Open Solutions, Inc. Form 10-K

10-K 1 b53293ose10vk.htm OPEN SOLUTIONS, INC. FORM 10-K Open Solutions, Inc. Form 10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO

SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the fiscal year ended December 31, 2004

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period of to

Commission file number 000-02333

Open Solutions Inc.

(Exact name of registrant as specified in its charter)


Delaware		22-3173050
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

300 Winding Brook Drive, Glastonbury, CT (Address of principal executive offices)		06033 (Zip Code)

(860) 652-3155

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.01 par value per share

(Title of Class)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). þ

Aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the last sale price for such stock on June 30, 2004: $476,100,415.

As of March 9, 2005, 19,475,290 shares of common stock, $0.01 par value per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE


		Form 10-K
Document Description		Part

Portions of the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held May 19, 2005		III

INDEX


		Page

Special Note Regarding Forward-Looking Statements			1
PART I
Item 1.	Business		2
Item 2.	Properties		17
Item 3.	Legal Proceedings		17
Item 4.	Submission of Matters to a Vote of Security Holders		17
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		18
Item 6.	Selected Financial Data		19
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 7A.	Quantitative and Qualitative Disclosure about Market Risk		46
Item 8.	Financial Statements and Supplementary Data		47
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		47
Item 9A.	Controls and Procedures		47
Item 9B.	Other Information		48
PART III
Item 10.	Directors and Executive Officers of the Registrant		48
Item 11.	Executive Compensation		49
Item 12.	Security Ownership of Certain Beneficial Owners and Management		49
Item 13.	Certain Relationships and Related Transactions		49
Item 14.	Principal Accounting Fees and Services		49
PART IV
Item 15.	Exhibits and Financial Statement Schedules		49
Signatures			51
Index to Consolidated Financial Statements			52
Ex-2.7 Asset Purchase Agreement
Ex-10.9 Form of Restricted Stock unit Agreement
Ex-10.14 Lease with Carl Foster
Ex-10.17 Compensatory Arrangements with Executive Officers
Ex-10.18 Compensatory Arrangements with Non-Employee Directors
Ex-21.1 List of Subsidiaries
Ex-23.1 Consent of PricewaterhouseCoopers LLP
Ex-31.1 Sect. 302 Certification of C.E.O.
Ex-31.2 Sect. 302 Certification of the C.F.O.
Ex-32.1 Section 906 Certification of the C.E.O.
Ex-32.2 Sect. 906 Certification of the C.F.O.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to the historical information, this Annual Report on Form 10-K contains or incorporates forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate and management’s beliefs and assumptions. In addition, other written or oral statements that constitute forward-looking statements may be made by or on our behalf. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. We have included important factors in the cautionary statements under the heading “Factors That May Affect Future Results” that we believe could cause our actual results to differ materially from the forward-looking statements we make. We do not intend to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I


Item 1.	*Business*

Overview

Open Solutions Inc. is a provider of software and services that allow financial institutions to compete and service their customers more effectively. We develop, market, license and support an enterprise-wide suite of software and services that performs a financial institution’s data processing and information management functions, including account, transaction, lending, operations, back office, client information and reporting. Our core software and our complementary products access and update real-time data stored in a single relational database, which is designed to deliver strategic benefits to financial institutions. Our software can be operated either by the financial institution internally, on an outsourced basis in one of our outsourcing centers or through an outsourcing center hosted by one of our resellers. We have historically targeted commercial banks and thrifts with assets under $20 billion and all credit unions. Our aggregate revenues increased from approximately $44.3 million in 2002 to approximately $63.9 million in 2003, and were approximately $107.2 million for the year ended December 31, 2004.

Our complementary products can be licensed to financial institutions separately or as part of our fully-integrated suite. When combined with our core software, these complementary products provide financial institutions with a suite of applications that operate efficiently and take advantage of the architecture of our core solution, limiting the need for software customization or middleware, which is software that allows two applications to interface. Our complementary products, which are fully integrated with our core, include business intelligence, customer relationship management, or CRM, check imaging, interactive voice response, Internet banking and cash management, general ledger and profitability, loan origination and check and item processing functions. We use an open and flexible software architecture to maximize a client’s flexibility with respect to different hardware configurations and third-party software applications that are commonly used by financial institutions, allowing our clients to select our complete suite or third-party products without incurring substantial additional implementation costs. Based on a design that is customer-centric, our software leverages an institution’s customer information through data mining (sorting through data to identify patterns and establish relationships) and collaborative filtering (the creation of recommendations for a customer based on data gathered on similar customers’ actions and preferences) and allows an institution to provide its customers with better service, improve customer retention and identify and pursue potential cross-selling opportunities.

In contrast to legacy systems, our technologies are fully integrated, open, flexible, customer-centric and efficient, permitting financial institutions to draw on and deliver consistent information quickly. Our technology allows our clients to access information from disparate sources and then analyze and distribute that information for use at the point of customer contact. We believe that our products and services enable our clients to reduce their overall core processing and operational costs and meet their strategic needs more effectively.

With the acquisition of the Payment Solutions Group of Datawest Solutions Inc, we have added products targeted at institutions beyond the traditional definition of a financial institution, but which nonetheless participate in the processing of retail financial transactions in North America and internationally. These include independent sales organizations, large merchants and non-bank transaction processors. We believe that the products sold by the Payments Solutions Group of Datawest allow these institutions to drive and manage their own network of ATM and point of service terminals, as well as connect to national and international transaction processing networks.

Open Solutions Inc. is headquartered in Glastonbury, Connecticut, and has other facilities in Connecticut, New York, Michigan, Georgia, Indiana, New Hampshire and Ontario and British Columbia, Canada. We were founded in 1992 and are incorporated in Delaware. We operate and manage our business as one reportable segment, the development and marketing of computer software and related services and operate primarily in two geographic areas, the United States of America and Canada. As of March 1, 2005, we had approximately 776 employees. Our common stock is quoted on the Nasdaq National Market under the symbol OPEN.

We are subject to the informational requirements of the Securities Exchange Act of 1934 and will file reports, proxy statements and other information with the Securities and Exchange Commission, or SEC. Such reports, proxy statements and other information, as well as the registration statement and the exhibits and schedules thereto, may be inspected, without charge, at the public reference facility maintained by the SEC at 450 Fifth Street, NW, Washington, D.C. 20549. Copies of such material may also be obtained from the Public Reference Section of the SEC at 450 Fifth Street, NW, Washington, D.C. 20549, at prescribed rates. You may obtain information on the operation of the SEC public reference room in Washington, D.C. by calling the SEC at 1-800-SEC-0330. Such materials can also be inspected on the SEC’s website at www.sec.gov.

We maintain a website with the address www.opensolutions.com. We are not including the information contained on our website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC. We have posted on our website a copy of our code of business conduct and ethics. In addition, we intend to disclose on our website any amendments to, or waivers from, our code of business conduct and ethics that are required to be publicly disclosed pursuant to rules of the SEC and the Nasdaq National Market.

Industry Background

Financial institutions have historically invested a significant amount of money in information technology systems. Technology research firm IDC estimates that banks, thrifts and credit unions in the United States spent approximately $42 billion on information technology during 2004 and expects spending to grow to over $52 billion by 2007. According to Thomson Financial Inc., a leading provider of industry information, there are approximately 19,460 commercial banks, thrifts and credit unions in the United States, approximately 19,400 of which have an asset base of under $20 billion.

We believe that these financial institutions, which have traditionally competed on the basis of personalized service, are facing increasing challenges to improve their operating efficiencies. These challenges include the entrance of non-traditional competitors, the compression of margins on traditional products, significant channel proliferation and the convergence of financial products into a single institution. Recent legislation has allowed non-traditional competitors, such as insurance companies and brokerage houses, to enter the market for traditional banking products. Because these competitors are able to subsidize traditional banking products with the revenues of other, higher-profit products, financial institutions have experienced lower margins, increasing the pressure to reduce costs while continuing to offer an increasing array of consumer products and services. At the same time, the cost and complexity of delivering these products and services has increased as the widespread introduction of new technology has forced financial institutions to expand their distribution channels to include ATMs, telephone banking, Internet banking and wireless devices. Legislative changes have also accelerated the ability of financial institutions to offer wider ranges of products and services to their customers. To distinguish themselves from competitors in this more competitive environment, banks and credit unions must accurately define and understand their specific markets, and be able to launch relevant products and services to those markets over tailored delivery channels. These challenges are forcing financial institutions to examine how to conduct their business and service their customers most efficiently.

Financial institutions have traditionally fulfilled their information technology needs through legacy computer systems, operated either by the institution itself or through an outsourcing center. Legacy systems, which operate in large mainframe or minicomputer environments, are generally highly proprietary, inflexible and costly to operate and maintain. Legacy systems often require financial institutions to purchase a specific vendor’s hardware and software, requiring them to conform evolving business processes and reporting needs to the architecture of the legacy systems, and preventing them from adopting new technologies or launching new products on a cost-effective and timely basis. Most legacy systems employed by commercial banks are designed primarily to batch process a large number of transactions and create centralized financial records, limiting the ability of these banks to offer their customers real-time transaction processing. On the other hand, most legacy systems employed by credit unions are designed for real-time transaction processing, but they

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:


	•	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,

	•	deliver new products and services to their customers quickly and efficiently without extensive custom development,

	•	integrate easily with other applications used in the enterprise (whether on an in-house or an outsourced basis) without expensive middleware,

	•	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,

	•	allow real-time access to customer data while preserving the financial institution’s ability to batch process large transactions, and

	•	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.

We believe that a technology solution must meet all of these requirements to enable financial institutions to achieve a competitive advantage in their markets through improved customer service, competitive product offerings and lower costs. In addition, financial institutions are required by federal law to evaluate the effectiveness of their information technology systems periodically. This obligation, together with significant upgrades and phase-outs of certain hardware by hardware providers, creates an ongoing need for institutions to evaluate replacement of their information technology systems.

These requirements can be met by information technology systems based on open, industry-standard operating environments and relational databases. Relational and real-time technology can improve information sharing by providing access at each desktop to critical customer and transaction data and business applications, which is restricted or difficult to access in legacy environments. This technology also enables organizations to streamline business practices and reporting to make faster, more informed decisions. Because this technology is based on an open architecture, it is easily scalable by upgrading the server or linking multiple servers. In addition, this open model offers flexibility in that additional functionality can easily be provided through third-party applications. Furthermore, the costs of maintaining a legacy system, which include the costs of upgrading both legacy system software and hardware, are generally greater over time than the costs associated with newer technology.

Our Solution

Our core software product is a fully-integrated, open, flexible, customer-centric solution that enables financial institutions to service their customers more efficiently and effectively. Our core software operates in Microsoft, UNIX and LINUX environments using an Oracle relational database, supplemented by a suite of complementary software applications, which are fully integrated with our core technology and can also be used with any other vendor’s core software. We also offer our clients a comprehensive set of support services.

The key attributes of our solution are its:


	*Full Integration at the Core Level*


	•	Fully-Integrated Information Technology. Our core software supports all of a financial institution’s principal data processing requirements using a single relational database designed as an integral component of the system architecture. Our fully-integrated software suite allows our clients to replace their highly proprietary, inflexible and costly legacy systems, which generally contain many disparate software applications, multiple databases and cumbersome and expensive middleware, with one integrated software application based on a single database architecture.


	*Open Architecture*


	•	Compatibility With Varied Non-Proprietary Hardware. Because our core system was designed with an open architecture, our clients can run our software on desktop and server hardware supplied by a wide array of vendors, including Hewlett-Packard Company, IBM Corp., Dell Computer Corporation, Sun Microsystems, Inc. and Unisys Corporation. In contrast, legacy systems often require the financial institution to purchase vendor-specific hardware, a vendor’s core software product and vendor-specific complementary products, each of which must be customized to interface with a decades-old legacy system, imposing significant cost burdens, both in cash outlay and manpower.

	•	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.

	•	Scalability. Although most of our current clients have an asset base under $20 billion, our open architecture is designed to accommodate the needs of larger financial institutions, and to provide our clients the ability to continue to use our solution as they grow. In May and June 2002 we performed a three-week performance test and benchmark of our core software, the results of which demonstrated that our solution can meet the processing requirements of an institution with $40 billion in assets and four million accounts. The scalability of our architecture enables us to manage unexpected increases in clients’ processing volumes as well as support the growth of our clients’ businesses.


	*Flexibility*


	•	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.

	•	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.


	*Customer-Centric Architecture*


	•	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.

	•	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.


	*Efficiency*


	•	Cost Savings. We believe that our software reduces the overall cost of a financial institution’s information technology and allows our clients to meet their strategic goals more efficiently. The hardware required by a legacy system is expensive to obtain and costly to keep to current specifications while the pool of expertise with older systems is constantly shrinking. In contrast, our core system can run on hardware provided by many different vendors. Because our core software is fully integrated with our complementary products and supports third-party products, development and implementation costs for an institution’s information systems based on our software are lower than those for an institution which must modify its core software and obtain costly proprietary products for each new function. Our open architecture and flexibility allow our clients to modify their information systems requirements quickly and easily, without incurring the significant costs associated with supporting several disparate software applications. Our single relational database allows our clients to organize their data around individual customers, use our business intelligence tools to analyze and manage that data in the most efficient manner and launch new products and services desired by their customers in a cost-effective manner. In addition, because our software is based on widely adopted technologies, a financial institution using it requires less specialized expertise, which allows the institution to achieve greater operational efficiencies.

Business Strategy

Our objective is to be the leading supplier of software and services to our targeted market. Our strategy for achieving this objective is to:


	•	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.

	•	Expand Our Sources of Recurring Revenue. We generate recurring revenue through outsourcing and maintenance services. We currently host applications for approximately 535 financial institutions in our outsourcing centers and intend to continue to enhance this service, which we believe is an attractive solution for many of our targeted clients. Our outsourcing centers serve clients using our core software and clients using one or more of our Internet banking, ATM, cView, check imaging, cash management, collections, automated clearing house, or ACH, processing and check and item processing products. In

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.

• Expand Our Client Base by Licensing Our Core Software through Third-Party Outsourcing Centers. Approximately 172 financial institutions use our core software application at two reseller outsourcing centers, one operated by BISYS, Inc., a major national outsourcing center, and the other operated by Connecticut On-Line Computer Center, Inc., or COCC, a major regional outsourcing center. A number of financial institutions outsource their core processing systems to third-party outsourcing centers such as these, which typically choose one or more significant core software products to provide their services. We plan to work with our existing resellers to add new clients, and have recently expanded our relationship with BISYS for this purpose. We also plan to supplement these resellers with other national and regional outsourcing centers.

