e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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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, 2005
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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
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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
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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455 Winding Brook Drive,
Glastonbury, CT
(Address of principal
executive offices)
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06033
(Zip
Code)
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(860) 652-3155
(Registrants 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 if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
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 registrants 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 a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer o Accelerated
filer þ Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No 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, 2005:
$382,515,945.
As of March 8, 2006, 20,118,126 shares of common
stock, $0.01 par value per share, were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
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Form 10-K
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Document Description
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Part
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Portions of the Registrants
Proxy Statement for the Annual
Meeting of Stockholders to be held May 16, 2006
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III
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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, as
amended (the Exchange Act). These forward-looking
statements are based on current expectations, estimates,
forecasts and projections about the industry and markets in
which we operate and managements 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
Item 1A. Risk Factors 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 institutions 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 services 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. Our
aggregate revenues increased from approximately
$63.9 million in 2003 to approximately $107.2 million
in 2004, and were approximately $193.8 million for the year
ended December 31, 2005.
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 21 and item processing functions, web
hosting and design services, network service, payment solutions,
web-based archiving, retrieval and document distribution
solutions. We use an open and flexible software architecture to
maximize a clients 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 institutions 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. in October 2004, now called Open Solutions
Canada, 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. 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 sale terminals,
as well as connect to national and international transaction
processing networks.
On March 3, 2006, we purchased the outstanding common stock
of the Information Services Group of BISYS, Inc.
(BISYS) for a total cash consideration of
approximately $470.0 million subject to adjustment. This
acquisition will expand our product offerings, further
increasing our presence in the financial services marketplace
and extending our client base to include the insurance,
healthcare and other industries. In connection with our
acquisition of the Information Services Group of BISYS we
incurred $350.0 million in bank financing. (See
Managements Discussion and Analysis of Financial Condition
and Results of Operations Recent Developments,
Liquidity and Capital Resources Cash from
Financing Activities and Note 17 to our consolidated
financial statements for further discussion.)
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Open Solutions Inc. is headquartered in Glastonbury,
Connecticut, and has other facilities in Connecticut, New York,
Michigan, Georgia, Indiana, New Hampshire, California, Utah,
Illinois, Alabama, Texas, Ohio, Massachusetts and Ontario and
British Columbia, Canada and New Delhi, India. 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 and Canada.
As of March 3, 2006, we had approximately 1,700 employees.
Our common stock is quoted on the Nasdaq National Market under
the symbol OPEN.
We are subject to the informational requirements of the Exchange
Act 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 room maintained by the SEC at 100 F Street, N.E.,
Room 1580, Washington, D.C. 20549. Copies of such
material may also be obtained from the public reference room of
the SEC at prescribed rates. You may obtain information on the
operation of the SECs public reference room by calling the
SEC at
1-800-SEC-0330.
Such materials can also be inspected on the SECs 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 18,200 commercial banks, thrifts and
credit unions in the United States, approximately 18,260 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 vendors hardware and
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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
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 institutions 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
emerge.
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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
vendors 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:
Full
Integration at the Core Level
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Fully-Integrated Information Technology. Our
core software supports all of a financial institutions
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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Open
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 vendors 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 the past, 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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Flexibility
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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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Efficiency
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Cost Savings. We believe that our software
reduces the overall cost of a financial institutions
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 institutions 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.
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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 and minimum license payments from our reseller
partners. We currently host applications for approximately 815
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, payment processing and check and item processing
products.
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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 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
Reseller Partners. Approximately 210 financial
institutions use our core software application at two reseller
outsourcing centers, one operated by BISYS, 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 also plan
to work with resellers as we expand internationally, and have
established reseller partnerships based in Canada, China and
India. We plan to work with our existing resellers to add new
clients, and to supplement these resellers with new
relationships. In December 2005, we entered into a ten year
agreement with Celero Solutions (Celero), a joint
venture between five Canadian prairie cooperative organizations
that serves more than 150 credit unions in Canada, to use our
core software applications in its 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 clients 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. The same core software suite can be used by
clients outside the United States. 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 and
Canada. 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
financial institutions outside North America. 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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Date
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Acquired Business
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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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Certain business operations of 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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Remittance processing software
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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
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March 2005
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U.S. Based Services to Credit
Unions Business of CGI-AMS Inc.
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Core processing software for
credit unions
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April 2005
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S.O.S. Computer Systems, Inc.
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Core processing software for
credit unions
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June 2005
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Financial Data Solutions, Inc.
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Image and remittance item
processing and image statement and rendering services
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August 2005
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COWWW Software, Inc.
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Web-based archival, retrieval, and
document distribution services
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March 2006
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Information Services Group of BISYS
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Core processing software for banks
and other financial institutions and document imaging services
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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 clients 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 also 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
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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
clients 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
customers 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.
Core
Software
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
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platform that provides a comprehensive real-time open
architecture system capable of managing all of a financial
institutions 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.
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.
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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.
During 2005, in connection with our acquisition of S.O.S.
Computer Systems, Inc., we introduced our relationship-base core
data processing technology, The Complete Credit Union
Solution standard market edition
(TCCUS-sme). This is an out of the box
implementation with the credit union generalist in mind.
TCCUS-sme, also known as The Standard Market Edition, is an open
relational core system designed to be a full-featured, robust,
easily implemented and competitively priced solution intended
for a broad user base of Generalists.
Complementary
Products
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.
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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.
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.
Interaction Management Center. Interaction
Management Center (IMC) is a relationship management complement
to our suite of real-time, enabling technologies. IMC is a
browser-based application that provides call center and platform
representatives with centralized access from multiple CRM and
transactional systems in a consolidated environment.
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.
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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
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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 Reserves 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.
Remittance Systems. Our remittance systems
provide the solution for businesses and financial institutions
that need to eliminate the inefficiencies of manual payments
processing through an automated solution. With a combination of
proprietary software tools and third-party check transport
equipment, our remittance systems does away with redundant
processing steps; automatically captures and archives images of
payments and their related coupons; provides for retrieval for
research purposes; and can reduce overhead and operating time.
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 products can
also be adapted to suit a financial institutions 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.
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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 institutions 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 institutions bottom line. It can also
be used to segment and profile valuable customers and determine
which products, business units and channels are top performers.
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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 institutions
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.
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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.
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Payments
Products
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 (Payment Origination Service
Handler). POSH provides customers with the
functionality needed for driving ATMs and point of sale
terminals, or equivalent devices, at financial institution or
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.
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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 customers own environment. It is also
helpful in detecting signs of fraudulent activity.
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Outsourcing
Services
We have the capability to host a clients 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 these systems and without
having to make large initial expenditures. Our outsourcing
centers currently host applications for 815 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, web hosting and
design services, payment solutions, networking services, ACH
processing, payments processing, Check 21 and item
processing products. Our payments processing services operate
over 18,000 terminal devices for over 180 Independent Sales
Organizations.
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 clients 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,
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2005, approximately 4,500 financial institutions were using one
or more of our products. No client accounted for more than 10%
of total revenues for the fiscal years ended December 31,
2005 and 2003. One customer, BISYS, accounted for 11.7% of total
revenues for the fiscal year ended December 31, 2004. On
March 3, 2006 we acquired the Information Services Group of
BISYS and in conjunction therewith our reseller agreement with
BISYS was terminated. (See Managements Discussion and
Analysis of Financial Condition and Results of
Operations Recent Developments, Liquidity and
Capital Resources Cash from Financing
Activities and Note 17 to our consolidated financial
statements for further discussion.)
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.
Direct
Sales
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, 2006, our direct sales force was comprised of 68
salespersons, 43 of which were selling our core software, 23 of
which were selling our complementary products and 2 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 clients primary contact at Open
Solutions, recommends complementary products suitable for that
clients 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 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.
Indirect
Sales
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, COCC and Celero.
Under our agreements with these strategic marketing partners, we
receive license fees based on the asset size of the financial
institution using our applications.
On March 3, 2006 we acquired BISYSs Information
Services Group for $470.0 million (See Managements
Discussion and Analysis of Financial Condition and Results of
Operations Recent Developments, Liquidity and
Capital Resources Cash from Financing
Activities and Note 17 to our consolidated financial
statements for further discussion).
Prior to our purchase of the BISYSs Information Services
Group, BISYS had the right to provide outsourcing services using
our The Complete Banking Solution software to banks in the
United States. Under the amended agreement, BISYS had also
agreed to pay us minimum license fees and 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 had agreed not to compete with BISYS
for the provision of outsourcing services to banks in the United
States through June 2006 and thereafter (so long as BISYS
continued to pay us the required minimum fees and meet the
required minimum sales). Our reseller agreement with BISYS
terminated on March 3, 2006 in connection with our purchase
of BISYSs Information Services Group.
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
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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
COCCs 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
and license and maintenance fees for any sales above the
minimums.
Our agreement with Celero provides Celero a
10-year
licensing rights, reseller and maintenance agreement with us for
the Canadian version of The Complete Credit Union Solution which
grants Celero license to market and use The Complete Credit
Union Solution to provide outsourcing services to its credit
union clients in the Canadian provinces of Alberta, Manitoba and
Saskatchewan. Celero has the right to provide data center
services to credit unions in the previously mentioned
territories, up to an aggregate member base of 940,000 which may
be increased if Celero exceeds the initial member base. Under
the agreement, the license fees for these 940,000 members will
be paid quarterly over a three-year period. An initial license
fee of CAN$3.5 million was paid upon execution of the
agreement in December 2005.
During the fiscal year ended December 31, 2005, BISYS
represented approximately $18.0 million, or 9.3%, of our
total revenues, COCC represented approximately $2.5, or 1.3%, of
our total revenues, and Celero represented approximately
$2.7 million, or 1.4%, of our total revenues. 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.
Marketing
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.
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news letters
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on-line marketing
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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, 2005, 2004, and
2003, product development expenses were $19.6 million,
$11.0 million and $6.9 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, 2006, we
employed a staff of 248 development employees.
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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 Information Services 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 United States and International 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, among others.
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 3, 2006, we had a total of
1,700 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 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.
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.
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
17
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.
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.
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.
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 institutions 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, and check and item
processing, telephony products and payment processing. 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
clients business grows or it adds more software
applications, as well as through the provision of maintenance,
support and other professional services. Our data center and
payment processing services 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.
18
We
have had several profitable quarters, but we may never achieve
continued sustained profitability.
Although we were profitable for the year ended December 31,
2004, and the three and twelve months ended December 31,
2005, we may not be profitable in future periods, either on a
short or long-term basis. As of December 31, 2005, we had
an accumulated deficit of approximately $3.3 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.
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.
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 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
clients 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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our clients budgetary constraints,
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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
partners sales efforts, and
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the timing and expiration of our clients current license
agreements or outsourcing agreements for similar services.
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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.
19
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.
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 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 Information
Services 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.
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, 2005, we had approximately $94.1 million
of goodwill, $7.4 million of capitalized software costs and
$39.4 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
20
may be significant, and we are unable to predict the amount, if
any, of potential future impairments. In addition, if we engage
in additional acquisitions, we may incur additional goodwill and
other intangible assets.
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.
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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 analysts or investors
or our announced guidance. In either case, the price of our
common stock could be materially adversely affected.
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 26.6% of
revenues for the twelve months ended December 31, 2005,
30.8% of revenues for the year ended December 31, 2004,
33.5% of revenues for the year ended December 31, 2003 and
30.3% of revenues for the year ended December 31, 2002. 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.
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
21
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 personnel could have
a material adverse effect on our business, financial condition
and results of operations.
Our
indebtedness could adversely affect our financial health and
prevent us from fulfilling our obligations under our senior
subordinated convertible notes and our bank
financing.
We have a significant amount of indebtedness, including
approximately $144.1 million in senior subordinated notes
and approximately $350.0 million in bank financing. In
connection with our bank financing, we are required to maintain
sufficient leverage and fixed charge ratios. Our substantial
indebtedness could have important consequences to our
stockholders and note holders. For example, it could:
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make it more difficult for us to satisfy our obligations with
respect to our notes, our bank financing or other indebtedness,
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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.
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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, our bank
financing or any indebtedness that we may incur in the future,
we would be in default, which would permit the holders of the
notes, our lenders and the holders of such other indebtedness to
accelerate the maturity of the notes, our bank financing or such
other indebtedness, as the case may be, and could cause defaults
under the notes, our bank financing and such other indebtedness.
Any default under the notes, our bank financing 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.
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.
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
22
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.
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 January 1, 2001, we have acquired fourteen
businesses. As part of our business strategy, we may enter into
additional business combinations and acquisitions in the future.
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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the incurrence of additional debt related to the acquisition,
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potential unknown liabilities associated with acquired
businesses,
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unanticipated expenses related to acquired technology and its
integration into existing technology, and
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differing regulatory and industry standards, certification
requirements and product functional requirements.
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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 securities as consideration for these
acquisitions, which could cause our stockholders to suffer
significant dilution. Any future acquisitions may not generate
additional revenue for us.
On March 3, 2006, we purchased the outstanding common stock
of the Information Services Group of BISYS, our largest
acquisition to date. We expect that the integration of this
acquisition will require significant management time and
resources and may pose unexpected challenges. Any failure by us
to successfully integrate this acquisition would have a material
adverse effect on our results of operations and financial
condition.
