-----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, JQmK9FxiISkKJEXoaZansRadCE0unHVcgF+qjUFlVuved26TkgOkm2vR2UlR9ooH +kh2I2jmPcXXLXks91PYOw== 0000928385-01-000972.txt : 20010409 0000928385-01-000972.hdr.sgml : 20010409 ACCESSION NUMBER: 0000928385-01-000972 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 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: 10-K405 SEC ACT: SEC FILE NUMBER: 000-21735 FILM NUMBER: 1590942 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 10-K405 1 0001.txt FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED For the fiscal year ended December 31, 2000 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED For the transition period from ________to ___________ Commission File Number 000-21735 CREDIT MANAGEMENT SOLUTIONS, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 52-1549401 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 135 National Business Parkway, 07012 Annapolis Junction, MD (Zip Code) (Address of Principal Executive Offices) (Registrant's Telephone Number, Including Area Code) (301) 362-6000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Title of each class Name of each exchange on which registered - ----------------------------- ----------------------------------------- Common Stock, $0.01 par value Nasdaq National Market Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] At March 29, 2001 Credit Management Solutions, Inc. had 7,994,124 shares of Common Stock, par value $0.01, outstanding. 1 While it is difficult to determine the number of shares owned by non-affiliates, the registrant estimates that the aggregate market value of outstanding Common Stock on March 29, 2001 (based upon the average bid and asked prices of such Common Stock on the Nasdaq National Market on March 29, 2001) held by non- affiliates was approximately $ 17.7 million. For this computation, the registrant has excluded the market value of all shares of its Common Stock reported as beneficially owned by officers, directors and certain significant stockholders of the registrant. Such exclusion shall not be deemed to constitute an admission that any such stockholder is an affiliate of the registrant. This Annual Report on Form 10K includes statements which may constitute forward- looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements in this Report that are not strictly historical are "forward-looking" statements, which are subject to the many risks and uncertainties that exist in the Company's operations and business environment. These risks and uncertainties may cause actual results to differ materially from the expected results and include, but are not limited to, the risk that the proposed merger with The First American Corporation may not be completed, the Company's dependence upon the CreditRevue product line, the limited market acceptance to date of the Company's CreditOnline network and CreditConnection service, and other risks which are set forth in more detail below in "Business - Risk Factors," as well as in other reports and documents filed with the Securities and Exchange Commission. PART I Item 1. Business. Credit Management Solutions, Inc. ("CMSI" or the "Company") provides solutions and services for automation of the consumer and small business credit analysis, approval and funding processes. Products and services offered by CMSI or its subsidiaries are used in a wide range of credit products, including vehicle loans and leases, home equity loans, student loans, telecommunications services, credit cards and small business credit. CMSI's primary products and services include: . The CreditRevue software, which automates the entire credit application process -- from the entry of the credit application, through the making of the credit decision, to the transfer of the funding information to the credit provider's servicing system; . The eValuate software, which is designed to work with a credit provider's chosen credit origination application workflow system to provide background credit analysis, decisioning and pricing capabilities, based on client- defined criteria; . The CreditOnline online network, which links funding sources, credit information providers, and sources of credit origination, such as financing Web sites and retail management systems; and . The CreditConnection service, which allows automobile dealers and other credit originators to submit credit applications to multiple lenders, retrieve and analyze credit information, and manage the credit application process through features such as workflow management tools, a payment calculator and receipt of news bulletins from participating funding sources. Recent Event On January 30, 2001, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with The First American Corporation, a California corporation ("First American"), and Rusti Corp., a wholly-owned subsidiary of First American. If the merger contemplated by the Merger 2 Agreement is completed, the Company's stockholders will receive, for each share of CMSI stock held by them, the right to receive such fraction of a share of First American common stock equal to the quotient (rounded to the nearest ten- thousandth decimal place) resulting from the division of $6.25 by the average closing price per share of First American common stock as reported on the New York Stock Exchange for the ten trading days ended on the third trading day prior to the special meeting of CMSI's stockholders to be held for the purpose of voting upon the merger; provided that if the average closing price is greater than $30 per share, such average closing price shall be deemed to be $30 per share, and if the average closing price is less than $22 per share, such average closing price shall be deemed to be $22 per share. Consummation of the merger is subject to various conditions, including, among other things, receipt of the necessary approvals of the stockholders of CMSI, performance of covenants and agreements by the parties and other customary terms. The merger is intended to constitute a reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended. The companies expect the transaction to be completed in the second quarter of 2001. Products and Services CreditRevue CreditRevue is a UNIX-based software solution designed to automate the credit application process from the entry of the credit application to the credit decision, through the transfer of the funding information to the lender's servicing system. Using CreditRevue, a lender can automate the analysis of a wide range of consumer lending products, including vehicle loans and leases, home equity loans, student loans, telecommunications services and credit cards. Before CreditRevue is installed, the Company completes a review of the lender's credit application processing environment. CreditRevue is then configured to address the lender's specifications, including the lender's underwriting, approval and funding processes. The Company designs interfaces from CreditRevue to the lender's other related systems, such as its branch automation software, customer information repository and loan servicing software. The Company also markets the following supplemental CreditRevue products: . CreditRevue Student Lending is a specialized version of CreditRevue which, in addition to providing the full functionality of CreditRevue, is configured to support the requirements of the student lending marketplace. . CreditRevue Service Bureau is a product designed to allow lenders to connect multiple terminals or personal computers to a service bureau system in order to make use of the CreditRevue functionality. CreditRevue Service Bureau was designed to be used by small and medium sized financial institutions seeking to minimize the up-front hardware and software costs of an in-house system. The Company's original strategy was to enter into marketing alliances with established service bureau providers whereby such providers would re-market CreditRevue Service Bureau to their clients on a transaction fee basis. For the original CreditRevue Service Bureau product, the Company has converted its three strategic alliances into license agreements. The Company is considering changing its strategy to focus on an application service provider (ASP) or other service bureau model built around it's eValuate product and an enhanced CreditRevue product offering. The Company does not expect to offer new licenses for the original CreditRevue Service Bureau product. The Company also plans to release the eValuate software. The Company expects that the eValuate software will provide background credit analysis, decisioning and pricing, based on client-defined criteria. The eValuate software is being designed to work with the CreditRevue software or the customer's alternative credit origination workflow system. In conjunction with Dun & Bradstreet ("D&B") the Company also provides the following credit processing products: 3 . OneScore is a credit scoring product designed to assess credit risks associated with small businesses. Using advanced statistical techniques, D&B has developed a blended scoring model that permits D&B's comprehensive commercial information to be combined with information regarding the principals of the business concerned. The consumer information is provided by independent consumer bureaus to help customers better assess credit risks in dealings with smaller businesses. The Company uses its proprietary credit processing software to implement the D&B model on behalf of OneScore customers enrolled by D&B. This is a transaction fee-oriented service for which the Company receives a fee for each OneScore generated by a D&B client. . Dun & Bradstreet Portfolio Monitoring Service allows businesses to proactively monitor individual small business credit relationships, automate various credit analyses and reporting functions, and identify cross-sales opportunities. The service is based on D&B's standard and custom credit scoring services and the Company's data integration and systems capabilities. The service offers standard and custom management reports and can forward processed portfolio accounts to a customer's internal data warehouse. The standard monitoring service uses OneScore. Customers can also use custom scorecards to process their internal account performance data with external commercial and/or consumer data. The advanced statistical scorecard provides a business with a customized view of the changing risk profiles in its small business portfolio. This is a transaction fee-oriented service for which the Company receives fees based upon the number of small business accounts monitored, the monitoring frequency and the amount of custom development work selected. CreditOnline Network and CreditConnection Service The CreditOnline network offers connectivity between points of credit origination, such as automobile dealers, and funding sources. The CreditOnline network originated as part of the CreditConnection service, which was created to connect automobile dealers to lenders. In 1999, the Company introduced the CreditOnline network, which expanded the CreditConnection service to link other sources of credit applications, such as Internet financing Web sites, to funding sources. This connectivity enables the Company to offer a comprehensive "click- and-mortar" strategy for online financing designed to service three types of users -- lenders, credit originators such as dealers, and consumers. The CreditOnline network offers this connectivity, plus value-added services like workflow management and management reporting, for both dealers and lenders. Today, the CreditOnline network acts as a portal to the credit origination systems of many leading lending institutions. It also serves as a gateway to major consumer and business credit bureaus and provides an interface to several dealer management systems. The CreditOnline network supports several models of Internet financing, as follows: 1. In the "lender-centric model", the CreditOnline network can be used to connect a lender's Web site to the lender's credit origination system. The CreditOnline network can also be used to transmit credit applications from one lender to another -- a service the Company calls CreditOnline LenderLink. 2. The CreditOnline network also supports a "dealer-centric" model, in which an automobile dealer uses the CreditConnection Service to submit credit applications to funding sources and receive decisions from the funding sources. A dealer also may enable its Web site to transmit credit applications entered by consumers to funding sources and receive related credit decisions. 3. A third model of Internet financing, "consumer-centric", allows a consumer to apply for credit with multiple financial institutions through a "loan marketplace" provided by a third party. For 4 example, the Company's strategic alliance with Lending Tree allows automobile credit applications completed on Lending Tree's Web site to be transmitted to multiple funding sources through the CreditOnline network. There are two primary means for gaining access to the CreditOnline network: 1. CreditOnline Gateway The CreditOnline Gateway provides a standard interface for sending credit applications to lenders and for receiving credit decisions back from lenders. It also offers a standard interface for requesting credit bureau reports. 2. CreditConnection Service Under the current model, the CreditConnection service provides a set of tools for subscribing dealers. The tools allow dealers to submit credit applications to funding sources on the CreditOnline network and receive credit decisions from those funding sources. The dealer also can request one or more credit bureaus to be reviewed in several different formats. The dealer can select one or more lending institutions to which the credit application should be sent, and can specify criteria which determine how the application is to be sequenced and forwarded to secondary sources. The dealer can then view the lenders' credit decisions online. The CreditConnection service provides several other features to dealerships, including workflow management tools, payment calculators and the ability to receive news bulletins from participating funding sources. Many of the Company's prior agreements with subscribing lending institutions require that the Company and lending institution implement a marketing plan describing how the lending institution will utilize its sales force to increase dealership subscriptions to the CreditConnection service. The Company's current standard agreements for subscribing lending institutions, however, do not include this requirement. The Company also has been pursuing re- marketing arrangements for the CreditConnection service with vendors that provide automated systems for dealer management and operations. The Company has signed strategic alliance agreements with the Dealer Service's Group of ADP ("ADP"), Universal Computer Systems ("UCS"), and Advent Resources ("Advent") to re-market the CreditConnection service. These agreements provide that such parties are to offer the CreditConnection service as their standard approach to establishing electronic interfaces between dealerships and financial institutions. Under certain limited circumstances, these re-marketers may provide an interface that is different from the Company's. It is the Company's understanding that ADP, UCS, and Advent do not currently re-market any third party products or services that compete with the CreditConnection service. In addition, the Company has entered into agreements with other providers of dealer management systems or support, or Web sites used in the credit application process, under which those providers re-market the CreditConnection service or CreditOnline network. See "--Sales and Marketing." Customers The Company's customers are categorized by product type. With respect to the CreditRevue product, the Company has over 35 customers, including banks, savings and loan associations, finance companies, sub-prime lenders, leasing companies, student lenders and telecommunications companies. The Company intends to continue to focus on the financial services industry and to target the student lending, insurance, telecommunications, utilities and healthcare industries. With regards to its CreditConnection service, at December 31, 2000, the Company had contractual relationships with 30 lenders. The Company has developed electronic connections linking 24 financial institutions to the CreditConnection service. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of those customers who have accounted for 10% or more of the Company's revenues in either of 5 the past two fiscal years. Product Development Since its inception, the Company has made substantial investments in product development and has a dedicated product development organization which periodically releases new products and enhancements to existing products. The Company believes that its future performance will depend in large part on the Company's ability to enhance its current products and services and to develop new products 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. While the Company anticipates that certain new products and services will be developed internally, the Company may, based on timing and cost considerations, acquire or license technology or software from third parties when appropriate. For a discussion of certain risks associated with the Company's product development program, see "-- Risk Factors -- Rapid Technological Change; Risk Associated with New Products, Services or Enhancements" and "-- Risk Factors -- Risk of Defects, Development Delays and Lack of Market Acceptance." As of December 31, 2000, the Company's product development staff consisted of 27 employees. The Company anticipates that it will continue to commit resources to product development in the future. Customer Service and Support The Company believes that its success is dependent in part upon its ability to provide customers with responsive, prompt and efficient support and training. Each CreditRevue customer has a maintenance agreement, which is typically co- terminous with the license agreement, providing for service, support and product enhancements. The Company offers its clients a wide range of support services to assist them in deriving the most effective use of the Company's products and services, including technical support, formalized training and a user hotline. The Company's services also include implementation planning and assistance, software installation, software operations training and software maintenance. As of December 31, 2000, the Company's dedicated customer service and support team included 22 employees. The Company's support personnel are available to its customers 24 hours a day, 7 days a week through a hotline. The Company tracks each customer's service history to identify trends or problem areas and to recommend solution strategies. Most customer support questions are answered during the initial call. The Company can access a customer's system through a modem to diagnose the situation and implement corrective measures, if necessary. The Company also makes on-site visits for emergency or serious problem situations. The Company believes that its customers typically base their decisions to purchase the Company's products and services partly on the support and maintenance offered with such products and services. The Company intends to continue to strengthen its support team and reputation by adding professional personnel with significant experience in the financial services and software industries. Sales and Marketing As of December 31, 2000, the Company's sales and marketing organization consisted of 23 employees, 13 of whom were based at the Company's corporate headquarters in Annapolis Junction, Maryland. To support its sales force, the Company conducts comprehensive marketing programs, which include direct mail, public relations, seminars, trade shows and ongoing customer communications programs. The Company sells its CreditRevue products through a direct sales organization. The sales cycle begins with the generation of a sales lead or the receipt of a request for proposals from prospective customers. While the sales cycle varies substantially from customer to customer, it typically requires six to eight 6 months. The CreditOnline network also is sold through direct sales efforts to financial institutions, automobile superstores, independent dealerships, and finance and insurance systems providers. Direct selling is supported by participation in both financial and automotive trade shows and conferences, financial press relations, telemarketing, advertising campaigns and targeted mailings. The Company employs an indirect sales strategy for the CreditConnection service and CreditOnline network by supporting the sales efforts of certain financial institutions which have well-established relationships with many of the automobile dealerships in the United States. The Company supports these indirect sales channels through a variety of marketing communications efforts including the development of brochures and direct mail pieces, production of sales videos, participation in trade shows and conferences, support for bank dealer focus groups, advertising, press relations and seminar support. In November 1996, the Company entered into an agreement to form a strategic alliance with the Dealer Services Group of ADP. The Company and ADP have integrated CreditConnection with ADP's automated dealership management and operations systems so that ADP may re-market and license CreditConnection to ADP's automobile dealer customers. In exchange for its services, ADP is entitled to a percentage of the net revenues from transactions generated by ADP's dealers. In addition, pursuant to the agreement, ADP has the right to name one director to the Company's Board of Directors. In August 1997, the Company entered into an agreement to form a strategic alliance with UCS whereby UCS may re-market and license the CreditConnection service to UCS's automobile dealer customers. In May 1999, the Company entered into an agreement to form a strategic alliance with Advent whereby Advent may re-market and license the CreditConnection service to Advent's automobile dealer customers. In addition, the Company has entered into agreements with other providers of dealer management systems or support, or Web sites used in the credit application process, under which those providers re-market the CreditConnection service or CreditOnline network. Backlog At December 31, 2000, the Company had entered into contracts for its services for which $0.8 million of revenues will be recognized in future periods. At December 31, 1999, the comparable amount was $1.1 million. Competition The credit processing software and services industry is intensely competitive and rapidly changing. The Company believes its ability to compete depends upon many factors within and outside its control, including the timing and market acceptance of new products and services and enhancements developed by the Company and its competitors, including (i) application software companies, (ii) management information systems departments of potential customers, (iii) third-party professional services organizations, and (iv) computer services outsourcing providers which offer service bureau-based credit processing solutions. The Company believes that competitors for CreditRevue include American Management Systems, Inc., Appro Systems, Inc., Alltel Corporation, Fair, Isaac and Company, Inc., CFI ProServices, Inc., Affinity Technology Group, Inc., HNC Software and Lightbridge, Inc. The market for online credit origination also is intensely competitive and changes rapidly. The identities of competitors and the exact nature of their offerings are subject to change and may not be known with certainty at any given time. Currently, with respect to automobile lending, the Company believes that the following entities have introduced or announced an intent to introduce offerings competitive with the CreditConnection service or CreditOnline network in the market for online automotive lending: e-fin (in which The Reynolds & Reynolds Company has an interest), American Management Systems, Inc. and Dealer Trak. Single lender online lending solutions also may be competitors of the CreditConnection service or the CreditOnline network. In addition, various entities have introduced or 7 announced offerings in the marketplaces for online lending other than automotive finance, such as mortgage and business-to-business lending, which also may compete with the CreditConnection service or the CreditOnline network. Many of the Company's competitors are substantially larger than the Company and have significantly greater financial, technical, and marketing resources and established, extensive direct and indirect channels of distribution. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion, and sale of their products and services than the Company. As is typical in both the software and online credit origination industries, many actual or potential customers of the Company may become competitors by developing competitive technology internally. Due to the relatively low barriers to entry, the Company expects additional competition from other established and emerging companies as these markets continue to develop and expand. The Company also expects that competition will increase as a result of industry consolidations. The Company anticipates that its competitors may develop or acquire products or services that provide functionality that is similar to that produced by the Company's products and services, and that such products and services may be offered at a significantly lower price or bundled with other products and services. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address the needs of the Company's prospective customers. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. Increased competition is likely to result in price reductions, reduced gross margins and loss of market share, any of which could have a material adverse effect on the Company's business, results of operations and financial condition. There can be no assurance that the Company will be able to compete successfully against current or future competitors or that competitive pressures will not have a material adverse effect on the Company's business, results of operations and financial condition. Intellectual Property and Other Proprietary Rights The Company's success is heavily dependent upon its proprietary technology. The Company regards its software products and services as proprietary, and relies primarily on a combination of copyright protection, patent protection, trade secrets protection, confidentiality agreements and contractual provisions to protect its proprietary rights. The Company has no patents on its CreditRevue products currently in commercial use, and existing trade secrets, copyright laws and contractual provisions afford only limited protection. In March 1999, the U.S. Patent and Trademark Office issued the Company U.S. Patent 5,878,403 on the technology supporting its CreditConnection service and CreditOnline network. There can be no assurance this patent would survive a legal challenge to its validity or provide adequate protection. Furthermore, there can be no assurance that others will not design around any patents issued to the Company. It is the Company's policy to generally enter into confidentiality and assignment agreements with its employees. