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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2004 |
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or |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
of to |
Commission file number 000-02333
Open Solutions Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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22-3173050 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
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300 Winding Brook Drive,
Glastonbury, CT
(Address of principal executive offices) |
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06033
(Zip Code) |
(860) 652-3155
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $0.01 par value per share
(Title of Class)
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 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 þ No o
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. o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act
Rule 12b-2). þ
Aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant, based on the
last sale price for such stock on June 30, 2004:
$476,100,415.
As of March 9, 2005, 19,475,290 shares of common
stock, $0.01 par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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Form 10-K |
| Document Description |
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Part |
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Portions of the Registrant’s Proxy Statement for the Annual
Meeting of Stockholders to be held May 19, 2005
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III |
INDEX
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to the historical information, this Annual Report on
Form 10-K contains or incorporates forward-looking
statements within the meaning of section 27A of the
Securities Act of 1933 and section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are based
on current expectations, estimates, forecasts and projections
about the industry and markets in which we operate and
management’s beliefs and assumptions. In addition, other
written or oral statements that constitute forward-looking
statements may be made by or on our behalf. Words such as
“expect,” “anticipate,” “intend,”
“plan,” “believe,” “seek,”
“estimate,” and variations of such words and similar
expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and
assumptions that are difficult to predict. We have included
important factors in the cautionary statements under the heading
“Factors That May Affect Future Results” that we
believe could cause our actual results to differ materially from
the forward-looking statements we make. We do not intend to
update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise.
1
PART I
Overview
Open Solutions Inc. is a provider of software and services that
allow financial institutions to compete and service their
customers more effectively. We develop, market, license and
support an enterprise-wide suite of software and services that
performs a financial institution’s data processing and
information management functions, including account,
transaction, lending, operations, back office, client
information and reporting. Our core software and our
complementary products access and update real-time data stored
in a single relational database, which is designed to deliver
strategic benefits to financial institutions. Our software can
be operated either by the financial institution internally, on
an outsourced basis in one of our outsourcing centers or through
an outsourcing center hosted by one of our resellers. We have
historically targeted commercial banks and thrifts with assets
under $20 billion and all credit unions. Our aggregate
revenues increased from approximately $44.3 million in 2002
to approximately $63.9 million in 2003, and were
approximately $107.2 million for the year ended
December 31, 2004.
Our complementary products can be licensed to financial
institutions separately or as part of our fully-integrated
suite. When combined with our core software, these complementary
products provide financial institutions with a suite of
applications that operate efficiently and take advantage of the
architecture of our core solution, limiting the need for
software customization or middleware, which is software that
allows two applications to interface. Our complementary
products, which are fully integrated with our core, include
business intelligence, customer relationship management, or CRM,
check imaging, interactive voice response, Internet banking and
cash management, general ledger and profitability, loan
origination and check and item processing functions. We use an
open and flexible software architecture to maximize a
client’s flexibility with respect to different hardware
configurations and third-party software applications that are
commonly used by financial institutions, allowing our clients to
select our complete suite or third-party products without
incurring substantial additional implementation costs. Based on
a design that is customer-centric, our software leverages an
institution’s customer information through data mining
(sorting through data to identify patterns and establish
relationships) and collaborative filtering (the creation of
recommendations for a customer based on data gathered on similar
customers’ actions and preferences) and allows an
institution to provide its customers with better service,
improve customer retention and identify and pursue potential
cross-selling opportunities.
In contrast to legacy systems, our technologies are fully
integrated, open, flexible, customer-centric and efficient,
permitting financial institutions to draw on and deliver
consistent information quickly. Our technology allows our
clients to access information from disparate sources and then
analyze and distribute that information for use at the point of
customer contact. We believe that our products and services
enable our clients to reduce their overall core processing and
operational costs and meet their strategic needs more
effectively.
With the acquisition of the Payment Solutions Group of Datawest
Solutions Inc, we have added products targeted at institutions
beyond the traditional definition of a financial institution,
but which nonetheless participate in the processing of retail
financial transactions in North America and internationally.
These include independent sales organizations, large merchants
and non-bank transaction processors. We believe that the
products sold by the Payments Solutions Group of Datawest allow
these institutions to drive and manage their own network of ATM
and point of service terminals, as well as connect to national
and international transaction processing networks.
Open Solutions Inc. is headquartered in Glastonbury,
Connecticut, and has other facilities in Connecticut, New York,
Michigan, Georgia, Indiana, New Hampshire and Ontario and
British Columbia, Canada. We were founded in 1992 and are
incorporated in Delaware. We operate and manage our business as
one reportable segment, the development and marketing of
computer software and related services and operate primarily in
two geographic areas, the United States of America and Canada.
As of March 1, 2005, we had approximately 776 employees.
Our common stock is quoted on the Nasdaq National Market under
the symbol OPEN.
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We are subject to the informational requirements of the
Securities Exchange Act of 1934 and will file reports, proxy
statements and other information with the Securities and
Exchange Commission, or SEC. Such reports, proxy statements and
other information, as well as the registration statement and the
exhibits and schedules thereto, may be inspected, without
charge, at the public reference facility maintained by the SEC
at 450 Fifth Street, NW, Washington, D.C. 20549.
Copies of such material may also be obtained from the Public
Reference Section of the SEC at 450 Fifth Street, NW,
Washington, D.C. 20549, at prescribed rates. You may obtain
information on the operation of the SEC public reference room in
Washington, D.C. by calling the SEC at 1-800-SEC-0330. Such
materials can also be inspected on the SEC’s website at
www.sec.gov.
We maintain a website with the address www.opensolutions.com. We
are not including the information contained on our website as a
part of, or incorporating it by reference into, this Annual
Report on Form 10-K. We make available free of charge
through our website our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on
Form 8-K, and amendments to these reports, as soon as
reasonably practicable after we electronically file such
material with, or furnish such material to, the SEC. We have
posted on our website a copy of our code of business conduct and
ethics. In addition, we intend to disclose on our website any
amendments to, or waivers from, our code of business conduct and
ethics that are required to be publicly disclosed pursuant to
rules of the SEC and the Nasdaq National Market.
Industry Background
Financial institutions have historically invested a significant
amount of money in information technology systems. Technology
research firm IDC estimates that banks, thrifts and credit
unions in the United States spent approximately $42 billion
on information technology during 2004 and expects spending to
grow to over $52 billion by 2007. According to Thomson
Financial Inc., a leading provider of industry information,
there are approximately 19,460 commercial banks, thrifts and
credit unions in the United States, approximately 19,400 of
which have an asset base of under $20 billion.
We believe that these financial institutions, which have
traditionally competed on the basis of personalized service, are
facing increasing challenges to improve their operating
efficiencies. These challenges include the entrance of
non-traditional competitors, the compression of margins on
traditional products, significant channel proliferation and the
convergence of financial products into a single institution.
Recent legislation has allowed non-traditional competitors, such
as insurance companies and brokerage houses, to enter the market
for traditional banking products. Because these competitors are
able to subsidize traditional banking products with the revenues
of other, higher-profit products, financial institutions have
experienced lower margins, increasing the pressure to reduce
costs while continuing to offer an increasing array of consumer
products and services. At the same time, the cost and complexity
of delivering these products and services has increased as the
widespread introduction of new technology has forced financial
institutions to expand their distribution channels to include
ATMs, telephone banking, Internet banking and wireless devices.
Legislative changes have also accelerated the ability of
financial institutions to offer wider ranges of products and
services to their customers. To distinguish themselves from
competitors in this more competitive environment, banks and
credit unions must accurately define and understand their
specific markets, and be able to launch relevant products and
services to those markets over tailored delivery channels. These
challenges are forcing financial institutions to examine how to
conduct their business and service their customers most
efficiently.
Financial institutions have traditionally fulfilled their
information technology needs through legacy computer systems,
operated either by the institution itself or through an
outsourcing center. Legacy systems, which operate in large
mainframe or minicomputer environments, are generally highly
proprietary, inflexible and costly to operate and maintain.
Legacy systems often require financial institutions to purchase
a specific vendor’s hardware and software, requiring them
to conform evolving business processes and reporting needs to
the architecture of the legacy systems, and preventing them from
adopting new technologies or launching new products on a
cost-effective and timely basis. Most legacy systems employed by
commercial banks are designed primarily to batch process a large
number of transactions and create centralized financial records,
limiting the ability of these banks to offer their customers
real-time transaction processing. On the other hand, most legacy
systems employed by credit unions are designed for real-time
transaction processing, but they
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limit the ability to conduct high-volume processing or more
traditional commercial banking functions. In addition, legacy
systems typically store data in non-relational, or sequentially
indexed, files. Because the data is not organized by customer,
financial institutions often face challenges extracting
information from their legacy systems, which are unable to
easily provide real-time, actionable customer data to the
individuals within the financial institution servicing customers
without additional software.
We believe that financial institutions today are seeking more
integrated, open, flexible, customer-centric and efficient
information technology solutions that:
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combine high performance, scalability, reliability and security
with the advantages associated with relational and highly
normalized (which means data is easily accessible and not stored
redundantly) technology based on industry standards, |
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deliver new products and services to their customers quickly and
efficiently without extensive custom development, |
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integrate easily with other applications used in the enterprise
(whether on an in-house or an outsourced basis) without
expensive middleware, |
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provide quick and effective access to customer and account data
in order to offer better, more customized services, monitor
trends and performance and cross-sell services and products, |
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allow real-time access to customer data while preserving the
financial institution’s ability to batch process large
transactions, and |
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accommodate, in a single application, multiple delivery
channels, such as ATMs, telephone banking, Internet banking and
wireless banking, as well as new delivery channels as they
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We believe that a technology solution must meet all of these
requirements to enable financial institutions to achieve a
competitive advantage in their markets through improved customer
service, competitive product offerings and lower costs. In
addition, financial institutions are required by federal law to
evaluate the effectiveness of their information technology
systems periodically. This obligation, together with significant
upgrades and phase-outs of certain hardware by hardware
providers, creates an ongoing need for institutions to evaluate
replacement of their information technology systems.
These requirements can be met by information technology systems
based on open, industry-standard operating environments and
relational databases. Relational and real-time technology can
improve information sharing by providing access at each desktop
to critical customer and transaction data and business
applications, which is restricted or difficult to access in
legacy environments. This technology also enables organizations
to streamline business practices and reporting to make faster,
more informed decisions. Because this technology is based on an
open architecture, it is easily scalable by upgrading the server
or linking multiple servers. In addition, this open model offers
flexibility in that additional functionality can easily be
provided through third-party applications. Furthermore, the
costs of maintaining a legacy system, which include the costs of
upgrading both legacy system software and hardware, are
generally greater over time than the costs associated with newer
technology.
Our Solution
Our core software product is a fully-integrated, open, flexible,
customer-centric solution that enables financial institutions to
service their customers more efficiently and effectively. Our
core software operates in Microsoft, UNIX and LINUX environments
using an Oracle relational database, supplemented by a suite of
complementary software applications, which are fully integrated
with our core technology and can also be used with any other
vendor’s core software. We also offer our clients a
comprehensive set of support services.
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The key attributes of our solution are its:
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Full Integration at the Core Level |
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Fully-Integrated Information Technology. Our core
software supports all of a financial institution’s
principal data processing requirements using a single relational
database designed as an integral component of the system
architecture. Our fully-integrated software suite allows our
clients to replace their highly proprietary, inflexible and
costly legacy systems, which generally contain many disparate
software applications, multiple databases and cumbersome and
expensive middleware, with one integrated software application
based on a single database architecture. |
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Compatibility With Varied Non-Proprietary Hardware.
Because our core system was designed with an open architecture,
our clients can run our software on desktop and server hardware
supplied by a wide array of vendors, including Hewlett-Packard
Company, IBM Corp., Dell Computer Corporation, Sun Microsystems,
Inc. and Unisys Corporation. In contrast, legacy systems often
require the financial institution to purchase vendor-specific
hardware, a vendor’s core software product and
vendor-specific complementary products, each of which must be
customized to interface with a decades-old legacy system,
imposing significant cost burdens, both in cash outlay and
manpower. |
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Software Compatibility. The flexibility and scalability
of our core applications permit our clients to incorporate
complementary software applications, whether designed by us or
by a third party, in a cost-effective manner. Our complementary
products, which may be used with either our core software or a
third-party system, include profitability, web-based imaging,
loan origination, cash management, collections, interactive
voice solutions and check and item processing modules that may
be purchased as part of a fully-integrated software suite or
individually. In addition, our open architecture allows a client
to activate a particular software module as its functionality is
desired, which provides our clients with the ability to react to
their customers’ needs efficiently. |
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Scalability. Although most of our current clients have an
asset base under $20 billion, our open architecture is
designed to accommodate the needs of larger financial
institutions, and to provide our clients the ability to continue
to use our solution as they grow. In May and June 2002 we
performed a three-week performance test and benchmark of our
core software, the results of which demonstrated that our
solution can meet the processing requirements of an institution
with $40 billion in assets and four million accounts. The
scalability of our architecture enables us to manage unexpected
increases in clients’ processing volumes as well as support
the growth of our clients’ businesses. |
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Client Delivery of New Products and Services. Our
software allows our clients to offer new products and services
to their customers without reconfiguring their information
technology infrastructure. In contrast, modifications required
by legacy systems in order to accommodate new financial products
can be costly and time-consuming and may require the purchase
and maintenance of additional middleware. In addition, our
clients can change the way in which they serve their
customers — such as converting from a thrift to a
commercial bank — without replacing or making major
modifications to our software. |
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Direct License or Outsourced Distribution. We can provide
our core software to our clients by licensing it directly for
use on-site, through our own outsourcing centers or through
reseller outsourcing centers. We also provide certain
complementary applications at our outsourcing centers, including
our business intelligence, cash management, ATM, Internet
banking, web-based imaging, collections, interactive voice
solutions and check and item processing tools. Our flexibility
in distribution method allows our clients to use our core
software and other complementary applications in the most
cost-effective method to meet their specific operational and
competitive requirements. |
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Customer-Centric Architecture |
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Real-time Customer Information in a Single View. Our core
software uses a relational database organized around individual
customers, which allows a financial institution to update and
view customer information on a real-time basis instead of
relying on periodic batch processing. Our clients can provide
their customers with real-time information concerning their
accounts, as well as create accurate and current management
reports. Our software is designed to eliminate potential errors
arising from the maintenance of multiple databases and to
accommodate high volumes of customer data. |
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Better Relationship Management. Our relationship
management software provides a set of business intelligence
tools that is fully integrated with and acts as a natural
extension of our core software. This allows our clients to
eliminate the multiple databases required when layering
traditional business intelligence tools onto a legacy core
system. Because our suite exploits the strength of our core
system that is based on a single, relational database designed
around individual customers, a financial institution may easily
collect and analyze that data to generate timely and responsive
initiatives (such as promotional offers) and deliver those
initiatives immediately to the customer as the customer
interacts with the financial institution. |
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Cost Savings. We believe that our software reduces the
overall cost of a financial institution’s information
technology and allows our clients to meet their strategic goals
more efficiently. The hardware required by a legacy system is
expensive to obtain and costly to keep to current specifications
while the pool of expertise with older systems is constantly
shrinking. In contrast, our core system can run on hardware
provided by many different vendors. Because our core software is
fully integrated with our complementary products and supports
third-party products, development and implementation costs for
an institution’s information systems based on our software
are lower than those for an institution which must modify its
core software and obtain costly proprietary products for each
new function. Our open architecture and flexibility allow our
clients to modify their information systems requirements quickly
and easily, without incurring the significant costs associated
with supporting several disparate software applications. Our
single relational database allows our clients to organize their
data around individual customers, use our business intelligence
tools to analyze and manage that data in the most efficient
manner and launch new products and services desired by their
customers in a cost-effective manner. In addition, because our
software is based on widely adopted technologies, a financial
institution using it requires less specialized expertise, which
allows the institution to achieve greater operational
efficiencies. |
Business Strategy
Our objective is to be the leading supplier of software and
services to our targeted market. Our strategy for achieving this
objective is to:
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Expand Share of Our Historical Market. We believe that
our software is particularly well suited for financial
institutions which have an asset base of under $20 billion.
These financial institutions, which have historically
constituted our target market, typically can neither afford, nor
do they require, extensive customization in connection with the
implementation of a core system. As a result, we believe that
these financial institutions are willing to evaluate, and are
well positioned to benefit from, our flexible, cost-effective
technology. We intend to continue to pursue this market by
marketing and selling our core software to new clients seeking
to convert from a legacy system. |
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Expand Our Sources of Recurring Revenue. We generate
recurring revenue through outsourcing and maintenance services.
We currently host applications for approximately 535 financial
institutions in our outsourcing centers and intend to continue
to enhance this service, which we believe is an attractive
solution for many of our targeted clients. Our outsourcing
centers serve clients using our core software and clients using
one or more of our Internet banking, ATM, cView, check imaging,
cash management, collections, automated clearing house, or ACH,
processing and check and item processing products. In |
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the future, we plan to offer all of our products in our
outsourcing centers and continue to market our outsourcing
services aggressively. Our outsourcing services provide a source
of recurring revenue which can grow as the number of accounts
processed for a client increases. We continue to seek to expand
our client base through licensing arrangements, which we expect
to increase the recurring revenues, such as maintenance, that
correspond to those licenses. |
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Expand Our Client Base by Licensing Our Core Software through
Third-Party Outsourcing Centers. Approximately 172 financial
institutions use our core software application at two reseller
outsourcing centers, one operated by BISYS, Inc., a major
national outsourcing center, and the other operated by
Connecticut On-Line Computer Center, Inc., or COCC, a major
regional outsourcing center. A number of financial institutions
outsource their core processing systems to third-party
outsourcing centers such as these, which typically choose one or
more significant core software products to provide their
services. We plan to work with our existing resellers to add new
clients, and have recently expanded our relationship with BISYS
for this purpose. We also plan to supplement these resellers
with other national and regional outsourcing centers. |
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Provide Additional Products and Services to Our Installed
Client Base. We intend to continue to leverage our installed
client base by expanding the range of complementary products and
services available to our current clients, through both the
internal development of new products and services and through
acquisitions. In addition, each client has an account manager
who recommends complementary products suitable for the
client’s business and works with our sales group to
generate sales. We also intend to continue selling our
complementary products to financial institutions that use core
systems sold by third parties. |
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Maintain Technological Leadership. We believe that the
uniqueness of the open, flexible architecture of our system
provides us with competitive advantages over companies offering
other core processing systems. For example, our core software
suite can satisfy the technological requirements of a commercial
bank, thrift or credit union without modification or
customization. We recently announced the commercial release of
our web-based business intelligence suite, which allows a
financial institution to transmit action messages and collect
response information instantaneously while a customer conducts a
transaction. Our open architecture enables us to utilize
leading, non-proprietary software and hardware to provide
comprehensive functionality. We intend to extend our
technological leadership by continuing to add new applications,
integrate new technologies and expand the functionality of our
system. |
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Extend Target Markets. Our primary market currently
consists of small to mid-size commercial banks and thrifts and
all credit unions, located in the United States. We believe that
our core software has benefits beyond this market, and can scale
to meet the operating requirements of any financial institution.
We continue to explore additional ways to extend our target
markets, including by selling our products and services to
larger financial institutions and international financial
institutions. We also plan to market and sell our products and
services to clients in the payroll services, insurance and
brokerage industries. |
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Pursue Strategic Acquisitions. To complement and
accelerate our internal growth, we continue to explore
acquisitions of businesses and products that will complement our
existing products and services as well as expand our client
base. Since 2000, we have completed the following acquisitions: |
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Products and Services |
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June 2000
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Global Payment Systems LLC |
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Web-based cash management system |
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August 2001
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Sound Software Development, Inc. |
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Loan and mortgage origination product |
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December 2001
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Imagic Corporation |
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Check imaging product |
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March and October 2002
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HNC Financial Solutions, Inc. and HNC Software, Inc. |
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General ledger, profitability and other financial products |
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July 2003
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Liberty FiTech Systems, Inc. |
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Core processing software for credit unions |
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February 2004
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Maxxar Corporation |
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Interactive voice response, contact center management and voice
over IP |
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June 2004
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Eastpoint Technologies, LLC |
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Core processing software for banks |
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July 2004
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re:Member Data Services, Inc. |
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Core processing software for credit unions |
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July 2004
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Omega Systems of North America LLC |
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Document processing product |
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October 2004
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Datawest Solutions Inc. |
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Core processing software for credit unions and software for
payment processing in Canada and internationally |
Technology
We design our software to integrate with other products, to
allow individual customer data to be easily accessible at all
times, and to be able to deliver strategic benefits to financial
institutions at a lower cost. We released our initial product in
1995, at a time when technical advancements such as distributed
computing, browser-based applications and standards for
integrating disparate applications were becoming commonly
adopted in the marketplace. To take advantage of these technical
developments, we created an open product architecture to
maximize a client’s flexibility with respect to both
hardware options and integration with other software
applications. In addition, we sought to design a single platform
that could service all financial institutions, including
commercial banks, thrifts and credit unions. We d3also
understood the difficulties financial institutions face in
retrieving timely, accurate information with respect to their
customers, and therefore designed our software with a single
relational database as its integral component, placing an
emphasis on access to customer information rather than account
data. By creating a core processing solution that is open and
customer-centric, we believe we have minimized the need for
financial institutions to purchase costly middleware and
additional databases to perform the tasks that our products
achieve with only one software application and a single database.
Our core software application offers the following benefits:
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an open architecture that permits full integration with
third-party hardware and software and emerging technologies, |
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flexible functionality, scalability and high
performance, and |
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a highly relational database designed around customer
information. |
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We believe that our software provides these benefits through an
open architecture that utilizes a relational database, as well
as leading graphical user interfaces and report generation
tools. Our software operates in an open systems environment,
does not require any proprietary hardware components and is
currently deployed on a wide range of client and server
platforms. Our open architecture also permits our software to
interface with a broad range of third-party applications and
peripherals that are commonly used in banks and credit unions.
We implement our flexible solution through application modules,
each of which performs a specific core processing function. All
of our modules share and are able to access the data in a single
relational database, allowing for consistency of data throughout
our product suite. Through database normalization, data is
organized in tables that are easily accessible through a variety
of query tools as well as through the application modules. In
contrast to legacy systems, our architecture allows a financial
institution to capture an unlimited amount of data regarding
each of its customers without requiring additional software or
support. As a result, a higher degree of independence between a
client’s business processes and underlying data is achieved
and the solution is more scalable and adaptable to changing
business needs. New application modules may be developed or
existing modules may be altered as required without having to
change the underlying data model.
Our software utilizes a single, enterprise-wide relational
database model, as opposed to a distributed database in which
data is spread among two or more components, and typically
resides on different computers. The principal benefits of an
architecture using a single enterprise-wide relational database
is that it virtually eliminates the introduction of redundant
data and permits real-time processing so that, for example,
transactions are immediately reflected in a bank or credit union
customer’s account. This contrasts with a batch processing
approach in which all accounts are updated at scheduled
intervals, typically at the end of the business day. Our
software may also be configured to operate in a hybrid memo
batch/ real time mode for those banks or credit unions that
prefer to operate using the workflow model.
Our payments processing software is designed to run on a
scaleable cluster of small processors. This flexible
architecture allows these solutions to be viable for very small
institutions but also for extremely large transaction processing
organizations, like our own payments processor in Canada,
POSHnet, which operates the largest network of ATMs in Canada
entirely using our own software products. These switching
systems operate on a continuous, 24/7 basis and use industry
standard and operating system capabilities to deliver ultra-high
availability and transaction reliability. We believe that our
customers benefit from the ease of use and scalability of the
payments processing software.
Products and Services
We offer core software as well as several complementary products
that may be purchased with our core solution or separately. The
open and flexible architecture of our core solution is designed
to provide our clients with the maximum array of options for
complementary applications. While all of our products function
independently of each other, financial institutions which use
our entire software suite benefit from our fully-integrated
platform and the ability to obtain comprehensive real-time
information on all of their customers.
The Complete Banking Solution and The Complete Credit Union
Solution. We market our core software in two versions, one
directed primarily at commercial banks and thrifts and the other
directed primarily at credit unions. The Complete Banking
Solution and The Complete Credit Union Solution share a common
software platform that provides a comprehensive real-time open
architecture system capable of managing all of a financial
institution’s core processing requirements. Our core
software permits the financial institution and its customers to
view their transactions immediately, whether the transactions
occur over the telephone, on the Internet, at the ATM, inside
the financial institution or at an external debit location.
We believe that our core software is less expensive to install
and maintain than most legacy systems. It can be easily
integrated with third party applications or our own
complementary products to provide a comprehensive solution that
can immediately retrieve valuable customer information for
specifically targeting customers with cross-selling or
up-selling opportunities.
9
Some of the key features of our core software include:
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customer-centric system, |
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real-time customer touch-point integration, |
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integrated real-time and/or batch processing, |
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comprehensive lending and deposit processing, |
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forms integration (including signature and photo storage), |
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customizable web-based reporting, |
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comprehensive teller/ customer service applications, |
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commercial institution functionality, |
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institution and branch operations, |
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direct payroll processing, and |
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product delivery manager. |
The features of our core software offer a comprehensive
real-time view of each customer relationship, which enables our
clients to provide better customer service by having a complete
customer profile available to tellers and officers
instantaneously.
To enhance our core software, we offer a number of complementary
products. All of our complementary products are designed to run
on any core processing system. However, when used with our core
solution, our complementary products are designed to take
advantage of the availability of real-time customer information.
These products provide functionality beyond that in any core
solution, and include:
cView. cView is an advanced business-intelligence suite
designed around two key functional areas: real-time customer
contact and knowledge management. cView permits a financial
institution to leverage relational technology, customer account
and transaction data and instant messaging to gather, convert
and analyze disparate customer information into knowledge that
can be applied to support timely and responsive initiatives such
as promotional offers and make them available immediately
through front-line delivery channels, such as Internet banking,
tellers and others. cView is designed to operate on any core
processing system, whether designed by us or by a third party.
The cView suite consists of the following web-based components:
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Dynamic Messaging Manager. Application that allows the
financial institution to set rules that define the real-time
distribution and receipt of messages throughout the organization. |
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Activity Manager. Application that allows the financial
institution to track and manage the activities of its customers
and prospects. |
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My Vision. Access point for cView applications, intranet
communications and access to relevant documents, messages and
Internet links. |
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Report Wizard. Query and report writing tool, which
allows users to simplify views of complex database table design,
effectively collapsing multiple tables into one. |
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Market Vision. Customer data warehouse designed to permit
financial institutions to learn about their customers,
prospects, products and business lines so they can make sound
business decisions and create effective marketing plans. |
Each component of the cView suite is integrated with the other
components, as well as with our core software, allowing clients
to focus on the implementation of CRM strategies rather than the
support and maintenance of separate software applications.
10
Channel Management Center. Channel Management Center is a
suite of applications and services designed to facilitate the
building and processing of interfaces between disparate systems.
Channel Management Center is designed to act as a translator
between core, business and delivery systems and to centralize
the collection and movement of information throughout the
financial institution, eliminating the need for multiple types
of middleware services.
eCommerce Banker — Consumer and eCommerce
Banker — Business. Our eCommerce Banker suite
provides clients with Internet banking and cash management tools
for commercial and retail customers. The modules permit a
financial institution to choose from a wide menu of financial
services that may be provided to either individuals or
businesses, including:
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Account Information. Customers can view balance
information for checking and savings accounts, certificates of
deposit, lines of credit, automobile loans and mortgage loans.
Customers can also view year-to-date interest accrued or paid,
interest rates and deposit maturity dates. |
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Cash Management. Business customers can monitor their
accounts, make tax payments and execute automated clearing house
or wire transfers. We also provide a cash concentration
function, which periodically sweeps cash from several accounts
into a single interest-bearing account. |
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Funds Transfer. Customers can transfer funds among
accounts and establish real-time electronic bill payment. |
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Compatibility with Personal Financial Management
Software. Popular personal financial management software,
such as Intuit Quicken® and Microsoft Money®, can be
automatically synchronized with recent transactions. |
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Bill Payment. Customers can pay bills electronically
24 hours a day, seven days a week and can establish future
and recurring payments. |
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Secure Messaging. Customers can communicate with a
financial institution through secure encrypted message systems. |
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Additional Features. Customers can reorder paper checks,
request an account statement or contact financial institution
personnel by e-mail. |
Our Internet banking application supports the open financial
exchange, or OFX standard, which enables the system to interface
to financial institution services that use a variety of devices
to originate customer transactions. These administrative
components include the ability for financial institutions’
customers and potential customers to submit account applications
in a secure environment. Also, financial institutions can
automatically generate e-mail responses to customer
applications, update product interest rates and terms and
receive customer-specific marketing and data analysis.
Check Imaging. This software application enables our
clients to create and store digital check images for inclusion
in monthly statements and to facilitate their customer support
services. This product suite includes item/ image capture,
document imaging/ computer output to laser disc, or COLD,
signature verification, electronic statements, full-service
check and item processing and managed services. This product is
designed to comply with federal legislation known as The Check
Clearing For The 21st Century Act, commonly known as
Check 21, and to be compatible with the Federal
Reserve’s FedImage Platform. These features are important
because when financial institutions exchange checks
electronically rather than physically as the legislation will
require, they will seek Check 21 compliant solutions. The
product is also designed to be web-enabled, to eliminate a large
portion of entry keying, and together with remote branch
capture, to assist our clients in centralizing electronic image
storage. Our clients can choose to purchase these products on an
in-house, serviced or managed services basis.
Loan Origination. Our loan origination technologies are
designed to provide full-service loan origination processing.
Because no two lenders transact business in exactly the same
manner, our loan origination
11
products can also be adapted to suit a financial
institution’s specific needs. Our software suite provides
integrated systems for mortgage, consumer and commercial lending:
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The Sound Mortgage Management System provides
comprehensive mortgage lending management. This product
automates the mortgage process, including advanced disclosures,
prequalification, origination, document preparation, processing,
loan tracking, underwriting, commitment, closing, full
management and government reporting. The system automatically
books loans to our clients’ in-house or outsourced
servicing systems. The system can be wide-area network enabled
throughout all branches, and also provides for remote
origination using the Internet. |
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The Sound Consumer Loan Management System provides
consumer loan management through a comprehensive set of
features, including full document preparation, loan processing,
tracking, underwriting, reporting and government reporting
requirements as well as an automated decision service. |
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The Sound Commercial Loan Documenter provides commercial
loan management from the creation of commitment/ proposal
letters to the final production and tracking of complete
document packages for any small-business to middle-market loan,
including commercial and industrial, or C&I, commercial real
estate and construction and Small Business Administration loans. |
Financial Products. Our financial accounting software
suite is designed to provide fully-integrated back-office
financial management technology to financial institutions,
including general ledger, accounts payable and fixed assets. In
addition, we offer strategic financial management tools such as
asset/ liability management, profitability and financial
planning:
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Financial Accounting Platform. Our financial accounting
platform is an integrated and comprehensive financial management
suite. With detailed reporting and responsive service, it helps
clients streamline accounting operations and improve the quality
of their financial management. The financial accounting platform
is comprised of four modules: general ledger, investment
management, accounts payable and fixed assets accounting. Each
system can operate as a stand-alone product or as part of the
integrated financial accounting platform. As a whole or on a
stand-alone basis, the open architecture and standardized file
specifications are designed to allow integration with other
accounting and information management software applications. |
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Asset/Liability Management and Financial Planning System.
