-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CVChxviAtO/zrbuP856SykgvJdVLe6yNlqRTyYxM4bZIv+Du2GyzjO3tg+VF59Gm g6fO50zSrR1eSM6cqvgBng== 0000891618-97-001919.txt : 19970429 0000891618-97-001919.hdr.sgml : 19970429 ACCESSION NUMBER: 0000891618-97-001919 CONFORMED SUBMISSION TYPE: S-8 PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19970428 EFFECTIVENESS DATE: 19970428 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CREDIT MANAGEMENT SOLUTIONS INC CENTRAL INDEX KEY: 0001024339 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 521549401 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-8 SEC ACT: 1933 Act SEC FILE NUMBER: 333-25969 FILM NUMBER: 97588676 BUSINESS ADDRESS: STREET 1: 5950 SYMPHONY WOODS RD CITY: COLUMBIA STATE: MD ZIP: 21044 BUSINESS PHONE: 4107401000 MAIL ADDRESS: STREET 1: 5950 SYMPHONY WOODS RD STREET 2: SUITE 301 CITY: COLUMBIA STATE: MD ZIP: 21044 S-8 1 FORM S-8 1 As filed with the Securities and Exchange Commission on April 28, 1997 Registration No.333-____________ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM S-8 REGISTRATION STATEMENT Under The Securities Act of 1933 CREDIT MANAGEMENT SOLUTIONS, INC. (Exact name of registrant as specified in its charter) DELAWARE 52-1549401 (State or other jurisdiction (IRS Employer Identification No.) of incorporation or organization) 5950 SYMPHONY WOODS ROAD COLUMBIA, MARYLAND 21044 (410) 740-1000 (Address of principal executive offices) (Zip Code) CREDIT MANAGEMENT SOLUTIONS, INC. 1996 EMPLOYEE STOCK PURCHASE PLAN 1996 NON-QUALIFIED STOCK OPTION PLAN (Full title of the Plans) JAMES R. DEFRANCESCO PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD CREDIT MANAGEMENT SOLUTIONS, INC. 5950 SYMPHONY WOODS ROAD COLUMBIA, MARYLAND 21044 (Name and address, including zip code, of agent for service) (410) 740-1000 (Phone number, including area code, of agent for service) CALCULATION OF REGISTRATION FEE
Proposed Proposed Title of Maximum Maximum Securities Amount Offering Aggregate Amount of to be to be Price Offering Registration Registered Registered(1) per Share Price Fee EMPLOYEE STOCK PURCHASE PLAN Common Stock, $0.01 250,000 shares $8.7125-$9.75(2) $ 2,436,616.86 $738.36 par value 1996 NON-QUALIFIED STOCK OPTION PLAN Options to purchase Common Stock Common Stock, $0.01 par value 2,750,000 shares $9.75(3) $26,812,500(3) $ 8,125 Aggregate Filing Fee $8,864
(1) This Registration Statement shall also cover any additional shares of Common Stock which become issuable under the Employee Stock Purchase Plan by reason of any stock dividend, stock split, recapitalization or other similar transaction effected without the receipt of consideration which results in an increase in the number of the outstanding shares of Common Stock of Credit Management Solutions, Inc. (2) Calculated solely for purposes of this offering under Rule 457(h) of the Securities Act of 1933, as amended, on the basis of (i) the purchase price per share on March 31, 1997 with respect to 5,550 shares of Registrant's Common Stock and (ii) the average of the high and low selling prices per share of Registrant's Common Stock on April 24, 1997, as reported on the Nasdaq National Market with respect to 244,950 Shares of Registrant's Common Stock. (3) Calculated solely for purposes of this offering under Rule 457(h) of the Securities Act of 1933, as amended, on the basis of the average of the high and low selling prices per share of Registrant's Common Stock on April 24, 1997, as reported by the Nasdaq National Market. 2 PROSPECTUS 5,550 SHARES Credit Management Solutions, Inc. Common Stock ($0.01 PAR VALUE PER SHARE) ----------------- This Prospectus relates to the offer and sale of up to 5,550 shares of the Common Stock, $0.01 par value per share (the "Shares"), of Credit Management Solutions, Inc., a Delaware corporation (the "Company"), by 60 of the Company employees (the "Selling Stockholders"). The Selling Stockholders purchased shares pursuant to the Company's Employee Stock Purchase Plan. None of the Selling Stockholders is or has ever been an officer or director of the Company. The Shares issued to the Selling Stockholders will be registered on a Form S-8 Registration Statement filed by the Company under the Securities Act of 1933, as amended (the "1933 Act"). The Shares may be offered by the Selling Stockholders from time to time in broker-dealer transactions effected on the Nasdaq National Market at market prices prevailing at the time of the sale. For further information concerning such sales, see the section below entitled "Plan of Distribution." The Company will not receive any of the proceeds from the sale of the Shares offered hereby. FOR INFORMATION CONCERNING THE PRINCIPAL RISK FACTORS ASSOCIATED WITH A PURCHASE OF THE SHARES OFFERED HEREBY, SEE THE SECTION BELOW ENTITLED "RISK FACTORS." The Company's Common Stock is quoted on the Nasdaq National Market under the symbol CMSS. On March 31, 1997, the closing price of the Common Stock was $8.7125 per share. ------------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------------- THE DATE OF THIS PROSPECTUS IS APRIL 28, 1997 1 3 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "1934 Act"), and in accordance therewith files reports, proxy statements, information statements and other information with the Securities and Exchange Commission (the "Commission"). Reports, proxy statements and other information filed by the Company may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices located at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and at Seven World Trade Center, New York, New York 10048. Copies of such material can be obtained by mail from the Public Reference Branch of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission also maintains a site on the World Wide Web that contains reports, proxy and information statements and other information regarding registrants that file electronically. The address for such site is http://www.sec.gov. The Company has filed with the Commission a registration statement on Form S-8 (herein, together with all amendments and exhibits, referred to as the "Registration Statement") under the 1933 Act with respect to the Common Stock issuable under the Plan, including the Shares offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information regarding the Company, the Common Stock offered hereby and the Plan, reference is hereby made to the Registration Statement and to the exhibits and schedules filed therewith. The Registration Statement, including the exhibits and schedules thereto, may be inspected at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and copies of all or any part thereof may be obtained from such office upon payment of the prescribed fees. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE Credit Management Solutions, Inc. (the "Registrant") hereby incorporates by reference into this Registration Statement the following documents previously filed with the Securities and Exchange Commission (the "SEC"): (a) The Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, filed with the SEC on March 31, 1996; and (b) The Registrant's Registration Statement No. 00-21735 on Form 8-A filed with the SEC on November 15, 1996 pursuant to Section 12 of the 1934 Act in which there is described the terms, rights and provisions applicable to the Registrant's outstanding Common Stock. The Company will provide without charge to each person to whom a copy of this Prospectus is delivered, upon the request of such person, a copy of any or all of the documents which are incorporated herein by reference (other than exhibits to such information, unless such exhibits are specifically incorporated by reference into the information this Prospectus incorporates). Requests should be directed to Credit Management Solutions, Inc., 5950 Symphony Woods Road, Columbia, Maryland 21044, telephone (410) 740-1000. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR BY ANY OTHER PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES COVERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO OR SOLICITATION OF ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION MAY NOT LAWFULLY BE MADE. 2 4 THE COMPANY Credit Management Solutions, Inc. (the "Company") is a developer and provider of software solutions and services for automating the consumer and small business credit analysis, decisioning and funding process. The Company is organized and existing under the laws of the State of Delaware. The Company's principal executive offices are located at 5950 Symphony Woods Road, Columbia, Maryland 21044, and the Company's telephone number is (410) 740-1000. RISK FACTORS The discussion in this Prospectus regarding the Company and the credit processing software and services industry contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements consist of any statement other than a recitation of historical fact and can be identified by the use of forward-looking terminology such as "may," "expect," "anticipate," "estimate" or "continue" or the negative thereof or other variations thereon or comparable terminology. The reader is cautioned that all forward-looking statements are necessarily speculative and there are certain risks and uncertainties that could cause actual events or results to differ materially from those referred to in such forward looking statements. The discussion below highlights some of the more important risks regarding the Company. The risks highlighted below should not be assumed to be the only things that could affect future performance. The Company does not have a policy of updating or revising forward-looking statements and thus it should not be assumed that silence by management of the Company over time means that actual events are bearing out as estimated in such forward looking statements. Uncertainty of Future Results of Operations; Fluctuations in Quarterly Results of Operations Prior growth rates in the Company's revenue and net income should not be considered indicative of future results of operations. Future results of operations will depend upon many factors, including market acceptance of new services, including the Company's Credit Connection and CreditRevue Service Bureau, the demand for the Company's products and services, the successful transition from predominantly license fee-based revenue to predominantly transaction fee-based revenue, the timing of new product and service introductions and software enhancements by the Company or its competitors, the level of product, service and price competition, the length of the Company's sales cycle, the size and timing of individual transactions, the delay or deferral of customer implementations, the Company's success in expanding its customer support organization, direct sales force and indirect distribution channels, the nature and timing of significant marketing programs, the mix of products and services sold, the timing of new hires, the ability of the Company to develop and market new products and services and control costs, competitive conditions in the industry and general economic conditions. In addition, the decision to implement the Company's products or services typically involves a significant commitment of customer resources and is subject to the budget cycles of the Company's customers. Licenses of CreditRevue generally reflect a relatively high amount of revenue per order. The loss or delay of individual orders, therefore, would have a significant impact on the Company's revenue and quarterly results of operations. The timing of revenue is difficult to predict because of the length and variability of the Company's sales cycle, which has ranged to date from two to 18 months from initial customer contact to the execution of a license agreement. In addition, since a substantial portion of the Company's revenue is recognized on a percentage-of-completion basis, the timing of revenue recognition for its licenses may be materially and adversely affected by delays or deferrals of customer implementations. Such delays or deferrals may also increase expenses associated with such implementations which would materially and adversely affect related operating margins. The Company's operating expenses are based in part on planned product and service introductions and anticipated revenue trends and, because a high percentage of these expenses are relatively fixed, a delay in the recognition of revenue from a limited number of transactions could cause significant variations in operating results from quarter-to-quarter and could result in operating losses. To the extent such expenses precede, or are not subsequently followed by, increased revenues, the Company's results of operations would be materially and adversely affected. As a result of these and other factors, revenues for any quarter are subject to significant variation, and the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. There can be no assurance that the Company will be profitable in any future quarter or that such fluctuations in results of operations will not result in volatility in the price of 3 5 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 virtually all of the Company's revenues through December 31, 1996. Although the Company has recently introduced its Credit Connection service, the Company expects that revenues generated from licenses and installations of CreditRevue will continue to account for a significant portion of the Company's revenues for the foreseeable future. To date, Credit Connection has generated approximately $48,500 in revenues. The life cycles of the Company's products and services are difficult to predict due to the effect of new product and service introductions or software enhancements by the Company or its competitors, market acceptance of new and enhanced versions of the Company's products and services, and competition in the Company's marketplace. A decline in the demand for CreditRevue, whether as a result of competition, technological change, price reductions or otherwise, would have a material adverse effect on the Company's business, results of operations and financial condition. Lengthy Sales and Implementation Cycle The licensing of the Company's software products and services is often an enterprise-wide decision by prospective customers and generally requires the Company to provide a significant level of education to prospective customers regarding the use and benefits of the Company's products and services. In addition, the implementation of the Company's software products involves a significant commitment of resources by prospective customers and is commonly accompanied by substantial reengineering efforts and a review of the customer's credit analysis, decisioning and funding processes. The cost to the customer of the Company's products and services is typically only a portion of the related hardware, software, development, training and integration costs associated with implementing a large-scale automated credit origination