• Provide Additional Products and Services to Our Installed Client Base. We intend to continue to leverage our installed client base by expanding the range of complementary products and services available to our current clients, through both the internal development of new products and services and through acquisitions. In addition, each client has an account manager who recommends complementary products suitable for the client’s business and works with our sales group to generate sales. We also intend to continue selling our complementary products to financial institutions that use core systems sold by third parties.

• Maintain Technological Leadership. We believe that the uniqueness of the open, flexible architecture of our system provides us with competitive advantages over companies offering other core processing systems. For example, our core software suite can satisfy the technological requirements of a commercial bank, thrift or credit union without modification or customization. We recently announced the commercial release of our web-based business intelligence suite, which allows a financial institution to transmit action messages and collect response information instantaneously while a customer conducts a transaction. Our open architecture enables us to utilize leading, non-proprietary software and hardware to provide comprehensive functionality. We intend to extend our technological leadership by continuing to add new applications, integrate new technologies and expand the functionality of our system.

• Extend Target Markets. Our primary market currently consists of small to mid-size commercial banks and thrifts and all credit unions, located in the United States. We believe that our core software has benefits beyond this market, and can scale to meet the operating requirements of any financial institution. We continue to explore additional ways to extend our target markets, including by selling our products and services to larger financial institutions and international financial institutions. We also plan to market and sell our products and services to clients in the payroll services, insurance and brokerage industries.


	•	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:


Date	Seller	Products and Services

June 2000	Global Payment Systems LLC	Web-based cash management system
August 2001	Sound Software Development, Inc.	Loan and mortgage origination product
December 2001	Imagic Corporation	Check imaging product
March and October 2002	HNC Financial Solutions, Inc. and HNC Software, Inc.	General ledger, profitability and other financial products
July 2003	Liberty FiTech Systems, Inc.	Core processing software for credit unions
February 2004	Maxxar Corporation	Interactive voice response, contact center management and voice over IP
June 2004	Eastpoint Technologies, LLC	Core processing software for banks
July 2004	re:Member Data Services, Inc.	Core processing software for credit unions
July 2004	Omega Systems of North America LLC	Document processing product
October 2004	Datawest Solutions Inc.	Core processing software for credit unions and software for payment processing in Canada and internationally

Technology

We design our software to integrate with other products, to allow individual customer data to be easily accessible at all times, and to be able to deliver strategic benefits to financial institutions at a lower cost. We released our initial product in 1995, at a time when technical advancements such as distributed computing, browser-based applications and standards for integrating disparate applications were becoming commonly adopted in the marketplace. To take advantage of these technical developments, we created an open product architecture to maximize a client’s flexibility with respect to both hardware options and integration with other software applications. In addition, we sought to design a single platform that could service all financial institutions, including commercial banks, thrifts and credit unions. We d3also understood the difficulties financial institutions face in retrieving timely, accurate information with respect to their customers, and therefore designed our software with a single relational database as its integral component, placing an emphasis on access to customer information rather than account data. By creating a core processing solution that is open and customer-centric, we believe we have minimized the need for financial institutions to purchase costly middleware and additional databases to perform the tasks that our products achieve with only one software application and a single database.

Our core software application offers the following benefits:


	•	an open architecture that permits full integration with third-party hardware and software and emerging technologies,

	•	flexible functionality, scalability and high performance, and

	•	a highly relational database designed around customer information.

We believe that our software provides these benefits through an open architecture that utilizes a relational database, as well as leading graphical user interfaces and report generation tools. Our software operates in an open systems environment, does not require any proprietary hardware components and is currently deployed on a wide range of client and server platforms. Our open architecture also permits our software to interface with a broad range of third-party applications and peripherals that are commonly used in banks and credit unions.

We implement our flexible solution through application modules, each of which performs a specific core processing function. All of our modules share and are able to access the data in a single relational database, allowing for consistency of data throughout our product suite. Through database normalization, data is organized in tables that are easily accessible through a variety of query tools as well as through the application modules. In contrast to legacy systems, our architecture allows a financial institution to capture an unlimited amount of data regarding each of its customers without requiring additional software or support. As a result, a higher degree of independence between a client’s business processes and underlying data is achieved and the solution is more scalable and adaptable to changing business needs. New application modules may be developed or existing modules may be altered as required without having to change the underlying data model.

Our software utilizes a single, enterprise-wide relational database model, as opposed to a distributed database in which data is spread among two or more components, and typically resides on different computers. The principal benefits of an architecture using a single enterprise-wide relational database is that it virtually eliminates the introduction of redundant data and permits real-time processing so that, for example, transactions are immediately reflected in a bank or credit union customer’s account. This contrasts with a batch processing approach in which all accounts are updated at scheduled intervals, typically at the end of the business day. Our software may also be configured to operate in a hybrid memo batch/ real time mode for those banks or credit unions that prefer to operate using the workflow model.

Our payments processing software is designed to run on a scaleable cluster of small processors. This flexible architecture allows these solutions to be viable for very small institutions but also for extremely large transaction processing organizations, like our own payments processor in Canada, POSHnet, which operates the largest network of ATMs in Canada entirely using our own software products. These switching systems operate on a continuous, 24/7 basis and use industry standard and operating system capabilities to deliver ultra-high availability and transaction reliability. We believe that our customers benefit from the ease of use and scalability of the payments processing software.

Products and Services

We offer core software as well as several complementary products that may be purchased with our core solution or separately. The open and flexible architecture of our core solution is designed to provide our clients with the maximum array of options for complementary applications. While all of our products function independently of each other, financial institutions which use our entire software suite benefit from our fully-integrated platform and the ability to obtain comprehensive real-time information on all of their customers.


	*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 platform that provides a comprehensive real-time open architecture system capable of managing all of a financial institution’s core processing requirements. Our core software permits the financial institution and its customers to view their transactions immediately, whether the transactions occur over the telephone, on the Internet, at the ATM, inside the financial institution or at an external debit location.

We believe that our core software is less expensive to install and maintain than most legacy systems. It can be easily integrated with third party applications or our own complementary products to provide a comprehensive solution that can immediately retrieve valuable customer information for specifically targeting customers with cross-selling or up-selling opportunities.

Some of the key features of our core software include:


	•	customer-centric system,

	•	real-time customer touch-point integration,

	•	integrated real-time and/or batch processing,

	•	comprehensive lending and deposit processing,

	•	forms integration (including signature and photo storage),

	•	customizable web-based reporting,

	•	comprehensive teller/ customer service applications,

	•	commercial institution functionality,

	•	institution and branch operations,

	•	direct payroll processing, and

	•	product delivery manager.

The features of our core software offer a comprehensive real-time view of each customer relationship, which enables our clients to provide better customer service by having a complete customer profile available to tellers and officers instantaneously.


	*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:


	•	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.

	•	Activity Manager. Application that allows the financial institution to track and manage the activities of its customers and prospects.

	•	My Vision. Access point for cView applications, intranet communications and access to relevant documents, messages and Internet links.

	•	Report Wizard. Query and report writing tool, which allows users to simplify views of complex database table design, effectively collapsing multiple tables into one.

	•	Market Vision. Customer data warehouse designed to permit financial institutions to learn about their customers, prospects, products and business lines so they can make sound business decisions and create effective marketing plans.

Each component of the cView suite is integrated with the other components, as well as with our core software, allowing clients to focus on the implementation of CRM strategies rather than the support and maintenance of separate software applications.

Channel Management Center. Channel Management Center is a suite of applications and services designed to facilitate the building and processing of interfaces between disparate systems. Channel Management Center is designed to act as a translator between core, business and delivery systems and to centralize the collection and movement of information throughout the financial institution, eliminating the need for multiple types of middleware services.

eCommerce Banker — Consumer and eCommerce Banker — Business. Our eCommerce Banker suite provides clients with Internet banking and cash management tools for commercial and retail customers. The modules permit a financial institution to choose from a wide menu of financial services that may be provided to either individuals or businesses, including:


	•	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.

	•	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.

	•	Funds Transfer. Customers can transfer funds among accounts and establish real-time electronic bill payment.

	•	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.

	•	Bill Payment. Customers can pay bills electronically 24 hours a day, seven days a week and can establish future and recurring payments.

	•	Secure Messaging. Customers can communicate with a financial institution through secure encrypted message systems.

	•	Additional Features. Customers can reorder paper checks, request an account statement or contact financial institution personnel by e-mail.

Our Internet banking application supports the open financial exchange, or OFX standard, which enables the system to interface to financial institution services that use a variety of devices to originate customer transactions. These administrative components include the ability for financial institutions’ customers and potential customers to submit account applications in a secure environment. Also, financial institutions can automatically generate e-mail responses to customer applications, update product interest rates and terms and receive customer-specific marketing and data analysis.

Check Imaging. This software application enables our clients to create and store digital check images for inclusion in monthly statements and to facilitate their customer support services. This product suite includes item/ image capture, document imaging/ computer output to laser disc, or COLD, signature verification, electronic statements, full-service check and item processing and managed services. This product is designed to comply with federal legislation known as The Check Clearing For The 21st Century Act, commonly known as Check 21, and to be compatible with the Federal Reserve’s FedImage Platform. These features are important because when financial institutions exchange checks electronically rather than physically as the legislation will require, they will seek Check 21 compliant solutions. The product is also designed to be web-enabled, to eliminate a large portion of entry keying, and together with remote branch capture, to assist our clients in centralizing electronic image storage. Our clients can choose to purchase these products on an in-house, serviced or managed services basis.

Loan Origination. Our loan origination technologies are designed to provide full-service loan origination processing. Because no two lenders transact business in exactly the same manner, our loan origination

products can also be adapted to suit a financial institution’s specific needs. Our software suite provides integrated systems for mortgage, consumer and commercial lending:


	•	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.

	•	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.

	•	The Sound Commercial Loan Documenter provides commercial loan management from the creation of commitment/ proposal letters to the final production and tracking of complete document packages for any small-business to middle-market loan, including commercial and industrial, or C&I, commercial real estate and construction and Small Business Administration loans.

Financial Products. Our financial accounting software suite is designed to provide fully-integrated back-office financial management technology to financial institutions, including general ledger, accounts payable and fixed assets. In addition, we offer strategic financial management tools such as asset/ liability management, profitability and financial planning:


	•	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.

	•	Asset/Liability Management and Financial Planning System. Our asset/ liability management and financial planning system provides analytical, budgeting and strategic planning software to enable financial institutions to better comprehend the factors driving their profitability. This software is designed to provide a financial institution with the ability to analyze the institution’s balance sheet in order to determine market value and risk, helping to ensure preservation of capital.

	•	ProfitVision. ProfitVision analyzes profitability at any level of the organization. It is designed to generate profit results and value indicators that reveal the contributors to an institution’s bottom line. It can also be used to segment and profile valuable customers and determine which products, business units and channels are top performers.

Interactive Voice Solutions. Our interactive voice solutions, which we obtained through the acquisition of Maxxar Corporation on February 24, 2004, are designed to provide financial institutions with products that enhance productivity, strengthen customer services and reduce overall operational costs.


	•	Interactive Voice Response. Our interactive voice response solution provides a financial institution’s customer with round the clock access to their financial information and the ability to complete account transactions such as transferring funds, applying for loans, and accessing information about products and services. The product supports both touch-tone keypad response or natural language speech recognition.

	•	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.


	•	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.


	*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 (Point of Sale Handler). POSH provides customers with the functionality needed for point of sale terminals, or equivalent devices, at retail sites for credit and debit transactions. POSH also provides the capability to operate and manage the customer relationships with merchants and partners in the POS marketplace as well as manage the financial reconciliation and settlement of transaction value and fees. The functionality includes:


	•	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.

	•	Data Security. All mandated processing relating to the security of cardholder information and PINs is included in POSH.

	•	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.

	•	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.

	•	POSHweb. A variety of integrated information services are available over the public world-wide web, subject to security controls. These include: report distribution, financial and transaction history, cash positions, monitoring status, history, and statistics, and news alerts.

ConCentre Application Monitoring. ConCentre is a comprehensive software tool designed to detect and manage errors and unusual events in a complex system processing environment such (as but not limited to) a large ATM network. Customers use Concentre to manage the alerts and faults in their network by improving service availability, track and enforce service level agreements, manage support personnel efficiently and use pre-emptive remediation techniques which allow for the automated correction of real-time errors. ConCentre functionality includes:


	•	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.

	•	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.

	•	Behavioral Analysis . The TRAFC component of ConCentre is designed to observe transactional activity and detect patterns of unusual or suspicious behavior. This service is particularly useful when monitoring dial-up POS terminals and can be beneficial in detecting errors outside of the range of the customer’s own environment. It is also helpful in detecting signs of fraudulent activity.


	*Outsourcing Services*

We have the capability to host a client’s data processing functions at our outsourcing centers, giving the client the benefit of our products and services without having to maintain personnel to develop, update and run

these systems and without having to make large initial expenditures. Our outsourcing centers currently host applications for 535 financial institutions, including clients who use our core software and clients who use one or more of our Internet banking, ATM, cView, check imaging, cash management, collections, ACH processing, payments processing and check and item processing products. Our payments processing services operate over 18,000 terminal devices for over 180 Independent Sales Organizations.


	*Training, Maintenance and Support Services*

Installation and Training. We provide comprehensive installation and training services in connection with the purchase of in-house systems and for new outsourcing center clients. The complete installation process of a core system typically includes planning, design, data conversion and testing.

Both in connection with installation of new systems and on an ongoing basis, our clients need, and we provide, extensive training services and programs related to our products and services. Training can be provided in our training centers, at meetings and conferences or onsite at our clients’ locations, and can be customized to meet our clients’ requirements. The large majority of our clients acquire additional training services, both to improve their employees’ proficiency and productivity and to make full use of the functionality of our systems.

Professional Services. Our professional service organization provides services on a contract basis such as operational reviews, which leverage the best practices of our clients to improve operational efficiency and effectiveness across our entire client base.

Support Services. We provide immediate telephone response service during normal working hours and on-call support 24 hours a day, seven days a week for all components of our solution. In addition, we offer remote product support services whereby our support team directly connects in a secure environment to our client’s server to troubleshoot or perform routine maintenance.

Clients

We serve financial institutions of all sizes, however, the majority of our clients are commercial banks and thrifts with under $20 billion of assets and credit unions of all sizes. The majority of our clients are located in the United States and Canada, although we also have clients in several other foreign countries. As of December 31, 2004, approximately 2,780 financial institutions were using one or more of our products. One customer, Bisys, Inc., accounted for 11.7% of total revenues for the fiscal year ended December 31, 2004. No client accounted for more than 10% of our revenues in the fiscal years ended December 31, 2003 or 2002.

