates to new software or enhancements which are not yet scheduled to
be delivered to credit decisioning customers. As of June 30, 1999, the analysis,
remediation, testing and implementation had been substantially completed for the
software and systems comprising the Company's e-commerce systems. During the
second quarter of 1999, the Company received additional requirements from one of
its service bureau customers. As of June 30, 1999, approximately 65% of the
total analysis, remediation, testing and implementation (including the
additional requirements) had been completed for the Company's service bureau
systems. As a result, the Year 2000 procedures for service bureau systems are
scheduled to be completed during the third quarter of 1999. As of June 30, 1999,
approximately 95% of the analysis, remediation, testing and implementation had
been completed for the Company's internal products and systems, which is also
scheduled to
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be completed early during the third quarter of 1999. The Company has also
implemented analysis and testing procedures to ensure that any enhancements to a
system following the completion of the analysis, remediation, testing and
implementation of that system do not contain any year 2000 issues.
In most cases, the software products and software-related services provided by
the Company interface to third party systems. In cases where a third party has
provided Year 2000 interface specifications, the Company is developing, testing
and implementing new interface code to comply with those specifications. While
the Company continues to receive changes to interface specifications from
certain third parties, the Company intends to complete and implement the changes
during the third quarter of 1999.
The Year 2000 activities described above relating to credit decisioning systems,
e-commerce systems, service bureau systems and third party products and systems
represent the standard procedures applied to the applicable system. In certain
circumstances, the Company may make changes to or deviate from these procedures.
COSTS
As of June 30, 1999, substantially all expenses have been associated with the
opportunity cost of time spent by employees of the Company on the Year 2000
Program, particularly on the analysis, development, testing and implementation
relating to software products and software-related services provided to
customers. The Company estimates that the opportunity cost incurred as of June
30, 1999 is approximately $1.75 million. This cost can be allocated as follows:
$850,000 to credit decisioning systems, $280,000 to e-commerce systems, $150,000
to service bureau systems, $60,000 to internal products and systems, and
$410,000 to Year 2000 Program management, project oversight, and client and
vendor communications. To complete the Year 2000 Program, in addition to the
opportunity costs of employees' time, the Company may also need to purchase
replacement products. The Company's projected costs of the entire Year 2000
Program is $2.3 million. A substantial portion of the remaining budget is
allocated for senior management, customer and vendor communications, as well as
contingency plans.
RISKS
If a product or service provided by the Company is found to cause damage or
injury to a customer of the Company due to a failure of such product or service
to operate without any adverse effect due to date related processing associated
with the year 2000, the Company could be liable to such customer for a breach of
warranty, depending on the specific contractual arrangement between the Company
and such customer. Although the Company's contractual arrangement with each of
its customers generally limits the Company's liability to such customer, the
Company cannot accurately predict whether or to what extent any legal claims
will be brought against the Company, or whether the Company will otherwise be
adversely affected by such claims.
In addition, a failure by the Company to make its products year 2000 compliant
could result in a decrease in sales of the Company's products, delays in the
development of other of the Company's products, an increase in the costs
associated with year 2000 remediation, and an increase in litigation costs. The
year 2000 issue may also have an indirect effect on the Company's business and
operations to the extent that potential customers of the Company may be using
significant resources to address year 2000 issues, and therefore may have fewer
resources to evaluate and purchase other products and services such as the
products and services offered by the Company. If a material third party product
or system which the Company uses or interfaces to fails to operate properly due
to the year 2000, such failure could have a material adverse effect on the
Company's business and results of operations.
CONTINGENCY PLANS
The Company will have a dedicated year 2000 support staff which will be prepared
to address year 2000 issues. The Company is currently in the process of
investigating and developing additional contingency plans which will be
implemented if necessary. The Company expects to complete development of the
contingency
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plans by the end of the third quarter of 1999.
