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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER: 1-15529
OPTIO SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
GEORGIA 58-1435435
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3015 WINDWARD PLAZA, WINDWARD FAIRWAYS II, ATLANTA, GA 30005
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 576-3500
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No /_/
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. /X/
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, based upon the closing sale price for the Common Stock on April 26,
2000 as reported by the Nasdaq National Market System, was approximately
$90,384,848. The shares of Common Stock held by each officer and director and
by each person known to the Registrant who owns 5% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
There were 17,383,640 shares of the Registrant's common stock outstanding as
of April 26, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Registrant's Definitive Proxy Statement on Schedule 14A for its
2000 Annual Meeting of Stockholders are incorporated by reference in Part III of
this Annual Report on Form 10-K. The Proxy Statement will be filed within 120
days of the end of the fiscal year covered by this Annual Report on Form 10-K.
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OPTIO SOFTWARE, INC.
2000 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business............................................................................................... 2
Item 2. Properties.............................................................................................20
Item 3. Legal Proceedings......................................................................................20
Item 4. Submission of Matters to a Vote of Security Holders....................................................20
Item 4A. Executive Officers of the Registrant...................................................................20
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..................................23
Item 6. Selected Financial Data................................................................................24
Item 7. Management `s Discussion and Analysis of Financial Condition and Results
of Operations....................................................................................26
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.............................................35
Item 8. Financial Statements and Supplementary Data............................................................36
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.......................................................................................36
PART III
Item 10. Directors and Executive Officers of the Registrant.....................................................**
Item 11. Executive Compensation.................................................................................**
Item 12. Security Ownership of Certain Beneficial Owners and Management.........................................**
Item 13. Certain Relationships and Related Transactions.........................................................**
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................................36
** The information required by Items 10, 11, 12 and 13 of Part III is hereby
incorporated by reference to the Registrant's Definitive Proxy Statement on
Schedule 14A to be filed not more than 120 days after January 31, 2000.
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FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report contains
forward-looking statements that involve risks and uncertainties. These
forward-looking statements include, among other things, statements regarding
Optio Software, Inc.'s ("Optio") anticipated costs and expenses, Optio's capital
needs and financing plans, product and service development, Optio's growth
strategies, market demand for Optio's products and services, relationships with
Optio's strategic marketing alliances, competition and plans for addressing Year
2000 issues. These forward-looking statements include, among others, those
statements including the words "expects," "anticipates," "intends," "believes"
and similar language. Optio's actual results may differ significantly from those
projected in the forward-looking statements. Factors that might cause or
contribute to such differences include, but are not limited to, risks associated
with Optio's reliance on strategic marketing and reseller relationships,
fluctuations in operating results because of acquisitions, changes in
competition, delays in developing new software, disputes regarding Optio's
intellectual property, or risks associated with expanding Optio's international
operations. These and additional factors are set forth in "Safe Harbor
Compliance Statement for Forward-Looking Statements" included as Exhibit 99.8 to
this Annual Report on for 10-K. You should carefully review these risks and
additional risks described in other documents Optio files from time to time with
the Securities and Exchange Commission, including the Quarterly Reports on Form
10-Q that Optio will file. You are cautioned not to place undue reliance on the
forward-looking statements, which speak only as of the date of this Annual
Report on Form 10-K. Optio undertakes no obligation to publicly release any
revisions to the forward-looking statements or reflect events or circumstances
after the date of this document.
PART I
ITEM 1. BUSINESS
Optio is a provider of software that customizes and delivers
information to meet the business needs of an organization. Historically, Optio's
software delivered this customized information by fax, printer and e-mail.
Recently, Optio released its e-business software, which helps organizations move
beyond the inherent limitations of paper-intensive commerce such as high cost,
inflexibility and limited delivery options and take advantage of the connective
power of the Internet to conduct business more effectively. Using the Internet
to conduct business, also known as e-business, includes the ability to publish
business information to the Internet or exchange it with customers and suppliers
over the Internet to automate the buying and selling of goods and services.
