Form Of Tax Indemnification Agreement

TAX INDEMNIFICATION AGREEMENT


This TAX INDEMNIFICATION AGREEMENT (the "Agreement") is entered into as of December __, 1996 between Credit Management Solutions, Inc., a Delaware corporation (the "Company"), and the persons listed on Schedule A attached hereto (individually a "Stockholder" and collectively the "Stockholders"). Capitalized terms not otherwise defined have the meanings ascribed to them in Section 1.1.


WHEREAS, the Company and the Stockholders have entered into this Agreement as a condition to the Public Offering;


WHEREAS, the Company has been an "S corporation" (as defined in Section 1361(a)(1) of the Code) for federal tax purposes since its inception in 1987;


WHEREAS, the Company's election to be treated as an S corporation terminated upon the reincorporation of the Company in Delaware (the "Termination Date"), and as a result the Company has been a "C corporation" (as defined in Section 1361(a)(2) of the Code) since the Termination Date;


WHEREAS, the Company will declare the AAA Dividend, a portion of which will be payable on the Closing Date and the balance of which will be payable on or before the Balance Payment Date;


WHEREAS, the Company and the Stockholders wish to provide for certain tax related payments in connection with the Company's status as an S corporation and for the adjustment of the amount of the AAA Dividend in certain events; and


WHEREAS, the Company and the Stockholders wish to terminate this Agreement such that it has no effect should the Pubic Offering not occur.


NOW, THEREFORE, the parties agree as follows:


ARTICLE I


DEFINITIONS


1.1 Definitions. the following terms, as used herein, have the following meanings:


"AAA" means the Company's "Accumulated adjustments account," as defined in Section 1368(e)(1) of the Code, as of the close of business on the day before the Termination Date. 2
"AAA Dividend" means the dividend to be declared by the Company in an amount equal to the Company's undistributed S corporation earnings to the stockholders of record one day prior to the Termination Date.


"AAA Settlement Date" means the last day of one of the following periods, whichever is applicable: (i) the "post-termination transition period," as defined in Section 1377(b) of the Code, of the Company, in the case where the AAA is determined to be greater than determined on the Balance Payment Date, or (ii) the calendar year of the Closing Date, in the case where the AAA is determined to be less than determined on the Balance Payment Date.


"Adjustment Amount" means the net increase in taxable income of one or more of the Stockholders or the Company based on a Final Determination and which gives rise to a payment pursuant to Section 3.3 or Section 3.4 hereof.


"Affected Stockholder" means a stockholder whose tax returns are adjusted in a manner which gives rise to an obligation of the Company pursuant to Section 3.3 hereof.


"Balance AAA Dividend" means the portion of the AAA Dividend payable to the Stockholders of record as of one day prior to the Termination Date in an amount equal to the balance of the AAA on the Termination Date minus the Initial AAA Dividend.


"Balance Payment Date" means January 15, 1997.


"Blended Rate" means a percentage which equals the sum of the maximum marginal federal and state individual income tax rates for an individual residing in Maryland (after giving effect to the full deductibility of state income taxes for federal income tax purposes) in effect for the year of the adjustment to a tax return of the Company or such Stockholder that gives rise to a correlative adjustment to a tax return of such Stockholder or the Company, respectively. For example, if an adjustment that results in an amount due from the Stockholders hereunder, the year of the Company's return that was adjusted shall determine the Blended Rate to be used in computing the amount due.


"Closing Date" means the date on which the Public Offering closes.


"Code" means the Internal Revenue Code of 1986, as amended.


"C Short Year" means that portion of the S Termination Year of the Company beginning on the Termination Date and ending on the last day of the S Termination Year.


"C Taxable Year" means any taxable year (or portion thereof) of the Company during which it is a C corporation, including the C Short Year.


2 3
"Final Determination" means the earliest to occur of (i) the execution of a closing agreement between a Stockholder and a Taxing Authority or between the Company and a Taxing Authority, (ii) a decision of a court of law that is either nonappealable or with respect to which no appeal is taken, or (iii) any other event or agreement which establishes the tax treatment of an item to the reasonable satisfaction of both parties.


"Initial AAA Dividend" means the portion of the AAA Dividend to be paid to the Stockholders of record as of one on or immediately after the Closing Date.


"Public Offering" means the initial public offering of the Company's Common Stock pursuant to the Registration Statement on Form S-1 originally filed by the Company with the Securities and Exchange Commission on October 11, 1996.


"S Short Year" means the portion of the S Termination Year beginning on the first day of such taxable year and ending on the day immediately preceding the Termination Date.


"S Taxable Year" means any taxable year (or portion thereof) of the Company during which the Company was an S corporation for the entire year, including the S Short Year.


"S Termination Year" shall mean the fiscal year of the Company that includes the Termination Date.


"Taxing Authority" means the United States Internal Revenue Service and any comparable state or foreign taxing authority.


ARTICLE II


TERMINATION OF S CORPORATION STATUS, ALLOCATION
OF INCOME AND ADJUSTMENT OF AAA DIVIDEND


2.1 Termination of S Corporation Status. Termination of the Company's S corporation status occurred upon the reincorporation of the Company in Delaware.


2.2 Declaration of AAA Dividend. On December 1, 1996 the Company shall declare the AAA Dividend. The AAA Dividend (including the Initial AAA Dividend and the Balance AAA Dividend and any adjustments thereto) shall be payable based upon the Stockholders ownership of common stock as of one day prior to the Termination Date.


2.3 Allocation Election. The Company shall be required to elect to allocate the items described in Section 1362(e) (2) (A) of the Code pursuant to Section 1362(e) (3) of the Code under "normal tax accounting rules," and the Stockholders agree to consent to such


3 4 election and to provide the Company with the statement of consent of all Stockholders described in Section 1.1362-6(b) of the Treasury Regulations.


2.4 Adjustment to AAA Dividend.


(a) The parties acknowledge that the amount of the Initial AAA Dividend and the Balance AAA Dividend will be based on good faith determinations by the Company of the amount of AAA.


(b) The parties agree that if the Company determines after the Termination Date and on or before the AAA Settlement Date that the amount of the AAA as of December 15, 1996 does not equal the amount of the sum of the Initial AAA Dividend and the Balance AAA Dividend, then:


(i) if the amount of the sum of the Initial AAA
Dividend and the Balance AAA Dividend exceeds the amount of
the AAA as of December 15, 1996, the Stockholders who received
the Initial AAA Dividend and the Balance AAA Dividend shall
immediately thereafter remit to the Company their pro-rata
share of such excess; and


(ii) if the amount of the AAA as of December 15,
1996 exceeds the amount of the sum of the Initial AAA Divide ...