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, BISYS has accounted for a meaningful
portion of our revenues over time. During the twelve months
ended December 31, 2005, BISYS represented approximately
$18.0 million, or 9.3%, of our total revenues. During the
fiscal year ended December 31, 2004, BISYS represented
approximately $12.5 million, or 11.7%, of our total
revenues. As discussed under the heading Managements
Discussion and Analysis of Financial Condition and Results of
Operations Recent Developments, we
acquired BISYSs Information Services Group for
$470.0 million on March 3, 2006.
23
In December 2005, we signed an agreement with Celero. The
agreement provides Celero with
10-year
licensing, reseller and maintenance rights for the Canadian
version of The Complete Credit Union Solution, this agreement
grants Celero license to market and use The Complete Credit
Union Solution and the right to provide outsourcing services to
credit union clients in the Canadian provinces of Alberta,
Manitoba and Saskatchewan. Celero has the right to provide data
center services to credit unions in the previously mentioned
territories up to an aggregate member base of 940,000. Under the
agreement, the license fees for these 940,000 members will be
paid quarterly over a three-year period. An initial license fee
of CAN$3.5 million was paid upon execution of the agreement
in December 2005.
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 or
experience a decline in the revenue from them, 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.
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.
We
could be sued for contract or product liability claims and
lawsuits may disrupt our business, divert managements
attention or have an adverse effect on our financial
results.
Failures in a clients 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 managements 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 clients expectations could seriously damage our
reputation and affect our ability to attract new business.
In August 2005, we became aware that we had not timely filed
certain federal tax forms on behalf of some of our clients.
Although we do not believe that this instance will result in
penalties against us or indemnification obligations to our
clients, we cannot be assured that similar instances will not
occur in the future and that in the event that they do occur,
that such future instance will not result in penalties or
indemnification obligations.
24
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, the Health Insurance Portability and Accountability
Act of 1996 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 and the Examination Parity and Year 2000 Readiness for
Financial Institutions 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
and the protection of consumer personal information belonging to
financial institutions 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.
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.
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,
25
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 managements 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.
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.
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., now known as Open Solutions Canada, 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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26
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 the additional debt we
incurred in connection with our acquisition of BISYSs
Information Services Group (BISYS Acquisition
Financing), 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 and BISYS Acquisition
Financing, or to fund our other liquidity needs. We may need to
refinance all or a portion of our indebtedness, including the
notes and BISYS Acquisition Financing, on or before maturity. We
cannot assure you that we will be able to refinance any of our
indebtedness, including the notes and BISYS Acquisition
Financing, on commercially reasonable terms or at all.
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 annual revenues increased from
approximately $27.3 million in 2001 to approximately
$193.8 million in 2005. As of December 31, 2005, we
had approximately 1,100 employees, up from approximately 600 as
of December 31, 2003. The acquisition of the BISYSs
Information Services Group will significantly increase the size
of our operations. 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.
The
requirements of being a public company strain our resources and
distract management.
As a public company, we are subject to the reporting
requirements of the Exchange Act and the
Sarbanes-Oxley
Act of 2002. These requirements may place a strain on our
systems and resources. The 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. 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, managements 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 will need to hire
additional accounting and financial staff with appropriate
public company experience and technical accounting knowledge and
we cannot assure you that we will be able to do so in a timely
fashion.
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
independent registered public accounting firm is required to
audit both the design and operating effectiveness of our
internal control over financial reporting and managements
assessment of the design and the effectiveness of its internal
control over
27
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.
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 vendors 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.
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.
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.
We may
need additional capital in the future, which may not be
available to us, and if we raise additional capital, it may
dilute your ownership in us.
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,
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|
making capital improvements to increase our servicing capacity,
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|
paying amounts due under our senior subordinated convertible
notes,
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|
developing new services or products, and
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responding to competitive pressures.
|
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.
28
Any debt incurred by us 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 your ownership percentage
in us. 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 few years, technology stocks listed on the Nasdaq
National Market have experienced high levels of volatility. The
price of our common stock 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:
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price and volume fluctuations in the overall stock market from
time to time,
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|
significant volatility in the market price and trading volume of
financial services companies,
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actual or anticipated changes in our earnings or fluctuations in
our operating results or in the expectations of securities
analysts,
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|
general economic conditions and trends,
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major catastrophic events,
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|
loss of a significant client or clients,
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|
sales of large blocks of our stock, or
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departures of key personnel.
|
In the past, following periods of volatility in the market price
of a companys 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
managements 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.
In addition, as of December 31, 2005, we had options to
purchase a total of 3,562,047 shares of our common stock
outstanding under our stock incentive plans, of which 1,644,522
were vested. We have filed
Form S-8
registration statements to register all of the shares of our
common stock issuable under these plans. 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.
29
Some
provisions in our certificate of incorporation and by-laws may
deter third parties from acquiring us.
Our restated certificate of incorporation and our amended and
restated 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:
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our board of directors is classified into three classes, each of
which serves for a staggered three year term,
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only our board of directors, the chairman of our board of
directors or our president may call special meetings of our
stockholders,
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our stockholders may take action only at a meeting of our
stockholders and not by written consent,
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we have authorized undesignated preferred stock, the terms of
which may be established and shares of which may be issued
without stockholder approval,
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our stockholders have only limited rights to amend our
by-laws, and
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we require advance notice requirements for stockholder proposals.
|
These anti-takeover defenses could discourage, delay or prevent
a transaction involving a change in 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 in 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 corporations
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 in control of our company that our
stockholders might consider to be in their best interests.
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Item 1B.
|
Unresolved
Staff Comments
|
None.
30
As of March 1, 2006, operations were conducted at the
leased facilities described below.
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Lease
|
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Approximate
|
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Expiration
|
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Location
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Operations Conducted
|
|
Square Feet
|
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Date
|
|
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Murrietta, California
|
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Sales office and item processing
center
|
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8,700
|
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|
2008
|
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Murrietta, California
|
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Storage facility
|
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|
3,500
|
|
|
|
2006
|
|
San Leandro, California
|
|
Item processing center
|
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|
4,900
|
|
|
|
2010
|
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El Monte, California
|
|
Item processing center
|
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5,200
|
|
|
|
2006
|
|
Glastonbury, Connecticut
|
|
Executive offices and data center
|
|
|
66,000
|
|
|
|
2013
|
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Windsor Locks, Connecticut
|
|
Item processing center
|
|
|
6,000
|
|
|
|
2010
|
|
Shelton, Connecticut
|
|
Sales office
|
|
|
1,200
|
|
|
|
2006
|
|
Atlanta, Georgia
|
|
Support and data processing center
|
|
|
21,000
|
|
|
|
2007
|
|
Marietta, Georgia
|
|
Sales office
|
|
|
6,000
|
|
|
|
2006
|
|
Indianapolis, Indiana
|
|
Support and data processing center
|
|
|
60,000
|
|
|
|
2010
|
|
Dryden, New York
|
|
Sales office
|
|
|
1,000
|
|
|
|
2007
|
|
Whitesboro, New York
|
|
Item processing center
|
|
|
2,000
|
|
|
|
2007
|
|
Wixom, Michigan
|
|
Sales office
|
|
|
12,000
|
|
|
|
2007
|
|
Belmont, Michigan
|
|
Support and data processing center
|
|
|
5,900
|
|
|
|
2009
|
|
Southfield, Michigan
|
|
Support and data processing center
|
|
|
11,000
|
|
|
|
2011
|
|
New Bedford, New Hampshire
|
|
Sales office
|
|
|
7,000
|
|
|
|
2006
|
|
Orem, Utah
|
|
Support and data processing center
|
|
|
23,000
|
|
|
|
2010
|
|
Vancouver, British Columbia
|
|
Executive offices, support and
data
processing center
|
|
|
29,000
|
|
|
|
2007
|
|
Missassauga, Ontario
|
|
Development office and disaster
recovery center
|
|
|
4,000
|
|
|
|
2006
|
|
Oakville, Ontario
|
|
Payment processing center
|
|
|
30,000
|
|
|
|
2009
|
|
New Delhi, India
|
|
Product development center
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12,000
|
|
|
|
2010
|
|
|
|
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 managements 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.
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Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
31
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, 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 1, 2006, the closing sale price of our common stock
was $29.63 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.
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High
|
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Low
|
|
|
First Quarter 2004
|
|
$
|
26.07
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|
|
$
|
17.40
|
|
Second Quarter 2004
|
|
$
|
25.75
|
|
|
$
|
19.42
|
|
Third Quarter 2004
|
|
$
|
25.86
|
|
|
$
|
20.33
|
|
Fourth Quarter 2004
|
|
$
|
28.60
|
|
|
$
|
23.66
|
|
First Quarter 2005
|
|
$
|
25.07
|
|
|
$
|
19.09
|
|
Second Quarter 2005
|
|
$
|
20.54
|
|
|
$
|
17.49
|
|
Third Quarter 2005
|
|
$
|
23.96
|
|
|
$
|
20.37
|
|
Fourth Quarter 2005
|
|
$
|
24.45
|
|
|
$
|
19.23
|
|
First Quarter 2006 (through
March 1, 2006)
|
|
$
|
29.63
|
|
|
$
|
22.99
|
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As of March 1, 2006, there were approximately 61 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.
Repurchases
of Our Common Stock
The following table provides information about repurchases by us
of our common stock during the three months ended
December 31, 2005.
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|
|
|
|
|
|
|
|
|
|
|
Total Number of
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|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased as
|
|
|
Approximate Dollar Value
|
|
|
|
|
|
|
|
|
|
Part of Publicly
|
|
|
of Shares that May Yet
|
|
|
|
Total Number of Shares
|
|
|
Average Price Paid
|
|
|
Announced Program
|
|
|
be Purchased Under
|
|
Period
|
|
Purchased (1)
|
|
|
per Share
|
|
|
(2)
|
|
|
the Program
|
|
|
10/1/05 10/31/05
|
|
|
79,661
|
|
|
$
|
19.25
|
|
|
|
79,661
|
|
|
$
|
0
|
|
11/1/05 11/30/05
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
0
|
|
12/1/05 12/31/05
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
79,661
|
|
|
$
|
19.25
|
|
|
|
79,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
All repurchases by us of our common stock during the three
months ended December 31, 2005 were done pursuant to the
repurchase program that we publicly announced on April 27,
2005 (the Program). |
|
(2) |
|
Our Board of Directors approved the repurchase of
$10.0 million of our common stock pursuant to the Program.
The Program expires May 2, 2006 unless terminated earlier
by resolution of our Board of Directors. The shares that we
repurchased during October 2005 completed the purchase of shares
authorized under the Program. |
32
Securities
Authorized for Issuance Under Equity Compensation
Plans
The following table provides information as of December 31,
2005 about the securities authorized for issuance under our
equity compensation plans, consisting of our 1994 Stock Option
Plan, 2000 Stock Incentive Plan, 2003 Stock Incentive Plan and
2003 Employee Stock Purchase Plan. All of our equity
compensation plans were approved by our stockholders.
Equity
Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available
|
|
|
|
|
|
|
|
|
|
for Future Issuance
|
|
|
|
Number of Securities to
|
|
|
Weighted-average
|
|
|
Under Equity
|
|
|
|
be Issued Upon
|
|
|
Exercise Price of
|
|
|
Compensation Plans
|
|
|
|
Exercise of
|
|
|
Outstanding
|
|
|
(Excluding Securities
|
|
|
|
Outstanding Options,
|
|
|
Options, Warrants
|
|
|
Reflected in Column
|
|
Plan Category
|
|
Warrants and
Rights
|
|
|
and Rights
|
|
|
(a)) (1)(2)
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved
by stockholders
|
|
|
3,562,047
|
|
|
$
|
14.99
|
|
|
|
4,674,251
|
|
Equity compensation plans not
approved by stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,562,047
|
|
|
$
|
14.99
|
|
|
|
4,674,251
|
|
|
|
|
(1) |
|
In addition to being available for future issuance upon exercise
of options that may be granted after December 31, 2005,
shares issuable under our 2000 Stock Incentive Plan may instead
be issued in the form of restricted stock and shares issuable
under our 2003 Stock Incentive Plan may instead be issued in the
form of restricted stock or other stock-based awards. |
|
(2) |
|
Includes 1,243,586 shares issuable under our 2003 Employee
Stock Purchase Plan, including shares issuable in connection
with the current offering period, which ends on May 31,
2006. Also includes 1,383,768 shares available for issuance
under our 2000 Stock Incentive Plan and 2,046,897 shares
available for issuance under our 2003 Stock Incentive Plan.