Neither of these abilities are generally possible using faxes, printers or
e-mail. Information from a wide range of enterprise applications, databases and
files is monitored and analyzed by Optio's software in real-time, customized
according to the business needs of an organization's customers, suppliers and
partners and then delivered to the appropriate destination. These destinations
support a variety of business purposes and range from the Internet, wireless
devices and other information systems to printers, faxes and e-mail. Optio's
software provides a comprehensive, cost-effective solution for organizations
that need to enhance the benefits of their investments in existing information
systems while taking advantage of the opportunities presented by e-business.
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Optio, which was founded in 1981, currently conducts its operations
through three wholly owned subsidiaries each of which is involved in the direct
sales, marketing and support activities of Optio.
WHOLLY-OWNED SUBSIDIARIES
OPTIO SOFTWARE, EUROPE S.A.
Optio Software Europe, S.A. ("Optio Europe"), a software product
distributor in Europe, was acquired in August 1998, which provided entry into
European markets. Optio Europe is directly involved in the sales, marketing and
support activities for Optio's products throughout mainland Europe as well as in
the United Kingdom through its wholly-owned subsidiary Optio Software UK, Pvt.
Limited.
OPTIO SOFTWARE, ASIA PACIFIC
Optio Software, Asia Pacific ("Optio Australia") was established in May
1999 in an effort to enhance the Company's worldwide presence, specifically in
the regions of Australia, Japan, Singapore, and India, as well as other
countries in the Asian Pacific. Optio Australia is also directly involved in the
direct sales, marketing and support activities in these regions of the world.
MUSCATO CORPORATION
On March 27, 2000, Optio purchased Muscato Corporation, located in
Orlando, Florida. Muscato Corporation is a provider of business-to-business
("B2B") infrastructure software and services that enable the secure, reliable
transformation and exchange of e-commerce, financial and healthcare transactions
across diverse trading communities.
SEGMENT INFORMATION
The Company is organized around geographic areas. Optio's US operations
plus its two foreign subsidiaries, Optio Europe and Optio Australia, as well as
Optio Europe's subsidiary, Optio UK, represent Optio's four reportable segments.
Prior to fiscal 1999, the Company operated in one geographic segment. During
fiscal year 1999, the Company operated in two geographic segments, the United
States and France (Optio Europe), and expanded into the United Kingdom and
Australia subsequent to January 31, 1999. The foreign locations principally
function as distributors of products developed by the Company in the United
States. The accounting policies as described in the summary of significant
accounting policies are applied consistently across the segments. Intersegment
sales are based on intercompany transfer prices to achieve a reasonable margin
upon distribution.
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Segment information for the years ended January 31, 1999 and 2000 is
summarized below.
YEAR ENDED JANUARY 31, 1999 UNITED STATES FRANCE COMBINED ELIMINATIONS CONSOLIDATED
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Revenue from external customers:
License fees $ 11,442,000 $ 572,000 $ 12,014,000 $ - $ 12,014,000
Services, maintenance and other 7,111,000 414,000 7,525,000 - 7,525,000
Intersegment revenue 19,000 - 19,000 (19,000) -
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Total revenue 18,572,000 986,000 19,558,000 (19,000) 19,539,000
Segment net income (loss) 166,000 203,000 369,000 (19,000) 350,000
Total segment assets 9,554,000 1,184,000 10,738,000 - 10,738,000
UNITED UNITED
YEAR ENDED JANUARY 31, 2000 STATES FRANCE KINGDOM AUSTRALIA COMBINED ELIMINATIONS CONSOLIDATED
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Revenue from external customers:
License fees $ 14,521,000 $1,689,000 $796,000 $108,000 $17,114,000 $ - $ 17,114,000
Services, maintenance and other
14,107,000 1,121,000 467,000 24,000 15,719,000 - 15,719,000
Intersegment revenue 599,000 194,000 - - 793,000 (793,000) -
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Total revenue 29,227,000 3,004,000 1,263,000 132,000 33,626,000 (793,000) 32,833,000
Segment net income (loss) 1,783,000 162,000 390,000 (343,000) 1,992,000 - 1,992,000
Total segment assets 59,195,000 1,875,000 755,000 106,000 61,931,000 (1,289,000) 60,642,000
Optio's foreign operations generated revenue from licenses and services
to customers of $4.2 million in the year ended January 31, 2000, representing
13% of total revenue compared to revenue of $986,000 in the year ended January
31, 1999, representing 5% of total revenue.
