<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 22, 1998
REGISTRATION NO. 333-56503
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
OPEN SOLUTIONS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 7372 22-317350
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
300 WINDING BROOK DRIVE
GLASTONBURY, CONNECTICUT 06033
(860) 652-3155
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
DOUGLAS K. ANDERSON
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
OPEN SOLUTIONS INC.
300 WINDING BROOK DRIVE
GLASTONBURY, CONNECTICUT 06033
(860) 652-3155
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
MARK G. BORDEN, ESQ. JOHN J. EGAN III, ESQ.
PHILIP P. ROSSETTI, ESQ. JEFFREY C. HADDEN, ESQ.
HALE AND DORR LLP GOODWIN, PROCTER & HOAR LLP
60 STATE STREET EXCHANGE PLACE
BOSTON, MASSACHUSETTS 02109 BOSTON, MASSACHUSETTS 02109
TELEPHONE: (617) 526-6000 TELEPHONE: (617) 570-1000
TELECOPY: (617) 526-5000 TELECOPY: (617) 523-1231
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date hereof.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
JULY 22, 1998
2,800,000 SHARES
[OPEN SOLUTIONS LOGO]
COMMON STOCK
------------------------
Of the 2,800,000 shares of Common Stock ("Common Stock") offered hereby,
2,617,000 are being sold by Open Solutions Inc. ("OSI" or the "Company") and
183,000 are being sold by certain stockholders of the Company (the "Selling
Stockholders"). See "Principal and Selling Stockholders." The Company will not
receive any of the proceeds from the sale of shares by the Selling Stockholders.
Prior to this offering, there has been no public market for the Common Stock of
the Company. It is currently estimated that the initial public offering price
will be between $10.00 and $12.00 per share. See "Underwriting" for the factors
to be considered in determining the initial public offering price. Application
has been made for the listing of the Common Stock on the Nasdaq National Market
under the symbol "OSIF."
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS(2)
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<S> <C> <C> <C> <C>
Per Share ................. $ $ $ $
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Total(3) .................. $ $ $ $
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</TABLE>
(1) See "Underwriting" for information relating to indemnification of the
Underwriters.
(2) Before deducting estimated expenses of $900,000, all of which will be
payable by the Company.
(3) The Company and certain stockholders of the Company have granted to the
Underwriters a 30-day option to purchase up to 420,000 additional shares of
Common Stock solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, Proceeds to Company and Proceeds to Selling Stockholders will
be $ , $ , $ and $ ,
respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of BT Alex. Brown Incorporated, Baltimore, Maryland, on or about ,
1998.
BT ALEX. BROWN WARBURG DILLON READ LLC
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE> 3
[OPEN SOLUTIONS LOGO]
THE POWER OF CLIENT/SERVER
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK IN
CONNECTION WITH THE OFFERING, INCLUDING OVER-ALLOTMENT, STABILIZING AND
SHORT-COVERING TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
Open Solutions Inc. is a registered trademark, and The Complete Banking
Solution and The Complete Credit Union Solution are trademarks, of Open
Solutions Inc. All other trademarks or trade names referred to in this
Prospectus are the property of their respective owners.
2
<PAGE> 4
[DESCRIPTION OF LEFT HALF OF INSIDE FRONT COVER FOLDOUT GRAPHICS]
Product Preview
Four images of screens from the OSI system "The Complete Banking Solution" are
displayed along the left side of the page with text describing each screen
immediately to the right.
(Screen 1) The screen is the home screen of the Customer Service
Representative module. The screen contains a command line at the top of a large
yellow tickler field in the middle of the screen.
ENHANCED CUSTOMER SERVICE: Information concerning customers and prospects is
easily captured, updated and accessed. The entire customer relationship can be
viewed from any desktop, and the system prompts the user with timely
suggestions, reminders and cross-selling opportunities. The result is customer
service that is comprehensive, effective and personal.
(Screen 2) The screen is the "Edit Person" screen from the Customer
Service Representative Module. The screen contains a number of data elements on
the left side of the screen and images of the customer's face and signature on
the right.
COMPLETE CUSTOMER PROFILE: One screen displays the customer's photograph,
signature, and other identifiers, eliminating the need for a driver's license
or other identification.
(Screen 3) The screen is the "Payoff Inquiry" screen from the lending
module. The screen contains a number of data elements at the top and detailed
payoff information at the bottom that is adjustable with a scroll bar.
CONSOLIDATED PAYOFF INQUIRY/TRANSACTION: A loan payoff need not involve
numerous computer transactions. Loan balance, interim interest charges, escrow
balance, mortgage insurance premiums due, late charges and other relevant data
can be viewed on one screen. The "Payoff" button activates the transaction and
completes the payoff, indicating the loan balance due to the bank or to the
borrower.
(Screen 4) The screen is the "Edit Additional Property" screen from
the Lending module. The screen contains a number of data elements on the left
side of the screen and an image of a residential property on the right.
UP-TO-DATE COLLATERAL INFORMATION: A complete description of the latest
appraisal and all specifics regarding loan collateral, whether a home, car or
other property, can be obtained real-time. Appraisal information is easily
updated.
[DESCRIPTION OF RIGHT HALF OF INSIDE FRONT COVER FOLDOUT GRAPHICS]
OSI PRODUCTS
THE COMPLETE BANKING SOLUTION
THE COMPLETE CREDIT UNION SOLUTION
A three-dimensional circle at the center with the label "OSI System."
Surrounding the inner circle is a three-dimensional ring with connecting pipes
to the inner circle with the following text within the ring: " Internet/Home
Banking -- Lending -- Depository -- Teller/Platform -- ATM -- Operations." A
second ring surrounds the first ring with the following text within the ring:
"Third-Party Products -- Item Processing -- Imaging -- Electronic Forms --
Interactive Voice Response -- Cash Management -- General Ledger." A third ring
surrounds the entire graphic with the following text within the ring:
"Commercial Banks -- Thrifts -- Credit Unions."
The following text appears below the graphic described above.
"The Complete Banking Solution" and "The Complete Credit Union Solution"
(collectively, the "OSI System") from Open Solutions Inc. ("OSI") are fully-
integrated suites of financial applications that operate in a Microsoft Windows
NT environment with an Oracle relational database. The OSI System interfaces to
third-party applications that are commonly used in banks and credit unions and
is designed to enable OSI's customers to reduce their core data processing and
operational costs and to leverage their customer information.
[Open Solutions logo]
The Power of Client/Server
<PAGE> 5
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, all information
contained in this Prospectus (i) reflects the conversion of all outstanding
shares of the Company's Series A-1, Series A-2, Series B, Series C and Series D
Preferred Stock (the "Convertible Preferred Stock") into an aggregate of
5,308,472 shares of Common Stock at the closing of this offering and (ii)
assumes no exercise of the Underwriters' over-allotment option. This Prospectus
contains forward-looking statements which involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under "Risk Factors" and elsewhere in this Prospectus.
THE COMPANY
Open Solutions Inc. (the "Company") is a leading provider of client/server
core processing software and related services to small to mid-size banks and
credit unions. The Company has developed The Complete Banking Solution and The
Complete Credit Union Solution (the "OSI System"), which are fully-integrated
suites of banking and credit union applications that operate in a Microsoft
Windows NT environment with an Oracle relational database. The Company's
software supports all of an institution's core processing requirements,
including deposits and loans, teller functions, home/Internet banking and
platform automation. The OSI System enables banks and credit unions to enhance
customer satisfaction and compete more effectively in the financial services
industry.
Currently, there are over 20,000 banking and depository institutions in the
United States with assets of up to $3 billion, including small to mid-size
commercial banks, thrifts and credit unions. The Company believes that these
institutions, which have traditionally competed on personalized service, are
facing increasing competitive pressures and are seeking to implement information
technology systems that provide a competitive advantage. Banks and credit unions
also require core processing systems that are able to accommodate new and
emerging technologies, such as automated teller machines ("ATMs"), telephone
banking and home banking via personal computers and the Internet. These
institutions have traditionally fulfilled their information technology needs
through legacy computer systems, operated either by the institution or a service
bureau on an outsourced basis. These legacy systems are not easily integrated
with other applications used in the enterprise, typically do not provide
real-time transaction processing and are not easily adapted to evolving business
needs and regulatory requirements.
The need to improve customer service levels, enhance operating efficiencies
and lower costs has contributed to the growing acceptance of the client/server
model of computing based on open, industry-standard operating environments and
relational databases. Client/server systems can improve information sharing by
providing access at each desktop to critical customer and transaction data.
Until recently, the adoption of client/server systems in many banks and credit
unions has lagged other industries due to the limited number of suppliers of
open client/server systems designed specifically to address the core processing
requirements of such institutions. The Company believes that fewer than 200
small to mid-size banks and credit unions in the United States have implemented
open client/server core processing systems.
The OSI System is a client/server software solution that is designed to
enable the Company's customers to reduce their core processing and operational
costs and to leverage their customer information to improve retention and
identify potential cross-selling opportunities. In addition to providing
comprehensive core processing functionality, the OSI System interfaces to
third-party applications that are commonly used in banks and credit unions,
including check processing, ATMs and general ledger applications. The OSI System
can reduce the overall cost of ownership of a financial institution's core
system. By integrating core banking functions, which have historically run
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3
<PAGE> 6
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on separate systems, the OSI System enables its customers to achieve operational
efficiencies. The OSI System can also reduce the costs that would otherwise be
associated with the ongoing maintenance of legacy systems.
The Company's objective is to be the leading supplier of enterprise-wide
client/server software for small to mid-size banks and credit unions. The
Company's strategy for achieving this objective includes the following: (i)
continue to focus on small to mid-size banks and credit unions, (ii) expand
distribution through outsourcing solutions, (iii) leverage customer base and
(iv) maintain product leadership.
The Company markets its software and services primarily through its direct
sales force. To expand its distribution capabilities, the Company has also
established strategic relationships with The BISYS Group, Inc., a major national
outsourcing provider, and Connecticut On-Line Computer Center, Inc., a major
regional outsourcing provider, under which these third parties provide
outsourced processing services to the financial services industry using the OSI
System.
The Company was organized as a Delaware corporation in 1992. The Company's
principal office is located at 300 Winding Brook Drive, Glastonbury, Connecticut
06033 and its telephone number is (860) 652-3155.
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4
<PAGE> 7
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THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company........ 2,617,000 shares
Common Stock offered by the Selling
Stockholders............................. 183,000 shares
Common Stock to be outstanding after
the offering............................. 10,161,485 shares(1)
Use of proceeds............................ Working capital and other general
corporate purposes
Nasdaq National Market symbol.............. OSIF
</TABLE>
- ---------------
(1) Based on the number of shares of Common Stock outstanding on June 30, 1998.
Excludes an aggregate of 1,689,500 shares subject to options outstanding as
of June 30, 1998 at a weighted average exercise price of $0.77 per share, of
which options to purchase 1,036,155 shares of Common Stock are exercisable.
Also excludes an aggregate of 636,111 shares of Common Stock issuable upon
the exercise of outstanding warrants as of June 30, 1998 at a weighted
average exercise price of $5.66 per share, all of which are exercisable. See
"Risk Factors -- Shares Eligible for Future Sale; Registration Rights,"
"Management -- Stock Plans," "Description of Capital Stock -- Warrants" and
Notes 7 and 9 of Notes to the Company's Financial Statements.
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1997 1998
------ ------- ------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software license............. $ -- $ -- $ 213 $ 801 $ 4,099 $ 1,212 $ 2,759
Service and maintenance...... 95 -- 55 218 2,550 757 3,010
------ ------- ------- ------- ---------- ------- ----------
Total revenues................. 95 -- 268 1,019 6,649 1,969 5,769
Loss from operations........... (476) (1,205) (1,890) (3,774) (3,264) (2,480) (2,397)
Net loss....................... $ (513) $(1,191) $(1,895) $(3,638) $ (3,055) $(2,405) $ (2,216)
Net loss per common share
(basic and diluted).......... $(0.25) $ (0.61) $ (0.98) $ (1.73) $ (1.42) $ (1.12) $ (1.01)
Weighted average common shares
used to compute net loss per
share........................ 2,079 1,955 1,936 2,103 2,155 2,146 2,192
Unaudited pro forma net loss
per common share
(basic and diluted).......... $ (0.41) $ (0.30)
Unaudited pro forma weighted
average common shares
outstanding.................. 7,464 7,500
<CAPTION>
JUNE 30, 1998
--------------------------------------------
PRO PRO FORMA
ACTUAL FORMA(1) AS ADJUSTED(1)(2)
-------- ----------- -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 6,333 $ 6,333 $ 32,205
Working capital............................................. 5,818 5,818 31,690
Total assets................................................ 12,413 12,413 38,285
Mandatorily redeemable convertible preferred stock.......... 16,140 -- --
Stockholders' equity (deficit).............................. (8,412) 7,728 33,600
</TABLE>
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(1) Reflects conversion of all outstanding shares of Convertible Preferred Stock
into an aggregate of 5,308,472 shares of Common Stock upon the closing of
this offering. See Note 2 of Notes to the Company's Financial Statements.
(2) Adjusted to give effect to the sale by the Company of 2,617,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$11.00 per share and after deducting the estimated underwriting discounts
and commissions and offering expenses payable by the Company. See "Use of
Proceeds."
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5
<PAGE> 8
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the shares
of Common Stock offered by this Prospectus.
Limited Operating History; History of Losses. The Company was incorporated
in May 1992 and did not sell its first product until the second quarter of 1995.
Accordingly, the Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies with limited
operating histories. Although the Company has experienced revenue growth in
recent periods, historical growth rates may not be sustained and are not
necessarily indicative of future operating results. The Company incurred
operating losses of $2.5 million, $3.3 million, $3.8 million and $1.9 million
for the six months ended June 30, 1998 and the years ended December 31, 1997,
1996 and 1995, respectively. There can be no assurance that operating losses
will not increase in the future or that the Company will ever achieve or sustain
profitability on a quarterly or annual basis. 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 the Company is
unable to adjust operating expense levels accordingly, the Company's business,
financial condition and results of operations will be materially adversely
affected. As of June 30, 1998, the Company had an accumulated deficit of $12.8
million.
Potential Fluctuations in Quarterly Performance. The Company's revenues
and operating results have varied substantially from quarter to quarter. The
Company's quarterly operating results may continue to fluctuate due to a number
of factors, including the timing, size and nature of the Company's licensing
transactions, lengthy and unpredictable sales cycles, the timing of introduction
and market acceptance of new products or product enhancements by the Company or
its competitors, product and price competition, the relative proportions of
revenues derived from license fees and services, changes in the Company's
operating expenses, software bugs or other product quality problems, personnel
changes and fluctuations in economic and financial market conditions.
The Company recognizes software license revenues upon delivery and, if
required by the contract, upon customer acceptance, if such criteria is other
than perfunctory, which typically does not occur in the same quarter in which
the software license agreement for the system is signed. As a result, the
Company is constrained in its ability to increase its 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 the OSI System typically occurs over a 14 to 24 week period,
and the Company currently has limited implementation resources. As a result of
the Company's limited operating history and experience in the implementation of
the OSI System, the Company may from time to time experience delays and
difficulties in implementation of the OSI System. Delays in the delivery,
implementation or any required acceptance of the Company's products, including
delays resulting from constraints upon the Company's limited installation
resources, could materially adversely affect the Company's quarterly results of
operations. In addition, increased sales and marketing expenses for any given
quarter will negatively impact operating results of such quarter due to a lack
of recognition of associated revenues until the subsequent delivery of the
product.
The Company's expense levels are based, in significant part, on its
expectations as to future revenues and are largely fixed in the short term. As a
result, the Company 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 the Company's expectations
would have an immediate and materially adverse effect on the Company's business,
financial condition and results of operations. In addition, the Company plans to
increase operating expenses to expand its installation, product development,
sales and marketing and administrative organizations. The timing of such
expansion and the rate at which new personnel become productive could cause
material fluctuations in quarterly results of operations.
6
<PAGE> 9
The Company believes that period-to-period comparisons of its 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 some future quarter the Company's results of operations will be
below the expectations of public market analysts and investors. In either case,
the price of the Company's Common Stock could be materially adversely affected.
Acceptance of OSI System. The Company's revenues are derived primarily
from two sources: (i) license fees for software products and (ii) fees for a
full range of services complementing its products, including implementation,
training, and support and maintenance services. Substantially all of these fees
are attributable to licenses of the OSI System. Although the use of
client/server technology has grown in the banking and credit union industry in
recent years, the client/server market is still an emerging market. Moreover,
banks and credit unions historically have been slow to adapt to and accept new
technologies, including client/server systems. The Company's success in
penetrating the banking industry, in particular large banks, may be adversely
affected by the unwillingness of such banks to incur the cost and effort to
convert from their current system to a client/server system and by the fact that
client/server core processing systems have not yet achieved widespread
acceptance. The Company's future financial performance will depend in large part
on continued growth in the number of banks and credit unions utilizing
client/server technology. Accordingly, if the client/server market fails to grow
or grows more slowly than the Company currently anticipates, the Company's
business, financial condition and results of operations could be materially
adversely affected. In addition, a significant portion of all banks and credit
unions have traditionally satisfied their information technology needs through a
service bureau or outsourcing solution. Upon purchasing the OSI System, these
customers will be required to employ information technology personnel in order
to successfully operate and maintain the OSI System. There can be no assurance
that the Company's customers will be able to hire and retain such personnel or
that any inability to do so will not affect their ability to successfully
operate and maintain the OSI System which could have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, the Company's future financial performance will depend in part on the
successful development, introduction and customer acceptance of new and enhanced
versions of the OSI System and other products. A decline in demand for, or
failure to achieve broad market acceptance of, the OSI System or any enhanced
version as a result of competition, technological change or otherwise, will have
a material adverse effect on the Company's business, financial condition and
results of operations.
Dependence on New Products and Rapid Technological Change; Product
Development Risk. The client/server application software market is characterized
by rapid 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 existing products obsolete
and unmarketable in short periods of time. The Company expects new products and
services, and enhancements to existing products and services, to be developed
and introduced by others, which will compete with the products and services
offered by the Company. The life cycles of the Company's products are difficult
to estimate. The Company's future success will depend upon the widespread
adoption of client/server application software in the banking and credit union
industry, as well as the Company's ability to enhance its 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 its customers. There can be no assurance that the Company
will be successful in developing and marketing new products or product
enhancements that meet these changing demands, that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of these products or that its new products and
product enhancements will adequately meet the demands of the marketplace and
achieve market acceptance.
Delays in the release of new and upgraded versions of the Company's
software products, particularly the Oracle relational database management
system, could have a material adverse effect
7
<PAGE> 10
on the Company's revenues and results of operations. Because of the complexities
inherent in developing software products as sophisticated as those sold by the
Company and the lengthy testing periods associated with such products, no
assurance can be given that future product introductions by the Company will not
be delayed. In addition, complex software programs 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 the Company's existing or
future products or third-party products upon which the Company's products are
dependent, such as the Oracle relational database and Microsoft Windows NT, with
the possible result of delays in or loss of market acceptance of the Company's
products, diversion of the Company's resources, injury to the Company's
reputation and increased service, warranty expenses and/or payment of damages.
Intense Competition. The market for the Company's products and services is
intensely competitive and subject to rapid technological change. Competitors
vary in size and in the scope and breadth of the products and services they
offer. The Company encounters competition from a number of sources, all of which
offer core software systems to the banking and credit union industry. The
Company expects additional competition from other established and emerging
companies as the client/server application software market continues to develop
and expand. The Company also expects that competition will increase as a result
of software industry consolidation, including particularly the acquisition of
any of its competitors or any of the client/server based retail banking system
providers by one of the larger service providers to the banking industry. The
Company encounters competition in the U.S. from a number of sources, including
Fiserv, Inc., NCR Corporation, Electronic Data Systems Corporation, Marshall &
Ilsley Corporation, M&I EastPoint, Phoenix International Ltd., Inc., Jack Henry
& Associates, Inc., ALLTEL Corporation, Prologic Corporation and Kirchman
Corporation, all of which offer core processing systems or outsourcing
alternatives to banks and credit unions. The Company also competes against a
number of smaller, regional competitors. In addition to these competitors, the
Company competes internationally with, Misys plc Banking Division (including
Midas-Kapiti International, Inc., Kindle Banking Systems and ACT Financial
Systems), Sanchez Computer Associates, Inc. and Financial Network Services,
among others. Some of the Company's current, and many of the Company's
potential, competitors have longer operating histories, greater name
recognition, larger customer bases and significantly greater financial,
engineering, technical, marketing and other resources than the Company. As a
result, they may be able to respond more quickly to new or emerging technologies
and changes in customer demands or to devote greater resources to the
development, promotion and sale of their products than the Company. In addition,
current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address the needs of the Company's prospective customers.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. The Company expects
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 the Company's technology.
There can be no assurance that the Company will be able to compete successfully
against current or future competitors or that competitive pressures faced by the
Company will not materially adversely affect its business, financial condition
and results of operations.
Management of Growth. The Company is currently experiencing a period of
rapid growth which has placed, and could continue to place, a strain on its
management and other resources. The Company's business has grown in size and
complexity over the past three years. Total revenues increased from $268,141 for
the year ended December 31, 1995 to $6.6 million for the year ended December 31,
1997 and to $5.8 million for the six months ended June 30, 1998. In addition,
the number of employees increased from 26 as of December 31, 1995 to 130 as of
June 30, 1998, and the Company expects to hire additional personnel during 1998
and 1999. The Company's need to manage its growth effectively will require it to
continue to implement and improve its operational, financial and other internal
systems on a timely basis, and to attract, train, motivate, manage and retain
its employees. If the Company's management is unable to manage growth
effectively or new
8
<PAGE> 11
employees are unable to achieve anticipated performance levels, the Company's
business, financial condition and results of operations could be materially
adversely affected. In addition, the Company from time to time may seek
acquisitions of businesses, products and technologies that are complementary to
those of the Company or that allow the Company to enter new markets. Any such
acquisition would place additional strains upon the Company's management and
other resources. Potential investors should consider the risks, expenses and
difficulties frequently encountered in connection with the operation and
development of an expanding business.
Reliance on New Customers. The Company historically has relied upon and
expects to continue to rely upon software license fees from new customers for a
substantial portion of its revenues. Most such licenses involve large dollar
amounts (typically ranging from $250,000 to $750,000), and the sales cycles for
these transactions are often lengthy and unpredictable. Any inability of the
Company to license and deliver the OSI System to a significant number of new
customers would have a material adverse effect on the Company's business,
financial condition and results of operations.
Expansion of Credit Union Customer Base. The Company's software for credit
unions, The Complete Credit Union Solution, has been installed to date at only
one credit union. There can be no assurance that The Complete Credit Union
Solution will be installed at additional credit unions or that it will achieve
wide customer acceptance. Any failure of the Company to successfully penetrate
the credit union industry could have a material adverse effect on the Company's
business, financial condition and results of operations.
Dependence on the Banking and Credit Union Industry; Risk of
Consolidation. Substantially all of the Company's revenues are derived from
customers in the banking and credit union industry, primarily small to mid-size
banks, and the Company expects it will continue to derive substantially all of
its revenues from such customers for the foreseeable future. Unfavorable
economic conditions adversely impacting the banking and credit union industry
could have a material adverse effect on the Company's business, financial
condition and results of operations. For example, the banking and credit union
industry has experienced and may continue to experience cyclical fluctuations in
profitability, which may affect the willingness or ability of participants in
this industry to fund projects such as those for which the Company may be
engaged.
Merger and acquisition activity among financial institutions, particularly
large banks, has been widespread in recent years and is expected to continue in
future years. As a result, industry consolidation could have the effect of
reducing the number of current and potential customers of the Company. Any
significant increase in the level of such consolidation among small to mid-size
banks and credit unions could adversely affect the Company's business, financial
condition and results of operations.
Lengthy Sales Cycle. The Company's software is used for business-critical
purposes, and its implementation involves significant capital commitments by
customers. Potential customers generally commit significant resources to an
evaluation of available software and require the Company to expend substantial
time, effort and money educating them as to the value of the Company's software.
Sales of the Company's software products require an extensive education and
marketing effort throughout a customer's organization because decisions to
license such software generally involve the evaluation of the software by a
significant number of customer personnel in various functional areas, each
having specific and often conflicting requirements. A variety of factors,
including factors over which the Company has little or no control, may cause
potential customers to favor a competing vendor or to delay or forego a
purchase. In addition, the sales cycles associated with these transactions are
subject to a number of uncertainties, including customers' budgetary
constraints, the timing of the expiration of customers' current system license
agreements or outsourced core processing agreements, the timing of customers'
budget cycles and approval processes and customers' willingness to implement a
client/server operating environment. As a result of these or other factors, the
sales cycle for the Company's products is long, typically ranging between six to
nine
9
<PAGE> 12
months. Due to the length of the sales cycle for its software products, the
Company's ability to forecast the timing and amount of specific sales is
limited, and the delay or failure to complete one or more large license
transactions could have a material adverse effect on the Company's business,
financial condition and results of operations.
Reliance on and Expansion of Sales Force and Third-Party Outsourcing
Agreements. The Company relies primarily on its direct sales force for sales of
the OSI System. The Company will be required to hire additional sales, customer
service and implementation personnel in 1998 and beyond if the Company is to
achieve revenue growth in the future. Competition for such personnel is intense,
and there can be no assurance that the Company will be able to retain its
existing sales, customer service and implementation personnel or will be able to
attract, assimilate or retain such additional highly qualified personnel in the
future. If the Company is unable to hire such personnel on a timely basis, its
business, financial condition and results of operations could be materially
adversely affected.
The Company has entered into exclusive license and marketing arrangements
with two providers of outsourcing services to financial institutions, The BISYS
Group, Inc. ("BISYS") and Connecticut On-Line Computer Center, Inc. ("COCC").
Accordingly, the Company's success depends in part on the ultimate success of
these license and marketing arrangements, including the effort and resources
expended by such providers to market outsourcing services using the OSI System.
Dependence on Key Personnel. The Company's future success depends to a
significant extent on the Company's executive officers and key employees,
including the Company's 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 the Company's business, financial condition
and results of operations. The Company does not maintain any key person life
insurance for any of its executive officers or key employees. Competition for
qualified personnel in the software industry is intense and the Company competes
for such personnel with other software companies that have greater financial and
other resources. The future success of the Company will depend in large part on
its ability to attract, retain and motivate highly qualified personnel, and
there can be no assurance that the Company will be able to do so. The Company
has from time to time experienced, and may in the future experience, difficulty
in locating and retaining candidates with appropriate qualifications,
particularly project managers, software engineers and other senior technical
personnel. Any difficulty in hiring needed personnel could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Dependence on Third-Party Technology. The Company's proprietary software
is currently designed, and may in the future be designed, to work on or in
conjunction with certain third-party hardware and/or software products,
including the Microsoft Windows NT operating system with an Oracle relational
database. Although the Company believes that there are alternatives for these
products, any significant interruption in the supply of such third-party
hardware and/or software could have a material adverse effect on the Company's
sales unless and until the Company can replace the functionality provided by
these products. In addition, the Company is to a certain extent dependent upon
such 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 the Company would be able to replace the functionality provided by the
third-party hardware and/or software currently offered in conjunction with the
Company's products in the event that such hardware and/or software becomes
obsolete or incompatible with future versions of the Company's 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 the Company's business, financial condition and results of
operations.