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 CreditConnection and CreditRevue(R) Service
Bureau, the demand for the Company's products and services, the successful
distribution and implementation of 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 development and 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 timely develop and successfully 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(R) generally reflect a relatively high amount
of revenue per order. The loss or delay of individual orders, therefore, would
have a significant impact on the Company's revenue and quarterly results of
operations. The timing of revenue is difficult to predict because of the length
and variability of the Company's sales cycle, which has ranged to date from two
to 18 months from initial customer contact to the execution of a license
agreement. In addition, since a substantial portion of the Company's revenue is
recognized on a percentage-of-completion basis, the timing of revenue
recognition for its licenses may be materially and adversely affected by delays
or deferrals of customer implementations. Such delays or deferrals may also
increase expenses associated with such implementations which would materially
and adversely affect related operating margins. The Company's operating expenses
are based in part on planned product and service introductions and anticipated
revenue trends and, because a high percentage of these expenses are relatively
fixed, a delay in the recognition of revenue from a limited number of
transactions could cause significant variations in operating results from
quarter-to-quarter and could result in operating losses. To the extent such
expenses precede, or are not subsequently followed by, increased revenues, the
Company's results of operations would be materially and adversely affected. As a
result of these and other factors, revenues for any quarter are subject to
significant variation, and the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance. There can be no
assurance that the Company will be profitable in any future quarter or that such
fluctuations in results of operations will not result in volatility in the price
of the Company's Common Stock. Due to all of the foregoing factors, it is likely
that in some future quarter the Company's results of operations will be below
the expectations of public market analysts and investors. In such event, the
market price of the Company's Common Stock will be materially and adversely
affected.
Dependence on CreditRevue(R) Product Line. License fees, maintenance fees and
third-party computer hardware sales associated with licenses and installations
of CreditRevue(R) accounted for the majority of all the Company's revenues
through June 30, 1999. Although the Company has introduced its
CreditConnection(R) service, the Company expects that revenues generated from
licenses and installations of CreditRevue(R) will continue to account for a
significant portion of the Company's revenues for the foreseeable future. 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(R) 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.
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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 CreditConnection; Transition to Transaction-Based Revenue.
The Company's CreditConnection service was commercially introduced in 1996 and
the Company's CreditRevue(R) Service Bureau service was commercially introduced
through strategic alliance partner, AnyTime Access, in January, 1998. The
CreditConnection service and the CreditRevue(R) Service Bureau service (as
provided by AnyTime Access and other third parties to which the Company licenses
the CreditRevue(R) Service Bureau) 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 CreditConnection or CreditRevue(R) 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. Further, the CreditConnection service has
taken longer to commercialize than originally anticipated. Although the Company
is exploring additional distribution options to further enhance the
CreditConnection service, there can be no assurance that any such channels will
be available to the Company on commercially reasonable terms, or at all. The
failure of the Company to successfully commercialize the CreditConnection
service would have a material adverse effect on the Company's business,
financial condition and results of operations. 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(R) .
Under the terms of its license agreements, a majority of the Company's revenues
are realized during the configuration and installation of CreditRevue(R).
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 CreditConnection and CreditRevue(R) 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. 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,
18
<PAGE> 19
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.
In addition, the Company has formed strategic alliances with Automatic Data
Processing (ADP), Universal Computer Systems (UCS), EDS and Advent Resources
(Advent) for remarketing CreditConnection and with Dun & Bradstreet for the
marketing of OneScore. There can be no assurance that these relationships will
be successful. Moreover, there can be no assurance that these companies will
actively remarket CreditConnection or OneScore. The failure by the Company to
leverage and maintain its existing relationships ADP, UCS, EDS, Advent and Dun &
Bradstreet, 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(R) 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(R) 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 55.4% and 48.8% of total revenues in 1998 and 1997, respectively.