RISKS INHERENT IN FOREIGN OPERATIONS
Optio's expanding international operations poses additional risks to
its operations as a result of the following factors:
- potential losses or gains from currency fluctuations as a
result of transactions and expenses being denominated in
foreign currencies;
- increased financial accounting and reporting burdens and
complexities and potentially adverse tax consequences;
- compliance with a wide variety of complex foreign laws and
treaties; and
- reduced protection for intellectual property rights in some
countries.
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INDUSTRY
GROWTH OF THE INTERNET AND ELECTRONIC BUSINESS
Organizations are constantly seeking ways to use information to operate
more productively and cost-effectively. To achieve these objectives,
organizations must deliver focused, business ready information derived from a
multitude of sources across the extended enterprise which includes employees,
customers, suppliers and strategic partners. Competitive pressures have created
a need for increasingly sophisticated and time-sensitive methods of information
delivery both inside and outside of the enterprise. A growing number of
organizations are using the Internet to compete more effectively and conduct
business electronically. As a result, e-business has become critical for nearly
every organization seeking to establish and maintain a competitive advantage.
In embracing e-business, organizations are attempting to maximize the
value of their business processes by using the Internet to conduct business
electronically and reach a large number of geographically dispersed users across
the extended enterprise. Some examples of e-business applications include the
electronic distribution of information related to the procurement of goods and
services, presentation of bills and collection of payments over the Internet and
the viewing of reports and other company information utilizing web browsers.
According to a report by International Data Corporation, or IDC, first published
in June 1999, worldwide e-commerce alone represented a $50 billion market in
1998 and is expected to grow to $1.3 trillion by 2003. IDC estimates the market
for e-commerce applications will grow from $444 million in 1998 to $13 billion
in 2003.
The growing business use of the Internet has provided enterprises with
new opportunities and expanded requirements to move beyond the limitations of
current paper-intensive processes. With the emergence of e-business, enterprises
can leverage the convenience and economy of the Internet to achieve substantial
efficiencies in their operations. At the same time, they are challenged to
manage their transition from a paper-based to an e-business environment.
Information now needs to be aggregated from a greater number of disparate
sources, customized to satisfy a richer set of business objectives and delivered
to a broader array of destinations through a variety of media. Sources of
information include e-business applications, enterprise, legacy and custom
applications, external databases and files; destinations include all members of
the extended enterprise; and delivery media alternatives include the Internet,
e-mail, printers, faxes and wireless devices.
TRADITIONAL APPROACHES TO MANAGING BUSINESS INFORMATION
Over the past few decades, organizations have made significant
investments in information systems to automate their business processes and
efficiently manage information. Many organizations have invested in solutions
like enterprise resource planning systems. Enterprise resource planning, or ERP,
systems are information systems that automate and integrate the business
processes of the departments within an organization. For example, ERP systems
from vendors such as J.D. Edwards, Oracle, SAP and others now automate the
financial, manufacturing and human
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resource functions of organizations. ERP installations require significant
investments to license and maintain the software, install the appropriate
infrastructure, re-engineer core business processes, transition legacy data,
train employees and make necessary adjustments to the system to attain
acceptable levels of operating efficiency. Despite the significant investments
required, an increasing number of organizations are expected to install and
enhance ERP systems in the future. According to a report by AMR Research
entitled "Enterprise Resource Planning Software Report, 1998-2003," total ERP
company revenues are expected to grow to $66.6 billion in 2003 from $16.7
billion in 1998, maintaining a compounded annual growth rate of 32%. Management
believes that ERP vendors are also increasingly enhancing their systems to
facilitate e-business.