10
<PAGE> 13
Concentration of Customers. Historically, a limited number of customers
have accounted for a significant percentage of the Company's revenues in each
year. For the year ended December 31, 1997, two bank customers accounted for 17%
and 15% of the Company's total revenues. For the year ended December 31, 1996,
four bank customers accounted for 38%, 22%, 20% and 14% of the Company's total
revenues. Although the Company expects that its reliance on any particular
customer will decline as its customer base expands, the failure of the Company
to enter into a sufficient number of licensing agreements during a particular
period could have a material adverse effect on the Company's business, financial
condition and results of operations.
Year 2000 Issues. A portion of the growth in the Company's revenues in
1997 and the first half of 1998 resulted from the Company's ability to provide
banking applications that resolve the Year 2000 problem. As the overall demand
for Year 2000 solutions declines, there can be no assurance that the demand for
the Company's products and services will not be materially adversely affected.
Although the Company believes the OSI System complies with Year 2000
requirements, there can be no assurance that customers will not encounter
difficulties with the OSI System arising from Year 2000 issues. In addition,
there can be no assurance that Year 2000 issues will not adversely affect
third-party network or application software that is integrated with the OSI
System.
Potential for Contract Liability. Failures in a customer's system could
result in an increase in service and warranty costs or a claim for substantial
damages against the Company. There can be no assurance that the limitations of
liability set forth in the Company's contracts would be enforceable or would
otherwise protect the Company from liability for damages. The Company maintains
general liability insurance coverage, including coverage for errors and
omissions in excess of the applicable deductible amount. There can be no
assurance that such 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 the Company that exceeds available
insurance coverage, or the occurrence of changes in the Company's insurance
policies, including premium increases or the imposition of large deductible or
co-insurance requirements, could have a material adverse effect on the Company's
business, financial condition and results of operations. Furthermore,
litigation, regardless of its outcome, could result in substantial cost to the
Company and divert management's attention from the Company's operations. Any
contract liability claim or litigation against the Company could, therefore,
have a material adverse effect on its business, financial condition and results
of operations. Because many of the Company's projects are business-critical
projects for financial institutions, a failure or inability to meet a customer's
expectations could seriously damage the Company's reputation and affect its
ability to attract new business.
Government Regulation. While the Company's operations are not directly
regulated by banking authorities, the Company's existing and potential customers
are subject to extensive federal, state and foreign governmental regulations.
Such regulations may adversely affect the banking and credit union industry,
limit the number of potential customers for the Company's products and services
or otherwise have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, governmental regulation in the
financial services industry is evolving, particularly with respect to banking
technology. There can be no assurance that future changes in such regulations or
in their interpretation will not adversely affect the business of the Company.
Dependence on Intellectual Property Rights; Risk of Infringement. The
Company relies on a combination of copyright, trademark and trade secret laws,
nondisclosure agreements and other contractual provisions and technical measures
to protect its intellectual property rights. There can be no assurance that
these protections will be adequate to prevent the Company's competitors from
copying or reverse-engineering the Company's products, or that the Company's
competitors will not independently develop technologies that are substantially
equivalent or superior to the Company's technology. The Company does not include
in its products any mechanism to prevent unauthorized copying and any such
unauthorized copying could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company has no
patents, and existing
11
<PAGE> 14
copyright laws afford only limited protection for the Company's intellectual
property rights and will not protect such rights in the event competitors
independently develop products similar to those of the Company. In addition, the
laws of certain countries in which the Company's products are or may be licensed
do not protect the Company's products and intellectual property rights to the
same extent as the laws of the United States.
Although the Company has never been the subject of a material intellectual
property dispute, there can be no assurance that a third party will not assert
that the Company's technology violates its intellectual property rights in the
future. As the number of software products in the Company's target market
increases and the functionality of these products further overlap, the Company
believes that software developers may become increasingly subject to
infringement claims. Any such claims, whether with or without merit, can be time
consuming and expensive to defend. There can be no assurance that third parties
will not assert infringement claims against the Company in the future with
respect to its current or future products or that any such assertion will not
require the Company to enter into royalty arrangements (if available) or
litigation that could be costly to the Company.
Significant Influence by Directors, Officers and Principal
Stockholders. Upon completion of this offering, the Company's directors,
officers and certain principal stockholders of the Company will beneficially own
approximately 64% of the Company's outstanding Common Stock. These stockholders,
if acting together, would have the ability to elect the Company's directors and
may have the ability to determine the outcome of corporate actions requiring
stockholder approval, irrespective of how other stockholders of the Company may
vote. This concentration of ownership may have the effect of delaying or
preventing a change in control of the Company.
Benefits of this Offering to Current Stockholders. The completion of this
offering will provide significant benefits to the current stockholders of the
Company, including certain of its directors and executive officers. The Company
will not receive any of the net proceeds from the sale of shares by the Selling
Stockholders, which will total approximately $1.9 million, assuming a public
offering price of $11.00 per share. The completion of this offering will create
a public market for the Common Stock and thereby may increase the market value
of the investment by the current stockholders in the Company. Upon the closing
of this offering, the difference between the aggregate purchase price paid by
the Company's current stockholders for their shares and the aggregate market
value of such shares will be approximately $63.9 million, assuming a public
offering price of $11.00 per share. See "Dilution," "Principal and Selling
Stockholders" and "Shares Eligible for Future Sale."
Broad Discretion as to Use of Proceeds. The net proceeds from this
offering will be used, as determined by management in its sole discretion, for
working capital and general corporate purposes, as well as for the possible
acquisition of additional businesses and technologies that are complementary to
the current or future business of the Company. However, the Company has not
determined the specific allocation of the net proceeds among the various uses
described above. The Company's management will have broad discretion over the
use and investment of such net proceeds, and, accordingly, investors in this
offering will rely upon the judgment of the Company's management with respect to
the use of proceeds, with only limited information concerning management's
specific intentions.
No Prior Public Market for Common Stock; Possibility of Volatility of Stock
Price. Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
or be sustained after this offering or that the market price of the Common Stock
will not decline below the initial public offering price. The initial public
offering price will be determined by negotiations between the Company and the
Representatives of the Underwriters and is not necessarily indicative of the
market price at which the Common Stock of the Company will trade after this
offering. The market prices for securities of technology companies have been
highly volatile and the market has experienced significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. Announcements of
12
<PAGE> 15
technological innovations or new products or service offerings by the Company or
its competitors, developments concerning proprietary rights, including patents
and litigation matters, domestic or international regulatory developments
affecting the banking and credit union industry, general market conditions, any
shortfall in revenues or earnings from expected levels or other failures by the
Company to meet expectations of securities analysts and other factors, may have
a significant impact on the market price of the Common Stock.
Dividends. No cash dividends have been declared or paid on its capital
stock to date and the Company does not anticipate paying cash dividends in the
foreseeable future. In addition, under the terms of the Company's credit
agreement there are certain restrictions on the Company's ability to declare and
pay dividends.
Dilution. Purchasers of shares of Common Stock in this offering will
suffer an immediate and substantial dilution in the net tangible book value of
the Common Stock from the initial public offering price.
Shares Eligible for Future Sale; Registration Rights. Sales of substantial
amounts of shares of Common Stock in the public market following this offering
could adversely affect the market price of the Common Stock. Upon completion of
this offering, the Company will have outstanding 10,161,485 shares of Common
Stock. On the date of this Prospectus, in addition to the 2,800,000 shares
offered hereby, approximately 10,000 shares of Common Stock, which are not
subject to 180-day lock-up agreements (the "Lock-up Agreements") with the
Representatives of the Underwriters, will be eligible for immediate sale in the
public market pursuant to Rule 144(k) under the Securities Act of 1933, as
amended (the "Securities Act"). Approximately 146 additional shares of Common
Stock, which are not subject to the Lock-up Agreements, will be eligible for
sale in the public market in accordance with Rule 144 or Rule 701 under the
Securities Act beginning 90 days after the date of this Prospectus. Upon
expiration of the Lock-up Agreements 180 days after the date of this Prospectus,
approximately 7,351,339 additional shares of Common Stock will be available for
sale in the public market, subject to the provisions of Rule 144 under the
Securities Act. Promptly following the consummation of this offering, the
Company intends to register an aggregate of 5,000,000 shares of Common Stock
issuable under its 1994 Stock Option Plan, 1998 Employee Stock Purchase Plan and
1998 Stock Incentive Plan. Holders of approximately 9,665,450 shares of Common
Stock (including 2,314,111 shares of Common Stock that may be acquired pursuant
to the exercise of options and warrants held by them) have agreed, pursuant to
the Lock-up Agreements, not to directly or indirectly offer, sell, pledge,
contract to sell, grant any option to purchase or otherwise dispose of such
shares for 180 days after the date of the final Prospectus. The Company is
unable to predict the effect that sales made under Rule 144, or otherwise, may
have on the then prevailing market price of the Common Stock. The holders of
approximately 5,944,583 shares of Common Stock, including the shares issuable
upon exercise of outstanding warrants, are entitled to certain incidental and
demand registration rights with respect to such shares. By exercising their
registration rights, such holders could cause a large number of shares to be
registered and sold in the public market. Sales pursuant to Rule 144 or other
exemptions from registration, or pursuant to registration rights, may have an
adverse effect on the market price for the Common Stock and could impair the
Company's ability to raise capital through offerings of its equity securities.
Antitakeover Provisions. The Company's Amended and Restated Certificate of
Incorporation (the "Restated Certificate of Incorporation") requires that any
action required or permitted to be taken by stockholders of the Company must be
effected at a duly called annual or special meeting of stockholders and may not
be effected by any consent in writing, and requires advance notice by, and
certain information from, a stockholder of a proposal or director nomination
which such stockholder desires to present at any annual or special meeting of
stockholders. Special meetings of stockholders may be called only by the
Chairman of the Board or the President of the Company or by the Board of
Directors. The Restated Certificate of Incorporation provides for a classified
Board of Directors, and members of the Board of Directors may be removed only
for cause upon the affirmative vote of holders of at least 75% of the votes
which all the stockholders would be entitled to cast in any
13
<PAGE> 16
annual election of directors or class of directors. In addition, shares of the
Company's Preferred Stock may be issued in the future without further
stockholder approval and upon such terms and conditions, and having such rights,
privileges and preferences, as the Board of Directors may determine. The rights
of the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of any holders of Preferred Stock that may be issued in the
future. The Company has no present plans to issue any shares of Preferred Stock.
These provisions, and other provisions of the Restated Certificate of
Incorporation, the Company's By-laws and certain provisions of the Delaware
corporation law, may have the effect of deterring hostile takeovers or delaying
or preventing acquisition proposals or changes in control or management of the
Company, including transactions in which stockholders might otherwise receive a
premium for their shares over then current market prices. In addition, these
provisions may limit the ability of stockholders to approve transactions that
they may deem to be in their best interests.
14
<PAGE> 17
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,617,000 shares of
Common Stock offered by the Company hereby are estimated to be $25,871,910 after
deducting the estimated underwriting discounts and commissions and offering
expenses payable by the Company and assuming an initial public offering price of
$11.00 per share. The Company will not receive any of the net proceeds from the
sale of shares by the Selling Stockholders. See "Principal and Selling
Stockholders."
The principal purposes of this offering are to increase the Company's
equity capital, to create a public market for the Company's Common Stock, to
facilitate future access by the Company to public equity markets, to provide
liquidity to existing stockholders, to provide increased visibility and
credibility in a marketplace where several of its current and potential
competitors are or will be publicly held companies, and to enhance the ability
of the Company to use its Common Stock as consideration for acquisitions and as
a means of attracting and retaining key employees.
The Company expects to use the net proceeds from this offering for working
capital and other general corporate purposes, including expansion of its
facilities and expansion of its installation, product development, sales and
marketing and administrative organizations. The Company has not as yet
identified specific uses for or allocated to such general corporate purposes any
specific portion of such proceeds, and management will have discretion over
their use, allocation and investment. Pending use of the net proceeds, the
Company intends to invest the net proceeds from this offering in short-term,
investment grade, interest-bearing instruments. See "Risk Factors -- Broad
Discretion as to Use of Proceeds."
The Company may seek acquisitions of businesses, products and technologies
that are complementary to those of the Company, and a portion of the net
proceeds may also be used for such acquisitions. While the Company engages from
time to time in discussions with respect to potential acquisitions, the Company
has no plans, commitments or agreements with respect to any such acquisitions as
of the date of this Prospectus, and there can be no assurances that any
acquisitions will be made.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain earnings, if any, to support its
growth strategy and does not anticipate paying cash dividends in the foreseeable
future. Payment of future dividends, if any, will be at the discretion of the
Company's Board of Directors after taking into account various factors,
including the Company's financial condition, operating results, current and
anticipated cash needs and plans for expansion. Under the terms of the Company's
credit agreement there are certain restrictions on the Company's ability to
declare and pay dividends. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and Note 6 of Notes to the Company's Financial Statements.
15
<PAGE> 18
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1998 (i) on an actual basis, (ii) on a pro forma basis giving effect, upon
the closing of this offering, to the conversion of all outstanding shares of the
Company's Convertible Preferred Stock into an aggregate of 5,308,472 shares of
Common Stock and the filing of the Company's Restated Certificate of
Incorporation to increase the number of authorized shares of Common Stock,
eliminate the terms of the Company's existing series of Convertible Preferred
Stock and create a class of authorized but undesignated Preferred Stock and
(iii) on a pro forma basis, as adjusted to reflect the issuance and sale of the
shares of Common Stock offered by the Company hereby at an assumed initial
public offering price of $11.00 per share, after deducting the estimated
underwriting discounts and commissions and offering expenses. The capitalization
information set forth in the table below is qualified by the Company's Financial
Statements and Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
--------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------ ------------ ------------
<S> <C> <C> <C>
Mandatorily redeemable convertible preferred stock:
Series A-2 Preferred Stock, $0.01 par value; 166,667
shares authorized, 166,667 issued and outstanding
(actual); no shares authorized, issued or outstanding
(pro forma and pro forma as adjusted)................... $ 500,000 $ --
Series B Preferred Stock, $0.01 par value; 1,736,250
shares authorized, 1,627,917 issued and outstanding
(actual); no shares authorized, issued or outstanding
(pro forma and pro forma as adjusted)................... 4,930,333 --
Series C Preferred Stock, $0.01 par value; 1,375,000
shares authorized, 1,263,889 issued and outstanding
(actual); no shares authorized, issued or outstanding
(pro forma and pro forma as adjusted)................... 5,731,482 --
Series D Preferred Stock, $0.01 par value; 1,250,000
shares authorized, 833,333 issued and outstanding
(actual); no shares authorized, issued or outstanding
(pro forma and pro forma as adjusted)................... 4,977,734 --
------------ ------------
16,139,549 --
------------ ------------
Stockholders' equity:
Series A-1 Preferred Stock, $0.01 per value; 1,000,000
shares authorized, 1,000,000 issued and outstanding
(actual); no shares authorized, issued or outstanding
(pro forma and pro forma as adjusted)................... 10,000 --
Series A-2 Preferred Stock, $0.01 par value; 416,666
shares authorized, 416,666 issued and outstanding
(actual); no shares authorized, issued or outstanding
(pro forma and pro forma as adjusted)................... 4,167 --
Preferred Stock, $0.01 par value; no shares authorized,
issued or outstanding (actual); 5,000,000 shares
authorized, no shares issued and outstanding (pro forma
and pro forma as adjusted).............................. -- --
Common Stock, $0.01 par value; 19,055,417 shares
authorized, 2,236,013 issued and outstanding (actual);
50,000,000 shares authorized, 7,544,485 (pro forma) and
10,161,485 (pro forma as adjusted) shares issued and
outstanding(1).......................................... 22,360 75,445 $ 101,615
Additional paid-in capital................................ 4,311,842 20,412,473 46,258,213
Accumulated deficit....................................... (12,760,110) (12,760,110) (12,760,110)
------------ ------------ ------------
Total stockholders' equity (deficit).................... (8,411,741) 7,727,808 33,599,718
------------ ------------ ------------
Total capitalization................................ $ 7,727,808 $ 7,727,808 $ 33,599,718
============ ============ ============
</TABLE>
- ---------------
(1) Excludes an aggregate of 1,689,500 shares of Common Stock subject to options
outstanding as of June 30, 1998 at a weighted average exercise price of
$0.77 per share, of which options to purchase 1,036,155 shares of Common
Stock are exercisable. Also excludes an aggregate of 636,111 shares of
Common Stock issuable upon the exercise of outstanding warrants as of June
30, 1998 at a weighted average exercise price of $5.66 per share, all of
which are exercisable. See "Risk Factors -- Shares Eligible for Future Sale;
Registration Rights," "Management -- Stock Plans," "Description of Capital
Stock -- Warrants" and Notes 7 and 9 of Notes to the Company's Financial
Statements.
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<PAGE> 19
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1998
was $7,081,500 or $0.94 per share of Common Stock. Pro forma net tangible book
value per share is determined by dividing the Company's tangible net worth
(tangible assets less liabilities) by the number of shares of Common Stock
outstanding, after giving effect to the mandatory conversion of the Company's
Convertible Preferred Stock upon the completion of this offering. After giving
effect to the sale of the shares of Common Stock offered by the Company hereby
at an assumed initial public offering price of $11.00 per share and after
deducting the estimated underwriting discounts and commissions and offering
expenses, the pro forma net tangible book value of the Company as of June 30,
1998 would have been $3.24 per share. This represents an immediate increase in
such pro forma net tangible book value of $2.30 per share to existing
stockholders and an immediate dilution of $7.76 per share to new investors
purchasing shares in this offering. If the initial public offering price is
higher or lower, the dilution to the new investors will be greater or less,
respectively. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $11.00
Pro forma net tangible book value per share as of June 30,
1998................................................... $ 0.94
Increase per share attributable to this offering.......... 2.30
------
Pro forma net tangible book value per share after this
offering.................................................. 3.24
------
Dilution per share to new investors......................... $ 7.76
======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1998,
the total number of shares of Common Stock purchased from the Company, the total
consideration paid and the average consideration paid per share by the existing
stockholders and by the new investors based (for new investors) upon an assumed
initial public offering price of $11.00 per share (before deducting the
estimated underwriting discounts and commissions and offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- --------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)..... 7,544,485 74.2% $19,052,191 39.8% $ 2.53
New investors................ 2,617,000 25.8 28,787,000 60.2 $11.00
---------- ----- ----------- ----- ------
Total................... 10,161,485 100.0% $47,839,191 100.0%
========== ===== =========== =====
</TABLE>
- ---------------
(1) Sales by the Selling Stockholders in this offering will reduce the number of
shares held by existing stockholders to 7,361,485, or approximately 72% of
the total number of shares of Common Stock outstanding after this offering
(or 7,291,485 shares and approximately 69% if the Underwriters'
over-allotment option is exercised in full), and will increase the number of
shares held by new investors to 2,800,000, or approximately 28% of the total
number of shares of Common Stock outstanding after this offering (or
3,220,000 shares and approximately 31% if the Underwriters' over-allotment
option is exercised in full).
17
<PAGE> 20
SELECTED FINANCIAL DATA
The selected financial data set forth below as of December 31, 1997 and
1996, and for the three years ended December 31, 1997 are derived from the
Company's financial statements, which appear elsewhere in this Prospectus and
which have been audited by PricewaterhouseCoopers LLP, independent accountants.
The selected financial data set forth below as of December 31, 1995 and 1994,
and for the year ended December 31, 1994 are derived from the Company's audited
financial statements which are not included in this Prospectus. The selected
financial data set forth below as of and for the year ended December 31, 1993
are derived from the Company's unaudited financial statements which are not
included in this Prospectus. The selected financial data set forth below as of
June 30, 1998, and for the six months ended June 30, 1998 and 1997 are derived
from the Company's unaudited financial statements, which appear elsewhere in
this Prospectus. In the opinion of management, the unaudited financial
statements have been prepared on a basis consistent with the financial
statements which appear elsewhere in this Prospectus and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the financial position and results of operations for these
unaudited periods. The operating results for the six months ended June 30, 1998
are not necessarily indicative of the results to be expected for the full year
ending December 31, 1998. The data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's financial statements, including the notes thereto,
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software license.................. $ -- $ -- $ 213 $ 801 $ 4,099 $ 1,212 $ 2,759
Service and maintenance........... 95 -- 55 218 2,550 757 3,010
--------- --------- --------- --------- --------- --------- ---------
Total revenues.................. 95 -- 268 1,019 6,649 1,969 5,769
Cost of revenues:
Software license.................. -- -- 223 507 1,160 368 619
Service and maintenance........... 25 -- 477 1,530 3,150 1,391 2,455
--------- --------- --------- --------- --------- --------- ---------
Total cost of revenues.......... 25 -- 700 2,037 4,310 1,759 3,074
Operating expenses:
Sales and marketing............... 60 136 398 1,051 2,132 955 1,562
Product development............... 436 985 661 1,060 1,902 995 919
General and administrative........ 50 84 399 645 1,569 740 1,346
Contract termination.............. -- -- -- -- -- -- 1,265
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses........ 546 1,205 1,458 2,756 5,603 2,690 5,092
--------- --------- --------- --------- --------- --------- ---------
Loss from operations................ (476) (1,205) (1,890) (3,774) (3,264) (2,480) (2,397)
Interest income (expense), net...... (37) 14 (5) 136 209 75 181
--------- --------- --------- --------- --------- --------- ---------
Net loss............................ $ (513) $ (1,191) $ (1,895) $ (3,638) $ (3,055) $ (2,405) $ (2,216)
========= ========= ========= ========= ========= ========= =========
Net loss per common share (basic and
diluted).......................... $ (0.25) $ (0.61) $ (0.98) $ (1.73) $ (1.42) $ (1.12) $ (1.01)
Weighted average common shares used
to compute net loss per share..... 2,079 1,955 1,936 2,103 2,155 2,146 2,192
Unaudited pro forma net loss per
common share (basic and
diluted).......................... $ (0.41) $ (0.30)
Unaudited pro forma weighted average
common shares outstanding......... 7,464 7,500
<CAPTION>
DECEMBER 31,
------------------------------------------- JUNE 30,
1993 1994 1995 1996 1997 1998
----- ----- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 2 $ 652 $ 3,914 $ 4,438 $ 7,596 $ 6,333
Working capital (deficit)................................. (100) 660 3,570 4,901 6,198 5,818
Total assets.............................................. 67 771 4,354 7,546 11,302 12,413
Long-term debt, less current portion...................... 730 250 -- -- 58 --
Mandatorily redeemable convertible preferred stock........ -- -- 5,092 10,573 15,551 16,140
Stockholders' equity (deficit)............................ (764) 521 (1,253) (4,779) (7,826) (8,412)
</TABLE>
18
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a leading provider of client/server core processing software
and related services to small to mid-size banks and credit unions. The Company
established operations in May 1992, and released its first major product, The
Complete Banking Solution, in the second quarter of 1995. The Company released a
second major product, The Complete Credit Union Solution, in the first quarter
of 1998. These two products (the "OSI System") are fully-integrated suites of
banking and credit union applications that operate in a Windows NT environment
using an Oracle relational database. The OSI System supports an institution's
entire core processing requirements, including deposits and loans, teller
functions, home/Internet banking and platform automation.
As of June 30, 1998, 31 banks and one credit union utilized the OSI System.
An additional 38 banks were in various stages of implementation, including 13
banks owned by three bank holding companies and nine banks utilizing outsourcing
services provided by the Company's outsourcing partners.
The Company currently markets its products in the United States directly
and, through an alliance with Unisys PAAG ("Unisys"), in Asia (except Japan),
South Africa and certain other countries. The Company has established software
license and marketing agreements with BISYS and COCC under which these third
parties use the OSI System to provide core processing services to banks and
credit unions on an outsourced basis. Under the agreement with BISYS, software
license fees are paid to the Company over a three-year period following BISYS'
implementation of each OSI System. The Company recognized $115,658 under the
BISYS agreement through June 30, 1998, comprising primarily of consulting
related revenue. Under the agreement with COCC, software license fees are paid,
and revenues are recognized, upon implementation of each OSI System. Under this
agreement, once cumulative software license fees total a stipulated amount, COCC
is released from any further obligation to pay license fees. This release is
subject to a one-time payment in December 2002 if the asset base of COCC's
customers has exceeded a specified amount. Under both the BISYS and COCC
agreements, the Company is also entitled to annual support and maintenance
payments on each installed OSI System. The Company recognized revenue of
$308,278 under the COCC agreement in the six months ended June 30, 1998. Of this
amount the Company recognized $250,000 for the delivery of the OSI System source
code to COCC. The Company will earn an additional $250,000 for implementation
assistance on the first three COCC customers. Apart from these fees, the Company
does not expect to recognize significant revenues from its agreements with
Unisys and COCC until at least 1999.
The Company's revenues are primarily derived from two sources: (i) software
license revenues and (ii) service and maintenance fees. Software license
revenues primarily include revenues from software licenses for the OSI System.
The Company also derives software license revenues from the sale of third-party
software sublicensed by the Company. Software license fees are generally based
on the bank's asset size and the number of accounts and typically are payable
upon delivery of the software. The Company derives service and maintenance
revenues from (i) implementation and training fees, which are based on customer
size and the magnitude and complexity of the project and (ii) customer support
and maintenance fees for providing on-going support and product updates.
Customer support and maintenance fees are established as a percentage of the
list price for the software license and are paid annually. Support and
maintenance agreements generally have a term of 12 months and are renewable
annually. As of June 30, 1998, all users of the OSI System were covered by
support and maintenance agreements.
Effective January 1, 1997 the Company adopted AICPA Statement of Position
97-2, "Software Revenue Recognition" ("SOP 97-2"). Under SOP 97-2, the Company
recognizes software license revenue when a noncancelable license agreement has
been executed, fees are fixed and determina-
19
<PAGE> 22
ble, the software has been delivered, and accepted by the customer if acceptance
is required by the contract and other than perfunctory, and collection is
considered probable. Prior to 1997, the Company recognized software license
revenue in accordance with AICPA Statement of Position 91-1, "Software Revenue
Recognition" ("SOP 91-1"). Under SOP 91-1, the Company recognized software
license revenue when the software was delivered, collectibility was probable and
no other significant post-delivery obligations remained.
In December 1997, the Company revised its standard end user license
agreement to eliminate certain customer acceptance provisions that required the
deferral of software license revenue recognition until after implementation was
completed, which generally lagged software delivery by three to four months. The
anticipated impact of the revised end user license agreement on future results
will be to eliminate the deferral of software license revenue pending completion
of implementation. The Company expects that its future licensing arrangements
will generally be governed by the revised license agreement, although licenses
sold under the previous agreement will continue to affect revenue recognition
through 1998 and certain new agreements may contain acceptance or other
provisions that have the effect of deferring software license revenue
recognition. Such differences in the timing of revenue recognition will impact
the comparability of the Company's historical revenues and operating results to
future results of operations.
The Company continues to evaluate and address business and operational
issues related to Year 2000 compliance, and believes that its internal
management systems and software products are in such compliance. The Company
expects that the total cost to the Company to address any potential Year 2000
issues will not be material to operations.