Sales and Marketing

We have established a multi-channel distribution and sales network. We sell and license our products directly to end-users through our direct sales force and indirectly through resellers, including third-party outsourcing centers. In addition, we support our direct and indirect sales efforts through strategic marketing relationships and public relations programs, trade shows and other marketing activities. We operate primarily in two geographical areas, the United States and Canada.


	*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, 2005, our direct sales force was comprised of 46 salespersons, 17 of which were selling our core software, 23 of which were selling our complementary products and 6 of which were selling our payments products. In addition, our sales group is complemented by application specialists, all of whom have extensive experience in banking technology and provide pre-sales support to potential clients on product information and deployment capabilities. Each client is also assigned an account manager who is that client’s primary contact at Open Solutions, recommends complementary products suitable for that client’s business and works with our sales group to generate sales. Our sales group for core software is focused in two distinct areas; the banking industry

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 and COCC. Under our agreements with these strategic marketing partners, we receive license fees based on the asset size of the financial institution using our applications.

BISYS has the right to provide outsourcing services using our The Complete Banking Solution software to banks in the United States. Under the amended agreement, BISYS has also agreed to pay us minimum license fees and must achieve minimum sales requirements, as well as pay us annual maintenance fees for each of their clients that uses one or more of our products or services. In exchange, we have agreed not to compete with BISYS for the provision of outsourcing services to banks in the United States through September 2005 and thereafter (so long as BISYS continues to pay us the required minimum fees and meet the required minimum sales), and we have agreed not to enter into similar reseller agreements with any one of six named competitors of BISYS before March 1, 2005. Our agreement with COCC provides it with the right to provide services using our The Complete Banking Solution software to banks in ten states, primarily in the northeastern and mid-Atlantic United States. In February 2004, we entered into an expanded agreement with COCC, which provides for the license and resale of our e-Commerce Banker suite of electronic banking and cash management products operated from their data center. This agreement was amended in December 2004 and granted COCC the right to additional TCBS modules and ancillary products. The amended agreement has a term of ten years, with an option to renew for another five years at COCC’s option. In addition, COCC will pay us non-refundable minimum license fees related to the achievement of certain minimum sales requirements for both unit sales and license fees.

During the fiscal year ended December 31, 2004, BISYS represented approximately $12.5 million, or 11.7%, of our total revenues, and COCC represented approximately $2.0 million, or 1.9%, of our total revenues. During the fiscal year ended December 31, 2003, BISYS represented approximately $5.8 million, or 9.1%, of our total revenues, and COCC represented approximately $1.5 million, or 2.4%, of our total revenues. During the fiscal year ended December 31, 2002, BISYS represented approximately $2.9 million, or 6.5%, of our total revenues, and COCC represented approximately $1.3 million, or 2.9%, of our total revenues.


	*Marketing*

Our marketing program includes:


	•	direct mail,

	•	telemarketing,

	•	hosting an annual client conference,

	•	advertising in banking and credit union trade journals and periodicals,

	•	publishing articles and editorials,

	•	speaking engagements, and

	•	participating in seminars and trade shows.

Product Development

We plan to continue to invest significant resources to maintain and enhance our current product and service offerings, and we are continually developing new products that complement these offerings. For the years ended December 31, 2004, 2003 and 2002, product development expenses were $11.0 million, $6.8 million and $6.2 million, respectively. We have historically released two upgrades of existing products each year, and, since the beginning of fiscal year 2002, we have introduced a collections system, a safe deposit box system, a web-based business intelligence suite, a web-based imaging system and tools to facilitate the building and processing of interfaces between disparate systems, as well as several smaller modules. The collections system and safe deposit box system were market-driven additions to our core software suite. The business intelligence, web-based imaging systems and the interface tools were designed to exploit the uniqueness of our core architecture, but as with all of our complementary products, they work with other core solutions. We have several new products under development and plan to sell them to both our existing client base and new clients. Our clients also regularly advise us of new products and functionalities that they desire, which we take into account with respect to planning our research and development operations. As of March 1, 2005, we employed a staff of 132 development employees.

Competition

The financial services software market is intensely competitive and subject to technological change. Competitors vary in size and in the scope and breadth of products and services offered. We encounter competition in the United States from a number of companies including Fiserv, Inc., Jack Henry & Associates, Inc., Fidelity National Financial Corporation and John H. Harland Company. We also compete against a number of smaller, regional competitors, as well as vendors of products that compete with one or more of our complementary products. Many of our current competitors have longer operating histories, larger client bases and greater financial resources than we do. In general, we compete on the basis of product architecture and functionality, service and support, including the range and quality of technical support, installation and training services, and product pricing in relation to performance and support.

Intellectual Property and Other Proprietary Rights

We rely primarily on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary rights. We seek to protect our software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. Our license agreements contain provisions which limit the number of users, state that title remains with Open Solutions and protect confidentiality. We presently have no patents or patent applications pending.

Open Solutions Inc., The Complete Banking Solution, The Complete Credit Union Solution, Bank-on-it and We Move Money are registered trademarks, and eCommerce Banker and eCommerce Mart are trademarks of ours. Open Solutions Inc. is also a service mark of ours. All other trade names and trademarks referred to in this Annual Report on Form 10-K are the property of their respective owners.

Employees

As of March 1, 2005, we had a total of 776 employees. Approximately 33 employees in Canada are unionized and subject to a collective bargaining agreement which expired on February 28, 2003. We are currently negotiating a new collective bargaining agreement. We have not experienced any work stoppages and believe that our relations with our employees are good.

Infrastructure

Our communications and network equipment is located in our corporate headquarters in Glastonbury, Connecticut and other offices throughout the United States and Canada. We have preventive maintenance and disaster recovery plans, which include periodic equipment, software and disaster recovery testing, data monitoring and maintaining records of system errors. We have 24-hour monitoring and engineering support

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.


Item 2.	*Properties*

Our operations are currently conducted at the leased facilities described below. In 2005, we will move our executive offices to another leased facility in Glastonbury, Connecticut. The new facility is approximately 46,000 square feet and that lease expires in 2012.


					Lease
			Approximate		Expiration
Location	Operations Conducted		Square Feet		Date

Glastonbury, Connecticut		Executive offices		12,000		2005
Glastonbury, Connecticut		Executive offices		30,000		2005
Windsor Locks, Connecticut		Item processing center		5,000		2010
Shelton, Connecticut		Sales office		4,000		2006
Atlanta, Georgia		Support and data processing center		21,000		2008
Marietta, Georgia		Sales office		6,000		2006
Dryden, New York		Sales office		1,000		2007
Whitesboro, New York		Item processing center		2,000		2007
Indianapolis, Indiana		Support and data processing center		60,000		2010
Wixom, Michigan		Sales office		12,000		2007
Bedford, New Hampshire		Sales office		14,000		2006
Vancouver, British Columbia		Canadian executive offices		6,000		2005
Vancouver, British Columbia		Support and data processing center		29,000		2007
Missassauga, Ontario		Development office		2,000		2005
Oakville, Ontario		Payment processing center		30,000		2009


Item 3.	*Legal Proceedings*

We are from time to time a party to legal proceedings which arise in the normal course of business. We are not currently involved in any material litigation, the outcome of which would, in management’s judgment based on information currently available, have a material adverse effect on our results of operations or financial condition, nor is management aware of any such litigation threatened against us.


Item 4.	*Submission of Matters to a Vote of Security Holders*

None

PART II


Item 5.	*Market for Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities*

Since November 26, 2003, our common stock has traded on the Nasdaq National Market under the symbol “OPEN.” On March 9, 2005, the closing sale price of our common stock was $20.95 per share. The following table sets forth the high and low sales prices per share of our common stock for the periods indicated as reported on the Nasdaq National Market.


	High		Low

November 26, 2003 (inception of trading) — December 31, 2003	$	19.78	$	15.65
First Quarter 2004	$	26.07	$	17.40
Second Quarter 2004	$	25.75	$	19.42
Third Quarter 2004	$	25.86	$	20.33
Fourth Quarter 2004	$	28.60	$	23.66

As of March 9, 2005, there were approximately 58 record holders of our common stock. This number does not include stockholders for whom shares are held in a “nominee” or “street” name.

We have never paid cash dividends. We currently intend to retain all future earnings, if any, for use in our business and we do not anticipate paying any cash dividends in the foreseeable future.

Initial Public Offering and Use of Proceeds from Sales of Registered Securities

On December 2, 2003, we completed an initial public offering of 5,750,000 shares of our common stock, par value $.01 per share, at a price to the public of $17.00 per share. The offer and sale of all of the shares in the IPO were registered under the Securities Act pursuant to a Registration Statement on Form S-1 (File No. 333-108293), which was declared effective by the Securities and Exchange Commission on November 25, 2003. After expenses, the net proceeds to us from the IPO were approximately $86.4 million.

In addition to the use of proceeds previously disclosed in our Form 10-K for the year ended December 31, 2003, during the year ended December 31, 2004, we spent $6.9 million, $21.9 million, $47.6 million, $6.8 million and $2.5 million on the purchase of all of the capital stock of Maxxar Corporation, re:Member Data Services, Inc. and Datawest Solutions Inc. and substantially all of the assets of Eastpoint Technologies, LLC and Omega Systems of North America LLC, respectively, which accounts for all of the net proceeds from the IPO. Payments of proceeds were to persons other than our directors or officers or their associates, persons owning 10% or more of our equity securities, or our affiliates.


Item 6.	*Selected Financial Data*

The selected financial data set forth below are derived from our audited financial statements. Since June 2000, we have acquired ten businesses, as more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. These acquisitions have significantly affected our revenues, results of operations and financial condition. The operating results of each business acquired have been included in our financial statements from the respective dates of acquisition.

The historical results presented below are not necessarily indicative of the results to be expected for any future period. The data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K.


			Year Ended December 31,

			2004		2003			2002			2001			2000

			(In thousands, except per share data)
Statement of Operations Data:
Revenues:
	Software license		$	33,032	$	21,391		$	13,449		$	9,971		$	8,595
	Service, maintenance and hardware			74,151		42,461			30,896			17,295			11,625

		Total revenues		107,183		63,852			44,345			27,266			20,220

Cost of revenues:
	Software license			6,705		5,341			3,152			1,592			2,165
	Service, maintenance and hardware			37,919		23,540			18,430			10,084			7,229

		Total cost of revenues		44,624		28,881			21,582			11,676			9,394

Operating expenses (including restricted stock expense and related taxes of $3,444 for the year ended December 31, 2003)				46,396		33,471			25,773			25,929			26,152

Income (loss) from operations				16,163		1,500			(3,010	)		(10,339	)		(15,326	)
Interest income and other, net				1,520		43			145			428			661

Income (loss) before income taxes				17,683		1,543			(2,865	)		(9,911	)		(14,665	)
Income tax (provision) benefit				7,441		(234	)		(32	)		250			—

Net income (loss)				25,124		1,309			(2,897	)		(9,661	)		(14,665	)
Preferred stock accretion charge				—		(31,500	)		—			—			—

Net income (loss) attributable to common stockholders			$	25,124	$	(30,191	)	$	(2,897	)	$	(9,661	)	$	(14,665	)

Net income (loss) per common share
	— Basic		$	1.37	$	(7.74	)	$	(1.18	)	$	(4.71	)	$	(7.42	)
	— Diluted			1.26		(7.74	)		(1.18	)		(4.71	)		(7.42	)
Weighted average common shares used to compute net income (loss) per common share
	— Basic			18,313		3,903			2,453			2,051			1,977
	— Diluted			19,896		3,903			2,453			2,051			1,977


	December 31,

	2004		2003		2002			2001			2000

	(In thousands, except per share data)
Balance Sheet Data:
Cash and cash equivalents	$	49,447	$	14,853	$	11,414		$	11,552		$	8,522
Working capital		59,084		73,305		1,486			3,261			5,051
Total assets		225,474		133,071		35,839			33,745			20,905
Long-term debt, current portion		1,239		—		750			748			—
Long-term debt, less current portion		1,736		—		700			—			—
Mandatorily redeemable convertible preferred stock		—		—		31,100			31,100			20,084
Redeemable convertible preferred stock		—		—		26,480			26,480			24,744
Stockholders’ equity (deficit)		178,313		105,419		(43,261	)		(40,699	)		(33,751	)


Item 7.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with, and are derived from, our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions, which could cause actual results to differ materially from management’s expectations. Important factors that could cause these differences include those described in “Factors That May Affect Future Results” and elsewhere in this Annual Report on Form 10-K.

We use the terms “Open Solutions,” “we,” “us” and “our” to refer to the business of Open Solutions Inc. and our subsidiaries. All references to years, unless otherwise noted, refer to our fiscal years, which end on December 31.

Overview

We are a provider of software and services that allow financial institutions to compete and service their customers more effectively. We develop, market, license and support an enterprise-wide suite of software and services that perform a financial institution’s data processing and information management functions, including account, transaction, lending, operations, back office, client information and reporting. Our complementary products and services supplement our core software to provide our clients with fully-integrated business intelligence, customer relationship management, or CRM, check imaging, Internet banking and cash management, general ledger and profitability, loan origination, interactive voice solutions and check and item processing functions. Our software can be operated either by the financial institution itself, on an outsourced basis in one of our outsourcing centers or through an outsourcing center hosted by one of our resellers. Substantially all of our historical revenue has been generated through the licensing of our core software and our complementary products and the provision of related services and maintenance to small and mid-size commercial banks and thrifts and credit unions of all sizes. In connection with our acquisition of Datawest Solutions Inc. in October 2004, we also derive revenue from payment processing services.

We derive revenues from two primary sources:


	•	sales of licenses for our core software and complementary products, and

	•	fees from installation, training, maintenance and support services, as well as fees generated from our outsourcing centers and the outsourcing centers hosted by our resellers.

Our revenues have grown from approximately $14.1 million in 1999 to approximately $107.2 million in 2004. This growth has resulted primarily from strategic acquisitions and internal expansion, through which we have developed and acquired new products and services and have expanded the number of clients using one or more of our products to approximately 2,780 financial institutions as of December 31, 2004.

Software license revenue includes fees received from the licensing of application software. We license our proprietary software products under standard agreements which typically provide our clients with a perpetual non-exclusive, non-transferable right to use the software for a single financial institution upon payment of a license fee. We also license certain third-party software products to end users.

We generate service and maintenance fees by converting clients to our core software suite, installing our software, assisting our clients in operating the applications, modifying and updating the software and providing outsourcing services. Our software license agreements typically provide for five years of support and maintenance. We perform outsourcing services through our outsourcing centers and our check and item processing centers. Revenues from outsourcing center services and the check and item processing centers are derived from monthly usage fees, typically under three to five-year service contracts with our clients.