Our asset/ liability management and financial planning system
provides analytical, budgeting and strategic planning software
to enable financial institutions to better comprehend the
factors driving their profitability. This software is designed
to provide a financial institution with the ability to analyze
the institution’s balance sheet in order to determine
market value and risk, helping to ensure preservation of capital. |
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ProfitVision. ProfitVision analyzes profitability at any
level of the organization. It is designed to generate profit
results and value indicators that reveal the contributors to an
institution’s bottom line. It can also be used to segment
and profile valuable customers and determine which products,
business units and channels are top performers. |
Interactive Voice Solutions. Our interactive voice
solutions, which we obtained through the acquisition of Maxxar
Corporation on February 24, 2004, are designed to provide
financial institutions with products that enhance productivity,
strengthen customer services and reduce overall operational
costs.
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Interactive Voice Response. Our interactive voice
response solution provides a financial institution’s
customer with round the clock access to their financial
information and the ability to complete account transactions
such as transferring funds, applying for loans, and accessing
information about products and services. The product supports
both touch-tone keypad response or natural language speech
recognition. |
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Contact Center Management. Our contact center management
solution is comprised of an enhanced Automatic Call Distributor
(ACD) designed to provide sophisticated routing of
telephone contacts and other forms of electronic media and agent
workflow software used to manage a broad range of client
services and marketing needs of a financial institution. |
12
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Voice Over IP. Our voice over IP product provides a
financial institution with a reliable and economical voice
communication solution to meet the needs of a multi-site
organization. |
To provide a complete operating environment for financial
institution and other customers wishing to provide transaction
services either in-house, as a service bureau, or using our own
service, the Payment Solutions Group develops and markets a
number of products. These products are independent of the Core
and Complementary products but can be integrated to provide
further synergies for their enhanced operation.
POSH (Point of Sale Handler). POSH provides customers
with the functionality needed for point of sale terminals, or
equivalent devices, at retail sites for credit and debit
transactions. POSH also provides the capability to operate and
manage the customer relationships with merchants and partners in
the POS marketplace as well as manage the financial
reconciliation and settlement of transaction value and fees. The
functionality includes:
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Transaction Routing. Card-based transactions can be
routed for approval to international networks, local processors,
and in-house and remote hosts. Transactions are all managed with
the integrity required by international standards. |
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Data Security. All mandated processing relating to the
security of cardholder information and PINs is included in POSH. |
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Settlement and Reconciliation. POSH tracks and reports on
all transaction activity and can provide all the needed
information to ensure ongoing integrity in all processing and
financial relationships with outside partners and agencies. |
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Merchant/ ISO Management. Fees, statements, and
information provision are handled by POSH to allow all
downstream partners in either a proprietary or service bureau
business model to receive all their payments, revenues, and
control information. |
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POSHweb. A variety of integrated information services are
available over the public world-wide web, subject to security
controls. These include: report distribution, financial and
transaction history, cash positions, monitoring status, history,
and statistics, and news alerts. |
ConCentre Application Monitoring. ConCentre is a
comprehensive software tool designed to detect and manage errors
and unusual events in a complex system processing environment
such (as but not limited to) a large ATM network. Customers use
Concentre to manage the alerts and faults in their network by
improving service availability, track and enforce service level
agreements, manage support personnel efficiently and use
pre-emptive remediation techniques which allow for the automated
correction of real-time errors. ConCentre functionality includes:
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Flexible Error Detection. The ConCentre Interface Agent
provides testing of resources, application relationships,
timing, and statuses of any application environment. This
information is collected in a non-intrusive way to ensure no
noticeable degradation in the application environment being
monitored. |
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Automated Remediation. In addition to merely reporting
errors in the environment, ConCentre can be configured to
automatically attempt to repair errors. This feature can
increase overall availability and reduce resource costs. |
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Behavioral Analysis . The TRAFC component of ConCentre is
designed to observe transactional activity and detect patterns
of unusual or suspicious behavior. This service is particularly
useful when monitoring dial-up POS terminals and can be
beneficial in detecting errors outside of the range of the
customer’s own environment. It is also helpful in detecting
signs of fraudulent activity. |
We have the capability to host a client’s data processing
functions at our outsourcing centers, giving the client the
benefit of our products and services without having to maintain
personnel to develop, update and run
13
these systems and without having to make large initial
expenditures. Our outsourcing centers currently host
applications for 535 financial institutions, including clients
who use our core software and clients who use one or more of our
Internet banking, ATM, cView, check imaging, cash management,
collections, ACH processing, payments processing and check and
item processing products. Our payments processing services
operate over 18,000 terminal devices for over 180 Independent
Sales Organizations.
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Training, Maintenance and Support Services |
Installation and Training. We provide comprehensive
installation and training services in connection with the
purchase of in-house systems and for new outsourcing center
clients. The complete installation process of a core system
typically includes planning, design, data conversion and testing.
Both in connection with installation of new systems and on an
ongoing basis, our clients need, and we provide, extensive
training services and programs related to our products and
services. Training can be provided in our training centers, at
meetings and conferences or onsite at our clients’
locations, and can be customized to meet our clients’
requirements. The large majority of our clients acquire
additional training services, both to improve their
employees’ proficiency and productivity and to make full
use of the functionality of our systems.
Professional Services. Our professional service
organization provides services on a contract basis such as
operational reviews, which leverage the best practices of our
clients to improve operational efficiency and effectiveness
across our entire client base.
Support Services. We provide immediate telephone response
service during normal working hours and on-call support
24 hours a day, seven days a week for all components of our
solution. In addition, we offer remote product support services
whereby our support team directly connects in a secure
environment to our client’s server to troubleshoot or
perform routine maintenance.
Clients
We serve financial institutions of all sizes, however, the
majority of our clients are commercial banks and thrifts with
under $20 billion of assets and credit unions of all sizes.
The majority of our clients are located in the United States and
Canada, although we also have clients in several other foreign
countries. As of December 31, 2004, approximately 2,780
financial institutions were using one or more of our products.
One customer, Bisys, Inc., accounted for 11.7% of total revenues
for the fiscal year ended December 31, 2004. No client
accounted for more than 10% of our revenues in the fiscal years
ended December 31, 2003 or 2002.
Sales and Marketing
We have established a multi-channel distribution and sales
network. We sell and license our products directly to end-users
through our direct sales force and indirectly through resellers,
including third-party outsourcing centers. In addition, we
support our direct and indirect sales efforts through strategic
marketing relationships and public relations programs, trade
shows and other marketing activities. We operate primarily in
two geographical areas, the United States and Canada.
We market our products primarily through a direct sales force
which is split between our sales personnel who sell our core
software and those who sell our complementary products. As of
March 1, 2005, our direct sales force was comprised of 46
salespersons, 17 of which were selling our core software, 23 of
which were selling our complementary products and 6 of which
were selling our payments products. In addition, our sales group
is complemented by application specialists, all of whom have
extensive experience in banking technology and provide pre-sales
support to potential clients on product information and
deployment capabilities. Each client is also assigned an account
manager who is that client’s primary contact at Open
Solutions, recommends complementary products suitable for that
client’s business and works with our sales group to
generate sales. Our sales group for core software is focused in
two distinct areas; the banking industry
14
and the credit union industry. We believe that this distinction
facilitates the ongoing effort to design, develop and build
better technology products aimed at the specific needs of the
banking and credit union industries.
We supplement our direct sales force with a range of resellers
who sell our complementary products in conjunction with their
own products and services. These resellers include a range of
hardware and software vendors and permit us to better address
specific geographical markets, including those outside the
United States, and potential clients reliant on existing
third-party core solutions.
Historically, a significant portion of financial institutions
have chosen to satisfy their information technology needs
through third-party outsourcing centers. In addition to our own
technology outsourcing centers, we have entered into software
license and marketing agreements with BISYS and COCC. Under our
agreements with these strategic marketing partners, we receive
license fees based on the asset size of the financial
institution using our applications.
BISYS has the right to provide outsourcing services using our
The Complete Banking Solution software to banks in the United
States. Under the amended agreement, BISYS has also agreed to
pay us minimum license fees and must achieve minimum sales
requirements, as well as pay us annual maintenance fees for each
of their clients that uses one or more of our products or
services. In exchange, we have agreed not to compete with BISYS
for the provision of outsourcing services to banks in the United
States through September 2005 and thereafter (so long as BISYS
continues to pay us the required minimum fees and meet the
required minimum sales), and we have agreed not to enter into
similar reseller agreements with any one of six named
competitors of BISYS before March 1, 2005. Our agreement
with COCC provides it with the right to provide services using
our The Complete Banking Solution software to banks in ten
states, primarily in the northeastern and mid-Atlantic United
States. In February 2004, we entered into an expanded agreement
with COCC, which provides for the license and resale of our
e-Commerce Banker suite of electronic banking and cash
management products operated from their data center. This
agreement was amended in December 2004 and granted COCC the
right to additional TCBS modules and ancillary products. The
amended agreement has a term of ten years, with an option to
renew for another five years at COCC’s option. In addition,
COCC will pay us non-refundable minimum license fees related to
the achievement of certain minimum sales requirements for both
unit sales and license fees.
During the fiscal year ended December 31, 2004, BISYS
represented approximately $12.5 million, or 11.7%, of our
total revenues, and COCC represented approximately
$2.0 million, or 1.9%, of our total revenues. During the
fiscal year ended December 31, 2003, BISYS represented
approximately $5.8 million, or 9.1%, of our total revenues,
and COCC represented approximately $1.5 million, or 2.4%,
of our total revenues. During the fiscal year ended
December 31, 2002, BISYS represented approximately
$2.9 million, or 6.5%, of our total revenues, and COCC
represented approximately $1.3 million, or 2.9%, of our
total revenues.
Our marketing program includes:
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direct mail, |
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telemarketing, |
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hosting an annual client conference, |
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advertising in banking and credit union trade journals and
periodicals, |
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publishing articles and editorials, |
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speaking engagements, and |
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participating in seminars and trade shows. |
15
Product Development
We plan to continue to invest significant resources to maintain
and enhance our current product and service offerings, and we
are continually developing new products that complement these
offerings. For the years ended December 31, 2004, 2003 and
2002, product development expenses were $11.0 million,
$6.8 million and $6.2 million, respectively. We have
historically released two upgrades of existing products each
year, and, since the beginning of fiscal year 2002, we have
introduced a collections system, a safe deposit box system, a
web-based business intelligence suite, a web-based imaging
system and tools to facilitate the building and processing of
interfaces between disparate systems, as well as several smaller
modules. The collections system and safe deposit box system were
market-driven additions to our core software suite. The business
intelligence, web-based imaging systems and the interface tools
were designed to exploit the uniqueness of our core
architecture, but as with all of our complementary products,
they work with other core solutions. We have several new
products under development and plan to sell them to both our
existing client base and new clients. Our clients also regularly
advise us of new products and functionalities that they desire,
which we take into account with respect to planning our research
and development operations. As of March 1, 2005, we
employed a staff of 132 development employees.
Competition
The financial services software market is intensely competitive
and subject to technological change. Competitors vary in size
and in the scope and breadth of products and services offered.
We encounter competition in the United States from a number of
companies including Fiserv, Inc., Jack Henry &
Associates, Inc., Fidelity National Financial Corporation and
John H. Harland Company. We also compete against a number of
smaller, regional competitors, as well as vendors of products
that compete with one or more of our complementary products.
Many of our current competitors have longer operating histories,
larger client bases and greater financial resources than we do.
In general, we compete on the basis of product architecture and
functionality, service and support, including the range and
quality of technical support, installation and training
services, and product pricing in relation to performance and
support.
Intellectual Property and Other Proprietary Rights
We rely primarily on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures and contractual
provisions to protect our proprietary rights. We seek to protect
our software, documentation and other written materials under
trade secret and copyright laws, which afford only limited
protection. Our license agreements contain provisions which
limit the number of users, state that title remains with Open
Solutions and protect confidentiality. We presently have no
patents or patent applications pending.
Open Solutions Inc., The Complete Banking Solution, The Complete
Credit Union Solution, Bank-on-it and We Move Money are
registered trademarks, and eCommerce Banker and eCommerce Mart
are trademarks of ours. Open Solutions Inc. is also a service
mark of ours. All other trade names and trademarks referred to
in this Annual Report on Form 10-K are the property of
their respective owners.
Employees
As of March 1, 2005, we had a total of 776 employees.
Approximately 33 employees in Canada are unionized and subject
to a collective bargaining agreement which expired on
February 28, 2003. We are currently negotiating a new
collective bargaining agreement. We have not experienced any
work stoppages and believe that our relations with our employees
are good.
Infrastructure
Our communications and network equipment is located in our
corporate headquarters in Glastonbury, Connecticut and other
offices throughout the United States and Canada. We have
preventive maintenance and disaster recovery plans, which
include periodic equipment, software and disaster recovery
testing, data monitoring and maintaining records of system
errors. We have 24-hour monitoring and engineering support
16
and emergency communication lines. In the event of an emergency,
we have a contingency plan to provide services through a
nationally recognized emergency service provider.
Our operations are currently conducted at the leased facilities
described below. In 2005, we will move our executive offices to
another leased facility in Glastonbury, Connecticut. The new
facility is approximately 46,000 square feet and that lease
expires in 2012.
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Operations Conducted | |
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Date | |
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Glastonbury, Connecticut
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Executive offices |
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12,000 |
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2005 |
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Glastonbury, Connecticut
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Executive offices |
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30,000 |
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2005 |
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Windsor Locks, Connecticut
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Item processing center |
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5,000 |
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2010 |
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Shelton, Connecticut
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Sales office |
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4,000 |
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2006 |
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Atlanta, Georgia
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Support and data processing center |
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21,000 |
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2008 |
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Marietta, Georgia
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Sales office |
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6,000 |
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2006 |
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Dryden, New York
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Sales office |
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1,000 |
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2007 |
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Whitesboro, New York
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Item processing center |
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2,000 |
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2007 |
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Indianapolis, Indiana
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Support and data processing center |
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60,000 |
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2010 |
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Wixom, Michigan
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Sales office |
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12,000 |
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2007 |
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Bedford, New Hampshire
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Sales office |
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14,000 |
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2006 |
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Vancouver, British Columbia
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|
|
Canadian executive offices |
|
|
|
6,000 |
|
|
|
2005 |
|
|
Vancouver, British Columbia
|
|
|
Support and data processing center |
|
|
|
29,000 |
|
|
|
2007 |
|
|
Missassauga, Ontario
|
|
|
Development office |
|
|
|
2,000 |
|
|
|
2005 |
|
|
Oakville, Ontario
|
|
|
Payment processing center |
|
|
|
30,000 |
|
|
|
2009 |
|
|
|
| Item 3. |
Legal Proceedings |
We are from time to time a party to legal proceedings which
arise in the normal course of business. We are not currently
involved in any material litigation, the outcome of which would,
in management’s judgment based on information currently
available, have a material adverse effect on our results of
operations or financial condition, nor is management aware of
any such litigation threatened against us.
|
|
| Item 4. |
Submission of Matters to a Vote of Security Holders |
None
17
PART II
|
|
| Item 5. |
Market for Registrant’s Common Stock, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
Since November 26, 2003, our common stock has traded on the
Nasdaq National Market under the symbol “OPEN.” On
March 9, 2005, the closing sale price of our common stock
was $20.95 per share. The following table sets forth the
high and low sales prices per share of our common stock for the
periods indicated as reported on the Nasdaq National Market.
| |
|
|
|
|
|
|
|
|
| |
|
High | |
|
Low | |
| |
|
| |
|
| |
|
November 26, 2003 (inception of trading) —
December 31, 2003
|
|
$ |
19.78 |
|
|
$ |
15.65 |
|
|
First Quarter 2004
|
|
$ |
26.07 |
|
|
$ |
17.40 |
|
|
Second Quarter 2004
|
|
$ |
25.75 |
|
|
$ |
19.42 |
|
|
Third Quarter 2004
|
|
$ |
25.86 |
|
|
$ |
20.33 |
|
|
Fourth Quarter 2004
|
|
$ |
28.60 |
|
|
$ |
23.66 |
|
As of March 9, 2005, there were approximately 58 record
holders of our common stock. This number does not include
stockholders for whom shares are held in a “nominee”
or “street” name.
We have never paid cash dividends. We currently intend to retain
all future earnings, if any, for use in our business and we do
not anticipate paying any cash dividends in the foreseeable
future.
Initial Public Offering and Use of Proceeds from Sales of
Registered Securities
On December 2, 2003, we completed an initial public
offering of 5,750,000 shares of our common stock, par value
$.01 per share, at a price to the public of $17.00 per
share. The offer and sale of all of the shares in the IPO were
registered under the Securities Act pursuant to a Registration
Statement on Form S-1 (File No. 333-108293), which was
declared effective by the Securities and Exchange Commission on
November 25, 2003. After expenses, the net proceeds to us
from the IPO were approximately $86.4 million.
In addition to the use of proceeds previously disclosed in our
Form 10-K for the year ended December 31, 2003, during
the year ended December 31, 2004, we spent
$6.9 million, $21.9 million, $47.6 million,
$6.8 million and $2.5 million on the purchase of all
of the capital stock of Maxxar Corporation, re:Member Data
Services, Inc. and Datawest Solutions Inc. and substantially all
of the assets of Eastpoint Technologies, LLC and Omega Systems
of North America LLC, respectively, which accounts for all of
the net proceeds from the IPO. Payments of proceeds were to
persons other than our directors or officers or their
associates, persons owning 10% or more of our equity securities,
or our affiliates.
18
|
|
| Item 6. |
Selected Financial Data |
The selected financial data set forth below are derived from our
audited financial statements. Since June 2000, we have acquired
ten businesses, as more fully described in
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our consolidated
financial statements and related notes thereto included
elsewhere in this Annual Report on Form 10-K. These
acquisitions have significantly affected our revenues, results
of operations and financial condition. The operating results of
each business acquired have been included in our financial
statements from the respective dates of acquisition.
The historical results presented below are not necessarily
indicative of the results to be expected for any future period.
The data set forth below should be read in conjunction with
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our consolidated
financial statements and related notes thereto included
elsewhere in this Annual Report on Form 10-K.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Software license
|
|
$ |
33,032 |
|
|
$ |
21,391 |
|
|
$ |
13,449 |
|
|
$ |
9,971 |
|
|
$ |
8,595 |
|
| |
Service, maintenance and hardware
|
|
|
74,151 |
|
|
|
42,461 |
|
|
|
30,896 |
|
|
|
17,295 |
|
|
|
11,625 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total revenues
|
|
|
107,183 |
|
|
|
63,852 |
|
|
|
44,345 |
|
|
|
27,266 |
|
|
|
20,220 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Software license
|
|
|
6,705 |
|
|
|
5,341 |
|
|
|
3,152 |
|
|
|
1,592 |
|
|
|
2,165 |
|
| |
Service, maintenance and hardware
|
|
|
37,919 |
|
|
|
23,540 |
|
|
|
18,430 |
|
|
|
10,084 |
|
|
|
7,229 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total cost of revenues
|
|
|
44,624 |
|
|
|
28,881 |
|
|
|
21,582 |
|
|
|
11,676 |
|
|
|
9,394 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses (including restricted stock expense and
related taxes of $3,444 for the year ended December 31,
2003)
|
|
|
46,396 |
|
|
|
33,471 |
|
|
|
25,773 |
|
|
|
25,929 |
|
|
|
26,152 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
16,163 |
|
|
|
1,500 |
|
|
|
(3,010 |
) |
|
|
(10,339 |
) |
|
|
(15,326 |
) |
|
Interest income and other, net
|
|
|
1,520 |
|
|
|
43 |
|
|
|
145 |
|
|
|
428 |
|
|
|
661 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
17,683 |
|
|
|
1,543 |
|
|
|
(2,865 |
) |
|
|
(9,911 |
) |
|
|
(14,665 |
) |
|
Income tax (provision) benefit
|
|
|
7,441 |
|
|
|
(234 |
) |
|
|
(32 |
) |
|
|
250 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
25,124 |
|
|
|
1,309 |
|
|
|
(2,897 |
) |
|
|
(9,661 |
) |
|
|
(14,665 |
) |
|
Preferred stock accretion charge
|
|
|
— |
|
|
|
(31,500 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$ |
25,124 |
|
|
$ |
(30,191 |
) |
|
$ |
(2,897 |
) |
|
$ |
(9,661 |
) |
|
$ |
(14,665 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
— Basic
|
|
$ |
1.37 |
|
|
$ |
(7.74 |
) |
|
$ |
(1.18 |
) |
|
$ |
(4.71 |
) |
|
$ |
(7.42 |
) |
| |
— Diluted
|
|
|
1.26 |
|
|
|
(7.74 |
) |
|
|
(1.18 |
) |
|
|
(4.71 |
) |
|
|
(7.42 |
) |
|
Weighted average common shares used to compute net income (loss)
per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
— Basic
|
|
|
18,313 |
|
|
|
3,903 |
|
|
|
2,453 |
|
|
|
2,051 |
|
|
|
1,977 |
|
| |
— Diluted
|
|
|
19,896 |
|
|
|
3,903 |
|
|
|
2,453 |
|
|
|
2,051 |
|
|
|
1,977 |
|
19
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
49,447 |
|
|
$ |
14,853 |
|
|
$ |
11,414 |
|
|
$ |
11,552 |
|
|
$ |
8,522 |
|
|
Working capital
|
|
|
59,084 |
|
|
|
73,305 |
|
|
|
1,486 |
|
|
|
3,261 |
|
|
|
5,051 |
|
|
Total assets
|
|
|
225,474 |
|
|
|
133,071 |
|
|
|
35,839 |
|
|
|
33,745 |
|
|
|
20,905 |
|
|
Long-term debt, current portion
|
|
|
1,239 |
|
|
|
— |
|
|
|
750 |
|
|
|
748 |
|
|
|
— |
|
|
Long-term debt, less current portion
|
|
|
1,736 |
|
|
|
— |
|
|
|
700 |
|
|
|
— |
|
|
|
— |
|
|
Mandatorily redeemable convertible preferred stock
|
|
|
— |
|
|
|
— |
|
|
|
31,100 |
|
|
|
31,100 |
|
|
|
20,084 |
|
|
Redeemable convertible preferred stock
|
|
|
— |
|
|
|
— |
|
|
|
26,480 |
|
|
|
26,480 |
|
|
|
24,744 |
|
|
Stockholders’ equity (deficit)
|
|
|
178,313 |
|
|
|
105,419 |
|
|
|
(43,261 |
) |
|
|
(40,699 |
) |
|
|
(33,751 |
) |
|
|
| Item 7. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
The following discussion and analysis of our financial condition
and results of operations should be read in conjunction with,
and are derived from, our consolidated financial statements and
related notes appearing elsewhere in this Annual Report on
Form 10-K. In addition to historical information, this
discussion and analysis contains forward-looking statements that
involve risks, uncertainties and assumptions, which could cause
actual results to differ materially from management’s
expectations. Important factors that could cause these
differences include those described in “Factors That May
Affect Future Results” and elsewhere in this Annual Report
on Form 10-K.
We use the terms “Open Solutions,” “we,”
“us” and “our” to refer to the business of
Open Solutions Inc. and our subsidiaries. All references to
years, unless otherwise noted, refer to our fiscal years, which
end on December 31.
Overview
We are a provider of software and services that allow financial
institutions to compete and service their customers more
effectively. We develop, market, license and support an
enterprise-wide suite of software and services that perform a
financial institution’s data processing and information
management functions, including account, transaction, lending,
operations, back office, client information and reporting. Our
complementary products and services supplement our core software
to provide our clients with fully-integrated business
intelligence, customer relationship management, or CRM, check
imaging, Internet banking and cash management, general ledger
and profitability, loan origination, interactive voice solutions
and check and item processing functions. Our software can be
operated either by the financial institution itself, on an
outsourced basis in one of our outsourcing centers or through an
outsourcing center hosted by one of our resellers. Substantially
all of our historical revenue has been generated through the
licensing of our core software and our complementary products
and the provision of related services and maintenance to small
and mid-size commercial banks and thrifts and credit unions of
all sizes. In connection with our acquisition of Datawest
Solutions Inc. in October 2004, we also derive revenue from
payment processing services.
We derive revenues from two primary sources:
|
|
|
| |
• |
sales of licenses for our core software and complementary
products, and |
| |
| |
• |
fees from installation, training, maintenance and support
services, as well as fees generated from our outsourcing centers
and the outsourcing centers hosted by our resellers. |
Our revenues have grown from approximately $14.1 million in
1999 to approximately $107.2 million in 2004. This growth
has resulted primarily from strategic acquisitions and internal
expansion, through which we have developed and acquired new
products and services and have expanded the number of clients
using one or more of our products to approximately 2,780
financial institutions as of December 31, 2004.
20
Software license revenue includes fees received from the
licensing of application software. We license our proprietary
software products under standard agreements which typically
provide our clients with a perpetual non-exclusive,
non-transferable right to use the software for a single
financial institution upon payment of a license fee. We also
license certain third-party software products to end users.
We generate service and maintenance fees by converting clients
to our core software suite, installing our software, assisting
our clients in operating the applications, modifying and
updating the software and providing outsourcing services. Our
software license agreements typically provide for five years of
support and maintenance. We perform outsourcing services through
our outsourcing centers and our check and item processing
centers. Revenues from outsourcing center services and the check
and item processing centers are derived from monthly usage fees,
typically under three to five-year service contracts with our
clients.
We derive other revenues from hardware sales and client
reimbursement of out-of-pocket and telecommunications costs. We
have entered into agreements with several hardware manufacturers
under which we sell computer hardware and related services,
primarily to our check imaging clients. Client reimbursements
represent direct costs paid to third parties primarily for data
communication, postage and travel.
We expect that our revenues from installation, training,
maintenance, support services, our outsourcing centers and the
outsourcing centers hosted by our resellers will continue to
expand as our base of clients expands. Our maintenance revenues
are the largest of these revenue components, and we expect that
these revenues, due to their recurring nature, will continue to
be a significant portion of our total revenue as our client base
grows.
In the fourth quarter of 2004, we have reversed the valuation
allowance of $17.9 million against our deferred tax assets
because we have determined that it is more likely than not that
current and future net income will allow for the realization of
these assets. As a result, we have recorded an income tax
benefit directly related to the reversal of the valuation
allowance of $8.6 million in the fourth quarter. The
remainder of the valuation allowance reversal was primarily
recorded as an increase to equity of $7.8 million. For
subsequent periods, we anticipate recording a tax provision
against income at our effective tax rate. However, we do not
expect to incur significant federal tax payments until all
anticipated net operating loss carry forwards are utilized. We
continue to maintain a full valuation allowance on deferred tax
assets related to Datawest Solutions Inc.
On March 10, 2005, we acquired the U.S.-based services to
credit unions business of CGI-AMS Inc., a provider of core
processing solutions for credit unions, for cash consideration
of approximately $24.0 million. We believe this acquisition
will increase our core data processing client base among credit
unions and increase the recurring revenue component of our
revenues.
21
Results of Operations
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Software license
|
|
$ |
33,032 |
|
|
$ |
21,391 |
|
|
$ |
13,449 |
|
| |
Service, maintenance and hardware
|
|
|
74,151 |
|
|
|
42,461 |
|
|
|
30,896 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total revenues
|
|
|
107,183 |
|
|
|
63,852 |
|
|
|
44,345 |
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Software license
|
|
|
6,705 |
|
|
|
5,341 |
|
|
|
3,152 |
|
| |
Service, maintenance and hardware
|
|
|
37,919 |
|
|
|
23,540 |
|
|
|
18,430 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
44,624 |
|
|
|
28,881 |
|
|
|
21,582 |
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Sales and marketing
|
|
|
14,272 |
|
|
|
10,729 |
|
|
|
9,533 |
|
| |
Product development
|
|
|
11,001 |
|
|
|
6,854 |
|
|
|
6,223 |
|
| |
General and administrative (includes restricted stock expense
and related taxes of $3,444 for the year ended December 31,
2003)
|
|
|
21,123 |
|
|
|
15,888 |
|
|
|
10,017 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total operating expenses
|
|
|
46,396 |
|
|
|
33,471 |
|
|
|
25,773 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
16,163 |
|
|
|
1,500 |
|
|
|
(3,010 |
) |
|
Interest income and other, net
|
|
|
1,520 |
|
|
|
43 |
|
|
|
145 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
17,683 |
|
|
|
1,543 |
|
|
|
(2,865 |
) |
|
Income tax (provision) benefit
|
|
|
7,441 |
|
|
|
(234 |
) |
|
|
(32 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
25,124 |
|
|
$ |
1,309 |
|
|
$ |
(2,897 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
As a Percentage of Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Software license
|
|
|
30.8 |
|
|
|
33.5 |
|
|
|
30.3 |
|
| |
Service, maintenance and hardware
|
|
|
69.2 |
|
|
|
66.5 |
|
|
|
69.7 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total revenues
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
22
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Software license
|
|
|
6.3 |
|
|
|
8.4 |
|
|
|
7.1 |
|
| |
Service, maintenance and hardware
|
|
|
35.3 |
|
|
|
36.9 |
|
|
|
41.6 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total cost of revenues
|
|
|
41.6 |
|
|
|
45.3 |
|
|
|
48.7 |
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Sales and marketing
|
|
|
13.3 |
|
|
|
16.8 |
|
|
|
21.5 |
|
| |
Product development
|
|
|
10.3 |
|
|
|
10.7 |
|
|
|
14.0 |
|
| |
General and administrative
|
|
|
19.7 |
|
|
|
24.9 |
|
|
|
22.6 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total operating expenses
|
|
|
43.3 |
|
|
|
52.4 |
|
|
|
58.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
15.1 |
|
|
|
2.3 |
|
|
|
(6.8 |
) |
|
Interest income and other, net
|
|
|
1.4 |
|
|
|
0.1 |
|
|
|
0.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net income (loss) before income taxes
|
|
|
16.5 |
|
|
|
2.4 |
|
|
|
(6.5 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Income tax (provision) benefit
|
|
|
6.9 |
|
|
|
(0.4 |
) |
|
|
(0.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
23.4 |
% |
|
|
2.0 |
% |
|
|
(6.6 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2004 Compared to Year Ended
December 31, 2003 |
Revenues. We generate revenues from licensing the rights
to use our software products and certain third-party software
products to clients. We also generate revenues from
installation, training, maintenance and support services
provided to clients, from outsourcing center services and from
hardware sales related to our check imaging and telephony
businesses. Revenues increased 67.9% from $63.9 million for
the year ended December 31, 2003 to $107.2 million for
the year ended December 31, 2004. This increase was
attributable to a $11.6 million increase in licensing
revenue from our core and complementary products attributable to
sales to new clients, including those clients of our acquired
entities, sales of additional products to existing clients and
an increase in license fees from BISYS. Of the
$11.6 million increase in licensing revenues,
$3.1 million related to revenue from those acquisitions
completed subsequent to January 1, 2004, which were Maxxar
Corporation, Eastpoint Technologies, LLC, re:Member Data
Services, Inc., Omega Systems of North America LLC and Datawest
Solutions Inc, adjusted for the partial year impact of the
Liberty FiTech Systems, Inc. business. The increase in revenues
was also attributable to an increase of $7.1 million in our
implementation and other professional services,
$2.6 million of which was from acquired businesses. We also
realized an increase of $10.2 million in our maintenance
revenue, $6.5 million of which was from acquired
businesses, and an increase of $12.9 million in our
outsourcing revenues, $12.2 million of which was from
acquired businesses. The increases in implementation,
professional services and maintenance revenues were also
directly related to the increase in sales of licenses to new
clients and sales of additional products to existing clients.