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of
revenues for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------- ---------------
1995 1996 1997 1997 1998
------ ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Revenues:
Software license........................... 79.3% 78.6% 61.7% 61.6% 47.8%
Service and maintenance.................... 20.7 21.4 38.3 38.4 52.2
------ ------ ----- ------ -----
Total revenues.......................... 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Software license........................... 83.2 49.8 17.4 18.7 10.7
Service and maintenance.................... 177.9 150.1 47.4 70.6 42.6
------ ------ ----- ------ -----
Total cost of revenues.................. 261.1 199.9 64.8 89.3 53.3
Operating expenses:
Sales and marketing........................ 148.6 103.0 32.1 48.5 27.1
Product development........................ 246.3 104.0 28.6 50.6 15.9
General and administrative................. 149.0 63.3 23.6 37.6 23.3
Contract termination....................... -- -- -- -- 21.9
------ ------ ----- ------ -----
Total operating expenses................ 543.9 270.3 84.3 136.7 88.2
Loss from operations......................... (705.0) (370.2) (49.1) (126.0) (41.5)
Interest income (expense), net............... (1.7) 13.3 3.2 3.8 3.1
------ ------ ----- ------ -----
Net loss..................................... (706.7)% (356.9)% (45.9)% (122.2)% (38.4)%
====== ====== ===== ====== =====
</TABLE>
20
<PAGE> 23
Six Months Ended June 30, 1998 and June 30, 1997
Revenues. Revenues increased 193.0% to $5.8 million for the six months
ended June 30, 1998 from $2.0 million for the six months ended June 30, 1997.
Software license revenues increased 127.6% to $2.8 million for the six months
ended June 30, 1998 from $1.2 million for the six months ended June 30, 1997.
This increase of software license revenues was primarily due to increased sales
of the OSI System. In addition, during the six months ended June 30, 1998, the
Company recognized revenues of $250,000 upon delivery of source code to COCC for
the OSI System pursuant to the agreement with COCC. For the six months ended
June 30, 1998 and 1997, software license revenues included $534,887 and
$269,500, respectively, related to third-party software products, primarily
Oracle's relational database management software, which were sold by the Company
with the OSI System under various sublicense agreements. Service and maintenance
revenues increased 297.7% to $3.0 million for the six months ended June 30, 1998
from $756,824 for the six months ended June 30, 1997. This increase in service
and maintenance revenues was primarily due to implementation fees on a larger
number of completed or in-process installations ($1.3 million) and, to a lesser
extent, an increase in the installed base of customers under support and
maintenance agreements ($473,482). The Company's installed customer base was 32
at June 30, 1998 compared with 15 at June 30, 1997.
The Company's backlog at June 30, 1998 was approximately $9.6 million,
which represented the unrecognized portion of contractually committed software
license and implementation fees.
Cost of revenues. Cost of software license revenues consists primarily of
sublicense fees paid on third-party software products that are sold with the OSI
System, including Oracle's relational database product, amortization of
capitalized software development costs and personnel and other costs to develop
and produce media and documentation. The Company amortizes capitalized software
development costs over a three-year period. Through March 1998, cost of revenues
also included royalties paid to Banking Spectrum Services, Inc., a shareholder
of the Company ("Spectrum"), and Banking Spectrum, Inc. (together with Spectrum,
"Banking Spectrum") to license certain software products and for consulting and
support services. In March 1998, the Company entered into an agreement with
Banking Spectrum that released it from paying future royalties to Banking
Spectrum. (See Note 13 of Notes to the Company's Financial Statements). Cost of
service and maintenance fees primarily consists of personnel and related
facility expenses associated with implementation, training and consulting
activities, and ongoing customer support and product maintenance activities.
Total cost of revenues increased 74.7% to $3.1 million for the six months
ended June 30, 1998 from $1.8 million for the six months ended June 30, 1997. As
a percent of total revenues, total cost of revenues decreased to 53.3% for the
six months ended June 30, 1998 from 89.3% for the six months ended June 30,
1997, reflecting higher total revenues and productivity gains in the
implementation, training and customer support functions.
Cost of software license revenues increased 67.9% to $618,795 for the six
months ended June 30, 1998 from $368,606 for the six months ended June 30, 1997.
This increase was primarily due to an increase in the number of Oracle
relational database licenses ($132,963) required to support a greater number of
new installations and increased amortization of capitalized software development
costs ($97,100). Cost of software license revenues as a percent of software
license revenues decreased to 22.4% for the six months ended June 30, 1998 from
30.4% for the six months ended June 30, 1997. This decline was primarily due to
a larger software license fee revenue base over which to spread costs.
Cost of service and maintenance revenues increased 76.5% to $2.5 million
for the six months ended June 30, 1998 from $1.4 million for the six months
ended June 30, 1997. This increase is primarily due to the hiring of additional
personnel in the implementation, training and customer support departments
($742,327). Cost of service and maintenance revenues as a percentage of service
and maintenance revenues decreased to 81.6% for the six months ended June 30,
1998 from
21
<PAGE> 24
183.7% for the six months ended June 30, 1997. This decrease was primarily due
to a larger service and maintenance revenue base and productivity gains achieved
in the implementation, training and support functions with a larger number of
installations and a larger installed base. The Company anticipates that the
dollar amount of service and maintenance costs will increase in future periods
as the Company expands its implementation staff to accommodate future growth.
Sales and marketing. Sales and marketing expenses primarily include
personnel costs associated with the Company's sales and marketing activities,
including sales commissions, travel and related overhead, and expenses incurred
in connection with trade shows, advertising, product literature and other
promotional activities. Sales and marketing expenses increased 63.7% to $1.6
million for the six months ended June 30, 1998 from $954,373 for the six months
ended June 30, 1997. This increase was primarily due to an increase in sales
department personnel ($299,391), increase in advertising and promotion
($80,153), increase in travel and entertainment expenses ($77,108) and increased
sales commissions paid on higher revenues ($73,713). Sales and marketing
expenses as a percentage of total revenues decreased to 27.1% for the six months
ended June 30, 1998 from 48.5% for the six months ended June 30, 1997. This
decrease was primarily due to a larger revenue base over which to spread costs.
The Company anticipates that the dollar amount of its sales and marketing
expenses will increase in future periods as the Company expands its sales force
and increases advertising and promotional expenditures.
Product development. Product development expenses consist of personnel and
related overhead expenses for programmers and outside consultants involved in
developing and maintaining new and existing software products. The Company
accounts for software development costs under Statement of Financial Accounting
Standards No. 86 "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed" ("SFAS 86"). Product development expenses are
charged to expenses as incurred until technological feasibility is established.
Thereafter, costs are capitalized until the product is released to the market.
The Company defines technological feasibility as the point in time at which the
Company has a working model of the related product. Capitalized software costs
are amortized over three years. Product development expenses decreased 7.7% to
$918,356 for the six months ended June 30, 1998 from $995,216 for the six months
ended June 30, 1997. This decrease was primarily due to increases in capitalized
software that more than offset increases in expenses associated with additional
staffing. The Company capitalized software development costs of $235,442 and
$34,977 for the six months ended June 30, 1998 and 1997, respectively, in
accordance with SFAS 86. Product development expenses as a percentage of total
revenues decreased to 15.9% for the six months ended June 30, 1998 from 50.6%
for the six months ended June 30, 1997. This decrease was primarily due to a
larger revenue base over which to spread costs. The Company anticipates that
product development costs will increase in absolute terms in future periods as
the Company continues its development work on future releases of the OSI System.
General and administrative. General and administrative expenses primarily
include personnel costs associated with the executive, administrative and
finance staff, as well as outside professional fees and other administrative
costs. General and administrative costs increased 81.9% to $1.3 million for the
six months ended June 30, 1998 from $739,708 for the six months ended June 30,
1997. This increase was primarily due to the addition of personnel to support
the Company's growth ($374,876), increased professional services ($71,592) and
increased computer supplies ($33,298). The Company believes that the dollar
amount of its general and administrative costs will continue to increase in
future periods to accommodate anticipated growth and expenses associated with
its responsibilities as a public company. General and administrative expenses as
a percentage of total revenues decreased to 23.3% for the six months ended June
30, 1998 from 37.6% for the six months ended June 30, 1997. This decrease was
primarily due to a larger revenue base over which to spread costs.
Contract termination. In January 1994, the Company entered into an
agreement with Banking Spectrum to license certain software products and for
consulting and support services. Pursuant to the agreement the Company agreed to
pay Banking Spectrum a royalty based on the licensing of
22
<PAGE> 25
software products and related services, ranging from three percent to 17% of net
revenues, based on Banking Spectrum's involvement in the sale of such products
and services.
In March 1998, the Company and Banking Spectrum entered into an agreement
that terminated their previous agreement. The agreement released the Company
from any future royalty payments to Banking Spectrum in exchange for a cash
payment of $100,000 to Banking Spectrum and fully vested options to shareholders
of Spectrum to purchase 275,000 shares of Common Stock at an exercise price of
$0.45 per share. The stock options were estimated by management to have a fair
value of approximately $1.6 million. Net of amounts previously accrued, the
Company recorded a contract termination expense of approximately $1.3 million
for the six months ended June 30, 1998.
Interest income (expense), net. For the six months ended June 30, 1998,
the Company's cash balance was higher than in 1997 resulting in higher interest
income, which was partially offset by interest expense relating to an equipment
loan.
Years Ended December 31, 1997 and 1996
Revenues. Total revenues increased 552.3% to $6.6 million in 1997 from
$1.0 million in 1996. Software license revenues increased 411.5% to $4.1 million
in 1997 from $801,532 in 1996. This increase was primarily due to increased
sales of the OSI System. Service and maintenance revenues increased 1070.4% to
$2.5 million in 1997 from $217,861 in 1996. This increase in service and
maintenance revenues was primarily due to a larger number of completed or
in-process installations ($1,879,745) and, to a lesser extent, an increase in
the installed base of customers under support and maintenance agreements
($327,256).
Cost of revenues. Total cost of revenues increased 111.5% to $4.3 million
in 1997 from $2.0 million in 1996. This increase was primarily due to additional
staffing in the implementation, conversion, training and customer support
departments ($1,198,304), increased license fees for third-party software
($352,510) and royalties paid to Banking Spectrum ($301,805). Total cost of
revenues as a percent of total revenues decreased to 64.8% in 1997 from 199.9%
in 1996. This decrease was primarily due to higher total revenues and
productivity gains in the implementation, training and customer support
functions.
Cost of software license revenues increased 128.8% to $1.2 million in 1997
from $507,094 in 1996. This increase was primarily due to an increase in the
number of Oracle relational database software licenses ($282,627) required for
the increased number of new installations, and increased royalties paid to
Banking Spectrum ($273,395). Cost of software license revenues as a percent of
software license revenues decreased to 28.3% in 1997 from 63.3% in 1996. This
decrease was primarily due to a larger software license fee revenue base over
which to spread costs.
Cost of service and maintenance revenues increased 105.8% to $3.2 million
in 1997 from $1.5 million in 1996. This increase was primarily attributable to
increased staffing in the implementation, conversion, training and customer
support departments to support the Company's growth ($1,198,304). Cost of
service and maintenance revenues as a percentage of service and maintenance
revenues decreased to 123.6% in 1997 from 702.5% in 1996. This decrease was
primarily due to a larger service and maintenance revenue base and productivity
gains achieved in the implementation, training and support functions as a result
of a larger number of installations and a larger installed base.
Sales and marketing. Sales and marketing expenses increased 102.9% to $2.1
million in 1997 from $1.1 million in 1996. This increase was primarily due to an
increase in sales and marketing personnel ($411,572), increased sales
commissions paid on higher revenues ($221,758) and increased advertising and
promotion expenses ($145,906) and increased travel and entertainment expenses
($97,698). Sales and marketing expenses as a percentage of total revenues
decreased to 32.1% in 1997 from 103.1% in 1996. This decrease was primarily due
to a larger revenue base over which to spread costs.
23
<PAGE> 26
Product development. Product development expenses increased 79.4% to $1.9
million in 1997 from $1.1 million in 1996. This increase was primarily due to
increased staffing and consulting fees incurred in connection with continued
development of the Company's software products. During 1997 and 1996, the
Company capitalized software development costs of $455,078 and $153,209,
respectively, in accordance with SFAS 86. Amounts capitalized in 1997 included
$240,000 related to the acquisition of automated teller machine ("ATM")
management software from a third party. Product development expenses as a
percentage of total revenues decreased to 28.6% in 1997 from 104.0% in 1996.
This decrease was primarily due to a larger revenue base over which to spread
costs.
General and administrative. General and administrative expenses increased
143.2% to $1.6 million in 1997 from $645,334 in 1996. This increase was
primarily due to the hiring of additional accounting and executive personnel
required to support the Company's growth ($582,251). General and administrative
expenses as a percentage of total revenues decreased to 23.6% in 1997 from 63.3%
in 1996. This decrease was primarily due to a larger revenue base over which to
spread costs.
Interest income (expense), net. During 1997, the Company's average cash
balance was higher than in 1996, resulting in higher interest income, which was
partially offset by interest expense relating to an equipment loan.
Years Ended December 31, 1996 and 1995
Revenues. Total revenues increased 280.2% to $1.0 million in 1996 from
$268,141 in 1995. Software license revenues increased 276.9% to $801,532 in 1996
from $212,653 in 1995. This increase was primarily due to increased sales of the
OSI System. Service and maintenance revenues increased 292.6% to $217,861 in
1996 from $55,488 in 1995. This increase in service fees was primarily due to
the increase in the number of installations ($87,212) in 1996 and, to a lesser
extent, an increase in the installed base of customers under support and
maintenance agreements ($75,161).
Cost of revenues. Total cost of revenues increased 191.1% to $2.0 million
in 1996 from $700,006 in 1995. As a percent of total revenues, total cost of
revenues decreased to 199.9% in 1996 from 261.1% in 1995, reflecting higher
total revenues over which to spread costs. Cost of software license revenues
increased 127.4% to $507,094 in 1996 from $223,015 in 1995. This increase was
due to increased license fees paid to third-party software providers ($118,840),
primarily Oracle, increased royalties paid to Banking Spectrum ($42,140) and
increased system documentation personnel ($42,262). Cost of service and
maintenance revenues increased 220.9% to $1.5 million in 1996 from $476,991 in
1995. This increase was primarily attributable to increased staffing in the
implementation, training and customer support functions required to support the
growth in customer installations as noted above ($769,867).
Sales and marketing. Sales and marketing expenses increased 163.7% to $1.1
million in 1996 from $398,496 in 1995. This increase was primarily due to an
increase in the number of sales personnel ($391,455), increased travel and
entertainment expenses ($122,988) and increased advertising and promotions
($91,619). Sales and marketing expenses as a percentage of total revenues
decreased to 103.1% in 1996 from 148.6% in 1995. This decrease was primarily due
to a larger revenue base over which to spread costs.
Product development. Product development expenses increased 60.5% to $1.1
million in 1996 from $660,510 in 1995. Product development expense increased
primarily due to increased staffing and consulting fees ($460,023) required to
support continued development of the Company's software products. During 1996
and 1995, the Company capitalized software development costs of $153,209 and
$119,514, respectively, in accordance with SFAS 86. Product development expenses
as a percentage of total revenues decreased to 104.0% in 1996 from 246.3% in
1995. This decrease was primarily due to a larger revenue base over which to
spread costs.
24
<PAGE> 27
General and administrative. General and administrative expenses increased
61.5% to $645,334 in 1996 from $399,576 in 1995. The increase in expenses was
primarily due to an increase in the Company's telephone and communication
expenses ($79,872), increased computer and office supplies ($62,171) and
increased travel and entertainment expenses ($22,067). General and
administrative expenses as a percentage of total revenues decreased to 63.3% in
1996 from 149.0% in 1995. This decrease was primarily due to a larger revenue
case over which to spread costs.
Interest income (expense), net. During 1995, the Company was funding
operations with bridge loans from existing investors until a December 1995
preferred stock sale. The interest on the bridge loans exceeded the interest
income earned on the operating account balance during 1995.
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly results of operations of
the Company for each of the quarters in the year ended December 31, 1997 and the
six months ended June 30, 1998. In management's opinion, this unaudited
information has been prepared on the same basis as the audited Financial
Statements and includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the information for the
quarters presented, when read in conjunction with the Company's Financial
Statements and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1997 1997 1997 1997 1998 1998
-------- -------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Software license.............. $ 693 $ 519 $ 643 $2,245 $ 1,158 $1,601
Service and maintenance....... 289 467 698 1,095 1,176 1,834
------- ------- ------- ------ ------- ------
Total revenues............. 982 986 1,341 3,340 2,334 3,435
Costs of revenues:
Software license.............. 219 150 251 541 333 286
Service and maintenance....... 732 658 748 1,012 987 1,468
------- ------- ------- ------ ------- ------
Total cost of revenues..... 951 808 999 1,553 1,320 1,754
Operating expenses:
Sales and marketing........... 458 496 500 678 784 778
Product development........... 472 523 517 390 444 475
General and administrative.... 324 416 381 447 643 703
Contract termination.......... -- -- -- -- 1,265 --
------- ------- ------- ------ ------- ------
Total operating expenses... 1,254 1,436 1,398 1,515 3,136 1,956
Income (loss) from operations... (1,223) (1,257) (1,055) 272 (2,122) (275)
Interest income (expense), net.. 44 31 46 88 95 86
------- ------- ------- ------ ------- ------
Net income (loss)............... $(1,179) $(1,226) $(1,010) $ 360 $(2,027) $ (189)
======= ======= ======= ====== ======= ======
</TABLE>
25
<PAGE> 28
The following table sets forth unaudited quarterly results of operations as
a percentage of revenues for each of the quarters in the year ended December 31,
1997 and the six months ended June 30, 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1997 1997 1997 1997 1998 1998
-------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Software license.............. 70.6% 52.6% 47.9% 67.2% 49.6% 46.6%
Service and maintenance....... 29.4 47.4 52.1 32.8 50.4 53.4
------- ------- ------ ------ ------ -------
Total revenues............. 100.0 100.0 100.0 100.0 100.0 100.0
Costs of revenues:
Software license.............. 22.3 15.1 18.7 16.2 14.3 8.3
Service and maintenance....... 74.5 66.8 55.8 30.3 42.3 42.7
------- ------- ------ ------ ------ -------
Total cost of revenues..... 96.8 81.9 74.5 46.5 56.6 51.0
Operating expenses:
Sales and marketing........... 46.7 50.3 37.3 20.3 33.6 22.7
Product development........... 48.0 53.1 38.5 11.7 19.0 13.8
General and administrative.... 32.9 42.2 28.4 13.3 27.5 20.5
Contract termination.......... -- -- -- -- 54.2 --
------- ------- ------ ------ ------ -------
Total operating expenses... 127.6 145.6 104.2 45.3 134.3 57.0
Income (loss) from operations... (124.4) (127.4) (78.7) 8.2 (90.9) (8.0)
Interest income (expense),
net........................... 4.4 3.1 3.4 2.6 4.1 2.5
------- ------- ------ ------ ------ -------
Net income (loss)............... (120.0)% (124.3)% (75.3)% 10.8% (86.8)% (5.5)%
======= ======= ====== ====== ====== =======
</TABLE>
The Company's revenues and operating results have varied substantially from
quarter to quarter. The Company's quarterly operating results may continue to
fluctuate due to a number of factors, including the timing, size and nature of
the Company's licensing transactions, lengthy and unpredictable sales cycles,
the timing of introduction and market acceptance of new products or product
enhancements by the Company or its competitors, product and price competition,
the relative proportions of revenues derived from license fees and services,
changes in the Company's operating expenses, software bugs or other product
quality problems, personnel changes and fluctuations in economic and financial
market conditions. Accordingly, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and the
results of operations for any quarter are not necessarily indicative of future
results of operations.
Revenues of $3.3 million for the three months ended December 31, 1997
included software license and implementation revenues of $1.6 million associated
with two larger banks (assets greater than $1 billion) that were implemented in
that quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily from the sale of
preferred stock and from a credit line for equipment purchases. The Company had
net working capital of $5.8 million at June 30, 1998, including cash and cash
equivalents totaling $6.3 million.
Cash used in operating activities was $995,822, $1.0 million, $3.9 million
and $1.7 million for the six months ended June 30, 1998 and for the years ended
December 31, 1997, 1996 and 1995, respectively. Cash used in operations during
each of these periods was primarily due to net losses and an increase in
accounts receivable partially offset in each period by increases in short-term
liabilities, including deferred revenues. In 1996, the cash used in operating
activities was also attributable to expenditures for deferred project costs. In
1997, cash flow from operations was favorably impacted by a reduction in
deferred project costs.
Cash used in investing activities was $609,864, $812,334, $850,083 and
$212,037 for the six months ended June 30, 1998, and for the years ended
December 31, 1997, 1996 and 1995, respectively. Cash used during such periods
was to acquire property and equipment and for
26
<PAGE> 29
capitalized software development costs. The Company currently has no significant
capital spending or purchase commitments, except for furniture for additional
office space in the amount of approximately $200,000, but expects to continue to
engage in capital spending in the ordinary course of business.
Cash provided by financing activities was $342,119, $5.0 million, $5.3
million and $5.2 million for the six months ended June 30, 1998, and for the
years ended December 31, 1997, 1996 and 1995, respectively. During 1997, 1996
and 1995, the Company received $5.0 million, $5.5 million, and $5.1 million,
respectively, of net proceeds from the sale of preferred stock. In addition, the
Company received $60,000 and $120,000 in proceeds during 1996 and 1995,
respectively, from a subscription note receivable.
In 1995, the Company received and repaid $1.0 million in bridge loans from
existing investors. In September 1996, the Company entered into a $250,000
equipment line of credit with a bank. The equipment line allowed for draw downs
through September 1997 with the outstanding borrowings on the equipment line
converting to a $104,002, nine percent term loan payable in 36 months beginning
in October 1997. As of June 30, 1998, the Company had no outstanding balance
under this term loan. In June 1997, the Company entered into a $1.0 million
working capital line of credit with the same bank that provides the equipment
line of credit. The line is secured by all assets, exclusive of those financed
under the equipment line. The maximum amount available under this line of credit
is 75% of domestic accounts receivable, less amounts that have been outstanding
for more than 90 days. This line of credit expires July 20, 1998. At June 30,
1998, there was no balance outstanding on this line of credit.
The Company believes that the proceeds generated by the sale of Common
Stock by the Company in this offering, cash and cash equivalents on hand will,
in light of anticipated future cash flows, be sufficient to meet the Company's
working capital requirements for the next twelve months.
27
<PAGE> 30
BUSINESS
The Company is a leading provider of client/server core processing software
and related services to small to mid-size banks and credit unions. The Company
has developed The Complete Banking Solution and The Complete Credit Union
Solution (the "OSI System"), which are fully-integrated suites of banking and
credit union applications that operate in a Microsoft Windows NT environment
with an Oracle relational database. The Company's software supports all of an
institution's core processing requirements, including deposits and loans, teller
functions, home/ Internet banking and platform automation. The Company's open
and flexible client/server architecture is designed to enable its customers to
reduce their core processing and operational costs and leverage customer
information to improve retention and identify potential cross-selling
opportunities. The OSI System interfaces to third-party applications that are
commonly used in banks and credit unions, including check processing, ATMs and
general ledger applications. The OSI System enables banks and credit unions to
enhance customer satisfaction and compete more effectively in the financial
services industry.
INDUSTRY BACKGROUND
Currently, there are over 20,000 banking and depository institutions in the
United States with assets of up to $3 billion, including small to mid-size
commercial banks, thrifts and credit unions. The Company believes that these
institutions, which have traditionally competed on personalized service, are
facing increasing competitive pressures to improve their efficiencies in the
areas of customer service, operations and marketing. In addition, the evolving
requirements of the electronic marketplace demand that banks expand their
traditional services to include ATMs, telephone banking and home banking through
personal computers and the Internet. Banks and depository institutions of all
sizes are also experiencing increased competitive pressures from non-bank
competitors which, as a result of the deregulation of the financial services
industry, can offer products and services traditionally marketed by banks.
In responding to these trends, small to mid-size banks and credit unions
are increasingly seeking to implement information technology systems that will
enable them to increase the efficiency of their operations, offer a broader
array of services and provide enhanced levels of customer service. These
institutions have traditionally fulfilled their information technology needs
through legacy computer systems, operated either by the institution or a service
bureau on an outsourced basis. These systems, which operate in large mainframe
or minicomputer environments, are designed primarily to batch process a large
number of transactions and create centralized financial records. Nightly batch
sessions are typically required to update each customer's account with the
business day's transactions. As a result, banks utilizing legacy systems
typically do not offer their customers real-time processing of transactions, a
feature that is becoming an increasingly important operating requirement.
Moreover, legacy systems typically store data in non-relational, sequentially
indexed files. In this environment, retrieval of customer or other information
can be burdensome and time consuming and limits an institution's flexibility in
meeting changing customer service requirements. The centralized processing and
proprietary architecture of these systems is not designed to easily support
analysis for decision-making or integrate with other business applications used
throughout the enterprise. Financial institutions relying on legacy systems
often find it difficult to conform their business processes and reporting to the
architecture of the system and are not able to easily adapt the system to their
evolving needs.
The need to improve customer service levels, enhance operating efficiencies
and lower costs has contributed to the growing acceptance of the client/server
model of computing based on open, industry-standard operating environments and
relational databases. In a client/server environment, servers provide shared
access to data and applications, while client devices such as personal computers
and workstations provide the user interface and local processing functions.
Client/server systems can improve information sharing by providing access at
each desktop to critical customer and transaction data and business
applications, which had historically been restricted or difficult to
28
<PAGE> 31
access in legacy environments. Client/server applications enable organizations
to streamline core business practices and reporting and to make faster, more
informed decisions. The client/server model is also scalable as capacity can be
increased by upgrading the server or linking multiple servers. In addition, the
client/server model offers flexibility in that additional functionality can
easily be provided through third-party applications.
The Company believes that, until recently, the adoption of client/server
systems in many banks and credit unions has lagged other industries due to the
limited number of suppliers of open client/server systems designed specifically
to address the core processing requirements of such institutions. In part, this
has been attributable to the industry's long-standing reliance on legacy systems
and the high-volume processing requirements of larger banks. Among smaller
banking institutions, which the Company believes are best positioned to benefit
from the implementation of client/server systems, the adoption of such systems
has been hampered by the absence of cost effective client/server systems
designed specifically for use by such institutions. The Company believes that
fewer than 200 small to mid-size banks and credit unions in the United States
have implemented open client/server core processing systems.
The Company believes that banks and credit unions today are seeking
information technology solutions that combine the performance, reliability and
security associated with legacy-based systems with the flexibility, ease-of-use,
scalability and reduced cost of ownership associated with client/server systems.
Banks and credit unions require systems that can be easily integrated with other
applications used in the enterprise, provide real-time transaction processing
and comply with applicable regulatory requirements. Banks and credit unions also
require core processing systems that are able to accommodate new and emerging
technologies, such as ATMs, telephone banking and home banking via personal
computers and the Internet. In addition, these institutions require systems that
are Year 2000 compliant. Banks and credit unions are also seeking information
technology solutions that offer 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. A client/server core
processing solution must be able to meet all of these requirements to enable
banks and credit unions to achieve a competitive advantage in their markets
through improved customer service, lower costs and enhanced access to customer
information.