We derive other revenues from hardware sales and client reimbursement of out-of-pocket and telecommunications costs. We have entered into agreements with several hardware manufacturers under which we sell computer hardware and related services, primarily to our check imaging clients. Client reimbursements represent direct costs paid to third parties primarily for data communication, postage and travel.

We expect that our revenues from installation, training, maintenance, support services, our outsourcing centers and the outsourcing centers hosted by our resellers will continue to expand as our base of clients expands. Our maintenance revenues are the largest of these revenue components, and we expect that these revenues, due to their recurring nature, will continue to be a significant portion of our total revenue as our client base grows.

In the fourth quarter of 2004, we have reversed the valuation allowance of $17.9 million against our deferred tax assets because we have determined that it is more likely than not that current and future net income will allow for the realization of these assets. As a result, we have recorded an income tax benefit directly related to the reversal of the valuation allowance of $8.6 million in the fourth quarter. The remainder of the valuation allowance reversal was primarily recorded as an increase to equity of $7.8 million. For subsequent periods, we anticipate recording a tax provision against income at our effective tax rate. However, we do not expect to incur significant federal tax payments until all anticipated net operating loss carry forwards are utilized. We continue to maintain a full valuation allowance on deferred tax assets related to Datawest Solutions Inc.

On March 10, 2005, we acquired the U.S.-based services to credit unions business of CGI-AMS Inc., a provider of core processing solutions for credit unions, for cash consideration of approximately $24.0 million. We believe this acquisition will increase our core data processing client base among credit unions and increase the recurring revenue component of our revenues.

Results of Operations


		Year Ended December 31,

		2004		2003			2002

		(In thousands)
Statement of Operations Data:
Revenues:
	Software license	$	33,032	$	21,391		$	13,449
	Service, maintenance and hardware		74,151		42,461			30,896

	Total revenues		107,183		63,852			44,345
Cost of revenues:
	Software license		6,705		5,341			3,152
	Service, maintenance and hardware		37,919		23,540			18,430

Total cost of revenues			44,624		28,881			21,582
Operating expenses:
	Sales and marketing		14,272		10,729			9,533
	Product development		11,001		6,854			6,223
	General and administrative (includes restricted stock expense and related taxes of $3,444 for the year ended December 31, 2003)		21,123		15,888			10,017

	Total operating expenses		46,396		33,471			25,773

Income (loss) from operations			16,163		1,500			(3,010	)
Interest income and other, net			1,520		43			145

Income (loss) before income taxes			17,683		1,543			(2,865	)
Income tax (provision) benefit			7,441		(234	)		(32	)

Net income (loss)		$	25,124	$	1,309		$	(2,897	)


		Year Ended December 31,

		2004		2003		2002

As a Percentage of Revenues:
Revenues:
	Software license		30.8		33.5		30.3
	Service, maintenance and hardware		69.2		66.5		69.7

	Total revenues		100.0		100.0		100.0


		Year Ended December 31,

		2004			2003			2002

Cost of revenues:
	Software license		6.3			8.4			7.1
	Service, maintenance and hardware		35.3			36.9			41.6

	Total cost of revenues		41.6			45.3			48.7
Operating expenses:
	Sales and marketing		13.3			16.8			21.5
	Product development		10.3			10.7			14.0
	General and administrative		19.7			24.9			22.6

	Total operating expenses		43.3			52.4			58.1

Income (loss) from operations			15.1			2.3			(6.8	)
Interest income and other, net			1.4			0.1			0.3

Net income (loss) before income taxes			16.5			2.4			(6.5	)

Income tax (provision) benefit			6.9			(0.4	)		(0.1

Net income (loss)			23.4	%		2.0	%		(6.6	)%


	*Year Ended December 31, 2004 Compared to Year Ended December 31, 2003*

Revenues. We generate revenues from licensing the rights to use our software products and certain third-party software products to clients. We also generate revenues from installation, training, maintenance and support services provided to clients, from outsourcing center services and from hardware sales related to our check imaging and telephony businesses. Revenues increased 67.9% from $63.9 million for the year ended December 31, 2003 to $107.2 million for the year ended December 31, 2004. This increase was attributable to a $11.6 million increase in licensing revenue from our core and complementary products attributable to sales to new clients, including those clients of our acquired entities, sales of additional products to existing clients and an increase in license fees from BISYS. Of the $11.6 million increase in licensing revenues, $3.1 million related to revenue from those acquisitions completed subsequent to January 1, 2004, which were Maxxar Corporation, Eastpoint Technologies, LLC, re:Member Data Services, Inc., Omega Systems of North America LLC and Datawest Solutions Inc, adjusted for the partial year impact of the Liberty FiTech Systems, Inc. business. The increase in revenues was also attributable to an increase of $7.1 million in our implementation and other professional services, $2.6 million of which was from acquired businesses. We also realized an increase of $10.2 million in our maintenance revenue, $6.5 million of which was from acquired businesses, and an increase of $12.9 million in our outsourcing revenues, $12.2 million of which was from acquired businesses. The increases in implementation, professional services and maintenance revenues were also directly related to the increase in sales of licenses to new clients and sales of additional products to existing clients. Additionally, revenues associated with hardware and other revenues increased by $1.6 million. The acquired businesses provided $1.8 million of hardware and other revenues.

Cost of Revenues. Cost of revenues increased 54.5% from $28.9 million for the year ended December 31, 2003 to $44.6 million for the year ended December 31, 2004. The increase was due primarily to a $4.1 million increase in costs associated with implementation and other professional services, $1.8 million of which is from the acquired businesses, a $3.1 million increase in costs associated with maintenance, $2.6 million of which was from the acquired businesses and a $6.2 million increase in costs associated with the growth of our outsourcing business, $5.4 million of which is from the acquired businesses. Cost of revenues represented 45.3% of revenues for the year ended December 31, 2003 as opposed to 41.6% of revenues for the year ended December 31, 2004. Cost of revenues increased on an absolute basis primarily as a result of the acquisitions completed since January 1, 2004, but also from increased third party license costs and costs of professional services associated with our revenue growth. Cost of revenues as a percentage of revenues

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 30, 2004 as opposed to 16.8% of revenues for the year ended December 30, 2003. Sales and marketing expenses as a percentage of revenues decreased because sales and marketing expenses did not increase proportionally to our revenue growth. In the event that we acquire product lines or businesses in the future, we would anticipate that, based on the nature and magnitude of those acquisitions, our sales and marketing expenses would increase as a result of those acquisitions.

Product Development. Product development expenses increased 60.5% from $6.9 million for the year ended December 31, 2003 to $11.0 million for the year ended December 31, 2004. This increase was due primarily to a $3.4 million increase in product development expenses from the acquired businesses. Product development expenses represented 10.7% of revenues for the year ended December 30, 2003 as opposed to 10.3% of revenues for the year ended December 30, 2004. Product development expenses as a percentage of revenues decreased primarily because our major product lines are largely developed and therefore did not require incremental investment. In the event that we acquire product lines or businesses in the future, we would anticipate that, based on the nature and magnitude of those acquisitions, our product development expenses would increase as a result of those acquisitions. As we increase our international operations, including the business acquired in the Datawest transaction, we expect to increase our product development expenses in order to modify our current product offerings to perform in non-U.S. banking systems.

General and Administrative. General and administrative expenses increased 32.9% from $15.9 million for the year ended December 31, 2003 to $21.1 million for the year ended December 31, 2004. The increase was due primarily to $5.3 million of expense from the acquired businesses, professional fees and other costs related to the requirements of being a public company, including the costs of compliance with Section 404 of Sarbanes-Oxley and capital based taxes of approximately $280,000, partially offset by a $3.4 million charge in 2003 related to the shares of restricted stock issued to certain employees as a result of our initial public offering. General and administrative expenses represented 24.9% of revenues for the year ended December 30, 2003 as opposed to 19.7% of revenues for the year ended December 30, 2004. In the event that we acquire product lines or businesses in the future, we would anticipate that, based on the nature and magnitude of those acquisitions, our general and administrative expenses would increase as a result of those acquisitions.

Interest Income and Other, net. Interest income and other, net, increased from $43,000 for the year ended December 30, 2003 to $1.5 million for the year ended December 31, 2004. This increase was due primarily to increased interest income from the investment of the proceeds of our initial public offering in the fourth quarter of 2003 and our follow-on public offering in the second quarter of 2004, as well as a foreign exchange gain of approximately $470,000 realized in the fourth quarter of 2004, partially offset by a loss on disposed equipment.

Income Tax (Benefit) Provision. Income tax benefit increased from a provision of $234,000 for the year ended December 31, 2003 to a U.S. tax benefit of $7.4 million for the year ended December 31, 2004. The increase was primarily the result of reversing our valuation allowance against our deferred tax assets in the fourth quarter of 2004. As a result, we have recorded an income tax benefit of $8.6 million in the fourth quarter directly related to the reversal of the valuation allowance. The remainder of the valuation allowance reversal was primarily recorded as an increase to equity of $7.8 million. For subsequent periods, we anticipate recording a tax provision against income at our effective tax rate.


	*Year Ended December 31, 2003 Compared to Year Ended December 31, 2002*

Revenues. Revenues increased 44.0% from $44.3 million for the year ended December 31, 2002 to $63.9 million for the year ended December 31, 2003. This increase was attributable primarily to a $6.9 million increase in licensing revenue from our core and complimentary products attributable to sales to new clients, cross sales to existing clients and an increase in license fees from BISYS. Of the increase of $6.9 million in our maintenance revenue, $1.7 million is from the Liberty FiTech Systems, Inc. business and of the $4.4 million increase in our outsourcing revenues, $2.5 million is from the Liberty FiTech Systems, Inc. business. The acquisition of Liberty FiTech Systems, Inc. on July 1, 2003 contributed an additional $2.7 million to revenues consisting primarily of license, service and hardware revenues for the year ended December 31, 2003.

Cost of Revenues. Cost of revenues increased 33.8% from $21.6 million for the year ended December 31, 2002 to $28.9 million for the year ended December 31, 2003. The increase was due primarily to a $2.1 million increase in costs associated with maintenance, $1.1 million of which is from the Liberty FiTech Systems, Inc. business and a $1.5 million increase in costs associated with the growth of our outsourcing business, $1.2 million of which is from the Liberty FiTech Systems, Inc. business.. The Liberty FiTech Systems, Inc. business contributed an additional $2.0 million of license, service and hardware costs. Cost of revenues represented 48.7% of revenues for the year ended December 31, 2002 as opposed to 45.3% of revenues for the year ended December 31, 2003. Cost of revenues as a percentage of revenues decreased primarily because our revenues grew at a faster rate than our costs. In addition, we experienced a decrease in sales of low-margin hardware during the period.


	Operating Expenses

Sales and Marketing. Sales and marketing expenses increased 12.5% from $9.5 million for the year ended December 31, 2002 to $10.7 million for the year ended December 31, 2003. This increase was due primarily to a incremental $1.0 million increase in sales and marketing expenses from owning the HNC business for a full year and owning Liberty FiTech Systems Inc. for six months in 2004. Sales and marketing expenses represented 21.5% of revenues for the year ended December 31, 2002 as opposed to 16.8% of revenues for the year ended December 31, 2003. Sales and marketing expenses as a percentage of revenues decreased primarily because we did not increase our sales or marketing expenses significantly, but revenues continued to grow.

Product Development. Product development expenses increased 10.1% from $6.2 million for the year ended December 31, 2002 to $6.9 million for the year ended December 31, 2003. This increase was due primarily to a $0.5 million increase in product development expenses from the Liberty FiTech Systems, Inc. business. Product development expenses represented 14.0% of revenues for the year ended December 31, 2002 as opposed to 10.7% of revenues for the year ended December 31, 2003. Product development expenses as a percentage of revenues decreased primarily because our major product lines are largely developed and therefore did not require incremental investment.

General and Administrative. General and administrative expenses increased 58.6% from $10.0 million for the year ended December 31, 2002 to $15.9 million for the year ended December 31, 2003. The increase was due primarily to a $3.4 million expense related to the shares of restricted stock issued to certain employees as a result of the initial public offering and $1.2 million of expense from the acquisition of the Liberty FiTech Systems, Inc. business. In addition, there was a $0.5 million increase in accounting and legal fees, due primarily to non-recurring expenses associated with preparing for our initial public offering and settling an outstanding litigation matter. General and administrative expenses represented 22.6% of revenues for the year ended December 31, 2002 as opposed to 24.9% of revenues for the year ended December 31, 2003. General and administrative expenses as a percentage of revenues increased primarily because of the restricted stock charge mentioned above.

Interest and Other Income (Expense), net. Interest and other income (expense), net, decreased from $145,000 for the year ended December 31, 2002 to $43,000 for the year ended December 31, 2003. This decrease was due primarily to increased interest payments because of the debt incurred as a result of the

acquisitions of Liberty FiTech Systems, Inc. and HNC Financial Solutions, as well as the draw down on our credit facility offset by interest earned on the investment of the proceeds of the initial public offering.

Income Tax Benefit (Provision). Income tax provision increased 631.3% from $32,000 for the year ended December 31, 2002 to $234,000 for the year ended December 31, 2003. The increase was primarily because of increased profitability resulting in higher state tax expense for states where the Company has no loss carryforward or where state net operating losses were temporary suspended and deferred tax expense related to the tax amortization of goodwill from the Liberty FiTech Systems Inc. acquisition.

Liquidity and Capital Resources

At December 31, 2004 and 2003, we had cash and cash equivalents totaling $49.4 million and $14.9 million, respectively.

The following table sets forth the elements of our cash flow statement for the following periods:


	Year Ended December 31,

	2004			2003			2002

	(In thousands)
Net cash provided by operating activities	$	19,767		$	10,069		$	2,702
Net cash used in investing activities		(22,201	)		(87,682	)		(2,280	)
Net cash provided by (used in) financing activities		37,024			81,052			(560	)


	*Cash from Operating Activities*

Cash provided by operations for the year ended December 31, 2004 was attributable to net income of $25.1 million, depreciation and amortization of $6.4 million partially offset by a deferred tax benefit of $8.1 million resulting primarily from the reversal of the valuation allowance and an increase in working capital of $4.3 million primarily due to an increase in accounts receivable. Cash provided by operations in the year ended December 31, 2003 was attributable to net income of $1.3 million, depreciation and amortization and other non-cash items, including restricted stock expense of $7.5 million and an increase in working capital of $1.2 million. Cash provided by operations for the year ended December 31, 2002 was attributable to a net loss of $2.9 million, depreciation and amortization and other non-cash items of $3.2 million and a decrease in working capital of $2.4 million primarily due to an increase in payments received from clients in advance of product and service delivery.


