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 March 31, 2000
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)
Delaware 52-1549401
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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: 7,820,598 shares of the
Company's Common Stock, $.01 par value, were outstanding as of May 10, 2000.
<PAGE>
CREDIT MANAGEMENT SOLUTIONS, INC.
Index to March 31, 2000 Form 10-Q
Page
----
Part I -- Financial Information
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets -- March 31, 2000 and December 3
31, 1999
Consolidated Statements of Operations -- Three Months Ended
March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows -- Three Months Ended
March 31, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Part II -- Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 19
2
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Item I. FINANCIAL STATEMENTS
Credit Management Solutions, Inc. and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
(unaudited)
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,253,187 $ 3,594,328
Investments available-for-sale 2,316,957 1,316,470
Accounts receivable, net of allowance of $311,583
in 2000 and 1999 5,482,747 5,724,256
Costs and estimated earnings in excess of
billings on uncompleted contracts 55,159 5,891
Prepaid expenses and other current assets 412,066 474,725
------------ ------------
Total current assets 11,520,116 11,115,670
Property and equipment:
Computer equipment and software 5,485,919 5,234,084
Office furniture and equipment 1,221,260 1,458,793
Leasehold improvements 2,775,460 2,769,926
------------ ------------
9,482,639 9,462,803
Accumulated depreciation and amortization (3,362,436) (3,065,136)
------------ ------------
6,120,203 6,397,667
Software development costs, net of accumulated amortization
of $359,165 in 2000 and 1999 2,312,020 1,932,867
Other non current assets 33,239 46,386
------------ ------------
Total assets $ 19,985,578 $ 19,492,590
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 2,002,520 2,163,044
Accrued payroll and related expenses 876,589 722,389
Billings in excess of costs and estimated
earnings on uncompleted contracts 714,265 101,046
Deferred revenue 2,634,573 2,920,904
Current portion of deferred tenant allowance 144,866 144,866
Short-term borrowings 798,000 798,000
Current portion of long-term debt and capital lease obligations 9,286 25,402
Total current liabilities 7,180,099 6,875,651
Deferred tenant allowance, less current portion 1,104,602 1,140,818
------------ ------------
Total liabilities 8,284,701 8,016,469
Shareholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized;
no shares issued or outstanding -- --
Common stock, $.01 par value; 40,000,000 shares authorized;
7,816,949 and 7,689,570 shares issued and outstanding at
March 31, 2000 and December 31, 1999, respectively 78,169 76,896
Additional paid-in capital 27,733,329 27,034,049
Accumulated deficit (16,110,621) (15,634,824)
------------ ------------
Total shareholders' equity 11,700,877 11,476,121
------------ ------------
Total liabilities and shareholders' equity $ 19,985,578 $ 19,492,590
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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<PAGE>
CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31,
2000 1999
----------- -----------
(Unaudited) (Unaudited)
Revenues:
License and software development fees $ 2,602,235 $ 3,553,099
Maintenance fees 1,487,314 1,191,197
Computer hardware sales 49,003 778,827
Service bureau revenues 1,058,861 608,608
----------- -----------
5,197,413 6,131,731
----------- -----------
Costs of revenues:
Cost of license and software development fees 1,391,528 1,704,541
Cost of maintenance fees 289,897 270,480
Cost of computer hardware sales 84,136 784,840
Cost of service bureau 1,026,956 736,467
----------- -----------
2,792,517 3,496,328
----------- -----------
Gross profit 2,404,896 2,635,403
Other Operating Expenses:
Selling, general and administrative expenses 2,684,857 2,969,572
Research and development costs 237,079 356,823
----------- -----------
2,921,936 3,326,395
----------- -----------
Loss from operation (517,040) (690,992)
Other income (expense):
Interest expense (22,785) (9,732)
Interest income 64,028 55,119
----------- -----------
41,243 45,387
----------- -----------
Net loss $ (475,797) $ (645,605)
=========== ===========
Basic and diluted loss per common share $ (0.06) $ (0.08)
=========== ===========
Weighted average shares used in computation 7,729,142 7,654,291
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
<PAGE>
CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (475,797) $ (645,605)
ADJUSTMENTS:
Depreciation 440,273 458,232
Amortization of software development costs -- 29,930
Amortization of deferred tenant allowance (36,216) --
Gain on disposal of property and equipment 80,494 15,937
Other lease obligations -- (95,780)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable, net 241,509 120,471
Prepaid expenses and other current assets 62,659 (381,926)
Accounts payable (160,524) (1,458,495)
Accrued payroll and related expenses 154,200 401,501
Net billings in excess of costs and estimated
gross profit on uncompleted contracts 563,951 (576,429)
Deferred revenue (286,331) (627,667)
------------ ------------
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES 584,218 (2,759,831)
INVESTING ACTIVITIES:
Purchase of investments available-for-sale (5,572,969) (8,823,470)
Sale of investments available-for-sale 4,572,482 13,485,998
Proceeds from sale of property and equipment 3,175 533
Purchase of property and equipment (246,478) (479,994)
Capitalized software development costs (379,153) (522,405)
Change in other assets 13,147 (893)
------------ ------------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (1,609,796) 3,659,769
FINANCING ACTIVITIES:
Payments under capital lease obligations and short
term borrowings (16,116) (16,790)
Proceeds from exercise of stock options 691,049 --
Proceeds from issuance of common stock 9,504 19,459
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 684,437 2,669
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (341,141) 902,607
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,594,328 3,090,565
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,253,187 $ 3,993,172
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
<PAGE>
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 months ended March 31, 2000 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2000. For further information, refer to the consolidated
financial statements and footnotes thereof included in the Company's annual
report on Form 10-K, for the year ended December 31, 1999. Certain amounts in
the 1999 consolidated financial statements have been reclassified to conform to
the 2000 presentation.
NOTE 2. CASH EQUIVALENTS
The Company considers all highly liquid investments 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 March 31, 2000, 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. LOSS PER SHARE
The following table summarizes the computations of basic and diluted loss per
share:
THREE MONTHS ENDED MARCH 31
2000 1999
------------ ------------
Numerator:
Net loss $ (475,797) $ (645,605)
=========== ===========
Denominator:
Weighted-average shares 7,729,142 7,654,291
=========== ===========
Basic and diluted loss per common share $ (0.06) $ (0.08)
=========== ===========
Dilutive loss per common share is equal to basic loss per common share because
if potentially dilutive securities were included in the computations, the
results would be anti-dilutive.
6
<PAGE>
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, 1999:
Cost and estimated earnings $ 169,923 $ 261,742 $ 431,665
Billings 164,032 362,788 526,820
----------- ----------- -----------
$ 5,891 $ (101,046) $ (95,155)
=========== =========== ===========
March 31, 2000:
Cost and estimated earnings $ 367,639 $ 668,885 $ 1,036,524
Billings 312,480 1,383,150 1,695,630
----------- ----------- -----------
$ 55,159 $ (714,265) $ (659,106)
=========== =========== ===========
</TABLE>
All receivables on contracts in progress are expected to be collected within
twelve months.
NOTE 6. SEGMENT REPORTING
Segment Reporting
The Company manages its business by focusing on distinct products and services.
Previously the Company was organized into three distinct business lines; Credit
Decreasing Systems, e-Commerce and Service Bureau Alliances. In February 2000,
the Company formed two new wholly-owned subsidiaries; Credit Online Inc. and
CMSI Systems Inc. and reorganized its three business lines into these new
subsidiaries.
<TABLE>
<CAPTION>
Three months ended March 31, 2000
------------------------ --------------- -------------- ------------
CMSI Systems Credit Online Total
------------------------ --------------- -------------- ------------
<S> <C> <C> <C>
Revenues $ 4,281,142 $ 916,271 $ 5,197,413
------------------------ --------------- -------------- ------------
Segment profit (loss) 1,953,233 (846,206) 1,107,027
------------------------ --------------- -------------- ------------
<CAPTION>
Three months ended March 31, 1999
------------------------ --------------- -------------- ------------
CMSI Systems Credit Online Total
------------------------ --------------- -------------- ------------
<S> <C> <C> <C>
Revenues $ 5,696,783 $ 434,948 $ 6,131,731
------------------------ --------------- -------------- ------------
Segment profit(loss) 2,374,893 (1,517,435) 857,458
------------------------ --------------- -------------- ------------
<CAPTION>
A reconciliation of segment profit for all segments to income before income
taxes is as follows:
Three months ended March 31,
----------------------------------------- -------------- ------------
2000 1999
---- ----
----------------------------------------- -------------- ------------
<S> <C> <C>
Total segment profit $1,107,027 $ 857,458
----------------------------------------- -------------- ------------
Corporate, general and administrative (1,183,794) (1,060,288)
expenses
----------------------------------------- -------------- ------------
Depreciation and amortization (440,273) (488,162)
----------------------------------------- -------------- ------------
Net interest income 41,243 45,387
----------------------------------------- -------------- ------------
Loss before income taxes $ (475,797) $ (645,605)
----------------------------------------- -------------- ------------
</TABLE>
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, 1999. 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."
OVERVIEW
The Company was incorporated in 1987 to commercialize an automated credit
processing system developed by James R. DeFrancesco, the Company's co-founder,
and Scott L. Freiman, the Company's President, Chief Executive Officer and
co-founder
7
<PAGE>
while they were employed by American Financial Corporation ("AFC"), an
automobile finance servicing company owned by Mr. DeFrancesco. AFC was acquired
in October 1987 by Perpetual Savings Bank, FSB. Mr. DeFrancesco and Mr. Freiman
retained ownership of AFC's credit processing software which formed the basis
for CreditRevue. CreditRevue was initially released in 1988. Since its initial
release, the Company has continually enhanced CreditRevue in response to the
needs of its customers. CreditConnection became commercially available in July
1996. The Dun & Bradstreet OneScore product was commercially released in October
1997. The CreditRevue Service Bureau was introduced in January 1998. The
Company's original strategy was to enter into marketing alliances with
established service bureau providers whereby such providers would re-market
CreditRevue Service Bureau to their clients on a transaction fee basis. The
Company is considering changing its strategy to focus on an application service
provider (ASP) or other service bureau models built around it's eValuate product
and an enhanced CreditRevue product offering. New licenses for the original
CreditRevue Service Bureau would no longer be offered. Dun & Bradstreet
Portfolio Monitoring was introduced in June 1998 and the CreditOnline network,
was announced in February, 1999. In March 1999, the Company announced
CreditRevue Maestro, an automated analysis engine for evaluating and decisioning
consumer and small business credit applications. During 1999, the CreditRevue
Maestro product was renamed eValuate. The Company currently expects eValuate to
be released in the second quarter of 2000.
In February 2000, the Company announced the formation of two new
wholly-owned subsidiaries: Credit Online, Inc. and CMSI Systems, Inc. Credit
Online, Inc., focusing on the Company's e-commerce strategy, will expand and
enrich the Company's offerings in online lending for the automotive industry.
Credit Online, Inc. also may leverage investments made in infrastructure to
expand into additional vertical markets in the business-to-business Internet
credit arena. CMSI Systems, Inc. will continue to provide the Company's line of
licensed credit management software solutions, including CreditRevue.