Under our 2000 Stock Incentive Plan, the number of shares
issuable is automatically increased every January 1 by an amount
equal to 5% of the total number of shares of our common stock
issued and outstanding as of the close of business on the
immediately preceding December 31, provided that the number
of shares issuable may not exceed 10,344,827. |
33
|
|
Item 6.
|
Selected
Financial Data
|
The selected financial data set forth below are derived from our
audited financial statements. During the period from
December 31, 2001 to December 31, 2005, we have
acquired thirteen businesses, as more fully described in
Managements 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
Managements 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,
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
|
|
|
(In thousands, except per share
data)
|
|
|
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software license
|
|
$
|
51,534
|
|
|
$
|
33,032
|
|
|
$
|
21,391
|
|
|
$
|
13,449
|
|
|
$
|
9,971
|
|
|
|
|
|
Service, maintenance and hardware
|
|
|
142,217
|
|
|
|
74,151
|
|
|
|
42,461
|
|
|
|
30,896
|
|
|
|
17,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
193,751
|
|
|
|
107,183
|
|
|
|
63,852
|
|
|
|
44,345
|
|
|
|
27,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software license
|
|
|
7,071
|
|
|
|
6,705
|
|
|
|
5,341
|
|
|
|
3,152
|
|
|
|
1,592
|
|
|
|
|
|
Service, maintenance and hardware
|
|
|
76,302
|
|
|
|
37,919
|
|
|
|
23,540
|
|
|
|
18,430
|
|
|
|
10,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
83,373
|
|
|
|
44,624
|
|
|
|
28,881
|
|
|
|
21,582
|
|
|
|
11,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
80,419
|
|
|
|
46,396
|
|
|
|
33,471
|
|
|
|
25,773
|
|
|
|
25,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
29,959
|
|
|
|
16,163
|
|
|
|
1,500
|
|
|
|
(3,010
|
)
|
|
|
(10,339
|
)
|
|
|
|
|
Interest and other income
|
|
|
330
|
|
|
|
1,520
|
|
|
|
43
|
|
|
|
145
|
|
|
|
428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
30,289
|
|
|
|
17,683
|
|
|
|
1,543
|
|
|
|
(2,865
|
)
|
|
|
(9,911
|
)
|
|
|
|
|
Income tax (provision) benefit
|
|
|
(11,739
|
)
|
|
|
7,441
|
|
|
|
(234
|
)
|
|
|
(32
|
)
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
18,550
|
|
|
|
25,124
|
|
|
|
1,309
|
|
|
|
(2,897
|
)
|
|
|
(9,661
|
)
|
|
|
|
|
Preferred stock accretion charge
|
|
|
|
|
|
|
|
|
|
|
(31,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to
common stockholders
|
|
$
|
18,550
|
|
|
$
|
25,124
|
|
|
$
|
(30,191
|
)
|
|
$
|
(2,897
|
)
|
|
$
|
(9,661
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.96
|
|
|
$
|
1.37
|
|
|
$
|
(7.74
|
)
|
|
$
|
(1.18
|
)
|
|
$
|
(4.71
|
)
|
|
|
|
|
Diluted
|
|
$
|
0.85
|
|
|
$
|
1.26
|
|
|
$
|
(7.74
|
)
|
|
$
|
(1.18
|
)
|
|
$
|
(4.71
|
)
|
|
|
|
|
Weighted average common shares
used to compute net income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
19,361
|
|
|
|
18,313
|
|
|
|
3,903
|
|
|
|
2,453
|
|
|
|
2,051
|
|
|
|
|
|
Diluted
|
|
|
24,977
|
|
|
|
19,896
|
|
|
|
3,903
|
|
|
|
2,453
|
|
|
|
2,051
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(In thousands, except per share
data)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
174,426
|
|
|
$
|
49,447
|
|
|
$
|
14,853
|
|
|
$
|
11,414
|
|
|
$
|
11,552
|
|
Working capital
|
|
|
171,734
|
|
|
|
59,084
|
|
|
|
73,305
|
|
|
|
1,486
|
|
|
|
3,261
|
|
Total assets
|
|
|
411,212
|
|
|
|
225,474
|
|
|
|
133,071
|
|
|
|
35,839
|
|
|
|
33,745
|
|
Convertible notes payable
|
|
|
144,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Redeemable convertible preferred
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,480
|
|
|
|
26,480
|
|
Stockholders equity (deficit)
|
|
|
195,704
|
|
|
|
178,313
|
|
|
|
105,419
|
|
|
|
(43,261
|
)
|
|
|
(40,699
|
)
|
|
|
Item 7.
|
Managements
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 managements expectations.
Important factors that could cause these differences include
those described in Item 1A. Risk Factors 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 institutions 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, check and item processing functions and web-based
archiving, retrieval and document distribution solutions. 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. We also derive revenue from payment
processing services. We view our operations and manage our
business in one reportable segment, the development and
marketing of computer software and related 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 $27.3 million in
2001 to approximately $193.8 million in 2005. This growth
has resulted primarily from strategic acquisitions and internal
expansion, through which we have
35
developed and acquired new products and services and have
expanded the number of clients using one or more of our products
to approximately 4,500 financial institutions as of
December 31, 2005.
On March 3, 2006, we purchased the outstanding common stock
of the Information Services Group of BISYS for a total cash
consideration of approximately $470.0 million, subject to
adjustment. This acquisition will expand our product offerings,
further increasing our presence in the financial services
marketplace and extending our client base to include the
insurance, healthcare and other industries.
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 clients.
We generate service and maintenance fees by converting clients
to our core software suite, installing our software, assisting
our clients in operating the applications, maintaining and
updating the software and providing outsourcing services. Our
software license agreements typically provide for five years of
support and maintenance, with automatic yearly renewals. We
perform outsourcing services through our outsourcing centers and
our check, item and payment processing centers. Revenues from
outsourcing center services and the check, item and payment
processing centers are derived from monthly usage or transaction
based 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. 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 outsourcing and
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 addition, in
connection with our acquisition of the Information Services
Group of BISYS, we expect these components as a percentage of
our total revenue to increase during 2006.
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
directly related to the reversal of the valuation allowance of
$8.6 million in the fourth quarter of 2004. The remainder
of the valuation allowance reversal was primarily recorded as an
increase to equity of $7.8 million. During 2005, we
recorded 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 had previously provided a valuation allowance
for the full amount of the deferred tax asset of our Canadian
subsidiary. During the fourth quarter of 2005, we determined
that it is more likely than not that the deferred tax asset of
this subsidiary would be realized. The reversal of the valuation
allowance was recorded as a reduction to goodwill to the
Canadian subsidiary.
Recent
Developments
On March 3, 2006, we purchased the outstanding common stock
of the Information Services Group of BISYS for a total cash
consideration of approximately $470.0 million, subject to
adjustment. We expect that this acquisition will expand our
product offerings, further increasing our presence in the
financial services marketplace and extending our client base to
include the insurance, healthcare and other industries. We also
expect that this acquisition will increase the recurring portion
of our revenues. In addition, in conjunction with this
acquisition our reseller agreement with BISYS was terminated.
During the fiscal years ended December 31, 2005, 2004 and
2003, BISYS represented approximately $18.0 million, or
9.3%, of our total revenues, $12.5 million, or 11.7%, of
our total revenues, and $5.8 million, or 9.1%, of our total
revenues, respectively.
36
We used the proceeds from a $350.0 million bank financing
along with $120.0 million of available cash to fund the
$470.0 million purchase price. As discussed in greater
detail below under Liquidity and Capital Resources,
this bank financing substantially increased our indebtedness.
Results
of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
As a Percentage of
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software license
|
|
|
26.6
|
%
|
|
|
30.8
|
%
|
|
|
33.5
|
%
|
Service, maintenance and hardware
|
|
|
73.4
|
|
|
|
69.2
|
|
|
|
66.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software license
|
|
|
3.6
|
|
|
|
6.3
|
|
|
|
8.4
|
|
Service, maintenance and hardware
|
|
|
39.4
|
|
|
|
35.3
|
|
|
|
36.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
43.0
|
|
|
|
41.6
|
|
|
|
45.3
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
12.6
|
|
|
|
13.3
|
|
|
|
16.8
|
|
Product development
|
|
|
10.1
|
|
|
|
10.3
|
|
|
|
10.7
|
|
General and administrative
|
|
|
18.8
|
|
|
|
19.7
|
|
|
|
24.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
41.5
|
|
|
|
43.3
|
|
|
|
52.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
15.5
|
|
|
|
15.1
|
|
|
|
2.3
|
|
Interest and other income
|
|
|
0.2
|
|
|
|
1.4
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
15.7
|
|
|
|
16.5
|
|
|
|
2.4
|
|
Income tax (provision) benefit
|
|
|
(6.1
|
)
|
|
|
6.9
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
9.6
|
%
|
|
|
23.4
|
%
|
|
|
2.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2005 Compared to Year Ended
December 31, 2004
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 the licensing of our software and
other third party software products. Revenues increased 80.8%
from $107.2 million for the year ended December 31,
2004 to $193.8 million for the year ended December 31,
2005. This increase was partly attributable to a
$18.5 million increase in licensing revenue from our core
and complementary products primarily 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 $18.5 million increase
in licensing revenues, $4.3 million related to revenue from
those acquisitions completed subsequent to January 1, 2005,
which were the U.S. based services to credit unions
business of
CGI-AMS
Inc., S.O.S. Computer Systems, Inc., Financial Data Solutions,
Inc. and COWWW Software, Inc. plus the partial period effect
from the acquisitions completed during 2004 which were Maxxar
Corporation, Eastpoint Technologies, LLC, re:Member Data
Services, Inc., Omega Systems of North America LLC and
Datawest Solutions Inc. The remaining $14.2 million related
to the increased number of license transactions for our core and
complementary products, including $6.1 million related to
the licensing of The Complete Credit Union Solution to Canadian
clients. The increase in revenues was also attributable to an
increase of $9.2 million in our implementation and other
professional services, $5.9 million of which was from
acquired businesses. We also realized an increase of
$13.7 million in our maintenance revenue,
$10.5 million of which was from acquired businesses, and an
increase of $41.7 million in our outsourcing revenues,
$39.9 million of which was from acquired businesses. The
increases in implementation, professional services and
maintenance
37
revenues not related to acquisitions are directly related to the
increase in sales of licenses to new clients and sales of
additional products to existing clients. Additionally, hardware
and other revenues increased by $3.5 million, which was
primarily as a result of the acquired businesses.
Cost of Revenues. Cost of revenues includes
third party license fees and the direct expenses associated with
providing our services such as systems operations, customer
support, installations, professional services and other related
expenses. Cost of revenues increased 86.8% from
$44.6 million for the year ended December 31, 2004 to
$83.4 million for the year ended December 31, 2005.
The increase in cost of revenues was due primarily to a
$23.5 million increase in costs associated with the growth
of our outsourcing and payment processing business,
$22.3 million of which is from the acquired businesses.
There was also a $7.8 million increase in costs associated
with implementation and other professional services,
$4.3 million of which is from acquired businesses and the
remainder of which is primarily related to increased personnel
costs as a result of increased implementation activities.
Maintenance costs increased $4.6 million, of which
$3.6 million is from the acquired businesses and costs
associated with hardware and other revenues increased by
$2.5 million, which was primarily from the acquired
businesses. Cost of revenues represented 41.6% of revenues for
the year ended December 31, 2004 as opposed to 43.0% of
revenues for the year ended December 31, 2005. Cost of
revenues increased on an absolute basis primarily as a result of
the acquisitions completed since January 1, 2005, 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 increased 1.4% from 2004
as a result of the increase in service, maintenance, outsourcing
and hardware and other revenues of $68.1 million, which
carry lower margins, partially offset by an increase in license
revenue of $18.5 million, which carry higher margins. We
expect that service, maintenance and outsourcing revenues as a
percentage of total revenue will continue to increase.
Operating
Expenses
Sales and Marketing. Sales and marketing
expenses increased 71.4% from $14.3 million for the year
ended December 31, 2004 to $24.5 million for the year
ended December 31, 2005. This increase was due primarily to
$3.4 million in sales and marketing expenses from the
acquired businesses, higher sales commissions and commission
related bonuses of approximately $2.4 million due to the
increase in license revenues and increases in salaries, user
group expenses and other marketing costs of approximately
$1.6 million. Sales and marketing expenses represented
12.6% of revenues for the year ended December 31, 2005 as
opposed to 13.3% of revenues for the year ended
December 31, 2004. Sales and marketing expenses as a
percentage of revenues decreased primarily because sales and
marketing expenses did not increase proportionally to our
revenue growth. For certain acquisitions, we acquired a wide
client base, but did not continue to market the acquired
companys products, as our strategy has been to market our
solutions to the clients of these acquired companies, resulting
in lower marketing expenses compared to revenues. 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 78.2% from $11.0 million for the year
ended December 31, 2004 to $19.6 million for the year
ended December 31, 2005. This increase was due primarily to
a $4.8 million increase in product development expenses
from the acquired businesses and $1.3 million related to
the internationalization and localization of our products.
Product development expenses represented 10.3% of revenues for
the year ended December 31, 2004 as opposed to 10.1% of
revenues for the year ended December 31, 2005. Product
development expenses as a percentage of revenues decreased
primarily because product development expenses did not increase
proportionally to our revenue growth. Product development
expenses increased on an absolute basis primarily due to our
investment in the internationalization of our products, the
localization of our products in Canada and the development of
other enhancements to our major product lines.
General and Administrative. General and
administrative expenses consist of salaries for executive,
administrative, and financial personnel, consulting expenses and
facilities costs such as office leases, insurance and
depreciation. General and administrative expenses increased
72.5% from $21.1 million for the year ended
December 31, 2004 to $36.4 million for the year ended
December 31, 2005. The increase was due primarily to
$10.0 million of expense from the acquired businesses, an
increase in employee compensation and recruiting costs
38
of approximately $2.6 million, an increase in rent expense
of approximately $0.3 million, an increase in audit and
audit related services of approximately $0.5 million, an
increase in consulting expenses of approximately
$0.4 million and investments in our infrastructure,
including increases in depreciation expense from the development
of new internal software systems. General and administrative
expenses represented 19.7% of revenues for the year ended
December 31, 2004 as opposed to 18.8% of revenues for the
year ended December 31, 2005. 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. Interest income and
other, increased from $1.6 million for the year ended
December 31, 2004 to $4.8 million for the year ended
December 31, 2005. The increase was primarily due to
interest income from the investment of the proceeds from our
convertible notes payable offering during the first quarter of
2005.