	*Cash from Investing Activities*

Cash from investing activities consists primarily of purchases of fixed assets, investments in marketable securities and business acquisitions. Total capital expenditures for the years ended December 31, 2004, 2003 and 2002 were $5.6 million, $1.5 million and $1.7 million, respectively, and were primarily related to the purchase of computer equipment, computer software, software development services, furniture and fixtures and leasehold improvements. T he increase in capital expenditures relates primarily to the implementation of a new enterprise software system and leasehold improvements at our new corporate lease facility. We currently have no significant capital spending or purchase commitments, but expect to continue to engage in capital spending in the ordinary course of business.

At December 31, 2004, we held $12.7 million in marketable securities. During the year ended December 31, 2004, we purchased $62.0 million of marketable securities and sold $127.4 million of marketable securities.

Additionally, net cash used in investing activities for the year ended December 31, 2004 included $82.0 million used for acquisitions. Net cash used in investing activities for the year ended December 31, 2003 included $8.0 million used for the acquisition of Liberty FiTech Systems, Inc. Net cash used in investing activities for acquisitions was $564,000 for the year ended December 31, 2002.


	*Cash from Financing Activities*

On May 17, 2004, we completed a follow-on offering of 4,436,442 shares of our common stock at a price of $21.50 per share. Of the 4,436,442 shares offered, 1,000,000 shares were offered by Open Solutions and 3,436,442 shares were offered by certain of our existing stockholders. On June 8, 2004, the underwriters exercised their option to purchase 665,466 additional shares of our common stock at a price of $21.50 per share. The aggregate net proceeds from the offering were $33.4 million.

During the year ended December 31, 2004, we also received approximately $3.9 million of proceeds from the exercise of stock options and $799,000 from the issuance of common stock in connection with our employee stock purchase program.

On December 2, 2003, we completed our initial public offering raising proceeds, net of expenses, of $86.4 million.

On February 2, 2005, we sold senior subordinated convertible notes due 2035, which we call the Notes, with an aggregate principal amount at maturity of $235 million to qualified institutional buyers pursuant to exemptions from the registration requirements of the Securities Act of 1933, afforded by Section 4(2) and Rule 144A. We also granted to the Note purchasers an option, which was exercised in full, to purchase additional Notes with an aggregate principal amount at maturity of $35 million. The issue price of the Notes was $533.56 per $1,000 principal amount at maturity of Notes, which resulted in aggregate gross proceeds to us of approximately $144.1 million. The Notes are our general unsecured obligations and are junior to any of our existing and future senior indebtedness. The Notes bear cash interest at a rate of 2.75% per year on the issue price until February 2, 2012. After that date, original issue discount will accrue on the Notes at a rate of 2.75% per year on a semi-annual bond equivalent basis. On the maturity date, a holder will receive $1,000 in cash per $1,000 principal amount at maturity of Notes. These notes do not include any financial covenants.

We currently anticipate that our current cash balance and cash flow from operations, including the proceeds from the convertible notes issued in February 2005, will be sufficient to meet our presently anticipated capital needs for the next twelve months, but may be insufficient to provide funds necessary for any future acquisitions we may make during that time. To the extent we require additional funds, whether for acquisitions or otherwise, we may seek additional equity or debt financing. Such financing may not be available to us on terms that are acceptable to us, if at all, and any equity financing may be dilutive to our stockholders. To the extent we obtain additional debt financing, our debt service obligations will increase and the relevant debt instruments may, among other things, impose additional restrictions on our operations, require us to comply with additional financial covenants or require us to pledge assets to secure our borrowings.

Off Balance Sheet Arrangements

We do not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which are typically established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Contractual Obligations as of December 31, 2004


	Payments Due by Period

			Less than						More than
Contractual Obligations	Total		1 Year		1-3 Years		3-5 Years		5 Years

Long-Term Debt to Customers	$	2,963,000	$	1,086,000	$	1,317,000	$	560,000	$	—
Capital Lease Obligations		1,034,000		788,000		211,000		35,000		—
Operating Leases		19,002,000		4,312,000		6,664,000		4,799,000		3,227,000

Total Contractual Obligations	$	22,999,000	$	6,186,000	$	8,192,000	$	5,394,000	$	3,227,000

In February 2004, we sold senior subordinated convertible notes due 2035 with an aggregate principal amount at maturity of $270 million. These notes are not included in the above table.

Income Taxes

In the fourth quarter of 2004, we reversed the valuation allowance of $17.9 million against our deferred tax assets because we determined that it is more likely than not that current and future net income will allow for the realization of these assets. As a result, we recorded an income tax benefit of $8.6 million in the fourth quarter directly related to the reversal of the valuation allowance. The remainder of the valuation allowance reversal was primarily recorded as an increase to equity of $7.8 million. For subsequent periods, we anticipate recording a tax provision against income at our effective tax rate. However, we do not expect to incur significant federal tax payments until all anticipated net operating loss carry forwards are utilized. We continue to maintain a full valuation allowance on deferred tax assets related to Datawest Solutions Inc.

At December 31, 2004, the Company had approximately $49.5 million of federal net operating loss carryforwards that begin expiring in 2007, had approximately $36.4 million of state net operating loss carryforwards, which begin to expire in 2005 and had approximately $31.3 million of foreign net operating loss carryforwards, which begin to expire in 2007. At December 31, 2004, the Company had approximately $1.0 million of federal research and development credit carryforwards that begin to expire in 2007 and approximately $780,000 of state research and development carryforwards with an unlimited carryforward period.

As defined in Section 382 of the Internal Revenue Code, certain ownership changes limit the annual utilization of federal net operating losses and tax credit carry forwards. We experienced such an ownership change in 1995. The follow-on offering has resulted in a second ownership change. This limitation of the utilization of federal net operating losses imposed by Section 382 is applied annually and is equal to a published long term exempt rate multiplied by the aggregate fair value of the company immediately prior to the ownership change. This resulting limitation may also be increased by imputed tax deductions of certain intangibles resulting from built-in gains, as defined. We do not believe that the Section 382 limitation with respect to the 1995 ownership change nor the change that resulted from the follow-on offering will result in the loss of any net operating losses or tax credit carry forwards prior to their expiration. As a result of future issuance of, sales of, and other transactions involving our common stock, we may experience an ownership change in the future, which could cause such federal net operating losses and tax credit carryforwards to be subject to limitation under Section 382.

Acquisitions

Since August 2001, we have expanded our product offerings and client base through the acquisition of nine businesses. The operating results of each business acquired have been included in our financial statements from the respective dates of acquisition.

On August 3, 2001, we acquired Sound Software Development, Inc. for a purchase price of $3.0 million, consisting of $1.7 million in cash, 80,472 shares of our Series G preferred stock and 55,496 shares of our common stock. In conjunction with this acquisition, we incurred $113,000 of acquisition related costs. This acquisition was recorded under the purchase method with the total consideration allocated to the fair value of the assets acquired, including purchased technology of $832,000, goodwill of $1.6 million and other intangibles of $196,000. Additionally, we recorded a charge of $447,000 related to in-process research and development. This acquisition expanded our complementary product offering to include loan origination software and expanded our client base.

On December 14, 2001, we acquired Imagic Corporation for a purchase price of $4.2 million, consisting of $1.8 million in cash and 314,486 shares of our common stock. Our assumed liabilities included a note payable of $748,000 that was subsequently paid in full in January 2002. In conjunction with this acquisition, we incurred $120,000 of acquisition related costs. This acquisition was recorded under the purchase method with the total consideration allocated to the fair value of the assets acquired, including purchased technology

of $1.9 million, goodwill of $4.0 million and other intangibles of $80,000. This acquisition expanded our complementary product offering to include check imaging software and services and expanded our client base.

During 2002, we acquired business operations from HNC Financial Solutions, Inc. On March 29, 2002, we acquired certain intellectual property rights of HNC Financial Solutions, Inc. and assumed the related future software maintenance and support obligations in exchange for a $500,000 promissory note. This note was paid in full in December 2004 with the proceeds from the initial public offering. We concurrently entered into a license and service agreement with the seller for the HNC Profit Manager software in exchange for $564,000 in cash. In conjunction with this acquisition, we incurred $39,000 of acquisition related costs. This acquisition expanded our complementary product offering to include financial accounting, asset/ liability management and financial planning products, and expanded our client base and product offerings.

On October 31, 2002, we purchased the intellectual property rights that had been licensed in the March 2002 HNC Financial Solutions transaction, plus accounts receivable and related future software maintenance and support obligations for a $950,000 promissory note. This note was paid in full in December 2003 with the proceeds from the initial public offering. The combined transaction was recorded under the purchase method with the purchase price allocated to the fair value of the assets acquired, including purchased technology of $1.2 million and goodwill of $772,000. This acquisition expanded our financial product offering to include profitability analysis.

On July 1, 2003, we acquired substantially all of the assets of Liberty FiTech Systems, Inc. and assumed certain liabilities and the related future software maintenance and support obligations for consideration of $11.7 million, consisting of $8.0 million in cash, a $1.9 million promissory note and 133,195 shares of our common stock. The 133,195 shares of common stock issued to Liberty FiTech Systems, Inc. were subject to a put and call agreement, in which Liberty FiTech Systems, Inc. had the right to require us to purchase the shares at a price of $13.51 per share, and we had the right to require Liberty FiTech Systems, Inc. to sell these shares to us at a price of $13.51 per share. On September 3, 2003, FS Acquisition, Inc., the successor-in-interest to Liberty FiTech Systems, Inc., exercised its put right pursuant to this put and call agreement with respect to these shares. On December 2, 2003, we purchased these 133,195 shares at a price of $13.51 per share, or an aggregate of approximately $1.8 million. The note was paid in full in December 2003 with the proceeds from the initial public offering. The acquisition was recorded under the purchase method with the total consideration allocated to the fair value of assets acquired, including purchased technology of $530,000, goodwill of $4.8 million and other intangible assets of $6.7 million. We view this acquisition as an opportunity to increase our core data processing client base among credit unions and to increase the recurring revenue component of our revenues.

On February 24, 2004, we acquired Maxxar Corporation for cash consideration of approximately $6.5 million. Subsequent to the acquisition date, we paid an additional $190,000 as a contractual adjustment of the original purchase price. In connection with the acquisition, we incurred approximately $185,000 of acquisition related costs. This acquisition was recorded under the purchase method of accounting with the total consideration allocated to the fair value of assets acquired, including purchased technology of approximately $760,000 and other intangibles of approximately $700,000. The excess of the purchase price over the fair value of the net assets acquired of $4.3 million has been allocated to goodwill. This acquisition expanded our complementary product offerings to include a comprehensive suite of interactive voice information solutions and computer telephony integration products.

On June 18, 2004, we acquired substantially all of the outstanding operating assets and assumed certain liabilities of Eastpoint Technologies, LLC, a provider of core processing software and related services for banks, for cash consideration of approximately $7.0 million. Subsequent to the acquisition date, we received $206,000 and $114,000 from amounts paid to escrow as a contractual adjustment of the original purchase price. In connection with the acquisition, we incurred approximately $83,000 of acquisition-related costs. This acquisition was recorded under the purchase method of accounting with the total consideration allocated to the fair value of the assets acquired, including purchased technology of $290,000 and other intangibles of approximately $1,990,000 and liabilities assumed based on estimates of fair value. The excess of the purchase price over the fair value of the net assets acquired of $5.2 million has been allocated to goodwill. Purchase

accounting for this acquisition is preliminary, primarily with respect to the certain portions of the purchase price which are contingent upon future events, and is expected to be finalized during 2005. This acquisition increased our core data processing client base among banks and increased the recurring revenue component of our revenues.

On July 8, 2004, we acquired the stock of re:Member Data Services, Inc., a provider of core processing solutions for credit unions, for cash consideration of approximately $21.9 million and employee stock options valued at approximately $789,000. In connection with the acquisition, the Company incurred approximately $96,000 of acquisition-related costs. This acquisition was recorded under the purchase method of accounting with the total consideration allocated to the fair value of the assets acquired, including purchased technology of $750,000 and other intangibles of approximately $11.4 million and liabilities assumed based on estimates of fair value. The excess of the purchase price over the fair value of the net assets acquired of $12.1 million has been allocated to goodwill. This acquisition increased our core data processing client base among credit unions and increased the recurring revenue component of our revenues.

On July 23, 2004, we acquired substantially all of the outstanding operating assets and assumed certain liabilities of Omega Systems of North America LLC, a company specializing in remittance and lock box solutions, for cash consideration of approximately $2.4 million and acquisition-related costs of approximately $49,000.

On October 29, 2004, we acquired all of the outstanding stock of Datawest Solutions Inc., a provider of core data processing and payment technology solutions in Canada for cash consideration of CDN $1.16 (approximately US$0.95 at the exchange rate as of October 29, 2004) per common share for 29,824,126 common shares and CDN $2.60 (approximately US$2.13 at the exchange rate as of October 29, 2004) per preferred share for 5,000,000 preferred shares, for a total aggregate consideration of approximately CDN$47,596,000 (approximately US$38.9 million at the exchange rate as of October 29, 2004). Additionally, we repaid US$8.3 million of outstanding debt and have incurred approximately US$368,000 of acquisition costs for a total purchase price of US$47.6 million. This acquisition was recorded under the purchase method of accounting with the total consideration allocated to the fair value of the assets acquired, including purchased technology of $2.2 million and other intangibles of approximately $11.5 million and liabilities assumed based on estimates of fair value. The excess of the purchase price over the fair value of the net assets acquired of $32.1 million has been allocated to goodwill. Purchase accounting for this acquisition is preliminary and is expected to be finalized during 2005. This acquisition increased our core data processing client base among banks and increased the recurring revenue component of our revenues. This acquisition increased our core data processing base internationally into Canada, increased the recurring revenue component of our revenues and expanded our product offerings to include electronic payment products and services.

Critical Accounting Policies and Estimates

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require that management make numerous estimates and assumptions. Actual results could differ from those estimates and assumptions, impacting our reported results of operations and financial position. Our significant accounting policies are more fully described in Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The critical accounting policies described below are those that are most important to the depiction of our financial condition and results of operations and their application requires management’s most subjective judgment in making estimates about the effect of matters that are inherently uncertain.