THE OSI SOLUTION
The OSI System enables financial institutions to process transactions and
access critical customer and account data through a suite of open, distributed
application modules that operate in a Microsoft Windows NT environment with an
Oracle relational database. The Company's solutions are designed to provide its
customers with the following benefits:
- Fully-Integrated Solution. The OSI System supports all of an
institution's core processing requirements, including those of its branch
offices. The OSI System accommodates telephone banking and home banking
via personal computers and the Internet, and provides ATM management
capabilities. All components of the OSI System utilize a common
relational database and operating system. This architecture allows a bank
to provide its customers with real-time information concerning their
accounts and to create real-time management reports. The OSI System also
eliminates potential errors arising from the maintenance of multiple
databases and enables institutions to change their business processes
without requiring the modification of the underlying data model.
- Enhanced Customer Service Through Real-Time Processing. The OSI System
allows a bank's customers and employees to access and process information
on a real-time basis, which enables a bank's customers to receive up to
the minute account and transaction information from any branch,
telephone, home or Internet location. The OSI System also enables bank
employees to quickly identify customers and gather accurate and current
information about the entire customer relationship. Availability of this
information enables institutions to
29
<PAGE> 32
improve their level of customer service and provide them with incremental
opportunities for marketing additional products and services.
- Open Architecture. The OSI System operates in an open environment using
the Microsoft Windows NT operating system and the Oracle relational
database management system, which are installed on non-proprietary
hardware. The flexible, open architecture of the OSI System facilitates
the use of popular, off-the-shelf third-party software and the addition
of more processing capability as the institution's requirements increase.
- Reduced Cost of Ownership. The OSI System can reduce the overall cost of
ownership of a financial institution's core system. By integrating core
banking functions, which have historically run on separate systems, into
one seamless environment, the OSI System enables its customers to achieve
operational efficiencies. The OSI System can also reduce the costs that
would otherwise be associated with the ongoing maintenance of legacy
systems. In addition, the time and expense required to adapt the OSI
System to accommodate changing business processes and regulatory
requirements is less than that required with a typical legacy system. The
ability of the OSI System to operate across a broad range of popular
hardware provides customers with increased flexibility and the ability to
select the most cost-effective system.
STRATEGY
The Company's objective is to be the leading supplier of enterprise-wide
client/server software for small to mid-size banks and credit unions. The
Company's strategy for achieving this objective includes the following:
- Focus on Small to Mid-Size Banks and Credit Unions. The Company will
continue to focus on providing core processing solutions to small to
mid-size banks and credit unions, which the Company defines as
institutions with assets up to $3 billion. The Company believes that the
client/server model of computing is particularly well-suited for
institutions in this market. These institutions, unlike larger banks,
typically do not require extensive customization in connection with the
implementation of a banking system which makes it easier for them to
realize the benefits of client/server core processing systems in a
cost-effective manner. The Company believes that the demand for
client/server systems in this market is increasing as a result of these
factors.
- Expand Distribution Through Outsourcing Solutions. A number of small to
mid-size banks and credit unions outsource their core processing systems
to third-party service providers. These third-party service providers
typically choose one or more significant banking solutions on which they
base their outsourcing services. The Company has established strategic
relationships with BISYS, a major national outsourcing provider, and
COCC, a major regional outsourcing provider, under which these third
parties provide outsourced processing services to the financial services
industry using the OSI System. The Company plans to continue to jointly
market the OSI System with its outsourcing partners to expand its
installed customer base.
- Leverage Customer Base. The Company intends to continue to leverage its
installed customer base by expanding the range of complementary products
and services available to its customers. The Company generates recurring
revenues by entering into maintenance arrangements with its customers
that provide for annual service fees. As the asset size or number of
accounts of a financial institution increases, or as additional
application modules or services are provided, customers typically pay
incremental license and maintenance fees. The Company plans to continue
to expand its professional services offerings to its installed base of
customers as they implement additional application modules.
- Maintain Product Leadership. The Company believes that the open
client/server architecture of the OSI System provides it with competitive
advantages over other core processing
30
<PAGE> 33
systems. For example, the OSI System offers on-line, real-time
transaction processing capabilities that are not available in many
competitive systems, and the Company recently announced the introduction
of a home/Internet banking module supporting the Open Financial Exchange
("OFX") standard, which enables customers to access bank services using
personal computers and the Internet. The Company's open architecture
enables it to utilize leading, non-proprietary software and hardware to
provide comprehensive functionality. The Company intends to extend its
technological leadership by continuing to add new applications, integrate
new technologies and expand the functionality of its system.
TECHNOLOGY
The Company developed the OSI System to enable customers to realize the
advantages of client/server architectures. The OSI System is designed to offer
the following benefits: (i) flexible functionality, scalability, and high
performance, (ii) lower total cost of ownership, (iii) the ability to operate
either in real-time or batch processing mode and (iv) integration with
third-party applications and emerging technologies. The Company believes that
the OSI System achieves these objectives through an open architecture that is
based on leading technologies in the areas of operating systems, relational
databases, graphical user interfaces and report generation tools.
The foundation of the OSI System is an enterprise-wide relational database.
The OSI System uses relational database software from the industry's leading
supplier, Oracle Corporation. The OSI System's functionality is implemented
through application modules, each of which performs a specific core processing
function, that share the data in the relational database. This approach allows
for database normalization and business modeling. Through database
normalization, data is organized in tables that are easily accessible through a
variety of query tools as well as the application modules. The OSI System's data
model consists of over 600 tables, which the Company believes is substantially
greater than the number of tables in the data models of competing solutions. As
a result, a higher degree of independence between a customer's business
processes and underlying data is achieved and the OSI System 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.
The OSI System is based on a single, enterprise-wide database as opposed to
a distributed database in which the database is spread among two or more
components, typically resident on different computers. The principal benefit of
an architecture using a single enterprise-wide database is that it 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 only at scheduled
intervals, typically at the end of the business day. The OSI System may be
configured to operate in either batch mode or a hybrid batch/real-time mode for
those banks or credit unions that do not require or desire real-time processing.
The OSI System is a 32-bit Microsoft Windows NT application that operates
in an open systems environment. The system does not require any proprietary
hardware components and is currently deployed on a wide range of client and
server platforms. The system features multi-level security that takes advantage
of the features of the underlying operating system and relational database as
well as offers some that are indigenous to the system. The OSI System also
interfaces to a broad range of third-party applications and peripherals that are
commonly used in banks and credit unions.
PRODUCTS
The OSI System is an enterprise-wide solution that addresses the core
processing requirements of small to mid-size banks and credit unions and other
financial institutions. The OSI System consists of software application modules
that operate on a fully-integrated basis and is designed to be Year
2000-compliant. The Company recently released its OSI/ATM Server, the OSI
home/Internet banking module and a 32-bit version of the OSI System. In
addition, the Company markets third-
31
<PAGE> 34
party applications that are commonly used in banks and credit unions. Current
prices for the base OSI System software license range from approximately
$140,000 to $1.5 million, depending on asset size and number of customer
accounts.
Application Modules
The following table describes certain application modules of the OSI
System:
<TABLE>
<CAPTION>
APPLICATION DESCRIPTION
- ----------- -----------
<S> <C>
Customer Service.......................... Provides a quick and comprehensive view of each cus-
tomer relationship; maintains customer's picture and
signature for recognition; supports opening and
maintenance of all types of accounts and provides a
measure of an individual customer's profitability;
enables tellers to complete an entire transaction
on-line in the presence of the customer.
Comprehensive Lending..................... Provides comprehensive management of all loans,
whether mortgage, consumer or commercial, including
establishment of escrow, insurance and tax accounts;
can provide loan-loss reserve calculations based on
risk ratings and loan classifications; includes "what
if" loan calculator and amortization schedule.
Depository System......................... Supports all forms of deposit instruments, including
passbook and statement savings, club accounts and
checking accounts, share drafts (credit unions),
certificates of deposit and time deposits and
repurchase agreements.
Teller Application........................ Provides a teller with real-time access to the bank's
database and a complete profile of the bank's clients
(including a customer's picture and signature); easily
navigated by the teller and does not require
transaction codes.
General Ledger Interface.................. Easy-to-use module designed to manage interfaces to
popular general ledger systems.
Bank and Branch Operations................ A comprehensive and secure administrative management
tool for determining user accessibility, security,
hours of operation, cash boxes and authorization
structures.
End of Day Production..................... Identifies and schedules all end of day processing,
including updating of interest, fees and other
charges, and produces daily production reports and
customer statements.
Executive Information..................... Enables management to monitor bank's performance
through on-line queries of any product or branch;
tools can generate new reports in graphical or tabular
form based upon ad hoc information requests.
External File Manager..................... Manages all data that must be entered into the
database from external sources, including check
clearings, ACH (automatic clearing house), loan
origination and ATM transaction files.
Payroll................................... Enables updating of all payroll accounts provided
through an ACH format or from outside payroll systems.
</TABLE>
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<PAGE> 35
<TABLE>
<CAPTION>
APPLICATION DESCRIPTION
- ----------- -----------
<S> <C>
Product Manager........................... Enables bank to design and promote new loan, checking
and deposit products and to monitor current product
offerings; uses fill-in-the-blank, easy-to-follow
screens with user defined fees and rate schedules that
allow for unlimited tiering.
IRS/Year-End Reporting.................... Supports year-end IRS reporting information for both
standard and specialized forms.
Forms Integration......................... Integrates generation of forms, includes new account
documents, disclosures, signature cards and passbooks;
eliminates need to inventory pre-printed forms.
</TABLE>
OSI/ATM Server
The OSI/ATM Server is an ATM management system that provides banks with the
capability to directly manage their own ATM network or interface with regional
ATM networks. The OSI/ATM Server enables customers to reduce costs associated
with ATM systems and provides features such as real-time, single balance update
capabilities, support for multiple ATM transactions and processing and
authorization options. In addition, the OSI/ATM Server enables banks to define
their own operating parameters without the need for program modifications. The
system, which operates on Stratus computers, is designed to provide
fault-tolerant reliability. The OSI/ATM Server is fully integrated with the OSI
System. Current list prices for the OSI/ATM Server module range from
approximately $45,000 to $90,000.
Home/Internet Banking Module
The Company's home/Internet banking module enables customers to remotely
access an online banking system through which a customer can transfer funds from
transaction accounts, make balance inquiries, generate instant statements and
monitor account activity. The Company's system supports the OFX standard, which
enables the system to interface to bank services that use a variety of devices
to originate customer transactions. Through the OFX standard, the OSI System can
also be integrated with commonly-used personal financial management products,
such as Microsoft's Money 98 and Intuit's Quicken. Current list prices for the
home/Internet banking module range from approximately $50,000 to $100,000.
Third-Party Applications
The open architecture of the OSI System facilitates the integration of
third-party applications, and the Company offers various third-party
applications for use with the OSI System. Such applications include:
asset/liability management, check and statement imaging, collection management,
disaster recovery planning, general ledger, voice response, loan origination and
on-line ATM interface.
SALES AND MARKETING
The Company markets its software and services primarily through its direct
sales force. As of June 30, 1998, the Company employed 22 sales and marketing
personnel.
The Company's marketing program includes direct mail, networking,
telemarketing, advertising in industry specific trade journals and periodicals,
seminars and trade shows. The Company maintains an Internet web site from which
prospective customers can retrieve and view product information. The Company has
established an alliance with Unisys PAAG under which Unisys has exclusive rights
to market the OSI System in Asia (except Japan), South Africa and certain other
countries. The Company has established strategic relationships with Oracle
Corporation, Compaq Computer Corporation and Stratus Computer, Inc. providing
for joint marketing efforts.
Historically, a significant portion of all banks and credit unions have
chosen to satisfy their information technology needs through service bureaus. To
address this market, the Company has
33
<PAGE> 36
entered into software license and marketing agreements with BISYS and COCC under
which these third parties provide outsourced core processing services to the
financial services industry using the OSI System.
Pursuant to a Software License and Marketing and Distribution Agreement
with BISYS, the Company has granted BISYS the exclusive right in the United
States, subject to certain exceptions (including the Company's right to use
regional providers of outsourcing services), to use the OSI System to provide
outsourcing of core processing services to banks and credit unions. The OSI
System may not be sublicensed by BISYS, and all proprietary rights to the OSI
System remain with the Company. This right becomes non-exclusive if BISYS fails
to obtain a specified number of customer contracts, or pay the minimum required
license and maintenance fees in each of these first three years. BISYS has
agreed that the Company shall be its exclusive provider of client/server core
processing systems for BISYS during the term of the Agreement. Royalty payments
under the Agreement are consistent with those paid by other outsourcing
providers of the OSI System. The Company has agreed to provide BISYS with
pricing and other terms at least as favorable as those granted by the Company to
other outsourcing providers. Pursuant to the agreement, the parties engage in
joint marketing of each other's products and services and refer potential
customers to each other. As of June 30, 1998, BISYS had entered into outsourcing
agreements with five institutions.
The Company has also entered into a License and Marketing Agreement with
COCC under which the Company has granted COCC certain exclusive rights to use
the OSI System to provide outsourced core processing services to banks and
credit unions in the New England states and New York. COCC must meet certain
customer milestones to maintain its exclusivity. The Company receives license
fees with respect to outsourced data processing agreements entered into by COCC,
subject to a cumulative maximum payment, as stipulated in the agreement. As of
June 30, 1998, COCC had entered into outsourcing agreements with four
institutions.
CUSTOMERS
The Company's customers are primarily small to mid-size banks and credit
unions, typically with fewer than ten branches, that serve the banking needs of
their local communities. These banks are often the primary local providers of
savings accounts and consumer, mortgage and commercial loans in the markets they
serve. The majority of the Company's customers are located in the Northeast
region, although the Company is expanding its presence in other regions. As of
June 30, 1998, 31 banks and one credit union utilized the OSI System. An
additional 38 banks were in various stages of implementation, including 13 banks
owned by three bank holding companies and nine banks utilizing outsourcing
services provided by the Company's outsourcing partners. The average asset size
of the Company's current customer base is approximately $245 million.
Sales to the Hawthorne Savings and Loan Association accounted for
approximately 11% of total revenues in the six months ended June 30, 1998. Sales
to The Savings Bank of Manchester and The Savings Bank of Utica accounted for
approximately 17% and 15% of total revenues, respectively, in the year ended
December 31, 1997. Sales to American Federal Bank, Gloversville Federal Savings
and Loan Association, Dean Cooperative Bank and Signet Bank accounted for
approximately 38%, 22%, 20% and 14% of total revenues, respectively, in the year
ended December 31, 1996. Sales to Seneca Falls Savings Bank and The Simsbury
Savings Bank accounted for approximately 56% and 43% of total revenues,
respectively, in the year ended December 31, 1995. The Company anticipates that
no customer will account for more than 10% of revenues in the year ending
December 31, 1998.
SERVICES
The Company provides comprehensive implementation and training services to
customers who purchase the OSI System. An implementation team works with the
customer through all phases of the project, including software installation,
data conversion, education and training. Full implemen-
34
<PAGE> 37
tation of the OSI System typically occurs over a 14 to 24 week period, depending
on the complexity of the conversion. The Company also provides
post-implementation customer support and maintenance. As of June 30, 1998, the
Company had 62 employees dedicated to implementation, training, support and
maintenance.
- Implementation. The Company assigns to each customer a project manager
who coordinates all activities related to the implementation of the OSI
System. The Company also assigns conversion programmers who convert a
bank's current account data to the relational database in the OSI System.
Data conversion activities include data mapping, program development,
testing, data auditing and a complete trial conversion prior to the final
implementation date.
- Training. The Company offers a comprehensive education and training
program to its customers. The Company offers training classes at its
headquarters in Connecticut and hands-on application training at the
customer site prior to installation of the OSI System. In addition,
on-site training for ancillary products is available upon request. The
Company also assists customers desiring to adapt the OSI System to
particular needs, including customer-specific software features, reports
or regulatory requirements.
- Support and Maintenance. Support and maintenance personnel provide
immediate telephone response service during normal working hours,
supplemented by on-call support 24 hours a day, seven days a week. The
Company also provides product support services through the Internet,
electronic mail and facsimile. In addition, the Company offers remote
product support services whereby the Company's support team directly
connects to a customer's server to troubleshoot or perform routine
maintenance. The Company enters into maintenance agreements with its
customers pursuant to which they pay an annual maintenance fee, based on
a percentage of the license fee, over the term of the software license.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview."
PRODUCT DEVELOPMENT
The Company plans to continue to invest significant resources to maintain
and enhance its current product and service offerings. The Company's principal
product development focus is on: (i) enhanced functionality of the OSI System
through the development of new features and improvements to existing
applications modules, (ii) software updates as new versions of the Windows NT
operating system and Oracle relational database are released and (iii) tools to
automate the process of converting a customer's legacy data to the OSI System.
As of June 30, 1998, the Company employed a staff of 28 employees engaged
in product development. The Company's product development expenditures were
approximately $918,356, $1.9 million, $1.1 million and $660,510 for the six
months ended June 30, 1998 and the years ended December 31, 1997, 1996 and 1995,
respectively.
COMPETITION
The financial services software market is intensely competitive and subject
to rapid technological change. Competitors vary in size and in the scope and
breadth of products and services offered. The Company encounters competition in
the U.S. from a number of competitors which offer alternative client/server
systems to banks and credit unions, including M&I EastPoint, Phoenix
International Ltd., Inc. and Prologic Corporation, and a number of competitors,
including Fiserv, Inc., NCR Corporation, Electronic Data Systems Corporation,
Marshall & Ilsley Corporation, Jack Henry & Associates, Inc., ALLTEL Corporation
and Kirchman Corporation, all of which offer legacy core processing systems or
outsourcing alternatives to banks and credit unions. The Company also competes
against a number of smaller, regional competitors. In addition to these
competitors, the Company competes internationally with Misys plc Banking
Division (including Midas-Kapiti International, Inc., Kindle Banking Systems and
ACT Financial Systems), Sanchez Computer Associates, Inc. and Financial Network
Services, among others. The Company also competes with other core processing
alternatives, including in-house applications, which were either developed
internally or purchased from third-party vendors, and outsourcing, either as a
part of a total outsourcing solution
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<PAGE> 38
or through a service bureau arrangement. Furthermore, the Company expects
additional competition from other established and emerging companies as the
client/server application software market continues to expand. There can be no
assurance that the Company will be able to compete successfully against either
its existing or future competitors.
In general, the Company competes on the basis of product architecture and
functionality, service and support, including the range and quality of technical
support, training and implementation services, and product pricing in relation
to performance and support.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company relies primarily on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary rights. The Company seeks to protect its software,
documentation and other written materials under trade secret and copyright laws,
which afford only limited protection. The Company's license agreements contain
provisions which limit the number of users, state that title remains with the
Company and protect confidentiality. The Company presently has no patents or
patent applications pending.
Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. Policing
unauthorized use of the Company's products is difficult, particularly overseas,
and while the Company is unable to determine the extent to which piracy of its
software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to the extent of the laws of the United States.
Nevertheless, the Company believes that due to the rapid pace of technological
change in the information technology and software industries, factors such as
the technological and creative skills of its employees, new product
developments, frequent product enhancements and the timeliness and quality of
support services are more important to establishing and maintaining a
competitive advantage in the industry.
The Company does not believe that any of its products infringe upon the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim infringement by the Company with respect to current
or future products. Any such claim could result in costly litigation, cause
product shipment delays or require the Company to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on terms acceptable to the Company or at all, which could have a
material adverse effect upon the Company's business, financial condition and
results of operations.
EMPLOYEES
As of June 30, 1998, the Company had a total of 130 employees, of which 28
were engaged in product development and system documentation, 62 were engaged in
implementation, training, support and maintenance, 22 were engaged in sales and
marketing and 18 were engaged in finance and administration and other functions.
None of the Company's employees is represented by a labor union. The Company has
not experienced any work stoppages and considers relations with its employees to
be good.
FACILITIES
The Company currently leases approximately 22,000 square feet of space in
its headquarters facility in Glastonbury, Connecticut. The lease for 15,000
square feet expires in 2003 and for 7,000 square feet expires in 2001. The
Company plans to lease approximately 8,000 additional square feet at this
facility before the end of 1998.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings that would
have a material adverse effect on the Company's business, financial condition or
results of operations.
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<PAGE> 39
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The executive officers, directors and certain other key employees of the
Company, their respective ages as of June 30, 1998 and their positions with the
Company are as follows:
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS AND DIRECTORS AGE POSITION
- -------------------------------- --- --------
<S> <C> <C>
Douglas K. Anderson....................... 48 Chairman of the Board and Chief Executive
Officer
John L. Person............................ 63 President and Chief Operating Officer
Graham H. Gurney.......................... 57 Senior Vice President of Sales and
Director
Clifford I. Waggoner...................... 57 Senior Vice President, Chief Technology
Officer and Director
Richard J. Willemin....................... 47 Senior Vice President and Chief Financial
Officer
Carlos P. Naudon (1)...................... 47 Vice Chairman of the Board
Douglas C. Carlisle (2)................... 41 Director
David M. Clarke (1)....................... 47 Director
Samuel F. McKay (1)(2).................... 58 Director
William W. Neville........................ 44 Director
Richard P. Yanak (2)...................... 63 Director
KEY EMPLOYEES
- ---------------
Charles J. Beer........................... 40 Vice President of Application Development
John J. DeMita............................ 53 Vice President of Professional Services
John L. Messier........................... 34 Vice President of Conversion Services
Michael D. Nicastro....................... 39 Vice President of Marketing
Debra M. Dabrowski........................ 30 Controller
</TABLE>
- ---------------
(1) Member of the Audit Committee effective as of the closing of this offering.
(2) Member of the Compensation Committee effective as of the closing of this
offering.
Mr. Anderson has served as Chairman of the Board and Chief Executive
Officer of the Company since December 1997 and as a director since July 1994.
Mr. Anderson served as President of the Company from October 1995 to December
1997. From December 1986 to October 1995, Mr. Anderson was employed by the
Savings Bank of Manchester and was responsible for all bank operations and
information technology, most recently as Executive Vice President. Prior to
joining the Savings Bank of Manchester, Mr. Anderson was employed for 14 years
by Unisys Corporation.
Mr. Person has served as President and Chief Operating Officer of the
Company since December 1997, and served as Executive Vice President and Chief
Operating Officer of the Company from May 1997 to December 1997. From August
1996 to May 1997, Mr. Person was Managing Director of Compression Engines, LLC,
a software company. From October 1994 to May 1997, Mr. Person served as
President of Enanti Corporation, a contact management software company. From
July 1992 to October 1994, Mr. Person served as President of HP Films, a film
production company. Mr. Person also served as President of Newtrend MISER Group,
a company specializing in banking software.
Mr. Gurney co-founded the Company in 1992, and has served as Senior Vice
President of Sales of the Company since June 1996 and as a director since 1992.
From September 1984 to October 1987, Mr. Gurney served as regional district
manager for the New York district of Sperry Corporation, a computer hardware and
software company. From October 1987 to June 1992, Mr. Gurney served as the
Eastern regional sales director for Sharebase Corporation, a relational database
company.
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<PAGE> 40
Mr. Gurney was employed in various positions for 15 years in the financial
services computing industry.
Mr. Waggoner co-founded the Company in 1992, has served as Senior Vice
President and Chief Technology Officer of the Company since October 1995 and as
a director since 1992. Mr. Waggoner served as President of the Company from May
1992 to October 1995. From June 1987 to May 1992, Mr. Waggoner was Vice
President and Principal of Linc Systems Corporation, a software services
company. Prior to joining Linc Systems Corporation, Mr. Waggoner was employed
for 17 years by Electronic Data Systems Corporation.
Mr. Willemin has served as Senior Vice President and Chief Financial
Officer of the Company since April 1998. From March 1997 to April 1998, Mr.
Willemin served as Chief Financial Officer of Summit Medical, Inc., a supplier
of clinical database software. From September 1996 to February 1997, Mr.
Willemin served as Chief Financial Officer of Datalogix International, Inc., a
supplier of manufacturing and logistics software. From June 1994 to August 1996,
Mr. Willemin served as Vice President and Chief Financial Officer of NEIC, a
transaction processing company in the health care industry. From March 1992 to
June 1994, Mr. Willemin served as interim Chief Financial Officer during periods
of transition for several companies, including, Saratoga Springs Water Company,
a beverage manufacturer and distributor, and Canyon Ranch Spa Cuisine, a mail
order health food company.
Mr. Naudon has served as Vice Chairman of the Board of the Company since
October 1995 and as a director since September 1994, and served as Managing
Director from March 1995 to October 1995. Since May 1992, Mr. Naudon, has served
as Chairman of the Board of BSI Administrative Services Inc., a benefits plan
administration company. In addition, since January 1984, Mr. Naudon has served
as President, Chief Executive Officer and director of Spectrum and Banking
Spectrum, Inc., each a banking consulting company.
Mr. Carlisle has served as a director of the Company since March 1994.
Since 1984, Mr. Carlisle has served as a general partner of Menlo Ventures VI,
L.P. ("Menlo Ventures"), a venture capital fund that invests in emerging growth
technology companies. Mr. Carlisle is a director of Carrier Access Corporation.
Mr. Clarke has served as a director of the Company since April 1998. Since
September 1993, Mr. Clarke has served as Vice President, Private Equity, of the
Aetna Investment Management Group of Aetna Life Insurance Company ("Aetna").
From September 1977 to September 1993, Mr. Clarke held various other positions
in the Private Bond Investment Group of Aetna.
Mr. McKay has served as a director of the Company since December 1995.
Since April 1994, Mr. McKay has served as a general partner of Axiom Venture
Partners, L.P. ("Axiom"), a venture capital firm. Previously, Mr. McKay was
general partner of Connecticut Seed Ventures, L.P. Mr. McKay is a director of
Anika Therapeutics, Inc., Sabre Communications Corporation, Costar Corporation
and Nightingale Corp.
Mr. Neville has served as a director of the Company since June 1998. Since
June 1997, Mr. Neville has served as President of BISYS, Inc., a subsidiary of
BISYS. From June 1995 to June 1997, Mr. Neville served as Senior Vice President
and Eastern regional General Manager of BISYS, Inc. From June 1992 to June 1995,
Mr. Neville served as Vice President and General Manager of the New England
region of BISYS, Inc.
Mr. Yanak has served as a director of the Company since May 1996. Since
October 1996, Mr. Yanak has served as Senior Advisor of NYCE Corporation, an
electronic banking services company. From December 1987 to October 1996, Mr.
Yanak served as President and Chief Executive Officer of NYCE Corporation.
Mr. Beer has served as Vice President of Application Development of the
Company since October 1996, and served as Director of Application Development of
the Company from June 1992
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<PAGE> 41
to October 1996. Previously, Mr. Beer served as Assistant Vice President of
Development of American Savings Bank.
Mr. DeMita has served as Vice President of Professional Services of the
Company since September 1996. From December 1995 to September 1996, Mr. DeMita
served as Vice President of Production of NYCE Corporation, an electronic
banking services company. From July 1992 to October 1995, Mr. DeMita served as
President of Hardcopy Media Inc., a printing company and owned and operated
Alpha Graphics, a printing franchise company. Previously, Mr. DeMita served as
President of American Business Information Services, a subsidiary of American
Savings Bank.