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use the Company's products or technology without authorization, to obtain and use information that the Company regards as proprietary, or to develop similar or superior products or technology independently. Policing unauthorized use of the Company's products is difficult, and while the Company is unable to determine the extent to which piracy of its software products exists, software piracy can be expected to be a persistent problem, particularly in international markets and as a result of the growing use of the Internet. The source code for the Company's proprietary software is protected both as a trade secret and as a copyrighted work. The Company has in the past and may in the future make source code for one or more of its products available to certain of its customers and strategic partners, which may increase the likelihood of misappropriation or other misuse of the Company's software. In addition, the laws of some foreign countries do not protect the Company's proprietary rights 8 to the same extent as do the laws of the United States. There can be no assurance that the steps taken by the Company to protect its proprietary rights will be adequate or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technologies. CREDITCONNECTION, CREDIT CONNECTION, CREDITONLINE, CREDIT ONLINE, CREDITREVUE, EVALUATE, INCREDIT, LEAPSPEED, LENDERLINK and ORIGENATE, the associated logos and designs, and the Company logos and designs, are trademarks, tradenames or registered trademarks of the Company. The Company is not aware that any of its products, services, trademarks or other proprietary rights infringes the proprietary rights of third parties. However, there can be no assurance that third parties will not assert infringement claims against the Company in the future with respect to current or future products or services. As the number of software and online credit products and services in the industry increases and the functionality of these products and services further overlaps, the Company believes that software developers and online credit product and service providers may become increasingly subject to infringement claims. Furthermore, there can be no assurance that former employers of the Company's present and future employees will not assert claims that such employees have improperly disclosed confidential or proprietary information to the Company. Any such claims, with or without merit, can be time consuming and expensive to defend, cause product and service delays, or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company, or at all, which could have a material adverse effect on the Company's business, results of operations and financial condition. Employees As of December 31, 2000, the Company had 193 full time employees, including 27 in product development, 121 in technical operations, 23 in sales and marketing and 22 in finance and administration. The Company's employees are not covered by any collective bargaining agreements. The Company has experienced no work stoppages and believes that its relations with its employees are good. Financial Information About Geographic Areas Substantially all of the Company's revenues and assets are attributed to or located in the United States. Financial Information About Segments The Company currently has two reportable operating segments: CMSI Systems, Inc. and Credit Online, Inc. See Note 13 in the Notes to the Consolidated Financial Statements attached to this Report for more information about the Company's reportable segments. Risk Factors In addition to the other information in this Form 10-K, the following risk factors should be carefully considered in evaluating the Company and its business because such factors may have a significant impact on the Company's business, operating results and financial condition. If any of the risks set forth in this Form 10-K or in the Company's other Securities and Exchange Commission filings actually occur, the Company's business, financial conditions and results of operations could be materially adversely affected. The Proposed Merger with First American May Not Be Completed If the proposed merger with First American is not completed for any reason, the Company may be subject to a number of material risks, including the following: 9 . the price of the Company's common stock may decline to the extent that the current market price reflects a market assumption that the merger will be completed; and . costs related to the merger, such as legal, accounting and financial advisor fees, must be paid even if the merger is not completed. In addition, the Company's customers and suppliers, in response to the announcement of the merger, may delay or defer decisions concerning the Company or decide to terminate their relationships with the Company. Any delay or deferral in those decisions or any decision to terminate such relationships by the Company's customers or suppliers could have a material adverse effect on the Company's business. Similarly, this could adversely affect the Company's ability to attract and maintain key management, sales, marketing and technical personnel. Further, if the merger is terminated and the Company's Board of Directors determines to seek another merger or business combination, there can be no assurance that it will be able to find a partner willing to pay an equivalent or more attractive price than the price to be paid in the merger. In addition, during the period in which the merger agreement is in effect, and subject to very narrowly-defined exceptions, the Company is prohibited from soliciting, initiating, knowingly encouraging, endorsing or entering into any competing transaction. 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, such as the Company's CreditConnection, eValuate and CreditOnline products and services, the demand for the Company's products and services, the success of the Company's relationships with third party re-marketers of the CreditConnection service and CreditOnline network, 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 Company typically enters into an initial contract with each client for the purposes of developing an analysis of the customer's credit operations and a functional specification for the customer's proposed CreditRevue system. Following this initial contract phase, customers may elect to not proceed with the CreditRevue license and system implementation. The loss, cancellation 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, deferrals or cancellation 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 10 the extent such expenses precede, or are not subsequently followed by, increased revenues, the Company's results of operations could be materially and adversely affected. As a result of these and other factors, revenues for any quarter are subject to significant variation, and the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. There can be no assurance that the Company will be profitable in any future quarter or that such fluctuations in results of operations will not result in volatility in the price of the Company's Common Stock. Due to all of the foregoing factors, it is likely that in some future quarter the Company's results of operations will be below the expectations of public market analysts and investors. In such event, the market price of the Company's Common Stock may be materially and adversely affected. See "-- Market Acceptance of CreditOnline and CreditConnection; Transition to Transaction-Based Revenue" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Dependence on CreditRevue Product Line License fees, maintenance fees and third-party computer hardware sales associated with licenses and installations of CreditRevue accounted for the majority of the Company's revenues through December 31, 2000. Although the Company introduced its CreditConnection service in the fourth quarter of 1996, its Dun & Bradstreet OneScore Service in the fourth quarter of 1997, its CreditRevue Service Bureau in January 1998, and its CreditOnline network in February 1999, the Company expects that revenues generated from licenses and installations of CreditRevue will continue to account for a significant portion of the Company's revenues for the foreseeable future. The life cycles of the Company's products and services are difficult to predict due to the effect of new product and service introductions or software enhancements by the Company or its competitors, market acceptance of new and enhanced versions of the Company's products and services, and competition in the Company's marketplace. A decline in the demand for CreditRevue, whether as a result of competition, technological change, price reductions or otherwise, could have a material adverse effect on the Company's business, results of operations and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Market Acceptance of CreditOnline and CreditConnection; Transition to Transaction-Based Revenue The Company's CreditConnection service was commercially introduced in 1996, and the Company's CreditOnline network was introduced in February 1999. The CreditConnection service and CreditOnline 11 network are projected to account for a significant portion of the Company's revenues in the future. As a result, demand and market acceptance for these services are subject to a high level of uncertainty, and the Company will be heavily dependent on their market acceptance. There can be no assurance that these products and services will be commercially successful. The failure of the Company to generate demand for the CreditConnection service or CreditOnline network, or the occurrence of any significant technological problems with such products or services, could have a material adverse effect on the Company's business, results of operations and financial condition. Historically, the majority 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 and the subsequent custom enhancements provided by the Company's professional services staff. However, the Company anticipates that a significant portion of the Company's future revenues will be derived from per-usage transaction-based fees and subscription fees charged to credit originators and financial institutions for transactions originated through the CreditConnection service or CreditOnline network. There can be no assurance that the Company will successfully manage the transition of a significant portion of its revenues from license-based revenue to transaction-based revenue. The failure of the Company to successfully manage the transition to a transaction-based revenue stream would have a material adverse effect on the Company's business, results of operations and financial condition. Reliance on Certain Relationships The Company has established relationships with a number of companies that it believes are important to its sales, marketing and support activities, as well as to its product, service and software development efforts. The Company has relationships with automated scorecard companies, hardware vendors and credit bureaus. There can be no assurance that these relationships will be successful on an ongoing basis. Moreover, 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 leverage and 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. See "--Sales and Marketing." In addition, the Company has formed strategic alliances with companies that re-market the CreditConnection service or CreditOnline network, and with D&B for the marketing of OneScore and Portfolio Monitoring. There can be no assurance that these relationships will be successful. Moreover, there can be no assurance that these companies will actively re-market the CreditConnection service, CreditOnline network or OneScore or Portfolio Monitoring. The failure by the Company to leverage and maintain its existing re-marketing 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. See "-- Sales and Marketing." Dependence on Large License Fee Contracts and Customer Concentration A relatively small number of customers have accounted for a significant percentage of the Company's revenues. License fees for CreditRevue are based on a percentage-of-completion method on a cost-incurred basis with the final installment being paid in full upon acceptance of the Company's software. The Company receives continuing revenues on CreditRevue from annual maintenance agreements which commence upon acceptance of the software by the customer. Maintenance agreements are renewable annually by the customer, and the license agreements are co-terminous with the maintenance agreements. 12 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 ten largest customers accounted for 56.6% and 55.1% of total revenues in 2000 and 1999, respectively. One of the Company's customers individually accounted for 10% or more of total revenues in 2000. None of the Company's customers individually accounted for 10% or more of total revenues in 1999. 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, termination of orders by any such customer, 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Management of Changing Business The Company has experienced significant changes in its business, including changes in the Company's staff and customer base and the development of new products, services and enhancements to its software, including the commercial release of CreditConnection in 1996, CreditRevue Service Bureau in 1998 and the CreditOnline network in 1999. Such changes have placed, and may continue to place, a significant strain upon the Company's management, systems and resources. 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, budgeting and forecasting capabilities on a timely basis, expand its sales and marketing work force and train and manage its employee work force. There can be no assurance that the Company, or the Company's current management, 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. See "-- Sales and Marketing." Dependence on Key Personnel The Company's future performance depends in significant part upon the continued service of its key technical, sales and senior management personnel, particularly Scott L. Freiman, President and Chief Executive Officer. The Company has obtained key-person life insurance on the life of Mr. Freiman, although the Company does not believe that such insurance is adequate to compensate for the loss of Mr. Freiman. The loss of the services of one or more of the Company's executive officers could have a material adverse effect on the Company's business, results of operations and financial condition. The Company retains its key employees through the use of equity incentive programs, including stock option plans, employee stock purchase plans, and competitive compensation packages. Although the Company 13 has entered into employment agreements with its executive officers, there can be no assurances that it will be successful in retaining such personnel. The Company's future success also depends on its continuing ability to attract and retain highly qualified managerial, sales, technical, and customer support 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. The Company has in the past and may in the future experience significant delays in product development. There can be no assurance that these new products and services, if developed, will gain market acceptance or that the Company will be successful in developing and marketing new products or services that respond to technological change, evolving industry standards and changing customer requirements, that the Company will not experience difficulties that could delay or prevent the successful development, introduction and marketing of these products or services, or that its new products or services will adequately meet the requirements of the marketplace and achieve any significant degree of market acceptance. In addition, a majority of the Company's current products operate in the UNIX operating system. Although the Company's software is designed to work with other operating environments, a requirement to port to a different operating system could be costly and time consuming and could have a material adverse effect on the Company's business, results of operations and financial condition. Failure of the Company to develop and introduce, for technological or other reasons, new products and services in a timely and cost-effective manner could have a material adverse effect on the Company's business, results of operations and financial condition. Furthermore, the introduction or announcement of new product or service offerings or enhancements by the Company or the Company's competitors may cause customers to defer or forgo purchases of the Company's products or services, which could have a material adverse effect on the Company's business, results of operations and financial condition. See "-- Product Development." 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 currently located at a single site. The Company relocated operations to new leased facilities in Annapolis Junction, Maryland in late 1998. The new facilities, which include the Company's main data center, have become the primary production center for the Company's data processing needs. The Company currently does not have a separate back-up facility to mitigate certain substantial risks to the Company's operations, including temporary interruptions resulting from damage caused by any one or more of the foregoing factors or due to other causes including computer viruses, hackers or similar disruptive problems. While the Company maintains $1.6 million of property insurance coverage, business interruption insurance coverage, $2.0 million of errors and omissions insurance coverage and $10.0 million of umbrella insurance coverage, such insurance may not be adequate to compensate the Company for all 14 losses that may occur or to provide for costs associated with system failure or business interruption. Any damage or failure that causes interruptions in the Company's operations could have a material adverse effect on the Company's business, results of operations and financial condition. Persistent problems continue to affect public and private data networks. For example, in a number of networks, hackers have bypassed firewalls and have appropriated confidential information. Such computer break-ins and other disruptions may jeopardize the security of information stored in and transmitted through the computer systems of the parties utilizing the Company's services, which may result in significant liability to the Company and also may deter potential customers from using the Company's services. In addition, while the Company attempts to be careful with respect to the employees it hires and maintain controls through software design and security systems to prevent unauthorized employee access, it is possible that, despite such safeguards, an employee of the Company could obtain access, which would also expose the Company to a risk of loss or litigation and possible liability to users. The Company attempts to limit its liability to customers, including liability arising from the failure of the security features contained in the Company's system and services, through contractual provisions. However, there can be no assurance that such limitations will be enforceable. There can be no guarantee that the growth of the Company's customer base will not strain or exceed the capacity of its computer and telecommunications systems and lead to degradations in performance or system failure. Any damage, failure or delay that causes interruptions in the Company's operations could have a material adverse effect on the Company's business, results of operations and financial condition. Risk of Defects, Development Delays and Lack of Market Acceptance Software products and services as sophisticated as those offered by the Company often encounter development delays and may contain defects or failures when introduced or when new versions are released. The Company has in the past and may in the future experience significant 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 and may result in additional development costs. 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 or in future releases or enhancements. The Company may continue to 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. See "-- Products and Services" and "-- Product Development." Future Capital Needs; Uncertainty of Additional Financing The Company currently anticipates that its available cash resources combined with anticipated funds from operations and its bank line of credit will be sufficient to meet its presently anticipated working capital and capital expenditure and debt repayment requirements through 2001. Thereafter, in the event that the proposed merger with First American is not completed, 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 shareholders of the Company will be reduced, shareholders 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. See "Management's Discussion and Analysis of Financial Condition and Results of 15 Operations-- Liquidity and Capital Resources." 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 may not itself be 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' or the Company's compliance with current regulations and to address changes in customers' or the Company's regulatory environments, 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 Shareholders Assuming no exercise of outstanding options, James R. DeFrancesco co- founder and Director of the Company, and Scott L. Freiman, the Company's President and Chief Executive Officer, collectively beneficially own approximately 49% of the outstanding shares of Common Stock. As a result, these stockholders will be able to exercise control over matters requiring shareholders 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, including the upcoming vote on the Company's proposed merger with First American. With regard to the vote on the First American merger, Messrs. DeFrancesco and Freiman have executed Voting Agreements with respect to shares representing, in the aggregate, approximately 49% of the outstanding shares of Common Stock, pursuant to which they have agreed to vote for the merger. This may prevent or discourage competing offers to acquire the Company's Common Stock. Possible Volatility of Stock Price The trading price of the Company's Common Stock has in the past and may in the future be subject to significant fluctuations in response to variations in quarterly operating results, changes in earning estimates by analysts, the gain or loss of significant orders, 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. Furthermore, the price of the Company's Common Stock may fluctuate as a result of fluctuations in the market price of First American's Common Stock. 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 to or related to that of the Company and which have been unrelated to the operating performance of these companies. These market fluctuations may adversely affect the market price of the Company's Common Stock. Effect of Certain Charter Provisions; Antitakeover Effects of Certificate of Incorporation, Bylaws and Delaware Law The Company's Board of Directors has the authority to issue up to 1,000,000 shares of Preferred Stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights of those shares, without any further vote or action by the stockholders. The Preferred Stock could be issued with voting, liquidation, dividend and other rights superior to those of the Common Stock. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the 16 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. The Company currently has no plans to issue Preferred Stock, and the Merger Agreement with First American substantially limits the Company's ability to issue equity securities without the prior consent of First American. Item 2. Properties. The Company's principal executive offices are located in Annapolis Junction, Maryland in a leased facility consisting of approximately 71,000 square feet of office space under lease that expires in 2008. The Company additionally has the right to either one five-year or one three-year renewal option. The Company has a right of first refusal on additional office space in the same building. The Company previously occupied approximately 55,000 square feet of office space in Columbia, Maryland under several leases that expire in 2002. As of December 31, 2000, the Company subleases to others but remains liable for approximately 10,000 square feet of the previously occupied space. In early 2000 the Company entered into a lease for approximately 4,000 square feet of office space in the Hunt Valley, Maryland area. In December 2000 the Company entered into a lease for approximately 1,500 square feet of office space in the Gaithersburg, Maryland area. Item 3. Legal Proceedings. No material legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. 17 Market Information The Company's Common Stock is traded on the Nasdaq National Market under the symbol "CMSS." The following table sets forth, for the calendar periods indicated, the range of high and low bid quotations as reported by the Nasdaq National Market. These quotations reflect inter-dealer prices, without retail mark-up, markdown or commission and may not necessarily represent actual transactions.
Stock Price ------------------- High Low ------ ----- Calendar Year 1999: First Quarter $ 5.75 $3.63 Second Quarter $ 5.00 $3.50 Third Quarter $ 7.75 $4.50 Fourth Quarter $ 9.00 $3.88 Calendar Year 2000: First Quarter $14.50 $7.25 Second Quarter $ 8.50 $3.63 Third Quarter $ 5.75 $3.75 Fourth Quarter $ 4.25 $0.88
On March 23, 2000, the last reported sales price for the Company's common stock on the Nasdaq National Market was $6.00. Holders As of March 29, 2001, the approximate number of registered shareholders of record of the Common Stock was 190. Dividends The Company has not paid any cash dividends since its inception, and does not anticipate paying any cash dividends in the foreseeable future. The Company currently intends to retain any future earnings for use in its business. In addition, the Company's bank line of credit prohibits the payment of cash dividends without the bank's prior written consent, and the Merger Agreement with First American prohibits the payment of dividends without First American's prior written consent. Item 6. Selected Financial Data. The consolidated statement of operations data set forth below for the fiscal years ended December 31, 1996, 1997, 1998, 1999 and 2000 and the consolidated balance sheet data at December 31, 1996, 1997, 1998, 1999 and 2000 have been derived from the audited consolidated financial statements of the Company. The consolidated balance sheets at December 31, 1999 and 2000, and the consolidated statement of operations for each of the years in the three year period ended December 31, 2000, together with the notes thereto and the related report of Ernst & Young LLP, are included elsewhere in this Report. The selected financial data set forth below are qualified in their entirety by, and should be read in conjunction with, the consolidated financial statements, the related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Report. 18
Year Ended December 31, -------------------------------------------------------------------- 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- Statement of Operations Data: Revenues License and software development fees $10,101,377 $11,549,378 $ 10,186,421 $12,872,321 $12,349,667 Maintenance fees 2,045,258 3,311,013 4,294,572 5,059,352 6,442,967 Computer hardware sales 2,106,634 1,656,530 776,790 1,248,615 972,337 Service bureau revenues -- 640,818 1,644,991 3,594,717 5,408,256 ----------- ----------- ------------ ----------- ----------- 14,253,269 17,157,739 16,902,774 22,775,005 25,173,227 Costs of revenues Cost of license and software development fees 5,095,814 7,329,091 6,988,649 6,504,519 7,323,375 Cost of maintenance fees 452,559 880,360 1,108,367 940,091 1,402,122 Cost of computer hardware sales 1,782,166 1,504,915 952,662 1,528,243 1,201,837 Cost of service bureau -- 2,085,543 3,398,453 3,038,483 4,595,746 Selling, general and Administrative expenses 6,126,494 8,537,967 12,823,909 12,122,557 12,011,636 Research and development costs 526,521 1,790,709 1,964,057 1,458,331 758,440 ----------- ----------- ------------ ----------- ----------- 13,983,554 22,128,585 27,236,097 25,592,224 27,293,156 ----------- ----------- ------------ ----------- ----------- Income (loss) from operations 269,715 (4,970,846) (10,333,323) (2,817,219) (2,119,929) Other income (expense) Interest income (expense) net (78,009) 1,181,411 763,292 262,443 211,351 Amortization of excess of assigned value of identifiable assets over cost of an acquired interest 304,749 50,792 -- -- -- ----------- ----------- ------------ ----------- ----------- 226,740 1,232,203 763,292 262,443 211,351 ----------- ----------- ------------ ----------- ----------- Income (loss) before income taxes $ 496,455 $(3,738,643) $ (9,570,031) $(2,554,776) $(1,908,578) Income tax expense 201,487 -- -- -- -- ----------- ----------- ------------ ----------- ----------- Net income (loss) $ 294,968 $(3,738,643) $ (9,570,031) $(2,554,776) $(1,908,578) =========== =========== ============ =========== =========== Basic earnings (loss) per common share $ 0.06 $ (0.49) $ (1.25) $ (0.33) $ (0.24) Diluted earnings (loss) per common share $ 0.05 $ (0.49) $ (1.25) $ (0.33) $ (0.24)
19
---- ---- ---- ---- ---- 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- Balance Sheet Data: Cash and cash equivalents $23,501,633 $20,569,300 $ 3,090,565 $ 3,594,328 $ 1,588,133 Investments available-for-sale -- -- 6,482,021 1,316,470 2,529,097 Working capital 21,056,337 19,502,516 6,450,498 4,240,019 2,101,403 Total assets 28,451,530 28,956,723 25,109,676 19,492,590 20,264,500 Long term debt and other lease obligations, less current portion 220,341 101,390 761,092 -- -- Shareholders' equity 22,587,896 23,211,385 13,849,643 11,476,121 10,305,550