	*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 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 noncancelable license agreement has been executed, fees are fixed or determinable, the software has been delivered, accepted by the client if acceptance is required by the contract and other than perfunctory, and collection is considered probable. The software licenses are sold in conjunction with professional services for installation, training, maintenance and support. For these arrangements, a portion of the total contract value is attributed first to the maintenance arrangement based on its fair value, which is derived from renewal rates. Another portion of the contract value is then attributed to installation and training services based on estimated fair value, which is derived from rates charged for similar services provided on a stand-alone basis multiplied by estimated hours to complete. Our software license agreements generally do not require significant modification or customization of the underlying software, and accordingly, installation and training services are not considered essential to functionality. The remainder of the total contract value is then attributed to the software licenses based on the residual method. The estimated hours and hourly rate for installation and training services affect the timing and amount of revenue recognized from license fees and installation and training services. Due to the uncertainties inherent in the estimation process, actual hours to complete installation and training services or the estimated hourly rate of these services may differ from estimates. If significant customization of our software is required, we recognize all revenue using the percentage-of-completion method. The complexity of some software license agreements requires us to routinely apply judgments regarding the application of software recognition accounting principles to specific agreements and transactions. Different judgments and estimates could have led to different accounting conclusions, which could have had a material adverse effect on our results of operations.

Revenues from software maintenance are typically generated under five-year agreements and are recognized ratably over the life of the agreements. Revenues from installation and training services are recognized as services are performed. We calculate revenue recognition for installation and training services based on the ratio of hours incurred to estimated total hours for the project. Accordingly, we must estimate the hours to complete the installation and training, and it is possible that estimates may be revised. These revisions are recognized in the period in which the revisions are determined, and changes in these estimates could have a material effect on our financial statements.

Data center revenues associated with allowing customers to utilize our software products on an outsourced basis and payment transaction processing revenues are recognized when evidence of an arrangement exists, fees are fixed or determinable, collectibility is reasonably assured and the service has been provided. The Company obtains signed contracts, which indicate the key terms, as well as the fixed and determinable fees, in each arrangement. Revenues and related costs associated with installation of data center and transaction processing arrangements are recognized over the term of the arrangement, typically 3 to 5 years.

We are receiving payments under certain license and marketing agreements with resellers. We have provided a master license to our two primary resellers BISYS, Inc. and Connecticut On-Line Computer Center, Inc., or COCC, and do not have any other continuing obligation to provide additional products or services, other than the provision of client support and maintenance. We recognize revenue when the revenue recognition criteria under SOP No. 97-2 are met, including when evidence of an arrangement exists, fees are fixed and determinable, collectibility is reasonably assured, and delivery has occurred. We recognize minimum quarterly non-refundable payments and any additional license fees as revenue in the quarter that they are due.

We typically recognize hardware revenue upon product shipment, including our voice response systems and other standard hardware equipment. We recognize certain hardware revenue related to our check imaging products on a percentage-of-completion basis because installation services related to these arrangements and the software related to these arrangements are considered essential to the functionality of certain of the hardware.

Deferred revenue is comprised of payments received related to product delivery, maintenance and other services, which have been paid by customers prior to the recognition of revenue. Deferred revenue relates primarily to cash received for maintenance contracts in advance of services performed, which is recognized as revenue ratably as services are performed. Deferred costs are comprised of costs incurred prior to the recognition of related revenue.


	*Allowance for Doubtful Accounts*

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our clients to make required payments. The amount of our reserve is based on historical experience and our analysis of the accounts receivable balance outstanding. If the financial condition of our clients were to deteriorate, resulting in their inability to make payments, additional allowances may be required which would result in an additional expense in the period that this determination was made. While credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Such estimates require significant judgment on the part of our management. Therefore, changes in the assumptions underlying our estimates or changes in the financial condition of our clients could result in a different required allowance, which would have a material effect on our results of operations.


	*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 calculation of the intrinsic value of a stock award was based on management’s estimate of the fair value of our common stock. Beginning in the third quarter of 2005, we will be required to recognize expense pursuant to SFAS 123R for stock-based compensation. Valuation of stock options requires significant estimates related to volatility and option life, and changes in these estimates would have a material impact on our stock-based compensation expense when the provisions of SFAS 123R are adopted.


	*Software Development Costs*

Software development costs for new software products and additional modules for existing software are expensed as incurred until technological feasibility is established. Technological feasibility is established when a working model of the product has been completed and completeness of the working model and its consistency with the product design has been confirmed by testing. Internal software development costs qualifying for capitalization under SFAS No. 86 have not been significant.


	*Accounting for Purchase Business Combinations*

All of our acquisitions were accounted for as purchase transactions, and the purchase price was allocated to the assets acquired and liabilities assumed based on the fair value of the acquired company’s then-current assets, purchased technology, property and equipment and liabilities. The excess of the purchase price over the fair value of net assets acquired or net liabilities assumed has been allocated to goodwill. The fair value of amortizable intangibles, primarily consisting of purchased technology, was determined using an estimate of discounted future cash flows related to the technology. Actual future cash flows from purchased technology could differ from estimated future cash flows. The allocation between amortizable intangibles and goodwill impacts future amortization expense in the financial statements.

We amortize intangibles over their estimated economic lives. While we believe it is unlikely that any significant changes to the useful lives of our tangible and intangible assets will occur in the near term, rapid changes in technology or changes in market conditions could result in revisions to such estimates that could materially affect the carrying value of these assets and our future operating results.

Deferred revenue acquired in business combinations is recorded based on the fair value of the legal obligation. We measure fair value as the cost to fulfill the obligation plus our historical profit margin on these services. Changes in the estimate of fair value of deferred revenue could have a material impact on the purchase price allocation and future recognition of revenue.


	*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:


	•	significant underperformance relative to expected historical or projected future operating results,

	•	significant changes in the manner of our use of the acquired assets or the strategy for our overall business, and

	•	significant negative industry or economic trends.

We also perform an annual impairment test of goodwill. We assess potential impairment through a comparison of the fair value of each reporting unit versus its carrying value. The estimated fair value of goodwill and intangible assets is based on a number of factors including past operating results, budgets, economic projections, market trends, product development cycles, and estimated future cash flows. Changes in these assumptions and estimates could cause a material impact on our financial statements.


	*Recent Accounting Pronouncements*

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment: an amendment of FASB Statements No. 123 and 95,” which requires companies to recognize in their statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees. SFAS No. 123R is effective for interim or annual periods beginning after June 15, 2005. Accordingly, we will adopt SFAS No. 123R in our third quarter of 2005. SFAS 123R requires all share-based payments to employees, including stock options and stock issued under certain employee stock purchase plans, to be recognized in the financial statements at their fair value. SFAS 123R will require us to estimate future forfeitures of stock based compensation, while the current pro forma disclosure includes only those options that have been forfeited during the current period. Therefore, we believe that the pro forma expense currently disclosed in Note 2 to our Consolidated Financial Statements represents an estimate of the amounts that would have been recorded under the provisions of SFAS 123R. We have not yet determined which fair value method and transitional provision we will follow. We are currently evaluating our stock based compensation plan, to determine if changes should be made to minimize compensation charges resulting from the adoption of SFAS 123R.

In October 2004, the FASB ratified EITF 04-8, “Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings Per Share.” The new rules require companies to include shares issuable upon conversion of contingently convertible debt in their diluted earnings per share calculations regardless of whether the debt has a market price trigger that is above the current fair market value of the company’s common stock that makes the debt currently not convertible. The new rules are effective for reporting periods ending on or after December 15, 2004. In February 2005, we completed an offering of convertible debt. The dilutive effect of shares from this debt will be included in the diluted earnings per share calculation using the if-converted method.

In December 2004, the FASB issued FSP No. 109-1 — Application of SFAS No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004, which provides guidance with respect to recording the potential impact of repatriation provisions of the American Job Creation Act of 2004 (the “Jobs Act”) to enterprises’ income tax expense and deferred tax liability. The Jobs Act creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing a dividends reduction for certain dividends from controlled foreign corporations. The deduction is subject to a number of limitations and uncertainty remains as to how the interpret certain provisions in the Jobs Act. As such, we have not yet determined whether, and to what extent, we might repatriate foreign earnings that have not yet been remitted to the U.S.

Factors That May Affect Future Results

The risks and uncertainties described below are not the only risks we face. Additional risks and uncertainties not presently known to us or that are currently deemed immaterial may also impair our business operations. If any of the following risks actually occur, our financial condition and operating results could be materially adversely affected.


	*We are dependent on the banking and credit union industry, and changes within that industry could reduce demand for our products and services.*

The large majority of our revenues are derived from financial institutions in the banking and credit union industry, primarily small to mid-size banks and thrifts and credit unions of all sizes, and we expect to continue to derive substantially all of our revenues from these institutions for the foreseeable future. Unfavorable economic conditions adversely impacting the banking and credit union industry could have a material adverse effect on our business, financial condition and results of operations. For example, financial institutions in the banking and credit union industry have experienced, and may continue to experience, cyclical fluctuations in profitability as well as increasing challenges to improve their operating efficiencies. Due to the entrance of non-traditional competitors and the current environment of low interest rates, the profit margins of commercial banks, thrifts and credit unions have narrowed. As a result, some banks have slowed, and may continue to slow, their capital spending, including spending on computer software and hardware, which can negatively impact license sales of our core and complementary products to new and existing clients. Decreases in or reallocation of capital expenditures by our current and potential clients, unfavorable economic conditions and new or persisting competitive pressures could adversely affect our business, financial condition and results of operations.


	*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 institution’s data processing functions at our outsourcing centers. Our outsourcing centers currently serve clients using our core software and our Internet banking, ATM, cView, cash management, collections, automated clearing house, or ACH, processing, check and item processing and telephony products. In the future, we plan to offer all of our products in our outsourcing centers and continue to market our outsourcing services aggressively.

Our outsourcing services provide a source of recurring revenue which can grow as the number of accounts processed for a client increases. We also seek to generate recurring revenue through our licensing model, which generates additional fees for us as a client’s business grows or it adds more software applications, as well as through the provision of maintenance, support and other professional services. Our maintenance revenues are the largest of these revenue components, and we expect that these revenues will continue to be a significant portion of our total revenues as our client base grows due to their recurring nature. To the extent we fail to persuade new or existing clients to purchase our outsourcing services or we are unable to offer some or all of our products to clients on an outsourced basis, we will be unable to implement our strategy and our revenue may be less predictable.


	*We have had several consecutive profitable quarters, but we may not achieve continued sustained profitability.*

We were incorporated in May 1992 and did not release our first product until 1995. Accordingly, our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies with limited operating histories. Although we have been profitable for the year ended December 31, 2004, we may not be profitable in future periods, either on a short or long-term basis. As of December 31, 2004, we had an accumulated deficit of approximately $21.9 million. There can be no assurance that operating losses will not recur in the future, that we will sustain profitability on a quarterly or annual basis or that our actual results will meet our projections, expectations or announced guidance. To the extent that revenues do not grow at anticipated rates, increases in operating expenses precede or are not subsequently followed by commensurate increases in revenues or we are unable to adjust operating expense levels accordingly, our business, financial condition and results of operations will be materially adversely affected.


	*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 client’s organization because decisions relating to licensing our core processing software generally involve the evaluation of the software by senior management and a significant number of client personnel in various functional areas, each having specific and often conflicting requirements.

We may expend significant funds and management resources during the sales cycle and ultimately fail to close the sale. Our core software product sales cycle generally ranges between six to nine months, and our implementation cycle for our core software generally ranges between six to nine months. Our sales cycle for all of our products and services is subject to significant risks and delays over which we have little or no control, including:


	•	our clients’ budgetary constraints,

	•	the timing of our clients’ budget cycles and approval processes,

	•	our clients’ willingness to replace their core software solution vendor,

	•	the success and continued support of our strategic marketing partners’ sales efforts, and

	•	the timing and expiration of our clients’ current license agreements or outsourcing agreements for similar services.

If we are unsuccessful in closing sales after expending significant funds and management resources or if we experience delays as discussed above, it could have a material adverse effect on our business, financial condition and results of operations.


	*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 Financial Corporation and John H. Harland Company, all of which offer core processing systems or outsourcing alternatives to banks, thrifts and credit unions. Some of our current, and many of our potential, competitors have longer operating histories, greater name recognition, larger client bases and significantly greater financial, engineering, technical, marketing and other resources than we do. As a result, these companies may be able to respond more quickly to new or emerging technologies and changes in client demands or to devote greater resources to the development, promotion and sale of their products than we can.

In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address the needs of our prospective clients. Accordingly, it is possible that new competitors or alliances among competitors may emerge and acquire significant market share. We expect that the banking and credit union software market will continue to attract new competitors and new technologies, possibly involving alternative technologies that are more sophisticated and cost-effective than our technology. There can be no assurance that we will be able to compete successfully against current or future competitors or that competitive pressures faced by us will not materially adversely affect our business, financial condition and results of operations.


	*An impairment of the value of our goodwill, capitalized software costs and other intangible assets could significantly reduce our earnings.*

We periodically review several items on our balance sheet for impairment and record an impairment charge if we determine that the value of our assets has been impaired. As of December 31, 2004, we had approximately $66.5 million of goodwill, $6.2 million of capitalized software costs and $31.2 million of other intangible assets. We periodically review these assets for impairment. If we determine that the carrying value of these assets are not recoverable, we would record an impairment charge against our results of operations. Such an impairment charge may be significant, and we are unable to predict the amount, in any, of potential future impairments. In addition, if we engage in additional acquisitions, we may incur additional goodwill, capitalized software costs and other intangible assets.


	*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:


	•	the timing, size and nature of our licensing transactions,

	•	lengthy and unpredictable sales cycles,

	•	the timing of introduction and market acceptance of new products or product enhancements by us or our competitors,

	•	the timing of acquisitions by us of businesses and products,

	•	product and price competition,

	•	the relative proportions of revenues derived from license fees and services,

	•	changes in our operating expenses,

	•	software bugs or other product quality problems, and

	•	personnel changes and fluctuations in economic and financial market conditions.

We believe that period-to-period comparisons of our results of operations are not necessarily meaningful. There can be no assurance that future revenues and results of operations will not vary substantially. It is also possible that in future quarters, our results of operations will be below the expectations of public market

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 30.8% of revenues for the year ended December 31, 2004, 33.5% of revenues for the year ended December 31, 2003, 30.3% of revenues for the year ended December 31, 2002 and 36.6% of revenues for the year ended December 31, 2001. We expect that revenues from software license sales will continue to provide a significant percentage of our revenues in future periods, and our ability to close license sales, as well as the timing of those sales, may have a material impact on our quarterly results. In addition, increased sales and marketing expenses for any given quarter may negatively impact operating results of that quarter due to lack of recognition of associated revenues until the delivery of the product in a subsequent quarter.


	*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 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 receive a portion of our revenues from relationships with strategic marketing partners, and if we lose one or more of these marketing partners or fail to add new ones it could have a negative impact on our business.