Mr. Messier has served as Vice President of Conversion Services of the
Company since December 1997, and served as Manager of Customer Support of the
Company from July 1995 to December 1997. From February 1990 to July 1995, Mr.
Messier served as a Product Support Specialist and Senior Project Manager at
Fiserv, Inc., a financial services technology company.
Mr. Nicastro has served as Vice President of Marketing of the Company since
October 1996, and served as Director of Marketing and Customer Services of the
Company from September 1994 to October 1996. From February 1985 to September
1994, Mr. Nicastro held various product management positions with the Data
Services Division of NCR Corporation. In addition, Mr. Nicastro served in
various positions at Bristol Savings Bank and Citicorp.
Ms. Dabrowski has served as Controller of the Company since May 1997. From
August 1989 to April 1997, Ms. Dabrowski was employed by Price Waterhouse LLP,
an independent public accounting firm, most recently as Audit Manager in its
Technology Industry Group. Ms. Dabrowski is a certified public accountant.
Pursuant to an Amended and Restated Investors' Rights Agreement dated as of
August 22, 1997 among the Company and certain stockholders of the Company, such
stockholders were granted the right (which terminates upon the closing of this
offering) to designate representatives on the Company's Board of Directors.
Under this agreement, Messrs. Carlisle, McKay, Clarke and Neville were elected
the representatives of Menlo Ventures, Axiom, Aetna and BISYS, respectively.
Pursuant to a Software License and Marketing and Distribution Agreement
dated as of August 20, 1997 between the Company and BISYS, Inc., a subsidiary of
BISYS, BISYS, Inc. was granted the right (which continues until termination of
the agreement) to nominate a candidate to the Company's Board of Directors.
Following this offering, the Board of Directors of the Company will be
divided into three classes, each of whose members will serve for a staggered
three-year term. The Board will consist of three Class I Directors (Messrs.
Carlisle, Naudon and Waggoner), three Class II Directors (Messrs. Gurney, McKay
and Yanak) and three Class III Directors (Messrs. Anderson, Clarke and Neville).
At each annual meeting of stockholders, a class of directors will be elected for
a three-year term to succeed the directors of the same class whose terms are
then expiring. The terms of the Class I Directors, Class II Directors and Class
III Directors expire upon the election and qualification of successor directors
at the annual meeting of stockholders to be held during the calendar years 1999,
2000 and 2001, respectively.
Each officer serves at the discretion of the Board of Directors and holds
office until his or her successor is elected and qualified or until his or her
earlier resignation or removal. There are no family relationships among any of
the directors or executive officers of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has a Compensation Committee composed of Messrs.
Carlisle, McKay and Yanak, which makes recommendations concerning salaries and
incentive compensation for employees of and consultants to the Company and
administers and grants stock options pursuant to the Company's stock option
plans, and an Audit Committee composed of Messrs. Clark, McKay and
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<PAGE> 42
Naudon, which reviews the results and scope of the audit and other services
provided by the Company's independent public accountants.
DIRECTOR COMPENSATION
Directors do not currently receive any compensation for their services on
the Board of Directors, other than reimbursement for out-of-pocket expenses.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued for
the year ended December 31, 1997 for the Company's Chief Executive Officer and
its three other most highly compensated executive officers in 1997 who were
serving as executive officers on December 31, 1997 (the Chief Executive Officer
and such other executive officers are hereinafter referred to as the "Named
Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------- ------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS(1) COMPENSATION
- --------------------------- -------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Douglas K. Anderson....... $175,000 $30,000 $-- 195,000(2) $40,000(2)
Chairman of the Board and
Chief Executive Officer
Graham H. Gurney.......... 100,000 15,400(3) -- -- --
Senior Vice President of
Sales
Clifford I. Waggoner...... 106,000 3,000 -- -- --
Senior Vice President and
Chief Technology Officer
John L. Person(4)......... 88,218 15,000 2,800(5) 100,000 4,936(6)
President and Chief
Operating Officer
</TABLE>
- ---------------
(1) Represents the number of shares covered by options to purchase shares of the
Company's Common Stock granted during the year ended December 31, 1997.
(2) In exchange for the surrender of the right to receive 175,000 shares of
Common Stock originally granted on October 2, 1995, Mr. Anderson received an
option to purchase 175,000 shares of Common Stock at an exercise price of
$0.45 per share and supplemental compensation of $40,000 in 1997 and $60,000
in 1998.
(3) Represents sales commissions.
(4) Mr. Person joined the Company in May 1997.
(5) Represents automobile allowance.
(6) Represents reimbursement for relocation expenses.
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<PAGE> 43
The following table sets forth grants of stock options to each of the Named
Executive Officers during the year ended December 31, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
------------------------------------------------------------------ AT ASSUMED ANNUAL RATES
PERCENT OF OF STOCK PRICE
NUMBER OF TOTAL APPRECIATION FOR OPTION
SECURITIES OPTIONS TERM(3)
UNDERLYING GRANTED TO EXERCISE FAIR MARKET ------------------------------
OPTIONS EMPLOYEES IN PRICE VALUE PER EXPIRATION
NAME GRANTED(1) FISCAL YEAR PER SHARE SHARE(2) DATE 0% 5% 10%
- ---- ---------- ------------ ----------- ----------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Douglas K. Anderson....... 175,000 36.3% $0.45 $1.50 7/21/07 $183,750 $299,309 $476,600
20,000 4.2% 0.45 1.50 7/21/07 21,000 34,207 54,469
Graham H. Gurney.......... -- -- -- -- -- -- -- --
Clifford I. Waggoner...... -- -- -- -- -- -- -- --
John L. Person............ 100,000 20.7% 0.45 1.50 5/07/07 105,000 171,034 272,343
</TABLE>
- ---------------
(1) Mr. Anderson's option to purchase 175,000 shares vested with respect to
84,722 shares immediately upon grant and the remaining shares underlying the
option vest in twenty-six equal monthly installments. Twenty-five percent of
Mr. Person's option and Mr. Anderson's option to purchase 20,000 shares vest
on the first anniversary of the date of grant and the remaining shares
underlying the options vest in thirty-six equal monthly installments.
(2) The fair market value of the Common Stock on the grant date was determined
in good faith by the Board of Directors, based upon factors such as the
terms upon which the Company issued securities to third parties in financing
transactions, the illiquid nature of the Company's securities, and the
financial condition, results of operations and business prospects of the
Company at each of the dates of grant. The Company's Common Stock was not
traded publicly at the time the options were granted to the Named Executive
Officers.
(3) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
term assuming the specified compound rates of appreciation (0%, 5% and 10%)
on the market value of the Common Stock on the date of option grant over the
term of the options. These numbers are calculated based on rules promulgated
by the Securities and Exchange Commission and do not reflect the Company's
estimate of future stock price growth. Actual gains, if any, on stock option
exercises and Common Stock holdings are dependent on the timing of such
exercise and the future performance of the Common Stock. There can be no
assurance that the rates of appreciation assumed in this table can be
achieved or that the amounts reflected will be received by the individuals.
Assuming the fair market value of the Common Stock at the date of grant was
an assumed initial public offering price of $11.00 per share, the potential
realizable value of these options (a) at a 5% assumed annual rate of stock
price appreciation would be $3,351,043 for Mr. Anderson and $1,718,484 for
Mr. Person, and (b) at a 10% assumed annual rate of stock price appreciation
would be $5,335,977 for Mr. Anderson and $2,736,398 for Mr. Person.
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<PAGE> 44
The following table sets forth certain information concerning the number
and value of unexercised options held by each of the Named Executive Officers on
December 31, 1997. None of the Named Executive Officers exercised any stock
options during the year ended December 31, 1997.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Douglas K. Anderson................. 130,555 94,445 $536,248 $384,002
Graham H. Gurney.................... 81,272 30,208 342,314 126,874
Clifford I. Waggoner................ 19,792 30,208 83,126 126,874
John L. Person...................... -- 100,000 -- 405,000
</TABLE>
- ---------------
(1) Represents the difference between the exercise price and the fair market
value of the Common Stock at fiscal year end.
STOCK PLANS
1994 Stock Option Plan and 1998 Stock Incentive Plan
The Company's 1994 Stock Option Plan (the "1994 Plan") was adopted by the
Board of Directors and approved by the stockholders of the Company in March
1994. Amendments to the 1994 Plan increased the number of authorized shares
under the Plan to 3,000,000 shares of Common Stock. As of June 30, 1998, options
to purchase an aggregate of 1,689,500 shares of Common Stock at a weighted
average exercise price of $0.77 per share were outstanding under the 1994 Plan.
No additional option grants will be made under the 1994 Plan.
The Company's 1998 Stock Incentive Plan (the "Incentive Plan") was adopted
by the Board of Directors, subject to stockholder approval, in June 1998. Awards
may be made under the Incentive Plan for up to the sum of (i) 1,200,000 shares
of Common Stock (subject to adjustment in the event of stock splits and other
similar events), plus (ii) the number of shares of Common Stock (up to
1,700,000) (subject to adjustment in the event of stock splits and other similar
events) subject to awards granted under the 1994 Plan which are not actually
issued because options granted under such plan expire or otherwise result in
shares not being issued or, in the case of restricted stock, are repurchased by
the Company pursuant to the terms of the applicable stock restriction agreement.
The Incentive Plan provides for the grant of incentive stock options
intended to qualify under Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), nonstatutory stock options, restricted stock awards and
other stock-based awards (collectively, "Awards").
Officers, employees, directors, consultants and advisors of the Company and
its subsidiaries are eligible to receive Awards under the Incentive Plan. Under
present law, however, incentive stock options may only be granted to employees.
The maximum number of shares with respect to which an Award may be granted to
any participant under the Incentive Plan may not exceed 400,000 shares per
calendar year.
Optionees receive the right to purchase a specified number of shares of
Common Stock at a specified option price and subject to such other terms and
conditions as are specified in connection with the option grant. Options may be
granted at an exercise price which may be less than, equal to or greater than
the fair market value of the Common Stock on the date of grant. Under present
law, incentive stock options and options intended to qualify as
performance-based compensation under Section 162(m) of the Code may not be
granted at an exercise price less than the fair market value of the Common Stock
on the date of grant (or less than 110% of the fair market value in the case of
incentive stock options granted to optionees holding more than 10% of the voting
power of the
42
<PAGE> 45
Company). The Incentive Plan permits the Board of Directors to determine the
manner of payment of the exercise price of options, including through payment by
cash, check or in connection with a "cashless exercise" through a broker, by
surrender to the Company of shares of Common Stock, by delivery to the Company
of a promissory note, or by any combination of the permitted forms of payment.
As of June 30, 1998, approximately 136 persons would have been eligible to
receive Awards under the Incentive Plan, including the Company's five executive
officers and six non-employee directors. The granting of Awards under the
Incentive Plan is discretionary.
The Incentive Plan is administered by the Board of Directors. The Board of
Directors has the authority to adopt, amend and repeal the administrative rules,
guidelines and practices relating to the Incentive Plan and to interpret the
provisions thereof. Pursuant to the terms of the Incentive Plan, the Board of
Directors may delegate authority under the Incentive Plan to one or more
committees of the Board of Directors and, subject to certain limitations, to one
or more executive officers of the Company. The Board of Directors has authorized
the Compensation Committee to administer the Incentive Plan, including the
granting of options to executive officers. Subject to any applicable limitations
contained in the Incentive Plan, the Board of Directors, the Compensation
Committee or any other committee or executive officer to whom the Board of
Directors delegates authority, as the case may be, selects the recipients of
Awards and determines (i) the number of shares of Common Stock covered by
options and the dates upon which such options become exercisable, (ii) the
exercise price of options, (iii) the duration of options, and (iv) the number of
shares of Common Stock subject to any restricted stock or other stock-based
Awards and the terms and conditions of such Awards, including the conditions for
repurchase, issue price and repurchase price.
In the event of a merger, liquidation or other Acquisition Event (as
defined in the Incentive Plan), the Board of Directors is authorized to provide
for outstanding options or other stock-based Awards to be assumed or substituted
for by the acquiror. If the acquiror refuses to assume or substitute for
outstanding Awards, they will accelerate, becoming fully exercisable and free of
restriction, prior to consummation of the Acquisition Event. In addition,
following an Acquisition Event, an assumed or substituted Award will accelerate
if the employment of its holder with the acquiror is terminated prior to the
first anniversary of the Aquisition Event other than "for cause," as defined in
the Incentive Plan.
No Award may be granted under the Incentive Plan after June 2008, but the
vesting and effectiveness of Awards previously granted may extend beyond that
date. The Board of Directors may at any time amend, suspend or terminate the
Incentive Plan, except that no Award granted after an amendment of the Incentive
Plan and designated as subject to Section 162(m) of the Code by the Board of
Directors shall become exercisable, realizable or vested (to the extent such
amendment was required to grant such Award) unless and until such amendment is
approved by the Company's stockholders.
The Company intends to grant options to purchase an aggregate of 200,000
shares of Common Stock to certain employees (none of whom is an executive
officer) on the effective date of this offering at a price per share equal to
the initial public offering price.
1998 Employee Stock Purchase Plan
The Company's 1998 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors, subject to stockholder approval, in June
1998. The Purchase Plan authorizes the issuance of up to a total of 250,000
shares of Common Stock to participating employees.
All employees of the Company, including directors of the Company who are
employees, and all employees of any participating subsidiaries, whose customary
employment is more than 20 hours per week and for more than five months in any
calendar year are eligible to participate in the
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<PAGE> 46
Purchase Plan. Employees who would immediately after the grant own 5% or more of
the total combined voting power or value of the stock of the Company or any
subsidiary are not eligible to participate. As of June 30, 1998, approximately
130 of the Company's employees would have been eligible to participate in the
Purchase Plan.
On the first day of a designated payroll deduction period (the "Offering
Period"), the Company will grant to each eligible employee who has elected to
participate in the Purchase Plan an option to purchase the number of shares of
Common Stock equal to an amount (a whole percentage from 1% to 10% of such
employee's base pay) authorized by the employee to be deducted by the Company
from such employee's base pay during the Offering Period. On the last day of the
Offering Period, the employee is deemed to have exercised the option, at the
option exercise price, to the extent of accumulated payroll deductions. Under
the terms of the Purchase Plan, the option price is an amount equal to 85% of
the closing price (as defined) per share of the Common Stock on either the first
business day or the last business day of the Offering Period, whichever is
lower. In no event may an employee purchase in any one Offering Period a number
of shares which exceeds the number of shares determined by dividing (a) the
product of $2,083 and the number of whole months in such Offering Period by (b)
the closing price per share of the Common Stock on the commencement date of the
Offering Period. The Compensation Committee may, in its discretion, choose an
Offering Period of 12 months or less for each Offering and choose a different
Offering Period for each Offering.
If an employee is not a participant on the last day of the Offering Period,
such employee is not entitled to exercise any option, and the amount of such
employee's accumulated payroll deductions will be refunded. An employee's rights
under the Purchase Plan terminate upon voluntary withdrawal from the Purchase
Plan at any time, or when such employee ceases employment for any reason, except
that upon termination of employment because of death, the employee's beneficiary
has certain rights to elect to exercise the option to purchase the shares which
the accumulated payroll deductions in the participant's account would purchase
at the date of death.
Because participation in the Purchase Plan is voluntary, the Company cannot
now determine the number of shares of Common Stock to be purchased by any
particular current executive officer, by all current executive officers as a
group or by non-executive employees as a group.
401(k) PLAN
The Company currently maintains a 401(k) salary reduction plan (the "401(k)
Plan") which is intended to qualify under Sections 401(a) and 401(k) of the
Internal Revenue Code of 1986. Employees working more than 20 hours per week are
eligible to begin participating in the 401(k) Plan on the first day of each
calendar quarter. All eligible executive officers, other than Mr. Person, have
elected to participate in the 401(k) Plan.
Eligible employees electing to participate in the 401(k) Plan may defer a
portion of their compensation on a pre-tax basis, by contributing a percentage
thereof to the 401(k) Plan. The maximum contribution is prescribed in Section
401(k) of the Internal Revenue Code of 1986. The contribution limit for 1997 was
$9,500. The Company made matching contributions of $30.00 plus 25% of the first
four percent of the employee's compensation which is deferred under the plan in
1997, subject to the foregoing limit. Eligible employees who elect to
participate in the 401(k) Plan are generally vested in the Company's matching
contribution after three years of service.
EMPLOYMENT AGREEMENTS
Pursuant to a Key Employee Agreement dated October 2, 1995, as amended on
July 21, 1997, the Company agreed to employ Douglas K. Anderson as President and
Chief Executive Officer. The Company also agreed to maintain a policy on the
life of Mr. Anderson with a death benefit of $300,000 payable to a beneficiary
named by Mr. Anderson. Under the agreement, Mr. Anderson retained 175,000 shares
of Common Stock initially issued to him and surrendered the right to
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<PAGE> 47
receive 175,000 shares in exchange for the grant of an incentive stock option to
purchase 175,000 shares of Common Stock at an exercise price of $0.45 per share
and supplemental compensation of $40,000 in 1997 and $60,000 in 1998. The
Company also granted to Mr. Anderson an additional option to purchase 20,000
shares of Common Stock at an exercise price of $0.45 per share. On March 2,
1998, by action of the Company's Board of Directors, the Company agreed to pay
Mr. Anderson an annual base salary of not less than $225,000 and a bonus of
$50,000 in 1998 based on the achievement of certain performance targets. The
Company also agreed to provide, under certain circumstances, for 24 months of
salary continuation and acceleration of options upon termination of Mr.
Anderson's employment.
Pursuant to employment agreements dated January 2, 1993, as amended on
January 2, 1994, the Company agreed to employ each of Graham H. Gurney and
Clifford I. Waggoner. The Company agreed to pay each of Messrs. Gurney and
Waggoner an annual base salary of $100,000. The agreements also include a
covenant by each of Messrs. Gurney and Waggoner not to compete with the business
of the Company, or to solicit any employee or client of the Company, during the
two-year period following his employment termination, and contain customary
confidentiality and invention assignment provisions.
Pursuant to a letter agreement dated April 10, 1997, the Company agreed to
employ John L. Person as Executive Vice President and Chief Operating Officer
and to grant Mr. Person an incentive stock option to purchase 100,000 shares of
Common Stock at an exercise price of $0.45 per share. On March 2, 1998, by
action of the Company's Board of Directors, the Company agreed to pay Mr. Person
an annual base salary of $190,000 and a bonus of up to $35,000 based on the
achievement of certain performance targets. The Company also agreed to provide,
under certain circumstances, 12 months salary continuation and acceleration of
options upon termination of Mr. Person's employment.
Pursuant to a letter agreement dated February 27, 1998, the Company agreed
to employ Richard J. Willemin as Senior Vice President and Chief Financial
Officer. The Company agreed to pay Mr. Willemin an annual base salary of
$150,000 and to grant Mr. Willemin an incentive stock option to purchase 100,000
shares of Common Stock at an exercise price of $2.75 per share. The Company also
agreed that in the event of a change in control of the Company the vesting of
all such options will be accelerated.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Compensation Committee of the Board of Directors
are Messrs. Carlisle, McKay and Yanak. No executive officer of the Company has
served as a director or member of the compensation committee (or other committee
serving an equivalent function) of any other entity, whose executive officers
served as a director of or member of the Compensation Committee of the Board of
Directors.
From January 1997 to June 1998, Mr. Naudon served as a member of the
Compensation Committee of the Board of Directors. Mr. Naudon is President, Chief
Executive Officer, a director and majority shareholder of Spectrum, a
shareholder of the Company. See "Certain Transactions."
Each of Messrs. Carlisle and McKay was appointed to the Board of Directors
as the designee of Menlo Ventures and Axiom, respectively. See "Certain
Transactions."
CERTAIN TRANSACTIONS
In January 1994, the Company entered into an agreement with Banking
Spectrum to license certain software products and for consulting and support
services. Pursuant to the agreement, the Company agreed to pay Banking Spectrum
a royalty based on the licensing of software products and related services,
ranging from three percent to 17% of net revenues, based on Banking Spectrum's
involvement in the sale of such products and services. In March 1998, the
Company and Banking
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<PAGE> 48
Spectrum entered into a distribution agreement and a termination agreement. The
March 1998 distribution agreement provides that the Company shall have a
fully-paid license to distribute twenty copies of an electronic regulatory
reference product developed by Banking Spectrum. The March 1998 termination
agreement releases the Company from any future royalty payments to Banking
Spectrum in exchange for a cash payment of $100,000 and grants to affiliates of
Banking Spectrum fully-vested options to purchase 275,000 shares of Common Stock
at an exercise price of $0.45 per share. Mr. Naudon, a director of the Company,
is President and Chief Executive Officer, director and the majority shareholder
of Spectrum. The stock options were estimated by management to have a fair value
of approximately $1.6 million, and the Company recorded a contract termination
expense of approximately $1.3 million (net of amounts previously accrued) for
the three months ended March 31, 1998.
In July 1992 and January 1994, the Company entered into Professional
Services Agreements (the "Prism Agreements") with Prince-Roth Information
Systems Management, Inc. T/A ("PRISM"). Under the PRISM Agreements, PRISM
provided data processing technical services to the Company, and the Company
deferred payment for such services under the agreements until June 1995 and June
1996, respectively. Pursuant to the terms of the PRISM Agreements, Messrs.
Gurney and Waggoner each received an aggregate of approximately $132,000.
Spouses of the shareholders of PRISM are shareholders of the Company.
On February 3, 1994, the Company issued an aggregate of 1,000,000 shares of
Series A-1 Preferred Stock at $1.50 per share for an aggregate purchase price of
$1.5 million to Menlo Ventures and Menlo Entrepreneurs Fund VI, L.P. ("Menlo
Entrepreneurs"). In addition, the Company issued warrants to purchase 333,333
shares of Series A-2 Preferred Stock with an exercise price of $3.00 per share.
These warrants were exercised on September 13, 1994 for $999,999. Mr. Carlisle,
a director of the Company, is a general partner of MV Management VI, L.P.
("MVM"). MVM is a general partner of Menlo Ventures and Menlo Entrepreneurs.
On September 14, 1994, the Company issued 83,333 shares of Series A-2
Preferred Stock at $3.00 per share for $50,000 cash and a $200,000 promissory
note from Banking Spectrum. Mr. Naudon, a director of the Company, is President
and Chief Executive Officer, and a director and the majority shareholder of
Banking Spectrum.
On May 12, 1995, the Company issued 166,667 shares of Series A-2 Preferred
Stock at $3.00 per share for an aggregate purchase price of $500,000 to
Connecticut Innovations, Incorporated ("CII"). CII is a holder of more than five
percent of the Convertible Preferred Stock.
On September 1, 1995, the Company issued demand notes with an interest rate
of 10% per annum to Menlo Ventures and Menlo Entrepreneurs in an aggregate
original principal amount of $500,000. On November 15, 1995, the Company issued
demand notes with an interest rate of 10% per annum to Menlo Ventures and Menlo
Entrepreneurs in an aggregate original principal amount of $500,000. Each of the
notes was repaid on December 27, 1995.
On December 27, 1995, the Company issued an aggregate of 1,543,334 shares
of Series B Preferred Stock at $3.00 per share for an aggregate purchase price
of $4,630,000 to certain investors, including Menlo Ventures, Menlo
Entrepreneurs, Axiom and CII. In addition, the Company issued warrants to
purchase 192,916 shares of Series B Preferred Stock at $4.00 per share. Warrants
to purchase 84,583 shares of Series B Preferred Stock were exercised by Menlo
Ventures and Menlo Entrepreneurs on March 6, 1998 for $338,332. The Company
granted each of Axiom and Menlo the right (which terminates upon the closing of
this offering) to designate one nominee for election to the Company's Board of
Directors. Mr. McKay, a director of the Company, is Chief Executive Officer of
Axiom Venture Associates, Inc. ("Axiom Associates"), the general partner of
Axiom.
On October 23, 1996, the Company issued 1,222,222 shares of Series C
Preferred Stock at $4.50 per share for an aggregate purchase price of $5,500,000
to Aetna, Menlo Ventures, Menlo Entrepreneurs, Axiom and CII. In addition, the
Company issued warrants to purchase 152,778 shares of
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<PAGE> 49
Series C Preferred Stock at $6.00 per share. Warrants to purchase 41,667 shares
of Series C Preferred Stock were exercised by Menlo Ventures and Menlo
Entrepreneurs on March 6, 1998 for $250,002. The Company granted Aetna the right
(which terminates upon the closing of this offering) to designate one nominee
for election to the Company's Board of Directors. Mr. Clarke, a director of the
Company, is Vice President, Private Equity, of Aetna.
On August 22, 1997, the Company issued 833,333 shares of Series D Preferred
Stock at $6.00 per share for an aggregate purchase price of $5,000,000 to BISYS.
In addition, the Company issued a warrant to purchase 416,667 shares of Series D
Preferred Stock at $6.00 per share. Concurrent with such preferred stock
offering, the Company entered into a software license and marketing and
distribution agreement with BISYS, Inc., a subsidiary of BISYS. See
"Business -- Sales and Marketing." Pursuant to such software license and
marketing and distribution agreement, BISYS, Inc. was granted the right (which
continues until termination of the agreement) to nominate a candidate to the
Company's Board of Directors. Mr. Neville, a director of the Company, is
President of BISYS, Inc.