License fees for CreditRevue are recognized based on a percentage-of-completion
method, measured generally on a cost-incurred basis. The Company typically
charges a nonrefundable fee of 25% of the preliminary estimate of the total
license fee to develop an analysis of the customer's credit operations and a
plan for the configuration and implementation of CreditRevue according to the
customer's requirements. Costs consist primarily of direct labor, 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
three months ended March 31, 2000, revenues from third-party hardware and
software sales accounted for 1.0% and 1.8% 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,
CreditRevue Service Bureau and Dun & Bradstreet's OneScore and the CreditOnline
network 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 the CreditConnection service, Dun & Bradstreet's OneScore,
Dun & Bradstreet's Portfolio Monitoring, CreditOnline network, eValuate, 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 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 March 31, 2000, the Company had 16 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
8
<PAGE>
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 decreased 15.2% from $6.1 million in the three
months ended March 31, 1999 to $5.2 million in the three months ended March 31,
2000. The Company's revenues are derived from four sources: license and software
development fees, maintenance fees, computer hardware sales and service bureau
revenues.
License and Software Development Fees. CreditRevue accounted for virtually all
of the Company's license and software development fee revenue through March 31,
2000. License and software development fees decreased 26.8% from $3.6 million in
the three months ended March 31, 1999 to $2.6 million in the three months ended
March 31, 2000. The decrease in license and software development fee revenue
through March 31, 2000 was the result of longer than expected sales cycles for
the CreditRevue product during the last half of 1999, due in part to Year 2000
freezes implemented by many of the Company's prospective customers.
Maintenance Fees. Maintenance fees include fees from software maintenance
agreements. Maintenance fees increased 24.9% from $1.2 million in the three
months ended March 31, 1999 to $1.5 million in the three months ended March 31,
2000. The growth in these revenues during the periods presented was the result
of increased maintenance fees associated with the increased number of licenses
of CreditRevue outstanding during such periods. New system implementations
coupled with increases of professional services license enhancements resulted in
increased base licenses subject to maintenance fees.
Computer Hardware Sales. Computer hardware sales revenue decreased 93.7% from
$0.8 million in the three months ended March 31, 1999 to $49,000 in the three
months ended March 31, 2000. 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 customers have
volume discount arrangements with hardware resellers making them eligible for
discounts greater than those offered by the Company.
Service Bureau Fees. Service Bureau revenues originate from several sources
including: CreditConnection transaction and interface fees, Credit Online
network fees, Dun & Bradstreet OneScore and Portfolio Management transaction and
implementation fees and CreditRevue Service Bureau. Total Service Bureau
revenues increased 74.0% from $0.6 million for the quarter ended March 31, 1999
as compared to $1.1 million for the quarter ended March 31, 2000. The
CreditConnection service and Credit Online network generated $0.9 million of
revenue in the quarter ended March 31, 2000 compared to $0.4 million for the
period ended March 31, 1999, an increase of 129.4%. Revenue increases are the
result of increases in the number of dealers and lenders enrolled in the
CreditConnection service and the resulting growth in transaction volume. At
March 2000 there were approximately 280 active dealer's enrolled in the service
compared to approximately 80 dealers at March 1999.
Dun & Bradstreet OneScore was commercially released in the fourth quarter of
1997. Portfolio Monitoring and CreditRevue Service Bureau were commercially
released in the first quarter of 1999. These Service Bureau products account for
an aggregate revenue of $0.2 million in the quarter ended March 31, 2000, which
is equal to the $0.2 million recorded in the quarter ended March 31, 1999.
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 decreased 18.4% from $1.7 million
in the three months ended March 31, 1999 to $1.4 million in the three months
ended March 31, 2000. As a percentage of license fee and software development
revenue, cost of license and software development fees were 48.0% and 53.5% in
the three months ended March 31, 1999 and 2000, respectively. The increase 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.
Revenue fluctuations result in corresponding fluctuations in the extent to which
the Company employs temporary contractors and can also result in increases or
decreases in-house programmer staffing as revenues increase or decrease. The net
reduction in costs of $0.3 million is the result of lower costs for the in-house
programmers. Total headcount for the Company was down to 180 employees as of
March 2000, compared to 201 employees as of March 1999.
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 7.2% from $0.27 million in the three months ended
March 31, 1999 to $0.29 million in the three months ended March 31, 2000. As a
percentage of maintenance fee revenue, cost of maintenance fees was 22.7% and
19.5% in the three months ended March 31, 1999 and 2000, respectively. The
dollar increase in the cost of maintenance fees reflects the growth in
CreditRevue systems in use during the periods presented.
9
<PAGE>
The fluctuation in the percentage of cost of maintenance fees to maintenance fee
revenues in 1999 and 2000 results from lower expenses for maintenance personnel
related to staffing reductions as maintenance revenues have increased. Staffing
utilization efficiencies will vary based on the timing and training of additions
to maintenance staff personnel.
Cost of Computer Hardware Sales. Cost of computer hardware sales consists of (i)
the Company's cost of computer hardware resold to the Company's customers that
are licensing CreditRevue and (ii) salaries and benefits for systems integration
employees. Cost of computer hardware sales decreased 89.3% from $0.8 million in
the three months ended March 31, 1999 to $0.1 million in the three months ended
March 31, 2000. As a percentage of computer hardware sales revenue, cost of
computer hardware sales was 101.0% and 171.7% in the three months ended March
31, 1999 and 2000, respectively. The increase in the cost of computer hardware
sales as a percent of revenue is the result of decreased hardware margins
resulting from decreased hardware sales, while fixed expenses, primarily
personnel-related in nature, remained relatively constant during the same
period.
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
March 31, 1999 and 2000 were $0.8 million and $1.0 million, respectively. Cost
of service bureau revenues during the three months ended March 31, 1999 exceeded
service bureau revenues because of start-up costs associated with establishing
the service bureau. As revenues from these new services continue to grow,
corresponding costs of service bureau fees are expected to decrease as a percent
of service bureau revenues. For the three months ended March 31, 2000, service
bureau costs increased 39.4% compared to service bureau revenue increases of 74%
generating a positive gross profit from service bureau revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 9.6% from $3.0 million in the three months
ended March 31, 1999 to $2.7 million in the three months ended March 31, 2000.
Of this $0.3 million decrease, approximately $0.1 million related to lower
payroll expenses which resulted primarily from a decrease in the Company's sales
staff and approximately $0.2 million of the decrease relates to non-salary based
administrative expenses, consisting primarily of travel, advertising, general
insurance and bad debt expenses.
Research and Development Costs. Research and development costs consist primarily
of salaries and benefits of in-house programmers. These costs decreased $0.1
million during the three months ended March 31, 2000 as compared to the three
months ended March 31, 1999 due to primarily the reductions in R&D staffing.
Certain development initiatives active during the first quarter of 1999 have
been completed and the Company is moving towards a development model based on
smaller more focused development teams. Overall R&D staffing at March 31, 2000
was 25 compared to 35 at March 31, 1999. The Company is continuing to capitalize
certain development costs associated with the eValuate product until commercial
release which is expected to occur in the second quarter of 2000. During the
three months ended March 31, 2000, approximately $0.4 million of expenses
related to the development of eValuate were capitalized which compares to
approximately $0.5 million which was capitalized, during the first quarter of
1999. See Note 1 to Notes to Consolidated Financial Statements in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999.
Interest Income (Expense). Net interest income for the three months ended March
31, 2000 of approximately $41,000 stayed even with net interest income reported
in the first three months ended March 31, 1999 of approximately $45,000.
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 three months
ended March 31, 1999, the Company consumed net cash in operating activities of
$2.8 million. During the three months ended March 31, 2000, the Company
generated $0.6 million of cash in operating activities. The improvement in cash
flow from operations results from a decrease in the net loss of $170,000 and
decreases in working capital investments. The working capital components
effecting the greatest change during the quarter were accounts payable, which
consumed $1.3 million less in 2000, and net billings in excess of costs and
estimated gross profit on uncompleted contracts, which reflected a net
improvement of $1.1 million in 2000 compared to 1999.
The Company's cash used in investing activities consists principally of
investments in property and equipment. During the three months ended March 31,
1999 and 2000, the Company invested a total of $0.5 and $0.2 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 March 31, 2000.
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 March 31, 2000
was approximately $0.8 million. The line of credit bears interest at the bank's
prime rate per annum (8.5% at March 31, 2000). 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
10
<PAGE>
any interest in another enterprise or entity
The Company currently anticipates that its available cash resources, expected
cash flows from operations, and its bank line of credit will be sufficient to
meet its presently anticipated working capital, capital expenditure and debt
repayment requirements through second quarter 2001.
Impact of Year 2000.
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.
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").
As of March 31, 2000, the analysis, remediation, testing and implementation had
been substantially completed for (i) the Company's customers' credit decisions
systems, (ii) the software and systems comprising the Company's e-commerce
systems, (iii) the Company's service bureau customers' systems, and (iv) the
Company's internal products and systems. The Company has not experienced any
material disruption to its business associated with the Year 2000 issue. To the
Company's knowledge, none of the Company's customers has experienced any
material disruption to its business which has been associated with the Year 2000
issue in connection with the Company's products.
For the Year 2000 and beyond, the Company continues to code according to its
Year 2000 coding standards. In addition, because system clocks are now in the
Year 2000, all testing necessarily includes testing of dates in the Year 2000.
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 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 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
11
<PAGE>
from initial customer contact to the execution of a license agreement. In
addition, since a substantial portion of the Company's revenue is recognized on
a percentage-of-completion basis, the timing of revenue recognition for its
licenses may be materially and adversely affected by delays or deferrals of
customer implementations. Such delays or deferrals may also increase expenses
associated with such implementations which would materially and adversely affect
related operating margins. The Company's operating expenses are based in part on
planned product and service introductions and anticipated revenue trends and,
because a high percentage of these expenses are relatively fixed, a delay in the
recognition of revenue from a limited number of transactions could cause
significant variations in operating results from quarter-to-quarter and could
result in operating losses. To the extent such expenses precede, or are not
subsequently followed by, increased revenues, the Company's results of
operations would be materially and adversely affected. As a result of these and
other factors, revenues for any quarter are subject to significant variation,
and the Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance. There can be no assurance that the Company
will be profitable in any future quarter or that such fluctuations in results of
operations will not result in volatility in the price of the Company's Common
Stock. Due to all of the foregoing factors, it is likely that in some future
quarter the Company's results of operations will be below the expectations of
public market analysts and investors. In such event, the market price of the
Company's Common Stock will be materially and adversely affected.
Dependence on CreditRevue Product Line. License fees, maintenance fees and
third-party computer hardware sales associated with licenses and installations
of CreditRevue accounted for the majority of all the Company's revenues through
March 31, 2000. Although the Company has recently introduced its
CreditConnection service, the Company expects that revenues generated from
licenses and installations of CreditRevue will continue to account for a
significant portion of the Company's revenues for the foreseeable future. The
life cycles of the Company's products and services are difficult to predict due
to the effect of new product and service introductions or software enhancements
by the Company or its competitors, market acceptance of new and enhanced
versions of the Company's products and services, and competition in the
Company's marketplace. A decline in the demand for CreditRevue, whether as a
result of competition, technological change, price reductions or otherwise,
would have a material adverse effect on the Company's business, results of
operations and financial condition.