One of the Company's customers accounted for 10% or more of total revenues in
1998 and none of the Company's customers accounted for more than 10% of total
revenues in 1997. The Company expects that a limited number of customers will
continue to account for a significant percentage of revenue for the foreseeable
future. The loss of any major customer or any reduction or delay in orders by
any such customer, delay or deferral in configurations or enhancements by such
customers or the failure of the Company to successfully market its products or
services to new customers, could have a material adverse effect on the Company's
business, results of operations and financial condition.
Dependence on Consumer Retail Lending Industry; Cyclical Nature of Consumer
Lending. The Company's business is currently concentrated in the consumer
lending industry and is expected to be so concentrated for the foreseeable
future, thereby making the Company susceptible to a downturn in the consumer
lending industry. For example, a decrease in consumer lending could result in a
smaller overall market for the Company's products and services. Furthermore,
banks in the United States are continuing to consolidate, decreasing the overall
potential number of customers for the Company's products and services. In
addition, demand for consumer loans has been historically cyclical, in large
part based on general economic conditions and cycles in overall consumer
indebtedness levels. Changes in general economic conditions that adversely
affect the demand for consumer loans, the willingness of financial institutions
to provide funds for such loans, changes in interest rates and the overall
consumer indebtedness level, as well as other factors affecting the consumer
lending industry, could have a material adverse effect on the Company's
business, results of operations and financial condition.
Management of Changing Business. The Company has experienced significant changes
in its business, such as an expansion customer base and the development of new
products, services and enhancements to its software. Such changes have placed
and may continue to place a significant strain upon the Company's management,
systems and resources. As of June 30, 1999, the Company had declined to 191
employees from 201 employees at June 30, 1998. 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
19
<PAGE> 20
continued service of its key technical, sales and senior management personnel,
particularly James R. DeFrancesco, Chairman, Peter M Leger, 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. Except with respect to Mr. Leger, 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.
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 process of acquiring and implementing a back-up, off-site processing system
capable of fully supporting its operations in the event of system failure.
During 1997, the Company implemented a limited redundant data center. The
Company relocated operations to new leased facilities in Annapolis Junction, MD
in late 1998. The new facilities, which include a state of the art data center,
will become the primary production center for the Company's data processing
needs. The Company also renewed its lease on its former data center located in
Columbia, Maryland. This former center will, during 1999 will become a back-up
center capable of fully supporting operations in the event of failure of the new
production center. Prior to full implementation of the new facility and the back
up facility, the Company's operations are subject to substantial risks,
including
20
<PAGE> 21
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 $1.6 million of
property insurance coverage, business interruption insurance coverage, $2.0
million of errors and omissions insurance coverage and $10.0 million of umbrella
insurance coverage, such insurance may not be adequate to compensate the Company
for all losses that may occur or to provide for costs associated with system
failure or business interruption. Any damage or failure that causes
interruptions in the Company's operations could have a material adverse effect
on the Company's business, results of operations and financial condition.
Persistent problems continue to affect public and private data networks. For
example, in a number of networks, hackers have bypassed firewalls and have
appropriated confidential information. Such computer break-ins and other
disruptions may jeopardize the security of information stored in and transmitted
through the computer systems of the parties utilizing the Company's services,
which may result in significant liability to the Company and also may deter
potential customers from using the Company's services. In addition, while the
Company attempts to be careful with respect to the employees it hires and
maintain controls through software design and security systems 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 1999. Thereafter, the
Company may need to raise additional funds.
The Company may need to raise additional funds sooner in order to fund more
rapid expansion, to develop new or enhanced products and services, to respond to
competitive pressures or to acquire complementary businesses or technologies. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of the stockholders of the Company will be reduced,
stockholders may experience additional dilution, or such equity securities may
have rights, preferences or privileges senior to those of the holders of the
Company's Common Stock. There can be no assurance that additional financing will
be available when needed on terms favorable to the Company or at all. If
adequate funds are not available or are not available on acceptable terms, the
Company may be unable to develop or enhance its products and services, take
advantage of future opportunities or respond to competitive pressures, which
could have a material adverse effect on the Company's business, results of
operations and financial condition.