The Company has adopted a policy providing that all material transactions
between the Company and its officers, directors and other affiliates must (i) be
approved by a majority of the members of the Company's Board of Directors and by
a majority of the disinterested members of the Company's Board of Directors and
(ii) be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
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<PAGE> 50
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of June 30, 1998, and as
adjusted to reflect the sale of the shares of Common Stock offered hereby, by
(i) each person or entity known to the Company to own beneficially more than 5%
of the Company's Common Stock, (ii) each of the directors of the Company, (iii)
each of the Named Executive Officers, (iv) all directors and executive officers
as a group and (v) each of the other Selling Stockholders. Except as indicated
below, none of these entities has a relationship with the Company or, to the
knowledge of the Company, any of the Underwriters or their respective
affiliates. Unless otherwise indicated, each person or entity named in the table
has sole voting power and investment power (or shares such power with his or her
spouse) with respect to all shares of capital stock listed as owned by such
person or entity. The address of each of the officers and directors of the
Company is c/o Open Solutions Inc., 300 Winding Brook Drive, Glastonbury, CT
06033.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES TO BE
OWNED BENEFICIALLY OWNED
PRIOR TO OFFERING (1) SHARES AFTER OFFERING(1)(2)
---------------------- BEING ----------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE OFFERED(3) NUMBER PERCENTAGE
- ------------------------ --------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
5% STOCKHOLDERS
MV Management VI, L.P.(4)................... 2,469,583 32.7% -- 2,469,583 24.3%
3000 Sand Hill Road
Building 4, Suite 100
Menlo Park, CA 94025
The BISYS Group, Inc.(5).................... 1,250,000 15.7% -- 1,250,000 11.8%
11 Greenway Plaza
Houston, TX 77046
Axiom Venture Partners, L.P.(6)............. 875,000 11.5% -- 875,000 8.5%
City Place II, 17th Floor
Hartford, CT 06103
Aetna Life Insurance Company(7)............. 750,000 9.8% -- 750,000 7.3%
151 Farmington Avenue
Hartford, CT 06106
Carlos P. Naudon(8)......................... 550,042 7.1% 55,000 495,042 4.8%
Connecticut Innovations, Incorporated(9).... 479,167 6.3% -- 479,167 4.7%
999 West Street
Rocky Hill, CT 06067
Lorraine H. Rothstein....................... 440,000 5.8% 88,000 352,000 3.5%
157 Arbour Circle
Basking Ridge, NJ 07920
Graham H. Gurney(10)........................ 439,605 5.8% -- 439,605 4.3%
Ellen A. Dugan.............................. 430,000 5.7% 40,000 390,000 3.8%
33 Country Oaks
Lebanon, NJ 08833
Clifford I. Waggoner(11).................... 378,125 5.0% -- 378,125 3.7%
OTHER DIRECTORS AND EXECUTIVE OFFICERS
Douglas K. Anderson(12)..................... 339,652 4.4% -- 339,652 3.3%
Douglas C. Carlisle(4)...................... 2,469,583 32.7% -- 2,469,583 24.3%
David M. Clarke(7).......................... 750,000 9.8% -- 750,000 7.3%
Samuel F. McKay(6).......................... 875,000 11.5% -- 875,000 8.5%
William W. Neville.......................... -- -- -- -- --
John L. Person(13).......................... 31,250 * -- 31,250 *
Richard J. Willemin......................... -- -- -- --
Richard P. Yanak(14)........................ 11,250 * -- 11,250 *
All executive officers and directors as a
group (11 persons)(15).................... 5,844,507 70.7% 55,000 5,789,507 53.2%
</TABLE>
- ---------------
* Less than 1%
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<PAGE> 51
(1) The number of shares beneficially owned by each stockholder is determined
under rules promulgated by the Securities and Exchange Commission, and the
information is not necessarily indicative of beneficial ownership for any
other purpose. Under such rules, beneficial ownership includes any shares
as to which the individual or entity has sole or shared voting power or
investment power and any shares as to which the individual or entity has
the right to acquire beneficial ownership within 60 days after June 30,
1998 through the exercise of any stock option, warrant or other right. The
inclusion herein of such shares, however, does not constitute an admission
that the named stockholder is a direct or indirect beneficial owner of such
shares.
(2) Assumes no exercise of the Underwriters' over-allotment option.
(3) In the event that the over-allotment option is exercised in full, Messrs.
Gurney and Waggoner will each sell 35,000 shares to the Underwriters. As a
result of such sale, Messrs. Gurney and Waggoner will thereafter
beneficially own 404,605 (3.8%) and 343,125 (3.3%), respectively, of the
shares outstanding after this offering.
(4) Consists of 2,433,003 shares held by Menlo Ventures and 36,580 shares held
by Menlo Entrepreneurs. MVM is a general partner of Menlo Ventures and
Menlo Entrepreneurs. Mr. Carlisle, a director of the Company, is a general
partner of MVM. Mr. Carlisle disclaims beneficial ownership of the shares
held by Menlo Ventures and Menlo Entrepreneurs, except to the extent of his
pecuniary interests therein.
(5) Includes 416,667 shares issuable upon the exercise of warrants held by
BISYS which are exercisable within 60 days after June 30, 1998.
(6) Includes 97,222 shares issuable upon the exercise of warrants held by Axiom
which are exercisable within 60 days after June 30, 1998. Mr. McKay, a
director of the Company, is Chief Executive Officer of Axiom Venture
Associates, Inc., the general partner of Axiom. Mr. McKay shares voting and
investment power with respect to such shares with two other executive
officers of Axiom Associates. Mr. McKay disclaims beneficial ownership of
the shares held by Axiom, except to the extent of his pecuniary interest
therein.
(7) Includes 83,333 shares issuable upon the exercise of warrants held by the
Aetna which are exercisable within 60 days after June 30, 1998. Mr. Clarke,
a director of the Company, is Vice President, Private Equity of Aetna.
(8) Consists of 251,762 shares held by Spectrum, 23,520 shares subject to
options held by Spectrum which are exercisable within 60 days after June
30, 1998, 14,375 shares held by Mr. Naudon, 205,695 shares held by Mr.
Naudon which are exercisable within 60 days after June 30, 1998, 10,000
shares held by The Enrique S. Naudon Trust, 10,000 shares held by The
Ignacio S. Naudon Trust, 10,000 shares held by The Huguette Rivet Trust,
9,065 shares held by The Eric P. Steingass Trust and 15,625 shares held by
Allister & Naudon Profit Sharing Pension Plan. Mr. Naudon, a director of
the Company, is President and Chief Executive Officer, and a director and
the majority shareholder of Spectrum, a trustee of the Allister & Naudon
Profit Sharing Plan, and Susan Steingass, his spouse, is a trustee of The
Enrique S. Naudon Trust, The Ignacio S. Naudon Trust, The Huguette Rivet
Trust and The Eric P. Steingass Trust.
(9) Includes 34,722 shares issuable upon the exercise of warrants held by CII
which are exercisable within 60 days after June 30, 1998.
(10) Includes 89,605 shares subject to options held by Mr. Gurney which are
exercisable within 60 days after June 30, 1998.
(11) Includes 28,125 shares subject to options held by Mr. Waggoner which are
exercisable within 60 days after June 30, 1998.
(12) Includes 164,652 shares subject to options held by Mr. Anderson which are
exercisable within 60 days after June 30, 1998.
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<PAGE> 52
(13) Consists of shares subject to options held by Mr. Person which are
exercisable within 60 days after June 30, 1998.
(14) Consists of shares subject to options held by Mr. Yanak which are
exercisable within 60 days after June 30, 1998.
(15) Includes an aggregate of 723,402 shares of Common Stock subject to options
or warrants which are exercisable within 60 days after June 30, 1998.
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<PAGE> 53
DESCRIPTION OF CAPITAL STOCK
After the filing of the Company's Restated Certificate of Incorporation
upon the closing of this offering, the authorized capital stock of the Company
will consist of 50,000,000 shares of Common Stock, $0.01 par value per share,
and 5,000,000 shares of Preferred Stock, $0.01 par value per share ("Preferred
Stock"). As of June 30, 1998 (after giving effect to the conversion of all
outstanding shares of Convertible Preferred Stock into Common Stock to be
effected upon the closing of this offering), there were outstanding (i)
7,544,485 shares of Common Stock held by 38 stockholders of record, (ii) options
to purchase an aggregate of 1,689,500 shares of Common Stock and (iii) warrants
to purchase an aggregate of 636,111 shares of Common Stock ("Warrants").
The following summary of certain provisions of the Company's Common Stock,
Preferred Stock, Warrants, Restated Certificate of Incorporation and Amended and
Restated By-laws (the "By-laws") is not intended to be complete and is qualified
by reference to the provisions of applicable law and to the Company's Restated
Certificate of Incorporation, By-laws and Warrants included as exhibits to the
Registration Statement of which this Prospectus is a part. See "Additional
Information."
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights of
outstanding Preferred Stock. Upon the liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to receive ratably the net
assets of the Company available after the payment of all debts and other
liabilities and subject to the prior rights of any outstanding Preferred Stock.
Holders of Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
offered by the Company in this offering will be, when issued and paid for, fully
paid and nonassessable. The rights, preferences and privileges of holders of
Common Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of Preferred Stock which the Company may
designate and issue in the future. Certain holders of Common Stock have the
right to require the Company to effect the registration of their shares of
Common Stock in certain circumstances. See "Shares Eligible for Future Sale."
PREFERRED STOCK
Under the terms of the Restated Certificate of Incorporation, the Board of
Directors is authorized, subject to any limitations prescribed by law, without
stockholder approval, to issue shares of Preferred Stock in one or more series.
Each such series of Preferred Stock shall have such rights, preferences,
privileges and restrictions, including voting rights, dividend rights,
conversion rights, redemption privileges and liquidation preferences, as shall
be determined by the Board of Directors.
The purpose of authorizing the Board of Directors to issue Preferred Stock
and determine its rights and preferences is to eliminate delays associated with
a stockholder vote on specific issuances. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from acquiring, a
majority of the outstanding voting stock of the Company. The Company has no
present plans to issue any shares of Preferred Stock.
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<PAGE> 54
WARRANTS
As of June 30, 1998, the Company has outstanding warrants to purchase
108,333 shares of Series B Preferred Stock at an exercise price of $4.00 per
share, warrants to purchase 111,111 shares of Series C Preferred Stock at an
exercise price of $6.00 per share and a warrant to purchase 416,667 shares of
Series D Preferred Stock at an exercise price of $6.00 per share. The warrants
to purchase Series B Preferred Stock expire on December 27, 2000. The warrants
to purchase Series C Preferred Stock expire on October 23, 2001. The warrant to
purchase Series D Preferred Stock expires on August 22, 2002. All of these
warrants will become warrants to purchase Common Stock upon the closing of this
offering.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. Subject to certain exceptions, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock.
The Restated Certificate of Incorporation provides for the division of the
Board of Directors into three classes as nearly equal in size as possible with
staggered three-year terms. See "Management." In addition, the Restated
Certificate of Incorporation provides that directors may be removed only for
cause by the affirmative vote of holders of at least 75% of the votes which all
the stockholders would be entitled to cast in any annual election of directors
or class of directors. Under the Restated Certificate of Incorporation, any
vacancy on the Board of Directors, however occurring, including a vacancy
resulting from an enlargement of the Board of Directors, may only be filled by
vote of a majority of the directors then in office. The classification of the
Board of Directors and the limitations on the removal of directors and filling
of vacancies could have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from acquiring, control of the
Company.
The Restated Certificate of Incorporation also provides that, after the
closing of this offering, any action required or permitted to be taken by the
stockholders of the Company at an annual meeting or special meeting of
stockholders may only be taken if it is properly brought before such meeting and
may not be taken by written action in lieu of a meeting. The Restated
Certificate of Incorporation further provides that special meetings of the
stockholders may only be called by the Chairman of the Board, the President or
the Board of Directors. Under the Company's By-laws, in order for any matter to
be considered "properly brought" before a meeting, a stockholder must comply
with certain requirements regarding advance notice and provide certain
information to the Company. The foregoing provisions could have the effect of
delaying until the next stockholders meeting stockholder actions which are
favored by the holders of a majority of the outstanding voting securities of the
Company. These provisions may also discourage another person or entity from
making a tender offer for the Common Stock, because such person or entity, even
if it acquired a majority of the outstanding voting securities of the Company,
would be able to take action as a stockholder (such as electing new directors or
approving a merger) only at a duly called stockholders' meeting, and not by
written consent.
The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless a corporation's certificate of incorporation or by-laws, as the case may
be, requires a greater percentage. The Restated Certificate of Incorporation and
the By-laws require the affirmative vote of holders of at least 75% of the votes
which all the stockholders would
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<PAGE> 55
be entitled to cast in any annual election of directors or class of directors to
amend or repeal any of the provisions described in the prior two paragraphs.
The Restated Certificate of Incorporation contains certain provisions
permitted under the General Corporation Law of Delaware relating to the
liability of directors. The provisions eliminate a director's liability for
monetary damages for a breach of fiduciary duty, except in certain circumstances
involving wrongful acts, such as the breach of a director's duty of loyalty or
acts or omissions which involve intentional misconduct or a knowing violation of
law. Further, the Restated Certificate of Incorporation contains provisions to
indemnify the Company's directors and officers to the fullest extent permitted
by the General Corporation Law of Delaware. The Company believes that these
provisions will assist the Company in attracting and retaining qualified
individuals to serve as directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is BankBoston, N.A.
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<PAGE> 56
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the securities
of the Company. Upon completion of this offering, based upon the number of
shares outstanding at June 30, 1998, there will be 10,161,485 shares of Common
Stock of the Company outstanding (assuming no exercise of the Underwriters'
over-allotment option or outstanding warrants or options of the Company). Of
these shares, the 2,800,000 shares sold in this offering will be freely
tradeable without restriction or further registration under the Securities Act
of 1933, as amended (the "Securities Act"), except that any shares purchased by
"affiliates" of the Company, as that term is defined in Rule 144 ("Rule 144")
under the Securities Act ("Affiliates"), may generally only be sold in
compliance with the limitations of Rule 144 described below.
SALES OF RESTRICTED SHARES
The remaining 7,361,485 shares of Common Stock are deemed "restricted
securities" under Rule 144. Of the restricted securities, approximately 10,000
shares of Common Stock, which are not subject to the 180-day lock-up agreements
(the "Lock-up Agreements") with the Representatives of the Underwriters, will be
eligible for immediate sale in the public market pursuant to Rule 144(k) under
the Securities Act. Approximately 146 additional shares of Common Stock, which
are not subject to Lock-up Agreements, will be eligible for sale in the public
market in accordance with Rule 144 or Rule 701 under the Securities Act
beginning 90 days after the date of this Prospectus. Upon expiration of the
Lock-up Agreements 180 days after the date of this Prospectus, approximately
7,351,339 additional shares of Common Stock will be available for sale in the
public market, subject to the provisions of Rule 144 under the Securities Act.
The officers and directors of the Company, and certain securityholders,
which executive officers, directors and securityholders in the aggregate hold
approximately 9,665,450 shares of Common Stock (including 2,314,111 shares of
Common Stock that may be acquired pursuant to the exercise of options and
warrants held by them) on the date of this Prospectus, have agreed that, for a
period of 180 days after the date of this Prospectus, they will not sell,
consent to sell or otherwise dispose of any shares of Common Stock, or any
shares convertible into or exchangeable for shares of Common Stock, owned
directly by such persons or with respect to which they have the power of
disposition, without the prior written consent of the Representatives of the
Underwriters.
In general, under Rule 144 as currently in effect, beginning 90 days after
the effective date of the Registration Statement of which this Prospectus is a
part, a stockholder, including an Affiliate, who has beneficially owned his or
her restricted securities (as that term is defined in Rule 144) for at least one
year from the later of the date such securities were acquired from the Company
or (if applicable) the date they were acquired from an Affiliate is entitled to
sell, within any three-month period, a number of such shares that does not
exceed the greater of 1% of the then outstanding shares of Common Stock
(approximately 101,614 shares immediately after this offering) or the average
weekly trading volume in the Common Stock during the four calendar weeks
preceding the date on which notice of such sale was filed under Rule 144,
provided certain requirements concerning availability of public information,
manner of sale and notice of sale are satisfied. In addition, under Rule 144(k),
if a period of at least two years has elapsed between the later of the date
restricted securities were acquired from the Company or (if applicable) the date
they were acquired from an Affiliate of the Company, a stockholder who is not an
Affiliate of the Company at the time of sale and has not been an Affiliate of
the Company for at least three months prior to the sale is entitled to sell the
shares immediately without compliance with the foregoing requirements under Rule
144.
Securities issued in reliance on Rule 701 (such as shares of Common Stock
acquired pursuant to the exercise of certain options granted under the Company's
stock plans) are also restricted securities and, beginning 90 days after the
effective date of the Registration Statement of which this Prospectus is a part,
may be sold by stockholders other than Affiliates of the Company subject only to
54
<PAGE> 57
the manner of sale provisions of Rule 144 and by Affiliates under Rule 144
without compliance with its one-year holding period requirement.
OPTIONS
The Company intends to file registration statements on Form S-8 with
respect to the shares of Common Stock issuable under the 1994 Plan, the
Incentive Plan and the Purchase Plan promptly following the consummation of this
offering. Shares issued upon the exercise of stock options after the effective
date of the Form S-8 registration statements will be eligible for resale in the
public market without restriction, subject to Rule 144 limitations applicable to
Affiliates and the Lock-Up Agreements noted above, if applicable.
REGISTRATION RIGHTS
Pursuant to an Amended and Restated Investors' Rights Agreement dated as of
August 22, 1997 among the Company and certain persons and entities (the
"Rightsholders"), including Aetna, Axiom, Spectrum, BISYS, CII and Menlo
Ventures and Menlo Entrepreneurs, such Rightsholders will be entitled following
the offering to certain rights with respect to the registration under the
Securities Act of a total of approximately 5,944,583 shares of Common Stock,
including the shares issuable upon exercise of outstanding warrants (the
"Registrable Stock"). The Amended and Restated Investors' Rights Agreement
generally provides that, in the event the Company proposes to register any of
its securities under the Securities Act, the Rightsholders shall be entitled to
include Registrable Stock in such Registration, subject to the right of the
managing underwriter of any underwritten offering to limit for marketing reasons
the number of shares of Registrable Stock included in such "piggyback"
registration period.
The Rightsholders may, upon the request of holders of Registrable Stock
having an aggregate offering price of at least $2,000,000, require the Company
to prepare and file a registration statement under the Securities Act with
respect to their shares of Registrable Stock at any time after this offering.
The Company need effect only two such demand registrations and is not required
to file a demand registration statement within one hundred eighty days after the
effective date of any other registration statement filed by the Company.
EFFECT OF SALES OF SHARES
Prior to this offering, there has been no public market for the Common
Stock, and no prediction can be made as to the effect, if any, that market sales
of shares of Common Stock or the availability of shares for sale will have on
the market price of the Common Stock prevailing from time to time. Nevertheless,
sales of significant numbers of shares of the Common Stock in the public market
could adversely affect the market price of the Common Stock and could impair the
Company's future ability to raise capital through an offering of its equity
securities.
55
<PAGE> 58
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives, BT
Alex. Brown Incorporated and Warburg Dillon Read LLC, a subsidiary of UBS AG,
have severally agreed to purchase from the Company and the Selling Stockholders
the following respective numbers of shares of Common Stock at the initial public
offering price less the underwriting discounts and commissions set forth on the
cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ----------- ---------
<S> <C>
BT Alex. Brown Incorporated.................................
Warburg Dillon Read LLC, a subsidiary of UBS AG.............
--------
Total............................................. 2,800,000
========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all shares of the Common Stock offered hereby if any
such shares are purchased.
The Company and the Selling Stockholders have been advised by the
Representatives of the Underwriters that the Underwriters propose to offer the
shares of Common Stock to the public at the initial public offering price set
forth on the cover page of this Prospectus, and to certain dealers at such price
less a concession not in excess of $ per share. The Underwriters
may allow, and such dealers may reallow, a concession not in excess of
$ per share to certain other dealers. After the initial public
offering, the public offering price and other selling terms may be changed by
the Representatives of the Underwriters.
The Company and certain stockholders of the Company (other than the Selling
Stockholders) have granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 420,000
additional shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown in the above table bears to 2,800,000, and such stockholders will be
obligated, pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 2,800,000 shares are being offered.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company, the Selling Stockholders and certain other
stockholders against certain civil liabilities, including liabilities under the
Securities Act.
56
<PAGE> 59
The Company, each of its officers and directors, and certain of its
stockholders, including all of the Selling Stockholders, have agreed, subject to
certain exceptions, not to offer, sell, pledge, contract to sell (including any
short sale), grant any option to purchase or otherwise dispose of any shares of
Common Stock or any shares which may be issued upon exercise of a stock option
or warrant or conversion of any convertible securities into Common Stock or
enter into any hedging transaction relating to the Common Stock for a period of
180 days after the date of this Prospectus without the prior written consent of
the Representatives of the Underwriters. The Representatives of the Underwriters
may, in their sole discretion and at any time without notice, release all or any
portion of the securities subject to Lock-up Agreements. See "Shares Eligible
for Future Sale."
The Representatives have advised the Company, the Selling Stockholders and
certain other stockholders that the Underwriters do not intend to confirm sales
to any accounts over which they exercise discretionary authority.
In connection with this offering, the Underwriters and other persons
participating in this offering may engage in transactions that stabilize,
maintain or otherwise affect the price of the Common Stock. Specifically, the
Underwriters may over-allot in connection with this offering, creating a short
position in Common Stock for their own account. To cover over-allotments or to
stabilize the price of the Common Stock, the Underwriters may bid for, and
purchase, shares of Common Stock in the open market. The Underwriters may also
impose a penalty bid whereby they may reclaim selling concessions allowed to an
Underwriter or a dealer for distributing Common Stock in this offering, if the
Underwriters repurchase previously distributed Common Stock in transactions to
cover their short position, in stabilization transactions or otherwise. Finally,
the Underwriters may bid for, and purchase, shares of Common Stock in market
making transactions. These activities may stabilize or maintain the market price
of the Common Stock above market levels that may otherwise prevail. The
Underwriters are not required to engage in these activities and may end any of
these activities at any time.
Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock will be determined by negotiations among the Company,
representatives of the Selling Stockholders and certain other stockholders and
the Representatives of the Underwriters. Among the factors to be considered in
such negotiations are the prevailing market conditions, the results of
operations of the Company in recent periods, the market capitalizations and
stages of development of other companies which the Company, representatives of
the Selling Stockholders and certain other stockholders and the Representatives
of the Underwriters believe to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development and other factors deemed relevant. Application has been made for
quotation of the Common Stock on the Nasdaq National Market under the symbol
"OSIF."
LEGAL MATTERS
The validity of the shares of Common Stock offered by the Company, the
Selling Stockholders and certain other stockholders hereby will be passed upon
for the Company by Hale and Dorr LLP, Boston, Massachusetts, and for the
Underwriters by Goodwin, Procter & Hoar LLP, Boston, Massachusetts.
EXPERTS
The Company's financial statements as of December 31, 1997 and 1996 and for
each of the three years in the period ended December 31, 1997 included in this
Prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
57
<PAGE> 60
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include all amendments,
exhibits, schedules and supplements thereto) on Form S-1 under the Securities
Act with respect to the shares of Common Stock offered hereby. This Prospectus,
which constitutes a part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission, to
which Registration Statement reference is hereby made. Statements made in this
Prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference.
The Registration Statement and the exhibits thereto may be inspected and
copied at prescribed rates at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at Seven World
Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. In addition, the Company is
required to file electronic versions to these documents with the Commission
through the Commission's Electronic Data Gathering, Analysis, and Retrieval
(EDGAR) system. The Commission maintains a World Wide Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
The Company intends to distribute to its stockholders annual reports
containing audited consolidated financial statements. The Company also intends
to make available to its stockholders, within 45 days after the end of each
fiscal quarter, reports for the first three quarters of each fiscal year
containing interim unaudited financial information.
58
<PAGE> 61
OPEN SOLUTIONS INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheet at December 31, 1996, 1997 and June 30, 1998
(unaudited)............................................... F-3
Statement of Operations for the years ended December 31,
1995, 1996 and 1997 and for the six months ended June 30,
1997 (unaudited) and June 30, 1998 (unaudited)............ F-4
Statement of Cash Flows for the years ended December 31,
1995, 1996 and 1997 and for the six months ended June 30,
1997 (unaudited) and June 30, 1998 (unaudited)............ F-5
Statement of Changes in Stockholders' Equity (Deficit) for
the years ended December 31, 1995, 1996 and 1997 and for
the six months ended June 30, 1998 (unaudited)............ F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 62
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Open Solutions Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of cash flows and of changes in stockholders' equity (deficit)
present fairly, in all material respects, the financial position of Open
Solutions Inc. at December 31, 1997 and 1996, and the results of its operations,
its cash flows and changes in stockholders' equity (deficit) for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. 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 generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, 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 the opinion expressed above.
Price Waterhouse LLP
Hartford, Connecticut
April 6, 1998
F-2
<PAGE> 63
OPEN SOLUTIONS INC.
BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------------------------
PRO FORMA
DECEMBER 31, STOCKHOLDERS'
------------------------ EQUITY
1996 1997 ACTUAL (NOTE 2 AND 15)
---------- ----------- ------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $4,437,657 $ 7,596,183 $ 6,332,616
Restricted cash (Note 2)................... 94,241 281,090 --
Accounts receivable (Note 2)............... 1,448,573 1,505,940 3,109,943
Prepaid expenses and other (Note 2)........ 135,210 232,807 951,427
Deferred project costs (Note 2)............ 458,675 -- --
---------- ----------- -----------
Total current assets................... 6,574,356 9,616,020 10,393,986
Fixed assets, net (Notes 2 and 3)............ 767,390 1,153,090 1,372,324
Software development costs, net (Note 2)..... 204,035 533,343 646,308
---------- ----------- -----------
Total assets........................... $7,545,781 $11,302,453 $12,412,618
========== =========== ===========
LIABILITIES, MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................... $ 227,887 $ 104,249 $ 368,514
Royalties payable (Note 13)................ 68,315 378,981 --
Accrued expenses (Note 4).................. 372,108 1,081,917 1,294,950
Note payable (Note 5)...................... -- 175,000 --
Current portion of long-term debt
(Note 6)................................. -- 34,668 --
Deferred revenue (Note 2).................. 1,005,129 1,643,457 2,912,427
---------- ----------- -----------
Total current liabilities.............. 1,673,439 3,418,272 4,575,891
---------- ----------- -----------
Accrued rent expense (Note 2)................ 77,731 100,823 108,919
Long-term debt, less current portion
(Note 6)................................... -- 57,778 --
---------- ----------- -----------
77,731 158,601 108,919
---------- ----------- -----------
Total liabilities............................ 1,751,170 3,576,873 4,684,810
Commitments and contingencies (Note 10)......