Interest Expense. Interest expense increased
from $0.1 million for the year ended December 31, 2004
to $4.5 million for the year ended December 31, 2005.
The increase was primarily due to interest expense related to
our convertible notes payable offering during the first quarter
of 2005.
Income Tax (Benefit) Provision. Income tax
provision increased from a benefit of $7.4 million for the
year ended December 31, 2004 to a provision of
$11.7 million for the year ended December 31, 2005. We
reversed the valuation allowance on our deferred tax assets as
of December 31, 2004, which resulted in an effective tax
benefit rate of 42.1%. In the first quarter of 2005, we began
recording a tax provision against our income at our estimated
annual effective tax rate, which was approximately 39% in 2005.
Prior to December 31, 2004, we recorded a tax provision
primarily related to state and alternative minimum taxes only.
Going forward, we will continue to provide a tax provision based
on an estimate of our annual effective tax rate. Factors that
may impact our expected rate would primarily include changes in
the magnitude and location of taxable income among taxing
jurisdictions, including the blended state tax rate based on the
mix of states we do business in, any non-deductible expenses and
any tax credits we may receive.
Year
Ended December 31, 2004 Compared to Year Ended
December 31, 2003
Revenues. 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. plus the partial period effect from the
acquisition completed during 2003 which was Liberty FiTech
Systems, Inc. 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
39
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 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.
Operating
Expenses
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 31, 2004 as opposed to 16.8% of revenues for the
year ended December 31, 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 31, 2003 as opposed to 10.3% of revenues for the
year ended December 31, 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 $0.3 million, 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 31, 2003 as opposed to 19.7% of revenues for the
year ended December 31, 2004.
Interest Income and Other. Interest income and
other increased from $0.2 million for the year ended
December 31, 2003 to $1.6 million for the year ended
December 31, 2004. The increase was primarily due to
interest income from the investment of the proceeds from 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 $0.5 million
realized in the fourth quarter of 2004, partially offset by a
loss on disposed equipment.
Interest Expense. Interest expense decreased
to $0.1 million for the year ended December 31, 2004
from $0.2 million for the year ended December 31, 2003.
Income Tax (Benefit) Provision. Income tax
benefit increased from a provision of $0.2 million 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.
40
Liquidity
and Capital Resources
At December 31, 2005, 2004 and 2003, we had cash and cash
equivalents totaling $174.4 million, $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,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
$
|
43,980
|
|
|
$
|
19,767
|
|
|
$
|
10,069
|
|
Net cash used in investing
activities
|
|
|
(48,953
|
)
|
|
|
(22,201
|
)
|
|
|
(87,682
|
)
|
Net cash provided by financing
activities
|
|
|
129,782
|
|
|
|
37,023
|
|
|
|
81,052
|
|
Cash
from Operating Activities
Cash provided by operations for the year ended December 31,
2005 was attributable to net income of $18.6 million,
depreciation and amortization expense of $11.4 million and
a deferred tax provision of $11.2 million. Working capital
increased by $1.0 million resulting primarily from
increases in accounts receivable of $12.9 million and
prepaids and other current assets of $6.8 million,
partially offset by increases in accounts payable and accrued
liabilities of $10.6 million and deferred revenue of
$10.7 million. Cash provided by operations for the year
ended December 31, 2004 was attributable to net income of
$25.1 million, depreciation and amortization expense 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
$1.0 million.
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, 2005, 2004 and 2003 were
$10.7 million, $5.6 million, and $1.5 million,
respectively, and were primarily related to the purchase of
computer equipment, computer software, software development
services, furniture and fixtures and leasehold improvements. In
addition, during 2005, we spent $1.4 million to purchase
developed software for resale for our ATM, credit card, debit
card, shared branch and on-line banking transactions. The
increase in capital expenditures in 2005 relates to the
implementation of a new enterprise software system and leasehold
improvements at our new corporate 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.
Net cash used in investing activities for the year ended
December 31, 2005 included $49.6 million used for the
acquisition of the U.S. services business of
CGI-AMS
Inc., S.O.S. Computer Systems, Inc., Financial Data Solutions,
Inc. and COWWW Software, Inc. Net cash used in investing
activities for the year ended December 31, 2004 included
$82.0 million used for acquisition of Maxxar Corporation,
Eastpoint Technologies, LLC, re: Member Data Services, Inc.,
Omega Systems of North America LLC and Datawest Solutions Inc.
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.
At December 31, 2005, we had no marketable securities
on-hand. During the year ended December 31, 2005, we
purchased $160.7 million of marketable securities and
$173.4 million of marketable securities were sold or
matured. 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.
41
Cash
from Financing Activities
On March 3, 2006, we purchased the outstanding common stock
of the Information Services Group of BISYS for a total cash
consideration of approximately $470.0 million, subject to
adjustment. This acquisition will expand our product offerings,
further increasing our presence in the financial services
marketplace and extending our client base to include the
insurance, healthcare and other industries.
We used the proceeds from a $350.0 million bank financing,
in addition to $120.0 million of available cash, to fund
the $470.0 million purchase price. The bank financing is in
the form of two agreements: a $320.0 million First Lien
Senior Secured Credit Agreement (the First
Agreement), which provides for a $290 million term
loan (the First Term Facility) and a
$30 million revolving line of credit (the Line of
Credit), and a $60 million Second Lien Senior Secured
Term Loan Agreement (the Second Term Facility). The
First Term Facility has a term of 5.5 years and bears
interest at LIBOR plus 250 basis points and is payable beginning
June 30, 2006 in the amount of $725,000 per quarter through
March 31, 2011, with balloon payments of
$137.8 million due on June 30, 2011 and
September 3, 2011. We may prepay the First Term Facility in
aggregate principal amounts of $1.0 million or a multiple
of $250,000 in excess thereof during the term of the First
Agreement. The Line of Credit expires on March 3, 2011 and
bears interest at LIBOR plus 250 basis points. Borrowings
under the Line of Credit are required to be in an aggregate
amount of $1.0 million or a multiple of $250,000 in excess
thereof. We have not currently drawn against the Line of Credit.
The Second Term Facility has a term of 6 years and bears
interest at LIBOR plus 650 basis points. The bank financing
contains both financial and non-financial covenants including
maintaining a senior leverage ratio, as defined, a total
leverage ratio, as defined and a fixed charge ratio, as defined.
These financial covenants are designed to measure our ability to
repay our outstanding debt as well as fund the related interest
payments borrowings under the bank financing are secured by
substantially all of our assets. We believe we will be in
compliance with the covenants related to our bank financing for
the next 12 months. See Note 17 to our consolidated
financial statements for further information.
In April 2005, our Board of Directors authorized the repurchase
of up to $10.0 million of our common stock on or before
May 2, 2006. We repurchased 546,134 shares of our
common stock for the full $10.0 million that was authorized
during 2005.
In February 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, as
amended (the Act), afforded by Section 4(2) of
the Act and Rule 144A under the Act. 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, including the indebtedness incurred
in connection with the acquisition of the Information Services
Group of BISYS. 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.
We incurred $5.0 million in issuance costs related to the
issuance of the Notes, which are being amortized over
7 years.
During 2005, we received approximately $3.0 million from
the exercise of stock options and $1.3 from the issuance of
common stock in connection with our employee stock purchase
program, and repaid $2.9 million of long-term debt from
customers and $0.7 million in capital lease obligations.
In May 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 $0.8 million from the issuance of common
stock in connection with our employee
42
stock purchase program, and repaid $459,000 of long-term debt
from customers and $0.7 million in capital lease
obligations.
On December 2, 2003, we completed our initial public
offering raising proceeds, net of expenses, of
$86.4 million.
We currently anticipate that our current cash balance and cash
flow from operations 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, 2005
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
Contractual
Obligations
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
Convertible Notes Payable
|
|
$
|
144,061
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
144,061
|
|
Capital Lease Obligations
|
|
|
224
|
|
|
|
102
|
|
|
|
122
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
|
27,415
|
|
|
|
5,313
|
|
|
|
9,714
|
|
|
|
8,016
|
|
|
|
4,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations
|
|
$
|
171,700
|
|
|
$
|
5,415
|
|
|
$
|
9,836
|
|
|
$
|
8,016
|
|
|
$
|
148,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
This table excludes any consideration for the purchase of the
BISYSs Information Services Group, including the
$350.0 million in bank financing, as discussed under the
heading Liquidity and Capital
Resources Cash from Financing Activities
above.
Income
Taxes
In the fourth quarter of 2005, we reversed the valuation
allowance of $5.1 million on deferred tax assets of our
Canadian subsidiary because we determined that it is more likely
than not that current and future net income of our Canadian
subsidiary will allow for the realization of these assets. These
deferred tax assets were acquired as part of our acquisition of
Datawest Solutions Inc. in 2004, but were fully reserved due to
uncertainty of their realization. The reversal of the valuation
allowance was recorded as an increase in current and long-term
tax assets and an equal decrease in goodwill.
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 our
current and future 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 of 2004 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 2005, we recorded a
tax provision against income at our effective tax rate of
approximately 39%. We expect our federal tax payments to
increase when all our net operating loss carry forwards are
utilized.
At December 31, 2005, the Company had approximately
$38.3 million of federal net operating loss carryforwards
that begin expiring in 2020, approximately $31.8 million of
state net operating loss carryforwards, which begin to expire in
2006 and approximately $20.3 million of foreign net
operating loss carryforwards, which
43
begin to expire in 2007. At December 31, 2005, the Company
had approximately $1.0 million of federal research and
development credit carryforwards that begin to expire in 2006
and approximately $1.4 million 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. Our follow-on
offering in 2004 resulted in a second ownership change. We do
not believe that the Section 382 limitation with respect to
the 1995 ownership change nor the change that resulted from our
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 January 1, 2003, we have expanded our product
offerings and client base through the acquisition of eleven
businesses. The operating results of each business acquired have
been included in our financial statements from the respective
dates of acquisition.
On March 3, 2006, we purchased the outstanding common stock
of the Information Services Group of BISYS for a total cash
consideration of approximately $470.0 million, subject to
adjustment. We expect that this acquisition will expand our
product offerings, further increasing our presence in the
financial services marketplace and extending our client base to
include the insurance, healthcare and other industries. Purchase
accounting for this acquisition is expected to be completed
during 2006. (See Managements Discussion and Analysis of
Financial Condition and Results of
Operations Recent Developments, Liquidity and
Capital Resources Cash from Financing
Activities and Note 17 to our consolidated financial
statements for further discussion.)
On August 9, 2005, we acquired COWWW Software, Inc. a
provider of web-based archiving, retrieval and document
distribution solutions for the financial services industry for
cash consideration and acquisition related costs of
approximately $8.5 million. The acquisition added web
based, archival and retrieval software to our complementary
product offerings and increased the recurring component of our
revenues.
On June 7, 2005, we acquired substantially all of the
outstanding operating assets and assumed certain liabilities of
Financial Data Solutions, Inc. a company which provides image
and remittance item processing, and image statement and
rendering services, for cash consideration and acquisition
related costs of approximately $9.0 million. This
acquisition increased our image and remittance item processing
client base and increased the recurring component of our
revenues.
On April 6, 2005, we acquired substantially all of the
outstanding operating assets and assumed certain liabilities of
S.O.S. Computer Systems, Inc. a provider of core processing
software and related services for credit unions, for cash
consideration and acquisition related costs of approximately
$11.5 million. This acquisition increased our client base
among credit unions and increased license revenues and the
recurring component of our revenues.
On March 10, 2005, we acquired the
U.S.-based
services to credit unions business of
CGI-AMS Inc.
for cash consideration and acquisition costs of approximately
$23.8 million. This acquisition increased our core data
processing client base among credit unions and increased the
recurring revenue component of revenues.
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, assumed debt and acquisition costs for an
aggregate of approximately US$47.6 million. 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.
44
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 and
acquisition related costs of approximately $2.5 million.
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, employee stock options and acquisition
related costs of approximately $22.8 million. This
acquisition increased our core data processing client base among
credit unions and increased the recurring revenue component of
our revenues.
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
and acquisition related costs of approximately
$6.8 million. This acquisition increased our core data
processing client base among banks and increased the recurring
revenue component of our revenues.
On February 24, 2004, we acquired Maxxar Corporation for
cash consideration and acquisition related costs of
approximately $6.9 million. This acquisition expanded our
complementary product offerings to include a comprehensive suite
of interactive voice information solutions and computer
telephony integration products.
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 $12.0 million.
This acquisition increased our core data processing client base
among credit unions and to increase the recurring revenue
component of our revenues.
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
managements most subjective judgment in making estimates
about the effect of matters that are inherently uncertain.
Revenue
Recognition
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, and other professional 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.
We recognize software license revenue when a non-cancelable
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 substantive 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.
45
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 with automatic renewals and are recognized
ratably over the period that maintenance services are provided.
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 as services are
provided, once evidence of an arrangement exists, fees are fixed
or determinable and collectibility is reasonably assured. 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 three primary resellers, BISYS, COCC and Celero, 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 97-2
are met, including when evidence of an arrangement exists, fees
are fixed or 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.
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.
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 low due to our client base and have 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.