Lengthy Sales and Implementation Cycle. The licensing of the Company's software
products and services is often an enterprise-wide decision by prospective
customers and generally requires the Company to provide a significant level of
education to prospective customers regarding the use and benefits of the
Company's products and services. In addition, the implementation of the
Company's software products involves a significant commitment of resources by
prospective customers and is commonly accompanied by substantial reengineering
efforts and a review of the customer's credit analysis, decisioning and funding
processes. The cost to the customer of the Company's products and services is
typically only a portion of the related hardware, software, development,
training and integration costs associated with implementing a large-scale
automated credit origination information system. For these and other reasons,
the period between initial customer contact and the implementation of the
Company's products is often lengthy (ranging from between two and 18 months) and
is subject to a number of significant delays over which the Company has little
or no control. The Company's implementation cycle could be lengthened by
increases in the size and complexity of its license transactions and by delays
or deferrals in its customers' implementation of appropriate interfaces and
networking capabilities. Delays in the sale or implementation of a limited
number of license transactions could have a material adverse effect on the
Company's business, results of operations and financial condition and cause the
Company's results of operations to vary significantly from quarter to quarter.
Market Acceptance of CreditOnline and CreditConnection; Transition to
Transaction-Based Revenue. The Company's CreditConnection service was
commercially introduced in 1996, the Company's CreditOnline network was
introduced in February, 1999, and the Company's CreditRevue Service Bureau
service was commercially introduced in January, 1998. The CreditConnection
service, CreditOnline network and CreditRevue Service Bureau product (which may
be introduced in new ASP or other format, based on the eValuate and CreditRevue
software in development) 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 products and services will be commercially successful. The failure of
the Company to generate demand for the CreditConnection service, CreditOnline
network or CreditRevue Service Bureau product, or the occurrence of any
significant technological problems with such products or services, would have a
material adverse effect on the Company's business, results of operations and
financial condition. Historically, virtually all of the Company's revenues have
been derived from license fees, maintenance fees and hardware sales associated
with licenses and installations of CreditRevue. Under the terms of its license
agreements, a majority of the Company's revenues are realized during the
configuration and installation of CreditRevue. However, the Company anticipates
that a significant portion of the Company's future revenues will be derived from
per-usage transaction-based fees and subscription fees charged to credit
originators and financial institutions for transactions originated through the
CreditConnection service, CreditOnline network and CreditRevue Service Bureau
product. 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
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<PAGE>
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, 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) and Universal Computer Systems (UCS) 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 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 are based on a
percentage-of-completion method on a cost-incurred basis with the final
installment being paid in full upon acceptance of the Company's software. The
Company receives continuing revenues on CreditRevue from annual maintenance
agreements which commence upon acceptance of the software by the customer.
Maintenance agreements are renewable annually by the customer, and the license
agreements are generally co-terminous with the maintenance agreements. Although
the Company has experienced a high degree of customer loyalty, the Company
cannot predict how many maintenance agreements will be renewed or the number of
years of renewal. Revenues generated by the Company's 10 largest customers
accounted for 55.1% and 55.4% of total revenues in 1999 and 1998, respectively.
None of the Company's customers individually accounted for 10% or more of total
revenues in 1999 and one customer accounted for 10% of revenues in 1998. The
Company expects that a limited number of customers will continue to account for
a significant percentage of revenue for the foreseeable future. The loss of any
major customer or any reduction or delay in orders by any such customer, delay
or deferral in configurations or enhancements by such customers or the failure
of the Company to successfully market its products or services to new customers,
could have a material adverse effect on the Company's business, results of
operations and financial condition.
Dependence on Consumer Retail Lending Industry; Cyclical Nature of Consumer
Lending. The Company's business is currently concentrated in the consumer
lending industry and is expected to be so concentrated for the foreseeable
future, thereby making the Company susceptible to a downturn in the consumer
lending industry. For example, a decrease in consumer lending could result in a
smaller overall market for the Company's products and services. Furthermore,
banks in the United States are continuing to consolidate, decreasing the overall
potential number of customers for the Company's products and services. In
addition, demand for consumer loans has been historically cyclical, in large
part based on general economic conditions and cycles in overall consumer
indebtedness levels. Changes in general economic conditions that adversely
affect the demand for consumer loans, the willingness of financial institutions
to provide funds for such loans, changes in interest rates and the overall
consumer indebtedness level, as well as other factors affecting the consumer
lending industry, could have a material adverse effect on the Company's
business, results of operations and financial condition.
Management of Changing Business. The Company has experienced significant changes
in its business, such as an expansion in the Company's staff and customer base
and the development of new products, services and enhancements to its software.
Such changes have placed and may continue to place a significant strain upon the
Company's management, systems and resources. As of March 31, 2000, the Company
had 180 employees down from 201 employees at March 31, 1999. The Company's
ability to compete effectively and to manage future changes will require the
Company to continue to improve its financial and management controls, reporting
systems and procedures and budgeting and forecasting capabilities on a timely
basis and expand its sales and marketing work force, and train and manage its
employee work force. There can be no assurance that the Company will be able to
manage such changes successfully. The Company's failure to do so could have a
material adverse effect upon the Company's business, results of operations and
financial condition.
Dependence on Key Personnel. The Company's future performance depends in
significant part upon the continued service of its key technical, sales and
senior management personnel, particularly, Scott L. Freiman, President and Chief
Executive Officer. The
13
<PAGE>
Company has obtained for key-person life insurance on the life of Mr. 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 Messrs. Freiman and Vollono the Company's Chief Financial
Officer, the Company has no employment agreements. The Company intends to enter
into employment agreements with other senior executives in the near 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. 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,
is primary production center for the Company's data processing needs. Prior to
full implementation of the back up facility, the Company's operations are
subject to substantial risks, including temporary interruptions resulting from
damage caused by any one or more of the foregoing factors or due to other causes
including computer viruses, hackers or similar disruptive problems. While the
Company maintains $1.6 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
14
<PAGE>
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 the second quarter of 2001.
Thereafter, the Company may need to raise additional funds.
The Company may need to raise additional funds sooner in order to fund more
rapid expansion, to develop new or enhanced products and services, to respond to
competitive pressures or to acquire complementary businesses or technologies. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of the stockholders of the Company will be reduced,
stockholders may experience additional dilution, or such equity securities may
have rights, preferences or privileges senior to those of the holders of the
Company's Common Stock. There can be no assurance that additional financing will
be available when needed on terms favorable to the Company or at all. If
adequate funds are not available or are not available on acceptable terms, the
Company may be unable to develop or enhance its products and services, take
advantage of future opportunities or respond to competitive pressures, which
could have a material adverse effect on the Company's business, results of
operations and financial condition.
Government Regulation and Uncertainties of Future Regulation. The Company's
current and prospective customers, which consist of state and federally
chartered banks, saving and loan associations, credit unions, consumer finance
companies and other consumer lenders, as well as customers in the industries
that the Company may target in the future, operate in markets that are subject
to extensive and complex federal and state regulations. While the Company is not
itself directly subject to such regulations, the Company's products and services
must be designed to work within the extensive and evolving regulatory
constraints in which its customers operate. These constraints include federal
and state truth-in-lending disclosure rules, state usury laws, the Equal Credit
Opportunity Act, the Fair Credit Reporting Act and the Community Reinvestment
Act. Furthermore, some consumer groups have expressed concern regarding the
privacy and security of automated credit processing, the use of automated credit
scoring tools in credit underwriting, and whether electronic lending is a
desirable technological development in light of the current level of consumer
debt. The failure by the Company's products and services to support customers'
compliance with current regulations and to address changes in customers'
regulatory environment, or to adapt to such changes in an efficient and
cost-effective manner, could have a material adverse effect on the Company's
business, results of operations and financial condition.
Control by Existing Stockholders. Assuming no exercise of outstanding options,
James R. DeFrancesco, the Company's co-founder and Scott L. Freiman, the
Company's President and Chief Executive Officer collectively beneficially own
approximately 52% 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
15
<PAGE>
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.
16
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
3.1 Certificate of Incorporation*
3.2 Bylaws of the Company*
4.1 Specimen certificate for Common Stock of the
Company*
4.2 See Exhibits 3.1 and 3.2 for
provisions of the Certificate of
Incorporation and Bylaws of the
Company defining rights of holders of
Common Stock of the Company
10.1 Form of Project Commencement Agreement*
10.2 Form of Software License Agreement*
10.3 Form of Software Maintenance Agreement*
10.4 Form of Professional Services Agreement*
10.5 Form of CreditConnection Lender Agreement (for
CreditRevue
Licensees)*
10.6 Form of CreditConnection Lender Agreement (for
non-CreditRevue 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*
10.8.5 135 National Business Parkway Lease between
Constellation Real Estate, Inc. and the Company
dated April 27, 1998
10.8.6 First Amendment of 135 National Business Parkway
Lease dated December 23, 1998
10.9 Promissory Note dated December 31, 1995 given by
the Company to James R. DeFrancesco*
17
<PAGE>
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*
10.16 1997 Credit Management Solutions, Inc. Stock
Incentive Plan**
10.17 Employment Agreement between Scott Freiman and
the Company
10.18 Employment Agreement between Robert Vollono and
the Company
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.
** Incorporated by reference to the Company's 1997 Proxy Statement, file no.
000-21735
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CREDIT MANAGEMENT SOLUTIONS, INC.
(Registrant)
Date: May 15, 1998 /s/ Scott L. Freiman
----------------------------------------
Scott L. Freiman
President, Chief Executive Officer
and Director
(Principal Executive Officer)
Date: May 15, 1998 /s/ Robert P. Vollono
----------------------------------------
Robert P. Vollono
Senior Vice President, Treasurer, Chief
Financial Officer and Director (Principal
Financial and Accounting Officer)
19
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement"), is made and entered into this
__ day of ____________________, 2000, by and between Credit Management
Solutions, Inc., a Delaware corporation with principal offices located at 135
National Business Parkway, Annapolis Junction, Maryland 20701 (the "Company"),
and Robert Vollono (the "Executive").
WITNESSETH
WHEREAS, the Company has a need for the Executive's personal services in an
executive capacity; and
WHEREAS, the Executive possesses the necessary strategic, financial,
planning, operational and managerial skills necessary to fulfill those needs;
and
WHEREAS, the Executive and the Company desire to enter into a formal
Employment Agreement to fully recognize the contributions of the Executive to
the Company and to assure continuous harmonious performance of the affairs of
the Company.