Mandatorily redeemable convertible preferred
stock and warrants (Note 7)................ 10,573,480 15,551,214 16,139,549 $ --
Stockholders' equity (deficit) (Note 8 and 9):
Preferred stock, $0.01 par value;
1,416,666, 1,416,666, 1,416,666, and
5,000,000 shares authorized; 1,416,666,
1,416,666, 1,416,666, and 0 shares issued
and outstanding.......................... 14,167 14,167 14,167 --
Common stock, $0.01 par value; 8,580,417,
9,830,417, 19,055,417, and 50,000,000
shares authorized; 2,115,000, 2,165,325,
2,236,013 and 7,544,485 shares issued and
outstanding.............................. 21,150 21,653 22,360 75,445
Additional paid-in capital................. 2,674,465 2,682,569 4,311,842 20,412,473
Accumulated deficit........................ (7,488,651) (10,544,023) (12,760,110) (12,760,110)
---------- ----------- ----------- -----------
Total stockholders' equity (deficit)... (4,778,869) (7,825,634) (8,411,741) $ 7,727,808
---------- ----------- ----------- ===========
Total liabilities, mandatorily redeemable
convertible preferred stock and
stockholders' equity (deficit)............. $7,545,781 $11,302,453 $12,412,618
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 64
OPEN SOLUTIONS INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues (Note 2):
Software license............................ $ 212,653 $ 801,532 $ 4,099,722 $ 1,211,857 $ 2,758,437
Service and maintenance..................... 55,488 217,861 2,549,890 756,824 3,010,156
----------- ----------- ----------- ----------- -----------
Total revenues....................... 268,141 1,019,393 6,649,612 1,968,681 5,768,593
----------- ----------- ----------- ----------- -----------
Cost of revenues:
Software license............................ 223,015 507,094 1,160,005 368,606 618,795
Service and maintenance..................... 476,991 1,530,528 3,150,536 1,390,648 2,455,041
----------- ----------- ----------- ----------- -----------
Total cost of revenues............... 700,006 2,037,622 4,310,541 1,759,254 3,073,836
----------- ----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing......................... 398,496 1,050,831 2,132,410 954,373 1,562,158
Product development......................... 660,510 1,059,879 1,901,892 995,216 918,356
General and administrative.................. 399,576 645,334 1,569,568 739,708 1,345,729
Contract termination (Note 13).............. -- -- -- -- 1,265,292
----------- ----------- ----------- ----------- -----------
Total operating expenses............. 1,458,582 2,756,044 5,603,870 2,689,297 5,091,535
----------- ----------- ----------- ----------- -----------
Loss from operations.......................... (1,890,447) (3,774,273) (3,264,799) (2,479,870) (2,396,778)
Interest income (expense), net................ (4,506) 135,801 209,427 74,834 180,691
----------- ----------- ----------- ----------- -----------
Net loss...................................... $(1,894,953) $(3,638,472) $(3,055,372) $(2,405,036) $(2,216,087)
=========== =========== =========== =========== ===========
Net loss per common share (basic and diluted)
(Note 2).................................... $ (0.98) $ (1.73) $ (1.42) $ (1.12) $ (1.01)
=========== =========== =========== =========== ===========
Weighted average common shares outstanding
(Note 2).................................... 1,935,644 2,102,568 2,155,333 2,146,459 2,191,878
=========== =========== =========== =========== ===========
Unaudited pro forma net loss per common share
(basic and diluted) (Note 2)................ $ (0.41) $ (0.30)
=========== ===========
Unaudited pro forma weighted average common
shares outstanding (Note 2)................. 7,463,805 7,500,350
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 65
OPEN SOLUTIONS INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................... $(1,894,953) $(3,638,472) $(3,055,372) $(2,405,036) $(2,216,087)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization............. 53,865 147,790 352,326 126,129 277,665
Compensation expense related to stock and
options granted......................... -- 52,500 85,526 52,756 68,952
Options granted to Banking Spectrum
(Note 13)............................... -- -- -- -- 1,608,750
Changes in operating assets and
liabilities:
Restricted cash......................... -- (94,241) (186,849) (254,734) 281,090
Accounts receivable..................... (146,240) (1,302,333) (57,367) (830,700) (1,604,003)
Prepaid expenses and other.............. (17,054) (110,005) (97,597) (276,286) (274,620)
Deferred project costs.................. -- (458,675) 458,675 458,675 --
Accounts payable and accrued expenses... 264,158 371,774 500,645 231,981 (35,654)
Royalties payable....................... -- 68,315 310,666 (68,315) (378,981)
Deferred revenue........................ -- 968,254 638,328 583,386 1,268,970
Accrued rent expense.................... -- 77,731 23,092 12,616 8,096
----------- ----------- ----------- ----------- -----------
Net cash used by operating activities... (1,740,224) (3,917,362) (1,027,927) (2,369,528) (995,822)
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchases of fixed assets................... (92,523) (696,874) (597,256) (348,969) (374,422)
Software development costs.................. (119,514) (153,209) (215,078) (34,977) (235,442)
----------- ----------- ----------- ----------- -----------
Net cash used by investing activities... (212,037) (850,083) (812,334) (383,946) (609,864)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from the sale of preferred
stock..................................... 5,092,000 5,481,480 4,977,734 -- --
Proceeds from exercise of stock options..... 1,500 -- 8,607 7,936 21,230
Proceeds from exercise of warrants.......... -- -- -- -- 588,335
Proceeds from short-term debt............... 1,000,000 -- -- -- --
Payments of short-term debt................. (1,000,000) (250,000) -- -- (209,668)
Proceeds from long-term debt................ -- -- 104,002 104,002 --
Payments of long-term debt.................. -- -- (91,556) -- (57,778)
Proceeds from subscription note
receivable................................ 120,000 60,000 -- -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by financing
activities........................... 5,213,500 5,291,480 4,998,787 111,938 342,119
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................... 3,261,239 524,035 3,158,526 (2,641,536) (1,263,567)
Cash and cash equivalents at beginning of
period.................................... 652,383 3,913,622 4,437,657 4,437,657 7,596,183
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of
period.................................... $ 3,913,622 $ 4,437,657 $ 7,596,183 $ 1,796,121 $ 6,332,616
=========== =========== =========== =========== ===========
Supplemental disclosure
Cash paid for:
Interest.................................. $ 21,781 $ 3,438 $ 9,148 $ 4,235 $ 4,305
Income taxes.............................. 4,156 25,923 19,172 12,300 25,300
</TABLE>
See discussion of non-cash transaction in Note 5.
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 66
OPEN SOLUTIONS INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
------------------- ------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY (DEFICIT)
--------- ------- --------- ------- ---------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance -- December 31, 1994....... 1,416,667 $14,167 1,930,000 $19,300 $2,442,315 $ (1,955,226) $ 520,556
Exercise of stock options........ -- -- 10,000 100 1,400 -- 1,500
Proceeds from subscription
note receivable................ -- -- -- -- 120,000 -- 120,000
Net loss......................... -- -- -- -- -- (1,894,953) (1,894,953)
--------- ------- --------- ------- ---------- ------------ -----------
Balance -- December 31, 1995....... 1,416,667 14,167 1,940,000 19,400 2,563,715 (3,850,179) (1,252,897)
Issuance of common stock
(Note 8)....................... -- -- 175,000 1,750 50,750 -- 52,500
Proceeds from subscription
note receivable................ -- -- -- -- 60,000 -- 60,000
Net loss......................... -- -- -- -- -- (3,638,472) (3,638,472)
--------- ------- --------- ------- ---------- ------------ -----------
Balance -- December 31, 1996....... 1,416,667 14,167 2,115,000 21,150 2,674,465 (7,488,651) (4,778,869)
Exercise of stock options........ -- -- 50,325 503 8,104 -- 8,607
Net loss......................... -- -- -- -- -- (3,055,372) (3,055,372)
--------- ------- --------- ------- ---------- ------------ -----------
Balance -- December 31, 1997....... 1,416,667 14,167 2,165,325 21,653 2,682,569 (10,544,023) (7,825,634)
Exercise of stock options........ -- -- 70,688 707 20,523 -- 21,230
Issuance of stock options
(Note 13)...................... -- -- -- -- 1,608,750 -- 1,608,750
Net loss......................... -- -- -- -- -- (2,216,087) (2,216,087)
--------- ------- --------- ------- ---------- ------------ -----------
Balance -- June 30, 1998
(unaudited)...................... 1,416,667 $14,167 2,236,013 $22,360 $4,311,842 $(12,760,110) $(8,411,741)
========= ======= ========= ======= ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 67
OPEN SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY
Open Solutions Inc. (the "Company") is a provider of client/server core
processing software and related professional services to small to mid-size banks
and credit unions. The Company was incorporated in Delaware in May 1992, and was
formed to design and develop enterprise wide banking software. The Company
released its first major product, The Complete Banking Solution, in the second
quarter of 1995. The Company's design and development efforts have principally
been funded through the sale of redeemable and non-redeemable equity securities
as more fully described in Notes 7 and 8. The Company's current products operate
in a Microsoft Windows NT environment using an Oracle relational database.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents include cash on deposit with banks, as well as
short-term investments with original maturities of 90 days or less.
Restricted Cash
As of December 31, 1996 and 1997, certain cash amounts were restricted by a
customer in an escrow account. In February 1998, the restriction was removed.
Accounts Receivable
Receivables are net of the allowance for doubtful accounts. As of December
31, 1996 and 1997 and June 30, 1998, the allowance for doubtful accounts was
approximately $86,000, $214,000 and $260,000 (unaudited), respectively.
Prepaid Expenses and Other (Unaudited)
At June 30, 1998, offering costs of $444,000 have been accrued and deferred
in anticipation of an initial public offering of common stock.
Fixed Assets
Fixed assets are stated at cost and are depreciated using the straight-line
method over the estimated useful lives of the assets, ranging from 5 and 7
years. Leasehold improvements are amortized over the shorter of the term of the
lease or the useful life of the asset.
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, in accordance with Statement of Financial Accounting Standard
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed." Technological feasibility is defined as the point in time
at which the Company has a product design and working model of the software
product that has been appropriately tested. Software development costs incurred
subsequent to the establishment of technological feasibility and prior to
general release of the product are capitalized and amortized based on the
greater of the amount computed using (a) the ratio that current gross revenues
for a product bear to the total of current and anticipated future gross revenues
for that product or (b) the straight-line method over the remaining estimated
economic life of the product, generally three years. Capitalized software
development costs were $153,209, $455,078 and $235,442 (unaudited) for years
ended December 31, 1996, 1997 and for the six months ended June 30, 1998,
respectively. Amortization expense was $19,919, $48,769, $125,770, $25,376
(unaudited) and $122,477
F-7
<PAGE> 68
OPEN SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(unaudited) for the years ended December 31, 1995, 1996, 1997 and the six months
ended June 30, 1997 and 1998, respectively. Accumulated amortization was
$68,688, $194,458, and $316,935 (unaudited) as of December 31, 1996, 1997 and
June 30, 1998, respectively.
Accrued Rent Expense
Accrued rent expense results from the recognition of rent expense on a
straight-line basis relating to a seven year lease agreement with escalating
payments expiring April 2003.
Pro Forma Data (Unaudited)
If the offering contemplated in this Prospectus is consummated, all of the
Company's preferred stock outstanding at the closing date will be converted into
an equal number of shares of common stock and all outstanding warrants to
purchase shares of preferred stock will become warrants to purchase an equal
number of shares of common stock. The unaudited pro forma stockholders' equity
as of June 30, 1998 reflects the conversion of all outstanding preferred stock
into 5,308,472 shares of common stock. The unaudited pro forma net loss per
common share data included in the Statement of Operations for the year ended
December 31, 1997 and for the six months ended June 30, 1998 give effect to this
conversion as if the shares were outstanding at the beginning of the respective
periods.
Revenue Recognition
The Company generates revenues from licensing the rights to use its
software products and certain third-party software products to end users. The
Company also generates revenues from customer support and maintenance, and from
implementation and training services provided to customers.
Effective January 1, 1997 the Company early adopted AICPA Statement of
Position 97-2, "Software Revenue Recognition" (SOP 97-2). Under SOP 97-2, the
Company recognizes software license revenue when a noncancelable license
agreement has been executed, fees are fixed and determinable, the software has
been delivered, accepted by the customer if acceptance is required by the
contract and other than perfunctory, and collection is considered probable.
Beginning in December 1997, the Company revised its standard end user license
agreements, eliminating certain customer acceptance provisions. License revenue
under the revised agreement will be recognized upon software delivery, assuming
all other revenue recognition criteria are met. Prior to 1997, the Company
recognized software license revenue in accordance with AICPA Statement of
Position 91-1, "Software Revenue Recognition" (SOP 91-1). Under SOP 91-1, the
Company recognized software license revenue when the software was delivered,
collectibility was probable and no other significant post delivery obligations
remained.
Maintenance revenues are recognized ratably over the maintenance period,
generally one year. Revenues from implementation and training services are
recognized as services are performed. The Company enters into contracts which
provide both license and service elements. As such service elements are not
essential to functionality of the software, in accordance with SOP 97-2, the
license fees are generally recognized upon delivery and the service revenues are
recognized when performed.
Deferred revenue is comprised of payments received in advance of product
delivery, maintenance and other services which have been paid by customers prior
to the services being performed. Deferred project costs are comprised of costs
associated with projects in process for which revenue has not yet been
recognized.
F-8
<PAGE> 69
OPEN SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company receives royalties from several software vendors for marketing
referrals. Royalty income is recognized at the time the software vendor receives
payment from its customer, and such income is included in service and
maintenance revenue.
As described in Note 10, the Company anticipates receiving payments under
certain license and marketing agreements. The Company expects to recognize such
license revenue when the software has been delivered to the reseller's customer.
When extended payment terms exist, generally the software license fee will be
recognized as payments become due, unless a determination is made at the outset
of the arrangement that the fee is fixed and determinable.
Income Taxes
The Company uses the liability method of accounting for income taxes, as
set forth in Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Under this method, deferred tax assets and liabilities are
recognized for the expected future tax consequences of temporary differences
between the financial statement carrying amounts and the tax basis of the assets
and liabilities and the net operating loss carryforwards using presently enacted
tax rates.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share" (EPS) (SFAS 128) which specifies the computation,
presentation and disclosure requirements for earnings per share of entities with
publicly held common stock or potential common stock. SFAS 128 is effective for
financial statements for both interim and annual periods ended after December
15, 1997. The statement defines two earnings per share calculations, basic and
diluted. Basic EPS is computed by dividing income available to common stock by
the weighted average number of common shares outstanding; diluted EPS is
computed by giving effect to all dilutive potential common shares that were
outstanding during the period. The calculation of diluted EPS is similar to
basic EPS except both the numerator and denominator are increased for the
conversion of potential common shares. Dilutive common share equivalents include
stock options, warrants, and convertible preferred stock.
The 1995, 1996, 1997 and June 1998 calculations of diluted EPS do not
include the exercise of stock options, conversion of preferred stock or the
exercise of warrants as the effect on diluted earnings per share would have been
antidilutive.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to
concentrations of credit risk are limited to accounts receivable. Sales to one
bank accounted for approximately 11% (unaudited) of total revenues in the six
months ending June 30, 1998. Sales to two banks accounted for approximately 17%
and 15% of total revenues, respectively, in the year ended December 31, 1997.
Sales to four banks accounted for approximately 38%, 22%, 20% and 14% of total
revenues, respectively, in the year ended December 31, 1996. Sales to two banks
accounted for approximately 56% and 43% of total revenues, respectively, in the
year ended December 31, 1995. The Company maintains reserves for potential
credit risks and otherwise controls this risk through credit approvals and
monitoring procedures.
Stock Based Compensation
The Company applies APB Opinion 25 and related interpretations in
accounting for its stock option plan. Under APB 25, compensation expense is
recognized 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.
Additional disclosures required under Financial Accounting Standards Board
Statement
F-9
<PAGE> 70
OPEN SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
No. 123 "Accounting for Stock-Based Compensation" (SFAS 123), are included in
Note 9, Stock Option Plan.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 applies to all
companies and is effective for fiscal years beginning after December 15, 1997.
SFAS 130 establishes standards for the reporting and display of comprehensive
income in a set of financial statements. Comprehensive income is defined as the
change in net assets of a business enterprise during a period from transactions
generated from non-owner sources. It includes all changes in equity during a
period except those resulting from investment by owners and distributions to
owners. The Company has adopted SFAS 130 beginning January 1, 1998. For the
years ended December 31, 1995, 1996, and 1997 and for the six months ended June
30, 1998, comprehensive loss was the same as net loss.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131 "Disclosures about Segments of an Enterprise and Related Information" (SFAS
131). SFAS 131 applies to all public companies and is effective for fiscal years
beginning after December 15, 1997. SFAS 131 requires that business segment
financial information be reported in the financial statements utilizing the
management approach. The management approach is defined as the manner in which
management organizes the segments within the enterprise for making operating
decisions and assessing performance. The Company has adopted SFAS 131 beginning
January 1, 1998. The Company's operations are currently managed all within one
segment.
Unaudited Interim Financial Statements. The financial statements as of
June 30, 1998 and for the six months ended June 30, 1997 and 1998 are unaudited
and include all adjustments (consisting of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair presentation of the
results for such interim periods. The results of operations for the six months
ended June 30, 1998 are not necessarily indicative of the results to be expected
for any future period.
NOTE 3 -- FIXED ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1996 1997 1998
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment................... $633,664 $1,106,892 $1,394,467
Office furniture and equipment....... 112,262 198,200 266,468
Leasehold improvements............... 186,855 239,945 258,524
-------- ---------- ----------
932,781 1,545,037 1,919,459
Less: accumulated depreciation....... (165,391) (391,947) (547,135)
-------- ---------- ----------
$767,390 $1,153,090 $1,372,324
======== ========== ==========
</TABLE>
F-10
<PAGE> 71
OPEN SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation expense was $33,946, $99,021 and $226,556, for the years ended
December 31, 1995, 1996 and 1997, respectively, and $100,753 (unaudited) and
$155,188 (unaudited) for the six months ended June 30, 1997 and 1998,
respectively.
NOTE 4 -- ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1996 1997 1998
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued compensation................. $146,555 $ 423,833 $ 335,774
Accrued third party license fees..... 75,275 327,425 192,949
Accrued sales tax.................... 113,102 316,463 297,392
Accrued offering costs............... -- -- 444,000
Other................................ 37,176 14,196 24,835
-------- ---------- -----------
$372,108 $1,081,917 $ 1,294,950
======== ========== ===========
</TABLE>
NOTE 5 -- NOTE PAYABLE
In August 1997, the Company entered into an agreement with another software
company for the purchase of certain assets, properties and rights relating to an
ATM software product in exchange for a $255,000 note. The amount due to the
vendor was paid down based on per copy fees of the purchased software products
and any remaining balance was due in full on June 30, 1998. At December 31, 1997
and June 30, 1998, the balance due to the software company was $175,000 and $0
(unaudited), respectively.
NOTE 6 -- LINES OF CREDIT
In September 1996, the Company entered into a $250,000 equipment line of
credit with a bank. The equipment line allowed for draw downs through September
1997 with the outstanding borrowings on the equipment line converting to a
$104,002, nine percent term loan payable in 36 months beginning October 1997.
Borrowings are secured by a first security interest in the related equipment. At
December 31, 1997 and June 30, 1998 the term loan balance was $92,446 and $0
(unaudited), respectively.
In June 1997, the Company entered into a $1,000,000 working capital line of
credit with the same bank. At December 31, 1997 and June 30, 1998, there was no
balance outstanding under this line of credit. The line of credit is secured
with a first security interest in all assets, exclusive of those financed under
the equipment line. The line of credit is available up to 75% of domestic
accounts receivable less than 90 days outstanding. Interest will be paid monthly
at the bank's prime plus 50 basis points.
In conjunction with these credit agreements, the Company must maintain
certain liquidity, tangible capital base and quick ratio financial covenants.
The Company was in compliance with its financial covenants at June 30, 1998
(unaudited). Payment of dividends is prohibited under the lines of credit.
NOTE 7 -- MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
In May 1995, the Company issued to Connecticut Innovations, Incorporated
("CII") 166,667 shares of Series A-2 Preferred Stock at $3.00 per share for
$500,000. As a requirement of the funding, the Company must maintain its
principal place of business and conduct the majority of its operations in
Connecticut. If the Company fails to maintain its Connecticut presence, CII may
require the Company to purchase CII's shares at the greater of the original
purchase price plus a 40% annual
F-11
<PAGE> 72
OPEN SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
compounded rate of return or the fair market value of the shares. In addition,
CII may require the Company to purchase its shares if the Company is a private
company and is acquired by a third party or if the Company disposes of
substantially all of its assets to a third party. The price of redemption will
be the greater of the original purchase price of the shares plus a 25% annually
compounded rate of return or the fair market value of the shares. Management
does not consider any of the events that would trigger mandatory redemption to
be probable events, has determined a reliable estimate of when the circumstances
that would result in the shares becoming mandatorily redeemable cannot be made,
and therefore does not accrue for accretion.
In December 1995, the Company issued to a group of investors 1,543,334
shares of Series B Preferred Stock at $3.00 per share for $4,630,000. In
conjunction with the sale, the Company issued 192,916 warrants to purchase
additional shares of Series B Preferred Stock at $4.00 per share of which 84,583
warrants were exercised in March 1998. The Series B Preferred Stock has similar
mandatory redemption features as the May 1995 Series A-2.
In October 1996, the Company issued to a group of investors 1,222,222
shares of Series C Preferred Stock at $4.50 per share for $5,500,000. In
conjunction with the sale, the Company issued 152,778 warrants to purchase
additional shares of Series C Preferred Stock at $6.00 per share of which 41,667
warrants were exercised in March 1998. The Series C Preferred Stock has similar
mandatory redemption features as the May 1995 Series A-2 and Series B.
In August 1997, the Company issued to an investor 833,333 shares of Series
D Preferred Stock at $6.00 per share for $5,000,000. In conjunction with the
sale, the Company issued 416,667 warrants to purchase additional shares of
Series D Preferred Stock at $6.00 per share. The Series D Preferred Stock has
similar mandatory redemption features as the May 1995 Series A-2, Series B and
Series C. Concurrent with the preferred stock offering, the investor in the
Series D Preferred Stock offering also entered into a marketing and distribution
agreement with the Company. For the six months ended June 30, 1998, there were
revenues of $115,658 recognized under this agreement.
The holders of preferred stock are entitled to receive noncumulative cash
dividends when and as declared by the Board of Directors and have similar voting
rights as common stockholders in addition to certain other defined voting
rights. In the event of any voluntary or involuntary liquidation of the Company,
the holders of Series A-1, Series A-2, Series B, Series C and Series D Preferred
Stock shall be entitled to all unpaid dividends at the time of liquidation and
$1.50, $3.00, $3.00 or $4.50 and $6.00, respectively, per share as a liquidating
distribution prior to any liquidating distribution to the common stockholders.
At the option of the preferred stockholders, their shares may be converted to
common stock at the rate of one common stock share for one share of preferred
stock. The preferred stock shall automatically convert into shares of common
stock upon the closing of a firm commitment underwritten public offering (i)
with an aggregate offering price of at least $10,000,000, (ii) with an offering
price per share, with respect to the shares of Series A-1, Series A-2 and Series
B Preferred Stock, of $6.00 and, with respect to the shares of Series C and
Series D Preferred Stock, of $7.50, (iii) where the common stock is listed for
trading on the Nasdaq National Market System and (iv) with the consent of the
holders of at least two-thirds of the outstanding shares of Series B and Series
C Preferred Stock.
The mandatory redemption features terminate upon the closing of a public
offering and the expiration of any related lock-up agreements, with the
exception of the Series A-2 Preferred Stock held by CII and the Series B
Preferred Stock. The rights of CII and of the holders of Series B Preferred
Stock to require the Company to purchase their shares of Series A-2 Preferred
Stock and Series B Preferred Stock, respectively, in the event the Company fails
to maintain its Connecticut presence do not terminate. The right of CII to
require the Company to purchase its shares of Series A-2 Preferred Stock in the
event of a change of control terminates upon the closing of a public offering.
(See Note 15).
F-12
<PAGE> 73
OPEN SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- STOCKHOLDERS' EQUITY
Capital Stock Transactions
In December 1995, in conjunction with the issuance of the Series B
Preferred Stock, the Company revised its certificate of incorporation to
authorize 11,000,000 shares, of which 7,680,417 were common stock and 3,319,583
were preferred stock. In October 1996, in conjunction with the issuance of the
Series C Preferred Stock, the Company revised its certificate of incorporation
to authorize 13,275,000 shares of which 8,580,417 were common stock and
4,694,583 were preferred stock. In August 1997, in conjunction with the issuance
of the Series D Preferred Stock, the Company revised its certificate of
incorporation to authorize 15,775,000 shares, of which 9,830,417 were common
stock and 5,944,583 were preferred stock. In February 1998, the Company revised
its certificate of incorporation to approve an increase in authorized shares
from 15,775,000 to 25,000,000.
In January 1996, the Company issued 175,000 shares of common stock to the
Chief Executive Officer, resulting in compensation expense of $52,500.
The Company has reserved shares of common stock as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
Conversion of preferred stock.......................... 5,182,222 5,308,472
Conversion of preferred stock upon exercise of
warrants............................................. 762,361 636,111
Exercise of options.................................... 1,610,000 3,000,000
--------- ---------
7,554,583 8,944,583
========= =========
</TABLE>
Preferred Stock
In February 1994, the Company issued 1,000,000 shares of preferred stock
designated as Series A-1 Preferred Stock at $1.50 per share. In conjunction with
the issuance of the Series A-1 Preferred Stock, the Company issued a warrant to
purchase 333,333 shares of Series A-2 Preferred Stock with an exercise price of
$3.00 per share. The warrant was subsequently converted to 333,333 shares of
Series A-2 Preferred Stock in September 1994 for $999,999.
In September 1994, the Company issued an additional 83,333 shares of
preferred stock designated as Series A-2 Preferred Stock at $3.00 per share. The
Company received $50,000 in cash and a note for $200,000 payable in monthly
installments of $10,000 plus interest, of which $60,000 and $0 was outstanding
at December 31, 1995 and 1996, respectively. The shares were pledged as
collateral against the note.
At the option of the preferred stockholders, their shares may be converted
to common stock at the rate of one common stock share for one share of preferred
stock. The preferred stock shall automatically convert into shares of common
stock upon the closing of a public offering meeting certain criteria.
NOTE 9 -- STOCK OPTION PLAN
The Company has established the 1994 Stock Option Plan (the "1994 Plan")
for employees, officers, directors, and consultants or advisors to the Company
under which the Board of Directors may grant incentive stock options and
non-qualified stock options. Incentive stock options will be granted at the fair
value of the Common Stock at the time of grant, as determined by the Board of
Directors. Generally, incentive stock options vest 25% on the first anniversary
of the date of grant
F-13
<PAGE> 74
OPEN SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
and then ratably on a monthly basis over the subsequent three years. In certain
circumstances, at the discretion of the Board of Directors, options are granted
with a vesting schedule of other than four years. Non-qualified stock options
have a vesting period as determined by the Board of Directors generally vesting
25% on the first anniversary of the date of grant and then ratably on a monthly
basis over the subsequent three years. The stock options are exercisable over a
period of ten years from the date of grant.
In May 1997, the shareholders approved an increase in the maximum number of
shares that may be issued under the 1994 Plan from 1,110,000 to 1,610,000. In
February 1998, the shareholders approved an increase in the maximum number of
shares that may be issued under the 1994 Plan from 1,610,000 to 3,000,000.
A summary of stock option activity under the 1994 Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding at December 31, 1995............................ 595,500 $0.20
Granted................................................... 386,500 0.30
---------
Outstanding at December 31, 1996............................ 982,000 0.24
Granted................................................... 482,250 1.23
Canceled.................................................. (47,675) 0.24
Exercised................................................. (50,325) 0.17
---------
Outstanding at December 31, 1997............................ 1,366,250 0.59
Granted................................................... 404,500 1.32
Canceled.................................................. (10,562) 2.11
Exercised................................................. (70,688) 0.30
---------
Outstanding at June 30, 1998 (unaudited).................... 1,689,500 0.77
=========
</TABLE>
Stock options outstanding at June 30, 1998 include 275,000 stock options
granted to affiliates of Banking Spectrum Services, Inc., a shareholder of the
Company, in March 1998. The Company recorded contract termination expense in
connection with these stock options, as described in Note 13, Related Parties.
The following table summarizes information regarding stock options granted
during 1995, 1996 and 1997, and the six months ended June 30, 1998 (unaudited):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SFAS123
WEIGHTED MINIMUM
NUMBER OF AVERAGE VALUE AT
OPTIONS EXERCISE GRANT
GRANTED PRICE DATE
--------- --------- ----------
<S> <C> <C> <C>
1995:
Options granted with an exercise price equal to market
value..................................................... 245,500 $0.28 $0.09
1996:
Options granted with an exercise price equal to market
value..................................................... 386,500 0.30 0.10
1997:
Options granted with an exercise price equal to market
value..................................................... 8,500 0.36 0.12
Options granted with an exercise price less than market
value..................................................... 473,750 1.25 1.10
1998:
Options granted with an exercise price less than market
value..................................................... 404,500 1.32 5.72
</TABLE>
F-14
<PAGE> 75
OPEN SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average SFAS 123 minimum value at grant date is the amount
attributable to the option that is calculated without considering the expected
volatility of the underlying stock.