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company's results of operations and financial condition. The discussion should be read in conjunction with the audited consolidated financial statements of the Company and notes thereto. The discussion contains certain statements of a forward- looking nature relating to future events or the future financial performance of the Company. Investors are cautioned that such statements are only predictions and that actual events or results may differ materially. In evaluating such statements, investors should carefully consider the various factors identified in this Report which could cause actual results to differ materially from those indicated by such forward-looking statements, including the matters set forth in "Business -- Risk Factors." General The Company was incorporated in 1987 to commercialize an automated credit processing system developed by James R. DeFrancesco, the Company's co-founder, and Scott L. Freiman, the Company's President, Chief Executive Officer and co- founder, while they were employed by American Financial Corporation ("AFC"), an automobile finance servicing company owned by Mr. DeFrancesco. AFC was acquired in October 1987 by Perpetual Savings Bank, FSB. Mr. DeFrancesco and Mr. Freiman retained ownership of AFC's credit processing software which formed the basis for CreditRevue. CreditRevue was initially released in 1988. Since its initial release, the Company has continually enhanced CreditRevue in response to the needs of its customers. CreditConnection, the Company's online credit information and processing service, became commercially available in July 1996. The Dun & Bradstreet OneScore product was commercially released in October 1997, CreditRevue Service Bureau was introduced in January 1998, Dun & Bradstreet Portfolio Monitoring was introduced in June 1998 and the CreditOnline network was introduced in February 1999. In March 1999, the Company announced CreditRevue Maestro, an automated analysis engine for evaluating and decisioning consumer and small business credit applications. During 1999, the CreditRevue Maestro product was renamed eValuate. The Company currently expects eValuate to be released in the second quarter of 2001. Fees from licenses of CreditRevue and related maintenance fees and resales of third-party computer hardware and software associated with installations of CreditRevue accounted for the majority of the Company's revenue through December 31, 2000. See Business -- Risk Factors - Dependence on CreditRevue Product Line." License fees for CreditRevue are recognized based on a percentage-of- completion method, measured generally on a cost-incurred basis. The Company typically charges a nonrefundable fee of 25% of the preliminary estimate of the total license fee to develop an analysis of the customer's credit operations and a 20 plan for the configuration and implementation of CreditRevue according to the customer's requirements. At the completion of this initial contract phase, a client decides whether to proceed with a software license and system implementation or terminate the project. Historically, there have been very few projects terminated at the completion of the commencement phase of the project. Costs consist primarily of direct labor and temporary contract labor. Contracts in progress are reviewed periodically, and revenues and earnings are adjusted based on revisions in contract value and estimated costs to completion. For a description of certain risks associated with the lengthy implementation time associated with installations of CreditRevue, see "Business -- Risk Factors -- Lengthy Sales and Implementation Cycle." The Company recognizes revenue for maintenance fees pro rata over the term of the related agreement, which is generally one year. Maintenance fees received in advance of revenue recognition are included in deferred revenue. In addition, as a convenience to its customers, the Company offers third-party computer hardware through various reseller arrangements. However, neither third-party hardware nor third-party software sales are a focus of the Company's overall marketing strategy. For the year ended December 31, 2000, revenues from third-party hardware and software sales accounted for 3.9% and 4.0% of total revenues, respectively. Revenues from resales of third-party computer hardware and software are recognized at the time of shipment and installation. Certain of the Company's products and services, including the CreditConnection service, Dun & Bradstreet's OneScore, and the CreditOnline network, are charged on a per transaction basis. As a result, the Company anticipates that transaction-based revenue will represent an increasing proportion of the Company's revenue. The Company's sales and marketing efforts will no longer be exclusively targeted at generating license-based revenue but will be increasingly focused on generating transaction-based revenue from prospective customers. The Company's anticipated future growth is based, in large part, on the success of these products and services and the transition to a transaction-based revenue stream. Accordingly, the failure by the Company to generate demand for the CreditConnection service, Dun & Bradstreet's OneScore, Dun & Bradstreet Portfolio Monitoring, CreditOnline network, eValuate, the occurrence of any significant technological problems, such as a system failure incurred prior to the implementation of a fully functioning back-up computer system, any inadequacy of the Company's business interruption insurance to cover costs associated with system failure or business interruptions, or the failure of the Company to successfully manage the transition to a transaction-based revenue stream could have a material adverse effect on the Company's business, results of operations and financial condition. See "Business -- Risk Factors -- Market Acceptance of CreditOnline and CreditConnection; Transition to Transaction-Based Revenue" and "-- System Interruption and Security Risks; Potential Liability; Possible Lack of Adequate Insurance; and System Inadequacy." Since 1987, the Company has continually invested in the development and introduction of new products, services and enhancements to its software. Research and development expenditures are expensed as incurred. Certain software development costs are capitalized subsequent to the establishment of technological feasibility in accordance with Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. Based on the Company's current research and development process, technological feasibility is established upon completion of a detailed design. The Company intends to continue to expend substantial resources on developing new products and services and enhancements to its software to incorporate technological developments and satisfy evolving customer needs. Results of Operations The following table sets forth certain operating data as a percentage of total revenues for the periods indicated (subtotals not adjusted for rounding): 21
Year Ended December 31, ------------------------------- 1998 1999 2000 ---- ---- ---- Percentages of Total Revenues Revenues License and software development fees 60.3 57.8 49.1 Maintenance fees 25.4 22.2 25.6 Computer hardware sales 4.6 5.5 3.8 Service bureau fees 9.7 14.5 21.5 ----- ----- ----- 100.0 100.0 100.0 ----- ----- ----- Costs and Expenses Cost of license and software development fees 41.3 28.6 29.1 Cost of maintenance fees 6.6 4.1 5.6 Cost of computer hardware sales 5.6 6.7 4.8 Cost of service bureau fees 20.1 13.3 18.3 Selling, general and 75.9 53.2 47.6 administrative expenses Research and development costs 11.6 6.4 3.0 ----- ----- ----- 161.1 112.4 108.4 ----- ----- ----- Loss from operations (61.1) (12.4) (8.4) Other income Interest income, net 4.5 1.2 0.8 ----- ----- ----- 4.5 1.2 0.8 ----- ----- ----- Net loss (56.6) (11.2) (7.6) ===== ===== =====
Total Revenues Total revenues increased 34.7% from $16.9 million in 1998 to $22.8 million in 1999, and increased 10.5% from $22.8 million in 1999 to $25.2 million in 2000. The Company's revenues are derived from four sources: license and software development fees, maintenance fees, computer hardware sales, and service bureau fees. The Company's ten largest customers accounted for 55.1% and 56.6% of total revenues in 1999 and 2000, respectively. None of the Company's customers accounted for 10% or more of total revenues in 1999 and one of the Company's customers accounted for 10% or more of total revenues in 2000. Growth in the Company's professional consulting, maintenance and service bureau revenues contributed to the year-to-year growth in total revenues from 1999 to 2000. License and Software Development Fees CreditRevue accounted for the majority of the Company's license and software development fee revenue through December 31, 2000. License and software development fees increased 29.2% from $10.2 million in 1998 to $13.2 million in 1999, and decreased 6.2% from $13.2 million in 1999 to $12.3 million in 2000. The increase in 1999 was primarily the result of signing, in late 1998, nine new contracts for CreditRevue with an aggregate contract value of approximately $7 million. Work on these new contracts began in late 1998 and early 1999 with the completion of many of these projects running into late 1999. Longer sales cycles and fewer new license sales in 1999 and 2000 resulted in a decline in pure license revenue in 2000. A large portion of the decrease in license revenue was offset by increases in software development fees generated by the Company's professional services staff on a time and material basis. From 1999 to 2000, pure license revenues decreased approximately $2.4 million, while at the same time 22 software development fees increased approximately $1.3 million. Maintenance Fees Maintenance fees include fees from software maintenance agreements. Maintenance fees increased 17.8% from $4.3 million in 1998 to $5.1 million in 1999, and 27.3% from $5.1 million in 1999 to $6.4 million in 2000. The growth in these revenues during the periods presented was primarily the result of increased maintenance fees associated with the increased number of licenses of CreditRevue outstanding during such periods. Enhancements to previously installed CreditRevue systems performed by the Company's professional services staff are also subject to maintenance and contribute to growth in maintenance revenues. Computer Hardware Sales Computer hardware sales revenue increased 60.7% from $0.8 million in 1998 to $1.2 million in 1999, and decreased 22.1% from $1.2 million in 1999 to $1.0 million in 2000. Computer hardware sales revenue consists of revenues received from resales of third-party hardware in connection with the license and installation of the Company's software. The fluctuation in such revenues during these periods is the result of customer purchase preferences for computer hardware systems. In certain instances, CreditRevue customers have volume discount arrangements with hardware resellers making them eligible for discounts greater than those offered by the Company. Service Bureau Fees Service bureau revenues originate from the CreditConnection service transaction and interface fees, from Dun & Bradstreet OneScore and Portfolio Monitoring transaction fees, CreditRevue Service Bureau fees, from transaction fees related to dedicated electronic interfaces implemented for CreditRevue customers and the resale on a transaction basis of third party value guides. CreditConnection service related revenues increased 68.3% from $1.3 million in 1998 to $2.1 million in 1999 and increased 119.1% from $2.1 million in 1999 to $4.6 million in 2000. Revenue increases are the result of increases in the number of dealers and lenders enrolled in the CreditConnection service and the resulting growth in transaction volume. At December 31, 2000, there were approximately 350 dealers enrolled in the service compared to approximately 250 dealers at December 31, 1999, and approximately 150 dealers at December 31, 1998. As of December 31, 2000, there were approximately 24 lenders connected to the CreditConnection service, compared to 22 at December 31, 1999, and 21 at December 31, 1998. Dun & Bradstreet related revenues decreased slightly from $0.4 million in 1999 to $0.3 million in 2000. The Dun & Bradstreet OneScore service was commercially released in the fourth quarter of 1997 and the Portfolio Monitoring Service was released in June of 1998. The CreditRevue Service Bureau was released in January 1998, but did not go into full production until January 1999. During 1999, CreditRevue Service Bureau revenues were $0.8 million. Due to the substantial costs of continued development and support for the CreditRevue service bureau model, the Company decided to change its strategy and discontinue further sales of the CreditRevue Service Bureau product during 2000. Accordingly, CreditRevue Service Bureau revenues in 2000 declined to $0.7 million and are expected to cease entirely in 2001. Cost of License and Software Development Fees Cost of license and software development fees consist primarily of salaries and benefits for in-house programmers and the cost of temporary contract labor. Cost of license and software development fees decreased 6.9% from $7.0 million in 1998 to $6.5 million 23 in 1999, and increased 12.6% from $6.5 million in 1999 to $7.3 million in 2000. As a percentage of license and software development fees, cost of license and software development fees were 68.6%, 49.4% and 59.3% in 1998, 1999 and 2000, respectively. The changes in cost of license and software fees as a percentage of license and software development fees over these periods is related to the fluctuation in the Company's quarterly revenues and hourly labor costs associated with temporary contractors during periods in which the Company experienced increased demand for its products. With respect to temporary contractors, the Company's costs on a full-time equivalent basis for these contractors is generally twice the amount incurred by the Company for its in- house technical personnel. The increase in license contract sales in late 1998 created demand for the internal resources and enabled the Company to better manage staff utilization during 1999, resulting in lower implementation costs per revenue dollar. The sales cycle for license software is often difficult to predict accurately. The skills and knowledge required to perform the licensed software implementation requires the Company to maintain certain levels of specialized staffing, occasionally creating production capacity in excess of sales demand which can result in higher costs and lower margins. In 2000, when license contract sales declined, the cost of retaining staff with the specialized skills and knowledge required to perform license implementations resulted in increased costs per dollar of license and software development fees. Additionally, the increase in lower margin software development fees as a percent of license revenue contributed further to the increase in costs of license and software development as a percentage of related revenues. Cost of Maintenance Fees Cost of maintenance fees consists primarily of personnel and related costs for customer maintenance and support. Cost of maintenance fees decreased 15.2% from $1.1 million in 1998 to $0.9 million in 1999, and increased 49.1% from $0.9 million in 1999 to $1.4 million in 2000. As a percentage of maintenance fee revenue, cost of maintenance fees was 25.8%, 18.6% and 21.8% in 1998, 1999 and 2000, respectively. The fluctuation in the percentage of cost of maintenance fees to maintenance fee revenues in 1998, 1999 and 2000 is primarily the result of incremental increases in staffing for maintenance personnel as maintenance revenues have increased. Staffing utilization efficiencies will vary based on the timing and training of additions to maintenance staff personnel. Cost of Computer Hardware Sales Cost of computer hardware sales consists of (i) the Company's cost of computer hardware resold to the Company's customers that are licensing CreditRevue and (ii) salaries and benefits for systems integration employees. Cost of computer hardware sales increased 60.4% from $1.0 million in 1998 to $1.5 million in 1999, and decreased 21.4% from $1.5 million in 1999 to $1.2 million in 2000. As a percentage of computer hardware sales revenue, cost of computer hardware sales was 122.6%, 122.4% and 123.6% in 1998, 1999 and 2000, respectively. The dollar fluctuation in the cost of computer hardware sales reflects the fluctuation in computer hardware sales during the periods presented. The Company's margin on computer hardware sales fluctuates based on changes in product sales mix, volume discounts to significant customers and negotiated mark-ups with customers. In many instances, hardware revenues may not be large enough to offset both the direct cost and the hardware being sold as well as certain fixed costs associated with the salaries and benefits for systems integration employees, thereby resulting in negative margins. Cost of Service Bureau Revenues Cost of service bureau revenues consists primarily of personnel costs associated with the operation and support of the service bureau. Other costs of service bureau revenues include equipment rental expenses, communications network costs from third parties and hardware and software pass through expenses. Service bureau costs decreased 10.6% from $3.0 million in 1998 to $3.0 million in 1999 and increased 51.3% from $3.0 million in 1999 to $4.6 million in 2000. As a percentage of service bureau revenue, cost of service bureau sales was 206.6%, 84.5% and 85.0% in 1998, 1999 and 2000, respectively. 24 The decreases in service bureau costs in 1999 were related to improved staffing utilization and efficiencies related to the new data center operations which commenced production early in 1999 following the Company's relocation to Annapolis Junction from Columbia, Maryland. The increases in service bureau costs in 2000 relate to the increases in service bureau revenues in 2000. As a percent of service bureau revenues, service bureau costs remained flat at 85.0% in 2000 and 1999. Selling, General and Administrative Expenses Selling, general and administrative expenses decreased 5.5% from $12.8 million in 1998 to $12.1 million in 1999, and decreased 0.92% from $12.1 million in 1999 to $12.0 million in 2000. Selling, general and administrative expenses as a percent of total revenues were 75.9%, 53.5% and 47.7% in 1998, 1999 and 2000 respectively. The decrease in selling, general and administrative expenses in 1999 was primarily the of result of reductions to office expense (approximately $1.0 million), and the non-recurrence of one-time expenses related to the Company's relocation in 1998 (approximately $0.9 million). The reduction in office expense relates to subleasing the Company's former offices which resulted in the recovery of approximately $1.0 million of the reserve recorded in 1998. The decline in selling, general and administrative expenses in 2000 resulted primarily from the reduction in selling, general and administrative staffing from 24 employees in 1999 to 22 employees in 2000. The other major contributor to the reduction in selling, general and administrative costs was telecommunications expense which decreased by approximately $0.4 million as a result of entering into longer term usage agreements at more favorable rates. Research and Development Costs Research and development costs consist primarily of salaries and benefits of in-house programmers. These costs decreased $0.5 million or 25.7%, from $2.0 million in 1998 to $1.5 million in 1999 and decreased $0.7 million, or 48.0%, from $1.5 million in 1999 to $0.8 million in 2000. These reductions are due in part to the capitalization of certain software development expenses. The capitalized expenses include the direct payroll costs of certain programmers and certain third party development expenses. During 1998, approximately $0.3 million of costs associated with the development of eValuate expenses were capitalized. During 1999, approximately $1.7 million of eValuate expenses were capitalized, resulting in lower year to year research and development expenses being recorded. During 2000 approximately $1.7 million of eValuate expenses were capitalized. See Note 1 of the Notes to Consolidated Financial Statements. Other factors contributing to the reduction of research and development costs include the discontinuation of the CreditRevue service bureau product and the organization of various development initiatives into smaller, more streamlined and efficient development teams. Interest Income (Expense) Interest expense was $0.1 million in both 1999 and 2000. Interest income was $0.3 million in both 1999 and 2000. The interest expense reported in 1999 and 2000 relates to borrowings under the Company's line of credit and obligations under capital lease. The interest income reported in 1999 and 2000 results from invested proceeds from the Company's initial public offering. 25 Income Tax Expense From its inception in 1987 until its reincorporation in Delaware in November 1996, the Company had been treated for income tax purposes as a corporation subject to federal and state taxation under Subchapter S of the Internal Revenue Code of 1986, as amended and comparable state laws. As a result, for federal and state income tax purposes, the Company's earnings had been taxed directly to the Company's shareholders. Upon termination of the Company's Subchapter S status in November 1996, the Company determined the differences between the financial reporting and income tax bases of its assets and liabilities, and recorded at that date the resulting deferred tax liability and income tax expense. Income tax amounts and balances are accounted for in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. At December 31, 2000, the Company had net operating loss carryforwards of approximately $21.1 million which will begin to expire in 2011. See Note 2 to the Consolidated Financial Statements for more information regarding the Company's income tax status. Liquidity and Capital Resources The Company has funded its working capital needs and investments in property and equipment from operating cash flows and approximately $22.1 million of net proceeds from the Company's initial public offering completed in December 1996. During 1998 and 1999, the Company's operations consumed cash of $7.3 million and $3.4 million, respectively. During 2000, the Company's operations generated cash of $1.1 million. The cash flow deficiencies during 1998 and 1999 were primarily caused by operating losses, an increase in accounts receivable in 1998 and a decrease in accounts payable in 1999. In 2000, reduced operating losses, and increases in accounts payable and deferred revenue contributed to the generation of cash from operations. The Company's cash used for investing activities consists principally of investments in property and equipment and capitalized software development costs. During the years ended December 31, 1998, 1999 and 2000, the Company invested a total of $4.3 million, $2.2 million and $2.6 million, respectively, in property and equipment and capitalized software development costs. These investments were directly attributable to the Company's growth in operations. The Company did not have any material commitments for the purchase of property and equipment at December 31, 2000. The Company has relied principally on its bank line of credit and proceeds from its initial public offering completed in December 1996 for its financing needs. The Company received $22.1 million of net proceeds from its initial public offering. The Company maintains a secured bank line of credit in the amount of $1.5 million. At December 31, 2000, there was an outstanding balance of approximately $0.8 million on the line of credit. The bank line of credit requires the bank's written consent prior to, among other things, (i) the payment of cash dividends, (ii) the Company's engagement in a substantially different business activity, or (iii) the purchase by the Company of any interest in another enterprise or entity. The Company currently anticipates that its available cash resources, expected cash flows from operations and its bank line of credit will be sufficient to meet its presently anticipated working capital, capital expenditure and debt repayment requirements through 2001. The Company has entered into an Agreement and Plan of Merger with First American and its wholly-owned subsidiary which substantially limits the Company's ability to incur indebtedness without the consent of First American. In addition, the Merger Agreement generally precludes the issuance of debt or equity securities by the Company without the prior consent of First American. 26 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. The Company is exposed to market risk related to changes in interest rates. The Company invests its excess cash balances in cash equivalents and municipal, commercial and government agency obligations which are interest rate sensitive. However, the maturities of these obligations is less than one year, mitigating their sensitivity to interest rates. The Company believes that the effect, if any, of reasonably possible near-term changes in interest rates on the Company's financial position, results of operations and cash flows is not material. Item 8. Financial Statements and Supplementary Data. The information required by the item is incorporated herein by reference to the consolidated financial statements listed in Item 14 below and attached to this Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 27 PART III Item 10. Directors and Executive Officers of the Registrant. The directors and executive officers of the Company, their ages and their positions with the Company are as follows: NAME AGE POSITION - -------------------------------------------------------------------------------- Scott L. Freiman 38 President, Chief Executive Officer and Director Howard L. Tischler 47 Senior Vice President; President and Chief Executive Officer of Credit Online, Inc. Robert P. Vollono 52 Senior Vice President, Chief Financial Officer, Treasurer and Director John J. McDonnell, Jr 63 Chairman of the Board of Directors James R. DeFrancesco 52 Director Stephen X. Graham 48 Director Scott L. Freiman, a co-founder of the Company, has served as the Company's President and Chief Executive Officer since September 1999, and as a director since 1987. Mr. Freiman served as Executive Vice President of the Company from October 1987 to September 1999. From 1985 to 1987, Mr. Freiman served as Technology Director of American Financial Corporation, an automobile finance/leasing company, where he worked with Mr. DeFrancesco to develop the Company's credit origination software. Prior to 1985, Mr. Freiman served as a development engineer for IBM and AT&T Bell Laboratories. Howard L. Tischler has served since February 2000 as the Company's Senior Vice President and as President and Chief Executive Officer of the Company's subsidiary, Credit Online, Inc. From November 1999 to February 2000, Mr. Tischler served as General Manager of the Company's e-Commerce division, predecessor to Credit Online, Inc. From 1995 to 1999, Mr. Tischler was President of SunGard Healthcare, a wholly owned subsidiary of SunGard Data Systems, Inc. Mr. Tischler was President of the Healthcare Systems Group of Intelus Corporation from 1993 until the acquisition of Intelus by SunGard Data Systems in 1995. From 1986 to 1993, Mr. Tischler served as Executive Vice President and Vice President, Operations, for Intelus Corporation. Robert P. Vollono has served as the Company's Senior Vice President and Chief Financial Officer since April 1995, and as the Company's Treasurer and a director since October 1996. Since February 1999, Mr. Vollono has served as Chief Financial Officer of CMSI Systems, Inc. and Credit Online, Inc. From 1988 to April 1995, Mr. Vollono served as Vice President and Chief Financial Officer of Carey International, Inc., a transportation services company. From 1986 to 1988, Mr. Vollono served as Vice President and Chief Financial Officer of Commercial Office Environments, Inc. John J. McDonnell, Jr. has served as a director since November 1996, and as Chairman of the Board since September 1999. Mr. McDonnell has served as a General Partner of McDonnell & Associates Investment Co., L.P., a private investment company, since September 2000. From February 2000 to September 2000, Mr. McDonnell served as President and Chief Executive Officer of Paylinx Corporation, a leading provider of Internet payment solutions. Mr. McDonnell served as President, Chief Executive Officer and a director of Transaction Network System, Inc., a nationwide communications network company specializing in transaction-oriented data services from 1990 until its acquisition by PSInet, Inc. in November 1999. From 1987 to 1989, Mr. McDonnell served as President and Chief Executive Officer of Digital Radio Network, Inc., a local access carrier for point-of-sale transactions. Mr. McDonnell has previously served as Group Vice President for the Information Technologies and Telecommunications Group of the Electronic Industries Association (EIA); Vice President, International Operations and Vice President, Sales, for Tymnet, Inc. with the responsibility for both private network sales and public services; and Director of Technology and Telecommunications for the National Commission on Electronic Funds Transfer. Mr. McDonnell was one of the founding members and is currently a member of the Executive Committee of the Board of Directors of the Electronics Funds Transfer Association. Mr. McDonnell currently serves on the Boards of Directors of Intelidata Data Technologies Corp., and CyberSource Corporation, as well as several private companies. 28 James R. DeFrancesco, a co-founder of the Company, has served as a director of the Company since 1987. Mr. DeFrancesco served as the Company's Chief Executive Officer from 1987 to May 1999, as Chairman of the Board of Directors from 1987 to September 1999 and as President from 1987 to 1998. Since 1989, Mr. DeFrancesco has served as the President of Businessliner, Inc., a company which leases an airplane to the Company for business travel. From August 1997 to May 1999, Mr. DeFrancesco served as a Vice President of D & R Investments, L.L.C., a company that leased an airplane to the Company for business travel during that period. From 1986 to April 1999, Mr. DeFrancesco served as President of Financial Design Systems, a software company. From 1987 to 1992, Mr. DeFrancesco served as President of Perpetual Leasing Services, Inc., the automobile leasing subsidiary of Perpetual Savings Bank, FSB. From 1976 to 1987, Mr. DeFrancesco founded and served as President and Chief Executive Officer of American Financial Corporation, an automobile finance/leasing company. Stephen X. Graham has served as a director since October 1996. Since 1998, he has been the President and Chief Executive Officer of Cross Hill Financial Group, Inc., a private investment banking firm. From 1988 to 1998, Mr. Graham served as President of Graham, Hamilton & Co., which merged into Cross Hill in 1998. Since 1996, Mr. Graham has also served as Chief Executive Officer of Prestwick Scientific Capital. From 1982 to 1988 Mr. Graham was a Vice President of Kidder, Peabody & Co. Section 16(a) Beneficial Ownership Reporting Compliance Under the securities laws of the United States, the Company's directors and executive officers, and any persons holding more than ten percent of the Company's Common Stock, are required to report their ownership of the Company's Common Stock and any changes in that ownership to the Securities and Exchange Commission. Specific due dates for these reports have been established and the Company is required to report in this Report any failure to file by these dates during 2000. Based solely on its review of such reports received by it from such persons for their 2000 transactions, the Company believes that all directors, executive officers and beneficial owners of more than ten percent of the Company's Common Stock were in compliance with all such filing requirements. 29 Item 11. Executive Compensation. Summary Compensation Table The following table provides certain summary information concerning the compensation earned by each person who served as an executive officer of the Company during the fiscal year ended December 31, 2000, for services rendered in all capacities to the Company and its subsidiaries for the fiscal years ended December 31, 1998, 1999 and 2000. The listed individuals shall be hereinafter referred to as the "Named Executive Officers".