Government Regulation and Uncertainties of Future Regulation. The Company's
current and prospective customers, which consist of state and federally
chartered banks, saving and loan associations, credit unions,
21
<PAGE> 22
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 60% 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; Anti-takeover Effects of Certificate of
Incorporation, Bylaws and Delaware Law. The Company's Board of Directors has the
authority to issue up to 1,000,000 shares of Preferred Stock and to determine
the price, rights, preferences, privileges and restrictions, including voting
rights of those shares without any further vote or action by the stockholders.
The Preferred Stock could be issued with voting, liquidation, dividend and other
rights superior to those of the Common Stock. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by the rights of
the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock could have the effect of making it more difficult
for a third party to acquire a majority of the outstanding voting stock of the
Company. Further, certain provisions of the Company's Certificate of
Incorporation, including provisions that create a classified Board of Directors,
and certain provisions of the Company's Bylaws and of Delaware law could delay
or make more difficult a merger, tender offer or proxy contest involving the
Company.
22
<PAGE> 23
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
(a) The Company's Annual Meeting of Stockholders was held on
June 29, 1999
(b) Not applicable
(c) Motions before stockholders
(1) Election of Three Directors
<TABLE>
<CAPTION>
NAME VOTES FOR VOTES AGAINST NON VOTES ABSTENTIONS
---- --------- ------------- --------- -----------
<S> <C> <C> <C> <C>
James R. DeFrancesco 6,790,248 5,463 0 0
John J. McDonnell, Jr. 6,790,248 5,463 0 0
</TABLE>
(2) Ratification of Ernst & Young, LLP as Auditors
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST NON VOTES ABSTENTIONS
--------- ------------- --------- -----------
<S> <C> <C> <C>
6,779,158 4,600 0 11,953
</TABLE>
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
23
<PAGE> 24
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 CreditConnection Lender Agreement (for CreditRevue(R)
Licensees)*
10.6 Form of CreditConnection Lender Agreement (for non-CreditRevue
(R) Licensees)*
10.7 Form of CreditConnection 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.
24
<PAGE> 25
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: August 16, 1998 /s/ Peter M. Leger
----------------------------------------------
Peter M. Leger
President and Chief Executive Officer and
(Principal Executive Officer)
Date: August 16, 1998 /s/ Robert P. Vollono
----------------------------------------------
Robert P. Vollono
Senior Vice President, Treasurer, Chief
Financial Officer and Director (Principal
Financial and Accounting Officer)
25
<PAGE> 26
CREDIT MANAGEMENT SOLUTIONS, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ----------- ----------- ----
<S> <C> <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 CreditConnection Lender Agreement (for CreditRevue(R)
Licensees)
10.6 Form of CreditConnection Lender Agreement (for non-CreditRevue(R)
Licensees)
10.7 Form of CreditConnection 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
</TABLE>
<PAGE> 27
<TABLE>
<S> <C>
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>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,463,160
<SECURITIES> 2,326,055
<RECEIVABLES> 6,079,515
<ALLOWANCES> (315,389)
<INVENTORY> 0
<CURRENT-ASSETS> 12,721,665
<PP&E> 11,825,504
<DEPRECIATION> (3,379,892)
<TOTAL-ASSETS> 22,588,909
<CURRENT-LIABILITIES> 8,898,985
<BONDS> 0
0
0
<COMMON> 76,585
<OTHER-SE> 13,213,540
<TOTAL-LIABILITY-AND-EQUITY> 22,588,909
<SALES> 1,061,125
<TOTAL-REVENUES> 12,272,780
<CGS> 1,218,752
<TOTAL-COSTS> 6,900,175
<OTHER-EXPENSES> 6,129,472
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 164,959
<INCOME-PRETAX> (591,908)
<INCOME-TAX> 0
<INCOME-CONTINUING> (591,908)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (591,908)
<EPS-BASIC> (.08)
<EPS-DILUTED> (.08)
</TABLE>