Additionally, revenues associated with hardware and other
revenues increased by $1.6 million. The acquired businesses
provided $1.8 million of hardware and other revenues.
Cost of Revenues. Cost of revenues increased 54.5% from
$28.9 million for the year ended December 31, 2003 to
$44.6 million for the year ended December 31, 2004.
The increase was due primarily to a $4.1 million increase
in costs associated with implementation and other professional
services, $1.8 million of which is from the acquired
businesses, a $3.1 million increase in costs associated
with maintenance, $2.6 million of which was from the
acquired businesses and a $6.2 million increase in costs
associated with the growth of our outsourcing business,
$5.4 million of which is from the acquired businesses. Cost
of revenues represented 45.3% of revenues for the year ended
December 31, 2003 as opposed to 41.6% of revenues for the
year ended December 31, 2004. Cost of revenues increased on
an absolute basis primarily as a result of the acquisitions
completed since January 1, 2004, but also from increased
third party license costs and costs of professional services
associated with our revenue growth. Cost of revenues as a
percentage of revenues
23
decreased primarily because certain of our costs are fixed and
our revenues (particularly maintenance, support and data center
revenue) grew at a faster rate than our costs.
Sales and Marketing. Sales and marketing expenses
increased 33.0% from $10.7 million for the year ended
December 31, 2003 to $14.3 million for the year ended
December 31, 2004. This increase was due primarily to
$1.5 million in sales and marketing expenses from the
acquired businesses and higher sales commissions due to the
increase in license revenues. Sales and marketing expenses
represented 13.3% of revenues for the year ended
December 30, 2004 as opposed to 16.8% of revenues for the
year ended December 30, 2003. Sales and marketing expenses
as a percentage of revenues decreased because sales and
marketing expenses did not increase proportionally to our
revenue growth. In the event that we acquire product lines or
businesses in the future, we would anticipate that, based on the
nature and magnitude of those acquisitions, our sales and
marketing expenses would increase as a result of those
acquisitions.
Product Development. Product development expenses
increased 60.5% from $6.9 million for the year ended
December 31, 2003 to $11.0 million for the year ended
December 31, 2004. This increase was due primarily to a
$3.4 million increase in product development expenses from
the acquired businesses. Product development expenses
represented 10.7% of revenues for the year ended
December 30, 2003 as opposed to 10.3% of revenues for the
year ended December 30, 2004. Product development expenses
as a percentage of revenues decreased primarily because our
major product lines are largely developed and therefore did not
require incremental investment. In the event that we acquire
product lines or businesses in the future, we would anticipate
that, based on the nature and magnitude of those acquisitions,
our product development expenses would increase as a result of
those acquisitions. As we increase our international operations,
including the business acquired in the Datawest transaction, we
expect to increase our product development expenses in order to
modify our current product offerings to perform in
non-U.S. banking systems.
General and Administrative. General and administrative
expenses increased 32.9% from $15.9 million for the year
ended December 31, 2003 to $21.1 million for the year
ended December 31, 2004. The increase was due primarily to
$5.3 million of expense from the acquired businesses,
professional fees and other costs related to the requirements of
being a public company, including the costs of compliance with
Section 404 of Sarbanes-Oxley and capital based taxes of
approximately $280,000, partially offset by a $3.4 million
charge in 2003 related to the shares of restricted stock issued
to certain employees as a result of our initial public offering.
General and administrative expenses represented 24.9% of
revenues for the year ended December 30, 2003 as opposed to
19.7% of revenues for the year ended December 30, 2004. In
the event that we acquire product lines or businesses in the
future, we would anticipate that, based on the nature and
magnitude of those acquisitions, our general and administrative
expenses would increase as a result of those acquisitions.
Interest Income and Other, net. Interest income and
other, net, increased from $43,000 for the year ended
December 30, 2003 to $1.5 million for the year ended
December 31, 2004. This increase was due primarily to
increased interest income from the investment of the proceeds of
our initial public offering in the fourth quarter of 2003 and
our follow-on public offering in the second quarter of 2004, as
well as a foreign exchange gain of approximately $470,000
realized in the fourth quarter of 2004, partially offset by a
loss on disposed equipment.
Income Tax (Benefit) Provision. Income tax benefit
increased from a provision of $234,000 for the year ended
December 31, 2003 to a U.S. tax benefit of
$7.4 million for the year ended December 31, 2004. The
increase was primarily the result of reversing our valuation
allowance against our deferred tax assets in the fourth quarter
of 2004. As a result, we have recorded an income tax benefit of
$8.6 million in the fourth quarter directly related to the
reversal of the valuation allowance. The remainder of the
valuation allowance reversal was primarily recorded as an
increase to equity of $7.8 million. For subsequent periods,
we anticipate recording a tax provision against income at our
effective tax rate.
24
|
|
|
Year Ended December 31, 2003 Compared to Year Ended
December 31, 2002 |
Revenues. Revenues increased 44.0% from
$44.3 million for the year ended December 31, 2002 to
$63.9 million for the year ended December 31, 2003.
This increase was attributable primarily to a $6.9 million
increase in licensing revenue from our core and complimentary
products attributable to sales to new clients, cross sales to
existing clients and an increase in license fees from BISYS. Of
the increase of $6.9 million in our maintenance revenue,
$1.7 million is from the Liberty FiTech Systems, Inc.
business and of the $4.4 million increase in our
outsourcing revenues, $2.5 million is from the Liberty
FiTech Systems, Inc. business. The acquisition of Liberty FiTech
Systems, Inc. on July 1, 2003 contributed an additional
$2.7 million to revenues consisting primarily of license,
service and hardware revenues for the year ended
December 31, 2003.
Cost of Revenues. Cost of revenues increased 33.8% from
$21.6 million for the year ended December 31, 2002 to
$28.9 million for the year ended December 31, 2003.
The increase was due primarily to a $2.1 million increase
in costs associated with maintenance, $1.1 million of which
is from the Liberty FiTech Systems, Inc. business and a
$1.5 million increase in costs associated with the growth
of our outsourcing business, $1.2 million of which is from
the Liberty FiTech Systems, Inc. business.. The Liberty FiTech
Systems, Inc. business contributed an additional
$2.0 million of license, service and hardware costs. Cost
of revenues represented 48.7% of revenues for the year ended
December 31, 2002 as opposed to 45.3% of revenues for the
year ended December 31, 2003. Cost of revenues as a
percentage of revenues decreased primarily because our revenues
grew at a faster rate than our costs. In addition, we
experienced a decrease in sales of low-margin hardware during
the period.
Sales and Marketing. Sales and marketing expenses
increased 12.5% from $9.5 million for the year ended
December 31, 2002 to $10.7 million for the year ended
December 31, 2003. This increase was due primarily to a
incremental $1.0 million increase in sales and marketing
expenses from owning the HNC business for a full year and owning
Liberty FiTech Systems Inc. for six months in 2004. Sales and
marketing expenses represented 21.5% of revenues for the year
ended December 31, 2002 as opposed to 16.8% of revenues for
the year ended December 31, 2003. Sales and marketing
expenses as a percentage of revenues decreased primarily because
we did not increase our sales or marketing expenses
significantly, but revenues continued to grow.
Product Development. Product development expenses
increased 10.1% from $6.2 million for the year ended
December 31, 2002 to $6.9 million for the year ended
December 31, 2003. This increase was due primarily to a
$0.5 million increase in product development expenses from
the Liberty FiTech Systems, Inc. business. Product development
expenses represented 14.0% of revenues for the year ended
December 31, 2002 as opposed to 10.7% of revenues for the
year ended December 31, 2003. Product development expenses
as a percentage of revenues decreased primarily because our
major product lines are largely developed and therefore did not
require incremental investment.
General and Administrative. General and administrative
expenses increased 58.6% from $10.0 million for the year
ended December 31, 2002 to $15.9 million for the year
ended December 31, 2003. The increase was due primarily to
a $3.4 million expense related to the shares of restricted
stock issued to certain employees as a result of the initial
public offering and $1.2 million of expense from the
acquisition of the Liberty FiTech Systems, Inc. business. In
addition, there was a $0.5 million increase in accounting
and legal fees, due primarily to non-recurring expenses
associated with preparing for our initial public offering and
settling an outstanding litigation matter. General and
administrative expenses represented 22.6% of revenues for the
year ended December 31, 2002 as opposed to 24.9% of
revenues for the year ended December 31, 2003. General and
administrative expenses as a percentage of revenues increased
primarily because of the restricted stock charge mentioned above.
Interest and Other Income (Expense), net. Interest and
other income (expense), net, decreased from $145,000 for the
year ended December 31, 2002 to $43,000 for the year ended
December 31, 2003. This decrease was due primarily to
increased interest payments because of the debt incurred as a
result of the
25
acquisitions of Liberty FiTech Systems, Inc. and HNC Financial
Solutions, as well as the draw down on our credit facility
offset by interest earned on the investment of the proceeds of
the initial public offering.
Income Tax Benefit (Provision). Income tax provision
increased 631.3% from $32,000 for the year ended
December 31, 2002 to $234,000 for the year ended
December 31, 2003. The increase was primarily because of
increased profitability resulting in higher state tax expense
for states where the Company has no loss carryforward or where
state net operating losses were temporary suspended and deferred
tax expense related to the tax amortization of goodwill from the
Liberty FiTech Systems Inc. acquisition.
Liquidity and Capital Resources
At December 31, 2004 and 2003, we had cash and cash
equivalents totaling $49.4 million and $14.9 million,
respectively.
The following table sets forth the elements of our cash flow
statement for the following periods:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Net cash provided by operating activities
|
|
$ |
19,767 |
|
|
$ |
10,069 |
|
|
$ |
2,702 |
|
|
Net cash used in investing activities
|
|
|
(22,201 |
) |
|
|
(87,682 |
) |
|
|
(2,280 |
) |
|
Net cash provided by (used in) financing activities
|
|
|
37,024 |
|
|
|
81,052 |
|
|
|
(560 |
) |
|
|
|
Cash from Operating Activities |
Cash provided by operations for the year ended December 31,
2004 was attributable to net income of $25.1 million,
depreciation and amortization of $6.4 million partially
offset by a deferred tax benefit of $8.1 million resulting
primarily from the reversal of the valuation allowance and an
increase in working capital of $4.3 million primarily due
to an increase in accounts receivable. Cash provided by
operations in the year ended December 31, 2003 was
attributable to net income of $1.3 million, depreciation
and amortization and other non-cash items, including restricted
stock expense of $7.5 million and an increase in working
capital of $1.2 million. Cash provided by operations for
the year ended December 31, 2002 was attributable to a net
loss of $2.9 million, depreciation and amortization and
other non-cash items of $3.2 million and a decrease in
working capital of $2.4 million primarily due to an
increase in payments received from clients in advance of product
and service delivery.
|
|
|
Cash from Investing Activities |
Cash from investing activities consists primarily of purchases
of fixed assets, investments in marketable securities and
business acquisitions. Total capital expenditures for the years
ended December 31, 2004, 2003 and 2002 were
$5.6 million, $1.5 million and $1.7 million,
respectively, and were primarily related to the purchase of
computer equipment, computer software, software development
services, furniture and fixtures and leasehold improvements. T
he increase in capital expenditures relates primarily to the
implementation of a new enterprise software system and leasehold
improvements at our new corporate lease facility. We currently
have no significant capital spending or purchase commitments,
but expect to continue to engage in capital spending in the
ordinary course of business.
At December 31, 2004, we held $12.7 million in
marketable securities. During the year ended December 31,
2004, we purchased $62.0 million of marketable securities
and sold $127.4 million of marketable securities.
Additionally, net cash used in investing activities for the year
ended December 31, 2004 included $82.0 million used
for acquisitions. Net cash used in investing activities for the
year ended December 31, 2003 included $8.0 million
used for the acquisition of Liberty FiTech Systems, Inc. Net
cash used in investing activities for acquisitions was $564,000
for the year ended December 31, 2002.
26
|
|
|
Cash from Financing Activities |
On May 17, 2004, we completed a follow-on offering of
4,436,442 shares of our common stock at a price of
$21.50 per share. Of the 4,436,442 shares offered,
1,000,000 shares were offered by Open Solutions and
3,436,442 shares were offered by certain of our existing
stockholders. On June 8, 2004, the underwriters exercised
their option to purchase 665,466 additional shares of our
common stock at a price of $21.50 per share. The aggregate
net proceeds from the offering were $33.4 million.
During the year ended December 31, 2004, we also received
approximately $3.9 million of proceeds from the exercise of
stock options and $799,000 from the issuance of common stock in
connection with our employee stock purchase program.
On December 2, 2003, we completed our initial public
offering raising proceeds, net of expenses, of
$86.4 million.
On February 2, 2005, we sold senior subordinated
convertible notes due 2035, which we call the Notes, with an
aggregate principal amount at maturity of $235 million to
qualified institutional buyers pursuant to exemptions from the
registration requirements of the Securities Act of 1933,
afforded by Section 4(2) and Rule 144A. We also
granted to the Note purchasers an option, which was exercised in
full, to purchase additional Notes with an aggregate principal
amount at maturity of $35 million. The issue price of the
Notes was $533.56 per $1,000 principal amount at maturity
of Notes, which resulted in aggregate gross proceeds to us of
approximately $144.1 million. The Notes are our general
unsecured obligations and are junior to any of our existing and
future senior indebtedness. The Notes bear cash interest at a
rate of 2.75% per year on the issue price until
February 2, 2012. After that date, original issue discount
will accrue on the Notes at a rate of 2.75% per year on a
semi-annual bond equivalent basis. On the maturity date, a
holder will receive $1,000 in cash per $1,000 principal amount
at maturity of Notes. These notes do not include any financial
covenants.
We currently anticipate that our current cash balance and cash
flow from operations, including the proceeds from the
convertible notes issued in February 2005, will be sufficient to
meet our presently anticipated capital needs for the next twelve
months, but may be insufficient to provide funds necessary for
any future acquisitions we may make during that time. To the
extent we require additional funds, whether for acquisitions or
otherwise, we may seek additional equity or debt financing. Such
financing may not be available to us on terms that are
acceptable to us, if at all, and any equity financing may be
dilutive to our stockholders. To the extent we obtain additional
debt financing, our debt service obligations will increase and
the relevant debt instruments may, among other things, impose
additional restrictions on our operations, require us to comply
with additional financial covenants or require us to pledge
assets to secure our borrowings.
Off Balance Sheet Arrangements
We do not have any off-balance sheet arrangements or
relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured
finance or special purpose entities, which are typically
established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes.
Contractual Obligations as of December 31, 2004
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due by Period | |
| |
|
| |
| |
|
|
|
Less than | |
|
|
|
More than | |
| Contractual Obligations |
|
Total | |
|
1 Year | |
|
1-3 Years | |
|
3-5 Years | |
|
5 Years | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Long-Term Debt to Customers
|
|
$ |
2,963,000 |
|
|
$ |
1,086,000 |
|
|
$ |
1,317,000 |
|
|
$ |
560,000 |
|
|
$ |
— |
|
|
Capital Lease Obligations
|
|
|
1,034,000 |
|
|
|
788,000 |
|
|
|
211,000 |
|
|
|
35,000 |
|
|
|
— |
|
|
Operating Leases
|
|
|
19,002,000 |
|
|
|
4,312,000 |
|
|
|
6,664,000 |
|
|
|
4,799,000 |
|
|
|
3,227,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations
|
|
$ |
22,999,000 |
|
|
$ |
6,186,000 |
|
|
$ |
8,192,000 |
|
|
$ |
5,394,000 |
|
|
$ |
3,227,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
In February 2004, we sold senior subordinated convertible notes
due 2035 with an aggregate principal amount at maturity of
$270 million. These notes are not included in the above
table.
Income Taxes
In the fourth quarter of 2004, we reversed the valuation
allowance of $17.9 million against our deferred tax assets
because we determined that it is more likely than not that
current and future net income will allow for the realization of
these assets. As a result, we recorded an income tax benefit of
$8.6 million in the fourth quarter directly related to the
reversal of the valuation allowance. The remainder of the
valuation allowance reversal was primarily recorded as an
increase to equity of $7.8 million. For subsequent periods,
we anticipate recording a tax provision against income at our
effective tax rate. However, we do not expect to incur
significant federal tax payments until all anticipated net
operating loss carry forwards are utilized. We continue to
maintain a full valuation allowance on deferred tax assets
related to Datawest Solutions Inc.
At December 31, 2004, the Company had approximately
$49.5 million of federal net operating loss carryforwards
that begin expiring in 2007, had approximately
$36.4 million of state net operating loss carryforwards,
which begin to expire in 2005 and had approximately
$31.3 million of foreign net operating loss carryforwards,
which begin to expire in 2007. At December 31, 2004, the
Company had approximately $1.0 million of federal research
and development credit carryforwards that begin to expire in
2007 and approximately $780,000 of state research and
development carryforwards with an unlimited carryforward period.
As defined in Section 382 of the Internal Revenue Code,
certain ownership changes limit the annual utilization of
federal net operating losses and tax credit carry forwards. We
experienced such an ownership change in 1995. The follow-on
offering has resulted in a second ownership change. This
limitation of the utilization of federal net operating losses
imposed by Section 382 is applied annually and is equal to
a published long term exempt rate multiplied by the aggregate
fair value of the company immediately prior to the ownership
change. This resulting limitation may also be increased by
imputed tax deductions of certain intangibles resulting from
built-in gains, as defined. We do not believe that the
Section 382 limitation with respect to the 1995 ownership
change nor the change that resulted from the follow-on offering
will result in the loss of any net operating losses or tax
credit carry forwards prior to their expiration. As a result of
future issuance of, sales of, and other transactions involving
our common stock, we may experience an ownership change in the
future, which could cause such federal net operating losses and
tax credit carryforwards to be subject to limitation under
Section 382.
Acquisitions
Since August 2001, we have expanded our product offerings and
client base through the acquisition of nine businesses. The
operating results of each business acquired have been included
in our financial statements from the respective dates of
acquisition.
On August 3, 2001, we acquired Sound Software Development,
Inc. for a purchase price of $3.0 million, consisting of
$1.7 million in cash, 80,472 shares of our
Series G preferred stock and 55,496 shares of our
common stock. In conjunction with this acquisition, we incurred
$113,000 of acquisition related costs. This acquisition was
recorded under the purchase method with the total consideration
allocated to the fair value of the assets acquired, including
purchased technology of $832,000, goodwill of $1.6 million
and other intangibles of $196,000. Additionally, we recorded a
charge of $447,000 related to in-process research and
development. This acquisition expanded our complementary product
offering to include loan origination software and expanded our
client base.
On December 14, 2001, we acquired Imagic Corporation for a
purchase price of $4.2 million, consisting of
$1.8 million in cash and 314,486 shares of our common
stock. Our assumed liabilities included a note payable of
$748,000 that was subsequently paid in full in January 2002. In
conjunction with this acquisition, we incurred $120,000 of
acquisition related costs. This acquisition was recorded under
the purchase method with the total consideration allocated to
the fair value of the assets acquired, including purchased
technology
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of $1.9 million, goodwill of $4.0 million and other
intangibles of $80,000. This acquisition expanded our
complementary product offering to include check imaging software
and services and expanded our client base.
During 2002, we acquired business operations from HNC Financial
Solutions, Inc. On March 29, 2002, we acquired certain
intellectual property rights of HNC Financial Solutions, Inc.
and assumed the related future software maintenance and support
obligations in exchange for a $500,000 promissory note. This
note was paid in full in December 2004 with the proceeds from
the initial public offering. We concurrently entered into a
license and service agreement with the seller for the HNC Profit
Manager software in exchange for $564,000 in cash. In
conjunction with this acquisition, we incurred $39,000 of
acquisition related costs. This acquisition expanded our
complementary product offering to include financial accounting,
asset/ liability management and financial planning products, and
expanded our client base and product offerings.
On October 31, 2002, we purchased the intellectual property
rights that had been licensed in the March 2002 HNC Financial
Solutions transaction, plus accounts receivable and related
future software maintenance and support obligations for a
$950,000 promissory note. This note was paid in full in December
2003 with the proceeds from the initial public offering. The
combined transaction was recorded under the purchase method with
the purchase price allocated to the fair value of the assets
acquired, including purchased technology of $1.2 million
and goodwill of $772,000. This acquisition expanded our
financial product offering to include profitability analysis.
On July 1, 2003, we acquired substantially all of the
assets of Liberty FiTech Systems, Inc. and assumed certain
liabilities and the related future software maintenance and
support obligations for consideration of $11.7 million,
consisting of $8.0 million in cash, a $1.9 million
promissory note and 133,195 shares of our common stock. The
133,195 shares of common stock issued to Liberty FiTech
Systems, Inc. were subject to a put and call agreement, in which
Liberty FiTech Systems, Inc. had the right to require us to
purchase the shares at a price of $13.51 per share, and we
had the right to require Liberty FiTech Systems, Inc. to sell
these shares to us at a price of $13.51 per share. On
September 3, 2003, FS Acquisition, Inc., the
successor-in-interest to Liberty FiTech Systems, Inc., exercised
its put right pursuant to this put and call agreement with
respect to these shares. On December 2, 2003, we purchased
these 133,195 shares at a price of $13.51 per share,
or an aggregate of approximately $1.8 million. The note was
paid in full in December 2003 with the proceeds from the initial
public offering. The acquisition was recorded under the purchase
method with the total consideration allocated to the fair value
of assets acquired, including purchased technology of $530,000,
goodwill of $4.8 million and other intangible assets of
$6.7 million. We view this acquisition as an opportunity to
increase our core data processing client base among credit
unions and to increase the recurring revenue component of our
revenues.
On February 24, 2004, we acquired Maxxar Corporation for
cash consideration of approximately $6.5 million.
Subsequent to the acquisition date, we paid an additional
$190,000 as a contractual adjustment of the original purchase
price. In connection with the acquisition, we incurred
approximately $185,000 of acquisition related costs. This
acquisition was recorded under the purchase method of accounting
with the total consideration allocated to the fair value of
assets acquired, including purchased technology of approximately
$760,000 and other intangibles of approximately $700,000. The
excess of the purchase price over the fair value of the net
assets acquired of $4.3 million has been allocated to
goodwill. This acquisition expanded our complementary product
offerings to include a comprehensive suite of interactive voice
information solutions and computer telephony integration
products.
On June 18, 2004, we acquired substantially all of the
outstanding operating assets and assumed certain liabilities of
Eastpoint Technologies, LLC, a provider of core processing
software and related services for banks, for cash consideration
of approximately $7.0 million. Subsequent to the
acquisition date, we received $206,000 and $114,000 from amounts
paid to escrow as a contractual adjustment of the original
purchase price. In connection with the acquisition, we incurred
approximately $83,000 of acquisition-related costs. This
acquisition was recorded under the purchase method of accounting
with the total consideration allocated to the fair value of the
assets acquired, including purchased technology of $290,000 and
other intangibles of approximately $1,990,000 and liabilities
assumed based on estimates of fair value. The excess of the
purchase price over the fair value of the net assets acquired of
$5.2 million has been allocated to goodwill. Purchase
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accounting for this acquisition is preliminary, primarily with
respect to the certain portions of the purchase price which are
contingent upon future events, and is expected to be finalized
during 2005. This acquisition increased our core data processing
client base among banks and increased the recurring revenue
component of our revenues.
On July 8, 2004, we acquired the stock of re:Member Data
Services, Inc., a provider of core processing solutions for
credit unions, for cash consideration of approximately
$21.9 million and employee stock options valued at
approximately $789,000. In connection with the acquisition, the
Company incurred approximately $96,000 of acquisition-related
costs. This acquisition was recorded under the purchase method
of accounting with the total consideration allocated to the fair
value of the assets acquired, including purchased technology of
$750,000 and other intangibles of approximately
$11.4 million and liabilities assumed based on estimates of
fair value. The excess of the purchase price over the fair value
of the net assets acquired of $12.1 million has been
allocated to goodwill. This acquisition increased our core data
processing client base among credit unions and increased the
recurring revenue component of our revenues.
On July 23, 2004, we acquired substantially all of the
outstanding operating assets and assumed certain liabilities of
Omega Systems of North America LLC, a company specializing in
remittance and lock box solutions, for cash consideration of
approximately $2.4 million and acquisition-related costs of
approximately $49,000.
On October 29, 2004, we acquired all of the outstanding
stock of Datawest Solutions Inc., a provider of core data
processing and payment technology solutions in Canada for cash
consideration of CDN $1.16 (approximately US$0.95 at the
exchange rate as of October 29, 2004) per common share for
29,824,126 common shares and CDN $2.60 (approximately US$2.13 at
the exchange rate as of October 29, 2004) per preferred
share for 5,000,000 preferred shares, for a total aggregate
consideration of approximately CDN$47,596,000 (approximately
US$38.9 million at the exchange rate as of October 29,
2004). Additionally, we repaid US$8.3 million of
outstanding debt and have incurred approximately US$368,000 of
acquisition costs for a total purchase price of
US$47.6 million. This acquisition was recorded under the
purchase method of accounting with the total consideration
allocated to the fair value of the assets acquired, including
purchased technology of $2.2 million and other intangibles
of approximately $11.5 million and liabilities assumed
based on estimates of fair value. The excess of the purchase
price over the fair value of the net assets acquired of
$32.1 million has been allocated to goodwill. Purchase
accounting for this acquisition is preliminary and is expected
to be finalized during 2005. This acquisition increased our core
data processing client base among banks and increased the
recurring revenue component of our revenues. This acquisition
increased our core data processing base internationally into
Canada, increased the recurring revenue component of our
revenues and expanded our product offerings to include
electronic payment products and services.
Critical Accounting Policies and Estimates
The accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States, which require that management
make numerous estimates and assumptions. Actual results could
differ from those estimates and assumptions, impacting our
reported results of operations and financial position. Our
significant accounting policies are more fully described in
Note 2 to our consolidated financial statements included
elsewhere in this Annual Report on Form 10-K. The critical
accounting policies described below are those that are most
important to the depiction of our financial condition and
results of operations and their application requires
management’s most subjective judgment in making estimates
about the effect of matters that are inherently uncertain.
We generate revenues from licensing the rights to use our
software products and certain third-party software products to
clients. We also generate revenues from installation, training,
maintenance and support services provided to clients, from
outsourcing center services, hardware sales related to our check
imaging and voice response businesses and fees collected on
transactions in our payment processing business.
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We recognize software license revenue when a noncancelable
license agreement has been executed, fees are fixed or
determinable, the software has been delivered, accepted by the
client if acceptance is required by the contract and other than
perfunctory, and collection is considered probable. The software
licenses are sold in conjunction with professional services for
installation, training, maintenance and support. For these
arrangements, a portion of the total contract value is
attributed first to the maintenance arrangement based on its
fair value, which is derived from renewal rates. Another portion
of the contract value is then attributed to installation and
training services based on estimated fair value, which is
derived from rates charged for similar services provided on a
stand-alone basis multiplied by estimated hours to complete. Our
software license agreements generally do not require significant
modification or customization of the underlying software, and
accordingly, installation and training services are not
considered essential to functionality. The remainder of the
total contract value is then attributed to the software licenses
based on the residual method. The estimated hours and hourly
rate for installation and training services affect the timing
and amount of revenue recognized from license fees and
installation and training services. Due to the uncertainties
inherent in the estimation process, actual hours to complete
installation and training services or the estimated hourly rate
of these services may differ from estimates. If significant
customization of our software is required, we recognize all
revenue using the percentage-of-completion method. The
complexity of some software license agreements requires us to
routinely apply judgments regarding the application of software
recognition accounting principles to specific agreements and
transactions. Different judgments and estimates could have led
to different accounting conclusions, which could have had a
material adverse effect on our results of operations.
Revenues from software maintenance are typically generated under
five-year agreements and are recognized ratably over the life of
the agreements. Revenues from installation and training services
are recognized as services are performed. We calculate revenue
recognition for installation and training services based on the
ratio of hours incurred to estimated total hours for the
project. Accordingly, we must estimate the hours to complete the
installation and training, and it is possible that estimates may
be revised. These revisions are recognized in the period in
which the revisions are determined, and changes in these
estimates could have a material effect on our financial
statements.
Data center revenues associated with allowing customers to
utilize our software products on an outsourced basis and payment
transaction processing revenues are recognized when evidence of
an arrangement exists, fees are fixed or determinable,
collectibility is reasonably assured and the service has been
provided. The Company obtains signed contracts, which indicate
the key terms, as well as the fixed and determinable fees, in
each arrangement. Revenues and related costs associated with
installation of data center and transaction processing
arrangements are recognized over the term of the arrangement,
typically 3 to 5 years.
We are receiving payments under certain license and marketing
agreements with resellers. We have provided a master license to
our two primary resellers BISYS, Inc. and Connecticut On-Line
Computer Center, Inc., or COCC, and do not have any other
continuing obligation to provide additional products or
services, other than the provision of client support and
maintenance. We recognize revenue when the revenue recognition
criteria under SOP No. 97-2 are met, including when
evidence of an arrangement exists, fees are fixed and
determinable, collectibility is reasonably assured, and delivery
has occurred. We recognize minimum quarterly non-refundable
payments and any additional license fees as revenue in the
quarter that they are due.
We typically recognize hardware revenue upon product shipment,
including our voice response systems and other standard hardware
equipment. We recognize certain hardware revenue related to our
check imaging products on a percentage-of-completion basis
because installation services related to these arrangements and
the software related to these arrangements are considered
essential to the functionality of certain of the hardware.
Deferred revenue is comprised of payments received related to
product delivery, maintenance and other services, which have
been paid by customers prior to the recognition of revenue.
Deferred revenue relates primarily to cash received for
maintenance contracts in advance of services performed, which is
recognized as revenue ratably as services are performed.
Deferred costs are comprised of costs incurred prior to the
recognition of related revenue.