Stock
Compensation
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
46
calculation of the intrinsic value of a stock award was based on
managements estimate of the fair value of our common
stock. Beginning January 1, 2006, we are required to
recognize expense pursuant to SFAS 123R for stock-based
compensation. We will utilize the Black-Scholes model to value
share-based payments and will follow the modified prospective
transition method. The Black-Scholes model uses judgemental
inputs such as option life, expected volatility and expected
forfeiture rate. Changes in these inputs may change the amount
of expense recognized for stock options issued during the period
of change.
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,
Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed, have not been significant
because the time between reaching of technological feasibility
to general release of the software has been short.
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 companys 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 and customer relationships, was determined
using an estimate of discounted future cash flows. Actual future
cash flows from these intangibles could differ from estimated
future cash flows. The allocation between amortizable
intangibles and goodwill impacts future amortization expense in
the financial statements. The operating results of each business
acquired have been included in our consolidated financial
statements from the respective dates of acquisition.
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.
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 at
December 31. 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.
47
Income
Taxes
In preparing our consolidated financial statements, we are
required to estimate income taxes in each of the jurisdictions
in which we operate. This involves estimating the actual current
tax exposure together with assessing temporary differences
between the tax basis of certain assets and liabilities and
their reported amounts in the financial statements, as well as
net operating losses, tax credits and other carryforwards. These
differences result in deferred tax assets and liabilities, which
are included within our consolidated balance sheets. We then
assess the likelihood that the deferred tax assets will be
realized from future taxable income, and to the extent that we
believe that realization is not likely, we establish a valuation
allowance.
Significant judgment is required in determining the provision
for income taxes and, in particular, any valuation allowance
recorded against our deferred tax assets. On a quarterly basis,
we evaluate the recoverability of our deferred tax assets based
upon historical results and forecasted taxable income over
future years, and match this forecast against the basis
differences, deductions available in future years and the
limitations allowed for net operating loss and tax credit
carryforwards to ensure that there is adequate support for the
realization of the deferred tax assets. While we have considered
future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation
allowance, in the event we were to determine that we would not
be able to realize all or part of our deferred tax assets in the
future, an adjustment to the deferred tax assets would be
charged as a reduction to income in the period such
determination was made. Likewise, should we determine that we
would be able to realize future deferred tax assets in excess of
its net recorded amount, an adjustment to the deferred tax
assets would increase net income in the period such
determination was made.
Recent
Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board
(FASB) issued SFAS No. 154, Accounting
Changes and Error Corrections (SFAS 154),
which replaces APB Opinion No. 20, Accounting
Changes, and FASB Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements, and
changes the requirements for the accounting for and reporting of
a change in accounting principle. SFAS 154 applies to all
voluntary changes in accounting principle and to changes
required by an accounting pronouncement in the unusual instance
that the pronouncement does not include specific transition
provisions. SFAS 154 is effective for accounting changes
made in fiscal years beginning after December 15, 2005. The
adoption of SFAS 154 is not expected to have a material
effect on our results.
In December 2004, the FASB issued SFAS No. 153,
Exchanges of Nonmonetary Assets and amendment of APB Opinion
No. 29 (SFAS 153), which eliminates
the exception from fair value measurement for nonmonetary
exchanges of similar productive assets in paragraph 21(b)
of APB Opinion No. 29, Accounting for Nonmonetary
Transactions, and replaces it with an exception for
exchanges that do not have commercial substance. SFAS 153
specifies that a nonmonetary exchange has commercial substance
if the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS 153 is
effective for nonmonetary exchanges occurring in fiscal periods
beginning after June 15, 2005. The adoption of
SFAS 153 did not have a material effect on our results.
In December 2004, the FASB issued SFAS No. 123R,
Share-Based Payment: an amendment of FASB Statements
No. 123 and 95 (SFAS 123R), 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 annual periods beginning after June 15, 2005.
Accordingly, we adopted SFAS 123R on January 1, 2006.
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 our 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. In
addition, SFAS 123R amended SFAS No. 95,
Statement of Cash Flows, requiring the cash flow effects
of excess tax benefits to be reported as an inflow from
financing activities. 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 will
utilize the Black-Scholes model to value share-based payments
and will follow the modified-prospective transition method
(MPA). In December 2005, we amended our 2003
Employee Stock Purchase Plan to reduce the discount provided to
5% and to eliminate any look-back features, which will make the
48
plan non-compensatory under SFAS 123R. We have not made any
other significant changes to our stock-based compensation plans
as a result of the adoption of SFAS 123R on January 1,
2006.
We are currently reviewing the method of adoption, including the
transition method, method of attribution for compensation cost,
valuation methods and support for the assumptions that underlie
the valuation of awards. In addition, a company that chooses to
utilize MPA will not restate its prior financial statements.
Instead, we will apply SFAS 123R for new awards granted
after January 1, 2006, any portion of awards that were
granted after December 15, 1994 that have not vested
by January 1, 2006, and any outstanding liability awards.
We also anticipate allocating expense on a straight-line basis
over the requisite service periods. In addition, with regard to
valuation methods, we also anticipate relying exclusively on
historical volatility.
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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 of 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.
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Item 8.
|
Financial
Statements and Supplementary Data
|
The information required by this item may be found on
page F-1
thru F-33 of this Annual Report on
Form 10-K.
|
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Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
Not applicable.
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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, 2005. 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
SECs 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 companys 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, 2005, 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
The implementation of additional modules of our new accounting
system, completed effective January 1, 2006, required us to
modify and add certain internal controls and processes and
procedures. Otherwise, no change in
49
our internal control over financial reporting (as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) occurred during the three months ended
December 31, 2005 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
Managements
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 Exchange Act 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:
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Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions
of our assets;
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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
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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.
|
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, 2005.
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, 2005, our internal control over financial
reporting was effective based on those criteria.
Our management has excluded the U.S. services business of
CGI-AMS Inc.
and S.O.S. Computer Systems, Inc., Financial Data Solutions,
Inc. and COWWW Software, Inc. from its assessment of internal
control over financial reporting as of December 31, 2005
because they were acquired in purchase business combinations
during 2005. The U.S. services business of
CGI-AMS Inc.
is a wholly-owned entity whose total assets and total revenues
represent 8 percent and 6 percent, respectively, of
the related consolidated financial statement amounts as of and
for the year ended December 31, 2005. S.O.S Computer
Systems, Inc is a wholly-owned entity whose total assets and
total revenues each represent 4 percent of the related
consolidated financial statement amounts as of and for the year
ended December 31, 2005. The other two acquired
entities total assets and total revenues represent
5 percent and 3 percent, respectively, of the related
consolidated financial statement amounts as of and for the year
ended December 31, 2005.
Our managements assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2005 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which appears herein.
|
|
Item 9B.
|
Other
Information
|
None.
50
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 16, 2006 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 contained in our
2006 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 2006 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 2006 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 2006 proxy statement are not incorporated
herein by reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The response to this item is contained in our 2006 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 2006 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 2006 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, 2005 and 2004
|
|
|
|
Consolidated Statements of Operations for the years ended
December 31, 2005, 2004 and 2003
|
51
|
|
|
|
|
Consolidated Statements of Stockholders Equity (Deficit)
and Comprehensive Income (Loss) for the years ended
December 31, 2005, 2004 and 2003
|
|
|
|
Consolidated Statements of Cash Flows for the years ended
December 31, 2005, 2004 and 2003
|
|
|
|
Notes to Consolidated Financial Statements.
|
(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.
52
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 15, 2006
|
|
|
|
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 15, 2006
|
|
|
|
|
|
/s/ KENNETH J.
SAUNDERS
Kenneth
J. Saunders
|
|
Executive Vice President and Chief
Financial Officer (Principal Financial Officer and Principal
Accounting Officer)
|
|
March 15, 2006
|
|
|
|
|
|
/s/ DOUGLAS K.
ANDERSON
Douglas
K. Anderson
|
|
Director
|
|
March 15, 2006
|
|
|
|
|
|
/s/ HOWARD L. CARVER
Howard
L. Carver
|
|
Director
|
|
March 15, 2006
|
|
|
|
|
|
/s/ DENNIS F. LYNCH
Dennis
F. Lynch
|
|
Director
|
|
March 15, 2006
|
|
|
|
|
|
/s/ SAMUEL F. McKAY
Samuel
F. McKay
|
|
Director
|
|
March 15, 2006
|
|
|
|
|
|
/s/ CARLOS P. NAUDON
Carlos
P. Naudon
|
|
Director
|
|
March 15, 2006
|
|
|
|
|
|
/s/ RICHARD P. YANAK
Richard
P. Yanak
|
|
Director
|
|
March 15, 2006
|
53
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To Board of Directors and Stockholders of Open Solutions Inc.:
We have completed integrated audits of Open Solutions
Inc.s 2005 and 2004 consolidated financial statements and
of its internal control over financial reporting as of
December 31, 2005, and an audit of its 2003 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, 2005 and 2004, and the results
of their operations and their cash flows for each of the three
years in the period ended December 31, 2005 in conformity
with accounting principles generally accepted in the United
States of America. These financial statements are the
responsibility of the Companys 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
Also, in our opinion, managements assessment, included in
Managements 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, 2005 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, 2005, based on criteria established in
Internal Control Integrated Framework
issued by the COSO. The Companys 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 managements assessment and on
the effectiveness of the Companys 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 managements 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 companys 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 companys
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
companys 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 Managements Report on Internal Control
Over Financial Reporting, management has excluded the
U.S. services business of
CGI-AMS
Inc., S.O.S. Computer Systems, Inc., Financial Data Solutions,
Inc. and COWWW Software, Inc. from its assessment of internal
control over financial reporting as of December 31, 2005
because they were acquired in purchase business combinations
during 2005. We have also excluded these entities from our audit
of internal control over financial reporting. The
U.S. services business of
CGI-AMS Inc.
is a wholly-owned entity whose total assets and total revenues
represent 8 percent and 6 percent, respectively, of
the related consolidated financial statement amounts as of and
for the year ended December 31, 2005. S.O.S. Computer
Systems, Inc. is a wholly-owned entity whose total assets and
total revenues represent 4 percent and 4 percent,
respectively, of the related consolidated financial statement
amounts as of and for the year ended December 31, 2005. The
other two acquired entities total assets and total
revenues represent 5 percent and 3 percent,
respectively, of the related consolidated financial statement
amounts as of and for the year ended December 31, 2005.