Annual Long-Term Compensation Compensation ----------------------------------------------------------------- Securities Other Annual Underlying All Other Name and Principal Fiscal Salary Bonus Compensation Options Compensation Position Year ($) ($) ($) (1) (#)(2) ($) - ------------------------------------------------------------------------------------------------------------------ Scott L. Freiman 2000 207,047 5,000 -- -- 9,854(3) Chief Executive Officer 1999 189,070 -- -- 24,000 6,000(4) and President 1998 192,923 -- -- -- 6,000(4) - ------------------------------------------------------------------------------------------------------------------ Howard L. Tischler 2000 164,032 32,000 -- -- 7,530(5) Senior Vice President; 1999 5,000 -- -- -- 1,000(4) President and Chief Executive 1998 -- -- -- -- -- Officer of Credit Online, Inc. - ------------------------------------------------------------------------------------------------------------------ Robert P. Vollono 2000 173,847 5,000 -- -- 7,589(6) Senior Vice President, 1999 155,968 -- -- 24,000 -- Treasurer and 1998 159,769 -- -- -- -- Chief Financial Officer - ------------------------------------------------------------------------------------------------------------------ Miles H. Grody 2000 174,924 5,000 -- -- 9,356(8) Senior Vice President; 1999 157,220 -- -- 24,000 -- President and Chief Executive 1998 158,654 -- -- -- -- Officer of CMSI Systems, Inc.(7)
(1) Other compensation in the form of perquisites and other personal benefits has been omitted as the aggregate amount of such perquisites and other personal benefits did not exceed the lesser of $50,000 or 10% of the total annual salary and bonus for the executive officer for such year. (2) The Company did not grant any stock appreciation rights or make any long- term incentive plan payments to any Named Executive Officer in 2000, 1999 or 1998. (3) Consists of an automobile allowance of $6,000 and $3,854 in matching contributions to the Company's 401(k) plan. (4) Consists of an automobile allowance. (5) Consists of an automobile allowance of $6,000 and $1,530 in matching contributions to the Company's 401(k) plan. (6) Consists of an automobile allowance of $6,000 and $1,589 in matching contributions to the Company's 401(k) plan. (7) Mr. Grody departed from his positions as an executive officer of the Company effective as of March 2, 2001. (8) Consists of an automobile allowance of $6,000 and $3,356 in matching contributions to the Company's 401(k) plan. 30 Option Grants in Last Fiscal Year No stock options or stock appreciation rights were granted to the Named Executive Officers during the last fiscal year. Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values The following table sets forth certain information with respect to the Named Executive Officers regarding stock option holdings as of December 31, 2000. No stock options were exercised by any Named Executive Officer during 2000. No stock appreciation rights were exercised by any Named Executive Officer during 2000 and no stock appreciation rights were outstanding as of December 31, 2000.
Number of Securities Underlying Unexercised Options at Fiscal Value of Unexercised In-The-Money Year-End (#) Options at Fiscal Year-End ($)(1) - --------------------------------------------------------------------------------------------------------- Name Exercisable Unexercisable Exercisable Unexercisable - --------------------------------------------------------------------------------------------------------- Scott L. Freiman 6,000 18,000 -- -- Robert P. Vollono 351,382 58,598 -- -- Howard L. Tischler 80,682 294,318 -- -- Miles H. Grody 351,382 58,598 -- --
(1) Based upon the closing selling price of the Company's Common Stock as reported on the Nasdaq National Market, of $1.13 per share on December 29, 2000. Compensation of Directors Cash Compensation. Employee directors do not currently receive a fee for attending Board of Directors or committee meetings, but are reimbursed for ordinary and necessary travel expenses related to such director's attendance at Board of Directors and committee meetings. Each non-employee director is paid $2,000 for each meeting of the Board of Directors or any committee thereof attended. Commencing in January 2000, each of Stephen Graham and John McDonnell were granted annual retainers of $24,000. Both Messrs. Graham and McDonnell have elected to apply 100% of their 2000 annual retainer fee to the acquisition of a special stock option grant pursuant to the Director Fee Option Grant Program under the Company's 1997 Stock Incentive Plan. Stock Option Grant. Pursuant to the Company's 1997 Stock Incentive Plan, each non-employee director is automatically granted a non-qualified stock option to purchase 5,000 shares of Common Stock upon such director's initial election to the Board of Directors and on each anniversary of such election while still serving on the Board of Directors. Such options vest 50% six months from the date of grant and 50% over six successive equal monthly installments thereafter. Directors who are employees of the Company do not receive any compensation as directors of the Company beyond that paid to them on account of their services as employees of the Company. On October 10, 2000, Mr. Graham was granted options to buy 5,000 shares of the Company's Common Stock at an option price of $3.313 per share. On November 15, 2000, Mr. McDonnell was granted options to buy 5,000 shares of the Company's Common Stock at an option price of $2.75 per share. These options vest 50% six months from date of grant and 50% over six successive equal monthly installments thereafter. 31 Employment Contracts, Termination of Employment and Change in Control Arrangements During 2000, the Company entered into employment agreements with each of Scott Freiman, Howard Tischler, Miles Grody and Robert Vollono, pursuant to which the Company agreed to continue to employ such persons as President and Chief Executive Officer of the Company, President and Chief Executive Officer of Credit Online, Inc., President and Chief Executive Officer of CMSI Systems, Inc. and Chief Financial Officer of the Company, respectively. The agreements provide for the payment of a minimum annual salary of $220,000 to Mr. Freiman and $175,000 to each of Messrs. Tischler, Grody and Vollono, subject to increase at the discretion of the Company. Each agreement provides for the payment of bonuses in the Company's sole discretion, based upon criteria determined by the Company. In addition, under each agreement the applicable executive is entitled to participate in all employee benefit plans provided by the Company from time to time, to receive 184 hours of paid leave per year of employment (two-thirds of which is considered to be vacation time), to be provided term life insurance with benefits equal to the executive's annual salary (up to a maximum of $400,000), a monthly automobile allowance of no less than $500, and reimbursement for all reasonable out-of-pocket expenses. If at any time the executive's employment under the agreement is terminated by the Company for any reason other than for cause or the executive resigns for good reason, then such executive will become entitled to the following severance benefits: (i) continued payment of his full salary for six months, (ii) continued medical, life and disability coverage for a period of six months, and (iii) immediate vesting of all of his outstanding stock options. If such termination or resignation occurs within a specified period of time before, or 18 months after, a change in control (as defined in the agreements) of the Company or an affiliate of the Company which employs the executive (the "Change In Control Period"), whether by merger, asset sale, tender or exchange offer for more than 50% of the outstanding voting securities of the Company or such affiliate, adoption by the Board (or the board of directors of such affiliate) of a plan of liquidation or a change in the majority of the Board (or the board of directors of such affiliate) by one or more contested elections, then the executive would instead become entitled to the following: (i) a lump sum payment equal to 2.99 times his average annual cash compensation during the previous five years (or such shorter period as he shall have been employed by the Company), (ii) upon his surrender of all rights to vested and unvested stock options granted to him by the Company, a lump sum payment equal to the difference between the exercise price of such options and the greater of the fair market value of the Common Stock on the date of the termination or the highest effective price paid for the Common Stock by any acquirer in connection with the change in control provided that if any acquiror of the Company elects to treat the transaction as a pading of interests for accounting purposes, then this benefit is deleted and replaced by immediate vesting of all outstanding options, (iii) continued medical, life and disability coverage for 12 months (or until he receives comparable coverage from a new employer, if sooner), and (iv) immediate vesting of all accrued retirement and deferred compensation plans. The Company's obligation to provide any such severance benefits is contingent upon the executive executing and delivering to the Company a general release of all claims against the Company, and is subject to reduction by the amount necessary to avoid the Company becoming subject to any excise tax under Section 4900 of the Internal Revenue Code and therefore not being able to take a federal tax deduction in connection with those benefits. In addition, all unvested stock options accelerate and vest in full upon a change of control. The term "cause" is defined under the agreements to include continued failure by the executive to perform his duties, conviction of a felony, willful or reckless misconduct which is injurious to the Company or any affiliate or the commission of fraud or malfeasance. The term "good reason" is defined to include a reduction in annual salary, the Company's failure to provide fringe benefits comparable to those offered to other executives, the failure of any successor to the Company to assume the Company's obligations under the employment agreements or a relocation of the executive's worksite to a location which increases the distance from his home to his worksite by more than 50 miles. Mr. Vollono is subject to a separate letter agreement pursuant to which his employment is to be terminated during the Change In Control Period in connection with the proposed merger with First American. He will then be entitled to receive severance benefits in accordance with his employment agreement. Mr. Grody's employment under his employment agreement terminated effective as of March 2, 2001. Mr. Grody was subject to a letter agreement similar to the one to which Mr. Vollono is subject. Accordingly, upon the consummation of the proposed merger with First American, Mr. Grody will be entitled to the severance benefits provided under his employment agreement in connection with a change in control. The Compensation Committee of the Board of Directors, as Plan Administrator of the Company's 1997 Stock Incentive Plan, has the authority to provide for accelerated vesting of the shares of Common Stock subject to any outstanding options held by the Chief Executive Officer or any other executive officer or any unvested share issuances actually held by such individual, in connection with certain changes in control of the Company or the subsequent termination of the officer's employment following the change in control event. Compensation Committee Interlocks and Insider Participation John J. McDonnell, Jr. and Stephen X. Graham served as members of the Company's compensation committee during 2000. Neither Mr. McDonnell nor Mr. Graham has been an officer or employee of the Company at any time. 32 Item 12. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of March 13, 2001 by (i) each stockholder known to the Company to beneficially own more than five percent of the outstanding shares of Common Stock, (ii) each director of the Company, (iii) each of the Named Executive Officers and (iv) all current executive officers and directors as a group. Unless otherwise indicated, the mailing address of each beneficial owner listed is 135 National Business Parkway, Annapolis Junction, Maryland 20701.
Amount and Nature Name of Beneficial Owner of Beneficial Ownership Percent of Class (1) (1) (2) - ------------------------------------------------------------------------------------------------------------------------ James R. DeFrancesco(3) 2,569,397 32.1 Scott L. Freiman(4) 1,362,160 17.0 Jon D. Gruber(5) 692,500 8.7 Cumberland Associates LLC(6) 688,000 8.6 J. Patterson McBaine(5) 651,800 8.2 Dolphin Offshore Partners, L.P.(7) 643,659 8.1 Eric B. Swergold(5) 614,900 7.7 Gruber & McBaine Capital Management, LLC(5) 610,000 7.6 Thomas O. Lloyd-Butler(5) 610,000 7.6 Miles H. Grody(8) 409,980 5.1 Robert P. Vollono(9) 351,407 4.2 John J. McDonnell, Jr. 226,400 2.8 Howard L. Tischler(10) 90,681 1.1 Stephen X. Graham(11) 29,721 0.4 All current executive officers and directors as a group (6 persons)(12) 4,629,766 54.8
(1) Gives effect to the shares of Common Stock issuable within 60 days of March 13, 2001, upon the exercise of all options and other rights beneficially owned by the indicated stockholders on that date. Unless otherwise indicated, the persons named in the table have sole voting and sole investment control with respect to all shares beneficially owned. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting and investment power with respect to shares. (2) Percent ownership is based upon 7,994,124 shares of Common Stock issued and outstanding as of March 29, 2001. (3) Includes an aggregate of 1,355,925 shares held by grantor retained annuity trusts established by Mr. DeFrancesco. Mr. DeFrancesco is the sole trustee of each of such trusts. In connection with the execution of the Merger Agreement, Mr. DeFrancesco and each of his grantor retained annuity trusts entered into a Voting Agreement with First American dated January 30, 2001, pursuant to which they must (i) vote their shares of Company Common Stock in favor of the approval and adoption of the Merger Agreement and the merger and any other matter or transaction reasonably required to effect the merger and other transactions contemplated by the Merger Agreement, and (ii) not vote those shares in favor of any competing proposal or any matter that could facilitate a competing proposal or impede the merger. Accordingly, Mr. DeFrancesco may be deemed to share voting power with respect to all of the shares held by him or any of his trusts. (4) Includes 6,000 shares of common stock issuable upon exercise of stock options exercisable within 60 days and 84,476 shares held by Mr. Freiman's wife and children, as to which Mr. Freiman disclaims 33 beneficial ownership. In connection with the execution of the Merger Agreement, Mr. Freiman entered into a Voting Agreement with First American dated January 30, 2001, pursuant to which Mr. Freiman must (i) vote the 1,271,684 shares held directly by him in favor of the approval and adoption of the Merger Agreement and the merger and any other matter or transaction reasonably required to effect the merger and other transactions contemplated by the Merger Agreement, and (ii) not vote those shares in favor of any competing proposal or any matter that could facilitate a competing proposal or impede the merger. Accordingly, Mr. Freiman may be deemed to share voting power with respect to such shares. (5) Pursuant to a Schedule 13D filed on August 2, 2000 with the Securities and Exchange Commission, Gruber & McBaine Capital Management, L.L.C. ("G&MCM") reported that as of that date it shared voting and dispositive power with respect to the 610,000 shares beneficially owned by it. Jon D. Gruber ("Gruber") and J. Patterson McBaine ("McBaine"), as managers of G&MCM,reported that they shared voting and dispositive powers with respect to the same 610,000 shares. In addition, Gruber reported having sole voting and dispositive power with respect to an additional 82,500 shares and McBaine reported having sole voting and dispositive power with respect to an additional 41,800 shares. Thomas Lloyd-Butler and Eric B. Swergold ("Swergold"), members of G&MCM, reported having shared voting and dispositive power with respect to the 610,000 shares. In addition, Swergold reported having sole voting and dispositive power with respect to an additional 4,900 shares. The mailing address of each of G & MCM, Gruber, McBaine, Thomas Lloyd-Butler and Swergold is 50 Osgood Place, Penthouse, San Francisco, California 94133 (6) Pursuant to a Schedule 13G filed February 14, 2001 with the Securities and Exchange Commission, Cumberland Associates LLC reported that as of December 31, 2000 it had sole voting power and dispositive power with respect to 634,650 of the shares and shared voting and dispositive power with respect to the remaining 53,350 shares. Cumberland Associates LLC's mailing address is 1114 Avenue of the Americas, New York, New York 10036. (7) Pursuant to a Schedule 13D filed on February 10, 2000 with the Securities and Exchange Commission, Peter E. Salas, as general partner of Dolphin Offshore Partners, L.P. ("DOP"), reported that as of December 31, 1999 he, as general partner of DOP, had sole voting and dispositive power with respect to all 643,659 shares. Mr. Salas's mailing address is c/o Dolphin Asset Management, 129 East 17th Street, New York, New York 10003. (8) Consists of shares of Common Stock issuable upon exercise of stock options. (9) Includes 25 shares held by Mr. Vollono's spouse and 351,382 shares of Common Stock issuable upon exercise of stock options. (10) Includes 80,681 shares of Common Stock issuable upon exercise of stock options. (11) Includes 20,000 shares of Common Stock issuable upon exercise of stock options. (12) See Notes (3),(4)and (9) through (11). Changes in Control As described under "Business - Recent Event" in Item 1 of this Report, the Company has entered into the Merger Agreement with First American. Item 13. Certain Relationships And Related Transactions. James R. DeFrancesco owns 50% of the outstanding stock, and is the President, of Businessliner, Inc. This Company leases airplanes to the Company for business travel. Businessliner pays an hourly fee for its use of each airplane and a portion of the monthly cost of maintaining the airplane. The Company believes that the amounts paid for the leases of the airplanes are comparable to the amounts the Company would have otherwise paid for comparable services from unaffiliated parties. For the fiscal year ended December 31, 2000, the Company paid Businessliner, Inc. $39,200 under this leasing arrangement. In addition, on May 20, 2000, the Company entered into a Consulting Agreement with Businessliner pursuant to which, effective as of January 1, 2000, Businessliner agreed to provide consulting services to 34 the Company and its affiliates, for an annual fee of $213,200. The term of the Consulting Agreement was originally scheduled to expire on December 31, 2000. On January 15, 2001, the Consulting Agreement was amended to extend the term through June 30, 2001. The parties have since agreed in principle that the term of the Consulting Agreement will expire on March 31, 2001. In addition, the information set forth under "Employment Contracts, Termination of Employment and Change in Control Arrangements" in Item 11 of this Annual Report is incorporated herein by reference. 35 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
Page Number _______ (a) Index to Consolidated Financial Statements Index F-1 Report of Independent Auditors F-2 Consolidated Balance Sheets as of December 31, 2000 and 1999 F-3 Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998 F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2000, 1999 and 1998 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 F-6 Notes to Consolidated Financial Statements F-7
(b) Financial Statement Schedules All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under The related instruction or are inapplicable and therefore have been omitted. (c) Reports on Form 8-K The Company did not file any Current Reports on Form 8-K during the fiscal quarter ended December 31, 2000. (d) Exhibits 2.1 Agreement and Plan of Merger by and among The First American Corporation, Rusti Corp. and the Company, dated as of January 30, 2001* 3.1 Certificate of Incorporation of the Company** 3.2 Bylaws of the Company** 4.1 Specimen certificate for Common Stock of the Company** 4.2 See Exhibits 3.1 and 3.2 for provisions of the Certificate of Incorporation 4 and Bylaws of the Company defining rights of holders of Common Stock of the Company 36 10.1 Form of Project Commencement Agreement** 10.2 Form of Software License Agreement** 10.3 Form of Software Maintenance Agreement** 10.4 Form of Professional Services Agreement** 10.5 Form of CreditConnection Lender Agreement (for CreditRevue Licensees)** 10.6 Form of CreditConnection Lender Agreement (for non-CreditRevue Licensees)** 10.7 Form of CreditConnection Dealer Subscription Agreement** 10.8.1 Office Building Lease between Symphony Woods Limited Partnership and the Company dated October 29, 1993** 10.8.2 Office Building Lease between Symphony Woods Limited Partnership and the Company dated February 10, 1995** 10.8.3 First Amendment to Lease dated March 29, 1995** 10.8.4 Second Amendment to Lease dated August 12, 1996** 10.8.5 135 National Business Parkway Lease between Constellation Real Estate, Inc. and the Company dated April 27, 1998**** 10.8.6 First Amendment of 135 National Business Parkway Lease dated December 23, 1998**** 10.9 Promissory Note dated December 31, 1995 given by the Company to James R. DeFrancesco** 10.10 Business Loan Agreement between The Columbia Bank and the Company dated June 10, 1994** 10.11 1996 Credit Management Solutions, Inc. Non-Qualified Stock Option Plan** 10.12 1996 Credit Management Solutions, Inc. Employee Stock Purchase Plan** 10.13 1996 Credit Management Solutions, Inc. Long-Term Incentive Plan** 10.14 Form of Tax Indemnification Agreement** 10.15 1996 Credit Management Solutions, Inc. Non-Qualified Stock Option Plan** 10.16 1997 Credit Management Solutions, Inc. Stock Incentive Plan*** 10.17 Employment Agreement between Miles Grody and the Company dated June 27, 2000***** 10.18 Employment Agreement between Scott Freiman and the Company dated June 27, 2000***** 37 10.19 Employment Agreement between Robert Vollono and the Company dated June 27, 2000***** 10.20 Form of Voting Agreement, dated as of January 30, 2001, by and among The First American Corporation and certain stockholders of the Company* 10.21 Consulting Agreement between Businessliner, Inc. and the Company dated as of May 20, 2000 (filed herewith) 10.22 Amendment, dated January 15, 2001, to Consulting Agreement between Businessliner, Inc. and the Company (filed herewith) 10.23 Employment Agreement between Howard Tischler and the Company effective January 1, 2000 (filed herewith) 10.24 Form of Amendment to Employment Agreements entered into between the Company and each of Scott Freiman, Miles Grody, Howard Tischler and Robert Vollono (filed herewith) 23.1 Consent of Independent Auditors - -------------- * Incorporated by reference to exhibits filed with the Company's Current Report on Form 8-K filed on February 1, 2001. ** Incorporated by reference to exhibits filed with the Company's Registration Statement on Form S-1, File No. 333-14007. *** Incorporated by reference to exhibits filed with the Company's 1997 Proxy Statement, File No. 000-21735 **** Incorporated by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000. ***** Incorporated by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. 38 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Credit Management Solutions, Inc. By: /s/ Scott L. Freiman April 2, 2001 -------------------------------------- Scott L. Freiman President and Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ John J. McDonnell, Jr. April 2, 2001 -------------------------------------- John J. McDonnell, Jr. Chairman of the Board of Directors By: /s/ Scott L. Freiman April 2, 2001 -------------------------------------- Scott L. Freiman President, Chief Executive Officer and Director (Principal Executive Officer) By: /s/ Robert P. Vollono April 2, 2001 -------------------------------------- Robert P. Vollono Senior Vice President, Treasurer, Chief Financial Officer and Director (Principal Financial and Accounting Officer) By: /s/ Stephen X. Graham April 2, 2001 -------------------------------------- Stephen X. Graham Director By: /s/ James R. DeFrancesco April 2, 2001 -------------------------------------- James R. DeFrancesco Director 39 EXHIBIT INDEX 2.1 Agreement and Plan of Merger by and among The First American Corporation, Rusti Corp. and the Company, dated as of January 30, 2001* 3.1 Certificate of Incorporation of the Company** 3.2 Bylaws of the Company** 4.1 Specimen certificate for Common Stock of the Company** 4.2 See Exhibits 3.1 and 3.2 for provisions of the Certificate of Incorporation 4 and Bylaws of the Company defining rights of holders of Common Stock of the Company 10.1 Form of Project Commencement Agreement** 10.2 Form of Software License Agreement** 10.3 Form of Software Maintenance Agreement** 10.4 Form of Professional Services Agreement** 10.5 Form of CreditConnection Lender Agreement (for CreditRevue Licensees)** 10.6 Form of CreditConnection Lender Agreement (for non-CreditRevue Licensees)** 10.7 Form of CreditConnection Dealer Subscription Agreement** 10.8.1 Office Building Lease between Symphony Woods Limited Partnership and the Company dated October 29, 1993** 10.8.2 Office Building Lease between Symphony Woods Limited Partnership and the Company dated February 10, 1995** 10.8.3 First Amendment to Lease dated March 29, 1995** 10.8.4 Second Amendment to Lease dated August 12, 1996** 10.8.5 135 National Business Parkway Lease between Constellation Real Estate, Inc. and the Company dated April 27, 1998**** 10.8.6 First Amendment of 135 National Business Parkway Lease dated December 23, 1998**** 10.9 Promissory Note dated December 31, 1995 given by the Company to James R. DeFrancesco** 10.10 Business Loan Agreement between The Columbia Bank and the Company dated June 10, 1994** 10.11 1996 Credit Management Solutions, Inc. Non-Qualified Stock Option Plan** 10.12 1996 Credit Management Solutions, Inc. Employee Stock Purchase Plan** 10.13 1996 Credit Management Solutions, Inc. Long-Term Incentive Plan** 10.14 Form of Tax Indemnification Agreement** 10.15 1996 Credit Management Solutions, Inc. Non-Qualified Stock Option Plan** 10.16 1997 Credit Management Solutions, Inc. Stock Incentive Plan*** 10.17 Employment Agreement between Miles Grody and the Company dated June 27, 2000***** 10.18 Employment Agreement between Scott Freiman and the Company dated June 27, 2000***** 10.19 Employment Agreement between Robert Vollono and the Company dated June 27, 2000***** 10.20 Form of Voting Agreement, dated as of January 30, 2001, by and among The First American Corporation and certain stockholders of the Company* 10.21 Consulting Agreement between Businessliner, Inc. and the Company dated as of May 20, 2000 (filed herewith) 10.22 Amendment, dated January 15, 2001, to Consulting Agreement between Businessliner, Inc. and the Company (filed herewith) 10.23 Employment Agreement between Howard Tischler and the Company effective January 1, 2000 (filed herewith) 10.24 Form of Amendment to Employment Agreements entered into between the Company and each of Scott Freiman, Miles Grody, Howard Tischler and Robert Vollono (filed herewith) 23.1 Consent of Independent Auditors - -------------- * Incorporated by reference to exhibits filed with the Company's Current Report on Form 8-K filed on February 1, 2001. ** Incorporated by reference to exhibits filed with the Company's Registration Statement on Form S-1, File No. 333-14007. *** Incorporated by reference to exhibits filed with the Company's 1997 Proxy Statement, File No. 000-21735 **** Incorporated by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000. ***** Incorporated by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. 