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Allowance for Doubtful Accounts |
We maintain an allowance for doubtful accounts for estimated
losses resulting from the inability of our clients to make
required payments. The amount of our reserve is based on
historical experience and our analysis of the accounts
receivable balance outstanding. If the financial condition of
our clients were to deteriorate, resulting in their inability to
make payments, additional allowances may be required which would
result in an additional expense in the period that this
determination was made. While credit losses have historically
been within our expectations and the provisions established, we
cannot guarantee that we will continue to experience the same
credit loss rates that we have in the past. Such estimates
require significant judgment on the part of our management.
Therefore, changes in the assumptions underlying our estimates
or changes in the financial condition of our clients could
result in a different required allowance, which would have a
material effect on our results of operations.
We apply the intrinsic value recognition and measurement
principles whereby compensation expense is recognized over the
vesting period to the extent that the fair market value of the
underlying stock on the date of grant exceeds the exercise price
of the employee stock option. For periods prior to our initial
public offering, the calculation of the intrinsic value of a
stock award was based on management’s estimate of the fair
value of our common stock. Beginning in the third quarter of
2005, we will be required to recognize expense pursuant to
SFAS 123R for stock-based compensation. Valuation of stock
options requires significant estimates related to volatility and
option life, and changes in these estimates would have a
material impact on our stock-based compensation expense when the
provisions of SFAS 123R are adopted.
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Software Development Costs |
Software development costs for new software products and
additional modules for existing software are expensed as
incurred until technological feasibility is established.
Technological feasibility is established when a working model of
the product has been completed and completeness of the working
model and its consistency with the product design has been
confirmed by testing. Internal software development costs
qualifying for capitalization under SFAS No. 86 have
not been significant.
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Accounting for Purchase Business Combinations |
All of our acquisitions were accounted for as purchase
transactions, and the purchase price was allocated to the assets
acquired and liabilities assumed based on the fair value of the
acquired company’s then-current assets, purchased
technology, property and equipment and liabilities. The excess
of the purchase price over the fair value of net assets acquired
or net liabilities assumed has been allocated to goodwill. The
fair value of amortizable intangibles, primarily consisting of
purchased technology, was determined using an estimate of
discounted future cash flows related to the technology. Actual
future cash flows from purchased technology could differ from
estimated future cash flows. The allocation between amortizable
intangibles and goodwill impacts future amortization expense in
the financial statements.
We amortize intangibles over their estimated economic lives.
While we believe it is unlikely that any significant changes to
the useful lives of our tangible and intangible assets will
occur in the near term, rapid changes in technology or changes
in market conditions could result in revisions to such estimates
that could materially affect the carrying value of these assets
and our future operating results.
Deferred revenue acquired in business combinations is recorded
based on the fair value of the legal obligation. We measure fair
value as the cost to fulfill the obligation plus our historical
profit margin on these services. Changes in the estimate of fair
value of deferred revenue could have a material impact on the
purchase price allocation and future recognition of revenue.
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Long-Lived Assets, Intangible Assets and Goodwill |
We assess the impairment of identifiable intangibles and
long-lived assets whenever events or changes in circumstances
indicate that the carrying value may not be recoverable.
Impairment is measured as the amount by which the carrying value
of the intangible asset exceeds its fair value. Factors we
consider important which could trigger an impairment review
include the following:
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significant underperformance relative to expected historical or
projected future operating results, |
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significant changes in the manner of our use of the acquired
assets or the strategy for our overall business, and |
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significant negative industry or economic trends. |
We also perform an annual impairment test of goodwill. We assess
potential impairment through a comparison of the fair value of
each reporting unit versus its carrying value. The estimated
fair value of goodwill and intangible assets is based on a
number of factors including past operating results, budgets,
economic projections, market trends, product development cycles,
and estimated future cash flows. Changes in these assumptions
and estimates could cause a material impact on our financial
statements.
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Recent Accounting Pronouncements |
In December 2004, the FASB issued SFAS No. 123R,
“Share-Based Payment: an amendment of FASB Statements
No. 123 and 95,” which requires companies to recognize
in their statement of operations the grant-date fair value of
stock options and other equity-based compensation issued to
employees. SFAS No. 123R is effective for interim or
annual periods beginning after June 15, 2005. Accordingly,
we will adopt SFAS No. 123R in our third quarter of
2005. SFAS 123R requires all share-based payments to
employees, including stock options and stock issued under
certain employee stock purchase plans, to be recognized in the
financial statements at their fair value. SFAS 123R will
require us to estimate future forfeitures of stock based
compensation, while the current pro forma disclosure includes
only those options that have been forfeited during the current
period. Therefore, we believe that the pro forma expense
currently disclosed in Note 2 to our Consolidated Financial
Statements represents an estimate of the amounts that would have
been recorded under the provisions of SFAS 123R. We have
not yet determined which fair value method and transitional
provision we will follow. We are currently evaluating our stock
based compensation plan, to determine if changes should be made
to minimize compensation charges resulting from the adoption of
SFAS 123R.
In October 2004, the FASB ratified EITF 04-8,
“Accounting Issues Related to Certain Features of
Contingently Convertible Debt and the Effect on Diluted Earnings
Per Share.” The new rules require companies to include
shares issuable upon conversion of contingently convertible debt
in their diluted earnings per share calculations regardless of
whether the debt has a market price trigger that is above the
current fair market value of the company’s common stock
that makes the debt currently not convertible. The new rules are
effective for reporting periods ending on or after
December 15, 2004. In February 2005, we completed an
offering of convertible debt. The dilutive effect of shares from
this debt will be included in the diluted earnings per share
calculation using the if-converted method.
In December 2004, the FASB issued FSP No. 109-1 —
Application of SFAS No. 109, Accounting for Income
Taxes, to the Tax Deduction on Qualified Production Activities
Provided by the American Jobs Creation Act of 2004, which
provides guidance with respect to recording the potential impact
of repatriation provisions of the American Job Creation Act of
2004 (the “Jobs Act”) to enterprises’ income tax
expense and deferred tax liability. The Jobs Act creates a
temporary incentive for U.S. corporations to repatriate
accumulated income earned abroad by providing a dividends
reduction for certain dividends from controlled foreign
corporations. The deduction is subject to a number of
limitations and uncertainty remains as to how the interpret
certain provisions in the Jobs Act. As such, we have not yet
determined whether, and to what extent, we might repatriate
foreign earnings that have not yet been remitted to the U.S.
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Factors That May Affect Future Results
The risks and uncertainties described below are not the only
risks we face. Additional risks and uncertainties not presently
known to us or that are currently deemed immaterial may also
impair our business operations. If any of the following risks
actually occur, our financial condition and operating results
could be materially adversely affected.
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We are dependent on the banking and credit union industry,
and changes within that industry could reduce demand for our
products and services. |
The large majority of our revenues are derived from financial
institutions in the banking and credit union industry, primarily
small to mid-size banks and thrifts and credit unions of all
sizes, and we expect to continue to derive substantially all of
our revenues from these institutions for the foreseeable future.
Unfavorable economic conditions adversely impacting the banking
and credit union industry could have a material adverse effect
on our business, financial condition and results of operations.
For example, financial institutions in the banking and credit
union industry have experienced, and may continue to experience,
cyclical fluctuations in profitability as well as increasing
challenges to improve their operating efficiencies. Due to the
entrance of non-traditional competitors and the current
environment of low interest rates, the profit margins of
commercial banks, thrifts and credit unions have narrowed. As a
result, some banks have slowed, and may continue to slow, their
capital spending, including spending on computer software and
hardware, which can negatively impact license sales of our core
and complementary products to new and existing clients.
Decreases in or reallocation of capital expenditures by our
current and potential clients, unfavorable economic conditions
and new or persisting competitive pressures could adversely
affect our business, financial condition and results of
operations.
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Consolidation in the banking and financial services
industry could adversely impact our business by eliminating a
number of our existing and potential clients. |
There has been and continues to be merger, acquisition and
consolidation activity in the banking and financial services
industry. Mergers or consolidations of banks and financial
institutions in the future could reduce the number of our
clients and potential clients. A smaller market for our services
could have a material adverse impact on our business and results
of operations. In addition, it is possible that the larger banks
or financial institutions which result from mergers or
consolidations could decide to perform themselves some or all of
the services which we currently provide or could provide. If
that were to occur, it could have a material adverse impact on
our business and results of operations.
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Our success depends on decisions by potential clients to
replace their legacy computer systems, and their failure to do
so would adversely affect demand for our products and
services. |
We primarily derive our revenues from two sources: license fees
for software products and fees for a full range of services
complementing our products, including outsourcing, installation,
training, maintenance and support services. A large portion of
these fees are either directly attributable to licenses of our
core software system or are generated over time by clients using
our core software. Banks and credit unions historically have
been slow to adapt to and accept new technologies. Many of these
financial institutions have traditionally met their information
technology needs through legacy computer systems, in which they
have often invested significant resources. As a result, these
financial institutions may be inclined to resist replacing their
legacy systems with our core software system. Our future
financial performance will depend in part on the successful
development, introduction and client acceptance of new and
enhanced versions of our core software system and our other
complementary products. A decline in demand for, or failure to
achieve broad market acceptance of, our core software system or
any enhanced version as a result of competition, technological
change or otherwise, will have a material adverse effect on our
business, financial condition and results of operations.
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If we fail to expand our outsourcing business and other
sources of recurring revenue, we may be unable to successfully
implement our business strategy. |
We can host a financial institution’s data processing
functions at our outsourcing centers. Our outsourcing centers
currently serve clients using our core software and our Internet
banking, ATM, cView, cash management, collections, automated
clearing house, or ACH, processing, check and item processing
and telephony products. In the future, we plan to offer all of
our products in our outsourcing centers and continue to market
our outsourcing services aggressively.
Our outsourcing services provide a source of recurring revenue
which can grow as the number of accounts processed for a client
increases. We also seek to generate recurring revenue through
our licensing model, which generates additional fees for us as a
client’s business grows or it adds more software
applications, as well as through the provision of maintenance,
support and other professional services. Our maintenance
revenues are the largest of these revenue components, and we
expect that these revenues will continue to be a significant
portion of our total revenues as our client base grows due to
their recurring nature. To the extent we fail to persuade new or
existing clients to purchase our outsourcing services or we are
unable to offer some or all of our products to clients on an
outsourced basis, we will be unable to implement our strategy
and our revenue may be less predictable.
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We have had several consecutive profitable quarters, but
we may not achieve continued sustained profitability. |
We were incorporated in May 1992 and did not release our first
product until 1995. Accordingly, our prospects must be
considered in light of the risks, expenses and difficulties
frequently encountered by companies with limited operating
histories. Although we have been profitable for the year ended
December 31, 2004, we may not be profitable in future
periods, either on a short or long-term basis. As of
December 31, 2004, we had an accumulated deficit of
approximately $21.9 million. There can be no assurance that
operating losses will not recur in the future, that we will
sustain profitability on a quarterly or annual basis or that our
actual results will meet our projections, expectations or
announced guidance. To the extent that revenues do not grow at
anticipated rates, increases in operating expenses precede or
are not subsequently followed by commensurate increases in
revenues or we are unable to adjust operating expense levels
accordingly, our business, financial condition and results of
operations will be materially adversely affected.
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If we fail to adapt our products and services to changes
in technology or in the marketplace, we could lose existing
clients and be unable to attract new business. |
The markets for our software products and services are
characterized by technological change, frequent new product
introductions and evolving industry standards. The introduction
of products embodying new technologies and the emergence of new
industry standards can render our existing products obsolete and
unmarketable in short periods of time. We expect new products
and services, and enhancements to existing products and
services, to continue to be developed and introduced by others,
which will compete with, and reduce the demand for, our products
and services. Our products’ life cycles are difficult to
estimate. Our future success will depend, in part, on our
ability to enhance our current products and to develop and
introduce new products that keep pace with technological
developments and emerging industry standards and to address the
increasingly sophisticated needs of our clients. There can be no
assurance that we will be successful in developing, marketing,
licensing and selling new products or product enhancements that
meet these changing demands, that we will not experience
difficulties that could delay or prevent the successful
development, introduction and marketing of these products or
that our new products and product enhancements will adequately
meet the demands of the marketplace and achieve market
acceptance.
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We encounter a long sales and implementation cycle
requiring significant capital commitments by our clients which
they may be unwilling or unable to make. |
The implementation of our core software system involves
significant capital commitments by our clients. Potential
clients generally commit significant resources to an evaluation
of available software and require us to
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expend substantial time, effort and money educating them as to
the value of our software. Sales of our core processing software
products require an extensive education and marketing effort
throughout a client’s organization because decisions
relating to licensing our core processing software generally
involve the evaluation of the software by senior management and
a significant number of client personnel in various functional
areas, each having specific and often conflicting requirements.
We may expend significant funds and management resources during
the sales cycle and ultimately fail to close the sale. Our core
software product sales cycle generally ranges between six to
nine months, and our implementation cycle for our core software
generally ranges between six to nine months. Our sales cycle for
all of our products and services is subject to significant risks
and delays over which we have little or no control, including:
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the timing of our clients’ budget cycles and approval
processes, |
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our clients’ willingness to replace their core software
solution vendor, |
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the success and continued support of our strategic marketing
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the timing and expiration of our clients’ current license
agreements or outsourcing agreements for similar services. |
If we are unsuccessful in closing sales after expending
significant funds and management resources or if we experience
delays as discussed above, it could have a material adverse
effect on our business, financial condition and results of
operations.
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We utilize certain key technologies from third parties,
and may be unable to replace those technologies if they become
obsolete or incompatible with our products. |
Our proprietary software is designed to work in conjunction with
certain third-party software products, including Microsoft and
Oracle relational databases. Although we believe that there are
alternatives to these products generally available to us, any
significant interruption in the supply of such third-party
software could have a material adverse effect on our sales
unless and until we can replace the functionality provided by
these products. In addition, we are dependent upon these third
parties’ abilities to enhance their current products, to
develop new products on a timely and cost-effective basis and to
respond to emerging industry standards and other technological
changes. There can be no assurance that we would be able to
replace the functionality provided by the third-party software
currently offered in conjunction with our products in the event
that such software becomes obsolete or incompatible with future
versions of our products or is otherwise not adequately
maintained or updated. The absence of, or any significant delay
in, the replacement of that functionality could have a material
adverse effect on our business, financial condition and results
of operations. Furthermore, delays in the release of new and
upgraded versions of third-party software products, particularly
the Oracle relational database management system, could have a
material adverse effect on our revenues and results of
operations. Because of the complexities inherent in developing
sophisticated software products and the lengthy testing periods
associated with these products, no assurance can be given that
our future product introductions will not be delayed.
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We operate in a competitive business environment, and if
we are unable to compete effectively, we may face price
reductions and decreased demand for our products. |
The market for our products and services is intensely
competitive and subject to technological change. Competitors
vary in size and in the scope and breadth of the products and
services they offer. We encounter competition from a number of
sources, all of which offer core software systems to the banking
and credit union industry. We expect additional competition from
other established and emerging companies as the market for core
processing software solutions and complementary products
continues to develop and expand.
We also expect that competition will increase as a result of
software industry consolidation, including particularly the
acquisition of any of our competitors or any of the retail
banking system providers by one of
36
the larger service providers to the banking industry. We
encounter competition in the United States from a number of
sources, including Fiserv, Inc., Jack Henry &
Associates, Inc., Fidelity National Financial Corporation and
John H. Harland Company, all of which offer core processing
systems or outsourcing alternatives to banks, thrifts and credit
unions. Some of our current, and many of our potential,
competitors have longer operating histories, greater name
recognition, larger client bases and significantly greater
financial, engineering, technical, marketing and other resources
than we do. As a result, these companies may be able to respond
more quickly to new or emerging technologies and changes in
client demands or to devote greater resources to the
development, promotion and sale of their products than we can.
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 our prospective clients. Accordingly, it is
possible that new competitors or alliances among competitors may
emerge and acquire significant market share. We expect that the
banking and credit union software market will continue to
attract new competitors and new technologies, possibly involving
alternative technologies that are more sophisticated and
cost-effective than our technology. There can be no assurance
that we will be able to compete successfully against current or
future competitors or that competitive pressures faced by us
will not materially adversely affect our business, financial
condition and results of operations.
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An impairment of the value of our goodwill, capitalized
software costs and other intangible assets could significantly
reduce our earnings. |
We periodically review several items on our balance sheet for
impairment and record an impairment charge if we determine that
the value of our assets has been impaired. As of
December 31, 2004, we had approximately $66.5 million
of goodwill, $6.2 million of capitalized software costs and
$31.2 million of other intangible assets. We periodically
review these assets for impairment. If we determine that the
carrying value of these assets are not recoverable, we would
record an impairment charge against our results of operations.
Such an impairment charge may be significant, and we are unable
to predict the amount, in any, of potential future impairments.
In addition, if we engage in additional acquisitions, we may
incur additional goodwill, capitalized software costs and other
intangible assets.
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Our quarterly revenues, operating results and
profitability will vary from quarter to quarter, which may
result in volatility in our stock price. |
Our quarterly revenues, operating results and profitability have
varied in the past and are likely to continue to vary
significantly from quarter to quarter. This may lead to
volatility in our stock price. These fluctuations are due to
several factors relating to the license and sale of our
products, including:
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the timing, size and nature of our licensing transactions, |
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lengthy and unpredictable sales cycles, |
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the timing of introduction and market acceptance of new products
or product enhancements by us or our competitors, |
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the timing of acquisitions by us of businesses and products, |
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product and price competition, |
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the relative proportions of revenues derived from license fees
and services, |
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changes in our operating expenses, |
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software bugs or other product quality problems, and |
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personnel changes and fluctuations in economic and financial
market conditions. |
We believe that period-to-period comparisons of our results of
operations are not necessarily meaningful. There can be no
assurance that future revenues and results of operations will
not vary substantially. It is also possible that in future
quarters, our results of operations will be below the
expectations of public market
37
analysts or investors or our announced guidance. In either case,
the price of our common stock could be materially adversely
affected.
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We face a lengthy sales cycle for our core software, which
may cause fluctuations in our revenues from quarter to
quarter. |
We may not be able to increase revenue or decrease expenses to
meet expectations for a given quarter. We recognize software
license revenues upon delivery and, if required by the
underlying agreement, upon client acceptance, if such criteria
is other than perfunctory, which does not always occur in the
same quarter in which the software license agreement for the
system is signed. As a result, we are constrained in our ability
to increase our software license revenue in any quarter if there
are unexpected delays in delivery or required acceptance of
systems for which software licenses were signed in previous
quarters. Implementation of our core software system typically
occurs over six to nine months. Delays in the delivery,
implementation or any required acceptance of our products could
materially adversely affect our quarterly results of operations.
Revenues from software license sales accounted for 30.8% of
revenues for the year ended December 31, 2004, 33.5% of
revenues for the year ended December 31, 2003, 30.3% of
revenues for the year ended December 31, 2002 and 36.6% of
revenues for the year ended December 31, 2001. We expect
that revenues from software license sales will continue to
provide a significant percentage of our revenues in future
periods, and our ability to close license sales, as well as the
timing of those sales, may have a material impact on our
quarterly results. In addition, increased sales and marketing
expenses for any given quarter may negatively impact operating
results of that quarter due to lack of recognition of associated
revenues until the delivery of the product in a subsequent
quarter.
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Our level of fixed expenses may cause us to incur
operating losses if we are unsuccessful in maintaining our
current revenue levels. |
Our expense levels are based, in significant part, on our
expectations as to future revenues and are largely fixed in the
short term. As a result, we may be unable to adjust spending in
a timely manner to compensate for any unexpected shortfall in
revenues. Accordingly, any significant shortfall of revenues in
relation to our expectations would have an immediate and
materially adverse effect on our business, financial condition
and results of operations. In addition, as we expand we would
anticipate increasing our operating expenses to expand our
installation, product development, sales and marketing and
administrative organizations. The time of such expansion and the
rate at which new personnel become productive could cause
material losses to the extent we do not generate additional
revenue.
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We rely on our direct sales force to generate revenue, and
may be unable to hire additional sales personnel in a timely
manner. |
We rely primarily on our direct sales force to sell licenses of
our core software system. We may need to hire additional sales,
client care and implementation personnel in the near-term and
beyond if we are to achieve revenue growth in the future.
Competition for such personnel is intense, and there can be no
assurance that we will be able to retain our existing sales,
customer service and implementation personnel or will be able to
attract, assimilate or retain additional highly qualified
personnel in the future. If we are unable to hire or retain
qualified sales personnel on a timely basis, our business,
financial condition and results of operations could be
materially adversely affected.
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We receive a portion of our revenues from relationships
with strategic marketing partners, and if we lose one or more of
these marketing partners or fail to add new ones it could have a
negative impact on our business. |
We expect that revenues generated from the sale of our products
and services by our strategic marketing partners will account
for a meaningful portion of our revenues for the foreseeable
future. In particular, we expect that BISYS, a national
outsourcing center, will account for a meaningful portion of our
revenues over time. During the year ended December 31,
2004, BISYS represented approximately $12.5 million, or
11.7%,
38
of our total revenues. During the fiscal year ended
December 31, 2003, BISYS represented approximately
$5.8 million, or 9.1%, of our total revenues.
Our strategic marketing partners pay us license fees based on
the volume of products and services that they sell. If we lose
one or more of our major strategic marketing partners, we may be
unable in a timely manner, or at all, to replace them with
another entity with comparable client bases and user
demographics, which would adversely affect our business,
financial condition and results of operations. In addition, we
plan to supplement our existing distribution partners with other
national and regional outsourcing centers. If we are unable to
identify appropriate resellers and enter into arrangements with
them for the outsourcing of our products and services to
financial institutions, we may not be able to sustain or grow
our business.
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If we do not retain our senior management and other key
employees, we may not be able to successfully implement our
business strategy. |
We have grown significantly in recent years, and our management
remains concentrated in a small number of key employees. Our
future success depends to a significant extent on our executive
officers and key employees, including our sales force and
software professionals, particularly project managers, software
engineers and other senior technical personnel. The loss of the
services of any of these individuals or group of individuals
could have a material adverse effect on our business, financial
condition and results of operations. Competition for qualified
personnel in the software industry is intense and we compete for
these personnel with other software companies that have greater
financial and other resources than we do. Our future success
will depend in large part on our ability to attract, retain and
motivate highly qualified personnel, and there can be no
assurance that we will be able to do so. Any difficulty in
hiring needed personnel could have a material adverse effect on
our business, financial condition and results of operations.
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We rely on internally developed software and systems as
well as third-party products, any of which may contain errors
and bugs. |
Our software may contain undetected errors, defects or bugs.
Although we have not suffered significant harm from any errors
or defects to date, we may discover significant errors or
defects in the future that we may or may not be able to correct.
Our products involve integration with products and systems
developed by third parties. Complex software programs of third
parties may contain undetected errors or bugs when they are
first introduced or as new versions are released. There can be
no assurance that errors will not be found in our existing or
future products or third-party products upon which our products
are dependent, with the possible result of delays in or loss of
market acceptance of our products, diversion of our resources,
injury to our reputation and increased service and warranty
expenses and/or payment of damages.
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We could be sued for contract or product liability claims
and lawsuits may disrupt our business, divert management’s
attention or have an adverse effect on our financial
results. |
Failures in a client’s system could result in an increase
in service and warranty costs or a claim for substantial damages
against us. There can be no assurance that the limitations of
liability set forth in our contracts would be enforceable or
would otherwise protect us from liability for damages. We
maintain general liability insurance coverage, including
coverage for errors and omissions in excess of the applicable
deductible amount. There can be no assurance that this coverage
will continue to be available on acceptable terms or will be
available in sufficient amounts to cover one or more large
claims, or that the insurer will not deny coverage as to any
future claim. The successful assertion of one or more large
claims against us that exceeds available insurance coverage, or
the occurrence of changes in our insurance policies, including
premium increases or the imposition of large deductible or
co-insurance requirements, could have a material adverse effect
on our business, financial condition and results of operations.
Furthermore, litigation, regardless of its outcome, could result
in substantial cost to us and divert management’s attention
from our operations. Any contract liability claim or litigation
against us could, therefore, have a material adverse effect on
our business, financial condition and results of operations. In
addition, because many of our projects are business-critical
projects for financial institutions, a failure or inability to
meet a client’s expectations could seriously damage our
reputation and affect our ability to attract new business.
39
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Our indebtedness could adversely affect our financial
health and prevent us from fulfilling our obligations under our
senior subordinated convertible notes. |
We have a significant amount of indebtedness. Our substantial
indebtedness could have important consequences to our
stockholders and noteholders. For example, it could:
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make it more difficult for us to satisfy our obligations with
respect to our notes, |
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increase our vulnerability to general adverse economic and
industry conditions, |
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require us to dedicate a substantial portion of our cash flow
from operations to payments on our indebtedness, thereby
reducing the availability of our cash flow to fund working
capital, capital expenditures, acquisitions, product development
efforts and other general corporate purposes, |
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limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate, |
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place us at a disadvantage compared to our competitors that have
less debt, and |
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limit our ability to borrow additional funds. |
If we are unable to generate sufficient cash flow or otherwise
obtain funds necessary to make required payments, or if we fail
to comply with the various requirements of our notes or any
indebtedness that we may incur in the future, we would be in
default, which would permit the holders of the notes and the
holders of such other indebtedness to accelerate the maturity of
the notes or such other indebtedness, as the case may be, and
could cause defaults under the notes and such other
indebtedness. Any default under the notes or any indebtedness
that we may incur in the future could have a material adverse
effect on our business, operating results, liquidity and
financial condition.
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Government regulation of our business could cause us to
incur significant expenses, and failure to comply with
applicable regulations could make our business less efficient or
impossible. |
The financial services industry is subject to extensive and
complex federal and state regulation. Financial institutions,
including banks, thrifts and credit unions, operate under high
levels of governmental supervision. Our clients must ensure that
our products and services work within the extensive and evolving
regulatory requirements applicable to them, including those
under federal and state truth-in-lending and truth-in-deposit
rules, usury laws, the Equal Credit Opportunity Act, the Fair
Housing Act, the Electronic Fund Transfer Act, the Fair
Credit Reporting Act, the Bank Secrecy Act, the Community
Reinvestment Act, the Gramm-Leach-Bliley Act of 1999, the USA
Patriot Act and other state and local laws and regulations. The
compliance of our products and services with these requirements
may depend on a variety of factors, including the product at
issue and whether the client is a bank, thrift, credit union or
other type of financial institution.
Neither federal depository institution regulators nor other
federal or state regulators of financial services require us to
obtain any licenses. We are subject to examination by federal
depository institution regulators under the Bank Service Company
Act.
Although we believe we are not subject to direct supervision by
federal and state banking agencies relating to other
regulations, we have from time to time agreed to examinations of
our business and operations by these agencies. These regulators
have broad supervisory authority to remedy any shortcomings
identified in any such examination.
Federal, state or foreign authorities could also adopt laws,
rules or regulations relating to the financial services industry
that affect our business, such as requiring us or our clients to
comply with data, record keeping and processing and other
requirements. It is possible that laws and regulations may be
enacted or modified with respect to the Internet, covering
issues such as end-user privacy, pricing, content,
characteristics, taxation and quality of services and products.
Adoption of these laws, rules or regulations could render our
business or operations more costly and burdensome or less
efficient and could require us to modify our current or future
products or services.
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Our limited ability to protect our proprietary technology
and other rights may adversely affect our ability to
compete. |
We rely on a combination of copyright, trademark and trade
secret laws, as well as licensing agreements, third-party
nondisclosure agreements and other contractual provisions and
technical measures to protect our intellectual property rights.
There can be no assurance that these protections will be
adequate to prevent our competitors from copying or
reverse-engineering our products, or that our competitors will
not independently develop technologies that are substantially
equivalent or superior to our technology. To protect our trade
secrets and other proprietary information, we require employees,
consultants, advisors and collaborators to enter into
confidentiality agreements. We cannot assure you that these
agreements will provide meaningful protection for our trade
secrets, know-how or other proprietary information in the event
of any unauthorized use, misappropriation or disclosure of such
trade secrets, know-how or other proprietary information. We do
not include in our products any mechanism to prevent
unauthorized copying and any such unauthorized copying could
have a material adverse effect on our business, financial
condition and results of operations. We have no patents, and
existing copyright laws afford only limited protection for our
intellectual property rights and may not protect such rights in
the event competitors independently develop products similar to
ours. In addition, the laws of certain countries in which our
products are or may be licensed do not protect our products and
intellectual property rights to the same extent as the laws of
the United States.
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If we are found to infringe the proprietary rights of
others, we could be required to redesign our products, pay
royalties or enter into license agreements with third
parties. |
Although we have never been the subject of a material
intellectual property dispute, there can be no assurance that a
third party will not assert that our technology violates its
intellectual property rights in the future. As the number of
software products in our target market increases and the
functionality of these products further overlap, we believe that
software developers may become increasingly subject to
infringement claims. Any claims, whether with or without merit,
could:
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be expensive and time consuming to defend, |
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cause us to cease making, licensing or using products that
incorporate the challenged intellectual property, |
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require us to redesign our products, if feasible, |
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divert management’s attention and resources, and |
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require us to enter into royalty or licensing agreements in
order to obtain the right to use necessary technologies. |
There can be no assurance that third parties will not assert
infringement claims against us in the future with respect to our
current or future products or that any such assertion will not
require us to enter into royalty arrangements, if available, or
litigation that could be costly to us.
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We have entered into and may continue to enter into or
seek to enter into business combinations and acquisitions which
may be difficult to integrate, disrupt our business, dilute
stockholder value or divert management attention. |
Since 2000, we have acquired ten businesses. As part of our
business strategy, we may enter into additional business
combinations and acquisitions in the future. Some of these
business combinations and acquisitions may be material to our
business. We have limited experience in making acquisitions. In
addition, acquisitions are typically accompanied by a number of
risks, including:
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the difficulty of integrating the operations and personnel of
the acquired companies, |
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the maintenance of acceptable standards, controls, procedures
and policies, |
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the potential disruption of our ongoing business and distraction
of management, |
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the impairment of relationships with employees and clients as a
result of any integration of new management and other personnel, |
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the inability to maintain relationships with clients of the
acquired business, |
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the difficulty of incorporating acquired technology and rights
into our products and services, |
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the failure to achieve the expected benefits of the combination
or acquisition, |
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expenses related to the acquisition, |
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potential unknown liabilities associated with acquired
businesses, and |
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unanticipated expenses related to acquired technology and its
integration into existing technology. |
If we are not successful in completing acquisitions that we may
pursue in the future, we would be required to reevaluate our
growth strategy and we may have incurred substantial expenses
and devoted significant management time and resources in seeking
to complete the acquisitions. In addition, with future
acquisitions, we could use substantial portions of our available
cash as all or a portion of the purchase price. We could also
issue additional shares of our common stock or other securities
as consideration for these acquisitions, which could cause our
stockholders to suffer significant dilution and could adversely
affect the rights of the holders of the notes. Any future
acquisitions may not generate additional revenue for us.