The following table summarizes additional information about stock options
outstanding at June 30, 1998 (unaudited):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------------------- OPTIONS EXERCISABLE
NUMBER WEIGHTED- --------------------------------
OUTSTANDING AT AVERAGE WEIGHTED NUMBER WEIGHTED
EXERCISE JUNE 30, REMAINING AVERAGE EXERCISABLE AT AVERAGE
PRICE 1998 CONTRACTUAL LIFE IN YEARS EXERCISE PRICE JUNE 30, 1998 EXERCISE PRICE
- -------- -------------- ------------------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
$0.15 296,000 5.9 $0.15 291,250 $0.15
0.15 20,000 6.6 0.15 17,083 0.15
0.30 133,000 7.1 0.30 104,759 0.30
0.30 368,000 7.9 0.30 181,510 0.30
0.45 311,000 8.7 0.45 164,261 0.45
0.45 275,000 9.7 0.45 275,000 0.45
2.75 157,500 9.3 2.75 2,292 2.75
2.75 8,500 9.7 2.75 -- --
2.75 100,000 9.8 2.75 -- --
4.50 9,000 9.8 4.50 -- --
6.00 11,500 10.0 6.00 -- --
--------- ---------
1,689,500 1,036,155
========= =========
</TABLE>
Had compensation expense been recognized based on the minimum value of the
employee options at their grant dates, as prescribed in SFAS 123, the Company's
pro forma net loss would have been as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------------ JUNE 30,
1995 1996 1997 1998
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net loss:
As reported................. $1,894,953 $3,638,472 $3,055,372 $2,216,087
Pro forma................... 1,896,688 3,646,337 3,131,847 2,317,576
Pro forma net loss per share
(basic and diluted):
As reported................. $ (0.98) $ (1.73) $ (1.42) $ (1.01)
Pro forma................... (0.98) (1.73) (1.45) (1.06)
</TABLE>
The minimum value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions used
for options granted during the applicable period:
<TABLE>
<CAPTION>
JUNE 30,
1995 1996 1997 1998
------- ------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Risk free interest rate....................... 7.24% 6.72% 5.65%-6.66% 5.32%-5.46%
Expected dividend yield....................... None None None None
Expected life of option....................... 6 years 6 years 6 years 6 years
Expected volatility........................... 0% 0% 0% 0%
</TABLE>
The minimum value method requires the input of subjective assumptions.
Changes in the subjective input assumptions can materially affect the minimum
value estimate.
F-15
<PAGE> 76
OPEN SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Compensation of $358,513 and $419,325 (unaudited) has been attributed to
those common stock options granted to employees during 1997 and the six months
ended June 30, 1998, respectively, with an exercise price below estimated fair
value. Compensation expense is recognized over the four year vesting period and
totaled $85,526, $52,756 (unaudited) and $68,952 (unaudited) for the year ended
December 31, 1997 and the six months ended June 30, 1997 and 1998, respectively.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
At June 30, 1998, the Company was committed under facility and various
other operating leases with an initial term of more than one year which expire
at various dates through 2003. Terms of the facility lease provide for
escalating rent payments in future years. Minimum lease payments under these
noncancelable leases are approximately as follows:
<TABLE>
<CAPTION>
AS OF AS OF
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
January 1 -- June 30, 1998.......... $ -- $ 82,000
July 1 -- December 31, 1998......... 86,000 86,000
1999................................ 182,000 182,000
2000................................ 191,000 191,000
2001................................ 211,000 211,000
2002................................ 219,000 219,000
Thereafter.......................... 72,000 72,000
---------- ----------
Total minimum
obligations............. $ 961,000 $1,043,000
========== ==========
</TABLE>
Rent expense under operating leases was approximately $36,000, $149,000 and
$194,000 for the years ended December 31, 1995, 1996 and 1997 and $101,000
(unaudited) and $127,000 (unaudited) for the six months ended June 30, 1997 and
1998, respectively.
The Company has license and marketing agreements which provide certain
geographically exclusive rights to use the Company's software product for the
outsourcing of core processing services to banks and credits unions. The
agreements provide defined geographic exclusivity as long as minimum revenue
targets are met.
From time to time in the ordinary course of business, the Company is
subject to legal proceedings. While it is impossible to determine the ultimate
outcome of such matters, it is management's opinion that the resolution of any
pending issues will not have a material adverse effect on the financial
position, results of operations or cash flows of the Company.
NOTE 11 -- DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, trade accounts receivable, other current
assets, trade accounts payable, royalties payable, accrued expenses, notes
payable and outstanding lines of credit approximate fair value because of the
short maturity of those instruments.
F-16
<PAGE> 77
OPEN SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- INCOME TAXES
Significant components of the Company's deferred tax asset at December 31,
1996 and 1997, and June 30, 1998 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Gross deferred tax assets:
Net operating loss
carryforwards.............. $ 2,853,000 $ 3,967,000 $ 4,105,000
Research & development credit
carryforwards.............. 130,000 332,000 446,000
Stock option expense.......... -- -- 643,000
Other......................... 32,000 126,000 147,000
----------- ----------- -----------
3,015,000 4,425,000 5,341,000
----------- ----------- -----------
Gross deferred tax liability:
Capitalized software
development costs.......... 84,000 221,000 189,000
Accelerated depreciation...... 14,000 71,000 86,000
----------- ----------- -----------
98,000 292,000 275,000
----------- ----------- -----------
Valuation allowance............. (2,917,000) (4,133,000) (5,066,000)
----------- ----------- -----------
Net deferred tax asset.......... $ -- $ -- $ --
=========== =========== ===========
</TABLE>
The Company has provided a valuation allowance for the full amount of the
net deferred tax asset as of December 31, 1996 and 1997 and June 30, 1998 since
management has not determined realization of these future benefits to be more
likely than not. If the Company achieves profitability, the deferred tax asset
would be available, subject to certain annual limitations, to offset future
income taxes.
At June 30, 1998, the Company had approximately $10.1 million (unaudited)
of federal net operating loss carryforwards that begin expiring in 2007 and had
approximately $10.9 million (unaudited) of state net operating loss
carryforwards that begin expiring in 1998. At June 30, 1998, the Company had
approximately $446,000 (unaudited) of research and development credit
carryforwards that begin expiring in 2007.
As defined in the Internal Revenue Code, certain ownership changes limit
the annual utilization of federal net operating loss and tax credit
carryforwards. The Company experienced such an ownership change in December 1995
which limits approximately $3.2 million of federal net operating loss
carryforwards and $149,000 of research tax credits to a $307,000 annual Section
382 limitation.
NOTE 13 -- RELATED PARTIES
Banking Spectrum
In January 1994, the Company entered into an agreement with Banking
Spectrum Services, Inc., a shareholder of the Company, and Banking Spectrum,
Inc. (collectively, "Banking Spectrum"), to provide and receive certain
consulting and support services. The majority shareholder of Banking Spectrum
Services, Inc. is a director and shareholder of the Company. Pursuant to the
agreement, the Company agreed to pay Banking Spectrum a royalty based on the
licensing of software products and related services, ranging from three percent
to 17% of net revenues, based on Banking Spectrum's involvement in the sale of
such products and services. The Company recognized royalty expense of $9,021,
$72,064, $337,945, $75,515 (unaudited) and $90,403 (unaudited) for the years
F-17
<PAGE> 78
OPEN SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ended December 31, 1995, 1996, 1997 and for the six months ended June 30, 1997
and 1998, respectively.
In March 1998, the Company and Banking Spectrum terminated their previous
agreement and entered into a distribution and termination agreement. The new
agreement released the Company from any future royalty payments to Banking
Spectrum in exchange for cash payment of $100,000 to Banking Spectrum and fully
vested options to affiliates of Banking Spectrum Services, Inc. to purchase
275,000 shares of Common Stock at an exercise price of $0.45 per share. The
stock options were estimated by management to have a fair value of approximately
$1.6 million (unaudited). Net of amounts previously accrued, the Company
recorded a contract termination expense of approximately $1.3 million
(unaudited) for the six months ended June 30, 1998.
PRISM
During 1994, the Company borrowed $250,000 from Prince-Roth Information
Systems Management Inc. ("PRISM"), a related party. Spouses of the shareholders
of PRISM are shareholders of the Company. The note was paid in full during 1996
including interest due. Interest expense was $0 and $3,000 for the years ended
December 31, 1995 and 1996, respectively.
NOTE 14 -- 401(K) PLAN
In 1994 the Company established a voluntary 401(k) plan in which all full
time employees are eligible to participate. Since July 1996 the Company has
provided matching contributions of $30.00 per year plus 25% of the first four
percent of the employee's compensation which is deferred under the plan.
Eligible employees who elect to participate in the 401(k) plan are generally
vested in the Company's matching contributions after three years of service.
Company contributions for the years ended December 31, 1995, 1996 and 1997 and
for the six months ended June 30, 1998, were $0, $9,926, $27,773, and $24,112
(unaudited), respectively.
NOTE 15 -- SUBSEQUENT EVENTS (UNAUDITED)
Amended and Restated Certificate of Incorporation
After the filing of the Company's Amended and Restated Certificate of
Incorporation upon the closing of this offering, the authorized capital stock of
the Company will consist of 50,000,000 shares of common stock, $0.01 par value
per share, and 5,000,000 shares of preferred stock, $0.01 par value per share.
1994 Plan
The Company's 1994 Plan was amended by the Board of Directors, subject to
stockholder approval, in June 1998, effective upon the closing of the offering,
to provide for acceleration of vesting upon an acquisition event, as defined.
1998 Stock Incentive Plan
The Company's 1998 Stock Incentive Plan (the "Incentive Plan") was adopted
by the Board of Directors, subject to stockholder approval, in June 1998,
effective upon the closing of the offering contemplated in this Prospectus.
Awards may be made under the Incentive Plan for up to the sum of (i) 1,200,000
shares of common stock (subject to adjustment in the event of stock splits and
other similar events), plus (ii) the number of shares of common stock (up to
1,700,000) (subject to adjustment in the event of stock splits and other similar
events) subject to awards granted under the 1994 Plan which are not actually
issued because options granted under such plan expire or
F-18
<PAGE> 79
OPEN SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
otherwise result in shares not being issued or, in the case of restricted stock,
are repurchased by the Company pursuant to the terms of the applicable stock
restriction agreement.
1998 Employee Stock Purchase Plan
The Company's 1998 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors, subject to stockholder approval, in June
1998, effective upon the closing of the offering. The Purchase Plan authorizes
the issuance of up to a total of 250,000 shares of common stock to participating
employees.
Amendment to Preferred Stock and Warrant Purchase Agreements
In July 1998, the Company, CII and the requisite number of holders of
Series B and Series C Preferred Stock amended the Series A-2 Preferred Stock and
Warrant Purchase Agreement, dated as of May 12, 1995, the Series B Preferred
Stock and Warrant Purchase Agreement, dated as of December 27, 1995, and the
Series C Preferred Stock and Warrant Purchase Agreement, dated as of October 23,
1996, to provide that the mandatory redemption provisions of the Series A-2,
Series B and Series C Preferred Stock terminate upon the closing of a public
offering.
F-19
<PAGE> 80
================================================================================
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR
ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................................................... 3
Risk Factors.......................................................... 6
Use of Proceeds....................................................... 15
Dividend Policy....................................................... 15
Capitalization........................................................ 16
Dilution.............................................................. 17
Selected Financial Data............................................... 18
Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 19
Business.............................................................. 28
Management............................................................ 37
Certain Transactions.................................................. 45
Principal and Selling Stockholders.................................... 48
Description of Capital Stock.......................................... 51
Shares Eligible for Future Sale....................................... 54
Underwriting.......................................................... 56
Legal Matters......................................................... 57
Experts............................................................... 57
Additional Information................................................ 58
Index to Financial Statements......................................... F-1
</TABLE>
------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
================================================================================
================================================================================
2,800,000 SHARES
[OPEN SOLUTIONS LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
BT ALEX. BROWN
WARBURG DILLON READ LLC
, 1998
================================================================================
<PAGE> 81
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses, all of which will be
borne by the Registrant, in connection with the sale and distribution of the
securities being registered, other than the underwriting discounts and
commissions. All amounts shown are estimates except for the Securities and
Exchange Commission registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 11,800
NASD filing fee............................................. 4,500
Nasdaq National Market listing fee.......................... 95,000
Blue Sky fees and expenses.................................. 10,000
Transfer Agent and Registrar fees........................... 15,000
Accounting fees and expenses................................ 250,000
Legal fees and expenses..................................... 250,000
Printing and mailing expenses............................... 150,000
Miscellaneous............................................... 113,700
--------
Total.................................................. $900,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article EIGHTH of the Registrant's Amended and Restated Certificate of
Incorporation (the "Restated Certificate of Incorporation") provides that no
director of the Registrant shall be personally liable for any monetary damages
for any breach of fiduciary duty as a director, except to the extent that the
Delaware General Corporation Law prohibits the elimination or limitation of
liability of directors for breach of fiduciary duty.
Article NINTH of the Registrant's Restated Certificate of Incorporation
provides that a director or officer of the Registrant (a) shall be indemnified
by the Registrant against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement incurred in connection with any litigation
or other legal proceeding (other than an action by or in the right of the
Registrant) brought against him by virtue of his position as a director or
officer of the Registrant if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful and (b) shall be
indemnified by the Registrant against all expenses (including attorneys' fees)
and amounts paid in settlement incurred in connection with any action by or in
the right of the Registrant brought against him by virtue of his position as a
director or officer of the Registrant if he acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
Registrant, except that no indemnification shall be made with respect to any
matter as to which such person shall have been adjudged to be liable to the
Registrant, unless a court determines that, despite such adjudication but in
view of all of the circumstances, he is entitled to indemnification of such
expenses. Notwithstanding the foregoing, to the extent that a director or
officer has been successful, on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, he is required to be
indemnified by the Registrant against all expenses (including attorneys' fees)
incurred in connection therewith. Expenses shall be advanced to a director or
officer at his request, provided that he undertakes to repay the amount advanced
if it is ultimately determined that he is not entitled to indemnification for
such expenses.
Indemnification is required to be made unless the Registrant determines
that the applicable standard of conduct required for indemnification has not
been met. In the event of a determination by the Registrant that the director or
officer did not meet the applicable standard of conduct
II-1
<PAGE> 82
required for indemnification, or if the Registrant fails to make an
indemnification payment within 60 days after such payment is claimed by such
person, such person is permitted to petition the court to make an independent
determination as to whether such person is entitled to indemnification. As a
condition precedent to the right of indemnification, the director or officer
must give the Registrant notice of the action for which indemnity is sought and
the Registrant has the right to participate in such action or assume the defense
thereof.
Article NINTH of the Registrant's Restated Certificate of Incorporation
further provides that the indemnification provided therein is not exclusive, and
provides that in the event that the Delaware General Corporation Law is amended
to expand the indemnification permitted to directors or officers the Registrant
must indemnify those persons to the fullest extent permitted by such law as so
amended.
Section 145 of the Delaware General Corporation Law provides that a
corporation has the power to indemnify a director, officer, employee or agent of
the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred in
connection with an action or proceeding to which he is or is threatened to be
made a party by reason of such position, if such person shall have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, in any criminal proceeding, if such person
had no reasonable cause to believe his conduct was unlawful; provided that, in
the case of actions brought by or in the right of the corporation, no
indemnification shall be made with respect to any matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the adjudicating court determines that such indemnification is
proper under the circumstances.
Under Section 8 of the Underwriting Agreement, the Underwriters are
obligated, under certain circumstances, to indemnify directors and officers of
the Registrant against certain liabilities, including liabilities under the
Securities Act. Reference is made to the form of Underwriting Agreement filed as
Exhibit 1 hereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth in chronological order is information regarding shares of Common
Stock and Preferred Stock issued, warrants issued and options granted by the
Registrant since June 1995. Further included is the consideration, if any,
received by the Registrant for such shares, warrants and options and information
relating to the section of the Securities Act of 1933, as amended (the
"Securities Act"), or rule of the Securities and Exchange Commission under which
exemption from registration was claimed.
1. On December 27, 1995, the Registrant sold a total of 1,543,334
shares of Series B Preferred Stock to Axiom Venture Partners L.P., Barry
Bloom, Mark Heller, Menlo Ventures VI, L.P., Menlo Entrepreneurs Fund VI,
L.P., Connecticut Innovations, Incorporated and Zachs CMP for an aggregate
purchase price of $4.6 million. The Registrant also issued such investors
warrants to purchase an aggregate of 192,916 shares of Series B Preferred
Stock at an exercise price of $4.00 per share.
2. On October 23, 1996, the Registrant sold a total of 1,222,222
shares of Series C Preferred Stock to Aetna Life Insurance Company, Axiom
Venture Partners L.P., Menlo Ventures VI, L.P., Menlo Entrepreneurs Fund
VI, L.P. and Connecticut Innovations, Incorporated for an aggregate
purchase price of $5.5 million. The Registrant also issued such investors
warrants to purchase an aggregate of 152,778 shares of Series C Preferred
Stock at an exercise price of $6.00 per share.
3. On August 22, 1997, the Registrant sold a total of 833,333 shares
of Series D Preferred Stock to The BISYS Group, Inc. for $5.0 million. The
Company also issued such investor a warrant to purchase 416,667 shares of
Series D Preferred Stock at an exercise price of $6.00 per share.
II-2
<PAGE> 83
4. On March 6, 1998, the Registrant issued a total of 84,583 shares
of Series B Preferred Stock and 41,667 shares of Series C Preferred Stock
to Menlo Ventures VI, L.P. and Menlo Entrepreneurs Fund VI, L.P. upon the
exercise of warrants.
Certain of the transactions described above involved directors, officers
and five percent stockholders of the Registrant. See "Certain Transactions."
The Registrant's 1994 Stock Option Plan was adopted by the Board of
Directors and approved by the stockholders of the Registrant in March 1994. As
of June 30, 1998, options to purchase 61,013 shares of Common Stock had been
exercised for an aggregate consideration of $10,336, options to purchase
1,689,500 shares of Common Stock were outstanding and 175,000 shares of Common
Stock had been issued under an award of restricted stock under such plan.
The securities issued in the foregoing transactions were either (i) offered
and sold in reliance upon exemptions from Securities Act registration set forth
in Sections 3(b) and 4(2) of the Securities Act, or any regulations promulgated
thereunder, relating to sales by an issuer not involving any public offering, or
(ii) in the case of certain options to purchase shares of Common Stock and
shares of Common Stock issued upon the exercise of such options, such offers and
sales were made in reliance upon an exemption from registration under Rule 701
of the Securities Act. No underwriters were involved in the foregoing sales of
securities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
*1 Form of Underwriting Agreement.
*3.1 Certificate of Incorporation of the Registrant, as amended.
*3.2 Amended and Restated Certificate of Incorporation of the
Registrant, to be effective upon the closing of this
offering.
*3.3 By-Laws of the Registrant, as amended.
*3.4 Amended and Restated By-Laws of the Registrant, to be
effective upon the closing of this offering.
*4.1 Specimen certificate for shares of Common Stock.
*5 Opinion of Hale and Dorr LLP.
*10.1 1994 Stock Option Plan, as amended.
*10.2 1998 Stock Incentive Plan, including forms of stock option
agreement for incentive and nonstatutory stock options.
*10.3 1998 Employee Stock Purchase Plan.
*10.4 Amended and Restated Investors' Rights Agreement, dated as
of August 22, 1997, between the Company and the Investors
(as defined therein).
*10.5 Form of Stock Subscription Warrant to Purchase Series B
Preferred Stock dated December 27, 1995.
*10.6 Form of Stock Subscription Warrant to Purchase Series C
Preferred Stock dated October 23, 1996.
*10.7 Stock Subscription Warrant to Purchase Series D Preferred
Stock, dated August 22, 1997, issued to The BISYS Group,
Inc.
*10.8 Key Employee Agreement between the Company and Douglas K.
Anderson dated September 1995, as amended.
+*10.9 Software License and Marketing and Distribution Agreement,
between the Company and BISYS, Inc., dated as of August 20,
1997.
+*10.10 License and Marketing Agreement, between the Company and
Connecticut On-Line Computer Center, Inc., dated as of
December 9, 1997.
+*10.11 Software License Agreement, between the Company and Unisys
Corporation, dated as of June 18, 1997.
</TABLE>
II-3
<PAGE> 84
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
*10.12 Employment Agreement between the Company and Graham H.
Gurney dated January 2, 1993, as amended.
*10.13 Employment Agreement between the Company and Clifford I.
Waggoner dated January 2, 1993, as amended.
*10.14 Letter Agreement between the Company and John L. Person
dated April 10, 1997.
*10.15 Letter Agreement between the Company and Richard J. Willemin
dated February 27, 1998.
*10.16 Form of Information Processing System Agreement.
*10.17 Form of prior Information Processing System Agreement.
*10.18 Agreement, dated March 26, 1998, among the Company, Banking
Spectrum, Inc. and Banking Spectrum Services, Inc.
23.1 Consent of PricewaterhouseCoopers LLP.
*23.2 Consent of Hale and Dorr LLP (included in Exhibit 5).
*24 Power of Attorney (included on page II-6).
*27 Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed.
+ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Securities and Exchange Commission.
(B) FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts is included in this
Registration Statement. All other schedules have been omitted because they are
not required or because the required information is given in the Registrant's
Financial Statements or Notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions contained in the Amended and Restated
Certificate of Incorporation of the Registrant and the laws of the State of
Delaware, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted form the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
II-4
<PAGE> 85
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 86
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in Glastonbury,
Connecticut, on this 22nd day of July, 1998.
OPEN SOLUTIONS INC.
By: /s/ DOUGLAS K. ANDERSON
--------------------------------------
Douglas K. Anderson
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DOUGLAS K. ANDERSON Chairman of the Board and Chief July 22, 1998
- --------------------------------------------------- Executive Officer (Principal
Douglas K. Anderson Executive Officer)
/s/ RICHARD J. WILLEMIN Senior Vice President and Chief July 22, 1998
- --------------------------------------------------- Financial Officer (Principal
Richard J. Willemin Financial and Accounting Officer)
* Director July 22, 1998
- ---------------------------------------------------
Douglas C. Carlisle
* Director July 22, 1998
- ---------------------------------------------------
David M. Clarke
* Director July 22, 1998
- ---------------------------------------------------
Graham H. Gurney
* Director July 22, 1998
- ---------------------------------------------------
Samuel F. McKay
* Director July 22, 1998
- ---------------------------------------------------
Carlos P. Naudon
* Director July 22, 1998
- ---------------------------------------------------
William W. Neville
</TABLE>
II-6
<PAGE> 87
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Director July 22, 1998
- ---------------------------------------------------
Clifford I. Waggoner
* Director July 22, 1998
- ---------------------------------------------------
Richard P. Yanak
* /s/ RICHARD J. WILLEMIN July 22, 1998
- ---------------------------------------------------
Attorney-in-fact
</TABLE>
II-7
<PAGE> 88
SCHEDULE II
OPEN SOLUTIONS INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT ---------------------------------- DEDUCTIONS BALANCE AT
BEGINNING OF CHARGE TO COSTS CHARGE TO OTHER NET OF END OF
DESCRIPTION PERIOD AND EXPENSES ACCOUNTS WRITE-OFFS PERIOD
----------- ------------ ---------------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL
ACCOUNTS:
Years ended
December 31, 1995......... $ -- $ -- $ -- $ -- $ --
December 31, 1996......... -- 86 -- -- 86
December 31, 1997......... 86 239 -- 111 214
Six months ended June 30,
1998 (unaudited).......... 214 175 -- 129 260
</TABLE>
S-1
<PAGE> 89
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
*1 Form of Underwriting Agreement.
*3.1 Certificate of Incorporation of the Registrant, as amended.
*3.2 Amended and Restated Certificate of Incorporation of the
Registrant, to be effective upon the closing of this
offering.
*3.3 By-Laws of the Registrant, as amended.
*3.4 Amended and Restated By-Laws of the Registrant, to be
effective upon the closing of this offering.
*4.1 Specimen certificate for shares of Common Stock.
*5 Opinion of Hale and Dorr LLP.
*10.1 1994 Stock Option Plan, as amended.
*10.2 1998 Stock Incentive Plan, including forms of stock option
agreement for incentive and nonstatutory stock options.
*10.3 1998 Employee Stock Purchase Plan.
*10.4 Amended and Restated Investors' Rights Agreement, dated as
of August 22, 1997, between the Company and the Investors
(as defined therein).
*10.5 Form of Stock Subscription Warrant to Purchase Series B
Preferred Stock dated December 27, 1995.
*10.6 Form of Stock Subscription Warrant to Purchase Series C
Preferred Stock dated October 23, 1996.
*10.7 Stock Subscription Warrant to Purchase Series D Preferred
Stock, dated August 22, 1997, issued to The BISYS Group,
Inc.
*10.8 Key Employee Agreement between the Company and Douglas K.
Anderson dated September 1995, as amended.
+*10.9 Software License and Marketing and Distribution Agreement,
between the Company and BISYS, Inc., dated as of August 20,
1997.
+*10.10 License and Marketing Agreement, between the Company and
Connecticut On-Line Computer Center, Inc., dated as of
December 9, 1997.
+*10.11 Software License Agreement, between the Company and Unisys
Corporation, dated as of June 18, 1997.
*10.12 Employment Agreement between the Company and Graham H.
Gurney dated January 2, 1993, as amended.
*10.13 Employment Agreement between the Company and Clifford I.
Waggoner dated January 2, 1993, as amended.
*10.14 Letter Agreement between the Company and John L. Person
dated April 10, 1997.
*10.15 Letter Agreement between the Company and Richard J. Willemin
dated February 27, 1998.
*10.16 Form of Information Processing System Agreement.
*10.17 Form of prior Information Processing System Agreement.
*10.18 Agreement, dated March 26, 1998, among the Company, Banking
Spectrum, Inc. and Banking Spectrum Services, Inc.
23.1 Consent of PricewaterhouseCoopers LLP.
*23.2 Consent of Hale and Dorr LLP (included in Exhibit 5).
*24 Power of Attorney (included on page II-6).
*27 Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed.
+ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Securities and Exchange Commission.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 2 to the Registration Statement on Form S-1 of our report dated
April 6, 1998 relating to the financial statements of Open Solutions Inc., which
appears in such Prospectus. We also consent to the application of such report to
the Financial Statement Schedule for the three years ended December 31, 1997
listed under Item 16(b) of this Amendment No. 2 to the Registration Statement
when such schedule is read in conjunction with the financial statements referred
to in our report. The audits referred to in such report also included this
schedule. We also consent to the references to us under the headings "Experts"
and "Selected Financial Data" in such Prospectus. However, it should be noted
that PricewaterhouseCoopers LLP has not prepared or certified such "Selected
Financial Data."
/s/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
Hartford, Connecticut
July 21, 1998