40 CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Auditors F-2 Consolidated Balance Sheets F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Shareholders' Equity F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-7 F-1 Report of Independent Auditors The Board of Directors and Shareholders Credit Management Solutions, Inc. We have audited the accompanying consolidated balance sheets of Credit Management Solutions, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Credit Management Solutions, Inc. and subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Baltimore, Maryland February 23, 2001 F-2 CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, --------------------------- 2000 1999 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 1,588,133 $ 3,594,328 Investments available-for-sale 2,529,097 1,316,470 Accounts receivable, net of allowance of $339,681 and $311,583 in 2000 and 1999, respectively 6,558,672 5,724,256 Costs and estimated earnings in excess of billings on uncompleted contracts 25,779 5,891 Prepaid expenses and other current assets 362,720 474,725 ------------ ------------ Total current assets 11,064,401 11,115,670 Property and equipment: Computer equipment and software 5,775,962 4,826,085 Office furniture and equipment 1,223,036 1,458,793 Leasehold improvements 3,189,184 3,177,925 ------------ ------------ 10,188,182 9,462,803 Accumulated depreciation and amortization (4,651,211) (3,065,136) ------------ ------------ 5,536,971 6,397,667 Software development costs 3,625,665 1,932,867 Other assets 37,463 46,386 ------------ ------------ Total assets $ 20,264,500 $ 19,492,590 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,944,574 $ 2,163,044 Accrued payroll and related expenses 1,161,131 722,389 Billings in excess of costs and estimated earnings on uncompleted contracts 367,319 101,046 Deferred revenue 3,547,108 2,920,904 Current portion of deferred tenant allowance 144,866 144,866 Short-term borrowings 798,000 798,000 Current portion of capital lease obligations -- 25,402 ------------ ------------ Total current liabilities 8,962,998 6,875,651 Deferred tenant allowance, less current portion 995,952 1,140,818 ------------ ------------ Total liabilities 9,958,950 8,016,469 Commitments and contingent liabilities -- -- Shareholders' equity: Preferred stock, $.01 par value; 1,000,000 shares authorized; no shares issued or outstanding -- -- Common stock, $.01 par value; 40,000,000 shares authorized; 7,824,113 and 7,689,570 shares issued and outstanding at December 31, 2000 and 1999, respectively 78,241 76,896 Additional paid-in capital 27,770,711 27,034,049 Accumulated deficit (17,543,402) (15,634,824) ------------ ------------ Total shareholders' equity 10,305,550 11,476,121 ------------ ------------ Total liabilities and shareholders' equity $ 20,264,500 $ 19,492,590 ============ ============
The accompanying notes are an integral part of these financial statements. F-3 CREDIT MANAGEMENT SOLUTIONS, INC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31, ---------------------------------------- 2000 1999 1998 ----------- ----------- ------------ Revenues: License and software development fees $12,349,667 $12,872,321 $ 10,186,421 Maintenance fees 6,442,967 5,059,352 4,294,572 Computer hardware sales 972,337 1,248,615 776,790 Service bureau revenues 5,408,256 3,594,717 1,644,991 ----------- ----------- ------------ 25,173,227 22,775,005 16,902,774 Costs of revenues: Cost of license and software development fees 7,323,375 6,504,519 6,988,649 Cost of maintenance fees 1,402,122 940,091 1,108,367 Cost of computer hardware sales 1,201,837 1,528,243 952,662 Cost of service bureau 4,595,746 3,038,483 3,398,453 ----------- ----------- ------------ 14,523,080 12,011,336 12,448,131 ----------- ----------- ------------ Gross profit 10,650,147 10,763,669 4,454,643 Other operating expenses: Selling, general and administrative expenses 12,011,636 12,122,557 12,823,909 Research and development costs 758,440 1,458,331 1,964,057 ----------- ----------- ------------ 12,770,076 13,580,888 14,787,966 ----------- ----------- ------------ Loss from operations (2,119,929) (2,817,219) (10,333,323) Other income (expense): Interest expense (88,671) (57,426) (24,965) Interest income 300,022 319,869 788,257 ----------- ----------- ------------ 211,351 262,443 763,292 ----------- ----------- ------------ Net loss $(1,908,578) $(2,554,776) $ (9,570,031) =========== =========== ============ Basic and diluted loss per common share $ (0.24) $ (0.33) $ (1.25) =========== =========== ============ Weighted-average shares used in computation 7,798,679 7,660,897 7,636,217 =========== =========== ============
The accompanying notes are an integral part of these financial statements. F-4 CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock ----------------------- Additional Number Paid-In Accumulated of Shares Amount Capital Deficit Total --------- ---------- ----------- ------------ ----------- Balance at January 1, 1998 7,615,510 $ 76,155 $26,645,247 $ (3,510,017) $23,211,385 Issuance of common stock under employee stock purchase program 19,572 196 134,653 -- 134,849 Exercise of options to purchase common stock 14,688 146 73,294 -- 73,440 Net loss for 1998 -- -- -- (9,570,031) (9,570,031) --------- ---------- ----------- ------------ ----------- Balance at December 31, 1998 7,649,770 76,497 26,853,194 (13,080,048) 13,849,643 Issuance of common stock under employee stock purchase program 14,840 149 55,105 -- 55,254 Exercise of options to purchase common stock 24,960 250 125,750 -- 126,000 Net loss for 1999 -- -- -- (2,554,776) (2,554,776) --------- ---------- ----------- ------------ ----------- Balance at December 31, 1999 7,689,570 76,896 27,034,049 (15,634,824) 11,476,121 Issuance of common stock under employee stock purchase program 6,349 63 29,614 -- 29,677 Exercise of options to purchase common stock 128,194 1,282 707,048 -- 708,330 Net loss for 2000 -- -- -- (1,908,578) (1,908,578) --------- ---------- ----------- ------------ ----------- Balance at December 31, 2000 7,824,113 $ 78,241 $27,770,711 $(17,543,402) $10,305,550 ========= ========== =========== ============ ===========
The accompanying notes are an integral part of these financial statements. F-5 CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, ---------------------------------------- 2000 1999 1998 ---- ---- ---- Operating activities: Net loss $ (1,908,578) $ (2,554,776) $ (9,570,031) Adjustments: Depreciation 1,729,520 1,800,964 1,199,194 Amortization of software development costs -- 60,861 119,721 Decrease in deferred tenant allowance (144,866) (162,974) -- Loss on disposal of property and equipment 77,189 1,215,473 302,878 Changes in operating assets and liabilities: Accounts receivable, net (834,416) (179,240) (1,936,275) Prepaid expenses and other current assets 112,005 (193,511) 183,334 Accounts payable 781,530 (2,004,177) 102,200 Accrued payroll and related expenses 438,742 53,759 (390,547) Net billings in excess of costs and estimated earnings on uncompleted contracts 246,385 (702,029) 712,537 Deferred revenue 626,204 (1,019) 1,289,584 Other lease obligations -- (732,126) 732,126 ------------ ------------ ------------ Net cash provided by (used in) operating activities 1,123,715 (3,398,795) (7,255,279) Investing activities: Purchase of investments available-for-sale (13,451,832) (4,061,527) (11,166,659) Sale of investments available-for-sale 12,239,205 9,227,078 4,684,638 Proceeds from sale of property and equipment 7,423 55,563 162,672 Purchases of property and equipment (953,436) (576,222) (4,063,464) Capitalized software development costs (1,692,798) (1,655,004) (278,863) Decrease in other assets 8,923 2,974 374,526 ------------ ------------ ------------ Net cash provided by (used in) investing activities (3,842,515) 2,992,862 (10,287,150) Financing activities: Payments under capital lease obligations and short-term borrowings (25,402) (69,558) (144,595) Proceeds from short-term borrowings -- 798,000 -- Proceeds from exercise of stock options 708,330 126,000 73,440 Proceeds from issuance of common stock 29,677 55,254 134,849 ------------ ------------ ------------ Net cash provided by financing activities 712,605 909,696 63,694 ------------ ------------ ------------ Net change in cash and cash equivalents (2,006,195) 503,763 (17,478,735) Cash and cash equivalents at beginning of year 3,594,328 3,090,565 20,569,300 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 1,588,133 $ 3,594,328 $ 3,090,565 ============ ============ ============
The accompanying notes are integral part of these financial statements. F-6 CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation and Significant Accounting Policies Basis of Presentation of Financial Statements Description of Business Credit Management Solutions, Inc. and subsidiaries (the "Company") develops and provides software solutions and services for automating the consumer and small business credit analysis, decisioning and funding process. The Company's customers are primarily banks and other financial institutions located throughout the United States. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, CreditOnline, Inc. (formerly known as CreditConnection, Inc.) and CMSI Systems, Inc. The CreditOnline subsidiary operates an automated service bureau which electronically assembles and transmits between merchants and credit grantors credit applications of the merchants' customers. CMSI Systems, Inc. operates the Company's software license and related services business. All material intercompany accounts and transactions have been eliminated upon consolidation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Significant Accounting Policies Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The cost of these investments is equivalent to fair value. Investments Available-for-sale securities are carried at fair value, as measured on quoted exchanges, with unrealized security holding gains and losses recognized in comprehensive income. Realized gains and losses and declines in value judged to be other than temporary on available-for-sale securities are included in interest income. At December 31, 2000, available-for-sale securities consisted of municipal, corporate and government agency obligations, the cost of which approximates fair value. The Company has not had significant realized or unrealized gains or losses on its investments during the periods presented. These investments are classified as current as all maturities are less than one year. Property and Equipment Property and equipment is stated at cost and depreciated using the straight-line method based on estimated useful lives of between three and seven years. F-7 Included in computer equipment and software are direct costs of computer software developed for internal use. Costs incurred are capitalized and amortized over periods not exceeding three years. Amortization of leasehold improvements is provided using the straight-line method over the lesser of the life of the improvement or the remaining term of the lease. Assets held under capital leases are stated at the lesser of the present value of future minimum payments using the Company's incremental borrowing rate at the inception of the lease or the fair value of the property at the inception of the lease. The assets recorded under capital leases are amortized over the lesser of the lease term or the estimated useful life of the assets in a manner consistent with the Company's depreciation policy for owned assets. Software Development Costs Costs related to conceptual formulation and design of software products are expensed as incurred. Costs incurred subsequent to the establishment of technological feasibility, but prior to the product being available for general release to customers, are capitalized and amortized over estimated productive lives, generally three years. Amortization is recorded at the greater of the amount computed using the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product, or the straight-line method. The Company evaluates its investment in product development as events or changes in circumstances may arise, for the purpose of determining whether the carrying amount of such assets may exceed the net realizable value of the products. In the event that capitalized costs of a product exceed the estimated net realizable value of the product, such excess amount is expensed. Deferred Tenant Allowances Payments made by landlords to the Company as incentives under operating leases are recorded as liabilities and recognized as reductions in rental expense ratably over the terms of the leases. Revenue Recognition Revenues from long-term software license contracts for the customization and modification of the Company's software products are recognized using the percentage-of-completion method, measured generally on a cost incurred basis. Costs consist primarily of direct labor and applicable overhead. Contracts in progress are reviewed periodically as the work progresses, and revenues and earnings are adjusted in current accounting periods based on revisions in contract value and estimates to complete. Losses on contracts are provided for in the period they are first determined. The Company recognizes revenue from software maintenance contracts pro rata over the term of the agreements, generally one-year. Revenues from sales of hardware and software are recognized at time of shipment and when collection of the receivable is probable. Payments received in advance of revenue recognition for these services and product sales are included in deferred revenue. Service bureau revenues are transaction-based revenues that are recognized when the transaction is completed and collection is probable. Advertising Costs All advertising costs are expensed when incurred. Costs, which are included in selling, general and administrative expense, for the year ended December 31, 2000, 1999 and 1998 are $308,206, $282,262 and $384,863, respectively. Income Taxes The Company uses the liability method in accounting for income taxes. Under this method, deferred income tax assets and liabilities are determined based on differences between financial reporting and tax F-8 bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Reclassifications Certain amounts in the 1999 and 1998 consolidated financial statements have been reclassified to conform to the 2000 presentation. Adoption of Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 was later amended by the Financial Accounting Standards Board in 1999 and 2000 upon the issuance of SFAS No. 137 and SFAS No. 138. These standards, which the Company adopted on January 1, 2001, provide a comprehensive and consistent method for the recognition and measurement of derivatives and hedging activities. The adoption of SFAS No. 133 and its amendments did not have any impact on the consolidated financial statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." The Company adopted the provisions of SAB No. 101 in its consolidated financial statements in 2000. The adoption of this pronouncement did not have any impact on the Company's revenue recognition policies, consolidated financial position or results of operations. 2. Income Taxes The significant items comprising the Company's net deferred tax assets are as follows: December 31 ------------------------- 2000 1999 ---- ---- Deferred tax assets: Net operating loss carry forwards $ 8,452,812 $ 7,381,967 Accrued expenses 133,436 123,038 Provision for bad debts 135,872 124,633 Revenue recognition 136,617 -- ----------- ----------- Total deferred tax assets 8,858,737 7,629,638 Deferred tax liabilities: Software development costs 1,450,266 773,147 Revenue recognition -- (2,356) Depreciation 203,401 390,484 ----------- ----------- Total deferred tax liabilities 1,653,677 1,161,275 Net future income tax benefit 7,205,070 6,468,363 Valuation allowance for deferred tax assets (7,205,070) (6,468,363) ----------- ----------- Net deferred tax assets $ -- $ -- =========== =========== A reconciliation of income tax expense computed at the U.S. Federal statutory rate of 34% to the recorded amount of income tax expense is as follows:
Year ended December 31 -------------------------------------------- 2000 1999 1998 ----------- ----------- ------------ Tax expense at U.S. statutory rate $ (648,917) $ (868,624) $(3,253,811) State income taxes (114,515) (153,287) (574,202) Effect of permanent differences 26,725 38,164 24,235 Effect of change in valuation allowance for deferred tax assets 736,707 983,747 3,803,778 ----------- ----------- ----------- Total $ -- $ -- $ -- =========== =========== ===========
At December 31, 2000 the Company had net operating loss carry forwards of $21,132,030 which begin to expire in 2011. Income tax regulations contain provisions which may limit the net operating loss carryforwards available to be used in any given year if certain events occur, including significant changes in ownership. F-9 3. Loss Per Share The following table summarizes the computations of basic and diluted loss per common share:
Year ended December 31 -------------------------------- 2000 1999 1998 ---- ---- ---- Numerator: Net loss $(1,908,578) $(2,554,776) $(9,570,031) =========== =========== =========== Denominator: Weighted-average shares 7,798,679 7,660,897 7,636,217 =========== =========== =========== Basic and diluted loss per common share $ (0.24) $ (0.33) $ (1.25) =========== =========== ===========
Diluted loss per share is equal to basic loss per share in all years presented because if potentially dilutive securities were included in the computation, the result would be anti-dilutive. These potentially dilutive securities consist of stock options as described in Note 10. 4. Impairment Charge The Company recorded an impairment charge of $1.2 million on a pre-tax basis ($0.16 per share) during the fourth quarter of 1999. This charge resulted from the impairment of computer software developed by third parties to integrate some of the Company's internal systems. During the fourth quarter of 1999, due to concerns about the software's functionality, the Company abandoned the integration project and recorded a charge for the carrying amount of the assets it will no longer utilize. The impairment charge has been classified in the consolidated statement of operations as selling, general and administrative expenses. 5. Supplemental Disclosures of Non-Cash Investing and Financing Activities Interest paid during the years ended December 31, 2000, 1999, and 1998 was $88,671, $57,426 and $24,965, respectively. The Company paid no amounts related to income taxes during the three years ended December 31, 2000. 6. Costs and Estimated Earnings on Uncompleted Contracts Uncompleted contracts consist of the following components:
Balance Sheet Caption ----------------------------------- Costs and Billings in estimated earnings excess of costs in excess of and estimated billings earnings Total ------------------ --------------- ------------ December 31, 1999 Costs and estimated earnings $ 169,923 $ 261,742 $ 431,665 Billings 164,032 362,788 526,820 ---------- ---------- ---------- $ 5,891 $ (101,046) $ (95,155) ========== ========== ========== December 31, 2000 Costs and estimated earnings $ 209,940 $1,760,763 $1,970,703 Billings 184,161 2,128,082 2,312,243 ---------- ---------- ---------- $ 25,779 $ (367,319) $ (341,540) ========== ========== ==========
All receivables from contracts in-progress are expected to be collected within twelve months. F-10 7. Bank Line of Credit The Company has a revolving line of credit with a bank which allows for aggregate borrowings of $1.5 million through the expiration date of April 1, 2001. Borrowings under the line of credit are secured by the Company's accounts receivable and property and equipment, and bear interest at the bank's prime rate plus one percent (9.50% at December 31, 2000). Under the terms of the loan agreement, the Company is required to comply with certain covenants including a restriction on assuming additional indebtedness without the prior written consent of the bank. As of December 31, 2000, the Company was in compliance with all covenants. As of December 31, 2000, the Company had $798,000 outstanding under this line of credit. 8. Capital Lease Obligations The Company leases equipment under capital leases. Property and equipment includes the following amounts for leases that have been capitalized at December 31, 1999: Computer equipment $ 122,295 Office furniture and equipment 135,905 --------- Less: accumulated amortization 258,200 (142,933) --------- $ 115,267 =========
Amortization of leased assets is included in depreciation expense. At December 31, 2000, no amounts are due under capital lease obligation, and no assets are capitalized under capital leases. 9. Other Lease Obligations During 1998, the Company relocated its corporate headquarters, and at December 31, 1998 remained obligated under operating leases for unutilized space at its former headquarters. Accordingly, in 1998 the Company estimated the present value of its future minimum obligations and recorded $1,062,425 of rent expense. During 1999, the Company sublet portions of the unutilized space and terminated the leases on the remaining space. As a result of the 1999 agreements, the present value of the future minimum lease payments was reduced by $831,660. This amount was recorded as a reduction of rent expense in 1999. 10. Stock Options The Company records compensation expense for all stock-based compensation plans using the intrinsic value method prescribed by APB Opinion 25, Accounting for Stock Issued to Employees ("APB No. 25"). Under APB No. 25, if the exercise price of the Company's employee stock options equals the quoted value of the underlying stock on the date of grant, no compensation expense is generally recognized. Financial Accounting Standards Board Statement No. 123, Accounting for Stock-Based Compensation ("Statement No. 123"), encourages companies to recognize expense for stock-based awards based on their estimated value on the date of grant. Statement No. 123 requires the disclosure of pro forma income and earnings per share data in the notes to the financial statements if the fair value method is not elected. The Company supplementally discloses in these financial statements the pro forma information as if the fair value method had been adopted. F-11 In 1997, the Company adopted the 1997 Stock Incentive Plan (the "1997 Plan"). The 1997 Plan provides for the granting of either non-qualified or qualified options to purchase an aggregate of up to 3,400,000 shares of common stock, subject to adjustment, to employees of the Company and others. Each year, the 1997 Plan allows for a one percent increase in the number of shares available to be granted. At December 31, 2000, the Company had 3,503,000 shares of common stock available for grant. The 1997 Plan includes a discretionary option grant program, a salary investment option grant program, a stock issuance program, an automatic option grant program and a director fee option grant program. In 1999, the Company issued options outside the 1997 Plan to purchase 375,000 shares of common stock, pursuant to certain officer employment agreements. At December 31, 2000, these options remained outstanding. A summary of the Company's stock options activity and related information is as follows:
2000 1999 1998 ---------------------- ---------------------- --------------------- Weighted- Weighted- Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ----------- --------- ----------- --------- ----------- -------- Options outstanding-- beginning of year 3,494,458 $5.59 3,669,648 $6.33 2,691,844 $5.79 Granted 370,072 3.93 841,350 4.67 1,201,880 7.33 Exercised (128,194) 5.53 (24,960) 5.05 (14,688) 7.70 Forfeited (346,774) 6.11 (991,580) 7.54 (209,388) 5.00 ---------- ----- ---------- ----- ---------- ----- Options outstanding-- end of year 3,389,562 $5.36 3,494,458 $5.59 3,669,648 $6.33 ---------- ----- ---------- ----- ---------- ----- Exercisable at end of year 2,207,019 $5.40 1,847,688 $5.45 1,583,228 $5.32 ---------- ----- ---------- ----- ---------- -----
During all years presented, the Company issued options to purchase common stock with exercise prices at or above the market value of the Company's common stock at the date of grant. The following table summarizes the weighted-average exercise price and fair values of options granted during the years ended December 31:
Number of Weighted Average Weighted Average Shares Exercise Price Fair Value --------- ---------------- ---------------- 1999 Market price equal to exercise price on date of grant 587,560 $ 4.18 $ 3.24 Market price less than exercise price on date of grant 253,790 $ 6.11 $ 2.74 1998 Market price equal to exercise price on date of grant 451,880 $ 6.84 $ 4.33 Market price less than exercise price on date of grant 750,000 $ 7.60 $ 2.41
Options granted during 2000 had a fair value of $3.24 F-12 CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 10. Stock Options (continued) Exercise prices for options outstanding as of December 31, 2000 ranged from $1.13 to $18.50 as follows:
Weighted- Weighted- average Weighted- average exercise price average exercise price of of Exercise Options Options remaining life in options options Price Outstanding Exercisable years exercisable outstanding -------- ----------- ----------- ----------------- ----------------- -------------- $1.13 to $5.38 2,976,200 1,975,521 6.63 $ 4.95 $ 4.76 $5.50 to $8.00 159,442 64,317 8.06 $ 7.79 $ 7.20 $8.25 to $9.60 131,820 103,678 6.08 $ 9.56 $ 9.54 $9.75 to $18.50 122,100 63,503 7.64 $11.74 $10.94
All options granted under the Plan are subject to vesting provisions at the discretion of the Board of Directors. Options granted to date vest in varying percentages through 2004. Pro forma net loss and loss per share information required by Statement No. 123 has been determined as if the Company had accounted for its employee stock options under the fair value method. The fair value of options granted in 2000, 1999 and 1998 was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 5.8% in 2000 and 1999 and 5.5% in 1998; dividend yield of 0% in 2000, 1999 and 1998; volatility factor of the expected market price of the Company's common stock of 1.07, 1.00 and 0.81 in 2000, 1999 and 1998, respectively; and a weighted-average expected life of the options of seven years in 2000, eight years in 1999, and five years in 1998. Because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models methods prescribed by Statement No. 123 do not necessarily provide a single measure of the fair value of its employee stock options. For the purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting periods. The Company's pro forma information follows: 2000 1999 1998 ---- ---- ---- Pro forma net loss $(3,844,119) $(3,984,340) $(10,737,437) Pro forma loss per share (basic and diluted) $ (0.49) $ (0.52) $ (1.41) F-13 CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 11. Profit Sharing Plan The Company maintains a 401(k) profit sharing plan which covers all employees with at least six months of service. In addition, the Company may make a discretionary contribution based on each eligible participant's compensation. Participant contributions vest immediately and employer contributions vest over a six year period. During 1999 and 1998, the Company matched 20% per annum of the first $1,000 contributed to the plan by each employee. In January 2000, the Company began matching 50% of the first 4% of annual contributions by participating employees up to a maximum annual contribution per participating employee of $5,250. Contributions for the years ended December 31, 2000, 1999 and 1998 were $133,614, $29,745 and $33,189, respectively. F-14 CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 12. Operating Leases The Company leases certain office space and equipment under non-cancelable operating lease agreements which expire through 2008. The Company also subleases office space that was vacated in 1998. Future minimum lease payments at December 31, 2000 for leases and subleases with initial terms of one year or more consist of the following: As Lessee As Sublessor ----------- ------------ 2001 $ 1,558,913 $ 223,758 2002 1,467,620 2003 1,441,524 2004 1,427,271 2005 1,459,331 Thereafter 4,383,552 ----------- ------------ Total minimum lease payments $11,738,211 $ 223,758 =========== ============ Rent expense under all operating leases for the year ended December 31, 2000, 1999 and 1998 was $1,821,287, $809,236 and $2,359,666, respectively. Rent expense is net of $211,315 and $200,102 received under sublease agreements for the years ended December 31, 2000 and 1999, respectively. 13. Segment Reporting During 2000, the Company organized its operations into two wholly owned subsidiaries, CreditOnline, Inc. and CMSI Systems, Inc. CreditOnline, Inc. operates an automated service bureau which electronically assembles and transmits between merchants and credit grantors credit applications of the merchants' customers. CMSI Systems, Inc. operates the Company's software license and related services business. Previously, the Company was organized into three distinct business lines, Credit Decisioning Systems (CDS), E-Commerce and Service Bureau Alliances (SBA). Segment information for the prior periods has been reclassified to conform to the operating segments adopted in 2000. The Company evaluates performance and allocates resources based on income from operations before depreciation and amortization, and corporate general and administrative expenses. Assets are not F-15 CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) apportioned by segment and are not reviewed by management in assessing segment performance. The accounting policies used by the reportable segments are the same as those used by the Company and described in Note 1 to the consolidated financial statements. There are no intercompany sales or transfers. The subsidiaries are managed separately by presidents who are most familiar with the segment's operations. The following table sets forth information on the Company's reportable segments:
Year Ended December 31, 2000 ---------------------------------------------- CMSI Systems Credit Online Total ------------ ------------- ----- Revenues $20,620,270 $ 4,552,957 $25,173,227 Segment profits (loss) 8,323,786 (2,910,267) $ 5,413,519
Year Ended December 31, 1999 ---------------------------------------------- CMSI Systems Credit Online Total ------------ ------------- ----- Revenues $20,639,624 $ 2,135,381 $22,775,005 Segment profits (loss) 7,691,608 (2,312,258) $ 5,379,350
Year Ended December 31, 1998 ---------------------------------------------- CMSI Systems Credit Online Total ------------ ------------- ----- Revenues $15,627,754 $ 1,275,020 $16,902,774 Segment profits (loss) 3,622,615 (3,718,657) $ (96,042)
A reconciliation of segment profit (loss) for all segments to net loss for the years ended December 31, 2000, 1999 and 1998 is as follows:
2000 1999 1998 ---- ---- ---- Total segment profit (loss) $ 5,413,519 $ 5,379,350 $ (96,042) Corporate, general and administrative (5,948,794) (6,497,718) (8,918,366) Depreciation and amortization (1,584,654) (1,698,851) (1,318,915) Net interest income 211,351 262,443 763,292 ----------- ----------- ----------- Net loss $(1,908,578) $(2,554,776) $(9,570,031) =========== =========== ===========
Substantially all of the revenues and assets of the Company's reportable segments are attributed to or located in the United States. For the years ended December 31, 2000, and 1998 one customer accounted for 12.4% of total revenues. For the year ended December 31, 1999, no customer accounted for 10% of total revenues. 14. Quarterly Financial Data (unaudited) (data in thousands, except per share data) The following is a summary of the quarterly results of operations for the years ended December 31, 2000 and 1999:
2000 1999 ----------------------------------------- --------------------------------------- Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 -------- -------- -------- -------- -------- -------- -------- -------- Total revenues $ 6,901 $ 6,430 $ 6,645 $ 5,197 $ 5,241 $ 5,261 $ 6,141 $ 6,132 Gross profit 2,482 2,948 2,814 2,406 2,361 3,030 2,807 2,566 -------- -------- -------- -------- -------- -------- -------- -------- Net profit (loss) $ (994) $ (43) $ (396) $ (476) $ (2,024) $ 61 $ 54 $ (646) -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) per share $ (0.13) $ (0.01) $ (0.05) $ (0.06) $ (0.26) $ 0.01 $ 0.01 $ (0.08) -------- -------- -------- -------- -------- -------- -------- --------
F-16 15. Subsequent Event On January 30, 2001, the Company entered into an Agreement and Plan of Merger with The First American Corporation, a California corporation ("First American"), and Rusti Corp., a wholly-owned subsidiary of First American. If the merger contemplated by the Agreement is completed, the Company's stockholders will receive, for each share of common stock held by them, the right to receive such fraction of a share of First American common stock equal to the quotient (rounded to the nearest ten-thousandth decimal place) resulting from the division of $6.25 by the average closing price per share of First American common stock as reported on the New York Stock Exchange for the ten trading days ended on the third trading day prior to the special meeting of the Company's stockholders to be held for the purpose of voting upon the merger. However, if the average closing price is greater than $30 per share, such average closing price shall be deemed to be $30 per share, and if the average closing price is less than $22 per share, the average closing price shall be deemed to be $22 per share. Consummation of the merger is subject to various conditions, including, among other things, receipt of the necessary approvals of the stockholders of the Company, performance of covenants and agreements of the parties and other customary terms. The merger is intended to constitute a reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended. The transaction is expected to be completed in the second quarter of 2001. F-17 EX-10.21 2 0002.txt EXHIBIT 10.21 Exhibit 10.21 CONSULTING AGREEMENT -------------------- THIS CONSULTING AGREEMENT ("Agreement") is made and entered into as of the 20th day of May, 2000 by and between Businessliner, Inc. ("Consultant"), a Delaware corporation with its principal place of business at _______________, and Credit Management Solutions, Inc. ("Company"). Consultant and Company may sometimes hereinafter be referred to individually as a "party" or jointly as the "parties". W I T N E S S E T H: -------------------- WHEREAS, Consultant's President, James DeFrancesco, was Company's founder and held the position of Chief Executive Officer until May of 1999; and WHEREAS, Consultant possesses unique knowledge relating to Company's business; and WHEREAS, Company desires to retain Consultant's services on a temporary basis for the purpose of providing strategic business management guidance and advice to Company and its Affiliates; and WHEREAS, Consultant is willing to provide such services to Company. NOW, THEREFORE, in consideration of the mutual promises and obligations specified in this Agreement, and any compensation paid to Consultant for services hereunder, and intending to be legally bound hereby, the parties agree as follows: I. SCOPE OF SERVICES ----------------- A. Scope of Services. Consultant agrees to render consulting services ----------------- ("Services") to the Company and its Affiliates for the term of this Agreement. For the purposes of this Agreement, "Affiliate" means any person or entity that: 1. directly or indirectly owns more than fifty percent (50%) of the voting stock of Company; or 2. more than fifty percent (50%) of the voting stock of which is directly or indirectly owned by Company; or 3. more than fifty percent (50%) of the voting stock of which is directly or indirectly owned by another person or entity that directly or indirectly owns more than fifty percent (50%) of the voting stock of Company. The Services shall be as set forth in Exhibit A hereto and such other services --------- as Company may from time to time prescribe. B. Payment. Consultant shall be paid an annual fee of two hundred ------- thirteen thousand two hundred Dollars ($213,200.00), payable in bi-weekly installments. Any amounts previously paid by Company to Consultant or James DeFrancesco as compensation for consulting services rendered since January 1, 2000 shall be chargeable against this annual fee. II. TERM OF AGREEMENT ----------------- A. The term of this Agreement shall commence on January 1, 2000 and shall expire on December 31, 2000. Thereafter, this Agreement shall be renewable only upon mutual written agreement of the parties. III. CONFIDENTIAL INFORMATION ------------------------ A. Company and/or its Affiliates may disclose or may have previously disclosed to Consultant or his agents, or Consultant or his agents may obtain access to, develop, or create, proprietary and confidential information or material concerning or related to Company's and/or its Affiliates' products and/or services, or to Company's and/or its Affiliates' manufacturing and/or marketing processes, servicing, existing products, or general business operations. Such information or material may include, but is not limited to, the discovery, invention, research, improvement, manufacture, or sale of the products or services (including, without limitation, information created, discovered or developed by Consultant, or made known to Consultant during the term of this Agreement or arising out of Consultant's or his staff's performance of the Services hereunder), or Company's and/or its Affiliates' trade secrets, processes, formulas, data, know-how, software, documentation, program files, flow/charts, drawings, software diagnostic techniques and other techniques, source and object code, standards, specifications, improvements, inventions, customer information, accounting data, statistical data, research projects, development and marketing plans, strategies, forecasts, computer programs, customer lists, sales, costs, profits, and pricing methods and organizations, employee lists, compensation plans (collectively, the "Information" or "Confidential Information"). Consultant acknowledges the confidential and secret character of the Information and agrees that the Information is the sole, exclusive, and extremely valuable property of Company and/or its Affiliates. Accordingly, Consultant agrees that he and his agents will not reproduce any of the Information without Company's prior written consent, or use the Information except in the ordinary course of performance of this Agreement, or divulge all or any part of the Information to any third party, either during or after the term of this Agreement. B. Permitted Disclosure. Confidential Information shall not include any -------------------- information to the extent such information is generally known to the public through no disclosure or other act or omission, direct or indirect, of Consultant. Information shall not be deemed to be available to the general public for the purposes of this Agreement (a) merely because it is embraced by more general information in the prior possession of Consultant or of others, or (b) merely because it is expressed in public literature in general terms not specifically in accordance with the Information. C. Injunctive Relief. Consultant expressly agrees that the covenants set ----------------- forth in Article III are reasonable and necessary to protect Company and/or its Affiliates and their legitimate business interests, and to prevent the unauthorized dissemination of confidential Information to competitors of the Company and/or its Affiliates. Consultant also agrees that Company and/or its Affiliates will be irreparably harmed and that damages alone cannot 2 adequately compensate Company and/or its Affiliates if there is a violation of Article III by Consultant, and that injunctive relief against Consultant is essential for the protection of Company and/or its Affiliates. Therefore, in the event of any such breach, it is agreed that, in addition to any other remedies available, Company and/or its Affiliates shall be entitled as a matter of right to injunctive relief in any court of competent jurisdiction, plus attorneys' fees actually incurred for the securing of such relief. IV. INVENTIONS, COPYRIGHTS, ETC. ---------------------------- A. Rights in Inventions. All inventions, discoveries, developments, and -------------------- improvements made, conceived or reduced to practice by Consultant or his agents under or arising out of this Agreement ("Inventions") shall, whether or not such Inventions are patentable or copyrightable or made or conceived or reduced to practice or learned by Consultant or his agents either alone or jointly with others, become and remain the sole and exclusive property of Company. Consultant shall immediately notify Company in writing of, and provide detailed information concerning all such Inventions, and hereby transfers and assigns all of his rights, title, and interests in and to any such Inventions to Company, irrespective of whether or not any patent application is, or has been, filed for such Inventions. During and after the term of this Agreement, Consultant shall, at Company's request and Company's expense and through attorneys and representatives designated by Company, assist Company in making applications for Letters Patent in the United States and/or other countries for all such Inventions. Consultant will take whatever steps are necessary to have assigned to Company all such applications, and to protect Company's rights and vest in Company all rights, title, and interests in and to the Inventions and such Letters Patent. B. Copyrights. Consultant hereby assigns to Company all of his rights, ---------- title, and interests in and to all copyrights on all writings, documents, reports, papers, drawings, tabulations, books, computer programs, and other works written or made by Consultant or his agents under or arising out of this Agreement ("Material"). All Materials developed by Consultant or its agents under this Agreement are to be considered works made for hire as that term is defined in Section 101 of the Copyright Act (17 U.S.C. (S) 101) and are the sole and exclusive property of Company. To the extent that any such works may not be considered works made for hire for Company under applicable law, Consultant hereby assigns to Company and, upon their creation, will automatically assign to Company the ownership of such works, including copyright interests and any other intellectual property therein, without the necessity of any further consideration. Any assignment of copyright hereunder includes all rights of paternity, integrity, disclosure and withdrawal and any other rights that may be known as or referred to as "moral rights" (collectively "Moral Rights"). To the extent such Moral Rights cannot be assigned under applicable law and to the extent the following is allowed by the laws in the various countries where Moral Rights exist, Consultant hereby waives such Moral Rights and consents to any action of the Company that would violate such Moral Rights in the absence of such consent. Consultant will confirm any such waivers and consents from time to time as requested by the Company. C. Attorney-In-Fact. In the event that Company is unable for any reason ---------------- whatsoever to secure Consultant's signature to any lawful and necessary document required to apply for or execute any Letters Patent or other application with respect to such an Invention (including 3 renewals, extensions, continuations, divisions, or continuations in part of any Inventions), Consultant hereby irrevocably designates and appoints Company and its duly authorized officers and agents as Consultant's agents and attorneys-in- fact to act for and in Consultant's behalf and to execute and file any such Letters Patent and applications and to do all other lawfully permitted acts to further the prosecution of the application with the same legal force and effect as if executed by Consultant. V. NON-COMPETITION --------------- A. Consultant acknowledges that Company and its Affiliates have invested substantial time, money and resources in the development and retention of their Inventions, Confidential Information (including trade secrets), customers, accounts and business partners, and further acknowledges that during the course of Consultant's prior employment with Company and present consultant relationship with Company and its Affiliates, Consultant has had and will have access to Company's and/or its Affiliates' Inventions and Confidential Information (including trade secrets), and will be introduced to existing and prospective customers, accounts and business partners of Company and/or its Affiliates. Consultant acknowledges and agrees that any and all "goodwill" associated with any existing or prospective customer, account or business partner belongs exclusively to Company and/or its Affiliates, including, but not limited to, any goodwill created as a result of direct or indirect contacts or relationships between Consultant and any existing or prospective customers, accounts or business partners. Additionally, the parties acknowledge and agree that Consultant possesses skills that are special, unique or extraordinary and that the value of Company and its Affiliates depends upon his use of such skills on their behalf. B. In recognition of this, the Consultant covenants and agrees that: 1. During the term of this Agreement, and for a period of one (1) year thereafter, Consultant may not, without the prior written consent of Company, (whether as an employee, agent, servant, owner, partner, consultant, independent contractor, representative, stockholder or in any other capacity whatsoever) perform any work competitive in any way to the actual or planned business of Company and/or its Affiliates on behalf of any entity or person other than Company and/or its Affiliates (including Consultant). 2. During the term of this Agreement, and for a period of one (1) year thereafter, Consultant may not entice, solicit or encourage any Company or Affiliate employee to leave the employ of Company or its Affiliates or any independent contractor to sever its engagement with the Company and/or its Affiliates, absent prior written consent to do so from Company. 3. During the term of this Agreement, and for a period of one (1) year thereafter, Consultant may not, directly or indirectly, entice, solicit or encourage any customer or prospective customer of Company and/or its Affiliates to cease doing business with Company and/or its Affiliates, reduce its relationship with Company and/or its Affiliates or refrain from establishing or expanding a relationship with Company and/or its Affiliates. 4 VI. RETURN OF PROPERTY ------------------ A. Upon the termination of this Agreement for any reason whatsoever, Consultant agrees to end all further use and utilization of, and to immediately return to Company and/or its Affiliates, without limitation, Inventions, papers, drawings, tabulations, reports, computer programs, other documents or equipment, furnished by Company and/or its Affiliates or created or prepared by Consultant, either alone or jointly with others, pursuant to the provisions or requirements of this Agreement, and any tools or facilities furnished by Company and/or its Affiliates to Consultant or his agents. VII. TERMINATION ----------- A. Company may terminate this Agreement immediately without further payment to Consultant if: 1. Consultant materially breaches any provision of this Agreement; 2. Consultant does not satisfactorily perform the Services agreed upon in this Agreement; and 3. Consultant commits, attempts to commit, engages in or conspires to commit any crime or act involving fraud, misrepresentation or gross misconduct against the Company. B. Upon any termination under this Article VII, Consultant will immediately stop performing all Services unless otherwise directed by Company in writing. Within thirty (30) days after receipt from Consultant of a statement of services rendered, Company shall pay Consultant for all work properly completed prior to the termination. VIII. NOTICE ------ A. Any notice given under this Agreement shall be delivered personally or be written or telegraphic. Written notice shall be sent via next-day delivery or facsimile and by registered or certified mail, postage prepaid, return receipt requested. Any telegraphic notice must be followed within three (3) days by written notice. All notice shall be effective when first received at the following addresses except that any notice of change of address will be deemed effective only upon receipt by the party to whom it is directed: If to Consultant to: BUSINESSLINER, INC. _____________________ _____________________ _____________________ 5 If to Company to: PRESIDENT CREDIT MANAGEMENT SOLUTIONS, INC. 135 National Business Parkway Annapolis Junction, MD 20701 (With a copy to General Counsel) IX. COMPLIANCE WITH APPLICABLE LAWS ------------------------------- A. Consultant warrants that the Services performed under this Agreement shall comply with all applicable federal, state and local laws and regulations. B. Consultant's performance under this Agreement shall be conducted with due diligence and in full compliance with the highest professional standards of practice in the industry. Consultant shall comply with all applicable laws and Company and/or its Affiliates' safety rules in the course of performing the Services. If Consultant's work requires a license, Consultant has obtained that license and the license is in full force and effect. X. INDEPENDENT CONTRACTOR. Nothing herein contained shall be deemed to create ---------------------- an agency, joint venture, partnership or franchise relationship between parties hereto. Consultant acknowledges that he and his agents are independent contractors, and not agents or employees of the company or its affiliates and are not entitled to any company or affiliate employment rights or benefits and are not authorized to act on behalf of company or its affiliates. Consultant shall be solely responsible for any and all tax obligations of consultant, including but not limited to, all city, state and federal income taxes, social security withholding tax and other self employment tax incurred by consultant. Company and its affiliates shall not dictate the work hours of consultant or his agents during the term of this agreement. Anything herein to the contrary notwithstanding, the parties hereby acknowledge and agree that company and its affiliates shall have no right to control the manner, means, or method by which consultant performs the services called for by this agreement. Rather, company and its affiliates shall be entitled only to direct consultant with respect to the elements of services to be performed by consultant and the results to be derived by company and its affiliates, to inform consultant as to where and when such services shall be performed, and to review and assess the performance of such services by consultant for the limited purposes of assuring that such services have been performed and confirming that such results were satisfactory. Company and its affiliates shall be entitled to exercise broad general power of supervision and control over the results of work performed by consultant's personnel to ensure satisfactory performance, including the right to inspect, the right to stop work, the right to make suggestions or recommendations as to the details of the work, and the right to propose modifications to the work. XI. INDEMNIFICATION AND WARRANTIES. Consultant warrants that he shall have good ------------------------------ and marketable title to all of the inventions, information, material, work, or product made, created, conceived, written, invented, or provided by consultant pursuant to the provisions of this agreement ("product") except with respect to company's and/or its 6 affiliates' rights, title and interests in the product created hereunder. Consultant further warrants that the product shall be free and clear of all liens, claims, encumbrances, or demands of third parties other than company and/or its affiliates, including any claims by any such third parties of any rights, title, or interests in or to the product arising out of any trade secret, copyright, or patent. Consultant further warrants that his performance of all the terms of this agreement will not conflict with any federal, state or local laws, rules or regulations or proprietary rights of others or breach any agreement or arrangement by which consultant is bound, including, without limitation, any agreement to keep in confidence proprietary information acquired by consultant in confidence or in trust prior to his performance of the services for company and/or its affiliates. Consultant shall indemnify, defend, and hold harmless company and/or its affiliates and their customers from any and all liabilities, losses, costs, damages, judgments, or expenses (including reasonable attorneys' fees) resulting from or arising in any way out of any such claims by any third parties, and/or which are based upon, or are the result of any breach of the warranties contained in this section B. XII. GENERAL ------- A. Assignment. Company shall have the right to assign, delegate, or ---------- transfer at any time, in whole or in part, any or all of the rights, duties, and interests herein granted without the necessity of obtaining the consent of Consultant. Consultant acknowledges that this is a personal service contract and agrees not to assign any rights or delegate any duties hereunder without the prior written consent of Company. B. Controlling Law. This Agreement will be governed by those laws of the --------------- State of Maryland. C. Amendment. Except as otherwise provided herein, this Agreement may be --------- modified, amended, or any provision waived only by a written instrument signed by Consultant and Company. D. Entire Agreement. This Agreement and the Attachments hereto constitute ---------------- the entire agreement and set forth the entire understanding of the parties with respect to the subject matter hereof, supersede all prior agreements, covenants, arrangements, letters, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party, and may not be modified, amended or terminated by mutual consent except by a written agreement specifically referring to this Agreement signed by the parties hereto and any other party to be charged. E. Severability. In the event any one or more of the provisions of this ------------ Agreement are unenforceable, the remainder of the Agreement will be unimpaired. Any unenforceable provision will be replaced by a mutually acceptable provision which comes closest to the intention of the parties at the time the original provision was agreed upon. F. Headings. The Article and Section headings in this Agreement are for -------- purposes of reference only. 7 G. Right to Reproduce Consultant's Name. Consultant hereby grants ------------------------------------ Company, its designees, licensees, or successors, the right to reproduce, print, publish, or disseminate in any medium Consultant's name (including, without limitation, all professional, group, individual, and other assumed or fictitious names used by Consultant, if any) and biographical material concerning Consultant, as news or information, for purposes of trade, or for advertising purposes. H. Waiver. Company's failure at any time to require strict performance by ------ Consultant of any of the provisions hereof shall not waive or diminish Company's rights thereafter to demand strict compliance therewith or with any other provisions hereof. Waiver by Company of any default by Consultant shall not waive any other or similar default by Consultant. I. Confidentiality. Consultant and Company agree that no information --------------- concerning the terms of this Agreement may be disclosed to third-parties except as required by law. IN WITNESS WHEREOF, the parties hereto, each acting under due and proper authority, and each intending to be legally bound, have executed this Agreement on the date and year first above written. CREDIT MANAGEMENT SOLUTIONS, BUSINESSLINER, INC.: INC.: By: /s/ Scott Freiman By: /s/ James R. DeFrancesco ________________________ _________________________ Name/Title: CEO Name/Title: President 8 SCHEDULE A SCOPE OF WORK ------------- Consultant shall provide the following services in accordance with the terms and conditions of the Agreement dated of even date herewith by and between Consultant and Company to which this Schedule A is attached: Through James DeFrancesco only, provide advice and guidance on corporate transactions, strategic relationships, and product, marketing and sales strategies; attend client meetings, trade shows and corporate and marketing events; otherwise provide Company and its Affiliates with support in furtherance of their business interests. EX-10.22 3 0003.txt EXHIBIT 10.22 EXHIBIT 10.22 CONSULTING AGREEMENT -------------------- On this January 15, 2001, Businessliner, Inc. ("Consultant"), a Delaware corporation with its principal place of business at ______________, and Credit Management Solutions, Inc. ("Company"), a Delaware corporation with its principal place of business at 135 National Business Parkway, Annapolis Junction, Maryland, 20701, enter into this amendment (the "Amendment") of the Consulting Agreement (the "Agreement") between them dated May 20, 2000. WHEREAS, under the Agreement the term was to expire December 31, 2000. WHEREAS, after December 31, 2000, Company has received the consulting services of Consultant, and Company wishes to continue to receive those services through at least June 30, 2001. NOW THEREFORE, in consideration of the mutual promises and obligations specified in this Agreement, and any compensation paid to Consultant for services hereunder, and intending to be legally bound hereby, the parties agree as follows: 1. Article II.A. of the Agreement is amended to provide that the Agreement did not and shall not expire on December 31, 2000, but shall expire on June 30, 2001, except as agreed in a further written agreement of the parties. 1. Except as amended in Section 1 above, the Agreement is not amended and shall remain in full force and effect. 3. This Amendment may be executed by facsimile counterpart, each of which shall be deemed original and, taken together, shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto, each acting under due and proper authority, and each intending to be legally bound, have executed this Amendment on the date and year first above written. CREDIT MANAGEMENT SOLUTIONS, INC.: BUSINESSLINER, INC.: By: /s/ Scott Freiman By: /s/ James R. DeFrancesco __________________________ ___________________________ Name/Title: CEO Name/Title: President EX-10.23 4 0004.txt EXHIBIT 10.23 EXHIBIT 10.23 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement"), is made effective January 1, 2000 (the "Effective Date"), by and between Credit Management Solutions, Inc., a Delaware corporation with principal offices located at 135 National Business Parkway, Annapolis Junction, Maryland 20701 (the "Company"), and Howard Tischler (the "Executive"). WITNESSETH WHEREAS, the Company has a need for the Executive's personal services in an executive capacity; and WHEREAS, the Executive possesses the necessary strategic, financial, planning, operational and managerial skills necessary to fulfill those needs; and WHEREAS, the Executive and the Company desire to enter into a formal Employment Agreement to fully recognize the contributions of the Executive to the Company, to assure continuous harmonious performance of the affairs of the Company, and to formalize in writing the terms and conditions under which he has been employed by the Company since the Effective Date. NOW, THEREFORE, in consideration of the mutual promises, terms, provisions, and conditions contained herein, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. Definitions. For purposes of this Agreement, the following capitalized terms shall have the following meanings: a. "Affiliate" means any person or entity (i) that directly or indirectly owns more than fifty percent (50%) of the Voting Stock (as defined below) of the Company, or (ii) more than fifty percent (50%) of the Voting Stock of which is directly or indirectly owned by the Company, or (iii) more than fifty percent (50%) of the Voting Stock of which is directly or indirectly owned by another person or entity that directly or indirectly owns more than fifty percent (50%) of the Voting Stock of the Company. b. "Change of Control" of a company means the occurrence of any of the following: (i) any "person," as such term is currently used in Section 13(d) of the Securities Exchange Act of 1934, becomes a "beneficial owner," as such term is currently used in Rule 13d-3 promulgated under that Act of fifty percent (50%) or more of the Voting Stock of the company; (ii) a majority of the Board of Directors of the company consists of individuals other than Incumbent Directors, which term means the members of the Board on the date hereof; provided that any individual becoming a director subsequent to such date whose election or nomination for election was supported by two-thirds of the directors who then comprised the Incumbent Directors shall be considered to be an Incumbent Director; (iii) the Board of Directors of the company adopts any plan of liquidation providing for the distribution of all or substantially all of the company's assets; (iv) all or substantially all of the assets or business of the company are disposed of in any one or more transactions pursuant to a merger, consolidation or other transaction (unless the shareholders of the company immediately prior to such merger, consolidation or other transaction beneficially own, directly or indirectly, in substantially the same proportion as they owned the Voting Stock of the company, all of the Voting Stock or other ownership interests of the entity or entities, if any, that succeed to the business of the company); provided, however, that this subsection (iv) shall not apply in the event of a merger or consolidation of the Company with an Affiliate; or (v) the company combines with another company and is the surviving corporation but, immediately after the combination, the shareholders of the company immediately prior to the combination hold, directly or indirectly, fifty percent (50%) or less of the Voting Stock of the combined company, (there being excluded from the number of shares held by such shareholders, but not from the Voting Stock of the combined company, any shares received by affiliates of such other company in exchange for securities of such other company); provided, however, that this subsection (v) shall not apply in the event of a combination of the Company with an Affiliate. c. "Good Reason" means any of the following events: (i) a reduction in annual Salary (as defined below); (ii) a failure by the Company, or Affiliate by which the Executive is employed, to provide fringe benefits comparable to those offered to the Executive's peer executives; (iii) the failure of the Company, or Affiliate by which the Executive is employed, to obtain by operation of law or otherwise the assumption of its obligations to perform this Agreement from any successor to all or substantially all of the assets of the Company or such Affiliate; or (iv) a relocation of the Executive's worksite to a location which increases the distance from the Executive's home to his worksite by more than fifty (50) miles. d. "Good Reason Upon Change In Control" means any of the following events provided the event occurs either (i) less than eighteen (18) months after a Change in Control of the Company, or an Affiliate if the Executive is employed at that time by such Affiliate or the Company, or (ii) during the one-hundred and eighty (180) day or shorter time period between (x) the execution by Company (or such Affiliate) and a third party of a letter of intent or term sheet reflecting the terms of such Change in Control, or receipt by the Company (or such Affiliate) of a b2 written offer from a third party reflecting such Change in Control, and (y) the effective date of such Change in Control: (A) any of the events which constitute Good Reason under Section 1(c) above; (B) a material diminution in the Executive's duties or responsibilities; provided that a diminution shall not be deemed to have occurred solely because that Executive no longer has duties and responsibilities for a particular Affiliate as long as the Executive continues to have the same level, type and scope of duties and responsibilities as he had prior to the Change in Control; or (C) the assignment to the Executive of duties that materially impair his ability to perform the duties normally assigned to a person of his title and position at a corporation of the size and nature of the Company or Affiliate by which the Executive is employed (as applicable). e. "Voting Stock" means the issued and outstanding capital stock or other securities of any class or classes having general voting power under ordinary circumstances, in the absence of contingencies, to elect the directors of a corporation. f. "Termination Without Cause Upon Change in Control" means termination of the Executive's employment without "Cause" (as defined in Section 5(a) below) either (i) less than eighteen (18) months after a Change in Control of the Company , or an Affiliate if the Executive is employed at that time by such Affiliate or the Company, or (ii) during the one-hundred and eighty (180) day or shorter time period between (x) the execution by Company (or such Affiliate) and a third party of a letter of intent or term sheet reflecting the terms of such Change in Control, or receipt by the Company (or such Affiliate) of a written offer from a third party reflecting such Change in Control, and (y) the effective date of such Change in Control. 2. Position. -------- The Company hereby agrees to continue to employ the Executive to serve in the role of President and Chief Executive Officer of Credit Online, Inc. (a Delaware corporation), Credit Online, Inc. (a Maryland corporation), and CMSI Credit Services, Inc. (a Delaware corporation). The Company reserves the right to change the Executive's title, duties and/or responsibilities, and to reassign the Executive to or from any Affiliate. The Executive accepts such employment upon the terms and conditions set forth herein, and further agrees to perform to the best of his abilities the duties generally associated with his position, as well as such other duties as may be reasonably assigned by the Board of Directors of the Company (the "Board"), the Chief Executive Officer or President of the Company, and, if the Executive is employed by an Affiliate, the Chief Executive Officer, President or Board of Directors of such Affiliate. The Executive shall perform his duties diligently and faithfully and shall devote his full business time and attention to such duties. Each party's rights and obligations under this Section 2 are subject to Section 5 below. b3 3. Term of Employment and Renewal. ------------------------------ The term of the Executive's employment under this Agreement (the "Term") will commence on the date of this Agreement (the "Effective Date") and continue until terminated in accordance with Section 5 below. 4. Compensation and Benefits. ------------------------- (a) Salary. Commencing on the Effective Date, the Company agrees to pay ------ the Executive a base salary at an annual rate of one hundred and seventy-five thousand dollars ($175,000), payable in such installments as is the policy of the Company (the "Salary"), but no less frequently than monthly. Thereafter, the Company shall evaluate the Executive's Salary from time to time and make adjustments, in its discretion, subject to the rights and obligations set forth in Section 5 below. (b) Bonus. In its sole discretion, the Company may make the Executive ----- eligible to receive bonuses based on criteria to be determined by the Company and issued to the Executive in writing, in which event the Executive shall be entitled to receive such bonuses in accordance with such criteria. (c) Benefits. The Executive shall be entitled to participate in all -------- employee benefit plans which the Company provides or may establish from time to time for the benefit of its employees, including, without limitation, group life, medical, surgical, dental and other health insurance, short and long-term disability, deferred compensation, profit-sharing and similar plans. The Executive shall also be entitled to one hundred eighty four (184) hours of paid leave per year of employment, plus sick leave in accordance with standard Company policy. Two-thirds of any unused portion of such paid leave shall be considered to be vacation and, therefore, shall be paid to the Executive upon his cessation of employment with the Company. The Company will provide term life insurance for the Executive with benefits equal to his annual Salary, up to a maximum of four hundred thousand dollars ($400,000). The Company may also purchase one or more "key man" insurance policies on the Executive's life, each of which will be payable to and owned by the Company. The Company, in its sole discretion, may select the amount and type of key man life insurance purchased, and the Executive will have no interest in any such policy. The Executive will cooperate with the Company in securing this key man insurance, by submitting to all required medical examinations, supplying all information and executing all documents required in order for the Company to secure the insurance. (d) Stock Options. In the sole discretion of the Board, the Company may ------------- from time to time issue the Executive stock option grants under the Company's stock option plan and a stock option agreement, in which event the Executive shall be entitled to such options in accordance with such plan and agreement(s), subject however to the provisions of this Agreement regarding stock options. (e) Expenses. The Company shall pay or reimburse the Executive for all -------- reasonable out-of-pocket expenses actually incurred by the Executive during the Term in performing b4 services hereunder, provided that the Executive properly accounts for such expenses in accordance with the Company's policies. The Company shall pay the Executive an automobile allowance of no less than five hundred dollars ($500) per month through normal payroll procedures, and such allowance shall be reported as income on the Executive's year-end W-2 form. The Executive shall be responsible for submitting automobile expense reimbursement requests to the extent he wishes to convert any portion of the allowance to an expense reimbursement. The Company shall reimburse the Executive for cellular telephone expenses associated with business use. 5. Termination and Severance; Certain Events. ----------------------------------------- (a) Termination by the Company for Cause. Notwithstanding anything to the ------------------------------------ contrary in this Agreement, the Company may terminate the Executive's employment for Cause at any time, upon written notice to the Executive setting forth in reasonable detail the nature of such Cause. For purposes of this Agreement, "Cause" is defined as (i) the Executive's continued failure to perform his duties (other than due to physical incapacity or illness) after thirty (30) days' written notice and opportunity to cure; (ii) the Executive's conviction of any felony; (iii) the Executive's material misrepresentation of his professional qualifications; (iv) willful or reckless conduct by the Executive injurious to the Company or any Affiliate; or (v) the Executive's commission of fraud or malfeasance. Upon the termination for Cause of the Executive's employment, the Company and its Affiliates shall have no further obligation or liability to the Executive other than for Salary earned prior to the date of termination and any accrued but unused vacation. (b) Termination by the Company Without Cause. Notwithstanding anything to ---------------------------------------- the contrary in this Agreement, the Executive's employment hereunder may be terminated at any time without Cause by the Company upon fourteen (14) days' written notice to the Executive, provided, however, that if the Company terminates the Executive's employment without Cause the Company shall (i) pay the Executive on the effective date of termination all earned and unpaid Salary, earned and unpaid bonuses, and accrued and unused vacation; (ii) continue to pay the Executive the Salary and shall provide medical, life and disability coverage, under the same conditions as exist at the time of termination, for a six (6) month period beginning on the effective date of the termination; and (iii) notwithstanding anything to the contrary in any stock option agreement, any unvested stock options granted to the Executive shall accelerate and vest in full on the effective date of termination, and the Executive may exercise such options at any time up to two-hundred and seventy (270) days after the effective date of termination of his employment. As a condition of receiving such benefits pursuant to this Agreement, the Executive shall execute and deliver to the Company prior to his receipt of such benefits a general release substantially in the form attached hereto as Exhibit A, provided the Company executes such release and delivers an executed counterpart to the Executive. Notwithstanding anything to the contrary in this Section 5(b), if the termination constitutes a Termination Without Cause Upon Change in Control, then the Executive shall receive the benefits set forth in Section 5(d) below rather than as set forth in this Section 5(b). (c) Termination by the Executive. Notwithstanding anything to the contrary ---------------------------- in this Agreement, the Executive may terminate his employment hereunder upon thirty (30) days b5 written notice to the Company provided that the Company may pay the Executive his Salary in lieu of any portion of such notice period. The Executive may also terminate his employment hereunder after giving the Company written notice no more than thirty (30) days after the occurrence of an event which constitutes Good Reason, in which event the Company shall (i) pay the Executive on the effective date of termination all earned and unpaid Salary, earned and unpaid bonuses, and accrued and unused vacation; (ii) continue to pay the Executive the Salary and shall provide medical, life and disability coverage, under the same conditions as exist at the time of termination, for a six (6) month period beginning on the effective date of the termination, provided the Company executes such release and delivers an executed counterpart to the Executive; and (iii) notwithstanding anything to the contrary in any stock option agreement, any unvested stock options granted to the Executive shall accelerate and vest in full on the effective date of termination, and the Executive may exercise such options at any time up to two-hundred and seventy (270) days after the effective date of termination of his employment. As a condition of receiving such benefits pursuant to this Agreement, the Executive shall execute and deliver to the Company prior to his receipt of such benefits a general release substantially in the form attached hereto as Exhibit A, provided the Company shall execute such release and deliver an executed counterpart to the Executive. Notwithstanding anything to the contrary in this Section 5(c), if the Executive terminates his employment for Good Reason Upon Change in Control, then the Executive shall receive the benefits set forth in Section 5(d) below rather than as set forth in this Section 5(c). (d) Termination By Company or Executive After Change in Control. ----------------------------------------------------------- Notwithstanding anything to the contrary in this Agreement, in the event of a Termination Without Cause Upon Change in Control, or termination by the Executive for Good Reason Upon Change in Control, the Company shall provide the Executive the following benefits: (i) all earned and unpaid Salary and bonuses; (ii) all accrued and unused vacation; (iii) a lump sum payment equal to 2.99 times the Executive's average annual cash compensation during the previous five (5) years (or, if the Executive has been employed by the Company for a shorter period, then the average during such shorter period, with the first year's base salary annualized if the Executive was employed less than one (1) year); (iv) notwithstanding anything to the contrary in any stock option agreement, upon the Executive acknowledging in a signed writing the surrender of all his rights to vested and unvested stock options granted to him by the Company, a lump sum equal to the difference between the exercise price of such stock options and the higher of (x) the fair market value of the option shares on the effective date of the termination, or (y) the highest effective price paid for the Company's common stock by any acquirer in connection with the Change in Control; (v) medical, life and disability coverage for a period of twelve (12) months after the effective date of the termination, or until the Executive receives comparable coverage from another employer, whichever occurs first; and (vi) all accrued retirement and deferred compensation plans vest in full. Items (i) through (iv) shall be paid to the Executive within twenty (20) days after the effective date of the termination. As a condition of receiving such benefits pursuant to this Agreement, the Executive shall execute and deliver to the Company prior to his receipt of such benefits a general release substantially in the form attached hereto as Exhibit A, provided the Company shall execute such release and deliver an executed counterpart to the Executive. b6 (e) Death. In the event of the Executive's death during the Term of this ----- Agreement, the Executive's employment hereunder shall immediately and automatically terminate, and the Company shall (i) pay the Executive's estate or beneficiaries within a reasonable period after the effective date of termination all earned, unpaid Salary, all earned, unpaid bonuses and all