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We may not have sufficient funds available to pay amounts
due under our senior subordinated convertible notes. |
We will be required to pay cash to holders of our senior
subordinated convertible notes:
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upon purchase of the notes by us at the option of holders on
February 2 in each of 2012, 2015, 2020, 2025 and 2030, in an
amount equal to the issue price and accrued original issue
discount plus accrued and unpaid cash interest and liquidated
damages, if any, |
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upon purchase of the notes by us at the option of holders upon
some changes of control, in an amount equal to the issue price
and accrued original issue discount plus accrued and unpaid cash
interest and liquidated damages, if any, |
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at maturity of the notes, in an amount equal to the entire
outstanding principal amount, and |
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in the event that we elect to pay cash in lieu of the delivery
of shares of common stock upon conversion of the notes, upon
conversion, in an amount up to the conversion value of the notes. |
We may not have sufficient funds available or may be unable to
arrange for additional financing to satisfy these obligations. A
failure to pay amounts due under the notes upon repurchase, at
maturity or upon conversion in the event we elect to pay cash in
lieu of shares of common stock upon conversion, would constitute
an event of default under the indenture, which could, in turn,
constitute a default under the terms of any other indebtedness.
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We face risks associated with our Canadian operations that
could harm our financial condition and results of
operations. |
On October 29, 2004, we completed the acquisition of
Datawest Solutions Inc., a provider of banking and payment
technology solutions located in Vancouver, British Columbia,
Canada. Although historically we have not generated significant
revenues from operations outside the United States, we expect
that the portion of our revenues generated by our international
operations will increase as a result of our acquisition of
Datawest. As is the case with most international operations, the
success and profitability of such operations are subject to
numerous risks and uncertainties that include, in addition to
the risks our business as a whole faces, the following:
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difficulties and costs of staffing and managing foreign
operations, |
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differing regulatory and industry standards and certification
requirements, |
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the complexities of foreign tax jurisdictions, |
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currency exchange rate fluctuations, and |
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import or export licensing requirements. |
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To service our indebtedness, we will require a significant
amount of cash. Our ability to generate cash depends on many
factors beyond our control. |
Our ability to make payments on and to refinance our
indebtedness, including our notes, and to fund planned capital
expenditures and product development efforts will depend on our
ability to generate cash in the future. This, to a certain
extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our
control.
We cannot assure you that our business will generate sufficient
cash flow from operations or that future borrowings will be
available to us in an amount sufficient to enable us to pay our
indebtedness, including the notes, or to fund our other
liquidity needs. We may need to refinance all or a portion of
our indebtedness, including the notes, on or before maturity. We
cannot assure you that we will be able to refinance any of our
indebtedness, including the notes, on commercially reasonable
terms or at all.
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If we fail to effectively manage our growth, our financial
results could be adversely affected. |
We have expanded our operations rapidly in recent years. For
example, our aggregate revenues increased from approximately
$27.3 million in 2001 to approximately $107.2 million
in 2004. As of December 31, 2004, we had 762 employees, up
from 577 as of December 31, 2003. In addition, we continue
to explore ways to extend our target markets, including to
larger financial institutions, international clients, and
clients in the payroll services, insurance and brokerage
industries. Our growth may place a strain on our management
systems, information systems and resources. Our ability to
successfully offer products and services and implement our
business plan requires adequate information systems and
resources and oversight from our senior management. We will need
to continue to improve our financial and managerial controls,
reporting systems and procedures as we continue to grow and
expand our business. As we grow, we must also continue to hire,
train, supervise and manage new employees. We may not be able to
hire, train, supervise and manage sufficient personnel or
develop management and operating systems to manage our expansion
effectively. If we are unable to manage our growth, our
operations and financial results could be adversely affected.
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The requirements of being a public company may strain our
resources and distract management. |
As a public company, we are subject to the reporting
requirements of the Securities Exchange Act of 1934 and the
Sarbanes-Oxley Act of 2002. These requirements may place a
strain on our systems and resources. The Securities Exchange Act
requires, among other things, that we file annual, quarterly and
current reports with respect to our business and financial
condition. The Sarbanes-Oxley Act requires, among other things,
that we maintain effective disclosure controls and procedures
and internal controls for financial reporting. We currently do
not have an internal audit group. In order to maintain and
improve the effectiveness of our disclosure controls and
procedures and internal control over financial reporting,
significant resources and management oversight will be required.
As a result, management’s attention may be diverted from
other business concerns, which could have a material adverse
effect on our business, financial condition, results of
operations and cash flows. In addition, we may need to hire
additional accounting and financial staff with appropriate
public company experience and technical accounting knowledge and
we may not be able to do so in a timely fashion.
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Failure to continue to comply with all of the requirements
imposed by Section 404 of the Sarbanes-Oxley Act of 2002
could result in a negative market reaction. |
Section 404 of the Sarbanes-Oxley Act of 2002 requires that
we establish and maintain an adequate internal control structure
and procedures for financial reporting and assess on an on-going
basis the design and operating effectiveness of our internal
control structure and procedures for financial reporting. Our
indepen-
43
dent registered public accounting firm is required to audit both
the design and operating effectiveness of our internal control
over financial reporting and management’s assessment of the
design and the effectiveness of its internal control over
financial reporting. If we do not continue to comply with all of
the requirements of Section 404 or if our internal controls
are not designed or operating effectively, it could result in a
negative market reaction.
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The design of other core vendors’ software or their
use of financial incentives may make it more difficult for
clients to use our complementary products. |
Currently, some core software vendors design their software so
that it is difficult or infeasible to use third-party
complementary products, including ours. Some core software
vendors use financial incentives to encourage their core
software clients to purchase their proprietary complementary
products. For example, in the past a core software vendor has
charged disproportionately high fees to integrate third-party
complementary products such as ours, thereby providing a
financial incentive for clients of that vendor’s core
software to use its complementary products. We have responded to
this practice by emphasizing to prospective clients the features
and functionality of our products, lowering our price or
offering to perform the relevant integration services ourselves.
We cannot assure you that these competitors, or other vendors of
core software, will not begin or continue to construct
technical, or implement financial, obstacles to the purchase of
our products. These obstacles could make it more difficult for
us to sell our complementary products and could have a material
adverse effect on our business and results of operations.
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Operational failures in our outsourcing centers could
cause us to lose clients. |
Damage or destruction that interrupts our provision of
outsourcing services could damage our relationship with our
clients and may cause us to incur substantial additional expense
to repair or replace damaged equipment. Although we have
installed back-up systems and procedures to prevent or reduce
disruption, we cannot assure you that we will not suffer a
prolonged interruption of our data processing services. In the
event that an interruption of our network extends for more than
several hours, we may experience data loss or a reduction in
revenues by reason of such interruption. In addition, a
significant interruption of service could have a negative impact
on our reputation and could lead our present and potential
clients to choose service providers other than us.
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Unauthorized disclosure of data, whether through breach of
our computer systems or otherwise, could expose us to protracted
and costly litigation or cause us to lose clients. |
In our outsourcing centers, we collect and store sensitive data,
including names, addresses, social security numbers, checking
and savings account numbers and payment history records, such as
account closures and returned checks. If a person penetrates our
network security or otherwise misappropriates sensitive data, we
could be subject to liability or our business could be
interrupted. Penetration of the network security of our
outsourcing centers could have a negative impact on our
reputation and could lead our present and potential clients to
choose service providers other than us.
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We may need additional capital in the future, which may
not be available to us, and if we raise additional capital, it
may dilute the ownership of existing stockholders. |
We may need to raise additional funds through public or private
debt or equity financings in order to meet various objectives,
such as:
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taking advantage of growth opportunities, including more rapid
expansion, |
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• |
acquiring businesses and products, |
| |
| |
• |
making capital improvements to increase our servicing capacity, |
| |
| |
• |
developing new services or products, and |
| |
| |
• |
responding to competitive pressures. |
44
In addition, we may need additional financing if we decide to
undertake new sales and/or marketing initiatives, if we are
required to defend or enforce our intellectual property rights,
or if sales of our products do not meet our expectations.
Our existing debt and any debt incurred by us in the future
could impair our ability to obtain additional financing for
working capital, capital expenditures or further acquisitions.
Covenants governing any indebtedness we incur would likely
restrict our ability to take specific actions, including our
ability to pay dividends or distributions on, or redeem or
repurchase, our capital stock, enter into transactions with
affiliates, merge, consolidate or sell our assets or make
capital expenditure investments. In addition, the use of a
substantial portion of the cash generated by our operations to
cover debt service obligations and any security interests we
grant on our assets could limit our financial and business
flexibility.
Any additional capital raised through the sale of equity or
convertible debt securities may dilute the ownership of existing
stockholders. Furthermore, any additional debt or equity
financing we may need may not be available on terms favorable to
us, or at all. If future financing is not available or is not
available on acceptable terms, we may not be able to raise
additional capital, which could significantly limit our ability
to implement our business plan. In addition, we may have to
issue securities, including debt securities, that may have
rights, preferences and privileges senior to our common stock.
|
|
|
The price of our common stock may be volatile. |
In the past three years, technology stocks listed on the NASDAQ
National Market have experienced high levels of volatility and
significant declines in value from their historic highs. The
trading price of our common stock may fluctuate substantially.
During the period from our initial public offering to
December 31, 2004, the closing sale price of our common
stock on the NASDAQ National Market ranged from a low of
$16.10 per share to a high of $28.27 per share. The
price of the common stock that will prevail in the market
depends on many factors, some of which are beyond our control
and may not be related to our operating performance. The factors
that could cause fluctuations in the trading price of our common
stock include, but are not limited to, the following:
|
|
|
| |
• |
price and volume fluctuations in the overall stock market from
time to time, |
| |
| |
• |
significant volatility in the market price and trading volume of
financial services companies, |
| |
| |
• |
actual or anticipated changes in our earnings or fluctuations in
our operating results or in the expectations of securities
analysts, |
| |
| |
• |
general economic conditions and trends, |
| |
| |
• |
major catastrophic events, |
| |
| |
• |
loss of a significant client or clients, |
| |
| |
• |
sales of large blocks of our stock, or |
| |
| |
• |
departures of key personnel. |
In the past, following periods of volatility in the market price
of a company’s securities, securities class action
litigation has often been brought against that company. Due to
the potential volatility of our stock price, we may therefore be
the target of securities litigation in the future. Securities
litigation could result in substantial costs and divert
management’s attention and resources from our business.
|
|
|
If a substantial number of shares of our common stock
become available for sale and are sold in a short period of
time, the market price of our common stock could decline
significantly. |
If our stockholders sell substantial amounts of our common stock
in the public market, the market price of our common stock could
decrease significantly. The perception in the public market that
our stockholders might sell shares of common stock could also
depress the market price of our common stock.
45
In addition, as of December 31, 2004, options to purchase a
total of 3,042,425 shares of our common stock were
outstanding under our stock incentive plans, of which 1,461,217
were vested. A decline in the price of shares of our common
stock might impede our ability to raise capital through the
issuance of additional shares of our common stock or other
equity securities, and may cause you to lose part or all of your
investment in our shares of common stock.
|
|
|
Some provisions in our certificate of incorporation and
by-laws may deter third parties from acquiring us. |
Our certificate of incorporation and our by-laws contain
provisions that may make the acquisition of our company more
difficult without the approval of our board of directors,
including the following:
|
|
|
| |
• |
our board of directors is classified into three classes, each of
which serves for a staggered three year term, |
| |
| |
• |
only our board of directors, the chairman of our board of
directors or our president may call special meetings of our
stockholders, |
| |
| |
• |
our stockholders may take action only at a meeting of our
stockholders and not by written consent, |
| |
| |
• |
we have authorized undesignated preferred stock, the terms of
which may be established and shares of which may be issued
without stockholder approval, |
| |
| |
• |
our stockholders have only limited rights to amend our
by-laws, and |
| |
| |
• |
we require advance notice requirements for stockholder proposals. |
These provisions could discourage, delay or prevent a
transaction involving a change of control of our company. These
provisions could also discourage proxy contests and make it more
difficult for you and other stockholders to elect directors of
your choosing and cause us to take other corporate actions you
desire.
|
|
|
Section 203 of the Delaware General Corporation Law
may delay, defer or prevent a change of control that our
stockholders might consider to be in their best interest. |
We are subject to Section 203 of the Delaware General
Corporation Law which, subject to certain exceptions, prohibits
“business combinations” between a publicly-held
Delaware corporation and an “interested stockholder,”
which is generally defined as a stockholder, who becomes a
beneficial owner of 15% or more of a Delaware corporation’s
voting stock for a three-year period following the date that
such stockholder became an interested stockholder.
Section 203 could have the effect of delaying, deferring or
preventing a change of control of our company that our
stockholders might consider to be in their best interests.
|
|
| Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk |
We transact business with clients almost exclusively in the
United States and Canada and receive payment for our services
exclusively in United States dollars or Canadian dollars.
Therefore, we are exposed to foreign currency exchange risks and
fluctuations in foreign currencies which could impact our
results operations and financial condition. A 10% increase or
decrease in currency exchange rates would not have a material
adverse effect on our financial condition or results of
operations.
Our interest expense is generally not sensitive to changes in
the general level of interest rates in the United States,
particularly because a substantial majority of our indebtedness
is at fixed rates. A 10% increase or decrease in interest rates
would not have a material adverse effect on our financial
condition or results of operations.
We do not hold derivative financial or commodity instruments and
all of our cash and cash equivalents are held on deposit with
banks and highly liquid marketable securities with maturities of
three months or less.
46
|
|
| Item 8. |
Financial Statements and Supplementary Data |
The information required by this item may be found on page F-1
thru F-25 of this Annual Report on Form 10-K.
|
|
| Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure |
Not applicable.
|
|
| Item 9A. |
Controls and Procedures |
|
|
|
Evaluation of Disclosure Controls and Procedures. |
Our management, with the participation of our chief executive
officer and chief financial officer, evaluated the effectiveness
of our disclosure controls and procedures as of
December 31, 2004. The term “disclosure controls and
procedures,” as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, means controls and other
procedures of a company that are designed to ensure that
information required to be disclosed by the company in the
reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms. Disclosure
controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to
be disclosed by a company in the reports that it files or
submits under the Exchange Act is accumulated and communicated
to the company’s management, including its principal
executive and principal financial officers, as appropriate to
allow timely decisions regarding required disclosure. Our
management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only
reasonable assurance of achieving their objectives, and
management necessarily applies its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
Based on the evaluation of our disclosure controls and
procedures as of December 31, 2004, our chief executive
officer and chief financial officer concluded that, as of such
date, our disclosure controls and procedures were effective at
the reasonable assurance level.
|
|
|
Changes in Internal Control over Financial
Reporting |
No change in our internal control over financial reporting
occurred during the fiscal quarter ended December 31, 2004
that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
|
|
|
Management’s Report on Internal Control Over
Financial Reporting |
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal
control over financial reporting is defined in
Rule 13a-15(f) or 15d-15(f) promulgated under the
Securities Exchange Act of 1934 as a process designed by, or
under the supervision of, our principal executive and principal
financial officers and effected by our board of directors,
management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles and
includes those policies and procedures that:
|
|
|
| |
• |
Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions
of our assets; |
| |
| |
• |
Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that our receipts and expenditures are being made only in
accordance with authorizations of our management and
directors; and |
| |
| |
• |
Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial
statements. |
47
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal
control over financial reporting as of December 31, 2004.
In making this assessment, our management used the criteria set
forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal
Control-Integrated Framework.
Based on our assessment, management has concluded that, as of
December 31, 2004, our internal control over financial
reporting was effective based on those criteria.
Our management has excluded Maxxar Corporation, Eastpoint
Technologies, LLC, re: Member Data Services, Inc., Omega Systems
of North America LLC and Datawest Solutions Inc. from the
assessment of internal control over financial reporting as of
December 31, 2004 because they were acquired in a purchase
business combinations during 2004. Datawest Solutions, Inc. is a
wholly-owned entity whose total assets and total revenues
represent 26 percent and 5 percent, respectively, of
the related consolidated financial statement amounts as of and
for the year ended December 31, 2004. re:Member Data
Services, Inc. is a wholly-owned entity whose total assets and
total revenues represent 12 percent and 6 percent,
respectively, of the related consolidated financial statement
amounts as of and for the year ended December 31, 2004. The
other three acquired entities’ total assets and total
revenues represent 9 percent and 9 percent,
respectively, of the related consolidated financial statement
amounts as of and for the year ended December 31, 2004.
Our management’s assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2004 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which appears herein.
|
|
| Item 9B. |
Other Information |
On March 10, 2005, OS Acquisition Corp. (n/k/a Open
Solutions CU Technologies, Inc.), or OS Acquisition, a
subsidiary of ours, purchased certain assets of CGI-AMS Inc., or
CGI, pursuant to the terms of an Asset Purchase Agreement, dated
as of March 10, 2005, between OS Acquisition and CGI. The
purchased assets are comprised of the U.S. division of a
business unit known as the Services to Credit Union business,
which business unit provides core banking, data processing, loan
origination, loan decisioning, home banking, Internet banking,
website hosting, call center and related services to credit
unions in the United States, on either a licensed, in-house
basis or an outsourced basis. The aggregate consideration paid
for the assets was $24,000,000, of which $1,800,000 is to be
held in escrow for one year to secure indemnification
obligations of CGI, subject to a purchase price adjustment based
on the net current assets of the Services to Credit Union
business as of March 10, 2005.
The terms of the Asset Purchase Agreement were determined on the
basis of arms-length negotiations. Prior to the execution of the
Asset Purchase Agreement, to the best of our knowledge, we nor
any of our affiliates, any of our directors or officers, nor any
associate of any such director or officer, had any material
relationship with CGI.
The foregoing summary description of the terms of the
transaction is qualified in its entirety by reference to the
Asset Purchase Agreement, which is attached as Exhibit 2.7
to this Annual Report on Form 10-K.
PART III
|
|
| Item 10. |
Directors and Executive Officers of the Registrant |
The response to this item is contained in our proxy statement
for the Annual Meeting of Stockholders to be held on
May 19, 2005 under the captions
“Proposal One — Election of Directors”
and “Executive Officers,” and is incorporated herein
by reference. Information relating to certain filings on
Forms 3, 4 and 5 is
48
contained in our 2005 proxy statement under the caption
“Section 16(a) Beneficial Ownership Reporting
Compliance,” and is incorporated herein by reference.
Information required by this item pursuant to Item 401(h)
and 401(i) of Regulation S-K relating to an audit committee
financial expert and identification of the audit committee of
our board of directors is contained in our 2005 proxy statement
under the caption “Corporate Governance,” and is
incorporated herein by reference.
We have adopted a written code of business conduct and ethics
that applies to our principal executive officer, principal
financial officer, principal accounting officer or controller,
or persons performing similar functions. We have posted on our
website a copy of our code of business conduct and ethics. We
intend to disclose any amendments to, or waivers from, our code
of business conduct and ethics on our website, which is located
at www.opensolutions.com.
|
|
| Item 11. |
Executive Compensation |
The response to this item is contained in our 2005 proxy
statement under the captions “Compensation of
Directors,” “Information About Executive
Compensation,” “Employment Agreements” and
“Compensation Committee Interlocks and Insider
Participation,” and is incorporated herein by reference.
The sections entitled “Report of the Compensation
Committee” and “Comparative Stock Performance
Graph” in our 2005 proxy statement are not incorporated
herein by reference.
|
|
| Item 12. |
Security Ownership of Certain Beneficial Owners and
Management |
The response to this item is contained in our 2005 proxy
statement under the captions “Stock
Ownership Information” and “Securities Authorized
for Issuance Under Equity Compensation Plans,” and is
incorporated herein by reference.
|
|
| Item 13. |
Certain Relationships and Related Transactions |
The response to this item is contained in our 2005 proxy
statement under the caption “Certain Relationships and
Related Transactions,” and is incorporated herein by
reference.
|
|
| Item 14. |
Principal Accounting Fees and Services |
The response to this item is contained in our 2005 proxy
statement under the caption “Independent Registered Public
Accounting Firm Fees,” and is incorporated herein by
reference.
PART IV
|
|
| Item 15. |
Exhibit and Financial Statement Schedules |
(a) The following are filed as part of this Annual Report
on Form 10-K:
|
|
| |
1. Financial Statements |
| |
| |
The following consolidated financial statements are included in
Item 8: |
|
|
|
| |
• |
Consolidated Balance Sheets as of December 31, 2004 and 2003 |
| |
| |
• |
Consolidated Statements of Operations for the years ended
December 31, 2004, 2003 and 2002 |
| |
| |
• |
Consolidated Statements of Stockholders’ Equity (Deficit)
for the years ended December 31, 2004, 2003 and 2002 |
| |
| |
• |
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002 |
| |
| |
• |
Notes to Consolidated Financial Statements. |
49
(b) Exhibits
The exhibits listed in the Exhibit Index immediately
preceding the exhibits are filed as part of this Annual Report
on Form 10-K.
(c) Financial Statement Schedules
The information required by this item is contained in the
financial statements included in this Annual Report on
Form 10-K.
50
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.
| |
|
|
| |
| |
|
OPEN SOLUTIONS INC. |
|
Date: March 16, 2005 |
|
By: /s/ Louis
Hernandez, Jr.
Louis
Hernandez, Jr.
Chairman of the Board and
Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
| |
|
|
|
|
|
|
| Name |
|
Capacity |
|
Date |
| |
|
|
|
|
| |
/s/ LOUIS HERNANDEZ, JR.
Louis
Hernandez, Jr. |
|
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer) |
|
March 16, 2005 |
| |
/s/ CARL D. BLANDINO
Carl
D. Blandino |
|
Senior Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer and Principal Accounting Officer) |
|
March 16, 2005 |
| |
/s/ DOUGLAS K. ANDERSON
Douglas
K. Anderson |
|
Director |
|
March 16, 2005 |
| |
/s/ HOWARD L. CARVER
Howard
L. Carver |
|
Director |
|
March 16, 2005 |
| |
/s/ DENNIS F. LYNCH
Dennis
F. Lynch |
|
Director |
|
March 16, 2005 |
| |
/s/ SAMUEL F. MCKAY
Samuel
F. McKay |
|
Director |
|
March 16, 2005 |
| |
/s/ CARLOS P. NAUDON
Carlos
P. Naudon |
|
Director |
|
March 16, 2005 |
| |
/s/ RICHARD P. YANAK
Richard
P. Yanak |
|
Director |
|
March 16, 2005 |
51
INDEX TO FINANCIAL STATEMENTS
| |
|
|
|
|
| |
|
Page | |
| |
|
| |
|
Open Solutions Inc.
|
|
|
|
|
|
|
|
|
F-1 |
|
|
|
|
|
F-3 |
|
|
|
|
|
F-4 |
|
|
|
|
|
F-5 |
|
|
|
|
|
F-6 |
|
|
|
|
|
F-7 |
|
52
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Open Solutions
Inc.:
We have completed an integrated audit of Open Solutions
Inc.’s 2004 consolidated financial statements and of its
internal control over financial reporting as of
December 31, 2004 and audits of its 2003 and 2002
consolidated financial statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Our opinions, based on our audits, are
presented below.
Consolidated Financial statements
In our opinion, the consolidated financial statements listed in
the accompanying index, present fairly, in all material
respects, the financial position of Open Solutions Inc. and its
subsidiaries at December 31, 2004 and 2003, and the results
of their operations and their cash flows for each of the three
years in the period ended December 31, 2004 in conformity
with accounting principles generally accepted in the United
States of America. 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 of these
statements in accordance with the standards of the Public
Company Accounting Oversight Board (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 of financial statements
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
Internal control over financial reporting
In our opinion, management’s assessment, included in
Management’s Report on Internal Control over Financial
Reporting, appearing under Item 9a that the Company maintained
effective internal control over financial reporting as of
December 31, 2004 based on criteria established in
Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects,
based on those criteria. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control —
Integrated Framework issued by the COSO. The Company’s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management’s
assessment and on the effectiveness of the Company’s
internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting
in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over
financial reporting was maintained in all material respects. An
audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial
reporting, evaluating management’s assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
F-1
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
As described in Management’s Report on Internal Control
over Financial Reporting, management has excluded Maxxar
Corporation, Eastpoint Technologies, LLC, re: Member Data
Services, Inc., Omega Systems of North America LLC and Datawest
Solutions Inc. from its assessment of internal control over
financial reporting as of December 31, 2004 because they
were acquired in purchase business combinations during 2004. We
have also excluded these entities from our audit of internal
control over financial reporting. Datawest Solutions, Inc. is a
wholly-owned entity whose total assets and total revenues
represent 26 percent and 5 percent, respectively, of
the related consolidated financial statement amounts as of and
for the year ended December 31, 2004. re:Member Data
Services, Inc. is a wholly-owned entity whose total assets and
total revenues represent 12 percent and 6 percent,
respectively, of the related consolidated financial statement
amounts as of and for the year ended December 31, 2004. The
other three acquired entities’ total assets and total
revenues represent 9 percent and 9 percent,
respectively, of the related consolidated financial statement
amounts as of and for the year ended December 31, 2004.
|
|
| |
/s/ PRICEWATERHOUSECOOPERS LLP |
| |
|
| |
PricewaterhouseCoopers LLP |
Hartford, Connecticut
March 15, 2005
F-2
OPEN SOLUTIONS INC.