NOW, THEREFORE, in consideration of the mutual promises, terms, provisions,
and conditions contained herein, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
1. Definitions. For purposes of this Agreement, the following capitalized terms
shall have the following meanings:
a. "Affiliate" means any person or entity (i) that directly or indirectly
owns more than fifty percent (50%) of the Voting Stock (as defined below) of the
Company, or (ii) more than fifty percent (50%) of the Voting Stock of which is
directly or indirectly owned by the Company, or (iii) more than fifty percent
(50%) of the Voting Stock of which is directly or indirectly owned by another
person or entity that directly or indirectly owns more than fifty percent (50%)
of the Voting Stock of the Company.
b. "Change of Control" of a company means the occurrence of any of the
following:
(i) any "person," as such term is currently used in Section 13(d)
of the Securities Exchange Act of 1934, becomes a "beneficial owner," as
such term is currently used in Rule 13d-3 promulgated under that Act of
fifty percent (50%) or more of the Voting Stock of the company;
(ii) a majority of the Board of Directors of the company consists
of individuals other than Incumbent Directors, which term means the members
of the Board on the date hereof; provided that any individual becoming a
director subsequent to such date whose election or nomination for election
was supported by two-thirds of the directors who then comprised the
Incumbent Directors shall be considered to be an Incumbent Director;
<PAGE>
(iii) the Board of Directors of the company adopts any plan of
liquidation providing for the distribution of all or substantially all of
the company's assets;
(iv) all or substantially all of the assets or business of the
company are disposed of in any one or more transactions pursuant to a
merger, consolidation or other transaction (unless the shareholders of the
company immediately prior to such merger, consolidation or other
transaction beneficially own, directly or indirectly, in substantially the
same proportion as they owned the Voting Stock of the company, all of the
Voting Stock or other ownership interests of the entity or entities, if
any, that succeed to the business of the company); provided, however, that
this subsection (iv) shall not apply in the event of a merger or
consolidation of the Company with an Affiliate; or
(v) the company combines with another company and is the
surviving corporation but, immediately after the combination, the
shareholders of the company immediately prior to the combination hold,
directly or indirectly, fifty percent (50%) or less of the Voting Stock of
the combined company, (there being excluded from the number of shares held
by such shareholders, but not from the Voting Stock of the combined
company, any shares received by affiliates of such other company in
exchange for securities of such other company); provided, however, that
this subsection (v) shall not apply in the event of a combination of the
Company with an Affiliate.
c. "Good Reason" means any of the following events:
(i) a reduction in annual Salary (as defined below);
(ii) a failure by the Company, or Affiliate by which the
Executive is employed, to provide fringe benefits comparable to those
offered to the Executive's peer executives;
(iii) the failure of the Company, or Affiliate by which the
Executive is employed, to obtain by operation of law or otherwise the
assumption of its obligations to perform this Agreement from any successor
to all or substantially all of the assets of the Company or such Affiliate;
or
(iv) a relocation of the Executive's worksite to a location which
increases the distance from the Executive's home to his worksite by more
than fifty (50) miles.
d. "Good Reason Upon Change In Control" means any of the following events
provided the event occurs less than eighteen (18) months after a Change in
Control of (i) the Company or (ii) an Affiliate, if the Executive is employed at
that time by such Affiliate or the Company:
(A) any of the events which constitute Good Reason under Section 1(c)
above;
(B) a material diminution in the Executive's duties or
responsibilities; provided that a diminution shall not be deemed to
have occurred solely because that Executive no longer has duties and
responsibilities for a particular Affiliate as
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long as the Executive continues to have the same level, type and scope
of duties and responsibilities as he had prior to the Change in
Control; or
(C) the assignment to the Executive of duties that materially impair
his ability to perform the duties normally assigned to a person of his
title and position at a corporation of the size and nature of the
Company or Affiliate by which the Executive is employed (as
applicable).
e. "Voting Stock" means the issued and outstanding capital stock or other
securities of any class or classes having general voting power under ordinary
circumstances, in the absence of contingencies, to elect the directors of a
corporation.
f. "Termination Without Cause Upon Change in Control" means termination of
the Executive's employment without "Cause" (as defined in Section 5(a) below)
less than eighteen (18) months after a Change in Control of (i) the Company or
(ii) an Affiliate, if the Executive is employed at that time by such Affiliate
or the Company.
2. Position.
The Company hereby agrees to continue to employ the Executive to serve in
the role of Chief Financial Officer of the Company and each of its Affiliates.
The Company reserves the right to change the Executive's title, duties and/or
responsibilities, and to reassign the Executive to or from any Affiliate. The
Executive accepts such employment upon the terms and conditions set forth
herein, and further agrees to perform to the best of his abilities the duties
generally associated with his position, as well as such other duties as may be
reasonably assigned by the Board of Directors of the Company (the "Board"), the
Chief Executive Officer or President of the Company, and, if the Executive is
employed by an Affiliate, the Chief Executive Officer, President or Board of
Directors of such Affiliate. The Executive shall perform his duties diligently
and faithfully and shall devote his full business time and attention to such
duties. Each party's rights and obligations under this Section 2 are subject to
Section 5 below.
3. Term of Employment and Renewal.
The term of the Executive's employment under this Agreement (the "Term")
will commence on the date of this Agreement (the "Effective Date") and continue
until terminated in accordance with Section 5 below.
4. Compensation and Benefits.
(a) Salary. Commencing on the Effective Date, the Company agrees to pay the
Executive a base salary at an annual rate of one hundred and seventy-five
thousand ($175,000), payable in such installments as is the policy of the
Company (the "Salary"), but no less frequently than monthly. Thereafter, the
Company shall evaluate the Executive's Salary from time to time and make
adjustments, in its discretion, subject to the rights and obligations set forth
in Section 5 below.
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(b) Bonus. In its sole discretion, the Company may make the Executive
eligible to receive bonuses based on criteria to be determined by the Company
and issued to the Executive in writing, in which event the Executive shall be
entitled to receive such bonuses in accordance with such criteria.
(c) Benefits. The Executive shall be entitled to participate in all
employee benefit plans which the Company provides or may establish from time to
time for the benefit of its employees, including, without limitation, group
life, medical, surgical, dental and other health insurance, short and long-term
disability, deferred compensation, profit-sharing and similar plans. The
Executive shall also be entitled to one hundred eighty four (184) hours of paid
leave per year of employment. Two-thirds of any unused portion of such paid
leave shall be considered to be vacation and, therefore, shall be paid to the
Executive upon his cessation of employment with the Company. The Company will
provide term life insurance for the Executive with benefits equal to his annual
Salary, up to a maximum of four hundred thousand dollars ($400,000). The Company
may also purchase one or more "key man" insurance policies on the Executive's
life, each of which will be payable to and owned by the Company. The Company, in
its sole discretion, may select the amount and type of key man life insurance
purchased, and the Executive will have no interest in any such policy. The
Executive will cooperate with the Company in securing this key man insurance, by
submitting to all required medical examinations, supplying all information and
executing all documents required in order for the Company to secure the
insurance
(d) Stock Options. In the sole discretion of the Board, the Company may
from time to time issue the Executive stock option grants under the Company's
stock option plan and a stock option agreement, in which event the Executive
shall be entitled to such options in accordance with such plan and agreement(s),
subject however to the provisions of this Agreement regarding stock options.
(e) Expenses. The Company shall pay or reimburse the Executive for all
reasonable out-of-pocket expenses actually incurred by the Executive during the
Term in performing services hereunder, provided that the Executive properly
accounts for such expenses in accordance with the Company's policies. The
Company shall pay the Executive an automobile allowance of no less than five
hundred dollars ($500) per month through normal payroll procedures, and such
allowance shall be reported as income on the Executive's year-end W-2 form. The
Executive shall be responsible for submitting automobile expense reimbursement
requests to the extent he wishes to convert any portion of the allowance to an
expense reimbursement. The Company shall reimburse the Executive for cellular
telephone expenses associated with business use.
5. Termination and Severance.
The Executive's employment hereunder may terminate under the following
circumstances:
(a) Termination by the Company for Cause. Notwithstanding anything to the
contrary in this Agreement, the Company may terminate the Executive's employment
for Cause
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at any time, upon written notice to the Executive setting forth in reasonable
detail the nature of such Cause. For purposes of this Agreement, "Cause" is
defined as (i) the Executive's continued failure to perform his duties (other
than due to physical incapacity or illness) after thirty (30) days' written
notice and opportunity to cure; (ii) the Executive's conviction of any felony;
(iii) the Executive's material misrepresentation of his professional
qualifications; (iv) willful or reckless conduct by the Executive injurious to
the Company or any Affiliate; or (v) the Executive's commission of fraud or
malfeasance. Upon the termination for Cause of the Executive's employment, the
Company and its Affiliates shall have no further obligation or liability to the
Executive other than for Salary earned prior to the date of termination and any
accrued but unused vacation.
(b) Termination by the Company Without Cause. Notwithstanding anything to
the contrary in this Agreement, the Executive's employment hereunder may be
terminated at any time without Cause by the Company upon fourteen (14) days'
written notice to the Executive, provided, however, that if the Company
terminates the Executive's employment without Cause the Company shall (i) pay
the Executive on the effective date of termination all earned and unpaid Salary,
earned and unpaid bonuses, and accrued and unused vacation; (ii) continue to pay
the Executive the Salary and shall provide medical, life and disability
coverage, under the same conditions as exist at the time of termination, for a
six (6) month period beginning on the effective date of the termination; and
(iii) notwithstanding anything to the contrary in any stock option agreement,
any unvested stock options granted to the Executive shall accelerate and vest in
full on the effective date of termination. As a condition of receiving such
benefits pursuant to this Agreement, the Executive shall execute and deliver to
the Company prior to his receipt of such benefits a general release
substantially in the form attached hereto as Exhibit A. Notwithstanding anything
to the contrary in this Section 5(b), if the termination constitutes a
Termination Without Cause Upon Change in Control, then the Executive shall
receive the benefits set forth in Section 5(d) below rather than as set forth in
this Section 5(b).
(c) Termination by the Executive. Notwithstanding anything to the contrary
in this Agreement, the Executive may terminate his employment hereunder upon
thirty (30) days written notice to the Company provided that the Company may pay
the Executive his Salary in lieu of any portion of such notice period. The
Executive may also terminate his employment hereunder after giving the Company
written notice no more than thirty (30) days after the occurrence of an event
which constitutes Good Reason, in which event the Company shall (i) pay the
Executive on the effective date of termination all earned and unpaid Salary,
earned and unpaid bonuses, and accrued and unused vacation; (ii) continue to pay
the Executive the Salary and shall provide medical, life and disability
coverage, under the same conditions as exist at the time of termination, for a
six (6) month period beginning on the effective date of the termination; and
(iii) notwithstanding anything to the contrary in any stock option agreement,
any unvested stock options granted to the Executive shall accelerate and vest in
full on the effective date of termination. As a condition of receiving such
benefits pursuant to this Agreement, the Executive shall execute and deliver to
the Company prior to his receipt of such benefits a general release
substantially in the form attached hereto as Exhibit A. Notwithstanding anything
to the contrary in this Section 5(c), if the Executive terminates his employment
for Good Reason Upon Change in Control, then the Executive shall receive the
benefits set forth in Section 5(d) below rather than as set forth in this
Section 5(c).
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<PAGE>
(d) Termination By Company or Executive After Change in Control.
Notwithstanding anything to the contrary in this Agreement, in the event of a
Termination Without Cause Upon Change in Control, or termination by the
Executive for Good Reason Upon Change in Control, the Company shall provide the
Executive the following benefits: (i) all earned and unpaid Salary and bonuses;
(ii) all accrued and unused vacation; (iii) a lump sum payment equal to 2.99
times the Executive's average annual cash compensation during the previous five
(5) years (or, if the Executive has been employed by the Company for a shorter
period, then the average during such shorter period); (iv) notwithstanding
anything to the contrary in any stock option agreement, upon the Executive
acknowledging in a signed writing the surrender of all his rights to vested and
unvested stock options granted to him by the Company, a lump sum equal to the
difference between the exercise price of such stock options and the higher of
(x) the fair market value of the option shares on the effective date of the
termination, or (y) the highest effective price paid for the Company's common
stock by any acquirer in connection with the Change in Control; (v) medical,
life and disability coverage for a period of twelve (12) months after the
effective date of the termination, or until the Executive receives comparable
coverage from another employer, whichever occurs first; and (vi) all accrued
retirement and deferred compensation plans vest in full. Items (i) through (iv)
shall be paid to the Executive within twenty (20) days after the effective date
of the termination. As a condition of receiving such benefits pursuant to this
Agreement, the Executive shall execute and deliver to the Company prior to his
receipt of such benefits a general release substantially in the form attached
hereto as Exhibit A.