/s/ PRICEWATERHOUSECOOPERS
LLP
PricewaterhouseCoopers LLP
Hartford, Connecticut
March 13, 2006
F-2
OPEN
SOLUTIONS INC.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except share and
per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
174,426
|
|
|
$
|
49,447
|
|
Investments in marketable
securities
|
|
|
|
|
|
|
12,736
|
|
Accounts receivable, net
|
|
|
36,582
|
|
|
|
19,975
|
|
Deferred costs
|
|
|
5,656
|
|
|
|
2,067
|
|
Prepaid expenses and other current
assets
|
|
|
8,697
|
|
|
|
3,922
|
|
Deferred tax assets
|
|
|
13,000
|
|
|
|
12,356
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
238,361
|
|
|
|
100,503
|
|
Fixed assets, net
|
|
|
20,779
|
|
|
|
14,410
|
|
Capitalized software, net
|
|
|
7,355
|
|
|
|
6,211
|
|
Other intangible assets, net
|
|
|
39,439
|
|
|
|
31,168
|
|
Goodwill
|
|
|
94,081
|
|
|
|
66,548
|
|
Deferred tax assets, less current
portion
|
|
|
4,283
|
|
|
|
4,560
|
|
Other assets
|
|
|
6,914
|
|
|
|
2,074
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
411,212
|
|
|
$
|
225,474
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
7,313
|
|
|
$
|
2,521
|
|
Accrued expenses
|
|
|
24,624
|
|
|
|
15,338
|
|
Deferred revenue, current portion
|
|
|
34,588
|
|
|
|
21,586
|
|
Long-term debt from customers,
current portion
|
|
|
|
|
|
|
1,239
|
|
Capital lease obligations, current
portion
|
|
|
102
|
|
|
|
735
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
66,627
|
|
|
|
41,419
|
|
Convertible notes payable
|
|
|
144,061
|
|
|
|
|
|
Deferred revenue, less current
portion
|
|
|
3,251
|
|
|
|
2,706
|
|
Long-term debt from customers,
less current portion
|
|
|
|
|
|
|
1,736
|
|
Capital lease obligations, less
current portion
|
|
|
122
|
|
|
|
223
|
|
Other long-term liabilities
|
|
|
1,447
|
|
|
|
1,077
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
215,508
|
|
|
|
47,161
|
|
|
|
|
|
|
|
|
|
|
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, 2005 and 2004
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par
value; 95,000,000 shares authorized; 19,980,262 and
19,379,701 shares issued and outstanding at
December 31, 2005 and 2004, respectively
|
|
|
200
|
|
|
|
194
|
|
Additional paid-in capital
|
|
|
206,483
|
|
|
|
199,272
|
|
Deferred compensation
|
|
|
(127
|
)
|
|
|
|
|
Accumulated other comprehensive
income
|
|
|
2,469
|
|
|
|
718
|
|
Accumulated deficit
|
|
|
(3,321
|
)
|
|
|
(21,871
|
)
|
Treasury stock, at cost, 546,134
and no treasury shares at December 31, 2005 and 2004,
respectively
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
195,704
|
|
|
|
178,313
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
411,212
|
|
|
$
|
225,474
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
OPEN
SOLUTIONS INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share
data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software license
|
|
$
|
51,534
|
|
|
$
|
33,032
|
|
|
$
|
21,391
|
|
Service, maintenance and hardware
|
|
|
142,217
|
|
|
|
74,151
|
|
|
|
42,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
193,751
|
|
|
|
107,183
|
|
|
|
63,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software license
|
|
|
7,071
|
|
|
|
6,705
|
|
|
|
5,341
|
|
Service, maintenance and hardware
|
|
|
76,302
|
|
|
|
37,919
|
|
|
|
23,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
83,373
|
|
|
|
44,624
|
|
|
|
28,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
110,378
|
|
|
|
62,559
|
|
|
|
34,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
24,460
|
|
|
|
14,272
|
|
|
|
10,729
|
|
Product development
|
|
|
19,608
|
|
|
|
11,001
|
|
|
|
6,854
|
|
General and administrative
|
|
|
36,351
|
|
|
|
21,123
|
|
|
|
15,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
80,419
|
|
|
|
46,396
|
|
|
|
33,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
29,959
|
|
|
|
16,163
|
|
|
|
1,500
|
|
Interest income and other
|
|
|
4,808
|
|
|
|
1,645
|
|
|
|
197
|
|
Interest expense
|
|
|
(4,478
|
)
|
|
|
(125
|
)
|
|
|
(154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
30,289
|
|
|
|
17,683
|
|
|
|
1,543
|
|
Income tax (provision) benefit
|
|
|
(11,739
|
)
|
|
|
7,441
|
|
|
|
(234
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
18,550
|
|
|
|
25,124
|
|
|
|
1,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock accretion charge
(Note 10)
|
|
|
|
|
|
|
|
|
|
|
(31,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to
common stockholders
|
|
$
|
18,550
|
|
|
$
|
25,124
|
|
|
$
|
(30,191
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.96
|
|
|
$
|
1.37
|
|
|
$
|
(7.74
|
)
|
Diluted
|
|
$
|
0.85
|
|
|
$
|
1.26
|
|
|
$
|
(7.74
|
)
|
Weighted average common shares
used to compute net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
19,361
|
|
|
|
18,313
|
|
|
|
3,903
|
|
Diluted
|
|
|
24,977
|
|
|
|
19,896
|
|
|
|
3,903
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
OPEN
SOLUTIONS INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders
|
|
|
Comprehensive
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Deferred
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Treasury Stock
|
|
|
Equity
|
|
|
Income
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Shares
|
|
|
Amount
|
|
|
(Deficit)
|
|
|
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except share
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 of stock options
|
|
|
|
|
|
|
|
|
|
|
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 of stock options
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
Exercise of stock options
|
|
|
504,739
|
|
|
|
5
|
|
|
|
3,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,019
|
|
|
|
|
|
Issuance of common stock through
employee stock purchase plan
|
|
|
88,754
|
|
|
|
1
|
|
|
|
1,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,328
|
|
|
|
|
|
Reversal of accrued compensation
from exercise or forfeiture of stock options
|
|
|
|
|
|
|
|
|
|
|
297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
297
|
|
|
|
|
|
Issuance of restricted stock
|
|
|
7,068
|
|
|
|
|
|
|
|
138
|
|
|
|
(138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
546,134
|
|
|
|
(10,000
|
)
|
|
|
(10,000
|
)
|
|
|
|
|
Unrealized gain on marketable
securities, net of tax effects
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
|
|
|
$
|
52
|
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
Tax benefit related to stock options
|
|
|
|
|
|
|
|
|
|
|
2,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,435
|
|
|
|
|
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,699
|
|
|
|
1,699
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,550
|
|
|
|
|
|
|
|
|
|
|
|
18,550
|
|
|
|
18,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
19,980,262
|
|
|
$
|
200
|
|
|
$
|
206,483
|
|
|
$
|
(127
|
)
|
|
$
|
2,469
|
|
|
$
|
(3,321
|
)
|
|
|
546,134
|
|
|
$
|
(10,000
|
)
|
|
$
|
195,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
OPEN
SOLUTIONS INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
18,550
|
|
|
$
|
25,124
|
|
|
$
|
1,309
|
|
Adjustments to reconcile net
income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
11,380
|
|
|
|
6,434
|
|
|
|
3,901
|
|
Non-cash interest expense
|
|
|
688
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
402
|
|
|
|
388
|
|
|
|
3,542
|
|
Tax benefit on restricted stock
|
|
|
|
|
|
|
|
|
|
|
72
|
|
Deferred tax provision
|
|
|
11,197
|
|
|
|
(8,057
|
)
|
|
|
|
|
Provision for doubtful accounts
|
|
|
876
|
|
|
|
156
|
|
|
|
205
|
|
Changes in operating assets and
liabilities, excluding effects from acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(12,948
|
)
|
|
|
(3,950
|
)
|
|
|
(1,038
|
)
|
Prepaid expenses and other current
assets
|
|
|
(6,844
|
)
|
|
|
(604
|
)
|
|
|
(1,299
|
)
|
Other assets
|
|
|
(590
|
)
|
|
|
(139
|
)
|
|
|
|
|
Accounts payable and accrued
expenses
|
|
|
10,572
|
|
|
|
(394
|
)
|
|
|
2,586
|
|
Deferred revenue
|
|
|
10,697
|
|
|
|
809
|
|
|
|
791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
43,980
|
|
|
|
19,767
|
|
|
|
10,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of fixed assets
|
|
|
(10,748
|
)
|
|
|
(5,555
|
)
|
|
|
(1,469
|
)
|
Purchase of developed software
|
|
|
(1,373
|
)
|
|
|
|
|
|
|
(20
|
)
|
Purchase of marketable securities
|
|
|
(160,655
|
)
|
|
|
(62,016
|
)
|
|
|
(78,156
|
)
|
Sales and maturities of marketable
securities
|
|
|
173,443
|
|
|
|
127,375
|
|
|
|
|
|
Business acquisitions, net of cash
received
|
|
|
(49,620
|
)
|
|
|
(82,005
|
)
|
|
|
(8,037
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(48,953
|
)
|
|
|
(22,201
|
)
|
|
|
(87,682
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from convertible notes
payable
|
|
|
144,061
|
|
|
|
|
|
|
|
|
|
Payment of debt-issuance costs
|
|
|
(4,970
|
)
|
|
|
|
|
|
|
|
|
Repayment of long-term debt from
customers
|
|
|
(2,918
|
)
|
|
|
(459
|
)
|
|
|
|
|
Proceeds from exercise of stock
options
|
|
|
3,019
|
|
|
|
3,920
|
|
|
|
10
|
|
Proceeds from issuance of common
stock through employee stock purchase plan
|
|
|
1,328
|
|
|
|
799
|
|
|
|
|
|
Proceeds from issuance of
long-term debt
|
|
|
|
|
|
|
|
|
|
|
1,661
|
|
Repayment of long-term debt
|
|
|
|
|
|
|
|
|
|
|
(5,014
|
)
|
Repayment of capital lease
obligation
|
|
|
(738
|
)
|
|
|
(676
|
)
|
|
|
(207
|
)
|
Purchase of common stock
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
(1,800
|
)
|
Proceeds from sale of common stock
|
|
|
|
|
|
|
33,439
|
|
|
|
86,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
129,782
|
|
|
|
37,023
|
|
|
|
81,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate on cash
and cash equivalents
|
|
|
170
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents
|
|
|
124,979
|
|
|
|
34,594
|
|
|
|
3,439
|
|
Cash and cash equivalents,
beginning of period
|
|
|
49,447
|
|
|
|
14,853
|
|
|
|
11,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
period
|
|
$
|
174,426
|
|
|
$
|
49,447
|
|
|
$
|
14,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
2,152
|
|
|
$
|
125
|
|
|
$
|
178
|
|
Cash paid for income taxes
|
|
|
1,178
|
|
|
|
506
|
|
|
|
118
|
|
See Notes 4, 9, 10 and
11 for non-cash investing and financing disclosures
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
OPEN
SOLUTIONS INC.
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 institutions data processing and information
management functions. The Companys software can be
operated either by the financial institution itself, on an
outsourced basis in one of the Companys outsourcing
centers, or through an outsourcing center hosted by one of the
Companys resellers. The Company was incorporated in 1992
and is based in Glastonbury, Connecticut.
On March 3, 2006, the Company purchased the outstanding
common stock of the Information Services Group of BISYS, Inc.
(BISYS) for total cash consideration of
approximately $470,000,000, subject to adjustments defined in
the purchase agreement. This acquisition will expand the
Companys product offerings, further increasing the
Companys presence in the financial services marketplace
and extending the Companys client base to include the
insurance, healthcare and other industries. See Note 17 for
additional information.
On November 24, 2003, the Company effected a 1:1.45 reverse
stock split of the Companys common stock, par value
$0.01 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
|
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).
Use of
Estimates
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.
Foreign
Currency Translation and Transactions
The functional currency of our Canadian subsidiary 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. For the years ended
December 31, 2005 and 2004, the net effect of realized and
unrealized foreign currency transaction gain (loss) was $(3,000)
and $467,000. Prior to 2004, the Company had no foreign currency
transactions.
Segment
Reporting
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 Companys single reportable segment
include the organizational structure of the Company and the
financial information available for evaluation by the chief
operating decision-maker in
F-7
OPEN
SOLUTIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
making decisions about how to allocate resources and assess
performance. The Companys operating segments have been
aggregated into one reportable segment based on similar economic
characteristics 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,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Software license
|
|
$
|
51,534,000
|
|
|
$
|
33,032,000
|
|
|
$
|
21,391,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Installation, training and
professional services
|
|
|
26,938,000
|
|
|
|
17,754,000
|
|
|
|
10,686,000
|
|
Maintenance and support
|
|
|
43,577,000
|
|
|
|
29,926,000
|
|
|
|
19,736,000
|
|
Data center and payment processing
services
|
|
|
63,371,000
|
|
|
|
21,635,000
|
|
|
|
8,771,000
|
|
Hardware and other
|
|
|
8,331,000
|
|
|
|
4,836,000
|
|
|
|
3,268,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service, maintenance and hardware
|
|
|
142,217,000
|
|
|
|
74,151,000
|
|
|
|
42,461,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
193,751,000
|
|
|
$
|
107,183,000
|
|
|
$
|
63,852,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues and tangible long-lived assets by significant
geographic region are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
153,507,000
|
|
|
$
|
101,717,000
|
|
|
$
|
63,852,000
|
|
Canada
|
|
|
40,244,000
|
|
|
|
5,466,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
193,751,000
|
|
|
$
|
107,183,000
|
|
|
$
|
63,852,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Tangible Long-lived assets:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
14,773,000
|
|
|
$
|
9,664,000
|
|
Canada
|
|
|
6,006,000
|
|
|
|
4,746,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,779,000
|
|
|
$
|
14,410,000
|
|
|
|
|
|
|
|
|
|
|
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 long-term other assets in the accompanying
consolidated balance sheets as of December 31, 2005 and
2004 is restricted cash of $1,430,000 and $1,384,000,
respectively, related to security deposits for the Open
Solutions Canada payment processing business settlement account.
Cash held in the settlement account for payments in process is
held on behalf of users and no net cash balance is reflected on
the Companys financial statements.
Investments
in Marketable Securities
The Companys investments in marketable securities consist
primarily of corporate bonds and auction rate securities that
are held with a major financial institution. During the year
ended December 31, 2005, all investments in marketable
securities matured or were sold. 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
F-8
OPEN
SOLUTIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
Investments in the auction rate securities are recorded at cost
which approximates fair market value due to their variable
interest rates, which typically reset every 7 to 35 days.
Accounts
Receivable
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 are 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,
2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
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,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$
|
531,000
|
|
|
$
|
876,000
|
|
|
$
|
|
|
|
$
|
46,000
|
|
|
$
|
1,361,000
|
|
2004
|
|
|
420,000
|
|
|
|
156,000
|
|
|
|
|
|
|
|
45,000
|
|
|
|
531,000
|
|
2003
|
|
|
418,000
|
|
|
|
205,000
|
|
|
|
|
|
|
|
203,000
|
|
|
|
420,000
|
|
Fixed
Assets
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 and software
|
|
|
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, 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 software,
generally 3 to 5 years.
Capitalized
Software
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,
F-9
OPEN
SOLUTIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
(SFAS 86). These costs are amortized over
the estimated economic useful life of the software, which is
generally 5 to 7 years.
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 under SFAS 86 have not been
significant.
Long-Lived
Assets
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 2005,
2004 or 2003.
Goodwill
and Other Intangibles
The acquisitions described in Note 4 were accounted for
using the purchase method of accounting with a total of
$94,081,000 assigned to goodwill, of which approximately
$40,000,000 is expected to be deductible for tax purposes. The
recorded goodwill related to the Companys acquisitions has
not been subject to amortization. Other intangible assets, such
as customer relationships and trade names and purchased
technology resulting from the acquisitions, 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, 2005, the Company had
four reporting units. The Company has determined that the fair
value of each reporting unit is greater than its carrying value.
Accordingly, no impairment loss has been recognized.
Revenue
Recognition
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,
hardware sales related to its imaging and voice response
businesses, and fees collected on transactions in our payment
processing business. The Companys 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 or 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.