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands, except | |
| |
|
share and per share data) | |
|
ASSETS |
|
Current assets:
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
49,447 |
|
|
$ |
14,853 |
|
| |
Investments in marketable securities
|
|
|
12,736 |
|
|
|
70,100 |
|
| |
Accounts receivable, net
|
|
|
19,975 |
|
|
|
10,267 |
|
| |
Deferred costs
|
|
|
2,067 |
|
|
|
1,563 |
|
| |
Prepaid expenses and other current assets
|
|
|
3,922 |
|
|
|
2,409 |
|
| |
Deferred tax assets
|
|
|
12,356 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
| |
|
Total current assets
|
|
|
100,503 |
|
|
|
99,192 |
|
| |
Fixed assets, net
|
|
|
14,410 |
|
|
|
5,500 |
|
| |
Investments in marketable securities
|
|
|
— |
|
|
|
7,807 |
|
| |
Capitalized software cost, net
|
|
|
6,211 |
|
|
|
2,964 |
|
| |
Other intangible assets, net
|
|
|
31,168 |
|
|
|
6,421 |
|
| |
Goodwill
|
|
|
66,548 |
|
|
|
11,187 |
|
| |
Deferred tax assets
|
|
|
4,560 |
|
|
|
— |
|
| |
Other assets
|
|
|
2,074 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
| |
|
Total assets
|
|
$ |
225,474 |
|
|
$ |
133,071 |
|
| |
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
Current liabilities:
|
|
|
|
|
|
|
|
|
| |
Accounts payable
|
|
$ |
2,521 |
|
|
$ |
1,800 |
|
| |
Accrued expenses
|
|
|
15,338 |
|
|
|
8,368 |
|
| |
Deferred revenue, current portion
|
|
|
21,586 |
|
|
|
15,324 |
|
| |
Long-term debt from customers, current portion
|
|
|
1,239 |
|
|
|
— |
|
| |
Capital lease obligations, current portion
|
|
|
735 |
|
|
|
395 |
|
| |
|
|
|
|
|
|
| |
|
Total current liabilities
|
|
|
41,419 |
|
|
|
25,887 |
|
| |
|
|
|
|
|
|
| |
Long-term debt from customers, less current portion
|
|
|
1,736 |
|
|
|
— |
|
| |
Capital lease obligations, less current portion
|
|
|
223 |
|
|
|
64 |
|
| |
Deferred revenue, less current portion
|
|
|
2,706 |
|
|
|
1,479 |
|
| |
Other long-term liabilities
|
|
|
1,077 |
|
|
|
222 |
|
| |
|
|
|
|
|
|
| |
|
Total liabilities
|
|
|
47,161 |
|
|
|
27,652 |
|
| |
|
|
|
|
|
|
| |
| |
Commitments and contingencies (Note 13)
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
| |
Preferred stock, $0.01 par value; 5,000,000 shares
authorized; no shares issued and outstanding at
December 31, 2004 and 2003, respectively
|
|
|
— |
|
|
|
— |
|
| |
Common stock, $0.01 par value; 95,000,000 shares
authorized; 19,379,701 and 16,786,329 shares issued and
outstanding at December 31, 2004 and 2003, respectively
|
|
|
194 |
|
|
|
168 |
|
| |
Additional paid-in capital
|
|
|
199,272 |
|
|
|
152,274 |
|
| |
Accumulated other comprehensive income (loss)
|
|
|
718 |
|
|
|
(28 |
) |
| |
Accumulated deficit
|
|
|
(21,871 |
) |
|
|
(46,995 |
) |
| |
|
|
|
|
|
|
| |
|
Total stockholders’ equity
|
|
|
178,313 |
|
|
|
105,419 |
|
| |
|
|
|
|
|
|
| |
|
Total liabilities and stockholders’ equity
|
|
$ |
225,474 |
|
|
$ |
133,071 |
|
| |
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
OPEN SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Software license
|
|
$ |
33,032 |
|
|
$ |
21,391 |
|
|
$ |
13,449 |
|
| |
Service, maintenance and hardware
|
|
|
74,151 |
|
|
|
42,461 |
|
|
|
30,896 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total revenues
|
|
|
107,183 |
|
|
|
63,852 |
|
|
|
44,345 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Software license
|
|
|
6,705 |
|
|
|
5,341 |
|
|
|
3,152 |
|
| |
Service, maintenance and hardware
|
|
|
37,919 |
|
|
|
23,540 |
|
|
|
18,430 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total cost of revenues
|
|
|
44,624 |
|
|
|
28,881 |
|
|
|
21,582 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Gross profit
|
|
|
62,559 |
|
|
|
34,971 |
|
|
|
22,763 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Sales and marketing
|
|
|
14,272 |
|
|
|
10,729 |
|
|
|
9,533 |
|
| |
Product development
|
|
|
11,001 |
|
|
|
6,854 |
|
|
|
6,223 |
|
| |
General and administrative (includes restricted stock expense
and related taxes of $3,444 for the year ended December 31,
2003: Note 11)
|
|
|
21,123 |
|
|
|
15,888 |
|
|
|
10,017 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total operating expenses
|
|
|
46,396 |
|
|
|
33,471 |
|
|
|
25,773 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
16,163 |
|
|
|
1,500 |
|
|
|
(3,010 |
) |
| |
Interest income and other, net
|
|
|
1,645 |
|
|
|
197 |
|
|
|
172 |
|
| |
Interest expense
|
|
|
(125 |
) |
|
|
(154 |
) |
|
|
(27 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
17,683 |
|
|
|
1,543 |
|
|
|
(2,865 |
) |
|
Income tax (provision) benefit
|
|
|
7,441 |
|
|
|
(234 |
) |
|
|
(32 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
25,124 |
|
|
|
1,309 |
|
|
|
(2,897 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Preferred stock accretion charge (Note 10)
|
|
|
— |
|
|
|
(31,500 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$ |
25,124 |
|
|
$ |
(30,191 |
) |
|
$ |
(2,897 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
— Basic
|
|
$ |
1.37 |
|
|
$ |
(7.74 |
) |
|
$ |
(1.18 |
) |
| |
— Diluted
|
|
|
1.26 |
|
|
|
(7.74 |
) |
|
|
(1.18 |
) |
|
Weighted average common shares used to compute net income (loss)
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
— Basic
|
|
|
18,313 |
|
|
|
3,903 |
|
|
|
2,453 |
|
| |
— Diluted
|
|
|
19,896 |
|
|
|
3,903 |
|
|
|
2,453 |
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
OPEN SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(DEFICIT)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Other | |
|
|
|
Total | |
|
Compre- | |
| |
|
Common Stock | |
|
Additional | |
|
|
|
Comprehensive | |
|
|
|
Stockholders’ | |
|
hensive | |
| |
|
| |
|
Paid-In | |
|
Deferred | |
|
Income | |
|
Accumulated | |
|
Equity | |
|
Income | |
| |
|
Shares | |
|
Amount | |
|
Capital | |
|
Compensation | |
|
(Loss) | |
|
Deficit | |
|
(Deficit) | |
|
(Loss) | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except share data) | |
|
Balance at December 31, 2001
|
|
|
2,386,754 |
|
|
$ |
24 |
|
|
$ |
4,684 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(45,407 |
) |
|
$ |
(40,699 |
) |
|
|
|
|
|
Exercise of stock options
|
|
|
88,163 |
|
|
|
1 |
|
|
|
187 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
188 |
|
|
|
|
|
|
Reversal of accrued compensation from exercise or forfeiture
|
|
|
— |
|
|
|
— |
|
|
|
147 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
147 |
|
|
|
|
|
|
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,897 |
) |
|
|
(2,897 |
) |
|
$ |
(2,897 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(2,897 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
2,474,917 |
|
|
|
25 |
|
|
|
5,018 |
|
|
|
— |
|
|
|
— |
|
|
|
(48,304 |
) |
|
|
(43,261 |
) |
|
|
|
|
|
Exercise of stock options
|
|
|
7,943 |
|
|
|
— |
|
|
|
10 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10 |
|
|
|
|
|
|
Issuance of restricted stock
|
|
|
680,530 |
|
|
|
7 |
|
|
|
3,269 |
|
|
|
(3,276 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Amortization of deferred compensation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,276 |
|
|
|
— |
|
|
|
— |
|
|
|
3,276 |
|
|
|
|
|
|
Reversal of accrued compensation from exercise or forfeiture
|
|
|
— |
|
|
|
— |
|
|
|
60 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
60 |
|
|
|
|
|
|
Tax provision related to restricted stock
|
|
|
— |
|
|
|
— |
|
|
|
72 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
72 |
|
|
|
|
|
|
Issuance of common stock
|
|
|
5,570,000 |
|
|
|
56 |
|
|
|
87,891 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
87,947 |
|
|
|
|
|
|
Issuance cost from sale of common stock
|
|
|
— |
|
|
|
— |
|
|
|
(1,545 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,545 |
) |
|
|
|
|
|
Preferred stock accretion charge
|
|
|
— |
|
|
|
— |
|
|
|
(31,500 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(31,500 |
) |
|
|
|
|
|
Conversion of preferred stock
|
|
|
8,052,939 |
|
|
|
80 |
|
|
|
89,036 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
89,116 |
|
|
|
|
|
|
Deemed preferred stock dividends and accretion
|
|
|
— |
|
|
|
— |
|
|
|
(37 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(37 |
) |
|
|
|
|
|
Unrealized loss on marketable securities
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(28 |
) |
|
|
— |
|
|
|
(28 |
) |
|
|
(28 |
) |
|
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,309 |
|
|
|
1,309 |
|
|
|
1,309 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,281 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
16,786,329 |
|
|
$ |
168 |
|
|
$ |
152,274 |
|
|
$ |
— |
|
|
$ |
(28 |
) |
|
$ |
(46,995 |
) |
|
$ |
105,419 |
|
|
|
|
|
|
Exercise of stock options
|
|
|
880,820 |
|
|
|
9 |
|
|
|
3,911 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,920 |
|
|
|
|
|
|
Issuance of common stock through employee stock purchase plan
|
|
|
47,086 |
|
|
|
— |
|
|
|
799 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
799 |
|
|
|
|
|
|
Reversal of accrued compensation from exercise or forfeiture
|
|
|
— |
|
|
|
— |
|
|
|
321 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
321 |
|
|
|
|
|
|
Issuance of common stock
|
|
|
1,665,466 |
|
|
|
17 |
|
|
|
34,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
34,017 |
|
|
|
|
|
|
Issuance cost from sale of common stock
|
|
|
— |
|
|
|
— |
|
|
|
(578 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(578 |
) |
|
|
|
|
|
Unrealized loss on marketable securities, net of tax effects
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(9 |
) |
|
|
— |
|
|
|
(9 |
) |
|
$ |
(9 |
) |
|
Valuation of stock options issued in acquisition
|
|
|
— |
|
|
|
— |
|
|
|
789 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
789 |
|
|
|
|
|
|
Tax benefit related to stock options
|
|
|
— |
|
|
|
— |
|
|
|
7,756 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,756 |
|
|
|
|
|
|
Cumulative translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
755 |
|
|
|
— |
|
|
|
755 |
|
|
|
755 |
|
|
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
25,124 |
|
|
|
25,124 |
|
|
|
25,124 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
25,870 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
19,379,701 |
|
|
$ |
194 |
|
|
$ |
199,272 |
|
|
$ |
— |
|
|
$ |
718 |
|
|
$ |
(21,871 |
) |
|
$ |
178,313 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
OPEN SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except | |
| |
|
share and per share data) | |
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income (loss)
|
|
$ |
25,124 |
|
|
$ |
1,309 |
|
|
$ |
(2,897 |
) |
| |
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Depreciation and amortization
|
|
|
6,434 |
|
|
|
3,901 |
|
|
|
3,236 |
|
| |
|
Stock-based compensation expense
|
|
|
388 |
|
|
|
3,542 |
|
|
|
84 |
|
| |
|
Tax benefit on restricted stock
|
|
|
— |
|
|
|
72 |
|
|
|
— |
|
| |
|
Deferred tax provision
|
|
|
(8,057 |
) |
|
|
— |
|
|
|
— |
|
| |
|
Provision for doubtful accounts
|
|
|
156 |
|
|
|
205 |
|
|
|
270 |
|
| |
Changes in operating assets and liabilities, excluding effects
from acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Accounts receivable
|
|
|
(3,950 |
) |
|
|
(1,038 |
) |
|
|
(292 |
) |
| |
|
Prepaid expenses and other current assets
|
|
|
(604 |
) |
|
|
(1,299 |
) |
|
|
(614 |
) |
| |
|
Other assets
|
|
|
(139 |
) |
|
|
— |
|
|
|
— |
|
| |
|
Accounts payable and accrued expenses
|
|
|
(394 |
) |
|
|
2,586 |
|
|
|
(180 |
) |
| |
|
Deferred revenue
|
|
|
809 |
|
|
|
791 |
|
|
|
3,095 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net cash provided by operating activities
|
|
|
19,767 |
|
|
|
10,069 |
|
|
|
2,702 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Purchases of fixed assets
|
|
|
(5,555 |
) |
|
|
(1,469 |
) |
|
|
(1,666 |
) |
| |
Purchase of developed software
|
|
|
— |
|
|
|
(20 |
) |
|
|
(50 |
) |
| |
Purchase of marketable securities
|
|
|
(62,016 |
) |
|
|
(78,156 |
) |
|
|
— |
|
| |
Sale of marketable securities
|
|
|
127,375 |
|
|
|
— |
|
|
|
— |
|
| |
Business acquisitions, net of cash received
|
|
|
(82,005 |
) |
|
|
(8,037 |
) |
|
|
— |
|
| |
Business acquired from related party
|
|
|
— |
|
|
|
— |
|
|
|
(564 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net cash used in investing activities
|
|
|
(22,201 |
) |
|
|
(87,682 |
) |
|
|
(2,280 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Repayment of long-term debt from customers
|
|
|
(459 |
) |
|
|
— |
|
|
|
— |
|
| |
Proceeds from exercise of stock options
|
|
|
3,920 |
|
|
|
10 |
|
|
|
188 |
|
| |
Proceeds from issuance of common stock through employee stock
purchase plan
|
|
|
799 |
|
|
|
— |
|
|
|
— |
|
| |
Proceeds from issuance of long-term debt
|
|
|
— |
|
|
|
1,661 |
|
|
|
— |
|
| |
Repayment of long-term debt
|
|
|
— |
|
|
|
(5,014 |
) |
|
|
(748 |
) |
| |
Repayment of capital lease obligation
|
|
|
(676 |
) |
|
|
(207 |
) |
|
|
— |
|
| |
Purchase of common stock
|
|
|
— |
|
|
|
(1,800 |
) |
|
|
— |
|
| |
Proceeds from sale of common stock
|
|
|
33,439 |
|
|
|
86,402 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net cash provided by (used in) financing activities
|
|
|
37,023 |
|
|
|
81,052 |
|
|
|
(560 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate on cash and cash equivalents
|
|
|
5 |
|
|
|
— |
|
|
|
— |
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
34,594 |
|
|
|
3,439 |
|
|
|
(138 |
) |
|
Cash and cash equivalents, beginning of period
|
|
|
14,853 |
|
|
|
11,414 |
|
|
|
11,552 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$ |
49,447 |
|
|
$ |
14,853 |
|
|
$ |
11,414 |
|
| |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cash paid for interest
|
|
$ |
125 |
|
|
$ |
178 |
|
|
$ |
— |
|
| |
Cash paid for income taxes
|
|
|
506 |
|
|
|
118 |
|
|
|
32 |
|
|
See Notes 4, 9, 10 and 11 for investing and financing
non-cash disclosures
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
OPEN SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Open Solutions Inc. (the “Company”) is a provider of
software and services that allow financial institutions to
compete and service their customers more effectively. The
Company develops, markets, licenses and supports an
enterprise-wide suite of software and services that performs a
financial institution’s data processing and information
management functions. The Company’s software can be
operated either by the financial institution itself on an
outsourced basis in one of the Company’s outsourcing
centers or through an outsourcing center hosted by one of the
Company’s resellers.
The Company was incorporated in 1992 and is based in
Glastonbury, Connecticut.
On November 24, 2003, the Company effected a 1:1.45 reverse
stock split of the Company’s common stock, par value
$.01 per share. All share and per share amounts for all
years presented have been adjusted for the reverse stock split.
|
|
| 2. |
Summary of Significant Accounting Policies |
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates. Certain reclassifications to the
prior year information have been made to conform with the
current year classifications.
|
|
|
Principles of Consolidation |
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant
accounts, transactions and profits between the consolidated
companies have been eliminated in consolidation. Significant
accounts and transactions between the Company, including its
subsidiaries, and its directors, officers, and stockholders, are
disclosed as related party transactions (see Note 15).
|
|
|
Foreign Currency Translation and Transactions |
The functional currency of our Canadian subsidiaries is the
local currency, the Canadian dollar. Assets and liabilities of
foreign subsidiaries are translated at the rates in effect at
the balance sheet date, while stockholders’ equity is
translated at historical rates. The statements of operations and
cash flows are translated to the U.S dollar at the average rate
for the period presented. Translation adjustments are included
as a component of accumulated other comprehensive income.
Foreign currency transaction gains and losses are recognized in
other income. During 2004, the net effect of realized and
unrealized foreign currency transaction gains was $467,000.
Prior to 2004, the Company had no foreign currency transactions.
The Company applies the provisions of Statement of Financial
Accounting Standards (“SFAS”) No. 131,
Disclosures about Segments of an Enterprise and Related
Information. The Company views its operations and manages
its business as one reportable segment, the development and
marketing of computer software and related services. Factors
used to identify the Company’s single reportable segment
include the organizational structure of the Company and the
financial information available for evaluation by the chief
operating decision-maker in making decisions about how to
allocate resources and assess performance. The Company’s
operating segments have been aggregated into one reportable
segment based on similar economic
F-7
OPEN SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
and other qualitative criteria. The Company operates primarily
in two geographical areas, the United States and Canada. The
Company provides the following disclosures of revenues from
products and services:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Software license
|
|
$ |
33,032,000 |
|
|
$ |
21,391,000 |
|
|
$ |
13,449,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
Installation, training and professional services
|
|
|
17,754,000 |
|
|
|
10,686,000 |
|
|
|
9,519,000 |
|
|
Maintenance, support, data center and payment processing services
|
|
|
51,561,000 |
|
|
|
28,507,000 |
|
|
|
17,180,000 |
|
|
Hardware and other
|
|
|
4,836,000 |
|
|
|
3,268,000 |
|
|
|
4,197,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
Service, maintenance and hardware
|
|
|
74,151,000 |
|
|
|
42,461,000 |
|
|
|
30,896,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$ |
107,183,000 |
|
|
$ |
63,852,000 |
|
|
$ |
44,345,000 |
|
| |
|
|
|
|
|
|
|
|
|
Revenues and long-lived assets by significant geographic region
are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
101,717,000 |
|
|
$ |
63,852,000 |
|
|
$ |
44,345,000 |
|
|
Canada
|
|
|
5,466,000 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
107,183,000 |
|
|
$ |
63,852,000 |
|
|
$ |
44,345,000 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
As of December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
48,368,000 |
|
|
$ |
5,500,000 |
|
|
Canada
|
|
|
38,801,000 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
$ |
87,169,000 |
|
|
$ |
5,500,000 |
|
| |
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents |
Cash and cash equivalents include cash on deposit with banks and
all highly liquid marketable securities with maturities of three
months or less at the date of acquisition.
Included in Other Assets in the accompanying consolidated
balance sheets is restricted cash of $1,384,000, related to the
Open Solutions Canada payment processing business settlement
account. Cash held in a settlement account for payments in
process is immediately disbursed on behalf of users and no net
cash balance is reflected on the Company’s financial
statements.
|
|
|
Investments in Marketable Securities |
The Company’s investments consist primarily of corporate
bonds and auction rate securities that are held with a major
financial institution. At December 31, 2004 and 2003, the
Company classified its entire investment portfolio as
available-for-sale as defined in SFAS No. 115,
Accounting for Certain Investments in Debt and Equity
Securities. The specific identification method is used to
determine the cost basis and calculate unrealized gains and
losses. Corporate bond securities are recorded at fair value,
and unrealized gains and losses on these investments are
included as a separate component of accumulated other
comprehensive income (loss), net of any related tax effect. Our
investments in the auction rate securities are recorded at cost,
F-8
OPEN SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
which approximates fair market value due to their variable
interest rates, which typically reset every 7 to 35 days,
and, despite the long-term nature of their stated contractual
maturities, we have the ability to quickly liquidate these
securities. As a result, we had no cumulative gross unrealized
holding gains (losses) or gross realized gains (losses) from our
current investments in auction rate securities.
The Company makes judgments as to its ability to collect
outstanding receivables and provide allowances for the portion
of receivables when collection becomes doubtful. Provisions for
uncollectible accounts are made based upon a specific review of
all significant outstanding invoices and recorded in the
allowance for doubtful accounts. Receivables are presented net
of the allowance for doubtful accounts.
The following table represents the activity for the allowance
for doubtful accounts during the years ended December 31,
2004, 2003 and 2002:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Additions |
|
|
|
|
| |
|
Balance at | |
|
|
|
|
|
|
| |
|
Beginning | |
|
Charge to Costs | |
|
Charge to |
|
Deductions, | |
|
Balance at | |
| Description |
|
of Period | |
|
and Expenses | |
|
Other Accounts |
|
Net | |
|
End of Period | |
| |
|
| |
|
| |
|
|
|
| |
|
| |
|
Allowance for Doubtful Accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
$ |
420,000 |
|
|
$ |
156,000 |
|
|
$ |
— |
|
|
$ |
45,000 |
|
|
$ |
531,000 |
|
|
2003
|
|
|
418,000 |
|
|
|
205,000 |
|
|
|
— |
|
|
|
203,000 |
|
|
|
420,000 |
|
|
2002
|
|
|
573,000 |
|
|
|
270,000 |
|
|
|
— |
|
|
|
425,000 |
|
|
|
418,000 |
|
Fixed assets are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the
assets as follows:
| |
|
|
|
|
|
Computer equipment
|
|
|
3 to 5 years |
|
|
Office furniture and equipment
|
|
|
7 years |
|
|
Leasehold improvements
|
|
|
7 years |
|
Leasehold improvements are amortized over the shorter of the
term of the lease or the useful life of the asset.
The Company capitalizes certain costs related to the development
and purchase of internal-use software. Computer software costs
incurred in the preliminary project stage are expensed as
incurred until the point the preliminary project stage is
complete and management commits to funding a computer software
project and it is probable that the project will be completed
and the software will be used to perform the function intended.
Capitalization ceases at the point that the computer software
project is substantially complete and ready for its intended
use. The capitalized costs are amortized using the straight-line
method over the estimated economic life of the product,
generally three years to five years.
|
|
|
Capitalized Software Costs |
Capitalized software costs are primarily comprised of the costs
associated with purchased technology acquired in acquisitions,
software directly purchased from third-party vendors and
internally developed software for use in providing service to
clients (see discussion in Note 4 and Note 6).
Capitalized costs related to software to be sold, leased, or
otherwise marketed are accounted for pursuant to
SFAS No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed. These
costs are amortized over the estimated economic useful life of
the software, which is generally 5 to 7 years. The
Company’s policy is to
F-9
OPEN SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
record amortization for purchased technology based on the
greater of the amount computed using (a) the ratio that
current gross revenues for a product bear to the total of
current and anticipated future gross revenues for that product
or (b) the straight-line method over the remaining
estimated economic life of the product, including the period
being reported on. The Company reassesses this estimate
periodically. At each balance sheet date, the Company compares
the carrying value of the capitalized software to the net
realizable value of the product, determined using
management’s estimate of discounted cash flows. Any excess
of carrying value over net realizable value is written off. To
date, the Company has not recorded any impairment on its
capitalized software.
|
|
|
Research and Development Costs |
Research and development costs, which are described as product
development costs in the consolidated statement of operations,
are expensed as incurred. Software development costs for new
software products and additional modules for existing software
are expensed as incurred until technological feasibility is
established. Technological feasibility is established at the
point in which a working model of the product has been completed
and completeness of the working model and its consistency with
the product design has been confirmed by testing. The
establishment of technological feasibility of our products has
substantially coincided with the general release of such
software. As a result, internal software development costs
qualifying for capitalization have not been significant.
The Company evaluates its long-lived assets, which are comprised
primarily of fixed assets, other intangible assets and
capitalized software, for impairment whenever events or changes
in circumstances indicate that the carrying amount of such
assets may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount
of an asset group to future undiscounted net cash flows expected
to be generated by the asset group. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. The Company did not
recognize any impairment loss for long-lived assets in 2004,
2003 or 2002.
|
|
|
Goodwill and Other Intangibles |
The acquisitions described in Note 4 were accounted for
using the purchase method of accounting with a total of
$66.5 million assigned to goodwill. The recorded goodwill
related to the Company’s acquisitions has not been subject
to amortization. Other intangible assets, such as purchased
technology, customer relationships and tradenames are amortized
over their useful lives (see Note 6). The Company performs
an annual impairment test of its goodwill at December 31.
To accomplish this, the Company identifies its reporting units
and determines the carrying value of each reporting unit by
assigning the assets and liabilities, including the existing
goodwill and intangible assets, to those reporting units and
comparing such amounts to the respective fair values of each
reporting unit. As of December 31, 2004, the Company had
nine reporting units. Based on the results of the annual
impairment analysis, the Company has determined that no
impairment existed for its goodwill.
The Company generates revenues from licensing the rights to use
its software products and certain third-party software products
to end-users. The Company also generates revenues from customer
support and maintenance, installation, professional service and
training services provided to customers, data center services
and hardware sales related to its imaging and voice response
businesses and fees collected on transactions in
F-10
OPEN SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
our payment processing business. The Company’s maintenance
and support arrangements offer call center support and
unspecified upgrades and enhancements on software products on a
when-and-if-available basis.
The Company recognizes software license revenue when a
non-cancelable license agreement has been executed, fees are
fixed and determinable, the software has been delivered,
accepted by the customer if acceptance is required by the
contract and is other than perfunctory, and collection is
considered probable.
The Company sells software licenses in conjunction with
professional services for installation and maintenance. For
these arrangements, the total contract value is attributed first
to the maintenance arrangement based on its fair value, which is
derived from renewal rates. The contract value is then
attributed to installation and training services based on
estimated fair value, which is derived from the rates charged
for similar services provided on a stand-alone basis multiplied
by estimated hours to complete. The Company’s software
license agreements generally do not require significant
modification or customization of the underlying software, and
accordingly, installation and training services are not
considered essential to functionality. The remainder of the
total contract value is then attributed to the software license
and other delivered elements. If significant customization of
the Company’s software is required, the Company recognizes
all revenue using the percentage-of-completion method.
Maintenance revenues are recognized ratably over the maintenance
period, generally five years. Revenues from installation and
training services are recognized as services are performed. The
Company warrants its products will function substantially in
accordance with documentation provided to customers. To date,
the Company has not incurred any significant expenses related to
warranty claims.
Data center revenues associated with allowing customers to
utilize our software products on an outsourced basis and payment
transaction processing revenues are recognized when evidence of
an arrangement exists, fees are fixed and determinable,
collectibility is reasonably assured, and the service has been
provided. The Company obtains signed contracts, which indicate
the key terms, as well as the fixed and determinable fees, in
each arrangement. Revenues and related costs associated with
installation of data center and transaction processing
arrangements are recognized over the term of the arrangement,
typically 3 to 5 years.
The Company is receiving payments under certain license and
marketing agreements with resellers. The Company has provided a
master license to its two primary resellers and does not have
any other continuing obligation to provide additional products
or services, other than the provision of client support and
maintenance. The Company recognizes license revenue when
evidence of an arrangement exists, fees are fixed and
determinable, collectibility is reasonably assured, and delivery
of the master has occurred. The revenue for client support and
maintenance is recognized ratably over the period of
maintenance, generally 3 to 5 years.
Pursuant to its amended license agreement with BISYS, Inc.
(“BISYS”) on September 30, 2003 (see
Note 16), the Company is entitled to non-refundable license
fees, payable at the beginning of each quarter. The Company also
receives additional license fees for amounts that are sold above
the minimum license fee threshold, which are payable at the end
of each quarter. The Company records the quarterly minimum
license fee and the additional license fees as revenue in the
period in which they are due and payable, assuming that all
other revenue recognition criteria were met.
Pursuant to its amended license agreement with its regional
reseller on May 15, 2003 and further amended on
December 31, 2004 (see Note 16), the Company receives
payments upon signing and upon conversion of a financial
institution. The Company recognizes revenue upon signing of a
financial institution, assuming all other revenue recognition
criteria have been met. Prior to May 15, 2003, the Company
received payments from its regional reseller upon conversion of
a financial institution. For these arrangements, the Company
recognized revenue upon the conversion of the financial
institution, assuming all other revenue recognition was met.
F-11
OPEN SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Deferred revenue is comprised of payments received related to
product delivery, maintenance and other services, which have
been paid by customers prior to the recognition of revenue.
Deferred costs are comprised of costs incurred prior to the
recognition of the related revenue.
The Company accounts for income taxes under the asset and
liability approach, which recognizes deferred tax assets and
liabilities for the future tax consequences of items that have
already been recognized in its financial statements and tax
returns. A valuation allowance is established against net
deferred tax assets if, based on the weight of available
evidence, it is more likely than not that some or all of the net
deferred tax assets will not be realized.
|
|
|
Net Income and Loss Per Share |
Basic earnings per share (“EPS”), which excludes
dilution, is computed by dividing income or loss available to
common stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into
common stock. Diluted EPS includes in-the-money stock options
and warrants using the treasury stock method and also includes
the assumed conversion of preferred stock using the if-converted
method. During a loss period, the assumed exercise of
in-the-money stock options and warrants and the conversion of
convertible preferred stock has an anti-dilutive effect, and
therefore, these instruments would be excluded from the
computation of dilutive EPS.
In April 2004, the EITF issued Statement No. 03-06,
Participating Securities and the Two —
Class Method Under FASB Statement No. 128, Earnings
Per Share (“EITF 03-06”). EITF 03-06
addressed a number of questions regarding the computation of EPS
by companies that have issued securities other than common stock
that contractually entitle the holder to participate in
dividends and earnings of the Company when, and if, it declares
dividends on its common stock and provided guidance on
application of the two-class method. The two-class method is an
earnings allocation formula that determines EPS for common stock
and participating securities based upon an allocation of
earnings as if all of the earnings for the period had been
distributed in accordance with participation rights on
undistributed earnings. EITF 03-06 is effective for fiscal
periods beginning after March 31, 2004 and requires
retroactive restatement of previously presented EPS amounts. The
adoption of this standard in the second quarter of 2004 did not
require retroactive restatement of EPS for the years ended
December 31, 2003 and 2002, as allocating any net losses
would have an anti-dilutive effect. Since the Company’s
initial public offering in the fourth quarter of 2003, there is
only one class of stock outstanding and, accordingly, there is
no impact on EPS reported in 2004.
The following table reconciles the weighted average shares
outstanding used to calculate basic and diluted income per share:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Net income (loss) available to common stockholders
|
|
$ |
25,124,000 |
|
|
$ |
(30,191,000 |
) |
|
$ |
(2,897,000 |
) |
|
Basic net income per share — weighted average common
shares outstanding
|
|
|
18,312,997 |
|
|
|
3,903,252 |
|
|
|
2,452,848 |
|
|
Dilutive effect of stock options and warrants
|
|
|
1,583,450 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Diluted net income per share — weighted average common
shares outstanding
|
|
|
19,896,447 |
|
|
|
3,903,252 |
|
|
|
2,452,848 |
|
| |
|
|
|
|
|
|
|
|
|
F-12
OPEN SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Weighted average common share equivalents of 53,225, 7,168,026
and 9,025,381 were excluded from the computation of diluted EPS
for the years ended December 31, 2004, 2003 and 2002 as
they would have been anti-dilutive.
Comprehensive income (loss) includes net income (loss) as well
as other changes in stockholders’ equity, other than
stockholders’ investments and distributions and deferred
stock based compensation.
|
|
|
Concentration of Credit Risk |
Financial instruments that potentially expose the Company to
concentrations of credit risk are limited to accounts
receivable. One customer represented 11.7% of total revenues for
the year ended December 31, 2004. No individual customer
accounted for 10% or more of total revenues for the years ended
December 31, 2003 or 2002. As of December 31, 2004 and
2003, no customer accounted for 10% or more of the total
accounts receivable balance. The Company maintains allowances
for potential credit risks and otherwise controls this risk
through monitoring procedures.
|
|
|
Fair Value of Financial Instruments |
The carrying amount of cash equivalents, accounts receivable,
accounts payable and accrued expenses approximate fair value
because of the short maturity of those instruments. The carrying
amount of long-term debt approximates fair value, and a
fluctuation in interest rates would not be material to the
Company’s financial position.
The Company records stock-based compensation for awards issued
to employees and directors (collectively “employees”)
using the intrinsic value method and stock-based compensation
issued to non-employees using the fair value method. Stock-based
compensation is recognized on stock options issued to employees
if the option exercise price is less than the market price of
the underlying stock on the date of grant.
The following table illustrates the effect on net income (loss)
if the Company had applied the fair value recognition provisions
of SFAS No. 123 to stock compensation:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Net loss attributable to common stockholders, as reported
|
|
$ |
25,124,000 |
|
|
$ |
(30,191,000 |
) |
|
$ |
(2,897,000 |
) |
|
Add: Stock compensation expense, net of tax effect, included in
reported net loss
|
|
|
212,000 |
|
|
|
3,542,000 |
|
|
|
84,000 |
|
|
Subtract: Total stock compensation expense determined under fair
value method, net of tax effect
|
|
|
(2,658,000 |
) |
|
|
(5,630,000 |
) |
|
|
(1,933,000 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss)
|
|
$ |
22,678,000 |
|
|
$ |
(32,279,000 |
) |
|
$ |
(4,746,000 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Reported net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
1.37 |
|
|
$ |
(7.74 |
) |
|
$ |
(1.18 |
) |
| |
Diluted
|
|
|
1.26 |
|
|
|
(7.74 |
) |
|
|
(1.18 |
) |
|
Pro forma net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
1.24 |
|
|
$ |
(8.27 |
) |
|
$ |
(1.93 |
) |
| |
Diluted
|
|
|
1.17 |
|
|
|
(8.27 |
) |
|
|
(1.93 |
) |
F-13
OPEN SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
For purposes of computing 2004 pro forma net income per share,
18,312,997 of 19,413,390 weighted average shares outstanding
were used for the basic and diluted calculation, respectively.
The above pro forma results are not necessarily indicative of
future pro forma results. Other disclosures required by
SFAS No. 123 have been included in Note 11.
In connection with the preparation of these financial
statements, the Company has concluded that it was appropriate to
classify auction rate securities as current investments in
marketable securities. Previously, such investments had been
classified as cash and cash equivalents. Accordingly, these
securities have been reclassified as current investments in
marketable securities in the consolidated balance sheet as of
December 31, 2003. There have also been corresponding
adjustments to the consolidated statement of cash flows for the
year ended December 31, 2003, to reflect the purchases and
sales of these securities as investing activities rather than as
a component of cash and cash equivalents. This change in
classification does not affect previously reported cash flows
from operations or from financing activities in previously
reported consolidated statements of cash flows, or previously
reported consolidated statements of operations for any period.
|
|
|
Recent Accounting Pronouncements |
In December 2004, the FASB issued SFAS No. 123R,
Share-Based Payment: an amendment of FASB Statements
No. 123 and 95, which requires companies to recognize
in their statement of operations the grant-date fair value of
stock options and other equity-based compensation issued to
employees. SFAS 123R is effective for interim or annual
periods beginning after June 15, 2005. Accordingly, the
Company will adopt SFAS 123R in its third quarter of 2005.
SFAS 123R requires all share-based payments to employees,
including stock options and stock issued under certain employee
stock purchase plans, to be recognized in the financial
statements at their fair value. SFAS 123R will require the
estimation of future forfeitures of stock based compensation,
while the current pro forma disclosure includes only those
options that have been forfeited during the current period.
Therefore, the Company believes that the pro forma expense
currently disclosed in Note 2 to the Consolidated Financial
Statements represents an estimate of the amounts that would have
been recorded under the provisions of SFAS 123R. The
Company has not yet determined which fair value method and
transitional provision to follow. The Company is currently
evaluating its stock based compensation plans to determine if
changes should be made to minimize compensation charges
resulting from the adoption of SFAS 123R.