(e) Death. In the event of the Executive's death during the Term of this
Agreement, the Executive's employment hereunder shall immediately and
automatically terminate, and the Company shall (i) pay the Executive's estate or
beneficiaries within a reasonable period after the effective date of termination
all earned, unpaid Salary, all earned, unpaid bonuses and all accrued unused
vacation; and (ii) notwithstanding anything to the contrary in any stock option
agreement, any unvested stock options granted to the Executive shall accelerate
and vest in full on the effective date of termination. As a condition of
receiving such benefits pursuant to this Agreement, the recipient(s) of benefits
under this subsection shall execute and deliver to the Company prior to receipt
of such benefits a general release substantially in the form attached hereto as
Exhibit A.
(f) Disability. Notwithstanding anything to the contrary in the Agreement,
the Company may terminate the Executive's employment hereunder, upon written
notice to the Executive, in the event that the Executive becomes disabled during
the Term through any condition of either a physical or psychological nature and,
as a result, is, with or without reasonable accommodation, unable to perform the
essential functions of the services contemplated hereunder for (a) a period of
ninety (90) consecutive days, or (b) for shorter periods aggregating one hundred
twenty (120) days during any twelve (12) month period during the Term. Any such
termination shall become effective upon mailing or hand delivery of notice that
the Company has elected its right to terminate under this subsection 5(f), and
the Company shall (i) pay the Executive on the effective date of termination all
earned, unpaid Salary; (ii) pay the Executive on the effective date of
termination all earned, unpaid bonuses; (iii) pay the Executive on the effective
date of termination all accrued unused vacation; (iv) continue to pay the
Executive the Salary and shall provide medical, life and disability coverage,
under the same
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conditions as exist at the time of termination, for a six (6) month period
beginning on the effective date of the termination, and (v) notwithstanding
anything to the contrary in any stock option agreement, any unvested stock
options granted to the Executive shall accelerate and vest in full on the
effective date of termination. As a condition of receiving such benefits
pursuant to this Agreement, the Executive shall execute and deliver to the
Company prior to his receipt of such benefits a general release substantially in
the form attached hereto as Exhibit A.
(g) Tax Deductability. If it is determined by the Company or the Internal
Revenue Service that any payment or benefit received or deemed received by the
Executive from the Company (pursuant to this Agreement or otherwise) is or will
become subject to any excise tax under Section 4999 of the Internal Revenue
Code, and, therefore, that the Company will not be entitled to a federal tax
deduction in connection with such payments and benefits or any portion thereof,
then such payments and/or benefits shall be reduced, in a form and amount agreed
to by the parties in good faith, in the amount necessary to allow the Company a
federal tax deduction in connection with all payments and benefits provided to
the Executive.
6. Choice of Law.
The validity, interpretation and performance of this Agreement shall be
governed by, and construed in accordance with, the internal law of Maryland,
without giving effect to conflict of law principles.
7. Miscellaneous.
(a) Assignment; Delegation. The Executive acknowledges and agrees that the
rights and obligations of the Company under this Agreement may be assigned by
the Company to any successors in interest. The Executive further acknowledges
and agrees that the Company may delegate performance of its obligations to any
Affiliate provided that the Company shall retain liability for any breach of its
obligations under this Agreement. The Executive further acknowledges and agrees
that this Agreement is personal to the Executive and that the Executive may not
assign or delegate any rights or obligations hereunder.
(b) Withholding. All payments required to be made by the Company to the
Executive under this Agreement shall be subject to withholding taxes, social
security and other payroll deductions in accordance with the Company's policies
applicable to employees of the Company at the Executive's level.
(c) Entire Agreement. This Agreement, the Executive's employee
nondisclosure/noncompetition agreement with the Company, and any stock option
agreement(s) between the parties, set forth the entire agreement between the
parties on the subject matter contained herein and supersede any prior
communications, agreements and understandings, written or oral, with respect to
the terms and conditions of the Executive's employment.
(d) Amendments. Any attempted modification of this Agreement will not be
effective unless signed by an officer of the Company and the Executive.
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(e) Waiver of Breach. The Executive understands that a breach of any
provision of this Agreement may only be waived by an officer of the Company. The
waiver by the Company of a breach of any provision of this Agreement shall not
operate or be construed as a waiver of any subsequent breach.
(f) Severability. If any provision of this Agreement should, for any
reason, be held invalid or unenforceable in any respect by a court of competent
jurisdiction, then the remainder of this Agreement, and the application of such
provision in circumstances other than those as to which it is so declared
invalid or unenforceable, shall not be affected thereby, and each such provision
of this Agreement shall be valid and enforceable to the fullest extent permitted
by law.
(g) Notices. Any notices, requests, demands and other communications
provided for by this Agreement shall be in writing and shall be effective when
delivered (i) in hand by private messenger, or (ii) by a nationally known and
reputable overnight mail service, as follows (or to such other address as either
party shall designate by notice in writing to the other in accordance herewith):
If to the Company:
135 National Business Parkway
Annapolis Junction, MD 20701
Attn: CEO
With a copy to General Counsel
If to Executive:
--------------------------
--------------------------
--------------------------
--------------------------
(h) Survival. The Executive and the Company agree that certain provisions
of this Agreement shall survive the expiration or termination of this Agreement
and the termination of the Executive's employment with the Company. Such
provisions shall be limited to those within this Agreement which, by their
express and implied terms, obligate either party to perform beyond the
termination of the Executive's employment or termination of this Agreement.
(i) Arbitration of Disputes. Any controversy or claim arising out of this
Agreement or any aspect of the Executive's relationship with the Company
including the cessation thereof shall be resolved by arbitration in accordance
with the then existing Employment Dispute Resolution Rules of the American
Arbitration Association, in Washington, D.C., and judgment upon the award
rendered may be entered in any court having jurisdiction thereof. The parties
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shall split equally the costs of arbitration, except that each party shall pay
its own attorneys' fees. The parties agree that the award of the arbitrator
shall be final and binding.
(j) Rights of Other Individuals. This Agreement confers rights solely on
the Executive and the Company. This Agreement is not a benefit plan and confers
no rights on any individual or entity other than the undersigned.
(k) Headings. The parties acknowledge that the headings in this Agreement
are for convenience of reference only and shall not control or affect the
meaning or construction of this Agreement.
(l) Advice of Counsel. The Executive and the Company hereby acknowledge
that each party has had adequate opportunity to review this Agreement, to obtain
the advice of counsel with respect to this Agreement, and to reflect upon and
consider the terms and conditions of this Agreement. The parties further
acknowledge that each party fully understands the terms of this Agreement and
has voluntarily executed this Agreement. The Company shall pay the legal fees
and costs incurred by the Executive in connection with the negotiation and
preparation of this Agreement, upon the presentation of invoices in appropriate
form.
IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as of
the day and year set forth below.
EXECUTIVE CREDIT MANAGEMENT SOLUTIONS, INC.
By:
- ------------------------ -------------------------------
ROBERT VOLLONO
Title:
----------------------------
Dated: , 2000 Dated: , 2000
--------------------- ---------------------
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EXHIBIT A
SEPARATION AGREEMENT
AND GENERAL RELEASE
This Separation Agreement and General Release ("Agreement") is made
and entered into this ____ day of _____, _____, by and between Credit Management
Solutions, Inc. (hereinafter the "Company" or "Employer") and [EMPLOYEE NAME]
("Employee") (hereinafter collectively referred to as the "Parties"), and is
made and entered into with reference to the following facts.
RECITALS
WHEREAS, Employee was hired by the Company on or about ________, as a
____________; and
WHEREAS, the Company and Employee have agreed to terminate their
employment relationship effective ______, ____; and
WHEREAS, the Parties have entered into a written employment agreement,
dated _________ (the "Employment Agreement"), under which Employee is entitled
to certain severance benefits conditioned upon his/her execution of this
Agreement; and
WHEREAS, the Parties each desire to resolve any potential disputes
which exist or may exist arising out of Employee's employment with the Company
and/or the termination thereof.
NOW THEREFORE, in consideration of the covenants and promises
contained herein, the Parties hereto agree as follows:
AGREEMENT
1. Agreement By the Employee. In exchange for the payments described
in paragraph 2 below, Employee agrees to the following:
(a) that his/her employment with the Company is terminated
effective _________, ____ (hereinafter the "Termination
Date"); and
(b) to be bound by the terms of this entire Agreement.
2. Agreement By the Company. In exchange for Employee's agreement to
be bound by the terms of this entire Agreement, including but not limited to the
Release of Claims in paragraph 3, the Company agrees to provide Employee with a
severance benefits as provided for in the Employment Agreement.
Employee acknowledges that, absent this Agreement, s/he has no legal,
contractual or other entitlement to the consideration set forth in this
paragraph and that the amount set forth in this paragraph constitute valid and
sufficient consideration for Employee's release of claims and other obligations
set forth herein.
3. Release of Claims. Employee hereby expressly waives, releases,
acquits and forever discharges the Company and its divisions, subsidiaries,
affiliates, parents, related entities,
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partners, officers, directors, shareholders, investors, executives, managers,
employees, agents, attorneys, representatives, successors and assigns
(hereinafter collectively referred to as "Releasees"), from any and all claims,
demands, and causes of action which Employee has or claims to have, whether
known or unknown, of whatever nature, which exist or may exist on Employee's
behalf from the beginning of time up to and including the date of this
Agreement. As used in this paragraph, "claims," "demands," and "causes of
action" include, but are not limited to, claims based on contract, whether
express or implied, fraud, stock fraud, defamation, wrongful termination,
estoppel, equity, tort, retaliation, intellectual property, personal injury,
spoliation of evidence, emotional distress, public policy, wage and hour law,
statute or common law, claims for severance pay, claims related to stock options
and/or fringe benefits, claims for attorneys' fees, vacation pay, debts,
accounts, compensatory damages, punitive or exemplary damages, liquidated
damages, and any and all claims arising under any federal, state, or local
statute, law, or ordinance prohibiting discrimination on account of race, color,
sex, age, religion, sexual orientation, disability or national origin, including
but not limited to, the Age Discrimination in Employment Act, Title VII of the
Civil Rights Act of 1964 as amended, the Americans with Disabilities Act, the
Family and Medical Leave Act or the Employee Retirement Income Security Act.
4. Last Date of Employment. It is understood and agreed that
Employee's last date of employment with
Employer is _________, ____.
5. Receipt of Wages and Other Compensation. Employee acknowledges and
agrees that, prior to his/her execution of this Agreement, s/he has received
payment for all wages, salary, bonuses, accrued vacation, and all other
compensation owed to Employee by the Company.
6. Company Property/Proprietary Information. Employee agrees to
continue to abide by the terms of the Company's Proprietary Information
Agreement the terms of which are incorporated herein by reference.
7. Acceptance of Agreement/[Revocation]. This Agreement was received
by Employee on ______, ____. Employee may accept this Agreement by returning a
signed original to the Company. This Agreement shall be withdrawn if not
accepted in the above manner on or before _____.