information system. For these and other reasons, the period between initial customer contact and the implementation of the Company's products is often lengthy (ranging from between two and 18 months) and is subject to a number of significant delays over which the Company has little or no control. The Company's implementation cycle could be lengthened by increases in the size and complexity of its license transactions and by delays or deferrals in its customers' implementation of appropriate interfaces and networking capabilities. Delays in the sale or implementation of a limited number of license transactions could have a material adverse effect on the Company's business, results of operations and financial condition and cause the Company's results of operations to vary significantly from quarter to quarter. Market Acceptance of Credit Connection; Transition to Transaction-Based Revenue The Company's Credit Connection service has recently been commercially introduced and the Company's CreditRevue Service Bureau service is under development and is expected to be introduced in late 1997. These services are projected to account for a significant portion of the Company's revenues in the future. As a result, demand and market acceptance for these services are subject to a high level of uncertainty, and the Company will be heavily dependent on their market acceptance. There can be no assurance that these services will be commercially successful. The failure of the Company to generate demand for Credit Connection or CreditRevue Service Bureau or the occurrence of any significant technological problems with such services would have a material adverse effect on the Company's business, results of operations and financial condition. Historically, virtually all of the Company's revenues have been derived from license fees, maintenance fees and hardware sales associated with licenses and installations of CreditRevue. Under the terms of its license agreements, a majority of the Company's revenues are realized during the configuration and installation of CreditRevue. However, the Company anticipates that a significant portion of the Company's future revenues will be derived from per-usage transaction-based fees charged to credit originators and financial institutions for transactions originated from the 4 6 Credit Connection and CreditRevue Service Bureau services. There can be no assurance that the Company will successfully manage the transition of a significant portion of its revenues from license-based revenue to transaction-based revenue. The failure of the Company to successfully manage the transition to a transaction-based revenue stream would have a material adverse effect on the Company's business, results of operations and financial condition. Reliance on Certain Relationships The Company has established relationships with a number of companies that it believes are important to its sales, marketing and support activities, as well as to its product, service and software development efforts. The Company has relationships with automated scorecard companies, hardware vendors and credit bureaus and has also formed a strategic alliance with ADP for remarketing Credit Connection. There can be no assurance that these companies, most of which have significantly greater financial and marketing resources than the Company, will not develop or market products and services which will compete with the Company's products and services in the future. Furthermore, since many of these relationships are informal in nature, they are terminable by either party at will. Other relationships are terminable by either party after a relatively short notice period. There can be no assurance that these companies will not otherwise discontinue their relationships with or support of the Company. The failure by the Company to maintain its existing relationships or to establish new relationships in the future, because of a divergence of interests, acquisition of one or more of these third parties or other reasons, could have a material adverse effect on the Company's business, results of operations and financial condition. Dependence on Large License Fee Contracts and Customer Concentration A relatively small number of customers has 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 coterminous with the maintenance agreements. Although the Company has experienced a high degree of customer loyalty, the Company cannot predict how many maintenance agreements will be renewed or the number of years of renewal. Revenues generated by the Company's 10 largest customers accounted for 65.1% and 77.4% of total revenues in 1996 and 1995, respectively. Two of the Company's customers accounted for 19.9% and 12.9% of total revenues, respectively, in 1995. None of the Company's customers accounted for 10% or more of total revenues in 1996. The Company expects that a limited number of customers will continue to account for a significant percentage of revenue for the foreseeable future. The loss of any major customer or any reduction or delay in orders by any such customer, delay or deferral in configurations or enhancements by such customers or the failure of the Company to successfully market its products or services to new customers, could have a material adverse effect on the Company's business, results of operations and financial condition. Dependence on Consumer Retail Lending Industry; Cyclical Nature of Consumer Lending The Company's business is currently concentrated in the consumer lending industry and is expected to be so concentrated for the foreseeable future, thereby making the Company susceptible to a downturn in the consumer lending industry. For example, a decrease in consumer lending could result in a smaller overall market for the Company's products and services. Furthermore, banks in the United States are continuing to consolidate, decreasing the overall potential number of customers for the Company's products and services. In addition, demand for consumer loans has been historically cyclical, in large part based on general economic conditions and cycles in overall consumer indebtedness levels. Changes in general economic conditions that adversely affect the demand for consumer loans, the willingness of financial institutions to provide funds for such loans, changes in interest rates and the overall consumer indebtedness level, as well as other factors affecting the consumer lending industry, could have a material adverse effect on the Company's business, results of operations and financial condition. 5 7 Management of Changing Business The Company has experienced significant changes in its business, such as an expansion in the Company's staff and customer base and the development of new products, services and enhancements to its software, including the recent commercial release of Credit Connection. Such changes have placed and may continue to place a significant strain upon the Company's management, systems and resources. As of December 31, 1996, the Company had grown to 139 employees from 103 employees at December 31, 1995. The Company's ability to compete effectively and to manage future changes will require the Company to continue to improve its financial and management controls, reporting systems and procedures and budgeting and forecasting capabilities on a timely basis and expand its sales and marketing work force, and train and manage its employee work force. There can be no assurance that the Company will be able to manage such changes successfully. The Company's failure to do so could have a material adverse effect upon the Company's business, results of operations and financial condition. Dependence on Key Personnel The Company's future performance depends in significant part upon the continued service of its key technical, sales and senior management personnel, particularly James R. DeFrancesco, President and Chief Executive Officer, and Scott L. Freiman, Executive Vice President. The Company has obtained key-person life insurance on the lives of each of Messrs. DeFrancesco and Freiman. The loss of the services of one or more of the Company's executive officers could have a material adverse effect on the Company's business, results of operations and financial condition. The Company retains its key employees through the use of equity incentive programs, including stock option plans, employee stock purchase plans, and competitive compensation packages. The Company has no employment agreements and does not intend to enter into any such agreements in the foreseeable future. The Company's future success also depends on its continuing ability to attract and retain highly qualified technical, customer support, sales and managerial personnel. In particular, the Company has encountered difficulties in hiring sufficient numbers of programmers and technical personnel. Competition for qualified personnel is intense, and there can be no assurance that the Company will be able to retain its key technical, sales and managerial employees or that it can attract, assimilate or retain other highly qualified technical, sales and managerial personnel in the future. 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 6 8 competitors may cause customers to defer or forgo purchases of the Company's products or services, which could have a material adverse effect on the Company's business, results of operations and financial condition. System Interruption and Security Risks; Potential Liability; Possible Lack of Adequate Insurance; and System Inadequacy The Company's operations are dependent, in part, on its ability to protect its system from interruption by damage from fire, earthquake, power loss, telecommunication failure, unauthorized entry or other events beyond the Company's control. The Company's computer equipment constituting its central computer system, including its processing operations, is located at a single site. The Company is currently in the planning stages of acquiring and implementing a back-up, off-site processing system capable of supporting its operations in the event of system failure. The Company intends to have such system operational by the second quarter of 1997. Prior to such implementation, the Company's operations are subject to substantial risks, including temporary interruptions resulting from damage caused by any one or more of the foregoing factors or due to other causes including computer viruses, hackers or similar disruptive problems. While the Company maintains $1.84 million of property insurance policies, a business interruption insurance policy, a $3.0 million errors and omissions insurance policy and a $10.0 million umbrella insurance policy, such insurance may not be adequate to compensate the Company for all losses that may occur or to provide for costs associated with system failure or business interruption. Any damage or failure that causes interruptions in the Company's operations could have a material adverse effect on the Company's business, results of operations and financial condition. Persistent problems continue to affect public and private data networks. For example, in a number of networks, hackers have bypassed firewalls and have appropriated confidential information. Such computer break-ins and other disruptions may jeopardize the security of information stored in and transmitted through the computer systems of the parties utilizing the Company's services, which may result in significant liability to the Company and also may deter potential customers from using the Company's services. In addition, while the Company attempts to be careful with respect to the employees it hires and maintain controls through software design, security systems and accounting procedures to prevent unauthorized employee access, it is possible that, despite such safeguards, an employee of the Company could obtain access, which would also expose the Company to a risk of loss or litigation and possible liability to users. The Company attempts to limit its liability to customers, including liability arising from the failure of the security features contained in the Company's system and services, through contractual provisions. However, there can be no assurance that such limitations will be enforceable. There can be no guarantee that the growth of the Company's customer base will not strain or exceed the capacity of its computer and telecommunications systems and lead to degradations in performance or system failure. Any damage, failure or delay that causes interruptions in the Company's operations could have a material adverse effect on the Company's business, results of operations and financial condition. Risk of Defects, Development Delays and Lack of Market Acceptance Software products and services as sophisticated as those offered by the Company often encounter development delays and may contain defects or failures when introduced or when new versions are released. The Company has in the past and may in the future experience delays in the development of software and has discovered, and may in the future discover, software defects in certain of its products. Such delays and defects may result in lost revenues during the time corrective measures are being taken. Although the Company has not experienced material adverse effects resulting from any such defects to date, there can be no assurance that, despite testing by the Company, errors will not be found in its existing software in future releases or enhancements, or that the Company will not experience development delays, resulting in delays in the commercial release of new products and services, the loss of market share or the failure to achieve market acceptance. Any such occurrence could have a material adverse effect upon the Company's business, results of operations and financial condition. Future Capital Needs; Uncertainty of Additional Financing The Company currently anticipates that its available cash resources combined with anticipated funds from operations will be sufficient to meet its presently anticipated working capital and capital expenditure requirements 7 9 through 1997. Thereafter, the Company may need to raise additional funds. The Company may need to raise additional funds sooner in order to fund more rapid expansion, to develop new or enhanced products and services, to respond to competitive pressures or to acquire complementary businesses or technologies. If additional funds are raised through the issuance of equity securities, the percentage ownership of the stockholders of the Company will be reduced, stockholders may experience additional dilution, or such equity securities may have rights, preferences or privileges senior to those of the holders of the Company's Common Stock. There can be no assurance that additional financing will be available when needed on terms favorable to the Company or at all. If adequate funds are not available or are not available on acceptable terms, the Company may be unable to develop