In October 2004, the FASB ratified EITF 04-8, Accounting
Issues Related to Certain Features of Contingently Convertible
Debt and the Effect on Diluted Earnings Per Share. The new
rules require companies to include shares issuable upon
conversion of contingently convertible debt in their diluted
earnings per share calculations regardless of whether the debt
has a market price trigger that is above the current fair market
value of the company’s common stock that makes the debt
currently not convertible. The new rules are effective for
reporting periods ending on or after December 15, 2004. In
February 2005, the Company completed an offering of convertible
debt (see Note 17). In future financial reporting periods,
the dilutive effect of shares from this debt will be included in
the diluted earnings per share calculation using the
if-converted method.
In December 2004, the FASB issued FSP No. 109-1,
Application of SFAS No. 109, Accounting for Income
Taxes, to the Tax Deduction on Qualified Production Activities
Provided by the American Jobs Creation Act of 2004, which
provides guidance with respect to recording the potential impact
of repatriation provisions of the American Job Creation Act of
2004 (the “Jobs Act”) to enterprises’ income tax
expense and deferred tax liability. The Jobs Act creates a
temporary incentive for U.S. corporations to repatriate
accumulated income earned abroad by providing a dividends
reduction for certain dividends from controlled foreign
corporations. The deduction is subject to a number of
limitations and uncertainty remains as to how
F-14
OPEN SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
the interpret certain provisions in the Jobs Act. As such, the
Company has not yet determined whether, and to what extent, it
might repatriate foreign earnings that have not yet been
remitted to the U.S.
|
|
| 3. |
Investments in Marketable Securities |
The following table summarizes the Company’s available for
sale investments:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Gross | |
|
Gross | |
|
|
| |
|
Amortized | |
|
Unrealized | |
|
Unrealized | |
|
|
| |
|
Cost | |
|
Gains | |
|
Losses | |
|
Fair Value | |
| |
|
| |
|
| |
|
| |
|
| |
|
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate notes and bonds
|
|
$ |
9,797,000 |
|
|
$ |
— |
|
|
$ |
(42,000 |
) |
|
$ |
9,755,000 |
|
|
Federal notes and bonds
|
|
|
2,000,000 |
|
|
|
— |
|
|
|
(14,000 |
) |
|
|
1,986,000 |
|
|
Municipal notes and bonds
|
|
|
1,000,000 |
|
|
|
— |
|
|
|
(5,000 |
) |
|
|
995,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
12,797,000 |
|
|
$ |
— |
|
|
$ |
(61,000 |
) |
|
$ |
12,736,000 |
|
|
December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate notes and bonds
|
|
$ |
77,935,000 |
|
|
$ |
3,000 |
|
|
$ |
(31,000 |
) |
|
$ |
77,907,000 |
|
The Company’s investments in corporate notes and bonds are
scheduled to mature within one year. Based on the contractual
terms and credit quality of any investments with gross
unrealized losses, the Company does not consider it probable
that any of them will be settled by the issuer at a price less
than the amortized cost of the investments. Accordingly, the
Company does not consider these investments to be other than
temporarily impaired as of December 31, 2004.
The Company has entered into seven acquisitions (collectively,
the “Acquisitions) since the beginning of 2002 which are
summarized below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
HNC | |
| |
|
Datawest | |
|
Omega | |
|
re:Member | |
|
Eastpoint | |
|
Maxxar | |
|
Liberty FiTech | |
|
Financial | |
| |
|
Solutions | |
|
Systems | |
|
Data Services | |
|
Technologies | |
|
Corporatation | |
|
Systems | |
|
Solutions | |
| |
|
(2004) | |
|
(2004) | |
|
(2004) | |
|
(2004) | |
|
(2004) | |
|
(2003) | |
|
(2002) | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Tangible assets acquired
|
|
$ |
13,814,000 |
|
|
$ |
477,000 |
|
|
$ |
2,670,000 |
|
|
$ |
1,284,000 |
|
|
$ |
1,789,000 |
|
|
$ |
4,006,000 |
|
|
$ |
1,074,000 |
|
|
Purchased technology
|
|
|
2,223,000 |
|
|
|
250,000 |
|
|
|
750,000 |
|
|
|
290,000 |
|
|
|
760,000 |
|
|
|
530,000 |
|
|
|
1,193,000 |
|
|
Goodwill
|
|
|
32,105,000 |
|
|
|
2,004,000 |
|
|
|
12,100,000 |
|
|
|
5,225,000 |
|
|
|
4,268,000 |
|
|
|
4,843,000 |
|
|
|
772,000 |
|
|
Other intangibles
|
|
|
11,476,000 |
|
|
|
200,000 |
|
|
|
11,440,000 |
|
|
|
1,990,000 |
|
|
|
700,000 |
|
|
|
6,700,000 |
|
|
|
— |
|
|
Liabilities assumed
|
|
|
(12,039,000 |
) |
|
|
(472,000 |
) |
|
|
(4,206,000 |
) |
|
|
(2,025,000 |
) |
|
|
(642,000 |
) |
|
|
(4,089,000 |
) |
|
|
(986,000 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase price
|
|
$ |
47,579,000 |
|
|
$ |
2,459,000 |
|
|
$ |
22,754,000 |
|
|
$ |
6,764,000 |
|
|
$ |
6,875,000 |
|
|
$ |
11,990,000 |
|
|
$ |
2,053,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Each of these acquisitions was accounted for as a purchase
transaction. Accordingly, the purchase price was allocated to
the assets acquired and liabilities assumed based on estimates
of fair value. The fair value of purchased technology was
determined based on management’s valuation analysis
utilizing an income approach that takes into account future cash
flows. The excess of the purchase price over the fair value of
the net assets acquired has been allocated to goodwill. The
operating results of each business acquired have been included
in the Company’s consolidated financial statements from
respective dates of acquisition.
On October 29, 2004, the Company acquired all of the
outstanding stock of Datawest Solutions Inc., a provider of core
data processing and payment technology solutions in Canada for
cash consideration of CDN
F-15
OPEN SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
$1.16 (approximately US$0.95 at the exchange rate as of
October 29, 2004) per common share for 29,824,126 common
shares and CDN $2.60 (approximately US$2.13 at the exchange rate
as of October 29, 2004) per preferred share for 5,000,000
preferred shares, for a total aggregate consideration of
CDN$47,595,986 (approximately US$38.9 million at the
exchange rate as of October 29, 2004). Additionally, the
Company repaid US$8.3 million of outstanding debt and have
incurred approximately US$368,000 of acquisition costs for a
total purchase price of US$47.6 million. The purchased
technology related to this acquisition is being amortized over
its estimated useful life of five years. The other intangible
assets, comprised of customer relationships with the banking and
payments customers are being amortized over their estimated
useful lives of twelve years. Purchase accounting for this
acquisition is preliminary and is expected to be finalized
during 2005.
|
|
|
Omega Systems of North America LLC |
On July 23, 2004, the Company acquired substantially all of
the outstanding operating assets and assumed certain liabilities
of Omega Systems of North America LLC (“Omega”), a
company specializing in remittance and lock box solutions, for
cash consideration of approximately $2,410,000 and
acquisition-related costs of approximately $49,000. Pro forma
information related to the combined results of operations of the
Company and Omega were not material for the year ended
December 31, 2004 and 2003, respectively.
|
|
|
re:Member Data Services, Inc. |
On July 8, 2004, the Company acquired all of the
outstanding stock of re:Member Data Services, Inc.
(“RDS”), a provider of core processing software and
related services for credit unions, for cash consideration of
approximately $21,869,000 and employee stock options valued at
approximately $789,000. In connection with the acquisition, the
Company incurred approximately $96,000 of acquisition-related
costs. Acquired liabilities include approximately
$1.0 million related to estimated losses on a lease
obligation (see Note 13). The purchased technology related
to this acquisition is being amortized over its estimated useful
life of five years. The other intangible assets, comprised of
customer relationships, tradenames and a non-compete agreement
are being amortized over their estimated useful lives of
sixteen, five and five years, respectively.
|
|
|
Eastpoint Technologies, LLC |
On June 18, 2004, the Company acquired substantially all of
the outstanding operating assets and assumed certain liabilities
of Eastpoint Technologies, LLC, a provider of core processing
software and related services for banks, for cash consideration
of approximately $7,000,000. Subsequent to the acquisition date,
the Company received $320,000 from escrow as a contractual
adjustment of the original purchase price. In connection with
the acquisition, the Company incurred approximately $83,000 of
acquisition-related costs. The purchased technology related to
this acquisition is being amortized over its estimated useful
life of five years. The other intangible assets, comprised of
tradenames and customer relationships are being amortized over
their estimated useful lives of five and eleven years,
respectively. Purchase accounting for this acquisition is
preliminary, primarily with respect to the certain portions of
the purchase price which are contingent upon future events, and
is expected to be finalized during 2005.
On February 24, 2004, the Company acquired all of the
outstanding capital stock of Maxxar Corporation for cash
consideration of approximately $6,500,000. Subsequent to the
acquisition date, the Company paid an additional $190,000 as a
contractual adjustment of the original purchase price. In
connection with the acquisition, the Company incurred
approximately $185,000 of acquisition-related costs. This
acquisition expanded the Company’s complementary product
offerings to include a comprehensive suite of interactive voice
solutions and computer telephony integration products. The
purchased technology related to this
F-16
OPEN SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
acquisition is being amortized over its estimated useful life of
seven years. The other intangible assets, comprised of
tradenames and customer relationships are being amortized over
their estimated useful lives of ten to twenty years.
|
|
|
Liberty FiTech Systems, Inc. |
On July 1, 2003, the Company acquired from Liberty
Enterprises, Inc. substantially all of the operating assets and
assumed certain liabilities of Liberty FiTech Systems, Inc.
(“FiTech”), a provider of core processing software and
related services for credit unions, for consideration of
$11,704,000, consisting of $8,000,000 in cash, a promissory note
in the amount of $1,904,000 and 133,195 shares of the
Company’s common stock. In conjunction with the
acquisition, the Company incurred approximately $286,000 of
acquisition-related costs. The purchased technology related to
this acquisition is being amortized over its estimated useful
life of five years. The other intangible assets of $6,700,000,
comprised of customer lists, are being amortized approximately
$140,000 per quarter over their useful life of
12 years. Total amortization expense for the year ended
December 31, 2004 was $279,000.
The common stock issued to FiTech was subject to a put and call
agreement whereby the Company had the right to purchase, and
FiTech had the right to sell, the common stock to the other
party at $13.51 per share, or approximately $1,800,000. On
September 3, 2003, FS Acquisition, Inc., the
successor-in-interest to FiTech, exercised its put right
pursuant to this put and call agreement with respect to these
shares. In December 2003, the Company purchased these
133,195 shares at a price of $13.51 per share, or an
aggregate of $1,800,000.
|
|
|
HNC Financial Solutions, Inc. |
During 2002, the Company acquired certain business operations
from HNC Financial Solutions, Inc. (“HNC Financial
Solutions”), a division of HNC Software Inc. (“HNC
Software”) and an investor in the Company. These
acquisitions were completed in March 2002 and October 2002.
On March 29, 2002, the Company acquired fixed assets and
intellectual property rights of HNC Financial Solutions, and
assumed certain future software maintenance and support
obligations in exchange for a $500,000 promissory note.
Concurrent with the acquisition, the Company entered into a
license and service agreement with HNC Financial Solutions for
additional software. For these rights, the Company paid $564,000
in cash. Upon the acquisition of this business, the Company
employed HNC Financial Solutions’ employees involved with
this business, including sales, development, implementation and
customer support personnel. This acquisition expanded the
Company’s product offering to include financial accounting,
asset/ liability, management and financial planning products.
On October 31, 2002, the Company subsequently purchased
from HNC Software the underlying intellectual property rights to
the additional software that had been licensed in the March 2002
transaction, accounts receivable, fixed assets and related
future software maintenance and support obligations in exchange
for a $950,000 promissory note. Upon the acquisition of this
business, the Company employed additional employees of HNC
Financial Solutions involved with this business. The purchased
technology related to the March 2002 and October 2002
transaction is amortized on a straight-line basis over its
estimated useful life of seven years. In conjunction with these
transactions, the Company incurred approximately $39,000 of
acquisition-related costs. This acquisition expanded the
Company’s financial product offering to include
profitability analysis.
F-17
OPEN SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
Pro Forma Financial Information (unaudited) |
The financial information in the table below summarizes the
combined results of operations of the Company and the
Acquisitions on a pro forma basis, as though the companies had
been combined as of January 1, 2003. This pro forma
financial information is not necessarily indicative of the
results of operations that would have been achieved had the
acquisition actually taken place as of the beginning of the
period being presented below. The pro forma information excludes
the effects of Omega, as results of operations of Omega are not
significant to the Company.
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Pro forma revenues
|
|
$ |
142,560,000 |
|
|
$ |
127,574,000 |
|
|
Pro forma net income (loss)
|
|
|
25,055,000 |
|
|
|
(32,254,000 |
) |
|
Pro forma net income per share — basic
|
|
$ |
1.36 |
|
|
$ |
(8.26 |
) |
|
Pro forma net income per share — diluted
|
|
|
1.25 |
|
|
|
(8.26 |
) |
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Computer equipment and software
|
|
$ |
19,266,000 |
|
|
$ |
10,552,000 |
|
|
Office furniture and equipment
|
|
|
2,946,000 |
|
|
|
1,628,000 |
|
|
Leasehold improvements
|
|
|
1,391,000 |
|
|
|
1,020,000 |
|
|
Construction in progress
|
|
|
2,186,000 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
|
25,789,000 |
|
|
|
13,200,000 |
|
|
Less: accumulated depreciation
|
|
|
(11,379,000 |
) |
|
|
(7,700,000 |
) |
| |
|
|
|
|
|
|
| |
| |
|
$ |
14,410,000 |
|
|
$ |
5,500,000 |
|
| |
|
|
|
|
|
|
Construction in progress consists of implementation costs for
the Company’s enterprise software system, which was not
operational as of December 31, 2004, and leasehold
improvement costs for the Company’s new corporate lease
facility, which will be occupied during 2005. Depreciation and
amortization expense was $4,122,000, $2,462,000 and $1,860,000
for the years ended December 31, 2004, 2003 and 2002,
respectively.
|
|
| 6. |
Capitalized Software Costs and Other Intangible Assets |
Capitalized software costs include completed technology acquired
in business combinations. Capitalized software costs also
include costs associated with purchased third-party software and
costs related to the development and purchase of internal-use
software to be used in providing services to customers.
F-18
OPEN SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
A summary of the components of capitalized software costs is as
follows:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Purchased technology
|
|
$ |
10,148,000 |
|
|
$ |
5,921,000 |
|
|
Internal use software
|
|
|
1,746,000 |
|
|
|
1,746,000 |
|
|
Purchased third-party software
|
|
|
442,000 |
|
|
|
442,000 |
|
| |
|
|
|
|
|
|
| |
|
|
12,336,000 |
|
|
|
8,109,000 |
|
|
Less: accumulated amortization
|
|
|
(6,125,000 |
) |
|
|
(5,145,000 |
) |
| |
|
|
|
|
|
|
| |
|
$ |
6,211,000 |
|
|
$ |
2,964,000 |
|
| |
|
|
|
|
|
|
A summary of the components of other intangible assets is as
follows:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Customer relationships
|
|
$ |
32,175,000 |
|
|
$ |
6,700,000 |
|
|
Tradenames
|
|
|
626,000 |
|
|
|
276,000 |
|
|
Other intangible assets
|
|
|
160,000 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
|
32,961,000 |
|
|
|
6,976,000 |
|
|
Less: accumulated amortization
|
|
|
(1,793,000 |
) |
|
|
(555,000 |
) |
| |
|
|
|
|
|
|
| |
|
$ |
31,168,000 |
|
|
$ |
6,421,000 |
|
| |
|
|
|
|
|
|
Amortization expense related to capitalized software costs was
$1,131,000, $1,160,000 and $1,376,000 for the years ended
December 31, 2004, 2003 and 2002, respectively.
Amortization expense related to other intangible assets was
$1,238,000, $279,000 and $0 for the years ended
December 31, 2004, 2003 and 2002, respectively.
Amortization expense for each of the next five years ended
December 31 is expected to approximate:
| |
|
|
|
|
|
|
|
|
| |
|
Capitalized | |
|
Other | |
| |
|
Software Costs | |
|
Intangibles | |
| |
|
| |
|
| |
|
2005
|
|
$ |
1,460,000 |
|
|
$ |
2,562,000 |
|
|
2006
|
|
|
1,412,000 |
|
|
|
2,562,000 |
|
|
2007
|
|
|
1,385,000 |
|
|
|
2,562,000 |
|
|
2008
|
|
|
1,302,000 |
|
|
|
2,562,000 |
|
|
2009
|
|
|
694,000 |
|
|
|
2,451,000 |
|
F-19
OPEN SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Compensation
|
|
$ |
5,984,000 |
|
|
$ |
4,036,000 |
|
|
Third party license fees
|
|
|
4,246,000 |
|
|
|
2,027,000 |
|
|
Hardware purchases
|
|
|
229,000 |
|
|
|
491,000 |
|
|
Professional fees
|
|
|
653,000 |
|
|
|
527,000 |
|
|
Sales tax payable
|
|
|
931,000 |
|
|
|
498,000 |
|
|
Other
|
|
|
3,295,000 |
|
|
|
789,000 |
|
| |
|
|
|
|
|
|
| |
|
$ |
15,338,000 |
|
|
$ |
8,368,000 |
|
| |
|
|
|
|
|
|
|
|
| 8. |
Long-Term Debt from Customers |
Certain of Datawest’s customers prepaid their data center
fees for a number of years and the Company assumed this
liability upon acquisition. Customers receive interest on their
prepayments and fees for services are applied against the
prepayments as incurred. These borrowings mature from April 2005
to December 2009.
|
|
|
Long-term debt consists of the following at
December 31, 2004: |
| |
|
|
|
|
|
Prepayments from customers for data services, bearing interest
at rates ranging from prime plus 2.0% to a fixed rate of 11.0%
|
|
$ |
2,975,000 |
|
| |
|
|
|
|
Less current portion
|
|
|
1,239,000 |
|
| |
|
|
|
|
Long-term debt
|
|
$ |
1,736,000 |
|
| |
|
|
|
|
|
| 9. |
Capital Lease Obligations |
In conjunction with the certain acquisitions in 2003 and 2004,
the Company assumed capital leases for computer equipment and
vehicles. The capital leases are payable in monthly installments
through 2008 and have borrowing rates of 5.5 and
11.0 percent. The capital lease obligations are
collateralized by the equipment or vehicles under these leases.
Capital lease obligations are comprised of the following:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
|
December 31, | |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Computer equipment lease
|
|
$ |
931,000 |
|
|
$ |
459,000 |
|
|
Automobile lease
|
|
|
27,000 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
|
958,000 |
|
|
|
459,000 |
|
|
Less: current portion
|
|
|
(735,000 |
) |
|
|
(395,000 |
) |
| |
|
|
|
|
|
|
|
Capital lease obligations, net of current portion
|
|
$ |
223,000 |
|
|
$ |
64,000 |
|
| |
|
|
|
|
|
|
F-20
OPEN SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Future minimum payments under these leases are as follows:
| |
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
| |
2005
|
|
$ |
788,000 |
|
| |
2006
|
|
|
112,000 |
|
| |
2007
|
|
|
99,000 |
|
| |
2008
|
|
|
35,000 |
|
| |
|
|
|
|
Total minimum lease payments
|
|
|
1,034,000 |
|
|
Amounts representing interest
|
|
|
(76,000 |
) |
| |
|
|
|
|
Present value of minimum lease payments
|
|
$ |
958,000 |
|
| |
|
|
|
|
|
| 10. |
Capital Stock and Redeemable Convertible Preferred Stock |
As of December 31, 2004, the Company’s Certificate of
Incorporation authorizes up to 95,000,000 shares of common
stock and 5,000,000 shares of preferred stock. As of
December 31, 2004, the Company has reserved
7,861,354 shares of common stock for the exercise of
options.
|
|
|
Redeemable Convertible Preferred Stock |
The conversion formula for the Series F preferred stock
provided for adjustment of the Series F preferred stock
conversion price in the event that the Company’s initial
public offering price was less than $27.03 per share.
Holders of Series F preferred stock received shares of
common stock from the initial public offering with an aggregate
value of $62,600,000. The recorded value of Series F
preferred stock was $31,100,000 and as a result, upon the
closing of the initial public offering in 2003, the Company
recorded an accretion charge of $31,500,000 in
stockholders’ equity (deficit). This accretion charge
resulted in a non-cash deduction from income attributable to
holders of common stock and a deduction in related earnings per
share. Concurrent with the closing of the Company’s initial
public offering in December 2003, all preferred stock converted
into shares of common stock.
The Company established the 1994 Stock Option Plan (the
“1994 Plan”) for employees, officers, directors and
consultants of the Company under which the Board of Directors
granted incentive stock options and non-qualified stock options.
Incentive stock options were granted at the fair value of the
Common Stock at the time of grant, as determined by the Board of
Directors. Generally, incentive stock options vest 25% on the
first anniversary of the date of grant and then ratably on a
monthly basis over the subsequent three years. Non-qualified
stock options have a vesting period as determined by the Board
of Directors, generally vesting 25% on the first anniversary of
the date of grant and then ratably on a monthly basis over the
subsequent three years. The stock options are exercisable over a
period of ten years from the date of grant.
The Company’s 1994 Plan was amended by the Board of
Directors in March 2000 to provide for acceleration of vesting
upon an acquisition event, as defined, subject to revision by
the Board of Directors. The maximum number of shares that were
issuable under the 1994 Plan was 2,068,965. No further option
grants may be made under the 1994 Plan.
F-21
OPEN SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
2000 Stock Incentive Plan |
The Company’s 2000 Stock Incentive Plan (the “2000
Plan”) was adopted by the Board of Directors and approved
by the stockholders in December 2000. A maximum of
5,598,443 shares of common stock are issuable under the
plan. This maximum number of 5,598,443 shares increases
each January 1 during the term of the plan by an additional
number of shares of common stock equal to 5% of the total number
of shares of common stock issued and outstanding as of the close
of business on the preceding December 31. An amendment to
the 2000 Plan was adopted by the Board of Directors in August
2003 and approved by the stockholders in October 2003 to limit
the aggregate number of shares of common stock issuable under
the plan to 10,344,827 shares, notwithstanding the annual
increase in the number of shares issuable under the plan. No
participant in this plan may in any year be granted stock
options or awards with respect to more than 344,827 shares
of common stock.
In May 2003, the Company granted 680,530 shares of
restricted common stock to its officers, directors and certain
key employees, which vested either at the end of seven years or
immediately upon a change in control or initial public offering.
The weighted average fair value of restricted stock granted was
$4.81 at the time of grant. Upon issuance of the restricted
stock, deferred compensation equivalent to the $3,276,000 market
value at the date of grant was charged to shareholders’
equity and subsequently amortized. Upon the closing of the
Company’s initial public offering in December 2003, vesting
was automatically accelerated and the Company recorded
additional compensation expense of $3,003,000 and employer tax
expense of approximately $168,000 related to the restricted
stock in the fourth quarter of 2003.
The 2000 Plan is administered by the compensation committee of
the Board of Directors, which has the authority to determine
which individuals are eligible to receive options or restricted
stock awards, and the terms of those options or awards. The
exercise price of non-qualified stock options granted under this
plan may not be less than 85% of the fair market value of a
share of common stock on the date of grant, or 100%, in the case
of incentive stock options. The options become exercisable at
such time or times as are determined by the compensation
committee and expire after a specified period that may not
exceed ten years.
Upon the acquisition of 50% or more of the Company’s
outstanding common stock pursuant to a hostile tender offer,
each option granted to an officer of the Company, if it has been
outstanding for at least six months, will automatically be
canceled in exchange for a cash distribution to the officer
based upon the difference between the tender offer price and the
exercise price of the option.
In the event the Company is acquired, vesting of options and
restricted stock awards granted under the 2000 Plan will
accelerate to the extent that the options or the Company’s
repurchase rights with respect to restricted stock awards are
not assumed by or assigned to the acquiring entity. The
compensation committee also has discretion to provide for
accelerated vesting of options and restricted stock awards upon
the occurrence of certain changes in control. Accelerated
vesting may be conditioned upon subsequent termination of the
affected optionee’s service.
With the consent of an option holder, the compensation committee
can cancel that holder’s options and replace them with new
options for the same or a different number of shares having an
exercise price based upon the fair market value of the
Company’s common stock on the new grant date. The Company
has not canceled and reissued any options as of
December 31, 2004.
The Company’s board of directors may amend or modify the
2000 Plan at any time subject to the rights of holders of
outstanding options. This plan will terminate on
December 20, 2010.
|
|
|
2003 Stock Incentive Plan |
The Company’s 2003 Stock Incentive Plan (the “2003
Plan”) was adopted by the Board of Directors in August 2003
and approved by the stockholders in October 2003. This plan
provides for the grant of incentive
F-22
OPEN SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
stock options, nonqualified stock options and restricted stock
awards to the Company’s employees, officers, directors,
consultants and advisors. A maximum of 2,068,965 shares of
common stock will be reserved for issuance under this plan. No
participant in this plan may in any year be granted stock
options or awards with respect to more than 344,827 shares
of common stock.
The 2003 Plan will be administered by the Board of Directors,
which has the authority to determine which individuals are
eligible to receive options or restricted stock awards and the
terms of those options or awards.
Upon the acquisition of 50% or more of the Company’s
outstanding common stock pursuant to a hostile tender offer,
each option granted to an officer of the Company, if it has been
outstanding for at least six months, will automatically be
canceled in exchange for a cash distribution to the officer
based upon the difference between the tender offer price and the
exercise price of the option.
In the event the Company is acquired or the Company’s
common stock is exchanged for other consideration, vesting of
options and restricted stock awards granted under the 2003 Stock
Incentive Plan will accelerate to the extent that the options or
the Company’s repurchase rights with respect to restricted
stock awards are not assumed by or assigned to the acquiring
entity. The Board of Directors can additionally cause any
options or restricted stock awards to become fully exercisable
at any other time. With the consent of an option holder, the
Board of Directors can cancel that holder’s options and
replace them with new options for the same or a different number
of shares having an exercise price based upon the fair market
value of the Company’s common stock on the new grant date.
The Board of Directors may amend or modify the 2003 Plan at any
time subject to the rights of holders of outstanding options.
This plan will terminate in August 2013. As of December 31,
2004, no options or awards were issued pursuant to the 2003 Plan.
|
|
|
2003 Employee Stock Purchase Plan |
The Company’s 2003 Employee Stock Purchase Plan (the
“2003 ESPP”) was adopted by the Board of Directors in
August 2003 and approved by the stockholders in October 2003.
The purchase plan authorizes the issuance of up to a total of
1,379,310 shares of the Company’s common stock to
participating employees through payroll deductions. The plan is
intended to qualify as an “employee stock purchase
plan” under Section 423 of the Internal Revenue Code.
Employees are eligible to participate in the purchase plan at
the beginning of each six-month offering period. Employees may
elect to withhold up to 10% of their compensation to purchase
shares of the Company’s common stock at a price equal to
85% of the fair market value of the stock on the first and last
day of the offering period, whichever is lower. As of
December 31, 2004, 47,086 shares were issued pursuant
to the 2003 ESPP.
F-23
OPEN SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
A summary of stock option activity under the 1994 Plan, 2000
Plan and 2003 Plan is as follows.
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Weighted Average | |
| |
|
Number of Shares | |
|
Exercise Price | |
| |
|
| |
|
| |
|
Outstanding at December 31, 2001
|
|
|
2,189,002 |
|
|
$ |
5.18 |
|
| |
Granted
|
|
|
491,886 |
|
|
|
7.25 |
|
| |
Canceled
|
|
|
(288,683 |
) |
|
|
6.57 |
|
| |
Exercised
|
|
|
(88,163 |
) |
|
|
0.87 |
|
| |
|
|
|
|
|
|
|
Outstanding at December 31, 2002
|
|
|
2,304,042 |
|
|
|
5.60 |
|
| |
Granted
|
|
|
663,737 |
|
|
|
4.32 |
|
| |
Canceled
|
|
|
(49,544 |
) |
|
|
6.35 |
|
| |
Exercised
|
|
|
(7,943 |
) |
|
|
1.35 |
|
| |
|
|
|
|
|
|
|
Outstanding at December 31, 2003
|
|
|
2,910,292 |
|
|
|
5.32 |
|
| |
Granted
|
|
|
1,095,710 |
|
|
|
22.60 |
|
| |
Canceled
|
|
|
(82,757 |
) |
|
|
14.64 |
|
| |
Exercised
|
|
|
(880,820 |
) |
|
|
4.41 |
|
| |
|
|
|
|
|
|
|
Outstanding at December 31, 2004
|
|
|
3,042,425 |
|
|
$ |
11.55 |
|
The following table summarizes information regarding stock
options granted during the years ended December 31, 2004,
2003 and 2002:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted Average | |
| |
|
|
|
|
|
SFAS 123 | |
| |
|
Numbers of | |
|
Weighted Average | |
|
Fair Value | |
| |
|
Options Granted | |
|
Exercise Price | |
|
at Grant Date | |
| |
|
| |
|
| |
|
| |
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Options granted with an exercise price greater than market value
|
|
|
491,886 |
|
|
$ |
7.25 |
|
|
$ |
1.39 |
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Options granted with an exercise price equal to market value
|
|
|
88,959 |
|
|
|
13.05 |
|
|
|
8.71 |
|
| |
Options granted with an exercise price greater than market value
|
|
|
11,019 |
|
|
|
7.25 |
|
|
|
1.89 |
|
| |
Options granted with an exercise price less than market value
|
|
|
563,759 |
|
|
|
2.89 |
|
|
|
4.58 |
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Options granted with an exercise price equal to market value
|
|
|
1,043,862 |
|
|
|
23.08 |
|
|
|
12.98 |
|
| |
Options granted with an exercise price less than market value
|
|
|
51,848 |
|
|
|
12.86 |
|
|
|
8.34 |
|
As of December 31, 2004 and 2003, there were 1,461,217 and
1,780,740 shares exercisable at a weighted average exercise
price of $6.17 and $5.16, respectively.