We expect that revenues generated from the sale of our products and services by our strategic marketing partners will account for a meaningful portion of our revenues for the foreseeable future. In particular, we expect that BISYS, a national outsourcing center, will account for a meaningful portion of our revenues over time. During the year ended December 31, 2004, BISYS represented approximately $12.5 million, or 11.7%,

of our total revenues. During the fiscal year ended December 31, 2003, BISYS represented approximately $5.8 million, or 9.1%, of our total revenues.

Our strategic marketing partners pay us license fees based on the volume of products and services that they sell. If we lose one or more of our major strategic marketing partners, we may be unable in a timely manner, or at all, to replace them with another entity with comparable client bases and user demographics, which would adversely affect our business, financial condition and results of operations. In addition, we plan to supplement our existing distribution partners with other national and regional outsourcing centers. If we are unable to identify appropriate resellers and enter into arrangements with them for the outsourcing of our products and services to financial institutions, we may not be able to sustain or grow our business.


	*If we do not retain our senior management and other key employees, we may not be able to successfully implement our business strategy.*

We have grown significantly in recent years, and our management remains concentrated in a small number of key employees. Our future success depends to a significant extent on our executive officers and key employees, including our sales force and software professionals, particularly project managers, software engineers and other senior technical personnel. The loss of the services of any of these individuals or group of individuals could have a material adverse effect on our business, financial condition and results of operations. Competition for qualified personnel in the software industry is intense and we compete for these personnel with other software companies that have greater financial and other resources than we do. Our future success will depend in large part on our ability to attract, retain and motivate highly qualified personnel, and there can be no assurance that we will be able to do so. Any difficulty in hiring needed personnel could have a material adverse effect on our business, financial condition and results of operations.


	*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 management’s attention or have an adverse effect on our financial results.*

Failures in a client’s system could result in an increase in service and warranty costs or a claim for substantial damages against us. There can be no assurance that the limitations of liability set forth in our contracts would be enforceable or would otherwise protect us from liability for damages. We maintain general liability insurance coverage, including coverage for errors and omissions in excess of the applicable deductible amount. There can be no assurance that this coverage will continue to be available on acceptable terms or will be available in sufficient amounts to cover one or more large claims, or that the insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceeds available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, financial condition and results of operations. Furthermore, litigation, regardless of its outcome, could result in substantial cost to us and divert management’s attention from our operations. Any contract liability claim or litigation against us could, therefore, have a material adverse effect on our business, financial condition and results of operations. In addition, because many of our projects are business-critical projects for financial institutions, a failure or inability to meet a client’s expectations could seriously damage our reputation and affect our ability to attract new business.


	*Our indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations under our senior subordinated convertible notes.*

We have a significant amount of indebtedness. Our substantial indebtedness could have important consequences to our stockholders and noteholders. For example, it could:


	•	make it more difficult for us to satisfy our obligations with respect to our notes,

	•	increase our vulnerability to general adverse economic and industry conditions,

	•	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,

	•	limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate,

	•	place us at a disadvantage compared to our competitors that have less debt, and

	•	limit our ability to borrow additional funds.

If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments, or if we fail to comply with the various requirements of our notes or any indebtedness that we may incur in the future, we would be in default, which would permit the holders of the notes and the holders of such other indebtedness to accelerate the maturity of the notes or such other indebtedness, as the case may be, and could cause defaults under the notes and such other indebtedness. Any default under the notes or any indebtedness that we may incur in the future could have a material adverse effect on our business, operating results, liquidity and financial condition.


	Government regulation of our business could cause us to incur significant expenses, and failure to comply with applicable regulations could make our business less efficient or impossible.

The financial services industry is subject to extensive and complex federal and state regulation. Financial institutions, including banks, thrifts and credit unions, operate under high levels of governmental supervision. Our clients must ensure that our products and services work within the extensive and evolving regulatory requirements applicable to them, including those under federal and state truth-in-lending and truth-in-deposit rules, usury laws, the Equal Credit Opportunity Act, the Fair Housing Act, the Electronic Fund Transfer Act, the Fair Credit Reporting Act, the Bank Secrecy Act, the Community Reinvestment Act, the Gramm-Leach-Bliley Act of 1999, the USA Patriot Act and other state and local laws and regulations. The compliance of our products and services with these requirements may depend on a variety of factors, including the product at issue and whether the client is a bank, thrift, credit union or other type of financial institution.

Neither federal depository institution regulators nor other federal or state regulators of financial services require us to obtain any licenses. We are subject to examination by federal depository institution regulators under the Bank Service Company Act.

Although we believe we are not subject to direct supervision by federal and state banking agencies relating to other regulations, we have from time to time agreed to examinations of our business and operations by these agencies. These regulators have broad supervisory authority to remedy any shortcomings identified in any such examination.

Federal, state or foreign authorities could also adopt laws, rules or regulations relating to the financial services industry that affect our business, such as requiring us or our clients to comply with data, record keeping and processing and other requirements. It is possible that laws and regulations may be enacted or modified with respect to the Internet, covering issues such as end-user privacy, pricing, content, characteristics, taxation and quality of services and products. Adoption of these laws, rules or regulations could render our business or operations more costly and burdensome or less efficient and could require us to modify our current or future products or services.


	*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, we believe that software developers may become increasingly subject to infringement claims. Any claims, whether with or without merit, could:


	•	be expensive and time consuming to defend,

	•	cause us to cease making, licensing or using products that incorporate the challenged intellectual property,

	•	require us to redesign our products, if feasible,

	•	divert management’s attention and resources, and

	•	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 have entered into and may continue to enter into or seek to enter into business combinations and acquisitions which may be difficult to integrate, disrupt our business, dilute stockholder value or divert management attention.

Since 2000, we have acquired ten businesses. As part of our business strategy, we may enter into additional business combinations and acquisitions in the future. Some of these business combinations and acquisitions may be material to our business. We have limited experience in making acquisitions. In addition, acquisitions are typically accompanied by a number of risks, including:


	•	the difficulty of integrating the operations and personnel of the acquired companies,

	•	the maintenance of acceptable standards, controls, procedures and policies,

	•	the potential disruption of our ongoing business and distraction of management,


	•	the impairment of relationships with employees and clients as a result of any integration of new management and other personnel,

	•	the inability to maintain relationships with clients of the acquired business,

	•	the difficulty of incorporating acquired technology and rights into our products and services,

	•	the failure to achieve the expected benefits of the combination or acquisition,

	•	expenses related to the acquisition,

	•	potential unknown liabilities associated with acquired businesses, and

	•	unanticipated expenses related to acquired technology and its integration into existing technology.

If we are not successful in completing acquisitions that we may pursue in the future, we would be required to reevaluate our growth strategy and we may have incurred substantial expenses and devoted significant management time and resources in seeking to complete the acquisitions. In addition, with future acquisitions, we could use substantial portions of our available cash as all or a portion of the purchase price. We could also issue additional shares of our common stock or other securities as consideration for these acquisitions, which could cause our stockholders to suffer significant dilution and could adversely affect the rights of the holders of the notes. Any future acquisitions may not generate additional revenue for us.


	*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:


	•	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,

	•	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,

	•	at maturity of the notes, in an amount equal to the entire outstanding principal amount, and

	•	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., 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:


	•	difficulties and costs of staffing and managing foreign operations,

	•	differing regulatory and industry standards and certification requirements,


	•	the complexities of foreign tax jurisdictions,

	•	currency exchange rate fluctuations, and

	•	import or export licensing requirements.


	*To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.*

Our ability to make payments on and to refinance our indebtedness, including our notes, and to fund planned capital expenditures and product development efforts will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to pay our indebtedness, including the notes, or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness, including the notes, on or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness, including the notes, on commercially reasonable terms or at all.


	*If we fail to effectively manage our growth, our financial results could be adversely affected.*

We have expanded our operations rapidly in recent years. For example, our aggregate revenues increased from approximately $27.3 million in 2001 to approximately $107.2 million in 2004. As of December 31, 2004, we had 762 employees, up from 577 as of December 31, 2003. In addition, we continue to explore ways to extend our target markets, including to larger financial institutions, international clients, and clients in the payroll services, insurance and brokerage industries. Our growth may place a strain on our management systems, information systems and resources. Our ability to successfully offer products and services and implement our business plan requires adequate information systems and resources and oversight from our senior management. We will need to continue to improve our financial and managerial controls, reporting systems and procedures as we continue to grow and expand our business. As we grow, we must also continue to hire, train, supervise and manage new employees. We may not be able to hire, train, supervise and manage sufficient personnel or develop management and operating systems to manage our expansion effectively. If we are unable to manage our growth, our operations and financial results could be adversely affected.


	*The requirements of being a public company may strain our resources and distract management.*

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002. These requirements may place a strain on our systems and resources. The Securities Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls for financial reporting. We currently do not have an internal audit group. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight will be required. As a result, management’s attention may be diverted from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, we may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge and we may not be able to do so in a timely fashion.


	*Failure to continue to comply with all of the requirements imposed by Section 404 of the Sarbanes-Oxley Act of 2002 could result in a negative market reaction.*

Section 404 of the Sarbanes-Oxley Act of 2002 requires that we establish and maintain an adequate internal control structure and procedures for financial reporting and assess on an on-going basis the design and operating effectiveness of our internal control structure and procedures for financial reporting. Our indepen-

dent registered public accounting firm is required to audit both the design and operating effectiveness of our internal control over financial reporting and management’s assessment of the design and the effectiveness of its internal control over financial reporting. If we do not continue to comply with all of the requirements of Section 404 or if our internal controls are not designed or operating effectively, it could result in a negative market reaction.


	*The design of other core vendors’ software or their use of financial incentives may make it more difficult for clients to use our complementary products.*

Currently, some core software vendors design their software so that it is difficult or infeasible to use third-party complementary products, including ours. Some core software vendors use financial incentives to encourage their core software clients to purchase their proprietary complementary products. For example, in the past a core software vendor has charged disproportionately high fees to integrate third-party complementary products such as ours, thereby providing a financial incentive for clients of that vendor’s core software to use its complementary products. We have responded to this practice by emphasizing to prospective clients the features and functionality of our products, lowering our price or offering to perform the relevant integration services ourselves. We cannot assure you that these competitors, or other vendors of core software, will not begin or continue to construct technical, or implement financial, obstacles to the purchase of our products. These obstacles could make it more difficult for us to sell our complementary products and could have a material adverse effect on our business and results of operations.


	*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 the ownership of existing stockholders.*

We may need to raise additional funds through public or private debt or equity financings in order to meet various objectives, such as:


	•	taking advantage of growth opportunities, including more rapid expansion,

	•	acquiring businesses and products,

	•	making capital improvements to increase our servicing capacity,

	•	developing new services or products, and

	•	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.

Our existing debt and any debt incurred by us in the future could impair our ability to obtain additional financing for working capital, capital expenditures or further acquisitions. Covenants governing any indebtedness we incur would likely restrict our ability to take specific actions, including our ability to pay dividends or distributions on, or redeem or repurchase, our capital stock, enter into transactions with affiliates, merge, consolidate or sell our assets or make capital expenditure investments. In addition, the use of a substantial portion of the cash generated by our operations to cover debt service obligations and any security interests we grant on our assets could limit our financial and business flexibility.

Any additional capital raised through the sale of equity or convertible debt securities may dilute the ownership of existing stockholders. Furthermore, any additional debt or equity financing we may need may not be available on terms favorable to us, or at all. If future financing is not available or is not available on acceptable terms, we may not be able to raise additional capital, which could significantly limit our ability to implement our business plan. In addition, we may have to issue securities, including debt securities, that may have rights, preferences and privileges senior to our common stock.


	*The price of our common stock may be volatile.*

In the past three years, technology stocks listed on the NASDAQ National Market have experienced high levels of volatility and significant declines in value from their historic highs. The trading price of our common stock may fluctuate substantially. During the period from our initial public offering to December 31, 2004, the closing sale price of our common stock on the NASDAQ National Market ranged from a low of $16.10 per share to a high of $28.27 per share. The price of the common stock that will prevail in the market depends on many factors, some of which are beyond our control and may not be related to our operating performance. The factors that could cause fluctuations in the trading price of our common stock include, but are not limited to, the following:


	•	price and volume fluctuations in the overall stock market from time to time,

	•	significant volatility in the market price and trading volume of financial services companies,

	•	actual or anticipated changes in our earnings or fluctuations in our operating results or in the expectations of securities analysts,

	•	general economic conditions and trends,

	•	major catastrophic events,

	•	loss of a significant client or clients,

	•	sales of large blocks of our stock, or

	•	departures of key personnel.

In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Due to the potential volatility of our stock price, we may therefore be the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources from our business.


	*If a substantial number of shares of our common stock become available for sale and are sold in a short period of time, the market price of our common stock could decline significantly.*

If our stockholders sell substantial amounts of our common stock in the public market, the market price of our common stock could decrease significantly. The perception in the public market that our stockholders might sell shares of common stock could also depress the market price of our common stock.

In addition, as of December 31, 2004, options to purchase a total of 3,042,425 shares of our common stock were outstanding under our stock incentive plans, of which 1,461,217 were vested. A decline in the price of shares of our common stock might impede our ability to raise capital through the issuance of additional shares of our common stock or other equity securities, and may cause you to lose part or all of your investment in our shares of common stock.


	*Some provisions in our certificate of incorporation and by-laws may deter third parties from acquiring us.*

Our certificate of incorporation and our by-laws contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors, including the following:


	•	our board of directors is classified into three classes, each of which serves for a staggered three year term,

	•	only our board of directors, the chairman of our board of directors or our president may call special meetings of our stockholders,

	•	our stockholders may take action only at a meeting of our stockholders and not by written consent,

	•	we have authorized undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval,

	•	our stockholders have only limited rights to amend our by-laws, and

	•	we require advance notice requirements for stockholder proposals.

These provisions could discourage, delay or prevent a transaction involving a change of control of our company. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take other corporate actions you desire.


	*Section 203 of the Delaware General Corporation Law may delay, defer or prevent a change of control that our stockholders might consider to be in their best interest.*

We are subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits “business combinations” between a publicly-held Delaware corporation and an “interested stockholder,” which is generally defined as a stockholder, who becomes a beneficial owner of 15% or more of a Delaware corporation’s voting stock for a three-year period following the date that such stockholder became an interested stockholder. Section 203 could have the effect of delaying, deferring or preventing a change of control of our company that our stockholders might consider to be in their best interests.