or 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, savings and loan associations, credit unions, consumer finance companies and other consumer lenders, as well as customers in the industries that the Company may target in the future, operate in markets that are subject to extensive and complex federal and state regulations. While the Company is not itself directly subject to such regulations, the Company's products and services must be designed to work within the extensive and evolving regulatory constraints in which its customers operate. These constraints include federal and state truth-in-lending disclosure rules, state usury laws, the Equal Credit Opportunity Act, the Fair Credit Reporting Act and the Community Reinvestment Act. Furthermore, some consumer groups have expressed concern regarding the privacy and security of automated credit processing, the use of automated credit scoring tools in credit underwriting, and whether electronic lending is a desirable technological development in light of the current level of consumer debt. The failure by the Company's products and services to support customers' compliance with current regulations and to address changes in customers' regulatory environment, or to adapt to such changes in an efficient and cost-effective manner, could have a material adverse effect on the Company's business, results of operations and financial condition. Control by Existing Stockholders Assuming no exercise of outstanding options, James R. DeFrancesco, the Company's President and Chief Executive Officer, and Scott L. Freiman, the Company's Executive Vice President, collectively beneficially own approximately 64% of the outstanding shares of Common Stock. As a result, these stockholders will be able to exercise control over matters requiring stockholder approval, including the election of directors and the approval of mergers, consolidations and sales of all or substantially all of the assets of the Company. This may prevent or discourage tender offers for the Company's Common Stock unless the terms are approved by such stockholders. Possible Volatility of Stock Price The trading price of the Company's Common Stock could be subject to significant fluctuations in response to variations in quarterly operating results, the gain or loss of significant orders, changes in earnings estimates by analysts, announcements of technological innovations or new products by the Company or its competitors, general conditions in the consumer lending and software industries, credit processing software and services and other events or factors. In addition, the stock market in general has experienced extreme price and volume fluctuations which have affected the market price for many companies in industries similar or related to that of the Company and which have been unrelated to the operating performance of these companies. These market fluctuations may adversely affect the market price of the Company's Common Stock. Effect of Certain Charter Provisions; Antitakeover Effects of Certificate of Incorporation, Bylaws and Delaware Law The Company's Board of Directors has the authority to issue up to 1,000,000 shares of Preferred Stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights of those shares without 8 10 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. 9 11 SELLING STOCKHOLDERS The table below sets forth the number of shares of Common Stock owned by each of the Selling Stockholders as of March 31 , 1997, the number of Shares to be sold pursuant to this offering, and the number of shares of Common Stock to be retained by each of the Selling Stockholders if all the Shares offered hereby are in fact sold. All of the Selling Stockholders are employees of the Company who purchased shares of Common Stock under the Company's 1996 Employee Stock Purchase Plan. None of the Selling Stockholders is or has ever been an affiliate of the Company and no Selling Stockholder will sell an excess of 1,000 shares pursuant to the reoffer Prospectus. The Shares subject to this Prospectus may be offered from time to time for sale by the Selling Stockholders named below:
Number of Percentage of Shares of Number of Outstanding Common Stock Number of Shares to be Common Beneficially Shares Offered Owned after Stock to be Owned prior for Sale Consummation Owned after Name of Selling Stockholder to Sale(1) Hereby of the Sale the Sale - --------------------------------------- ------------------- ------------------- ------------------- ------------- William J. Becker III.................. 217 217 * * Richard C. Becker...................... 86 86 * * Michael L. Berrio...................... 292 292 * * Suzanne Bogatiuk....................... 14 14 * * James V. Cain.......................... 96 96 * * Hugo F. Cantu.......................... 33 33 * * Reuven Chapman......................... 122 122 * * Joseph M. Chiusano..................... 43 43 * * Wayne R. Coffron....................... 47 47 * * Kimberly A. Collins.................... 26 26 * * Susan J. Collins....................... 131 131 * * Kim Cramer............................. 103 103 * * James C. Curtis........................ 91 91 * * Jackie Daley........................... 92 92 * * Michael C. Diclaudio................... 84 84 * * Richard A. Ensminger, Jr............... 48 48 * * Jenny Ewing............................ 11 11 * * Michael J. Fitzsimmons................. 271 271 * * Andrew Fletcher........................ 22 22 * * Linda D. Fortuna....................... 35 35 * * David C. Geelhaar, Jr.................. 19 19 * * Mark D. Heistand....................... 193 193 * * Linda C. Hogan......................... 32 32 * * Daniel D. Honemann..................... 300 300 * * James C. Houk.......................... 17 17 * * Julio Jimenez.......................... 37 37 * * Daniel Katz............................ 530 530 * * Frances J. Kerr........................ 23 23 * * Meena A. Khatri........................ 26 26 * * Harsharaj S. Khinchi................... 188 188 * * Richard D. Kirkwood.................... 142 142 * * Nelly Kogan............................ 70 70 * * Ray B. Kosby........................... 32 32 * * Steven T. Langenfeld................... 34 34 * * John R. Lowry.......................... 16 16 * *
- ------------------ (1) Reflects shares acquired under the 1996 Employee Stock Purchase Plan. 10 12
Number of Percentage of Shares of Number of Outstanding Common Stock Number of Shares to be Common Beneficially Shares Offered Owned after Stock to be Owned prior for Sale Consummation Owned after Name of Selling Stockholder to Sale Hereby of the Sale the Sale - --------------------------------------- ------------------- ------------------- ------------------- ------------- Kevin I. Lutts......................... 78 78 * * Barbara Maddox......................... 99 99 * * Fred M. McHugh, Jr..................... 11 11 * * Joseph J. McDonald..................... 69 69 * * Julie M. McIntyre...................... 40 40 * * Susan E. McKenna....................... 52 52 * * Patricia B. Meehan..................... 43 43 * * Mark P. Mongelluzzo.................... 63 63 * * Jere C. Morrel......................... 200 200 * * Edward T. Mullin....................... 124 124 * * Duc Nguyen............................. 412 412 * * Diana L. Norton........................ 70 70 * * Paula Pennell ......................... 34 34 * * James Riggs............................ 158 158 * * Sherry D. Rock......................... 32 32 * * John R. Saul........................... 41 41 * * Stephen Short.......................... 85 85 * * Patricia G. Strayer.................... 74 74 * * Samuel A. Tawiah....................... 52 52 * * Robert F. Telewicz..................... 116 116 * * Kimberly A. Thornton................... 21 21 * * Patricia Whitlock...................... 118 118 * * Mary Y. Wood........................... 17 17 * * Matthew Wood........................... 11 11 * * Katherine A. Zdura..................... 7 7 * * - --------------------------------------------------------------------------------------------------------------------------- TOTAL 5,550 5,550 - ------------------
* less than one percent of outstanding Common Stock PLAN OF DISTRIBUTION The Company will receive no proceeds from the sale of the Shares pursuant to this offering. The Shares offered hereby may be sold by the Selling Stockholders from time to time through broker-dealer transactions effected on the Nasdaq National Market at market prices prevailing at the time of sale. The broker-dealers participating in such transactions may act as agent or may acquire the Shares as principal. Any broker-dealer acting as agent may receive commissions from the Selling Stockholders and/or the purchasers of the Shares for whom such broker-dealers are acting as agent. Usual and customary brokerage fees will be paid by the Selling Stockholders. Broker-dealers may agree with the Selling Stockholders to sell a specified number of Shares at a stipulated price per Share and, to the extent such broker-dealer is unable to do so as agent for the Selling Stockholders, to purchase as principal any unsold Shares at the price required to fulfill the broker-dealer commitment to the Selling Stockholders. Broker-dealers who acquire the Shares as principal may subsequently resell such Shares from time to time (including sales to or through other broker-dealers) in transactions effected on the Nasdaq National Market or through negotiated transactions or otherwise, at market prices prevailing at the time of sale or at negotiated prices. In connection with such resales, the broker-dealer may pay to or receive from the purchasers of the Shares compensation in the form of discounts, concessions or commissions, which may, as to a particular broker-dealer, be in excess of customary commissions. 11 13 In order to comply with the securities laws of certain states, if applicable, the Shares will be sold in such jurisdictions only through registered or licensed broker-dealers. In addition, in certain states the Shares may not be sold unless they have been registered or qualified for sale in the applicable state or unless there has been compliance with an applicable exemption from such registration or qualification requirements. The Selling Stockholders and any broker-dealers who participate with the Selling Stockholders in the distribution of the Shares may under certain circumstances be deemed to be "underwriters" within the meaning of the Securities Act. In such event, the Selling Stockholders may indemnify any such broker-dealer against certain liabilities, including liabilities arising under the 1933 Act. Any commissions received by the broker-dealers participating in the distribution and any profit on the resale of the Shares purchased by them may be deemed to be underwriting commissions or discounts under the 1933 Act. Pursuant to applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the Shares may not simultaneously engage in market making activities with respect to the Company's Common Stock for a period of two business days prior to the commencement of such distribution. In addition and without limiting the foregoing, each Selling Stockholder will be subject to applicable provisions of the 1934 Act and the rules and regulations thereunder, including (without limitation) Rules 10b-6 and 10b-7. Accordingly, each of the Selling Stockholders shall not, during the period such Selling Stockholder may be engaged in a distribution of the Shares offered hereby, (i) engage in any stabilization activity in connection with the Company's securities or (ii) bid for or purchase any of the Company's securities or any rights to acquire such securities or attempt to induce any person to purchase any of the Company's securities or rights to acquire such securities, other than as permitted under the 1934 Act. Each of the Selling Stockholders shall furnish each broker-dealer through whom the Shares offered hereby may be sold such copies of this Prospectus as such person may require. 12 14 PART II INFORMATION REQUIRED IN THE REGISTRATION STATEMENT Item 3. Incorporation of Documents by Reference Credit Management Solutions, Inc. (the "Registrant") hereby incorporates by reference into this Registration Statement the following documents previously filed with the Securities and Exchange Commission (the "SEC"): (a) The Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, filed with the SEC on March 31, 1996; and (b) The Registrant's Registration Statement No. 00-21735 on Form 8-A filed with the SEC on November 15, 1996 pursuant to Section 12 of the 1934 Act in which there is described the terms, rights and provisions applicable to the Registrant's outstanding Common Stock. All reports and definitive proxy or information statements filed pursuant to Section 13(a), 13(c), 14 or 15(d) of the 1934 Act after the date of this Registration Statement and prior to the filing of a post-effective amendment which indicates that all securities offered hereby have been sold or which deregisters all securities then remaining unsold shall be deemed to be incorporated by reference into this Registration Statement and to be a part hereof from the date of filing of such documents. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Registration Statement to the extent that a statement contained herein or in any subsequently filed document which also is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Registration Statement. Item 4. Description of Securities Not Applicable. Item 5. Interests of Named Experts and Counsel Not Applicable. Item 6. Indemnification of Directors and Officers The Registrant's Certificate of Incorporation, together with its Bylaws, provide that the Registrant shall indemnify officers and directors, and may indemnify other employees and agents, to the fullest extent permitted by law. The laws of the State of Delaware permit, and in some cases require, corporations to indemnify officers, directors, agents and employees who are or have been a party to or are threatened to be made a party to litigation against judgments, fines, settlements and reasonable expenses under certain circumstances. The Registrant's Certificate of Incorporation also limits the liability of directors and officers to the fullest extent permitted by law. Under the Registrant's Certificate of Incorporation, as permitted by the laws of the State of Delaware, a director or officer will not be liable to the Registrant or its stockholders for damages for breach of fiduciary duty. Such limitation of liability does not affect liability for (i) breach of a director's duty of loyalty to the corporation or its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law, (iii) any transaction from which the director derived an improper personal benefit, or (iv) the payment of any unlawful distribution. II-1 15 The Registrant has also purchased a general liability insurance policy that covers certain liabilities of directors and officers arising out of claims based on acts or omissions in their capacity as directors and officers. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "1933 Act") may be permitted to directors, officers or controlling persons of the Corporation pursuant to the foregoing provisions, Registrant has been informed that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the 1933 Act and is therefore unenforceable. Item 7. Exemption from Registration Claimed Not Applicable. Item 8. Exhibits Exhibit Number Exhibit 4 Instruments Defining the Rights of Stockholders. Reference is made to the Registrant's Registration Statement No. 00-21735 on Form 8-A which is incorporated herein by reference pursuant to Item 3(b) of this Registration Statement. 5 Opinion and consent of Brobeck, Phleger & Harrison LLP. 23.1 Consent of Ernst & Young LLP, Independent Accountants. 23.2 Consent of Brobeck, Phleger & Harrison LLP is contained in Exhibit 5. 24 Power of Attorney. Reference is made to page II-4 of this Registration Statement. 99.1 Credit Management Solutions, Inc. 1996 Employee Stock Purchase Plan. 99.2 Form of Subscription Agreement. 99.3 1996 Non-Qualified Stock Option Plan. 99.4 Form of Non-Qualified Stock Option Agreement. Item 9. Undertakings A. The undersigned Registrant hereby undertakes: (1) to file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement (i) to include any prospectus required by Section 10(a)(3) of the 1933 Act, (ii) to reflect in the prospectus any facts or events arising after the effective date of this Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in this Registration Statement and (iii) to include any material information with respect to the plan of distribution not previously disclosed in this Registration Statement or any material change to such information in this Registration Statement; provided, however, that clauses (1)(i) and (1)(ii) shall not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the Registrant pursuant to Section 13 or Section 15(d) of the 1934 Act that are incorporated by reference into this Registration Statement; (2) that for the purpose of determining any liability under the 1933 Act each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and (3) to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the Registrant's 1996 Employee Stock Purchase Plan and/or 1996 Non-Qualified Stock Option Plan. B. The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the 1933 Act, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the 1934 Act that is incorporated by reference into this Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-2 16 C. Insofar as indemnification for liabilities arising under the 1933 Act may be permitted to directors, officers, or controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that, in the opinion of the SEC, such indemnification is against public policy as expressed in the 1933 Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the 1933 Act and will be governed by the final adjudication of such issue. II-3 17 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-8, and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Columbia, State of Maryland on this 25th day of April, 1997. CREDIT MANAGEMENT SOLUTIONS, INC. By: /s/ James R. DeFrancesco -------------------------------------------------- James R. DeFrancesco President, Chief Executive Officer and Chairman of of the Board (Principal Executive Officer) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS: That the undersigned officers and directors of Credit Management Solutions, Inc., a Delaware corporation, do hereby constitute and appoint James R. DeFrancesco the lawful attorney-in-fact and agent with full power and authority to do any and all acts and things and to execute any and all instruments which said attorney and agent determine may be necessary or advisable or required to enable said corporation to comply with the Securities Act of 1933, as amended, and any rules or regulations or requirements of the Securities and Exchange Commission in connection with this Registration Statement. Without limiting the generality of the foregoing power and authority, the powers granted include the power and authority to sign the names of the undersigned officers and directors in the capacities indicated below to this Registration Statement, to any and all amendments, both pre-effective and post-effective, and supplements to this Registration Statement, and to any and all instruments or documents filed as part of or in conjunction with this Registration Statement or amendments or supplements thereof, and each of the undersigned hereby ratifies and confirms that the said attorney and agent shall do or cause to be done by virtue hereof. This Power of Attorney may be signed in several counterparts. IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney as of the date indicated. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ James R. DeFrancesco President, Chief Executive Officer April 25, 1997 - ------------------------- and Chairman of the Board James R. DeFrancesco (Principal Executive Officer) /s/ Robert P. Vollono Senior Vice President, Treasurer, April 25, 1997 - ------------------------- Chief Financial Officer and Director Robert P. Vollono (Principal Financial and Accounting Officer) /s/ Scott L. Freiman Executive Vice President and Director April 25, 1997 - ------------------------- Scott L. Freiman /s/ Miles H. Grody Senior Vice President, Secretary, April 25, 1997 - ------------------------- General Counsel and Director Miles H. Grody /s/ Stephen X. Graham Director April 25, 1997 - ------------------------- Stephen X. Graham /s/ John J. McDonnell, Jr. Director April 25, 1997 - ------------------------- John J. McDonnell, Jr. Director - ------------------------- Peter M. Leger
II-4 18 EXHIBIT INDEX Exhibit Number Exhibit ------ ------- 4 Instruments Defining the Rights of Stockholders. Reference is made to the Registrant's Registration Statement No. 00-21735 on Form 8-A which is incorporated herein by reference pursuant to Item 3(b) of this Registration Statement. 5 Opinion and consent of Brobeck, Phleger & Harrison LLP. 23.1 Consent of Ernst & Young LLP, Independent Accountants. 23.2 Consent of Brobeck, Phleger & Harrison LLP is contained in Exhibit 5. 24 Power of Attorney. Reference is made to page II-4 of this Registration Statement. 99.1 Credit Management Solutions, Inc. 1996 Employee Stock Purchase Plan. 99.2 Form of Subscription Agreement. 99.3 1996 Non-Qualified Stock Option Plan. 99.4 Form of Non-Qualified Stock Option Agreement. EX-5 2 OPINION AND CONSENT OF BROBECK, PHLEGER & HARRISON 1 EXHIBIT 5 OPINION AND CONSENT OF BROBECK, PHLEGER & HARRISON LLP April 28, 1997 Credit Management Solutions, Inc. 5950 Symphony Woods Road Columbia, Maryland 21044 Re: Registration Statement for Offering of an Aggregate of 3,000,500 Shares of Common Stock Ladies and Gentlemen: We refer to your registration statement on Form S-8 (the "Registration Statement") under the Securities Act of 1933, as amended, of (i) 244,950 shares of the Common Stock of Credit Management Solutions, Inc. (the "Company") under the Company's 1996 Employee Stock Purchase Plan currently held by certain selling stockholders (the "Selling Stockholders"), and (iii) 2,750,000 shares of Common Stock under the 1996 Non-Qualified Stock Option Plan (the "Option Plan"). We advise you that, in our opinion, when such shares have been issued and sold pursuant to the applicable provisions of the Purchase Plan and Option Plan and in accordance with the Registration Statement, such shares will be duly authorized, validly issued, fully paid and non-assessable shares of the Company's Common Stock. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement. Very truly yours, /s/ Brobeck, Phleger & Harrison LLP BROBECK, PHLEGER & HARRISON LLP EX-23.1 3 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33- ) pertaining to the 1996 Credit Management Solutions, Inc. Non-Qualified Stock Option Plan, Shares Sold by Selling Stockholders and 1996 Employee Stock Purchase Plan of our report dated January 24, 1997, with respect to the consolidated financial statements of Credit Management Solutions, Inc. included in its Annual Report (Form 10-K) for the year ended December 31, 1996, filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP Baltimore, Maryland April 24, 1997 EX-99.1 4 EMPLOYEE STOCK PURCHASE PLAN 1 Exhibit 99.1 1996 CREDIT MANAGEMENT SOLUTIONS, INC. EMPLOYEE STOCK PURCHASE PLAN I. PURPOSE OF THE PLAN This Employee Stock Purchase Plan is intended to promote the interests of Credit Management Solutions, Inc., a Delaware corporation (the "Corporation"), by providing eligible employees with the opportunity to acquire a proprietary interest in the Corporation through participation in a payroll-deduction based employee stock purchase plan designed to qualify under Section 423 of the Code. Capitalized terms herein shall have the meanings assigned to such terms in the attached Appendix. II. ADMINISTRATION OF THE PLAN The Plan Administrator shall have full authority to interpret and construe any provision of the Plan and to adopt such rules and regulations for administering the Plan as it may deem necessary in order to comply with the requirements of Code Section 423. Decisions of the Plan Administrator shall be final and binding on all parties having an interest in the Plan. III. STOCK SUBJECT TO PLAN A. Number of Shares Subject to Purchase. The stock purchasable under the Plan shall be shares of the Corporation's authorized but unissued or reacquired Common Stock, including shares of Common Stock purchased on the open market. The maximum number of shares of Common Stock which may be issued over the term of the Plan shall not exceed 250,000 shares. B. Adjustments Upon Changes in Capitalization. Should any change be made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, appropriate adjustments shall be made to (i) the maximum number and class of securities issuable under the Plan, and (ii) the number and class of securities and the price per share in effect under each outstanding purchase right in order to prevent the dilution or enlargement of benefits thereunder. IV. PURCHASE PERIODS A. General. Shares of Common Stock shall be offered for purchase under the Plan through a series of successive purchase periods until such time 2 as (i) the maximum number of shares of Common Stock available for issuance under the Plan shall have been purchased or (ii) the Plan shall have been sooner terminated. B. Quarterly Purchase Periods. Each purchase period shall have a duration of three (3) months. Purchase periods shall run from the first day of each calendar quarter to the last day of that calendar quarter. The first purchase period shall begin on January 1, 1997, and end on the last business day in March 31, 1997. V. ELIGIBILITY A. As of the Effective Date. Each individual who is an Eligible Employee as of the Effective Date shall be eligible to participate in the Plan for the initial purchase period. B. Following Effective Date. Each individual who becomes an Eligible Employee after the Effective Date shall be eligible to participate in the Plan as of the purchase period beginning on January 1 or July 1 immediately following the individual's completion of ninety (90) days of Service. C. Enrollment Procedure. To participate in the Plan for a particular purchase period, an Eligible Employee must complete the enrollment forms prescribed by the Plan Administrator (including a stock subscription agreement and a payroll deduction authorization form) and file such forms with the Plan Administrator (or its designate) on or before the start date of the purchase period. VI. PAYROLL DEDUCTIONS A. Maximum Deductions/Change in Rate of Deductions. The payroll deduction authorized by the Participant for purposes of acquiring shares of Common Stock under the Plan may be any multiple of one percent (1%) of the Eligible Earnings paid to the Participant during each purchase period, up to a maximum of fifteen percent (15%). Payroll deductions will be made in whole percentages only. The deduction rate so authorized shall continue in effect for the entire purchase period and each successive purchase period unless and until terminated or changed by the Participant. The Participant may not increase his or her rate of payroll deduction during a purchase period. However, the Participant may, at any time during the purchase period, reduce his or her rate of payroll deduction to become effective as soon as possible after filing the appropriate form with the Plan Administrator. The Participant may not, however, effect more than one (1) such reduction per purchase period. B. Holding of Deductions. Payroll deductions shall begin on the first pay day following the start date of the purchase period and shall (unless sooner terminated by the Participant) continue through the pay day ending with or immediately prior to the last day of the purchase period. The amounts so collected shall be credited 2. 3 to the Participant's book account under the Plan, but no interest shall be paid on the balance from time to time outstanding in such account. The amounts collected from the Participant shall not be held in any segregated account or trust fund and may be commingled with the general assets of the Corporation and used for general corporate purposes. A Participant may not make any additional payments into his account. C. Cessation of Payroll Deductions. Payroll deductions shall automatically cease upon the termination of the Participant's purchase right in accordance with the provisions of the Plan. D. Effect on Future Participation. The Participant's acquisition of Common Stock under the Plan on any Purchase Date shall neither limit nor require the Participant's acquisition of Common Stock on any subsequent Purchase Date. VII. PURCHASE RIGHTS A. Grant of Purchase Right. A Participant shall be granted a separate purchase right on the start date of each purchase period in which he or she participates. The purchase right shall provide the Participant with the right to purchase shares of Common Stock on the Purchase Date upon the terms set forth below. The Participant shall execute a stock subscription agreement embodying such terms and such other provisions (not inconsistent with the Plan) as the Plan Administrator may deem advisable. Under no circumstances shall purchase rights be granted under the Plan to any Eligible Employee if such individual would, immediately after the grant, own (taking into account stock owned by any person whose stock would be attributed to such Eligible Employee within the meaning of Code Section 424(d)) or hold outstanding options or other rights to purchase, stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Corporation or any Corporate Affiliate. B. Exercise of Purchase Right. Each purchase right shall be automatically exercised on the Purchase Date, and shares of Common Stock shall accordingly be purchased on behalf of each Participant (other than any Participant whose payroll deductions have previously been refunded in accordance with the Termination of Purchase Right provisions below) on such date. The purchase shall be effected by applying the Participant's payroll deductions for the purchase period ending on such Purchase Date to the purchase of shares of Common Stock at the purchase price in effect for that purchase period, and the shares will be held by the Corporation for the benefit of the Participant, unless delivery of the shares is requested by the Participant. No fractional shares will be purchased. 