8. Non-Admission of Liability. The Company denies any wrongdoing
whatsoever in connection with its dealings with Employee, including but not
limited to Employee's employment and termination. It is expressly understood and
agreed that nothing contained in this Agreement shall constitute or be treated
as an admission of any wrongdoing or liability on the part of the Company or the
Employee.
9. No Filing of Claims. Employee represents and warrants that s/he
does not presently have on file, and further represents and warrants that s/he
will not hereafter file, any claims, charges, grievances or complaints against
any of the Releasees (defined above) in or with any administrative, state,
federal or governmental entity, agency, board or court, or before any other
tribunal or panel or arbitrators, public or private, based upon any actions or
omissions by the Releasees occurring prior to the date of this Agreement.
10. Ownership of Claims. Employee represents and warrants that s/he is
the sole and lawful owner of all rights, title and interest in and to all
released matters, claims and demands referred to herein. Employee further
represents and warrants that there has been no assignment or other transfer of
any interest in any such matters, claims or demands which she may have against
the Releasees.
11. Confidentiality. Employee understands and agrees that this
Agreement, and the matters discussed in negotiating its terms, are entirely
confidential. It is therefore expressly understood
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and agreed that Employee will not reveal, discuss, publish or in any way
communicate any of the terms, amount or fact of this Agreement to any person,
organization or other entity, with the exception of his/her immediate family
members and professional representatives, unless required by subpoena or court
order. Employee further agrees that s/he will not, at any time in the future,
make any statements to any third parties that disparage any of the Releasees
personally or professionally.
12. Tax Indemnification. It is understood and agreed that Employee is
liable for all tax obligations, if any, with respect to the settlement payments
provided for herein. Employee agrees to indemnify, defend and hold harmless
Employer from any and all taxes, assessments, penalties, loss, costs, attorneys'
fees, expenses or interest payments that Employer may at any time incur by
reason of any demand, proceeding, action or suit brought against Employer
arising out of or in any manner related to any local, state or federal taxes
allegedly due from Employee in connection with this Agreement.
13. Maryland Law Applies. This Agreement, in all respects, shall be
interpreted, enforced and governed by and under the laws of the State of
Maryland. Any and all actions relating to this Agreement shall be filed and
maintained in the federal and/or state courts located in the State of Maryland,
and the parties consent to the jurisdiction of such courts. In any action
arising out of this Agreement, or involving claims barred by this Agreement, the
prevailing party shall be entitled to recover all costs of suit, including
reasonable attorneys' fees.
14. Successors and Assigns. The Parties expressly understand and agree
that this Agreement, and all of its terms, shall be binding upon their
representatives, heirs, executors, administrators, successors and assigns.
15. Consultation with Counsel. Employee acknowledges that s/he has
been advised to consult with legal counsel of her choice prior to execution and
delivery of this Agreement.
16. Integration. Except as otherwise specifically provided for, this
Agreement constitutes an integrated, written contract, expressing the entire
agreement between the Parties with respect to the subject matter hereof. In this
regard, Employee represents and warrants that s/he is not relying on any
promises or representations which do not appear written herein. Employee further
understands and agrees that this Agreement can be amended or modified only by a
written agreement, signed by all of the Parties hereto.
17. Counterparts. This Agreement may be executed in separate
counterparts and by facsimile, and each such counterpart shall be deemed an
original with the same effect as if all Parties had signed the same document.
18. Headings. The headings in each paragraph herein are for
convenience of reference only and shall be of no legal effect in the
interpretation of the terms hereof.
19. Severability. If any provision in this Agreement is held to be
invalid, the remainder of this Agreement shall not be affected by such a
determination.
20. Voluntary Agreement. EMPLOYEE UNDERSTANDS AND AGREES THAT S/HE MAY
BE WAIVING SIGNIFICANT LEGAL RIGHTS BY SIGNING THIS AGREEMENT, AND REPRESENTS
THAT S/HE HAS ENTERED INTO THIS AGREEMENT KNOWINGLY AND VOLUNTARILY, WITH A FULL
UNDERSTANDING OF AND IN AGREEMENT WITH ALL OF ITS TERMS.
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on
the dates provided below.
DATED: _____________________, ____ CREDIT MANAGEMENT SOLUTIONS, INC.
By: __________________________
Its: __________________________
DATED: _____________________, ____ [EMPLOYEE NAME]
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13
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement"), is made and entered into this
__ day of ____________________, 2000, by and between Credit Management
Solutions, Inc., a Delaware corporation with principal offices located at 135
National Business Parkway, Annapolis Junction, Maryland 20701 (the "Company"),
and Scott Freiman (the "Executive").
WITNESSETH
WHEREAS, the Company has a need for the Executive's personal services in an
executive capacity; and
WHEREAS, the Executive possesses the necessary strategic, financial,
planning, operational and managerial skills necessary to fulfill those needs;
and
WHEREAS, the Executive and the Company desire to enter into a formal
Employment Agreement to fully recognize the contributions of the Executive to
the Company and to assure continuous harmonious performance of the affairs of
the Company.
NOW, THEREFORE, in consideration of the mutual promises, terms, provisions,
and conditions contained herein, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
1. Definitions. For purposes of this Agreement, the following capitalized
terms shall have the following meanings:
a. "Affiliate" means any person or entity (i) that directly or indirectly
owns more than fifty percent (50%) of the Voting Stock (as defined below) of the
Company, or (ii) more than fifty percent (50%) of the Voting Stock of which is
directly or indirectly owned by the Company, or (iii) more than fifty percent
(50%) of the Voting Stock of which is directly or indirectly owned by another
person or entity that directly or indirectly owns more than fifty percent (50%)
of the Voting Stock of the Company.
b. "Change of Control" of a company means the occurrence of any of the
following:
(i) any "person," as such term is currently used in Section 13(d)
of the Securities Exchange Act of 1934, becomes a "beneficial owner,"
as such term is currently used in Rule 13d-3 promulgated under that
Act of fifty percent (50%) or more of the Voting Stock of the company;
(ii) a majority of the Board of Directors of the company consists
of individuals other than Incumbent Directors, which term means the
members of the Board on the date hereof; provided that any individual
becoming a director subsequent to such date whose election or
nomination for election was supported by two-thirds of the directors
who then comprised the Incumbent Directors shall be considered to be
an Incumbent Director;
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(iii) the Board of Directors of the company adopts any plan of
liquidation providing for the distribution of all or substantially all
of the company's assets;
(iv) all or substantially all of the assets or business of the
company are disposed of in any one or more transactions pursuant to a
merger, consolidation or other transaction (unless the shareholders of
the company immediately prior to such merger, consolidation or other
transaction beneficially own, directly or indirectly, in substantially
the same proportion as they owned the Voting Stock of the company, all
of the Voting Stock or other ownership interests of the entity or
entities, if any, that succeed to the business of the company);
provided, however, that this subsection (iv) shall not apply in the
event of a merger or consolidation of the Company with an Affiliate;
or
(v) the company combines with another company and is the
surviving corporation but, immediately after the combination, the
shareholders of the company immediately prior to the combination hold,
directly or indirectly, fifty percent (50%) or less of the Voting
Stock of the combined company, (there being excluded from the number
of shares held by such shareholders, but not from the Voting Stock of
the combined company, any shares received by affiliates of such other
company in exchange for securities of such other company); provided,
however, that this subsection (v) shall not apply in the event of a
combination of the Company with an Affiliate.
c. "Good Reason" means any of the following events:
(i) a reduction in annual Salary (as defined below);
(ii) a failure by the Company, or Affiliate by which the
Executive is employed, to provide fringe benefits comparable to those
offered to the Executive's peer executives;
(iii) the failure of the Company, or Affiliate by which the
Executive is employed, to obtain by operation of law or otherwise the
assumption of its obligations to perform this Agreement from any
successor to all or substantially all of the assets of the Company or
such Affiliate; or
(iv) a relocation of the Executive's worksite to a location which
increases the distance from the Executive's home to his worksite by
more than fifty (50) miles.
d. "Good Reason Upon Change In Control" means any of the following events
provided the event occurs less than eighteen (18) months after a Change in
Control of (i) the Company or (ii) an Affiliate, if the Executive is employed at
that time by such Affiliate or the Company:
(A) any of the events which constitute Good Reason under Section 1(c)
above;
(B) a material diminution in the Executive's duties or
responsibilities; provided that a diminution shall not be deemed to
have occurred solely because that Executive no longer has duties and
responsibilities for a particular Affiliate as
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long as the Executive continues to have the same level, type and scope
of duties and responsibilities as he had prior to the Change in
Control; or
(C) the assignment to the Executive of duties that materially impair
his ability to perform the duties normally assigned to a person of his
title and position at a corporation of the size and nature of the
Company or Affiliate by which the Executive is employed (as
applicable).
e. "Voting Stock" means the issued and outstanding capital stock or other
securities of any class or classes having general voting power under ordinary
circumstances, in the absence of contingencies, to elect the directors of a
corporation.
f. "Termination Without Cause Upon Change in Control" means termination of
the Executive's employment without "Cause" (as defined in Section 5(a) below)
less than eighteen (18) months after a Change in Control of (i) the Company or
(ii) an Affiliate, if the Executive is employed at that time by such Affiliate
or the Company.
2. Position.
The Company hereby agrees to continue to employ the Executive to serve in
the role of President and Chief Executive Officer of the Company. The Company
reserves the right to change the Executive's title, duties and/or
responsibilities, and to reassign the Executive to or from any Affiliate. The
Executive accepts such employment upon the terms and conditions set forth
herein, and further agrees to perform to the best of his abilities the duties
generally associated with his position, as well as such other duties as may be
reasonably assigned by the Board of Directors of the Company (the "Board"), the
Chief Executive Officer or President of the Company, and, if the Executive is
employed by an Affiliate, the Chief Executive Officer, President or Board of
Directors of such Affiliate. The Executive shall perform his duties diligently
and faithfully and shall devote his full business time and attention to such
duties. Each party's rights and obligations under this Section 2 are subject to
Section 5 below.
3. Term of Employment and Renewal.
The term of the Executive's employment under this Agreement (the "Term")
will commence on the date of this Agreement (the "Effective Date") and continue
until terminated in accordance with Section 5 below.
4. Compensation and Benefits.
(a) Salary. Commencing on the Effective Date, the Company agrees to pay the
Executive a base salary at an annual rate of two-hundred and twenty thousand
Dollars ($220,000), payable in such installments as is the policy of the Company
(the "Salary"), but no less frequently than monthly. Thereafter, the Company
shall evaluate the Executive's Salary from time to time and make adjustments, in
its discretion, subject to the rights and obligations set forth in Section 5
below.
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(b) Bonus. In its sole discretion, the Company may make the Executive
eligible to receive bonuses based on criteria to be determined by the Company
and issued to the Executive in writing, in which event the Executive shall be
entitled to receive such bonuses in accordance with such criteria.