F-24
OPEN SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes additional information about
stock options outstanding at December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options Outstanding | |
|
Options Exercisable | |
| |
|
| |
|
| |
| |
|
Number | |
|
Weighted Average | |
|
|
|
|
| |
|
Outstanding at | |
|
Remaining | |
|
|
|
Number | |
| |
|
December 31, | |
|
Contractual Life | |
|
Weighted Average | |
|
Exercisable at | |
| Range of Exercise Price |
|
2004 | |
|
in Years | |
|
Exercise Price | |
|
December 31, 2004 | |
| |
|
| |
|
| |
|
| |
|
| |
|
$ 0.00 - 3.00
|
|
|
550,548 |
|
|
|
7.4 |
|
|
$ |
2.55 |
|
|
|
196,875 |
|
|
3.01 - 4.50
|
|
|
38,075 |
|
|
|
2.9 |
|
|
|
3.99 |
|
|
|
38,075 |
|
|
4.51 - 6.75
|
|
|
428,312 |
|
|
|
4.8 |
|
|
|
5.80 |
|
|
|
428,312 |
|
|
6.76 - 10.00
|
|
|
930,200 |
|
|
|
6.5 |
|
|
|
7.26 |
|
|
|
763,900 |
|
|
10.01 - 15.00
|
|
|
88,958 |
|
|
|
8.7 |
|
|
|
12.91 |
|
|
|
24,353 |
|
|
15.01 - 22.50
|
|
|
674,832 |
|
|
|
9.0 |
|
|
|
21.40 |
|
|
|
9,702 |
|
|
22.51 - 28.17
|
|
|
331,500 |
|
|
|
9.6 |
|
|
|
26.41 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
3,042,425 |
|
|
|
7.3 |
|
|
$ |
11.55 |
|
|
|
1,461,217 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average SFAS No. 123 fair value at grant
date was $13.16, $5.09 and $1.39 for options granted in the
years ended December 31, 2004, 2003 and 2002, respectively.
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the
following assumptions used for options granted during the
applicable period:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Risk free interest rate
|
|
|
3.28 |
% |
|
|
2.99 |
% |
|
|
3.32 |
% |
|
Expected dividend yield
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
Expected life of option
|
|
|
5 years |
|
|
|
6 years |
|
|
|
6 years |
|
|
Expected volatility
|
|
|
66 |
% |
|
|
74 |
% |
|
|
72 |
% |
The fair value method requires the input of highly subjective
assumptions, including expected stock price volatility. Changes
in the subjective input assumptions can materially affect the
fair value estimate. See Note 2 for additional disclosures.
The Company has issued stock options with an exercise price less
than the then-current fair market value of common stock.
Compensation expense related to such option grants is being
recognized ratably over the four-year vesting period and totaled
$388,000, $266,000 and $84,000 for the years ended
December 31, 2004, 2003 and 2002, respectively. Accrued
compensation of $321,000 and $60,000 was reversed against
Additional Paid-In Capital related to forfeiture, expiration or
exercise of vested stock options for the years ended
December 31, 2004 and 2003, respectively.
12. 401(k) Plan
The Company has established a voluntary 401(k) plan in which all
full-time employees are eligible to participate. The Company
provides matching contributions of 25% of the first four percent
of the employee’s compensation that is deferred under the
plan which is funded on an annual basis. Eligible employees who
elect to participate in the 401(k) plan are generally vested in
the Company’s matching contributions after three years of
service. Company contributions for the years ended
December 31, 2004, 2003 and 2002 were $225,000, $186,000
and $130,000 respectively.
F-25
OPEN SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
| 13. |
Commitments and Contingencies |
At December 31, 2004, the Company was committed under
facility and various other operating leases, which expire at
various dates through 2012. Minimum future lease payments under
non-cancelable leases with a remaining term of greater than one
year at December 31, 2004 are approximately as follows:
| |
|
|
|
|
|
2005
|
|
$ |
4,312,000 |
|
|
2006
|
|
|
3,778,000 |
|
|
2007
|
|
|
2,886,000 |
|
|
2008
|
|
|
2,618,000 |
|
|
2009
|
|
|
2,181,000 |
|
|
Thereafter
|
|
|
3,227,000 |
|
| |
|
|
|
|
Total minimum obligations
|
|
$ |
19,002,000 |
|
| |
|
|
|
Rent expense under operating leases was $2,397,000, $1,417,000
and $1,072,000 for the years ended December 2004, 2003 and 2002,
respectively. The Company recognizes rent expense on a
straight-line basis relating to a five-year lease agreement with
escalating payment terms expiring April 2005, which results in
accrued rent expense of $65,000 and $130,000 as of
December 31, 2004 and 2003, respectively.
In 2004, the Company entered into a lease agreement for a new
corporate headquarters facility. The term of this lease
commences on August 1, 2005 or on an earlier date by mutual
written consent of the Company and lessor. Minimum future lease
payments total approximately $6.5 million over the seven
year term. In connection with the acquisitions discussed in
Note 4, the Company assumed certain lease obligations for
operating facilities. Minimum future lease payments for these
facilities are included in the above schedule.
The Company is from time to time a party to legal proceedings
which arise in the normal course of business. The Company is not
currently involved in any material litigation, the outcome of
which would, in management’s judgment based on information
currently available, have a material adverse effect on the
Company’s results of operations or financial condition, nor
is management aware of any such litigation.
Total income tax provision/(benefit) was allocated as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Net income
|
|
$ |
(7,441,000 |
) |
|
$ |
234,000 |
|
|
$ |
32,000 |
|
|
Goodwill, for recognition of tax benefit of stock option
deduction related to an acquisition
|
|
|
(110,000 |
) |
|
|
— |
|
|
|
— |
|
|
Goodwill, for initial recognition of acquired tax benefits that
previously were included in the valuation allowance
|
|
|
(774,000 |
) |
|
|
— |
|
|
|
— |
|
|
Stockholders’ equity, for tax benefit related to deductions
in excess of amounts recognized for financial reporting purposes
|
|
|
(7,756,000 |
) |
|
|
— |
|
|
|
— |
|
|
Other comprehensive income, for unrealized loss on marketable
securities
|
|
|
(24,000 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
(16,105,000 |
) |
|
$ |
234,000 |
|
|
$ |
32,000 |
|
| |
|
|
|
|
|
|
|
|
|
F-26
OPEN SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The income tax provision (benefit) attributable to net income
consists of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Federal
|
|
$ |
328,000 |
|
|
$ |
72,000 |
|
|
$ |
— |
|
| |
State
|
|
|
288,000 |
|
|
|
69,000 |
|
|
|
32,000 |
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Federal
|
|
|
(6,284,000 |
) |
|
|
81,000 |
|
|
|
— |
|
| |
State
|
|
|
(2,143,000 |
) |
|
|
12,000 |
|
|
|
— |
|
| |
Foreign
|
|
|
370,000 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
(7,441,000 |
) |
|
$ |
234,000 |
|
|
$ |
32,000 |
|
| |
|
|
|
|
|
|
|
|
|
The components of the Company’s deferred income taxes at
December 31, 2004 and 2003 are as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Gross deferred tax asset
|
|
|
|
|
|
|
|
|
| |
Net operating loss carryforwards
|
|
$ |
29,776,000 |
|
|
$ |
16,480,000 |
|
| |
Research and development and other credits
|
|
|
1,791,000 |
|
|
|
1,273,000 |
|
| |
Stock compensation expense
|
|
|
48,000 |
|
|
|
197,000 |
|
| |
Deferred revenue
|
|
|
577,000 |
|
|
|
1,507,000 |
|
| |
Accrued expenses
|
|
|
390,000 |
|
|
|
301,000 |
|
| |
Accounts receivable
|
|
|
357,000 |
|
|
|
164,000 |
|
| |
Accelerated depreciation
|
|
|
693,000 |
|
|
|
38,000 |
|
| |
Other
|
|
|
74,000 |
|
|
|
162,000 |
|
| |
|
|
|
|
|
|
|
Deferred tax assets, gross
|
|
|
33,706,000 |
|
|
|
20,122,000 |
|
|
Less: Valuation allowance
|
|
|
(9,380,000 |
) |
|
|
(19,955,000 |
) |
| |
|
|
|
|
|
|
|
Total deferred tax assets, net of valuation allowance
|
|
|
24,326,000 |
|
|
|
167,000 |
|
|
Gross deferred tax liabilities
|
|
|
|
|
|
|
|
|
| |
Intangible assets
|
|
|
(7,410,000 |
) |
|
|
260,000 |
|
| |
|
|
|
|
|
|
|
Net deferred tax asset (liability)
|
|
$ |
16,916,000 |
|
|
$ |
(93,000 |
) |
| |
|
|
|
|
|
|
The net change in total valuation allowance for the years ended
December 31, 2004 and 2003 was a decrease of
$10.6 million and an increase of $2.7 million,
respectively. Realization of the net deferred tax asset is
dependent on the Company generating sufficient taxable income
prior to the expiration of the loss carryforwards and general
business credits, where applicable. During 2004, the Company
reversed all of the valuation allowance against its
U.S. deferred tax assets, since the Company believes that
it is more likely than not that the deferred tax assets will not
be realized. The Company has provided a valuation allowance for
the full amount of the deferred tax asset of its Canadian
subsidiary, since management has determined that it is not,
after considering all the available objective evidence, both
positive and negative, more likely than not that these assets
will be realized. The valuation allowance could be reduced in
the future if results of operations of the subsidiary continue
to improve. Subsequently reported tax benefits relating to the
valuation allowance for foreign deferred tax assets as of
December 31, 2004 will be recorded as a reduction to
goodwill to the Canadian subsidiary.
F-27
OPEN SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The difference between the Company’s “expected”
tax (benefit) expense as computed by applying the
U.S. Federal corporate income tax rate of 34% to income
(loss) before taxes are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Computed “expected” tax expense (benefit)
|
|
$ |
6,012,000 |
|
|
$ |
525,000 |
|
|
$ |
(974,000 |
) |
|
State income taxes, net of federal tax benefit
|
|
|
(1,224,000 |
) |
|
|
100,000 |
|
|
|
(309,000 |
) |
|
Non-deductible expenses
|
|
|
104,000 |
|
|
|
67,000 |
|
|
|
50,000 |
|
|
Deferred compensation
|
|
|
28,000 |
|
|
|
78,000 |
|
|
|
— |
|
|
Losses benefitted
|
|
|
(12,414,000 |
) |
|
|
(513,000 |
) |
|
|
1,192,000 |
|
|
Foreign tax rate differential
|
|
|
15,000 |
|
|
|
— |
|
|
|
— |
|
|
Other
|
|
|
38,000 |
|
|
|
(23,000 |
) |
|
|
73,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) expense
|
|
$ |
(7,441,000 |
) |
|
$ |
234,000 |
|
|
$ |
32,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
Computed “expected” tax expense
|
|
|
34.0 |
% |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
State income taxes, net of federal tax benefit
|
|
|
(6.9 |
)% |
|
|
6.5 |
% |
|
|
10.8 |
% |
|
Non-deductible expenses
|
|
|
0.6 |
% |
|
|
4.3 |
% |
|
|
(1.7 |
)% |
|
Deferred compensation
|
|
|
0.1 |
% |
|
|
5.1 |
% |
|
|
— |
|
|
Losses benefitted
|
|
|
(70.2 |
)% |
|
|
(33.2 |
)% |
|
|
(41.6 |
)% |
|
Foreign tax rate differential
|
|
|
0.1 |
% |
|
|
— |
% |
|
|
— |
|
|
Other
|
|
|
0.2 |
% |
|
|
(1.5 |
)% |
|
|
(2.5 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) expense
|
|
|
(42.1 |
)% |
|
|
15.2 |
% |
|
|
(1.1 |
)% |
| |
|
|
|
|
|
|
|
|
|
At December 31, 2004, the Company had approximately
$49.5 million of federal net operating loss carryforwards
that begin expiring from 2007 to 2023, approximately
$36.4 million of state net operating loss carryforwards
which expire from 2005 to 2023 and approximately
$31.3 million of foreign net operating loss carryforwards
which expire from 2007 to 2010. At December 31, 2004, the
Company had approximately $780,000 of state research and
development credit carryforwards with an unlimited carryforward
period.
As defined in Section 382 of the Internal Revenue Code,
certain ownership changes limit the annual utilization of
federal net operating losses and tax credit carry forwards. We
experienced such an ownership change in 1995. The follow-on
offering in May 2004 has resulted in a second ownership change.
This limitation of the utilization of federal net operating
losses imposed by Section 382 is applied annually and is
equal to a published long term exempt rate multiplied by the
aggregate fair value of the company immediately prior to the
ownership change. This resulting limitation may also be
increased by imputed tax deductions of certain intangibles
resulting from built-in gains, as defined. We do not believe
that the Section 382 limitation with respect to the 1995
ownership change nor the change that resulted from the follow-on
offering will result in the loss of any net operating losses or
tax credit carry forwards prior to their expiration. As a result
of future issuance of, sales of, and other transactions
involving our common stock, we may experience an ownership
change in the future, which could cause such federal net
operating losses and tax credit carryforwards to be subject to
limitation under Section 382.
Deferred income taxes have not been provided for the
undistributed earnings of the Company’s foreign subsidiary,
which aggregated approximately $0.9 million at
December 31, 2004. The Company plans to reinvest all such
earnings for future expansion. The undistributed earnings will
be subject to U.S. taxation upon repatriation as dividends
to the U.S. parent. The amount of taxes attributable to
these undistributed earnings is not practically determinable.
F-28
OPEN SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Until his retirement in April 2004, a director of the Company
was a member of management at one of the Company’s clients.
For the years ended December 31, 2004, 2003 and 2002,
revenues from the client were $2,269,000, $599,000, and
$885,000, respectively. As of December 31, 2004 and 2003,
$10,000, and $0 was due from this client, respectively.
|
|
| 16. |
Amended Reseller Agreements |
On September 30, 2003, the Company amended and restated its
existing software license agreement with BISYS, one of its
resellers. Effective September 1, 2003, BISYS became the
Company’s national outsourcing reseller to provide data
processing services to banks and thrifts in the United States
using the Company’s The Complete Banking Solution software
through BISYS’ outsourcing centers. In addition, BISYS will
offer the Company’s complementary products and services,
which will be BISYS’ exclusive offering for such products
and services, to those banks and thrifts purchasing TotalCS. The
agreement has a term of five years, with an option to renew for
another five years by mutual consent or at BISYS’ option.
Under the terms of the agreement, BISYS pays the Company
non-refundable minimum license fees related to the achievement
of certain minimum sales requirements for both unit sales and
license fees. BISYS also pays an annual maintenance fee for each
customer contract that BISYS maintains that uses the
Company’s products or services. The Company has agreed not
to compete with BISYS for the sale of data processing services
using The Complete Banking Solution software on an outsourced
basis to banks and thrifts in the United States, except in
certain limited circumstances. The Company will also not provide
any third-party reseller of The Complete Banking Solution
software in the United States with more favorable prices and
pricing terms, in the aggregate, than are provided to BISYS
under the agreement. If, after September 30, 2005, BISYS
fails to achieve the minimum sales requirements, the Company may
terminate the limited non-compete and favorable price and
pricing term obligations, but the Company will no longer be
entitled to receive minimum license fee payments from BISYS.
BISYS also has the right to terminate the minimum payment
requirements after September 30, 2005 if it fails to
achieve the minimum sales requirements, but BISYS will have an
obligation for additional non-refundable minimum license fees in
order to exercise this right. BISYS’ termination of the
minimum payment requirements will automatically cancel the
limited non- compete and favorable price and pricing term
obligations. The Company has also agreed not to enter into a
similar reseller agreement with any one of six named BISYS
competitors before March 1, 2005.
For the years ended December 31, 2004 and 2003, revenues
related to licenses fees from BISYS under the new arrangement
were $8,812,000 and $2,716,000, respectively.
On May 15, 2003, the Company amended its existing software
license agreement with COCC, the Company’s primary regional
reseller. This amendment removes the maximum fee limit from the
original agreement for sales after December 9, 2002, and
provides for payments to the Company upon both contract signing
and the conversion of the end user financial institution. This
agreement was further amended on December 31, 2004. The
second amendment grants COCC the rights to additional TCBS
modules and ancillary products. The agreement has a term of ten
years, with an option to renew for another five years by mutual
consent or at COCC’s option. In addition, COCC will pay the
Company non-refundable minimum license fees related to the
achievement of certain minimum sales requirements for both unit
sales and license fees.
|
|
|
Senior Subordinated Convertible Notes |
In February 2005, the Company sold senior subordinated
convertible notes due 2035 (the “Notes”) with an
aggregate principal amount at maturity of $270 million to
qualified institutional buyers pursuant to the
F-29
OPEN SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
exemptions from the registration requirements of the Securities
Act of 1933, as amended (the “Act”), afforded by
Section 4(2) of the Act and Rule 144A under the Act.
The issue price of the Notes was $533.56 per $1,000
principal amount at maturity of Notes, which resulted in
aggregate gross proceeds to the Company of approximately
$144.1 million. The Notes are general unsecured obligations
of the Company and are junior to any of the Company’s
existing and future senior indebtedness.
The Notes are convertible into shares of common stock,
$0.01 par value per share, of the Company at an initial
conversion rate of 18.3875 shares of common stock per
$1,000 principal amount at maturity of Notes, which is equal to
an initial conversion price, based on the issue price, of
approximately $29.02 (subject to adjustment), only under the
following circumstances: (1) if the reported last sale
price of the Company’s common stock reaches a specified
threshold, (2) if the Notes are called for redemption,
(3) if specified corporate transactions or distributions to
holders of the Company’s common stock occur, (4) if a
change of control occurs or (5) during the 10 trading days
prior to, but not on, the maturity date of the Notes. In lieu of
delivering shares of common stock upon conversion of the Notes,
the Company may elect to deliver cash or a combination of cash
and shares of common stock. The Notes will bear cash interest at
a rate of 2.75% per year on the issue price until
February 2, 2012. After that date, original issue discount
will accrue on the Notes at a rate of 2.75% per year on a
semi-annual bond equivalent basis. On the maturity date, a
holder will receive $1,000 in cash per $1,000 principal amount
at maturity of Notes. The Company has the right to redeem for
cash all or a portion of the Notes at any time on or after
February 2, 2012 at a price equal to the sum of the issue
price and the accrued original issue discount plus accrued and
unpaid cash interest and liquidated damages, if any. Holders of
the Notes will have the right to require the Company to
repurchase some or all of the Notes in cash on February 2,
2012 for $533.56, on February 2, 2015 for $579.12, on
February 2, 2020 for $663.86, on February 2, 2025 for
$761.00 and on February 2, 2030 for $872.35, in each case,
per $1,000 principal amount at maturity of Notes, and upon
certain events constituting a change of control, subject to
specified exceptions, at a price equal to the sum of the issue
price and accrued original issue discount plus accrued and
unpaid cash interest and liquidated damages, if any.
On March 10, 2005, the Company acquired the U.S.-based
services to credit unions business of CGI-AMS Inc., a provider
of core processing solutions for credit unions, for cash
consideration of approximately $24.0 million.
F-30
OPEN SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
| 18. |
Selected Quarterly Financial Data (Unaudited) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
First Quarter | |
|
Second Quarter | |
|
Third Quarter | |
|
Fourth Quarter | |
| |
|
| |
|
| |
|
| |
|
| |
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Revenue
|
|
$ |
12,340,000 |
|
|
$ |
13,601,000 |
|
|
$ |
17,427,000 |
|
|
$ |
20,484,000 |
|
| |
Gross profit
|
|
|
6,659,000 |
|
|
|
7,572,000 |
|
|
|
9,023,000 |
|
|
|
11,717,000 |
|
| |
Income (loss) from operations
|
|
|
95,000 |
|
|
|
864,000 |
|
|
|
915,000 |
|
|
|
(374,000 |
) |
| |
Net income (loss)
|
|
|
77,000 |
|
|
|
790,000 |
|
|
|
806,000 |
|
|
|
(364,000 |
) |
| |
Net income (loss) attributable to common stockholders
(Note 10)
|
|
|
77,000 |
|
|
|
790,000 |
|
|
|
806,000 |
|
|
|
(31,864,000 |
) |
| |
Basic income (loss) per share
|
|
|
0.03 |
|
|
|
0.32 |
|
|
|
0.32 |
|
|
|
(3.94 |
) |
| |
Diluted income (loss) per share
|
|
|
0.01 |
|
|
|
0.08 |
|
|
|
0.08 |
|
|
|
(3.94 |
) |
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Revenue
|
|
$ |
20,950,000 |
|
|
$ |
21,820,000 |
|
|
$ |
28,332,000 |
|
|
$ |
36,081,000 |
|
| |
Gross profit
|
|
|
11,895,000 |
|
|
|
12,735,000 |
|
|
|
16,821,000 |
|
|
|
21,108,000 |
|
| |
Income from operations
|
|
|
2,925,000 |
|
|
|
3,006,000 |
|
|
|
4,362,000 |
|
|
|
5,870,000 |
|
| |
Net income
|
|
|
3,002,000 |
|
|
|
3,139,000 |
|
|
|
4,470,000 |
|
|
|
14,513,000 |
|
| |
Basic income per share
|
|
|
0.18 |
|
|
|
0.18 |
|
|
|
0.23 |
|
|
|
0.75 |
|
| |
Diluted income per share
|
|
|
0.16 |
|
|
|
0.16 |
|
|
|
0.21 |
|
|
|
0.70 |
|
F-31
EXHIBIT INDEX
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Description |
| |
|
|
| |
2 |
.1 |
|
Asset Purchase Agreement between Liberty FiTech Systems, Inc.,
Liberty Enterprises, Inc., Open Solutions FiTech, Inc. and Open
Solutions Inc. dated June 30, 2003, together with
Promissory Note made by Open Solutions FiTech, Inc. in favor of
Liberty FiTech Systems, Inc. for the principal sum of $1,700,000
dated June 30, 2003, together with Security Agreement
between Open Solutions FiTech, Inc. and Liberty FiTech Systems,
Inc. dated June 30, 2003 (Incorporated by reference to the
Registrant’s registration statement on Form S-1, filed
with the Securities and Exchange Commission on August 28,
2003 (File No. 333-108293)). |
| |
| |
2 |
.2 |
|
Stock Purchase Agreement among Open Solutions Inc., OSI
Acquisition Sub, Inc., Maxxar Corporation and the Stockholders
listed on Schedule 1 thereto, dated as of February 24, 2004
(Incorporated by reference to the Registrant’s Current
Report on Form 8-K dated February 24, 2004). |
| |
| |
2 |
.3 |
|
Asset Purchase Agreement, dated as of June 18, 2004,
between Eastpoint Technologies, LLC and EP Acquisition Corp.
(Incorporated by reference to the Registrant’s Current
Report on Form 8-K dated June 18, 2004). |
| |
| |
2 |
.4 |
|
Stock Purchase Agreement, dated as of July 8, 2004, by and
among David B. Becker, John E. Taylor, as Trustee of the David
B. Becker Family Trust and David B. Becker, as Trustee of the
David B. Becker Charitable Remainder Unitrust, as shareholders
of re:Member Data Services, Inc., and RD Acquisition Corp.
(Incorporated by reference to the Registrant’s Current
Report on Form 8-K dated July 8, 2004). |
| |
| |
2 |
.5 |
|
Asset Purchase Agreement, dated as of July 23, 2004, among
Omega Systems of North America LLC, Evan P. Lewis, as sole
trustee of Omega Systems of North America Voting Trust, Evan P.
Lewis, as sole trustee of Omega Systems of North America Holding
Trust, Tri-Core Systems Enterprises, LLC, Evan P. Lewis, as sole
trustee of Tri-Core Holding Trust, Evan P. Lewis and Open
Solutions Inc. (Incorporated by reference to the
Registrant’s Current Report on Form 8-K dated July 23,
2004). |
| |
| |
2 |
.6 |
|
Acquisition Agreement, dated as of August 25, 2004, between
Open Solutions Inc., 6259936 Canada Inc. and Datawest Solutions
Inc. (Incorporated by reference to the Registrant’s Current
Report on Form 8-K dated August 25, 2004). |
| |
| |
2 |
.7 |
|
Asset Purchase Agreement, dated as of March 10, 2005,
between CGI-AMS Inc. and OS Acquisition Corp. |
| |
| |
3 |
.1 |
|
Restated Certificate of Incorporation of the Registrant
(Incorporated by reference to Amendment No. 3 to the
Registrant’s registration statement on Form S-1, filed
with the Securities and Exchange Commission on November 7,
2003 (File No. 333-108293)). |
| |
| |
3 |
.2 |
|
Amended and Restated By-Laws of the Registrant (Incorporated by
reference to Amendment No. 3 to the Registrant’s
registration statement on Form S-1, filed with the
Securities and Exchange Commission on November 7, 2003
(File No. 333-108293)). |
| |
| |
4 |
.1 |
|
Specimen certificate for shares of the Registrant’s Common
Stock (Incorporated by reference to Amendment No. 3 to the
Registrant’s registration statement on Form S-1, filed
with the Securities and Exchange Commission on November 7,
2003 (File No. 333-108293)). |
| |
| |
4 |
.2 |
|
Indenture, dated as of February 2, 2005, between the
Registrant and U.S. Bank National Association, as Trustee
(Incorporated by reference to the Registrant’s Current
Report on Form 8-K dated February 2, 2005). |
| |
| |
10 |
.1 |
|
1994 Stock Option Plan, as amended (Incorporated by reference to
Amendment No. 1 to the Registrant’s registration
statement on Form S-1, filed with the Securities and
Exchange Commission on October 7, 2003 (File
No. 333-108293)). |
| |
| |
10 |
.2 |
|
2000 Stock Incentive Plan, as amended (Incorporated by reference
to Amendment No. 1 to the Registrant’s registration
statement on Form S-1, filed with the Securities and
Exchange Commission on October 7, 2003 (File
No. 333-108293)). |
| |
| |
10 |
.3 |
|
2003 Stock Incentive Plan (Incorporated by reference to
Amendment No. 1 to the Registrant’s registration
statement on Form S-1, filed with the Securities and
Exchange Commission on October 7, 2003 (File
No. 333-108293)). |
| |
|
|
|
|
| Exhibit | |
|
|
| Number | |
|
Description |
| | |
|
|
| |
| |
10 |
.4 |
|
2003 Employee Stock Purchase Plan (Incorporated by reference to
Amendment No. 6 to the Registrant’s registration
statement on Form S-1, filed with the Securities and
Exchange Commission on November 24, 2003 (File
No. 333-108293)). |
| |
| |
10 |
.5 |
|
Form of Incentive Stock Option Agreement for the
Registrant’s 2000 Stock Incentive Plan (Incorporated by
reference to the Registrant’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004). |
| |
| |
10 |
.6 |
|
Form of Nonstatutory Stock Option Agreement for the
Registrant’s 2000 Stock Incentive Plan (Incorporated by
reference to the Registrant’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004). |
| |
| |
10 |
.7 |
|
Form of Incentive Stock Option Agreement for the
Registrant’s 2003 Stock Incentive Plan (Incorporated by
reference to the Registrant’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004). |
| |
| |
10 |
.8 |
|
Form of Nonstatutory Stock Option Agreement for the
Registrant’s 2003 Stock Incentive Plan (Incorporated by
reference to the Registrant’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004). |
| |
| |
10 |
.9 |
|
Form of Restricted Stock Unit Agreement for the
Registrant’s 2003 Stock Incentive Plan. |
| |
| |
10 |
.10 |
|
Amended and Restated Investors’ Rights Agreement between
Open Solutions Inc. and the Investors (as defined therein) dated
March 17, 2000 (Incorporated by reference to the
Registrant’s registration statement on Form S-1, filed
with the Securities and Exchange Commission on August 28,
2003 (File No. 333-108293)). |
| |
| |
10 |
.11 |
|
Employment Agreement between Open Solutions Inc. and Louis
Hernandez, Jr. dated May 6, 2002 (Incorporated by
reference to the Registrant’s registration statement on
Form S-1, filed with the Securities and Exchange Commission
on August 28, 2003 (File No. 333-108293)). |
| |
| |
†10 |
.12 |
|
Software License Agreement between Open Solutions Inc. and
BISYS, Inc. dated as of September 1, 2003 (Incorporated by
reference to Amendment No. 5 to the Registrant’s
registration statement on Form S-1, filed with the
Securities and Exchange Commission on November 21, 2003
(File No. 333-108293)). |
| |
| |
10 |
.13 |
|
Gross Lease between Open Solutions Inc. and Principal Mutual
Life Insurance Company dated February 29, 1996, as amended
by the First Amendment to Lease between Open Solutions Inc. and
Principal Mutual Life Insurance Company dated January 27,
1998, as amended by the Second Amendment to Lease between Open
Solutions Inc. and Principal Life Insurance Company (f/k/a
Principal Mutual Life Insurance Company) dated May 25,
1999, as amended by the Third Amendment to Lease between Open
Solutions Inc. and Foster Properties, LLC (as
successor-in-interest to Principal Life Insurance Company) dated
September 16, 1999, as amended by the Fourth Amendment to
Lease between Open Solutions Inc. and Foster Properties, LLC
dated November 29, 2000 (Incorporated by reference to the
Registrant’s registration statement on Form S-1, filed
with the Securities and Exchange Commission on August 28,
2003 (File No. 333-108293)). |
| |
| |
10 |
.14 |
|
Lease between Open Solutions Inc. and Carl Foster, LLC dated
February 14, 2000, as amended by the Amendment of Lease
between Open Solutions Inc. and Carl Foster, LLC dated
May 8, 2000, as amended by the Second Amendment to Lease
between Open Solutions Inc. and Carl Foster, LLC dated
November 30, 2004, as amended by the Third Amendment to
Lease between Open Solutions Inc. and Carl Foster, LLC dated
December 16, 2004. |
| |
| |
10 |
.15 |
|
Lease between Open Solutions Inc. and WB Development Partnership
dated May 4, 2004 (Incorporated by reference to Amendment
No. 2 to the Registrant’s registration statement on
Form S-1, filed with the Securities and Exchange Commission
on May 6, 2004 (File No. 333-114704)). |
| |
| |
10 |
.16 |
|
Registration Rights Agreement, dated as of February 2,
2005, among the Registrant and the initial purchasers named
therein (Incorporated by reference to the Registrant’s
Current Report on Form 8-K dated February 2, 2005). |
| |
| |
10 |
.17 |
|
Compensatory Arrangements with Executive Officers. |
| |
| |
10 |
.18 |
|
Compensatory Arrangements with Non-Employee Directors. |
| |
| |
21 |
.1 |
|
List of Subsidiaries of Open Solutions Inc. |
| |
| |
23 |
.1 |
|
Consent of PricewaterhouseCoopers LLP. |
| |
|
|
|
|
| Exhibit | |
|
|
| Number | |
|
Description |
| | |
|
|
| |
| |
31 |
.1 |
|
Certification of Louis Hernandez, Jr., Chairman of the
Board and Chief Executive Officer, pursuant to
Rules 13a-14(a) and 15d-14(a) of the Exchange Act, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. |
| |
| |
31 |
.2 |
|
Certification of Carl D. Blandino, Senior Vice President, Chief
Financial Officer, Treasurer and Secretary, pursuant to
Rules 13a-14(a) and 15d-14(a) of the Exchange Act, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. |
| |
| |
32 |
.1 |
|
Certification of Louis Hernandez, Jr., Chairman of the
Board and Chief Executive Officer, pursuant to 18 U.S.C.
section 1350. |
| |
| |
32 |
.1 |
|
Certification of Carl D. Blandino, Senior Vice President, Chief
Financial Officer, Treasurer and Secretary, pursuant to
18 U.S.C. section 1350. |
|
|
| † |
Confidential treatment granted as to certain portions, which
portions have been omitted and filed separately with the
Securities and Exchange Commission. |