3. 4 C. Purchase Price. The purchase price per share at which Common Stock will be purchased on the Participant's behalf on each Purchase Date shall be equal to eighty-five percent (85%) of the lower of (i) the Fair Market Value per share of Common Stock on the start date of the purchase period or (ii) the Fair Market Value per share of Common Stock on that Purchase Date. D. Delivery. Upon receipt of a request from a Participant after each Purchase Date on which a purchase of shares occurs, the Corporation shall arrange for the delivery to each Participant, as appropriate, of a certificate representing the shares purchased on behalf of the Participant for such purchase period. Shares to be delivered to a Participant under the Plan shall be registered in the name of the Participant or in the name of the Participant and the Participant's spouse. E. Number of Purchasable Shares. The number of shares of Common Stock purchasable by a Participant on each Purchase Date shall be the number of shares obtained by dividing the amount collected from the Participant through payroll deductions during the purchase period ending with that Purchase Date by the purchase price in effect for that Purchase Date. F. Excess Payroll Deductions. Any payroll deductions accumulated in a Participant's account which are not sufficient to purchase a full share shall be carried over to the next purchase period, if the Participant elects to participate in the next purchase period, or returned to the Participant if he terminates participation. Any amount remaining in the Participant's account at the close of any Purchase Date caused by any reason other than a surplus due to fractional shares shall be refunded to the Participant in cash. G. Exercise of Purchase Right During Participant's Life. During a Participant's lifetime, the Participant's right to purchase shares under the Plan is exercisable only by the Participant. H. Termination of Purchase Right. The following provisions shall govern the termination of outstanding purchase rights: 1. A Participant may, at any time prior to the last day of the purchase period, terminate his or her outstanding purchase right by filing the appropriate form with the Plan Administrator (or its designate), and no further payroll deductions shall be collected from the Participant with respect to the terminated purchase right. Any payroll deductions collected during the purchase period in which such termination occurs shall be refunded as soon as practicable. 2. The termination of a purchase right shall be irrevocable, and a Participant may not subsequently rejoin the purchase 4. 5 period for which the terminated purchase right was granted. In order to resume participation in any subsequent purchase period, such individual must re-enroll in the Plan (by making a timely filing of the prescribed enrollment forms) on or before the start date of the new purchase period. 3. Should a Participant cease to remain an Eligible Employee for any reason (other than death or disability) while his or her purchase right remains outstanding, then that purchase right shall immediately terminate, and all of the Participant's payroll deductions for the purchase period in which the purchase right so terminates shall be refunded to the Participant as soon as practicable. Should the Participant cease to remain an Eligible Employee by reason of death or disability while his or her purchase right remains outstanding, then that purchase right shall immediately terminate and the Participant (or, in the event of the Participant's death, the personal representative of the Participant's estate) shall have the right to (a) withdraw the payroll deductions collected during such purchase period or (b) have such funds held for the purchase of shares at the next scheduled Purchase Date. If no such election is made prior to the next Purchase Date, then the payroll deductions collected with respect to the terminating right shall be refunded to the Participant or to the personal representative of the Participant's estate in the event of the Participant's death as soon as practicable. 4. Should the Participant cease to remain in active service by reason of an approved unpaid leave of absence, then the Participant shall have the right, exercisable up until the last business day of the purchase period in which such leave commences, to (a) withdraw the payroll deductions collected during such purchase period or (b) have such funds held for the purchase of shares at the next scheduled Purchase Date. In no event, however, shall any additional payroll deductions be collected on the Participant's behalf during such leave. Upon the Participant's return to active service, his or her payroll deductions under the Plan shall automatically resume at the rate in effect at the time the leave began. I. Corporate Transaction. Each outstanding purchase right shall automatically be exercised, immediately prior to the effective date of any Corporate Transaction, by applying the payroll deductions of each Participant for the purchase period in which such Corporate Transaction occurs to the purchase of shares of Common Stock at a purchase price per share equal to eighty-five percent (85%) of the lower of (i) the Fair Market Value per share of Common Stock on the start date of the purchase period in which such Corporate Transaction occurs or (ii) the Fair Market Value per share of Common Stock immediately prior to the effective date of such Corporate Transaction. 5. 6 J. Proration of Purchase Rights. Should the total number of shares of Common Stock which are to be purchased pursuant to the outstanding purchase rights on any particular date exceed the number of shares then available for issuance under the Plan, the Plan Administrator shall make a pro-rata allocation of the available shares on a uniform and nondiscriminatory basis, and the payroll deductions of each Participant, to the extent in excess of the aggregate purchase price payable for the Common Stock pro-rated to such individual, shall be refunded. K. Assignability. The purchase right shall be exercisable only by the Participant and shall not be assignable or transferable by the Participant. L. Stockholder Rights. A Participant shall have no stockholder rights with respect to the shares subject to his or her outstanding purchase right until the shares are purchased on the Participant's behalf in accordance with the provisions of the Plan and the Participant has become a holder of record of the purchased shares. VIII. ACCRUAL LIMITATIONS A. General Rule--$25,000 Limitation. No Participant shall be entitled to accrue rights to acquire Common Stock pursuant to any purchase right outstanding under this Plan if and to the extent such accrual, when aggregated with (i) rights to purchase Common Stock accrued under any other purchase right granted under this Plan and (ii) similar rights accrued under other employee stock purchase plans (within the meaning of Code Section 423) of the Corporation or any Corporate Affiliate, would otherwise permit such Participant to purchase more than Twenty-Five Thousand Dollars ($25,000) worth of stock of the Corporation or any Corporate Affiliate (determined on the basis of the Fair Market Value of such stock on the date or dates such rights are granted) for each calendar year such rights are at any time outstanding. B. Specific Application. For purposes of applying such accrual limitations, the following provisions shall be in effect: (i) The right to acquire Common Stock under each outstanding purchase right shall accrue on the Purchase Date in effect for the purchase period for which such right is granted. (ii) No right to acquire Common Stock under any outstanding purchase right shall accrue to the extent a Participant has already accrued in the same calendar year the right to acquire Common Stock under one (1) or more other purchase rights at a rate equal to Twenty-Five Thousand Dollars ($25,000) worth of Common Stock (determined on the basis of the Fair Market Value per share on the date or dates of grant) for each calendar year such rights were at any time outstanding. 6. 7 C. Refund to Participant. If by reason of such accrual limitations, any purchase right of a Participant does not accrue for a particular purchase period, then the payroll deductions which the Participant made during that purchase period with respect to such purchase right shall be refunded to the Participant as soon as practicable. D. Effect of Conflicting Terms in Plan. In the event there is any conflict between the provisions of this Article and one or more provisions of the Plan or any instrument issued thereunder, the provisions of this Article shall be controlling. IX. ADMINISTRATION A. Administrative Body. The Plan shall be administered by the Plan Administrator, which shall have full and exclusive discretionary authority to construe, interpret and apply the terms of the Plan, to determine eligibility and to adjudicate all disputed claims filed under the Plan. Every finding shall, to the full extent permitted by law, be final and binding upon all parties. X. DESIGNATION OF BENEFICIARY A. General Rule. Each Participant will file a written designation of a beneficiary who is to receive any shares and cash, if any, from the Participant's account under the Plan in the event of such Participant's death subsequent to a Purchase Date on which the purchase right is exercised but prior to delivery to such Participant of such shares and cash. In addition, a Participant may file a written designation of a beneficiary who is to receive any cash from the Participant's account under the Plan in the event of such Participant's death prior to a Purchase Date. If a Participant is married and the designated beneficiary is not the spouse, written spousal consent shall be required for such designation to be effective. B. Change of Beneficiary. A Participant may change his or her designation of beneficiary at any time by written notice, subject to the written consent of the Participant's spouse if the new beneficiary is someone other than the Participant's spouse. In the event of the death of a Participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such Participant's death, the Corporation shall deliver such shares and/or cash to the executor or administrator of the estate of the Participant, or if no such executor or administrator has been appointed (to the knowledge of the Corporation), the Corporation, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the Participant, or if no spouse, dependent or relative is known to the Corporation, then to such other person as the Corporation may designate. 7. 8 XI. AMENDMENT OR TERMINATION A. Termination. The Board of Directors may at any time and for any reason terminate or amend the Plan. No such termination can affect purchase rights previously granted, provided that a purchase period may be terminated by the Board on any Purchase Date if the Board determines that the termination of the Plan is in the best interests of the Corporation and its shareholders. Except as provided in Section III.B, no amendment may make any change in any purchase right theretofore granted which adversely affects the rights of any Participant. To the extent necessary to comply with Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended ("Rule 16b-3") or Section 423 of the Code (or any successor rule or provision or any other applicable law or regulation), the Corporation shall obtain shareholder approval in such a manner and to such a degree as required. B. Amendment. Without shareholder consent and without regard to whether any Participant rights may be considered to have been adversely affected, the Board of Directors shall be entitled to change the purchase periods, limit the frequency and/or number of changes in the amount withheld during purchase periods, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a Participant in order to adjust for delays or mistakes in the Corporation's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each Participant properly correspond with amounts withheld from the Participant's Eligible Earnings, and establish such other limitations or procedures as the Board (or its committee) determines in its sole discretion advisable which are consistent with the Plan. XII. GENERAL PROVISIONS A. Transferability. Neither payroll deductions credited to a Participant's account nor any rights with regard to the exercise of a purchase right or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section X hereof) by the Participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Corporation may treat such act as an election to terminate participation in accordance with Section VII.H. B. Annual Statement. Individual accounts will be maintained for each Participant in the Plan. Statements of account will be given to each Participant at least annually, which statements will set forth the Purchase Price, the number of shares purchased and the remaining cash balance, if any. 8. 9 C. Conditions Upon Issuance of Shares. Shares shall not be issued with respect to a purchase right unless the exercise of such right and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Corporation with respect to such compliance. As a condition to the exercise of purchase rights, the Corporation may require the person exercising such option to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Corporation, such a representation is required by any of the aforementioned applicable provisions of law. D. Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board of Directors or its approval by the shareholders of the Corporation. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section XI.A. E. Additional Restrictions of Rule 16b-3. The terms and conditions of purchase rights granted hereunder to, and the purchase of shares by, persons subject to Section 16 of the Exchange Act shall comply with the applicable provisions of Rule 16b-3. This Plan shall be deemed to contain, and such purchase rights shall contain, and the shares issued upon exercise thereof shall be subject to, such additional conditions and restrictions as may be required by Rule 16b-3 to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. F. Shareholder Approval. Continuance of the Plan shall be subject to approval by the shareholders of the Corporation within twelve (12) months before or after the date the Plan is adopted. If such shareholder approval is obtained at a duly held shareholders' meeting, the Plan must be approved by a majority of the votes cast at such shareholders' meeting at which a quorum representing a majority of all outstanding voting stock of the Corporation is, either in person or by proxy, present and voting on the plan, or, if such shareholder approval is obtained by written consent, it must be obtained by the written consent of the holders of a majority of all outstanding voting stock of the Corporation; provided, however, that approval at a meeting or by written consent may be obtained by a lesser degree of shareholder approval if the Board determines, in its discretion after consultation with the Corporation's legal counsel, that such a lesser degree of shareholder approval will comply with all applicable laws and will not adversely affect the qualification of the Plan under Section 423 of the Code. G. No Employment Rights. The Plan does not, directly or indirectly, create any right for the benefit of any employee or class of employees to 9. 10 purchase any shares under the Plan, or create in any employee or class of employees any right with respect to continuation of employment by the Corporation, and it shall not be deemed to interfere in any way with the Corporation's right to terminate, or otherwise modify, an employee's employment at any time. H. Effect of Plan. The provisions of the Plan shall, in accordance with its terms, be binding upon, and inure to the benefit of, all successors of each employee participating in the Plan, including, without limitation, such employee's estate and the executors, administrators or trustees thereof, heirs and legatees, and any receiver, trustee in bankruptcy or representative of creditors of such employee. I. Notices. All notices or other communications by a Participant to the Corporation under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Corporation at the location, or by the person, designated by the Corporation for the receipt thereof. J. Expenses. All costs and expenses incurred in the administration of the Plan shall be paid by the Corporation. K. Governing Law. The laws of the State of Delaware will govern all matters relating to this Plan. 10. 11 APPENDIX The following definitions shall be in effect under the Plan: A. Board shall mean the Corporation's Board of Directors. B. Code shall mean the Internal Revenue Code of 1986, as amended. C. Common Stock shall mean the Corporation's common stock. D. Corporate Affiliate shall mean any parent or subsidiary corporation of the Corporation (as determined in accordance with Code Section 424, whether now existing or subsequently established). E. Corporate Transaction shall mean either of the following stockholder approved transactions to which the Corporation is a party; (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Corporation in complete liquidation or dissolution of the Corporation. F. Corporation shall mean Credit Management Solutions, Inc., a Delaware corporation, and any corporate successor to all or substantially all of the assets or voting stock of Credit Management Solutions, Inc. which shall by appropriate action adopt the Plan. G. Effective Date shall mean the earlier to occur of the Plan's adoption by the Corporation's Board of Directors or the Plan's approval by the shareholders. Any Corporate Affiliate which becomes a Participating Corporation after such Effective Date shall designate a subsequent Effective Date with respect to its employee-Participants. H. Eligible Earnings shall mean the (i) regular base salary paid to a Participant by one or more Participating Corporations during such individual's period of participation in the Plan, plus (ii) any pre-tax contributions made by the Participant to any Code Section 401(k) salary deferral plan or any Code Section 125 cafeteria benefit program now or hereafter established by the Corporation or any Corporate Affiliate, plus (iii) all of the following amounts to the extent paid in cash: overtime payments, bonuses, A-1 12 commissions, profit-sharing distributions and other incentive-type payments. However, Eligible Earnings shall not include any contributions (other than Code Section 401(k) or Code Section 125 contributions) made on the Participant's behalf by the Corporation or any Corporate Affiliate to any deferred compensation plan or welfare benefit program now or hereafter established. I. Eligible Employee shall mean any person, including members of the Board of Directors, who is employed by the Corporation or a Participating Corporation on a basis under which he or she is regularly expected to render more than twenty (20) hours of service per week for more than five (5) months per calendar year for earnings considered wages under Code Section 3401(a). J. Fair Market Value per share of Common Stock on any relevant date shall be determined in accordance with the following provisions: (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as such price is reported by the National Association of Securities Dealers on the Nasdaq National Market or any successor system. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (iii) For purposes of the initial purchase period which begins at the Effective Date, the Fair Market Value shall be deemed to be equal to the price per share at which the Common Stock is sold in the initial public offering pursuant to the Underwriting Agreement. K. 1933 Act shall mean the Securities Act of 1933, as amended. L. Participant shall mean any Eligible Employee of a Participating Corporation who is actively participating in the Plan. A-2 13 M. Participating Corporation shall mean the Corporation and such Corporate Affiliate or Affiliates as may be authorized from time to time by the Board to extend the benefits of the Plan to their Eligible Employees. The Participating Corporations in the Plan as of the Effective Date are listed in attached Schedule A. N. Plan shall mean the Corporation's Employee Stock Purchase Plan, as set forth in this document. O. Plan Administrator shall mean shall mean the committee of two (2) or more members of the Board of Directors appointed by the Board to administer the Plan. P. Purchase Date shall mean the last business day of each purchase period. Q. Reserves shall mean the number of shares of Common Stock covered by each purchase right under the Plan which have not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but not yet placed under purchase. R. Service shall mean an individual's performance of services for the Corporation or any Corporate Affiliate as an employee, subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance. S. Stock Exchange shall mean either the American Stock Exchange or the New York Stock Exchange. A-3 14 SCHEDULE A CORPORATIONS PARTICIPATING IN EMPLOYEE STOCK PURCHASE PLAN AS OF THE EFFECTIVE DATE Credit Management Solutions, Inc. Credit Connection, Inc. EX-99.2 5 FORM OF SUBSCRIPTION AGREEMENT 1 Exhibit 99.2 1996 CREDIT MANAGEMENT SOLUTIONS, INC. EMPLOYEE STOCK PURCHASE PLAN SUBSCRIPTION AGREEMENT ______ Original Application Enrollment Date:________ ______ Change in Payroll Deduction Rate ______ Change of Beneficiary(ies) 1. _______________________ hereby elects to Participate in the 1996 Credit Management Solutions, Inc. Employee Stock Purchase Plan (the "Employee Stock Purchase Plan") and subscribes to purchase shares of the Company's Common Stock in accordance with this Subscription and the Employee Stock Purchase Plan. 2. I hereby authorize deductions from each paycheck in the amount of _____% of my Compensation on each payment (not to exceed fifteen 15%) during the purchase periods in accordance with the Employee Stock Purchase Plan. (Please note that no fractional percentages are permitted.) 3. I understand that said payroll deductions shall be accumulated for the purchase of shares of the Company's Common Stock at the applicable Purchase Price determined in accordance with the Employee Stock Purchase Plan. I understand that if I do not terminate my participation during a purchase period, any accumulated Payroll deductions will be used to automatically exercise my option to purchase shares. 4. I have received a copy of the complete Employee Stock Purchase Plan. I understand that my participation in the Employee Stock Purchase Plan is in all respects subject to the terms of the Plan. 5. Shares purchased for me under the Employee Stock Purchase Plan should be issued in the name(s) of: ------------------------------------------------- ------------------------------------------------- 6. I understand that if I dispose of any shares received by me pursuant to this Plan within 2 years after the Enrollment Date (the first day of the purchase period during which I purchased such shares) or within 1 year after the Exercise Date (the date I purchased such shares), I will be treated for federal income tax purposes as having received ordinary income at the time of such disposition in an 2 amount equal to the excess of the fair market value of the shares at the time such shares were delivered to me over the price which I paid for the shares. I hereby agree to notify the Company in writing within 30 days after the date of any such disposition and i will make adequate provision for Federal, State or other tax withholding obligations, if any which arise upon the disposition of the Common Stock. The Company may, but will not be obligated to, withhold from my compensation the amount necessary to meet any applicable withholding obligation including any withholding necessary to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by me. If I dispose of such shares at any time after the expiration of the 2-year and 1-year holding periods described above, I understand that I will be treated for federal income tax purposes as having received income only at the time of such disposition, and that such income will be taxed as ordinary income only to the extent of an amount equal to the lesser of (1) the excess of the fair market value of the shares at the time of such disposition over the purchase price which I paid for the shares, or (2) 15% of the fair market value of the shares on the first day of the Purchase Period. The remainder of the gain, if any, recognized on such disposition will be taxed as capital gain. I also understand that the foregoing income tax consequences are based on current federal income tax law and that the Company is not responsible for advising me of any changes in the applicable tax rules. 7. I hereby agree to be bound by the terms of the Employee Stock Purchase Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Employee Stock Purchase Plan. 8. In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all payments and shares due me under the Employee Stock Purchase Plan. NAME: (Please print) ______________________________________________________ (First) (Middle) (Last) Relationship ______________________________________________________ ______________________________________________________ (Address) Relationship ______________________________________________________ ______________________________________________________ (Address) Employee's Social Security Number: ______________________________________________________ 3 Employee's Address: ______________________________________________________ ______________________________________________________ ______________________________________________________ I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT SUCCESSIVE PURCHASE PERIODS UNLESS TERMINATED BY ME. Dated:_______________ _____________________________________________________ Signature of Employee Dated:_______________ _____________________________________________________ Signature of spouse if beneficiary is other than spouse EX-99.3 6 1996 NON-QUALIFIEED STOCK OPTION PLAN 1 EXHIBIT 99.3 1996 CREDIT MANAGEMENT SOLUTIONS, INC. NON-QUALIFIED STOCK OPTION PLAN GENERAL PLAN INFORMATION This Prospectus relates to 2,650,000 shares of the common stock ("Common Stock"), par value $0.01 per share, of Credit Management Solutions, Inc. (the "Company"), which will be offered upon exercise of options granted or to be granted under the 1996 Credit Management Solutions, Inc. Non-Qualified Stock Option Plan (the "Plan"). The Company was formed under the laws of the State of Delaware for the purpose of reincorporating Credit Management Solutions, Inc., a Maryland corporation ("CMSI-Md") on November 8, 1996. The Board of Directors of the Company adopted the Plan at its meeting on November 15, 1996 in order to exchange on a one for one basis stock options issued by CMSI-Md under an identical predecessor plan upon consummation of the reincorporation. The Plan was approved by the unanimous consent of the sole stockholder of the Company on November 15, 1996 and the predecessor plan was approved by the Board of Directors of CMSI-Md on June 27, 1996 (the "Effective Date") and ratified by the unanimous consent of the stockholders of CMSI-Md on October 10, 1996. The Plan is to continue in effect for a period of ten years from the Effective Date (i.e., June 27, 2006), unless earlier terminated or extended by the Company. Because the Company consummated its initial public offering on December 17, 1996, the Plan is subject to stockholder approval at the first annual meeting of stockholders following the consummation of the offering. Pursuant to the Plan, 2,750,000 shares of Common Stock were reserved for issuance by the Company upon exercise of stock options (the "Options") to be awarded to non-employee directors and employees who have significantly contributed and will significantly contribute to the growth and earnings of the Company. [100,000 shares of Common Stock issued pursuant to the Plan have previously been registered.] Options granted under the Plan do not qualify as Incentive Stock Options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). The Board of Directors may from time to time amend the terms of the Plan and, with respect to any shares at the time not subject to Options, suspend or terminate the Plan. However, no amendment, suspension or termination of the Plan shall, without the consent of any affected holders of an Option, alter or impair any rights or obligations under any Option theretofore granted. The Plan is not qualified under Section 401(a) of the Code and it is exempt from the provisions of the Employee Retirement Income Security Act of 1974, as amended. 