F-10
OPEN
SOLUTIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 substantive 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 Companys 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. If significant customization of
the Companys software is required, the Company recognizes
all revenue using the
percentage-of-completion
method. Maintenance revenues are recognized ratably over the
maintenance period, including the period from delivery to
completion of installation. 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 as services are
provided, once evidence of an arrangement exists, fees are fixed
or determinable and collectibility is reasonably assured. The
Company obtains signed contracts, which indicate the key terms,
as well as the fixed or 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 three 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 pursuant to
these arrangements when evidence of an arrangement exists, fees
are fixed or 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 the Companys license agreement with Celero
Solutions (Celero) signed on December 21, 2005,
the Company is entitled to receive minimum non-refundable
license fees, payable at the beginning of each quarter. The
Company may also receive additional license fees for amounts
that are sold above the minimum license fee threshold, in
addition to maintenance fees for post-contract support. The
Company records the quarterly minimum license fees and the
additional license fees as revenue in the period in which they
are due and payable.
Pursuant to its amended license agreement with BISYS signed on
September 30, 2003, the Company is entitled to minimum
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, in addition to
maintenance fees for post-contract support. 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.
On March 3, 2006, the Companys agreement with BISYS
was terminated in conjunction with the Companys purchase
of the Information Services Group of BISYS. See Note 17 for
additional information.
Pursuant to its amended license agreement with its regional
reseller signed 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, as well as certain minimum license fees. The
Company records quarterly minimum license fees and any
additional license fees as revenue in the period in which they
are due and payable, assuming all other revenue recognition
criteria were met.
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.
F-11
OPEN
SOLUTIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income
Taxes
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.
Significant judgment is required in determining the provision
for income taxes and, in particular, any valuation allowance
recorded against the Companys deferred tax assets. On a
quarterly basis, the Company evaluates the recoverability of its
deferred tax assets based upon historical results and forecasted
taxable income over future years, and matches this forecast
against the basis differences, deductions available in future
years and the limitations allowed for net operating loss and tax
credit carryforwards to ensure that there is adequate support
for the realization of the deferred tax assets. While the
Company has considered future taxable income and ongoing prudent
and feasible tax planning strategies in assessing the need for
any valuation allowances, in the event the Company was to
determine that it would not be able to realize all or part of
its deferred tax assets in the future, an adjustment to the
deferred tax assets would be charged as a reduction to income in
the period such determination was made. Likewise, should the
Company determine that it would be able to realize future
deferred tax assets in excess of its net recorded amount, an
adjustment to the deferred tax assets would increase net income
in the period such determination was made.
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 the convertible notes
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 are excluded from the computation of dilutive
EPS.
The following table reconciles the weighted average shares
outstanding used to calculate basic and diluted income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Net income (loss) used for basic
calculation
|
|
$
|
18,550,000
|
|
|
$
|
25,124,000
|
|
|
$
|
(30,191,000
|
)
|
Interest expense from convertible
debt, net of tax
|
|
|
2,635,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) used for diluted
calculation
|
|
|
21,185,000
|
|
|
|
25,124,000
|
|
|
|
(30,191,000
|
)
|
Basic net income per
share weighted average common shares outstanding
|
|
|
19,360,574
|
|
|
|
18,312,997
|
|
|
|
3,903,252
|
|
Dilutive effect of restricted
stock, stock options and warrants
|
|
|
1,087,475
|
|
|
|
1,583,450
|
|
|
|
|
|
Dilutive effect of convertible debt
|
|
|
4,528,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per
share weighted average common shares outstanding
|
|
|
24,977,035
|
|
|
|
19,896,447
|
|
|
|
3,903,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common share equivalents of 1,301,841, 53,225
and 7,168,026 were excluded from the computation of diluted EPS
for the years ended December 31, 2005, 2004 and 2003, as
they would have been anti-dilutive.
F-12
OPEN
SOLUTIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Comprehensive
Income
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. Other comprehensive income consists of
the cumulative translation adjustment related to our Canadian
subsidiary and unrealized gains and losses on marketable
securities.
Concentration
of Credit Risk
Financial instruments that potentially expose the Company to
concentrations of credit risk are limited to accounts
receivable. No individual customer accounted for 10% or more of
total revenues for the year ended December 31, 2005. 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 year ended December 31,
2003. As of December 31, 2005, 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 fair
value of the Companys convertible notes was approximately
$141,000,000 at December 31, 2005 and a fluctuation in
interest rates would not be material to the Companys
financial position.
Stock
Compensation
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, in accordance with
APB No. 25, Accounting for Stock Issued to
Employees. Effective January 1, 2006, the
Company will record compensation expense under the modified
prospective method pursuant to SFAS No. 123R,
Share-Based Payment: an amendment of FASB Statements
No. 123 and 95 (SFAS 123R).
F-13
OPEN
SOLUTIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table illustrates the effect on net income (loss)
if the Company had applied the fair value recognition provisions
of SFAS No. 123, Stock Compensation
(SFAS 123), to stock compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Net income (loss) attributable to
common stockholders, as reported
|
|
$
|
18,550,000
|
|
|
$
|
25,124,000
|
|
|
$
|
(30,191,000
|
)
|
Add: Stock compensation expense,
net of tax effect, included in reported net income (loss)
|
|
|
292,000
|
|
|
|
212,000
|
|
|
|
3,542,000
|
|
Subtract: Total stock compensation
expense determined under fair value method, net of tax effect
|
|
|
(6,061,000
|
)
|
|
|
(2,658,000
|
)
|
|
|
(5,630,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss)
|
|
$
|
12,781,000
|
|
|
$
|
22,678,000
|
|
|
$
|
(32,279,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported net income (loss) per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.96
|
|
|
$
|
1.37
|
|
|
$
|
(7.74
|
)
|
Diluted
|
|
|
0.85
|
|
|
|
1.26
|
|
|
|
(7.74
|
)
|
Pro forma net income (loss) per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.66
|
|
|
$
|
1.24
|
|
|
$
|
(8.27
|
)
|
Diluted
|
|
|
0.62
|
|
|
|
1.17
|
|
|
|
(8.27
|
)
|
For purposes of computing pro forma net income (loss) per share,
weighted average shares outstanding used for the basic and
diluted calculation were 19,360,574 and 24,679,866 for the year
ended December 31, 2005; 18,312,997 and 19,413,390 for the
year ended December 31, 2004; and 3,903,252 and 3,903,252
for the year ended December 31, 2003. The above pro forma
results are not necessarily indicative of future pro forma
results. Other disclosures required by SFAS 123 have been
included in Note 11.
Recent
Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board
(FASB) issued SFAS No. 154, Accounting
Changes and Error Corrections (SFAS 154),
which replaces APB Opinion No. 20, Accounting
Changes, and FASB Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements, and
changes the requirements for the accounting for and reporting of
a change in accounting principle. SFAS 154 applies to all
voluntary changes in accounting principle and to changes
required by an accounting pronouncement in the unusual instance
that the pronouncement does not include specific transition
provisions. SFAS 154 is effective for accounting changes
made in fiscal years beginning after December 15, 2005. The
adoption of SFAS 154 is not expected to have a material
effect on the results of the Company.
In December 2004, the FASB issued SFAS No. 153,
Exchanges of Nonmonetary Assets and amendment of APB Opinion
No. 29 (SFAS 153), which eliminates
the exception from fair value measurement for nonmonetary
exchanges of similar productive assets in paragraph 21(b)
of APB Opinion No. 29, Accounting for Nonmonetary
Transactions, and replaces it with an exception for
exchanges that do not have commercial substance. SFAS 153
specifies that a nonmonetary exchange has commercial substance
if the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS 153 is
effective for nonmonetary exchanges occurring in fiscal periods
beginning after June 15, 2005. The adoption of
SFAS 153 did not have a material effect on the results of
the Company.
In December 2004, the FASB issued SFAS 123R, 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 annual periods beginning after June 15, 2005.
Accordingly, the Company adopted SFAS 123R on
January 1, 2006. SFAS 123R requires all share-based
payments to employees, including stock
F-14
OPEN
SOLUTIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. In addition, SFAS 123R
amended SFAS No. 95, Statement of Cash Flow,
requiring the cash flow effects of excess tax benefits to be
reported as an inflow from financing activities. The Company
believes that the pro forma expense currently disclosed above
represents an estimate of the amounts that would have been
recorded under the provisions of SFAS 123R. The Company
will utilize the Black-Scholes model to value share-based
payments and will follow the modified-prospective transition
method. In December 2005, the Company amended its 2003 Employee
Stock Purchase Plan to reduce the discount provided to 5% and to
eliminate any look-back features, which will make the plan
non-compensatory under SFAS 123R. The Company does not
expect to make any other significant changes to its stock-based
compensation plans as a result of the adoption of SFAS 123R
on January 1, 2006.
The Company is currently reviewing the method of adoption,
including the transition method, method of attribution for
compensation cost, valuation methods and support for the
assumptions that underlie the valuation of awards. Currently,
the Company anticipates utilizing modified prospective
application (MPA) as its transition method. A
company that chooses to utilize MPA will not restate its prior
financial statements. Instead, the Company will apply
SFAS 123R for new awards granted after January 1,
2006, any portion of awards that were granted after
December 15, 1994 that have not vested by January 1,
2006, and any outstanding liability awards. The Company also
anticipates allocating expense on a straight-line basis over the
requisite service period. In addition, with regard to valuation
methods, the Company also anticipates relying exclusively on
historical volatility.
Upon adoption of SFAS 123R in the first quarter, the
Company will reverse all amounts previously recorded in equity
and liabilities related to deferred compensation. The Company
will also measure a cumulative effect adjustment for estimated
forfeitures on previously recognized stock compensation.
|
|
3.
|
Investments
in Marketable Securities
|
At December 31, 2005, the Company held no investments in
marketable securities. The following table summarizes the
Companys
available-for-sale
investments as of December 31, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-15
OPEN
SOLUTIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has entered into the following acquisitions
(collectively, the Acquisitions) since the beginning
of 2003, which are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business to credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unions of CGI-AMS,
|
|
|
S.O.S. Computer
|
|
|
Financial Data
|
|
|
COWWW
|
|
|
Datawest
|
|
|
|
Inc.
|
|
|
Systems, Inc.
|
|
|
Solutions, Inc.
|
|
|
Software, Inc
|
|
|
Solutions Inc.
|
|
|
|
(2005)
|
|
|
(2005)
|
|
|
(2005)
|
|
|
(2005)
|
|
|
(2004)
|
|
|
Tangible assets acquired
|
|
$
|
2,592,000
|
|
|
$
|
4,972,000
|
|
|
$
|
3,052,000
|
|
|
$
|
1,096,000
|
|
|
$
|
23,194,000
|
|
Purchased technology
|
|
|
350,000
|
|
|
|
500,000
|
|
|
|
|
|
|
|
500,000
|
|
|
|
2,223,000
|
|
Goodwill
|
|
|
16,745,000
|
|
|
|
5,552,000
|
|
|
|
4,996,000
|
|
|
|
6,222,000
|
|
|
|
23,901,000
|
|
Other intangibles
|
|
|
5,200,000
|
|
|
|
3,320,000
|
|
|
|
1,250,000
|
|
|
|
1,100,000
|
|
|
|
11,476,000
|
|
Liabilities assumed
|
|
|
(1,127,000
|
)
|
|
|
(2,799,000
|
)
|
|
|
(249,000
|
)
|
|
|
(445,000
|
)
|
|
|
(13,166,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase price
|
|
$
|
23,760,000
|
|
|
$
|
11,545,000
|
|
|
$
|
9,049,000
|
|
|
$
|
8,473,000
|
|
|
$
|
47,628,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Omega
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems of
|
|
|
re:Member
|
|
|
Eastpoint
|
|
|
Maxxar
|
|
|
Liberty FiTech
|
|
|
|
North America LLC
|
|
|
Data Services, Inc.
|
|
|
Technologies, LLC
|
|
|
Corporation
|
|
|
Systems, Inc.
|
|
|
|
(2004)
|
|
|
(2004)
|
|
|
(2004)
|
|
|
(2004)
|
|
|
(2003)
|
|
|
Tangible assets acquired
|
|
$
|
580,000
|
|
|
$
|
2,732,000
|
|
|
$
|
1,387,000
|
|
|
$
|
1,789,000
|
|
|
$
|
4,006,000
|
|
Purchased technology
|
|
|
250,000
|
|
|
|
750,000
|
|
|
|
290,000
|
|
|
|
760,000
|
|
|
|
530,000
|
|
Goodwill
|
|
|
1,901,000
|
|
|
|
12,038,000
|
|
|
|
5,122,000
|
|
|
|
4,268,000
|
|
|
|
4,843,000
|
|
Other intangibles
|
|
|
200,000
|
|
|
|
11,440,000
|
|
|
|
1,990,000
|
|
|
|
700,000
|
|
|
|
6,700,000
|
|
Liabilities assumed
|
|
|
(472,000
|
)
|
|
|
(4,206,000
|
)
|
|
|
(2,026,000
|
)
|
|
|
(642,000
|
)
|
|
|
(4,089,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase price
|
|
$
|
2,459,000
|
|
|
$
|
22,754,000
|
|
|
$
|
6,763,000
|
|
|
$
|
6,875,000
|
|
|
$
|
11,990,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 managements 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
Companys purchase agreements include adjustments for
working capital and collection of outstanding receivable
balances, which will be adjustments to the purchase price upon
final resolution with the sellers. The operating results of each
business acquired have been included in the Companys
consolidated financial statements from respective dates of
acquisition.