(c) Benefits. The Executive shall be entitled to participate in all
employee benefit plans which the Company provides or may establish from time to
time for the benefit of its employees, including, without limitation, group
life, medical, surgical, dental and other health insurance, short and long-term
disability, deferred compensation, profit-sharing and similar plans. The
Executive shall also be entitled to one hundred eighty four (184) hours of paid
leave per year of employment. Two-thirds of any unused portion of such paid
leave shall be considered to be vacation and, therefore, shall be paid to the
Executive upon his cessation of employment with the Company. The Company will
provide term life insurance for the Executive with benefits equal to his annual
Salary, up to a maximum of four hundred thousand dollars ($400,000). The Company
may also purchase one or more "key man" insurance policies on the Executive's
life, each of which will be payable to and owned by the Company. The Company, in
its sole discretion, may select the amount and type of key man life insurance
purchased, and the Executive will have no interest in any such policy. The
Executive will cooperate with the Company in securing this key man insurance, by
submitting to all required medical examinations, supplying all information and
executing all documents required in order for the Company to secure the
insurance
(d) Stock Options. In the sole discretion of the Board, the Company may
from time to time issue the Executive stock option grants under the Company's
stock option plan and a stock option agreement, in which event the Executive
shall be entitled to such options in accordance with such plan and agreement(s),
subject however to the provisions of this Agreement regarding stock options.
(e) Expenses. The Company shall pay or reimburse the Executive for all
reasonable out-of-pocket expenses actually incurred by the Executive during the
Term in performing services hereunder, provided that the Executive properly
accounts for such expenses in accordance with the Company's policies. The
Company shall pay the Executive an automobile allowance of no less than five
hundred dollars ($500) per month through normal payroll procedures, and such
allowance shall be reported as income on the Executive's year-end W-2 form. The
Executive shall be responsible for submitting automobile expense reimbursement
requests to the extent he wishes to convert any portion of the allowance to an
expense reimbursement. The Company shall reimburse the Executive for cellular
telephone expenses associated with business use.
5. Termination and Severance.
The Executive's employment hereunder may terminate under the following
circumstances:
(a) Termination by the Company for Cause. Notwithstanding anything to the
contrary in this Agreement, the Company may terminate the Executive's employment
for Cause
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at any time, upon written notice to the Executive setting forth in reasonable
detail the nature of such Cause. For purposes of this Agreement, "Cause" is
defined as (i) the Executive's continued failure to perform his duties (other
than due to physical incapacity or illness) after thirty (30) days' written
notice and opportunity to cure; (ii) the Executive's conviction of any felony;
(iii) the Executive's material misrepresentation of his professional
qualifications; (iv) willful or reckless conduct by the Executive injurious to
the Company or any Affiliate; or (v) the Executive's commission of fraud or
malfeasance. Upon the termination for Cause of the Executive's employment, the
Company and its Affiliates shall have no further obligation or liability to the
Executive other than for Salary earned prior to the date of termination and any
accrued but unused vacation.
(b) Termination by the Company Without Cause. Notwithstanding anything to
the contrary in this Agreement, the Executive's employment hereunder may be
terminated at any time without Cause by the Company upon fourteen (14) days'
written notice to the Executive, provided, however, that if the Company
terminates the Executive's employment without Cause the Company shall (i) pay
the Executive on the effective date of termination all earned and unpaid Salary,
earned and unpaid bonuses, and accrued and unused vacation; (ii) continue to pay
the Executive the Salary and shall provide medical, life and disability
coverage, under the same conditions as exist at the time of termination, for a
six (6) month period beginning on the effective date of the termination; and
(iii) notwithstanding anything to the contrary in any stock option agreement,
any unvested stock options granted to the Executive shall accelerate and vest in
full on the effective date of termination. As a condition of receiving such
benefits pursuant to this Agreement, the Executive shall execute and deliver to
the Company prior to his receipt of such benefits a general release
substantially in the form attached hereto as Exhibit A. Notwithstanding anything
to the contrary in this Section 5(b), if the termination constitutes a
Termination Without Cause Upon Change in Control, then the Executive shall
receive the benefits set forth in Section 5(d) below rather than as set forth in
this Section 5(b).
(c) Termination by the Executive. Notwithstanding anything to the contrary
in this Agreement, the Executive may terminate his employment hereunder upon
thirty (30) days written notice to the Company provided that the Company may pay
the Executive his Salary in lieu of any portion of such notice period. The
Executive may also terminate his employment hereunder after giving the Company
written notice no more than thirty (30) days after the occurrence of an event
which constitutes Good Reason, in which event the Company shall (i) pay the
Executive on the effective date of termination all earned and unpaid Salary,
earned and unpaid bonuses, and accrued and unused vacation; (ii) continue to pay
the Executive the Salary and shall provide medical, life and disability
coverage, under the same conditions as exist at the time of termination, for a
six (6) month period beginning on the effective date of the termination; and
(iii) notwithstanding anything to the contrary in any stock option agreement,
any unvested stock options granted to the Executive shall accelerate and vest in
full on the effective date of termination. As a condition of receiving such
benefits pursuant to this Agreement, the Executive shall execute and deliver to
the Company prior to his receipt of such benefits a general release
substantially in the form attached hereto as Exhibit A. Notwithstanding anything
to the contrary in this Section 5(c), if the Executive terminates his employment
for Good Reason Upon Change in Control, then the Executive shall receive the
benefits set forth in Section 5(d) below rather than as set forth in this
Section 5(c).
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(d) Termination By Company or Executive After Change in Control.
Notwithstanding anything to the contrary in this Agreement, in the event of a
Termination Without Cause Upon Change in Control, or termination by the
Executive for Good Reason Upon Change in Control, the Company shall provide the
Executive the following benefits: (i) all earned and unpaid Salary and bonuses;
(ii) all accrued and unused vacation; (iii) a lump sum payment equal to 2.99
times the Executive's average annual cash compensation during the previous five
(5) years (or, if the Executive has been employed by the Company for a shorter
period, then the average during such shorter period); (iv) notwithstanding
anything to the contrary in any stock option agreement, upon the Executive
acknowledging in a signed writing the surrender of all his rights to vested and
unvested stock options granted to him by the Company, a lump sum equal to the
difference between the exercise price of such stock options and the higher of
(x) the fair market value of the option shares on the effective date of the
termination, or (y) the highest effective price paid for the Company's common
stock by any acquirer in connection with the Change in Control; (v) medical,
life and disability coverage for a period of twelve (12) months after the
effective date of the termination, or until the Executive receives comparable
coverage from another employer, whichever occurs first; and (vi) all accrued
retirement and deferred compensation plans vest in full. Items (i) through (iv)
shall be paid to the Executive within twenty (20) days after the effective date
of the termination. As a condition of receiving such benefits pursuant to this
Agreement, the Executive shall execute and deliver to the Company prior to his
receipt of such benefits a general release substantially in the form attached
hereto as Exhibit A.
(e) Death. In the event of the Executive's death during the Term of this
Agreement, the Executive's employment hereunder shall immediately and
automatically terminate, and the Company shall (i) pay the Executive's estate or
beneficiaries within a reasonable period after the effective date of termination
all earned, unpaid Salary, all earned, unpaid bonuses and all accrued unused
vacation; and (ii) notwithstanding anything to the contrary in any stock option
agreement, any unvested stock options granted to the Executive shall accelerate
and vest in full on the effective date of termination. As a condition of
receiving such benefits pursuant to this Agreement, the recipient(s) of benefits
under this subsection shall execute and deliver to the Company prior to receipt
of such benefits a general release substantially in the form attached hereto as
Exhibit A.
(f) Disability. Notwithstanding anything to the contrary in the Agreement,
the Company may terminate the Executive's employment hereunder, upon written
notice to the Executive, in the event that the Executive becomes disabled during
the Term through any condition of either a physical or psychological nature and,
as a result, is, with or without reasonable accommodation, unable to perform the
essential functions of the services contemplated hereunder for (a) a period of
ninety (90) consecutive days, or (b) for shorter periods aggregating one hundred
twenty (120) days during any twelve (12) month period during the Term. Any such
termination shall become effective upon mailing or hand delivery of notice that
the Company has elected its right to terminate under this subsection 5(f), and
the Company shall (i) pay the Executive on the effective date of termination all
earned, unpaid Salary; (ii) pay the Executive on the effective date of
termination all earned, unpaid bonuses; (iii) pay the Executive on the effective
date of termination all accrued unused vacation; (iv) continue to pay the
Executive the Salary and shall provide medical, life and disability coverage,
under the same
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conditions as exist at the time of termination, for a six (6) month period
beginning on the effective date of the termination, and (v) notwithstanding
anything to the contrary in any stock option agreement, any unvested stock
options granted to the Executive shall accelerate and vest in full on the
effective date of termination. As a condition of receiving such benefits
pursuant to this Agreement, the Executive shall execute and deliver to the
Company prior to his receipt of such benefits a general release substantially in
the form attached hereto as Exhibit A.
(g) Tax Deductability. If it is determined by the Company or the Internal
Revenue Service that any payment or benefit received or deemed received by the
Executive from the Company (pursuant to this Agreement or otherwise) is or will
become subject to any excise tax under Section 4999 of the Internal Revenue
Code, and, therefore, that the Company will not be entitled to a federal tax
deduction in connection with such payments and benefits or any portion thereof,
then such payments and/or benefits shall be reduced, in a form and amount agreed
to by the parties in good faith, in the amount necessary to allow the Company a
federal tax deduction in connection with all payments and benefits provided to
the Executive.
6. Choice of Law.
The validity, interpretation and performance of this Agreement shall be
governed by, and construed in accordance with, the internal law of Maryland,
without giving effect to conflict of law principles.
7. Miscellaneous.
(a) Assignment; Delegation. The Executive acknowledges and agrees that the
rights and obligations of the Company under this Agreement may be assigned by
the Company to any successors in interest. The Executive further acknowledges
and agrees that the Company may delegate performance of its obligations to any
Affiliate provided that the Company shall retain liability for any breach of its
obligations under this Agreement. The Executive further acknowledges and agrees
that this Agreement is personal to the Executive and that the Executive may not
assign or delegate any rights or obligations hereunder.
(b) Withholding. All payments required to be made by the Company to the
Executive under this Agreement shall be subject to withholding taxes, social
security and other payroll deductions in accordance with the Company's policies
applicable to employees of the Company at the Executive's level.
(c) Entire Agreement. This Agreement, the Executive's employee
nondisclosure/noncompetition agreement with the Company, and any stock option
agreement(s) between the parties, set forth the entire agreement between the
parties on the subject matter contained herein and supersede any prior
communications, agreements and understandings, written or oral, with respect to
the terms and conditions of the Executive's employment.
(d) Amendments. Any attempted modification of this Agreement will not be
effective unless signed by an officer of the Company and the Executive.
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(e) Waiver of Breach. The Executive understands that a breach of any
provision of this Agreement may only be waived by an officer of the Company. The
waiver by the Company of a breach of any provision of this Agreement shall not
operate or be construed as a waiver of any subsequent breach.
(f) Severability. If any provision of this Agreement should, for any
reason, be held invalid or unenforceable in any respect by a court of competent
jurisdiction, then the remainder of this Agreement, and the application of such
provision in circumstances other than those as to which it is so declared
invalid or unenforceable, shall not be affected thereby, and each such provision
of this Agreement shall be valid and enforceable to the fullest extent permitted
by law.