2 The statements herein concerning the terms and provisions of the Plan are summaries and do not purport to be complete. All such statements are qualified in their entirety by reference to the full text of the Plan document as filed as Exhibit 4.1 to the Registration Statement of which this Prospectus is a part. Additional updating and other information with respect to the Plan and the Common Stock offered hereby may be provided in the future to Optionees by means of one or more supplements or appendices to this Prospectus. Additional information about the Plan (including a copy of the Plan), plan administration, and the Company may be obtained at the Company's principal offices, which are located at 5950 Symphony Woods Road, Columbia, Maryland 21044. The Company's telephone number is (410) 740-1000. ADMINISTRATION The Plan is administered by a committee of the Company's Board of Directors (the "Committee"). The Plan provides that the Committee will consist of not less than two directors of the Company. The members of the Committee are appointed by the Board and serve at the pleasure of the Board. Members of the committee are "non-employee directors" within the meaning of Rule 16b-3 promulgated under Rule 16(b) of the Securities Exchange Act of 1934, as amended (the "1934 Act"). A majority of the entire Committee shall consist of a quorum, and the action of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by a majority of the Committee without a meeting, shall be deemed the action of the Committee. Subject to the express provisions of the Plan and resolutions adopted by the Board, the Committee has sole and complete authority to select participants and grant Options, to interpret the Plan, to prescribe, amend and rescind the rules and regulations relating to the Plan, and to determine the form and content of Options to be issued under the Plan. In addition, the Committee is authorized to make all other determinations deemed necessary or advisable for the administration of the Plan and shall have and may exercise such other power and such authority as may be delegated to it by the Board from time to time. All decisions, determinations and interpretations of the Committee shall be final and conclusive to all persons affected thereby. Additional information about the Plan and the Committee may be obtained from the Company at the address of the Company listed under "General Plan Information." For a list of the current members of the Committee, see "Administration" at Appendix A. PURPOSE The purpose of the Plan is to promote the interests of the Company by attracting and retaining non-employee directors and employees who have significantly contributed 2. 3 and will significantly contribute to the growth and earnings of the Company by providing them with the opportunity to acquire Common Stock. SECURITIES TO BE OFFERED The aggregate number of shares of Common Stock which may be issued pursuant to Options granted or to be granted under the Plan is 2,750,000 shares, subject to certain adjustments for changes in the capital structure of the Company, as described below. See "Recapitalization, Merger, Consolidation, Reorganization and Similar Transactions." Any shares subject to an Option under the Plan which expire, become unexercisable or are forfeited for any reason without having been exercised will again be available for issuance under the Plan. ELIGIBILITY TO PARTICIPATE IN PLAN Discretionary grants of Options to purchase Common Stock under the Plan may be awarded to non-employee directors and employees of the Company or any parent or subsidiary of the Company. Non-employee directors shall each receive an Option to purchase 5,000 shares of Common Stock at the commencement of each year of such person's directorship. For a description of the number of persons currently eligible to participate in the Plan and the number of persons actually participating in the Plan, see "Participation in the Plan" at Appendix A. PURCHASES OF SECURITIES PURSUANT TO THE PLAN AND PAYMENT FOR SECURITIES OFFERED TERM OF THE PLAN. Unless previously terminated, the Plan shall continue in effect for a term of ten years from the Effective Date, after which no further Options may be granted. The future expiration of the Plan, or its termination by the Board, will not affect any Option previously granted. STOCK OPTION AGREEMENT. The Options granted under the Plan are evidenced by a stock option agreement (the "Option Agreement") substantially in the form of the Option Agreement filed as exhibits to the Registration Statement of which this Prospectus is a part. Each Option Agreement, and any amendment thereto, will contain terms and conditions consistent with the requirements of the Plan as the Committee shall determine. The Option Agreement shall constitute the only form of reports that Optionees shall receive related to the status of Options granted or which are exercisable under the Plan. The Plan provides that the Board of Directors of the Company may authorize the Committee to direct the execution of an instrument providing for the modification of any outstanding Option, provided that no such modification, extension or renewal shall confer on the Optionee any right or benefit which could not be conferred by the grant of a new Option at such time, and shall not alter or impair any rights or 3. 4 obligations under the Option without the Optionee's consent. OPTION PRICE. The exercise price for the purchase of shares subject to an Option at the date of grant shall be less than 100 percent (100%) of the fair market value of the shares covered by the Option on the date of grant. Options shall vest as determined by the Committee. The exercise price of the Options must be paid for in full in cash or in shares of Common Stock, or a combination of both. In the sole discretion of the Committee, payment of the exercise price may be made by promissory note. If the Common Stock is listed on a national securities exchange (including the Nasdaq National Market or Nasdaq SmallCap System) at the time of granting an Option, then the exercise price per share shall not be less than the average of the highest and lowest selling price on such exchange on the date such Option is granted; or if there were no sales on said date, then the exercise price shall be not less than the mean between the bid and asked price on such date. If the Common Stock is traded otherwise than on a national securities exchange at the time of the granting of an Option, then the exercise price per share shall be not less than the mean between the bid and asked price on the date the Option is granted or, if there is no bid and asked price on said date, then on the immediately next business day on which there was a bid and asked price. If no such bid and asked price is available, then the exercise price per share shall be determined by the Committee. OPTION PERIOD. The term of exercisability of an Option granted under the Plan shall be established by the Committee, but may not be for more than ten years from the date of grant of the Option. In the event that an Optionee ceases to serve as an employee of the Company for any reason other than permanent and total disability or death, an exercisable Option will generally continue to be exercisable for three months after termination of employment, but in no event after the expiration date of the Option. In the event of the permanent and total disability or death of an Optionee during such service, an exercisable Option, and Options that become exercisable within two years, will continue to be exercisable for two years from the date employment ceases, but in no event after the expiration date of such Options. In the event the Optionee's employment is terminated for just cause, the Option will expire on the date the employee is terminated. Under the Plan, the Committee's determination regarding whether an Optionee's employment has ceased, and the effective date thereof shall be final and conclusive on all persons affected thereby. For a period of 180 days from December 18, 1996, with certain exceptions, no Optionee may directly or indirectly sell, offer, contract to sell, transfer the economic risk of ownership in, make any short sale, pledge, or otherwise dispose of shares of Common Stock acquired through the exercise of Options. NON-TRANSFERABILITY. No Option granted under the Plan is transferable other than 4. 5 by will, the laws of descent and distribution, or pursuant to the terms of a "qualified domestic relations order" as that term is defined by the Code. CONDITIONS OF EXERCISE. Options may be exercised only during the periods specified in the Plan or the Option Agreement, certain information as to which is provided above (see "Option Period"). Except as described above and as may be limited by an Option Agreement, there is no limitation upon the number of Options that may be exercised in any one year, and Options not exercised in any one year may be exercised in subsequent years over the term of the Option. The Committee may impose additional conditions upon the rights of an Optionee to exercise any Option which are not inconsistent with the terms of the Plan. PAYMENT FOR OPTIONS. Under the Plan, full payment for each share of Common Stock purchased upon the exercise of any Option shall be made at the time of exercise of such Option and shall be paid in cash (in United States dollars), Common Stock, or a combination of cash and Common Stock. In the sole discretion of the Committee, full payment for each share may be made by the execution of a promissory note by the Optionee. No shares of Common Stock shall be issued under the Plan until full payment therefore has been received by the Company, and no Optionee shall have any of the rights of a shareholder of the Company until the shares of Common Stock are issued to him or her. ISSUANCE OF COMMON STOCK. Shares issued to Optionees upon exercise of Options may be either authorized but unissued shares or treasury shares. In either case, the Optionee shall not pay any fees, commissions, or other charges for such Common Stock other than the exercise price as stated in the Option Agreement. Cash proceeds from the sale of Common Stock issued pursuant to the exercise of Options will be added to the general funds of the Company to be used for general corporate purposes. Shares of Common Stock shall not be issued with respect to any Option granted under the Plan unless the issuance and delivery of such Common Stock shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended (the "1933 Act"), the rules and regulations promulgated thereunder, any applicable state securities law, and the requirements of any stock exchange upon which the Common Stock may then be listed. The inability of the Company to obtain approval from any regulatory body or authority deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Common Stock under the Plan shall relieve the Company of any liability in respect of the non-issuance or sale of such Common Stock. As a condition to the exercise of an Option, the Company may require the person exercising the Option to make such representations and warranties as may be necessary to assure the availability of an exemption from any additional registration requirements of federal or state securities laws. 5. 6 RECAPITALIZATION, MERGER, CONSOLIDATION, REORGANIZATION, AND SIMILAR TRANSACTIONS The number and kind of shares reserved for issuance under the Plan, and the number and kind of shares subject to outstanding Options (and the exercise price thereof) shall be proportionately adjusted for any increase, decrease, change, or exchange of Common Stock for a different number or kind of shares or other securities of the Company which results from a merger, consolidation, recapitalization, reorganization, reclassification, stock dividend, stock split, combination of shares, or similar event in which the number or kind of shares is changed without the receipt or payment of consideration by the Company. In the event of (i) the liquidation or dissolution of the Company, (ii) a merger or consolidation in which the Company is not the surviving entity, or (iii) the sale or disposition of all or substantially all of the assets of the Company, all outstanding Options shall be surrendered. With respect to each Option so surrendered as to which the holder has become vested, the Committee shall in its discretion determine whether the holder of the vested Option shall receive options for securities in which the Common Stock is exchanged or a cash payment equal to the market value of the Common Stock on the date of the transaction less the exercise price of the Option. If by reason of such an adjustment, an Optionee becomes entitled to new, additional, or different shares of stock or securities, the new, additional or different shares of stock or securities shall be subject to all of the conditions and restrictions that were applicable to the Options for the Common Stock before the adjustment was made. AMENDMENT AND TERMINATION OF THE PLAN The Board of Directors may amend the terms of the Plan, and with respect to shares not subject to Options, suspend or discontinue the Plan, except that stockholder approval must be obtained for any amendment of the Plan that would change the number of shares subject to the Plan, change the category of persons eligible to be participants, or materially increase the benefits under the Plan. RESTRICTIONS ON RESALE Unless specifically included as a term and condition of any Option, there are no restrictions on the resale of Common Stock acquired upon the exercise of Options, other than that for a period of 180 days from December 18, 1996, with certain exceptions, no Optionee may directly or indirectly sell shares of Common Stock acquired through the exercise of an Option. In addition, shares of Common Stock may be resold only in compliance with the registration requirements of the 1933 Act, and applicable state securities laws. Under the 1933 Act, affiliates of the Company generally may resell shares of Common Stock purchased pursuant to the Plan only (i) in accordance with the provisions 6. 7 of Rule 144 under the 1933 Act, or (ii) pursuant to an applicable current and effective registration statement under the 1933 Act. As defined in Rule 405 under the 1933 Act, an affiliate of the Company is a person who directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with the Company. The determination of whether a person is an affiliate of the Company is primarily a factual one based upon whether he possesses, directly or indirectly, individually or in concert with others, the power to direct or cause the direction of the management or policies of the Company, whether through the ownership of voting stock, by executive position, by membership on the Board, by contract or otherwise. Therefore, each Optionee should consult his counsel concerning whether he is an affiliate of the Company and the attendant restrictions on the resale under the 1933 Act of Common Stock acquired pursuant to the Plan. FEDERAL INCOME TAX CONSEQUENCES Under the Code, awards under the Plan will have the following consequences: 1. The grant of an Option will not by itself result in the recognition of taxable income to the Optionee nor entitle the Company to a deduction at the time of such grant. 