accrued unused vacation; and (ii) notwithstanding anything to the contrary in any stock option agreement, any unvested stock options granted to the Executive shall accelerate and vest in full on the effective date of termination, and the recipients of such benefits may exercise such options at any time up to two-hundred and seventy (270) days after the effective date of termination of the Executive's employment. As a condition of receiving such benefits pursuant to this Agreement, the recipient(s) of benefits under this subsection shall execute and deliver to the Company prior to receipt of such benefits a general release substantially in the form attached hereto as Exhibit A, provided the Company shall execute such release and deliver an executed counterpart to such recipient(s). (e) Disability. Notwithstanding anything to the contrary in the Agreement, ---------- the Company may terminate the Executive's employment hereunder, upon written notice to the Executive, in the event that the Executive becomes disabled during the Term through any condition of either a physical or psychological nature and, as a result, is, with or without reasonable accommodation, unable to perform the essential functions of the services contemplated hereunder for (a) a period of ninety (90) consecutive days, or (b) for shorter periods aggregating one hundred twenty (120) days during any twelve (12) month period during the Term. Any such termination shall become effective upon mailing or hand delivery of notice that the Company has elected its right to terminate under this subsection 5(f), and the Company shall (i) pay the Executive on the effective date of termination all earned, unpaid Salary; (ii) pay the Executive on the effective date of termination all earned, unpaid bonuses; (iii) pay the Executive on the effective date of termination all accrued unused vacation; (iv) continue to pay the Executive the Salary and shall provide medical, life and disability coverage, under the same conditions as exist at the time of termination, for a six (6) month period beginning on the effective date of the termination, and (v) notwithstanding anything to the contrary in any stock option agreement, any unvested stock options granted to the Executive shall accelerate and vest in full on the effective date of termination, and the Executive may exercise such options at any time up to two-hundred and seventy (270) days after the effective date of termination of his employment. As a condition of receiving such benefits pursuant to this Agreement, the Executive shall execute and deliver to the Company prior to his receipt of such benefits a general release substantially in the form attached hereto as Exhibit A, provided the Company shall execute such release and deliver an executed counterpart to the Executive. (f) Certain Events. Notwithstanding anything to the contrary in any stock -------------- option plan or agreement, in the event of a Change in Control of the Company, or Affiliate by which the Executive is employed, all unvested stock options in the Company granted to the Executive shall accelerate and vest in full upon the Change in Control. As a condition of the foregoing benefit, the Executive agrees that, if so requested by the Company, or such Affiliate, prior to the Change in Control, he shall continue to be employed by the Company or such Affiliate for a period of one (1) year, subject to all of the other terms and conditions of this Agreement, and if he fails to satisfy such obligation: b7 (A) He shall pay to the Company as liquidated damages a sum equal to the difference between: (i) the exercise price of any stock options that vested pursuant to this Section 5(f) ("Section 5(f) Options") and were exercised by Executive prior to termination of his employment; and (ii) the higher of (x) the fair market value of the option shares on the effective date of the Change in Control, (y) the highest effective price paid for the Company's common stock by any acquirer in connection with the Change in Control, or (z) the price at which those shares were sold by or on behalf of Executive; and (B) All unexercised Section 5(f) Options shall immediately expire upon the termination of his employment. As a further condition of the foregoing benefit, the Executive shall execute and deliver to the Company prior to his receipt of such benefit a general release of claims up to the date of the Change in Control, substantially in the form attached hereto as Exhibit A, provided the Company shall execute such release and deliver an executed counterpart to the Executive. (g) Tax Deductability. If it is determined by the Company or the Internal ----------------- Revenue Service that any payment or benefit received or deemed received by the Executive from the Company (pursuant to this Agreement or otherwise) is or will become subject to any excise tax under Section 4999 of the Internal Revenue Code, and, therefore, that the Company will not be entitled to a federal tax deduction in connection with such payments and benefits or any portion thereof, then such payments and/or benefits shall be reduced, in a form and amount agreed to by the parties in good faith, in the amount necessary to allow the Company a federal tax deduction in connection with all payments and benefits provided to the Executive. 6. Choice of Law. ------------- The validity, interpretation and performance of this Agreement shall be governed by, and construed in accordance with, the internal law of Maryland, without giving effect to conflict of law principles. 7. Miscellaneous. ------------- (a) Assignment; Delegation. The Executive acknowledges and agrees that the ---------------------- rights and obligations of the Company under this Agreement may be assigned by the Company to any successors in interest. The Executive further acknowledges and agrees that the Company may delegate performance of its obligations to any Affiliate provided that the Company shall retain liability for any breach of its obligations under this Agreement. The Executive further acknowledges and agrees that this Agreement is personal to the Executive and that the Executive may not assign or delegate any rights or obligations hereunder. b8 (b) Withholding. All payments required to be made by the Company to the ----------- Executive under this Agreement shall be subject to withholding taxes, social security and other payroll deductions in accordance with the Company's policies applicable to employees of the Company at the Executive's level. (c) Entire Agreement. This Agreement, the Executive's employee ---------------- nondisclosure/noncompetition agreement with the Company, and any stock option agreement(s) between the parties, set forth the entire agreement between the parties on the subject matter contained herein and supersede any prior communications, agreements and understandings, written or oral, with respect to the terms and conditions of the Executive's employment. (d) Amendments. Any attempted modification of this Agreement will not be ---------- effective unless signed by an officer of the Company and the Executive. (e) Waiver of Breach. The Executive understands that a breach of any ---------------- provision of this Agreement may only be waived by an officer of the Company. The waiver by the Company of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. (f) Severability. If any provision of this Agreement should, for any ------------ reason, be held invalid or unenforceable in any respect by a court of competent jurisdiction, then the remainder of this Agreement, and the application of such provision in circumstances other than those as to which it is so declared invalid or unenforceable, shall not be affected thereby, and each such provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. (g) Notices. Any notices, requests, demands and other communications ------- provided for by this Agreement shall be in writing and shall be effective when delivered (i) in hand by private messenger, or (ii) by a nationally known and reputable overnight mail service, as follows (or to such other address as either party shall designate by notice in writing to the other in accordance herewith): If to the Company: 135 National Business Parkway Annapolis Junction, MD 20701 Attn: CEO With a copy to General Counsel If to Executive: __________________________ __________________________ __________________________ b9 (h) Survival. The Executive and the Company agree that certain provisions -------- of this Agreement shall survive the expiration or termination of this Agreement and the termination of the Executive's employment with the Company. Such provisions shall be limited to those within this Agreement which, by their express and implied terms, obligate either party to perform beyond the termination of the Executive's employment or termination of this Agreement. (i) Arbitration of Disputes. Any controversy or claim arising out of this ----------------------- Agreement or any aspect of the Executive's relationship with the Company including the cessation thereof shall be resolved by arbitration in accordance with the then existing Employment Dispute Resolution Rules of the American Arbitration Association, in Washington, D.C., and judgment upon the award rendered may be entered in any court having jurisdiction thereof. The parties shall split equally the costs of arbitration, except that each party shall pay its own attorneys' fees. The parties agree that the award of the arbitrator shall be final and binding. (j) Rights of Other Individuals. This Agreement confers rights solely on --------------------------- the Executive and the Company. This Agreement is not a benefit plan and confers no rights on any individual or entity other than the undersigned. (k) Headings. The parties acknowledge that the headings in this Agreement -------- are for convenience of reference only and shall not control or affect the meaning or construction of this Agreement. (l) Advice of Counsel. The Executive and the Company hereby acknowledge ----------------- that each party has had adequate opportunity to review this Agreement, to obtain the advice of counsel with respect to this Agreement, and to reflect upon and consider the terms and conditions of this Agreement. The parties further acknowledge that each party fully understands the terms of this Agreement and has voluntarily executed this Agreement. The Company shall pay the legal fees and costs incurred by the Executive in connection with the negotiation and preparation of this Agreement, upon the presentation of invoices in appropriate form. IN WITNESS WHEREOF, the undersigned have duly executed this Agreement to be made effective as of the Effective Date. EXECUTIVE CREDIT MANAGEMENT SOLUTIONS, INC. /s/ Howard Tischler By: /s/ Scott Freiman ______________________________________ __________________________________ PRINT NAME Title: CEO/President Howard Tischler b10 EXHIBIT A SEPARATION AGREEMENT AND GENERAL RELEASE This Separation Agreement and General Release ("Agreement") is made and entered into this ____ day of _____, _____, by and between Credit Management Solutions, Inc. (hereinafter the "Company" or "Employer") and [EMPLOYEE NAME] ("Employee") (hereinafter collectively referred to as the "Parties"), and is made and entered into with reference to the following facts. RECITALS -------- WHEREAS, Employee was hired by the Company on or about ________, as a ____________; and WHEREAS, the Company and Employee have agreed to terminate their employment relationship effective ______, ____; and WHEREAS, the Parties have entered into a written employment agreement, dated _________ (the "Employment Agreement"), under which Employee is entitled to certain severance benefits conditioned upon his/her execution of this Agreement; and WHEREAS, the Parties each desire to resolve any potential disputes which exist or may exist arising out of Employee's employment with the Company and/or the termination thereof. NOW THEREFORE, in consideration of the covenants and promises contained herein, the Parties hereto agree as follows: AGREEMENT --------- 1. Agreement By the Employee. In exchange for the payments described ------------------------- in paragraph 2 below, Employee agrees to the following: (a) that his/her employment with the Company is terminated effective _________, ____ (hereinafter the "Termination Date"); and (b) to be bound by the terms of this entire Agreement. 2. Agreement By the Company. In exchange for Employee's agreement to ------------------------ be bound by the terms of this entire Agreement, including but not limited to the Release of Claims in paragraph 3, the Company agrees to provide Employee with a severance benefits as provided for in the Employment Agreement. Employee acknowledges that, absent this Agreement, s/he has no legal, contractual or other entitlement to the consideration set forth in this paragraph and that the amount set forth in this paragraph constitute valid and sufficient consideration for Employee's release of claims and other obligations set forth herein. b11 3. Release of Claims. ----------------- (a) Employee hereby expressly waives, releases, acquits and forever discharges the Company and its divisions, subsidiaries, affiliates, parents, related entities, partners, officers, directors, shareholders, investors, executives, managers, employees, agents, attorneys, representatives, successors and assigns (hereinafter collectively referred to as "Releasees"), from any and all claims, demands, and causes of action which Employee has or claims to have, whether known or unknown, of whatever nature, which exist or may exist on Employee's behalf from the beginning of time up to and including the date of this Agreement. As used in this paragraph 3, "claims," "demands," and "causes of action" include, but are not limited to, claims based on contract, whether express or implied, fraud, stock fraud, defamation, wrongful termination, estoppel, equity, tort, retaliation, intellectual property, personal injury, spoliation of evidence, emotional distress, public policy, wage and hour law, statute or common law, claims for severance pay, claims related to stock options and/or fringe benefits, claims for attorneys' fees, vacation pay, debts, accounts, compensatory damages, punitive or exemplary damages, liquidated damages, and any and all claims arising under any federal, state, or local statute, law, or ordinance prohibiting discrimination on account of race, color, sex, age, religion, sexual orientation, disability or national origin, including but not limited to, the Age Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964 as amended, the Americans with Disabilities Act, the Family and Medical Leave Act or the Employee Retirement Income Security Act. (b) The Company and its divisions, subsidiaries, affiliates, parents, related entities (hereinafter referred to as company), hereby expressly waive, release, acquit and forever discharge Employee and his agents, attorneys, representatives, successors, heirs and assigns (hereinafter collectively referred to as "Employee Releasees"), from any and all claims, demands, and causes of action which company has or claims to have, whether known or unknown, of whatever nature, which exist or may exist on company's behalf from the beginning of time up to and including the date of this Agreement. As used in this paragraph 3, "claims," "demands," and "causes of action" include, but are not limited to, claims based on contract, whether express or implied, fraud, stock fraud, defamation, wrongful termination, estoppel, equity, tort, retaliation, intellectual property, personal injury, spoliation of evidence, emotional distress, public policy, wage and hour law, statute or common law, claims for severance pay, claims related to stock options and/or fringe benefits, claims for attorneys' fees, vacation pay, debts, accounts, compensatory damages, punitive or exemplary damages, liquidated damages, and any and all claims arising under any federal, state, or local statute, law, or ordinance prohibiting discrimination on account of race, color, sex, age, religion, sexual orientation, disability or national origin, including but not limited to, the Age Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964 as amended, the Americans with Disabilities Act, the Family and Medical Leave Act or the Employee Retirement Income Security Act; provided, however, that, this release does not include any claim, demand or cause of action arising out of Executive's malfeasance, fraud, embezzlement, intentional torts, breach of his duties under his employee nondisclosure/noncompetition agreement with the Company, violation of any other duties with respect to confidential or proprietary information or intellectual property (including without limitation patents, copyrights, trade secrets and trademarks), noncompetition, nonsolicitation or loyalty, or violation of the Company's employee policies, including without limitation its Human Resources and securities trading policies. 4. Last Date of Employment. It is understood and agreed that ----------------------- Employee's last date of employment with Employer is _________, ____. b12 5. Receipt of Wages and Other Compensation. Employee acknowledges --------------------------------------- and agrees that, prior to his/her execution of this Agreement, s/he has received payment for all wages, salary, bonuses, accrued vacation, and all other compensation owed to Employee by the Company. 6. Company Property/Proprietary Information. Employee agrees to ---------------------------------------- continue to abide by the terms of his employee nondisclosure/noncompetition agreement with the Company, the terms of which are incorporated herein by reference. 7. Acceptance of Agreement/[Revocation]. This Agreement was received ------------------------------------ by Employee on ______, ____. Employee may accept this Agreement by returning a signed original to the Company. This Agreement shall be withdrawn if not accepted in the above manner on or before _____. 8. Non-Admission of Liability. The Company denies any wrongdoing -------------------------- whatsoever in connection with its dealings with Employee, including but not limited to Employee's employment and termination. It is expressly understood and agreed that nothing contained in this Agreement shall constitute or be treated as an admission of any wrongdoing or liability on the part of the Company or the Employee. 9. No Filing of Claims. Employee represents and warrants that s/he ------------------- does not presently have on file, and further represents and warrants that s/he will not hereafter file, any claims, charges, grievances or complaints against any of the Releasees (defined above) in or with any administrative, state, federal or governmental entity, agency, board or court, or before any other tribunal or panel or arbitrators, public or private, based upon any actions or omissions by the Releasees occurring prior to the date of this Agreement. 10. Ownership of Claims. Employee represents and warrants that s/he ------------------- is the sole and lawful owner of all rights, title and interest in and to all released matters, claims and demands referred to herein. Employee further represents and warrants that there has been no assignment or other transfer of any interest in any such matters, claims or demands which she may have against the Releasees. 11. Confidentiality. Employee understands and agrees that this --------------- Agreement, and the matters discussed in negotiating its terms, are entirely confidential. It is therefore expressly understood and agreed that Employee will not reveal, discuss, publish or in any way communicate any of the terms, amount or fact of this Agreement to any person, organization or other entity, with the exception of his/her immediate family members and professional representatives, unless required by subpoena or court order. Employee further agrees that s/he will not, at any time in the future, make any statements to any third parties that disparage any of the Releasees personally or professionally. 12. Tax Indemnification. It is understood and agreed that Employee is ------------------- liable for all tax obligations, if any, with respect to the settlement payments provided for herein. Employee agrees to indemnify, defend and hold harmless Employer from any and all taxes, assessments, penalties, loss, costs, reasonable attorneys' fees, expenses or interest payments that Employer may at any time incur by reason of any demand, proceeding, action or suit brought against Employer arising out of or in any manner related to any local, state or federal taxes allegedly due from Employee in connection with this Agreement; provided (a) Employer promptly notifies Employee of any such claim, demand or cause of action against the Company, and (b) keeps Employee fully informed of all material facts and events with respect to such proceedings (to the extent such information does not waive any privileges). 13. Maryland Law Applies. This Agreement, in all respects, shall be -------------------- interpreted, enforced and governed by and under the laws of the State of Maryland. Any and all actions relating to this Agreement shall be filed and maintained in the federal and/or state courts located in the State of b13 Maryland, and the parties consent to the jurisdiction of such courts. In any action arising out of this Agreement, or involving claims barred by this Agreement, the prevailing party shall be entitled to recover all costs of suit, including reasonable attorneys' fees. 14. Successors and Assigns. The Parties expressly understand and ---------------------- agree that this Agreement, and all of its terms, shall be binding upon their representatives, heirs, executors, administrators, successors and assigns. 15. Consultation with Counsel. Employee acknowledges that s/he has ------------------------- been advised to consult with legal counsel of her choice prior to execution and delivery of this Agreement. 16. Integration. Except as otherwise specifically provided for, this ----------- Agreement constitutes an integrated, written contract, expressing the entire agreement between the Parties with respect to the subject matter hereof. In this regard, Employee represents and warrants that s/he is not relying on any promises or representations which do not appear written herein. Employee further understands and agrees that this Agreement can be amended or modified only by a written agreement, signed by all of the Parties hereto. 17. Counterparts. This Agreement may be executed in separate ------------ counterparts and by facsimile, and each such counterpart shall be deemed an original with the same effect as if all Parties had signed the same document. 18. Headings. The headings in each paragraph herein are for -------- convenience of reference only and shall be of no legal effect in the interpretation of the terms hereof. 19. Severability. If any provision in this Agreement is held to be ------------ invalid, the remainder of this Agreement shall not be affected by such a determination. 20. Voluntary Agreement. EMPLOYEE UNDERSTANDS AND AGREES THAT S/HE ------------------- MAY BE WAIVING SIGNIFICANT LEGAL RIGHTS BY SIGNING THIS AGREEMENT, AND REPRESENTS THAT S/HE HAS ENTERED INTO THIS AGREEMENT KNOWINGLY AND VOLUNTARILY, WITH A FULL UNDERSTANDING OF AND IN AGREEMENT WITH ALL OF ITS TERMS. IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on the dates provided below. DATED: _____________________, ____ CREDIT MANAGEMENT SOLUTIONS, INC. By: ________________________ Its: _______________________ DATED: _____________________, ____ [EMPLOYEE NAME] _____________________________ b14 EX-10.24 5 0005.txt EXHIBIT 10.24 Exhibit 10.24 AMENDMENT OF EMPLOYMENT AGREEMENT This Amendment (the "Amendment"), is made and entered into this ____ day of December, 2000, by and between Credit Management Solutions, Inc., a Delaware corporation with principal offices located at 135 National Business Parkway, Annapolis Junction, Maryland 20701 (the "Company"), and ___________ (the "Executive"). WITNESSETH WHEREAS, the Executive and the Company entered into the Employment Agreement (the ("Agreement") dated __________; WHEREAS, the Executive and the Company agree that it is in their mutual interests to amend certain provisions of the Agreement; and WHEREAS, the Executive and the Company desire to enter into such Amendment. NOW, THEREFORE, for mutual consideration the receipt and sufficiency of which hereby is acknowledged, the parties agree to amend the Agreement as follows: 1. Capitalized terms defined in the Agreement shall have the same meaning in this Amendment. 2. The Agreement is amended as follows: The Executive agrees that he is not entitled to the consideration provided under Section 5(d)(iv) of the Agreement, in connection with either Termination Without Cause Upon Change in Control or termination by the Executive for Good Reason Upon Change in Control, if the acquirer in the Change in Control provides voting common stock in exchange for 90% or more of the voting common stock of the Company or otherwise seeks to treat the acquisition as a pooling for accounting purposes; provided, however, that the foregoing does not remove or otherwise modify the other consideration or conditions set forth in Section 5(d), and 2.1 If the date of termination is before the Change in Control, then the Executive is entitled to the consideration set forth in Section 5(b)(iii) of the Agreement; or 2.2 If the date of termination is after the Change of Control, then the conditions set forth in the second sentence of Section 5(f) of the Agreement do not apply, and the Executive's time to exercise his options are extended to 270 days after the date of termination. 3. Except as set forth in Section 2 above, the Agreement is not amended and remains in full force and effect. IN WITNESS WHEREOF, the undersigned have duly executed this Amendment as of the day and year set forth below. EXECUTIVE: ____________________________________ CREDIT MANAGEMENT SOLUTIONS, INC. ____________________________________ By: _________________________________ PRINT NAME Title: ______________________________ Dated: _____________, 2000 Dated: _______________, 2000 EX-23.1 6 0006.txt EXHIBIT 23.1 EX-23.1 CONSENT EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-37151) pertaining to the Credit Management Solutions, Inc. 1997 Stock Incentive Plan, of our report dated February 23, 2001 with respect to the consolidated financial statements of Credit Management Solutions, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 2000. /s/ Ernst & Young LLP Baltimore, Maryland March 27, 2001 -----END PRIVACY-ENHANCED MESSAGE-----