(g) Notices. Any notices, requests, demands and other communications
provided for by this Agreement shall be in writing and shall be effective when
delivered (i) in hand by private messenger, or (ii) by a nationally known and
reputable overnight mail service, as follows (or to such other address as either
party shall designate by notice in writing to the other in accordance herewith):
If to the Company:
135 National Business Parkway
Annapolis Junction, MD 20701
Attn: CEO
With a copy to General Counsel
If to Executive:
--------------------------
--------------------------
--------------------------
--------------------------
(h) Survival. The Executive and the Company agree that certain provisions
of this Agreement shall survive the expiration or termination of this Agreement
and the termination of the Executive's employment with the Company. Such
provisions shall be limited to those within this Agreement which, by their
express and implied terms, obligate either party to perform beyond the
termination of the Executive's employment or termination of this Agreement.
(i) Arbitration of Disputes. Any controversy or claim arising out of this
Agreement or any aspect of the Executive's relationship with the Company
including the cessation thereof shall be resolved by arbitration in accordance
with the then existing Employment Dispute Resolution Rules of the American
Arbitration Association, in Washington, D.C., and judgment upon the award
rendered may be entered in any court having jurisdiction thereof. The parties
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shall split equally the costs of arbitration, except that each party shall pay
its own attorneys' fees. The parties agree that the award of the arbitrator
shall be final and binding.
(j) Rights of Other Individuals. This Agreement confers rights solely on
the Executive and the Company. This Agreement is not a benefit plan and confers
no rights on any individual or entity other than the undersigned.
(k) Headings. The parties acknowledge that the headings in this Agreement
are for convenience of reference only and shall not control or affect the
meaning or construction of this Agreement.
(l) Advice of Counsel. The Executive and the Company hereby acknowledge
that each party has had adequate opportunity to review this Agreement, to obtain
the advice of counsel with respect to this Agreement, and to reflect upon and
consider the terms and conditions of this Agreement. The parties further
acknowledge that each party fully understands the terms of this Agreement and
has voluntarily executed this Agreement. The Company shall pay the legal fees
and costs incurred by the Executive in connection with the negotiation and
preparation of this Agreement, upon the presentation of invoices in appropriate
form.
IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as of
the day and year set forth below.
EXECUTIVE CREDIT MANAGEMENT SOLUTIONS, INC.
By:
- ------------------------------ -----------------------------
SCOTT FREIMAN
Title:
Dated: , 2000 Dated: , 2000
------------------- ----------------------
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EXHIBIT A
SEPARATION AGREEMENT
AND GENERAL RELEASE
This Separation Agreement and General Release ("Agreement") is made
and entered into this ____ day of _____, _____, by and between Credit Management
Solutions, Inc. (hereinafter the "Company" or "Employer") and [EMPLOYEE NAME]
("Employee") (hereinafter collectively referred to as the "Parties"), and is
made and entered into with reference to the following facts.
RECITALS
WHEREAS, Employee was hired by the Company on or about ________, as a
____________; and
WHEREAS, the Company and Employee have agreed to terminate their
employment relationship effective ______, ____; and
WHEREAS, the Parties have entered into a written employment agreement,
dated _________ (the "Employment Agreement"), under which Employee is entitled
to certain severance benefits conditioned upon his/her execution of this
Agreement; and
WHEREAS, the Parties each desire to resolve any potential disputes
which exist or may exist arising out of Employee's employment with the Company
and/or the termination thereof.
NOW THEREFORE, in consideration of the covenants and promises
contained herein, the Parties hereto agree as follows:
AGREEMENT
1. Agreement By the Employee. In exchange for the payments described
in paragraph 2 below, Employee agrees to the following:
(a) that his/her employment with the Company is terminated
effective _________, ____ (hereinafter the "Termination
Date"); and
(b) to be bound by the terms of this entire Agreement.
2. Agreement By the Company. In exchange for Employee's agreement to
be bound by the terms of this entire Agreement, including but not limited to the
Release of Claims in paragraph 3, the Company agrees to provide Employee with a
severance benefits as provided for in the Employment Agreement.
Employee acknowledges that, absent this Agreement, s/he has no legal,
contractual or other entitlement to the consideration set forth in this
paragraph and that the amount set forth in this paragraph constitute valid and
sufficient consideration for Employee's release of claims and other obligations
set forth herein.
3. Release of Claims. Employee hereby expressly waives, releases,
acquits and forever discharges the Company and its divisions, subsidiaries,
affiliates, parents, related entities,
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partners, officers, directors, shareholders, investors, executives, managers,
employees, agents, attorneys, representatives, successors and assigns
(hereinafter collectively referred to as "Releasees"), from any and all claims,
demands, and causes of action which Employee has or claims to have, whether
known or unknown, of whatever nature, which exist or may exist on Employee's
behalf from the beginning of time up to and including the date of this
Agreement. As used in this paragraph, "claims," "demands," and "causes of
action" include, but are not limited to, claims based on contract, whether
express or implied, fraud, stock fraud, defamation, wrongful termination,
estoppel, equity, tort, retaliation, intellectual property, personal injury,
spoliation of evidence, emotional distress, public policy, wage and hour law,
statute or common law, claims for severance pay, claims related to stock options
and/or fringe benefits, claims for attorneys' fees, vacation pay, debts,
accounts, compensatory damages, punitive or exemplary damages, liquidated
damages, and any and all claims arising under any federal, state, or local
statute, law, or ordinance prohibiting discrimination on account of race, color,
sex, age, religion, sexual orientation, disability or national origin, including
but not limited to, the Age Discrimination in Employment Act, Title VII of the
Civil Rights Act of 1964 as amended, the Americans with Disabilities Act, the
Family and Medical Leave Act or the Employee Retirement Income Security Act.
4. Last Date of Employment. It is understood and agreed that
Employee's last date of employment with Employer is _________, ____.
5. Receipt of Wages and Other Compensation. Employee acknowledges and
agrees that, prior to his/her execution of this Agreement, s/he has received
payment for all wages, salary, bonuses, accrued vacation, and all other
compensation owed to Employee by the Company.
6. Company Property/Proprietary Information. Employee agrees to
continue to abide by the terms of the Company's Proprietary Information
Agreement the terms of which are incorporated herein by reference.
7. Acceptance of Agreement/[Revocation]. This Agreement was received
by Employee on ______, ____. Employee may accept this Agreement by returning a
signed original to the Company. This Agreement shall be withdrawn if not
accepted in the above manner on or before _____.
8. Non-Admission of Liability. The Company denies any wrongdoing
whatsoever in connection with its dealings with Employee, including but not
limited to Employee's employment and termination. It is expressly understood and
agreed that nothing contained in this Agreement shall constitute or be treated
as an admission of any wrongdoing or liability on the part of the Company or the
Employee.
9. No Filing of Claims. Employee represents and warrants that s/he
does not presently have on file, and further represents and warrants that s/he
will not hereafter file, any claims, charges, grievances or complaints against
any of the Releasees (defined above) in or with any administrative, state,
federal or governmental entity, agency, board or court, or before any other
tribunal or panel or arbitrators, public or private, based upon any actions or
omissions by the Releasees occurring prior to the date of this Agreement.
10. Ownership of Claims. Employee represents and warrants that s/he is
the sole and lawful owner of all rights, title and interest in and to all
released matters, claims and demands referred to herein. Employee further
represents and warrants that there has been no assignment or other transfer of
any interest in any such matters, claims or demands which she may have against
the Releasees.
11. Confidentiality. Employee understands and agrees that this
Agreement, and the matters discussed in negotiating its terms, are entirely
confidential. It is therefore expressly understood
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and agreed that Employee will not reveal, discuss, publish or in any way
communicate any of the terms, amount or fact of this Agreement to any person,
organization or other entity, with the exception of his/her immediate family
members and professional representatives, unless required by subpoena or court
order. Employee further agrees that s/he will not, at any time in the future,
make any statements to any third parties that disparage any of the Releasees
personally or professionally.
12. Tax Indemnification. It is understood and agreed that Employee is
liable for all tax obligations, if any, with respect to the settlement payments
provided for herein. Employee agrees to indemnify, defend and hold harmless
Employer from any and all taxes, assessments, penalties, loss, costs, attorneys'
fees, expenses or interest payments that Employer may at any time incur by
reason of any demand, proceeding, action or suit brought against Employer
arising out of or in any manner related to any local, state or federal taxes
allegedly due from Employee in connection with this Agreement.
13. Maryland Law Applies. This Agreement, in all respects,
shall be interpreted, enforced and governed by and under the laws of the State
of Maryland. Any and all actions relating to this Agreement shall be filed and
maintained in the federal and/or state courts located in the State of Maryland,
and the parties consent to the jurisdiction of such courts. In any action
arising out of this Agreement, or involving claims barred by this Agreement, the
prevailing party shall be entitled to recover all costs of suit, including
reasonable attorneys' fees.
14. Successors and Assigns. The Parties expressly understand and agree
that this Agreement, and all of its terms, shall be binding upon their
representatives, heirs, executors, administrators, successors and assigns.
15. Consultation with Counsel. Employee acknowledges that s/he has
been advised to consult with legal counsel of her choice prior to execution and
delivery of this Agreement.
16. Integration. Except as otherwise specifically provided for, this
Agreement constitutes an integrated, written contract, expressing the entire
agreement between the Parties with respect to the subject matter hereof. In this
regard, Employee represents and warrants that s/he is not relying on any
promises or representations which do not appear written herein. Employee further
understands and agrees that this Agreement can be amended or modified only by a
written agreement, signed by all of the Parties hereto.
17. Counterparts. This Agreement may be executed in separate
counterparts and by facsimile, and each such counterpart shall be deemed an
original with the same effect as if all Parties had signed the same document.
18. Headings. The headings in each paragraph herein are for
convenience of reference only and shall be of no legal effect in the
interpretation of the terms hereof.
19. Severability. If any provision in this Agreement is held to be
invalid, the remainder of this Agreement shall not be affected by such a
determination.
20. Voluntary Agreement. EMPLOYEE UNDERSTANDS AND AGREES THAT S/HE MAY
BE WAIVING SIGNIFICANT LEGAL RIGHTS BY SIGNING THIS AGREEMENT, AND REPRESENTS
THAT S/HE HAS ENTERED INTO THIS AGREEMENT KNOWINGLY AND VOLUNTARILY, WITH A FULL
UNDERSTANDING OF AND IN AGREEMENT WITH ALL OF ITS TERMS.
12
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on
the dates provided below.
DATED: _____________________, ____ CREDIT MANAGEMENT SOLUTIONS, INC.
By: __________________________
Its: __________________________
DATED: _____________________, ____ [EMPLOYEE NAME]
----------------------------
13
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001024339
<NAME> CREDIT MANAGEMENT SOLUTIONS, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 3,253,187
<SECURITIES> 2,316,957
<RECEIVABLES> 5,794,330
<ALLOWANCES> (311,583)
<INVENTORY> 0
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<PP&E> 9,482,639
<DEPRECIATION> (3,362,436)
<TOTAL-ASSETS> 19,985,578
<CURRENT-LIABILITIES> 7,180,099
<BONDS> 0
0
0
<COMMON> 78,169
<OTHER-SE> 11,622,708
<TOTAL-LIABILITY-AND-EQUITY> 19,985,578
<SALES> 49,003
<TOTAL-REVENUES> 5,197,413
<CGS> 84,136
<TOTAL-COSTS> 2,792,517
<OTHER-EXPENSES> 2,921,936
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,785
<INCOME-PRETAX> (475,797)
<INCOME-TAX> 0
<INCOME-CONTINUING> (475,797)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (475,797)
<EPS-BASIC> (.06)
<EPS-DILUTED> (.06)
</TABLE>