2. The exercise of an Option will result in the recognition of ordinary income by the Optionee on the date of exercise in an amount equal to the difference between the Option exercise price and the fair market value, on the date of exercise, of the shares acquired pursuant to the exercise of such Option. 3. The Company will be allowed a tax deduction for federal tax purposes equal to the amount of ordinary income recognized by an Optionee at the time the Optionee recognizes such ordinary income under an Option. The foregoing provides only a general summary of the federal income tax consequences applicable to Optionees under the Plan. Each Optionee is urged to consult his or her own tax advisor for information regarding applicable federal and state tax consequences. ANNUAL REPORT TO SHAREHOLDERS The Company's financial statements for the period ended December 31, 1995, as contained in the Company's Registration Statement on Form S-1 (file number 333-14007) are incorporated herein by reference. In the future, the Company's latest Annual Report to Stockholders, including financial statements, will be mailed to all stockholders of record as of the close of business on such record date. Any person wishing to receive a copy of the Annual Report to Stockholders may obtain a copy by writing the Company at 7. 8 the address set forth below under "Additional Information." ADDITIONAL INFORMATION Additional updating information with respect to the Common Stock and the Plan covered herein may be provided in the future to Optionees by means of appendices to this Prospectus. The nature and frequency of any reports to be made to Optionees as to their participation in the Plan will be determined by the Committee. The Company upon written or oral request, will provide without charge to any person to whom this Prospectus is delivered; a copy of the Plan, a copy of its latest Annual Report to Stockholders (when available) and a copy of any and all of the documents that have been incorporated by reference in Item 3 of Part II of the Registration Statement of which this Prospectus is a part, and that such documents are deemed incorporated by reference in this 1933 Act Section 10(a) Prospectus. Further, other documents required to be delivered to Optionees as specified in Item 9 of Part II of the Registration Statement are available upon request. Any such request can be oral or in writing and should be addressed to the Corporate Secretary, 5950 Symphony Woods Road, Columbia, Maryland 21044. The Registrant's telephone number is (410) 740-1000. LEGAL OPINION The validity of the Common Stock offered hereby has been passed on for the Company by Manatt, Phelps & Phillips, LLP, 1501 M Street, N.W., Suite 700, Washington, D.C. 20005. 8. 9 APPENDIX A ADDITIONAL INFORMATION CONCERNING THE 1996 CREDIT MANAGEMENT SOLUTIONS, INC. NON-QUALIFIED STOCK OPTION PLAN (As of December 31, 1996) ADMINISTRATION The Board has appointed Directors Graham and McDonnell as members of the Committee responsible for administration of the 1996 Credit Management Solutions, Inc. Non-Qualified Stock Option Plan (the "Plan"). Grants of Options under the Plan may be made by the Committee. NUMBER OF SHARES SUBJECT TO PLAN On December 31, 1996, Options covering 2,462,800 shares of Common Stock were outstanding, which were previously granted at an average exercise price of $5.37 per share. As of the date of this Appendix A, previously issued Options for 100,000 shares of Common Stock had been exercised and 187,200 shares of Common Stock remain issuable under the Plan, which provides for the issuance of Options for a total of 2,750,000 shares of Common Stock. PARTICIPATION IN THE PLAN As of December 31, 1996, the Company and its subsidiaries had approximately ___ employees who, in the opinion of the Company's management, are eligible to participate in the Plan. Of such persons, as of December 31, 1996, ___ non-executive employees held outstanding Options to purchase 517,900 shares of Common Stock, five (5) executive officers held Options to purchase 1,929,900 shares of Common Stock. Additionally, Options to purchase 5,000 shares of Common Stock each were held by three non-employee members of the Board of Directors of the Company. OUTSTANDING AWARDS The following table presents information with respect to the outstanding Options under the Plans as of the date of this Appendix A. A-1 10
- ----------------------------------------------------------------------------------------------------------------------------- Number of Shares Presently Subject to Number of Persons Average Exercise Date of Award Options Holding Awards Price Per Share - ----------------------------------------------------------------------------------------------------------------------------- June 27, 1996 2,262,540 58 $5.00 - ----------------------------------------------------------------------------------------------------------------------------- October 10, 1996 32,360 8 $9.60 - ----------------------------------------------------------------------------------------------------------------------------- November 4, 1996 157,900 45 $9.60 - ----------------------------------------------------------------------------------------------------------------------------- November 15, 1996 5,000 1 $9.60 - ----------------------------------------------------------------------------------------------------------------------------- December 4, 1996 5,000 1 $9.60 - ----------------------------------------------------------------------------------------------------------------------------- Total 2,462,800 113 $5.37 - -----------------------------------------------------------------------------------------------------------------------------
A-2 EX-99.4 7 FORM OF NON-QUALIFIED STOCK OPTION AGREEMENT 1 EXHIBIT 99.4 1996 CREDIT MANAGEMENT SOLUTIONS, INC. NON-QUALIFIED STOCK OPTION PLAN AGREEMENT _______________________, Optionee: The option set forth herein is being granted by Credit Management Solutions, Inc. (the "Company") pursuant to the 1996 Credit Management Solutions, Inc. Non-Qualified Stock Option Plan (the "Plan"). The Company, has of the __th day of _________, 1996 (the "Effective Date"), granted to you an option to purchase shares of the common stock of the Company, par value $.01 per share ("Common Stock"). This option is not intended to qualify as an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). The details of your option are as follows: 1. (a) The total number of shares subject to this option is ___________________ (__________) (the "Option Shares"). (b) Subject to the foregoing and the limitations contained herein, this option shall vest and be exercisable as follows: (i) 10% or __________ of the Option Shares shall vest and be exercisable immediately; (ii) 20% or __________ of the Option Shares shall vest and be on and after December 15, 1997; (iii) 20% or __________ of the Option Shares shall vest and be exercisable on and after December 15, 1998; (iv) 20% or __________ of the Option Shares shall vest and be exercisable on and after December 15, 1999; (v) 20% or __________ of the Option Shares shall vest and be exercisable on and after December 15, 2000; and (vi) 10% or __________ of the Option Shares shall vest and be exercisable on and after December 15, 2001. (c) An appropriate and proportionate adjustment shall be made in the number and kind of Option Shares and in the exercise price per share in the event the outstanding shares of the Common Stock of the Company are increased, decreased or changed into, or exchanged for, a different number or kind of shares or securities of the Company, without receipt of consideration by the Company, through merger, consolidation, recapitalization, reorganization, reclassification, stock split, stock dividend, combination of shares or similar event. Any such adjustment, however, in an outstanding option shall be made without change in the total price applicable to the unexercised portion of this option but with a corresponding adjustment in the price for each share subject to the option. An appropriate adjustment shall be made in the exercise price per share of Option Shares in the event such adjustment is deemed appropriate as a result of the Securities and Exchange Commission's review of the Company's initial Registration Statement covering shares of Common Stock filed under the Securities Act of 1933. 2 as amended. Adjustments under this section shall be made by the Board of Directors whose determination as to what adjustments shall be made, and the extent thereof, shall be final and conclusive. 2. (a) The exercise price of this option is ___________dollars ($_____) per share. (b) The exercise price per share shall be paid upon exercise of all or any part of each installment which has become exercisable by you at the time the option is exercised in cash or by a check payable to the order of the Company. In the sole and absolute discretion of the Company, the Company may accept a promissory note or other shares of Common Stock in partial or full payment of the purchase price of Common Stock being acquired pursuant to exercise of this option. In the event such Common Stock is accepted as payment, such Common Stock shall be valued at its then current fair market value. 3. The minimum number of shares with respect to which this option may be exercised at any one time is one hundred (100). However, in the event that at any time there are less than one hundred (100) shares that may be acquired at such time through exercise of this option, the number of shares that may be acquired through option exercise at such time shall be the minimum number of shares. 4. The Company may require the Optionee or any person to whom an option is transferred under paragraph 7, as a condition of exercising the option, to give written assurance satisfactory to the Company stating that such person is acquiring the stock subject to the option for such person's own account and not with any present intention of selling or otherwise distributing the stock. 5. The term of this option commences on the Effective Date and may be exercised by you only with respect to the vested portion of this Option and only while you are an employee and have maintained Continuous Service (as defined in the Plan) from the date hereof or within three months after termination of such Continuous Service (but not later than the tenth anniversary of the Effective Date), except if your Continuous Service terminates by reason of: (a) "Just Cause" which for purposes hereof shall have the meaning set forth in any unexpired employment agreement between you and the Company (and, in the absence of any such agreement, shall mean termination because of your personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation, other than traffic violations or similar offenses) then your rights to exercise this Option shall expire on the date of such termination; (b) Death, then all Option Shares which have vested and which vest within two years of the date of your death may be exercised within two years from the date of your death (but not later than the tenth anniversary of the Effective Date) by the personal representatives of your estate or person or persons to whom your rights under this option shall have passed by will or by laws of descent and distribution; (c) Permanent and Total Disability (as such term is defined the Plan), then all Option Shares which have vested and which vest within two years of the date of your disability may be exercised within two years from the date of such Permanent and Total Disability (but not later than the tenth anniversary of the Effective Date). 6. This option may be exercised, to the extent specified above, by delivering written notice of exercise (specifying the number of Option Shares to be purchased) together with the exercise price to such person as the Company may designate, during regular business hours, together with such additional documents as the Company may then require. 7. This option is not assignable or transferable, except at death by will or by the laws of descent and distribution, and is exercisable during your life only by you or by your personal representative. 8. Any notices provided for in this option shall be given in writing and shall be deemed effectively 2 3 given upon receipt or, in the case of notices delivered by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the address specified below or at such other address as you hereafter designate by written notice to the Company. 9. You shall have no rights as a shareholder with respect to Option Shares covered by this option until the date of issuance to you of a certificate representing such shares. No adjustment will be made for dividends or other rights for which the record date is prior to the date such certificate is issued. 10. You represent that this option and any Common Shares which may be acquired hereby are being acquired by you for your own account and not for resale; and you agree: (a) that the Option Shares may not be registered under the Securities Act of 1933, as amended, or any state securities law; (b) that transfer of the Option Shares will be severely limited, and that none of the Option Shares may be sold, transferred, pledged, or hypothecated unless first registered under such laws or unless counsel satisfactory to the Company has given an opinion that registration under such laws is not required; (c) that certificates for the Option Shares may contain the following legend: "The common shares represented by this certificate were acquired for investment only and not for sale. They have not been registered under the Securities Act of 1933 or any state securities law. These shares may not be sold, transferred, pledged, or hypothecated unless first registered under such laws, or unless the Company has received an opinion of counsel satisfactory for it that registration under such laws is not required;" (d) that the Company may issue stop transfer instructions to its transfer agent or make a notation to such effect on its appropriate records; and (e) that the sale of Option Shares in market transactions be limited to transactions described in Rule 144 of the Securities and Exchange Commission. 11. The Company is not providing you with advice, warranties, or representations regarding any of the legal, tax or business effects to you with respect to this grant. This document has been prepared by the Company's legal counsel. You are encouraged to seek legal, tax and business advice from your own legal, tax and business advisers as soon as possible. Dated as of the th day of , 1996. ----- ------------ Very truly yours, CREDIT MANAGEMENT SOLUTIONS, INC. By: ------------------------------------- James R. DeFrancesco President and Chief Executive Officer The undersigned acknowledges receipt of the foregoing option and understands that all rights and liabilities with respect to this option are set forth herein. Acknowledged as of this th day of , 1996. ----- ------------- --------------------------- Address: --------------------------- --------------------------- 3 -----END PRIVACY-ENHANCED MESSAGE-----