Item 7A.	*Quantitative and Qualitative Disclosures About Market Risk*

We transact business with clients almost exclusively in the United States and Canada and receive payment for our services exclusively in United States dollars or Canadian dollars. Therefore, we are exposed to foreign currency exchange risks and fluctuations in foreign currencies which could impact our results operations and financial condition. A 10% increase or decrease in currency exchange rates would not have a material adverse effect on our financial condition or results of operations.

Our interest expense is generally not sensitive to changes in the general level of interest rates in the United States, particularly because a substantial majority of our indebtedness is at fixed rates. A 10% increase or decrease in interest rates would not have a material adverse effect on our financial condition or results of operations.

We do not hold derivative financial or commodity instruments and all of our cash and cash equivalents are held on deposit with banks and highly liquid marketable securities with maturities of three months or less.


Item 8.	*Financial Statements and Supplementary Data*

The information required by this item may be found on page F-1 thru F-25 of this Annual Report on Form 10-K.


Item 9.	*Changes in and Disagreements with Accountants on Accounting and Financial Disclosure*

Not applicable.


Item 9A.	*Controls and Procedures*


	*Evaluation of Disclosure Controls and Procedures.*

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2004. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2004, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.


	*Changes in Internal Control over Financial Reporting*

No change in our internal control over financial reporting occurred during the fiscal quarter ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


	*Management’s Report on Internal Control Over Financial Reporting*

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:


	•	Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

	•	Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

	•	Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2004. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.

Based on our assessment, management has concluded that, as of December 31, 2004, our internal control over financial reporting was effective based on those criteria.

Our management has excluded Maxxar Corporation, Eastpoint Technologies, LLC, re: Member Data Services, Inc., Omega Systems of North America LLC and Datawest Solutions Inc. from the assessment of internal control over financial reporting as of December 31, 2004 because they were acquired in a purchase business combinations during 2004. Datawest Solutions, Inc. is a wholly-owned entity whose total assets and total revenues represent 26 percent and 5 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2004. re:Member Data Services, Inc. is a wholly-owned entity whose total assets and total revenues represent 12 percent and 6 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2004. The other three acquired entities’ total assets and total revenues represent 9 percent and 9 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2004.

Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.


Item 9B.	*Other Information*

On March 10, 2005, OS Acquisition Corp. (n/k/a Open Solutions CU Technologies, Inc.), or OS Acquisition, a subsidiary of ours, purchased certain assets of CGI-AMS Inc., or CGI, pursuant to the terms of an Asset Purchase Agreement, dated as of March 10, 2005, between OS Acquisition and CGI. The purchased assets are comprised of the U.S. division of a business unit known as the Services to Credit Union business, which business unit provides core banking, data processing, loan origination, loan decisioning, home banking, Internet banking, website hosting, call center and related services to credit unions in the United States, on either a licensed, in-house basis or an outsourced basis. The aggregate consideration paid for the assets was $24,000,000, of which $1,800,000 is to be held in escrow for one year to secure indemnification obligations of CGI, subject to a purchase price adjustment based on the net current assets of the Services to Credit Union business as of March 10, 2005.

The terms of the Asset Purchase Agreement were determined on the basis of arms-length negotiations. Prior to the execution of the Asset Purchase Agreement, to the best of our knowledge, we nor any of our affiliates, any of our directors or officers, nor any associate of any such director or officer, had any material relationship with CGI.

The foregoing summary description of the terms of the transaction is qualified in its entirety by reference to the Asset Purchase Agreement, which is attached as Exhibit 2.7 to this Annual Report on Form 10-K.

PART III


Item 10.	*Directors and Executive Officers of the Registrant*

The response to this item is contained in our proxy statement for the Annual Meeting of Stockholders to be held on May 19, 2005 under the captions “Proposal One — Election of Directors” and “Executive Officers,” and is incorporated herein by reference. Information relating to certain filings on Forms 3, 4 and 5 is

contained in our 2005 proxy statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance,” and is incorporated herein by reference. Information required by this item pursuant to Item 401(h) and 401(i) of Regulation S-K relating to an audit committee financial expert and identification of the audit committee of our board of directors is contained in our 2005 proxy statement under the caption “Corporate Governance,” and is incorporated herein by reference.

We have adopted a written code of business conduct and ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. We have posted on our website a copy of our code of business conduct and ethics. We intend to disclose any amendments to, or waivers from, our code of business conduct and ethics on our website, which is located at www.opensolutions.com.


Item 11.	*Executive Compensation*

The response to this item is contained in our 2005 proxy statement under the captions “Compensation of Directors,” “Information About Executive Compensation,” “Employment Agreements” and “Compensation Committee Interlocks and Insider Participation,” and is incorporated herein by reference.

The sections entitled “Report of the Compensation Committee” and “Comparative Stock Performance Graph” in our 2005 proxy statement are not incorporated herein by reference.


Item 12.	*Security Ownership of Certain Beneficial Owners and Management*

The response to this item is contained in our 2005 proxy statement under the captions “Stock Ownership Information” and “Securities Authorized for Issuance Under Equity Compensation Plans,” and is incorporated herein by reference.


Item 13.	*Certain Relationships and Related Transactions*

The response to this item is contained in our 2005 proxy statement under the caption “Certain Relationships and Related Transactions,” and is incorporated herein by reference.


Item 14.	*Principal Accounting Fees and Services*

The response to this item is contained in our 2005 proxy statement under the caption “Independent Registered Public Accounting Firm Fees,” and is incorporated herein by reference.

PART IV


Item 15.	*Exhibit and Financial Statement Schedules*

(a) The following are filed as part of this Annual Report on Form 10-K:


	1. Financial Statements

	The following consolidated financial statements are included in Item 8:


	•	Consolidated Balance Sheets as of December 31, 2004 and 2003

	•	Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002

	•	Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2004, 2003 and 2002

	•	Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002

	•	Notes to Consolidated Financial Statements.

(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.

The information required by this item is contained in the financial statements included in this Annual Report on Form 10-K.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



		OPEN SOLUTIONS INC.
Date: March 16, 2005		By: /s/ Louis Hernandez, Jr. Louis Hernandez, Jr. Chairman of the Board and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Name	Capacity	Date


/s/ LOUIS HERNANDEZ, JR. Louis Hernandez, Jr.	Chairman of the Board and Chief Executive Officer (Principal Executive Officer)	March 16, 2005

/s/ CARL D. BLANDINO Carl D. Blandino	Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer)	March 16, 2005

/s/ DOUGLAS K. ANDERSON Douglas K. Anderson	Director	March 16, 2005

/s/ HOWARD L. CARVER Howard L. Carver	Director	March 16, 2005

/s/ DENNIS F. LYNCH Dennis F. Lynch	Director	March 16, 2005

/s/ SAMUEL F. MCKAY Samuel F. McKay	Director	March 16, 2005

/s/ CARLOS P. NAUDON Carlos P. Naudon	Director	March 16, 2005

/s/ RICHARD P. YANAK Richard P. Yanak	Director	March 16, 2005

INDEX TO FINANCIAL STATEMENTS


	Page

Open Solutions Inc.
Report of Independent Registered Public Accounting Firm		F-1
Consolidated Balance Sheets at December 31, 2004 and 2003		F-3
Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002		F-4
Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2004, 2003 and 2002		F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002		F-6
Notes to Consolidated Financial Statements		F-7

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Open Solutions Inc.:

We have completed an integrated audit of Open Solutions Inc.’s 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated Financial statements

In our opinion, the consolidated financial statements listed in the accompanying index, present fairly, in all material respects, the financial position of Open Solutions Inc. and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting

In our opinion, management’s assessment, included in Management’s Report on Internal Control over Financial Reporting, appearing under Item 9a that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

F-1

As described in Management’s Report on Internal Control over Financial Reporting, management has excluded Maxxar Corporation, Eastpoint Technologies, LLC, re: Member Data Services, Inc., Omega Systems of North America LLC and Datawest Solutions Inc. from its assessment of internal control over financial reporting as of December 31, 2004 because they were acquired in purchase business combinations during 2004. We have also excluded these entities from our audit of internal control over financial reporting. Datawest Solutions, Inc. is a wholly-owned entity whose total assets and total revenues represent 26 percent and 5 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2004. re:Member Data Services, Inc. is a wholly-owned entity whose total assets and total revenues represent 12 percent and 6 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2004. The other three acquired entities’ total assets and total revenues represent 9 percent and 9 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2004.


	/s/ PRICEWATERHOUSECOOPERS LLP

	PricewaterhouseCoopers LLP

Hartford, Connecticut

March 15, 2005

F-2

OPEN SOLUTIONS INC.

CONSOLIDATED BALANCE SHEETS


			December 31,

			2004			2003

			(In thousands, except
			share and per share data)
ASSETS
Current assets:
	Cash and cash equivalents		$	49,447		$	14,853
	Investments in marketable securities			12,736			70,100
	Accounts receivable, net			19,975			10,267
	Deferred costs			2,067			1,563
	Prepaid expenses and other current assets			3,922			2,409
	Deferred tax assets			12,356			—


		Total current assets		100,503			99,192
	Fixed assets, net			14,410			5,500
	Investments in marketable securities			—			7,807
	Capitalized software cost, net			6,211			2,964
	Other intangible assets, net			31,168			6,421
	Goodwill			66,548			11,187
	Deferred tax assets			4,560			—
	Other assets			2,074			—


		Total assets	$	225,474		$	133,071

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	2,521		$	1,800
	Accrued expenses			15,338			8,368
	Deferred revenue, current portion			21,586			15,324
	Long-term debt from customers, current portion			1,239			—
	Capital lease obligations, current portion			735			395

		Total current liabilities		41,419			25,887

	Long-term debt from customers, less current portion			1,736			—
	Capital lease obligations, less current portion			223			64
	Deferred revenue, less current portion			2,706			1,479
	Other long-term liabilities			1,077			222

		Total liabilities		47,161			27,652


	Commitments and contingencies (Note 13)
Stockholders’ Equity
	Preferred stock, $0.01 par value; 5,000,000 shares authorized; no shares issued and outstanding at December 31, 2004 and 2003, respectively			—			—
	Common stock, $0.01 par value; 95,000,000 shares authorized; 19,379,701 and 16,786,329 shares issued and outstanding at December 31, 2004 and 2003, respectively			194			168
	Additional paid-in capital			199,272			152,274
	Accumulated other comprehensive income (loss)			718			(28	)
	Accumulated deficit			(21,871	)		(46,995	)

		Total stockholders’ equity		178,313			105,419

		Total liabilities and stockholders’ equity	$	225,474		$	133,071

The accompanying notes are an integral part of these consolidated financial statements.

F-3

OPEN SOLUTIONS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS


			Year Ended December 31,

			2004			2003			2002

			(In thousands, except per share data)
Revenues:
	Software license		$	33,032		$	21,391		$	13,449
	Service, maintenance and hardware			74,151			42,461			30,896

		Total revenues		107,183			63,852			44,345


Cost of revenues:
	Software license			6,705			5,341			3,152
	Service, maintenance and hardware			37,919			23,540			18,430

		Total cost of revenues		44,624			28,881			21,582

	Gross profit			62,559			34,971			22,763


Operating expenses:
	Sales and marketing			14,272			10,729			9,533
	Product development			11,001			6,854			6,223
	General and administrative (includes restricted stock expense and related taxes of $3,444 for the year ended December 31, 2003: Note 11)			21,123			15,888			10,017

		Total operating expenses		46,396			33,471			25,773

Income (loss) from operations				16,163			1,500			(3,010	)
	Interest income and other, net			1,645			197			172
	Interest expense			(125	)		(154	)		(27	)

Income (loss) before income taxes				17,683			1,543			(2,865	)
Income tax (provision) benefit				7,441			(234	)		(32	)

Net income (loss)				25,124			1,309			(2,897	)

Preferred stock accretion charge (Note 10)				—			(31,500	)		—

Net income (loss) attributable to common stockholders			$	25,124		$	(30,191	)	$	(2,897	)

Net income (loss) per common share:
	— Basic		$	1.37		$	(7.74	)	$	(1.18	)
	— Diluted			1.26			(7.74	)		(1.18	)
Weighted average common shares used to compute net income (loss) per common share:
	— Basic			18,313			3,903			2,453
	— Diluted			19,896			3,903			2,453

The accompanying notes are an integral part of these consolidated financial statements.

F-4

OPEN SOLUTIONS INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

Accumulated

Other

Total

Compre-

Common Stock

Additional

Comprehensive

Stockholders’

hensive

Paid-In

Deferred

Income

Accumulated

Equity

Income

Shares

Amount

Capital

Compensation

(Loss)

Deficit

(Deficit)

(Loss)

(In thousands, except share data)

Balance at December 31, 2001

2,386,754

4,684

—

(45,407

)

(40,699

)

Exercise of stock options

88,163


		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.

	•	Expand Our Client Base by Licensing Our Core Software through Third-Party Outsourcing Centers. Approximately 172 financial institutions use our core software application at two reseller outsourcing centers, one operated by BISYS, Inc., a major national outsourcing center, and the other operated by Connecticut On-Line Computer Center, Inc., or COCC, a major regional outsourcing center. A number of financial institutions outsource their core processing systems to third-party outsourcing centers such as these, which typically choose one or more significant core software products to provide their services. We plan to work with our existing resellers to add new clients, and have recently expanded our relationship with BISYS for this purpose. We also plan to supplement these resellers with other national and regional outsourcing centers.

	•	Provide Additional Products and Services to Our Installed Client Base. We intend to continue to leverage our installed client base by expanding the range of complementary products and services available to our current clients, through both the internal development of new products and services and through acquisitions. In addition, each client has an account manager who recommends complementary products suitable for the client’s business and works with our sales group to generate sales. We also intend to continue selling our complementary products to financial institutions that use core systems sold by third parties.

	•	Maintain Technological Leadership. We believe that the uniqueness of the open, flexible architecture of our system provides us with competitive advantages over companies offering other core processing systems. For example, our core software suite can satisfy the technological requirements of a commercial bank, thrift or credit union without modification or customization. We recently announced the commercial release of our web-based business intelligence suite, which allows a financial institution to transmit action messages and collect response information instantaneously while a customer conducts a transaction. Our open architecture enables us to utilize leading, non-proprietary software and hardware to provide comprehensive functionality. We intend to extend our technological leadership by continuing to add new applications, integrate new technologies and expand the functionality of our system.

	•	Extend Target Markets. Our primary market currently consists of small to mid-size commercial banks and thrifts and all credit unions, located in the United States. We believe that our core software has benefits beyond this market, and can scale to meet the operating requirements of any financial institution. We continue to explore additional ways to extend our target markets, including by selling our products and services to larger financial institutions and international financial institutions. We also plan to market and sell our products and services to clients in the payroll services, insurance and brokerage industries.