Information
Services Group of BISYS
On March 3, 2006, the Company purchased the outstanding
common stock of the Information Services Group of BISYS for a
total cash consideration of approximately $470,000,000, subject
to adjustment. Due to the timing of the acquisition, the
purchase price allocation has not yet been determined by the
Company. See Note 17 for further information.
U.S.-based
services to credit unions business of
CGI-AMS
Inc.
On March 10, 2005, the Company acquired the
U.S.-based
services to credit unions business of
CGI-AMS Inc.
for cash consideration of $23,448,000. In connection with the
acquisition, the Company incurred approximately $312,000 of
acquisition-related costs. The purchased technology of $350,000
related to this acquisition is being
F-16
OPEN
SOLUTIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
amortized over its useful life of five years. The other
intangible asset, customer relationships of $5,200,000, is being
amortized over its useful life of 20 years. Purchase
accounting for this acquisition is preliminary with respect to
the settlement of certain contingent payments under the purchase
agreement and is expected to be finalized during 2006.
S.O.S.
Computer Systems, Inc.
On April 6, 2005, the Company acquired substantially all of
the outstanding operating assets and assumed certain liabilities
of S.O.S. Computer Systems, Inc. (SO Systems), a
provider of core processing software and related services for
credit unions, for cash consideration of $11,400,000 and
acquisition related costs of approximately $145,000. The
purchased technology of $500,000 related to this acquisition is
being amortized over its useful life of five years. The other
intangible assets, comprised of customer relationships of
$3,200,000 and tradenames of $120,000, are being amortized over
their useful lives of 25 and 5 years, respectively. Pro
forma information related to the combined results of operations
of the Company and SO Systems were not disclosed because the
results of the operations of SO Systems were not material for
the years ended December 31, 2005 and 2004.
Financial
Data Solutions, Inc.
On June 7, 2005, the Company acquired substantially all of
the outstanding operating assets and assumed certain liabilities
of Financial Data Solutions, Inc. (FDSI), a company
which provides image and remittance item processing, and image
statement and rendering services, for cash consideration of
$9,000,000 and acquisition-related costs of approximately
$49,000. Intangible assets, comprised of customer relationships
valued at $1,250,000, is being amortized over its useful life of
10 years. Pro forma information related to the combined
results of operations of the Company and FDSI were not disclosed
because the results of the operations of FDSI were not material
for the years ended December 31, 2005 and 2004.
COWWW
Software, Inc.
On August 9, 2005, the Company acquired all of the
outstanding stock of COWWW Software, Inc. (COWWW), a
provider of web-based archiving, retrieval and document
distribution solutions for the financial services industry, for
cash consideration of $8,426,000 and acquisition related costs
of $47,000. The purchased technology of $500,000 related to this
acquisition is being amortized over its useful life of
5 years. The other intangible asset, customer relationships
of $1,100,000, is being amortized over its useful life of
12 years. Pro forma information related to the combined
results of operations of the Company and COWWW were not
disclosed because the results of the operations of COWWW were
not material for the years ended December 31, 2005 and 2004.
Datawest
Solutions Inc.
On October 29, 2004, the Company acquired all of the
outstanding stock of Datawest Solutions Inc. (now known as
Open Solutions Canada), 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 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 incurred
approximately US$417,000 of acquisition costs for a total
purchase price of US$47,628,000. The purchased technology valued
at $2,223,000 (at the exchange rate as of October 29, 2004)
related to this acquisition is being amortized over its
estimated useful life of 5 years. The other intangible
asset, comprised of customer relationships with the banking and
payments customers valued at $11,476,000 (at the exchange rate
as of October 29, 2004), is being amortized over its
estimated useful life of 12 years.
F-17
OPEN
SOLUTIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. The
purchased technology, valued at $250,000, related to this
acquisition is being amortized over its estimated useful life of
5 years. The other intangible asset, customer relationships
valued at $200,000, is being amortized over its estimated useful
life of 5 years. Pro forma information related to the
combined results of operations of the Company and Omega were not
disclosed because the results of operations of Omega were not
material for the year ended December 31, 2004.
re:Member
Data Services, Inc.
On July 8, 2004, the Company acquired all of the
outstanding stock of re:Member Data Services, Inc., 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 through 2010. The
purchased technology, valued at $750,000, related to this
acquisition is being amortized over its estimated useful life of
5 years. The other intangible assets, comprised of customer
relationships valued at $11,100,000, tradenames valued at
$180,000 and a non-compete agreement valued at $160,000, are
being amortized over their estimated useful lives of 16, 5
and 5 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 $6,680,000. In connection with the acquisition,
the Company incurred approximately $83,000 of
acquisition-related costs. The purchased technology valued at
$290,000 related to this acquisition is being amortized over its
estimated useful life of 5 years. The other intangible
assets, comprised of tradenames valued at $50,000 and customer
relationships valued at $1,940,000, are being amortized over
their estimated useful lives of 5 and 11 years,
respectively.
Maxxar
Corporation
On February 24, 2004, the Company acquired all of the
outstanding capital stock of Maxxar Corporation for cash
consideration of approximately $6,690,000 and $185,000 of
acquisition-related costs.. The purchased technology valued at
$760,000 related to this acquisition is being amortized over its
estimated useful life of 7 years. The other intangible
assets, comprised of tradenames valued at $120,000 and customer
relationships valued at $580,000, are being amortized over their
estimated useful lives of 10 to 20 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
Companys common stock. In conjunction with the
acquisition, the Company incurred approximately $286,000 of
acquisition-related costs. The purchased technology related to
this acquisition of $530,000 is being amortized over its
estimated useful life of 5 years. The other intangible
assets of $6,700,000, comprised of customer lists, are being
amortized over their useful life of 12 years.
F-18
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 its material
acquisitions on a pro forma basis, as though the companies had
been combined as of January 1, 2004. The pro forma
information excludes the effects of Omega, SO Systems, FDSI and
COWWW, as the results of their operations are not significant to
the Company. 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.
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Pro forma revenues
|
|
$
|
196,965,000
|
|
|
$
|
160,835,000
|
|
Pro forma net income
|
|
|
18,465,000
|
|
|
|
24,859,000
|
|
Pro forma net income per
share basic
|
|
$
|
0.95
|
|
|
$
|
1.36
|
|
Pro forma net income per
share diluted
|
|
|
0.84
|
|
|
|
1.25
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Computer equipment and software
|
|
$
|
26,780,000
|
|
|
$
|
19,266,000
|
|
Office furniture and equipment
|
|
|
4,385,000
|
|
|
|
2,946,000
|
|
Leasehold improvements
|
|
|
3,591,000
|
|
|
|
1,391,000
|
|
Construction in progress
|
|
|
4,080,000
|
|
|
|
2,186,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,836,000
|
|
|
|
25,789,000
|
|
Less: accumulated depreciation
|
|
|
(18,057,000
|
)
|
|
|
(11,379,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,779,000
|
|
|
$
|
14,410,000
|
|
|
|
|
|
|
|
|
|
|
Construction in progress consists of software and related
implementation costs for the Companys enterprise software
system, which was fully placed into service on January 1,
2006, and leasehold improvement costs for additional space at
the Companys new corporate lease facility, which will be
fully occupied during 2006. Depreciation and amortization
expense was $6,931,000, $4,122,000 and $2,462,000 for the years
ended December 31, 2005, 2004 and 2003, respectively.
|
|
6.
|
Capitalized
Software and Other Intangible Assets
|
Capitalized software includes completed technology acquired in
business combinations. Capitalized software also includes 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-19
OPEN
SOLUTIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the components of capitalized software is as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Purchased technology
|
|
$
|
11,596,000
|
|
|
$
|
10,148,000
|
|
Internal use software
|
|
|
1,839,000
|
|
|
|
1,746,000
|
|
Purchased third-party software
|
|
|
1,700,000
|
|
|
|
442,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,135,000
|
|
|
|
12,336,000
|
|
Less: accumulated amortization
|
|
|
(7,780,000
|
)
|
|
|
(6,125,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,355,000
|
|
|
$
|
6,211,000
|
|
|
|
|
|
|
|
|
|
|
A summary of the components of other intangible assets is as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Customer relationships
|
|
$
|
43,316,000
|
|
|
$
|
32,175,000
|
|
Tradenames
|
|
|
550,000
|
|
|
|
626,000
|
|
Other intangible assets
|
|
|
160,000
|
|
|
|
160,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,026,000
|
|
|
|
32,961,000
|
|
Less: accumulated amortization
|
|
|
(4,587,000
|
)
|
|
|
(1,793,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
39,439,000
|
|
|
$
|
31,168,000
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to capitalized software costs was
$1,655,000, $1,131,000 and $1,160,000 for the years ended
December 31, 2005, 2004 and 2003, respectively.
Amortization expense related to other intangible assets was
$2,794,000, $1,238,000 and $279,000 for the years ended
December 31, 2005, 2004 and 2003, respectively.
Amortization expense for each of the next five years ended
December 31 is expected to approximate:
|
|
|
|
|
|
|
|
|
|
|
Capitalized
|
|
|
Other
|
|
|
|
Software
|
|
|
Intangible Assets
|
|
|
2006
|
|
$
|
1,815,000
|
|
|
$
|
3,223,000
|
|
2007
|
|
|
1,815,000
|
|
|
|
3,223,000
|
|
2008
|
|
|
1,639,000
|
|
|
|
3,223,000
|
|
2009
|
|
|
1,143,000
|
|
|
|
3,185,000
|
|
2010
|
|
|
516,000
|
|
|
|
3,138,000
|
|
F-20
OPEN
SOLUTIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Compensation related
|
|
$
|
12,932,000
|
|
|
$
|
5,984,000
|
|
Third party license fees
|
|
|
2,379,000
|
|
|
|
4,246,000
|
|
Professional fees
|
|
|
1,823,000
|
|
|
|
653,000
|
|
Accrued interest
|
|
|
1,651,000
|
|
|
|
|
|
Hardware and software purchases
|
|
|
1,911,000
|
|
|
|
229,000
|
|
Sales tax payable
|
|
|
867,000
|
|
|
|
931,000
|
|
Other
|
|
|
3,061,000
|
|
|
|
3,295,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,624,000
|
|
|
$
|
15,338,000
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
Convertible
Notes Payable
|
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 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 $533.36 per $1,000 principal at maturity of
Notes, which resulted in aggregate gross proceeds to the Company
of approximately $144.1 million. The Notes are general
unsecured obligations and junior to any of our existing and
future senior indebtedness, including the indebtedness incurred
in connection with the acquisition of the Information Services
Group of BISYS.
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 Companys
common stock reaches 130% of the accreted conversion price
($37.73 at December 31, 2005), (2) if the Notes are
called for redemption, (3) if specified corporate
transactions or distributions to holders of the Companys
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, payable semiannually in
arrears on February 2 and August 2 of each year beginning
August 2, 2005 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.
The costs of approximately $5.0 million related to the
issuance of the Notes have been recorded as deferred financing
costs within other assets in the accompanying financial
statements. During 2005 the Company recorded approximately
$688,000 of interest expense related to the amortization of
these deferred financing costs. The deferred financing costs is
being amortized to interest expense using the effective interest
method through the first put date in February 2012. If the Notes
become convertible, and the Company waives its option to pay for
the conversion in shares, the debt issuance costs will be
amortized immediately on such date.
F-21
OPEN
SOLUTIONS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
If the Company does not waive its option to settle the
conversion in shares, the debt issuance costs will not be
amortized immediately on the date the Notes become convertible.
Upon conversion, if the Company has not waived its option to
settle in shares and conversion is settled in: (a) shares,
the write-off of the debt issuance costs will be recorded to
additional
paid-in-capital
or (b) cash, the write-off of the debt issuance costs will
be recorded to the consolidated statement of operations in
accordance with Emerging Issues Task Force
No. 03-7,
Accounting for the Settlement of the Equity-Settled Portion
of a Convertible Debt Instrument That Permits or Requires the
Conversion Spread to Be Settled in Stock.
|
|
9.
|
Long-Term
Debt and Capital Lease Obligations
|
Certain of Open Solutions Canadas customers prepaid their
data center fees for a number of years and the Company assumed
this liability upon acquisition. Customers received interest on
their prepayments and fees for services are applied against the
prepayments as incurred. The Company paid these amounts in full
during 2005.
In conjunction with 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,
|
|
|
|
2005
|
|
|
2004
|
|
|
Computer equipment lease
|
|
$
|
224,000
|
|
|
$
|
931,000
|
|
Automobile lease
|
|
|
|
|
|
|
27,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
224,000
|
|
|
|
958,000
|
|
Less: current portion
|
|
|
(102,000
|
)
|
|
|
(735,000
|
)
|
|
|
|
|
|
|
|
|
|
Capital lease obligations, net of
current portion
|
|
$
|
122,000
|
|
|
$
|
223,000
|
|
|
|
|
|
|
|
|
|
|
Future minimum payments under these leases are as follows:
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2006
|
|
$
|
115,000
|
|
2007
|
|
|
90,000
|
|
2008
|
|
|
30,000
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
235,000
|
|
Amounts representing interest
|
|
|
(11,000
|
)
|
|
|
|
|
|
Present value of minimum lease
payments
|
|
$
|
224,000
|
|
|
|
|
|
|