These applications generate substantial amounts of information created
by ongoing business transactions. As the volume of this information grows,
organizations are challenged by the need to consolidate, customize and deliver
this information by fax, printer and e-mail to their employees, customers,
suppliers and strategic partners in a timely fashion to drive revenue growth and
profitability. Furthermore, when coupled with the challenge of leveraging the
Internet and wireless devices as media for information delivery and supporting
new e-business initiatives that leverage their investments in ERP and other
information systems, organizations will require increasingly sophisticated and
comprehensive solutions to meet their needs.
CURRENT METHODS FOR ACCESSING, CUSTOMIZING AND DELIVERING BUSINESS INFORMATION
Currently, businesses address their increasingly complex information
customization and delivery requirements primarily through the following
solutions:
- Custom software development, which provides a solution that is
specific to the applications and information formats of a
single organization. This approach requires significant
investments of capital, time and human resources. It also
tends to only focus on an organization's existing needs and,
therefore, is highly inflexible and does not readily adapt to
changes in the application, technology infrastructure or
business processes.
- Output management systems generally address the delivery of
documents or allow for a limited amount of customization, but
fail to adequately leverage the connective power and universal
access provided by the Internet.
- E-business enabling solutions, which take advantage of the
Internet as a platform for either delivering, viewing or
exchanging information. These systems often focus on
retrieving information from static databases which produces
information that is less timely and dynamic. They may also
provide limited support for more traditional delivery methods
such as printed documents, fax and e-mail as dictated by the
requirements of their customers, suppliers and partners or
focus solely on report generation and distribution.
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OPPORTUNITY FOR INTERNET-ENABLED INFORMATION ACCESS, CUSTOMIZATION AND DELIVERY
SYSTEM
The effectiveness of an organization's use of information is dependent
on its ability to effectively meet the challenges of today's e-business
environment. The requirements of the e-business model have exposed the
shortcomings of relying on paper-intensive manual processes, ERP systems and
other traditional software applications to manage the organization and delivery
of customized information. This e-business environment has created the need for
a comprehensive solution that maximizes the power of the Internet and gathers
information on a real-time basis from multiple sources, including e-business,
enterprise, legacy and custom applications, external databases and files;
evaluates the information to determine its suitability for business purposes;
customizes and formats the information to meet business objectives; and provides
timely delivery of the information to the appropriate destination.
THE OPTIO SOLUTION
Organizations use Optio's software to improve their communications with
employees, customers, suppliers and partners. These communications include the
viewing of business documents and reports over the Internet, e-business
transactions, printed documents, faxes and e-mail. Organizations using our
software can increase the efficiency of their procurement, purchasing,
inventory, shipping and payment functions by integrating them into a single
business process and producing customized information as required by its
recipients. Applications that produce this information do not require
modifications to interact with Optio's software. As a result, Optio's consulting
services group can rapidly deploy our software and train our customers in its
productive use.
Optio solutions benefit Optio's customers by:
EXTENDING THE REACH OF INFORMATION. Optio's software is designed to
empower users by providing relevant, flexible information more quickly and
cost-effectively than previously possible. For example, with Optio's solution,
an enterprise can aggregate real-time billing information from separate ERP and
legacy systems in a single business process. This information can then be
delivered in one or more forms such as printed documents or high volume fax. It
can also be delivered as Electronic Data Interchange, or EDI, or as Extensible
Markup Language, or XML, to other enterprise applications and systems. EDI is a
predefined format used to exchange data and documents electronically and XML is
a flexible language that allows organizations to define data and documents that
are transmitted over the Internet. Information is delivered to enterprise
information portals where people can securely view summary reports over the
Internet and receive e-mail notifications of significant transactions. Optio's
software can also format this information in ways suitable for delivery to
wireless devices, including alphanumeric pagers and, in the future, personal
digital assistants, or PDAs.
MAXIMIZING EXISTING AND NEW TECHNOLOGY INVESTMENTS. Optio's software
and services enable organizations to leverage the benefits of their investments
in existing information technology infrastructure. By using Optio's software,
organizations are able to utilize information from existing
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enterprise and legacy applications throughout the extended enterprise without
requiring extensive re-engineering. By leveraging these existing applications,
Optio's software offers an attractive value proposition. We believe that as
enterprises increasingly embrace e-business initiatives and applications, our
software will facilitate and optimize their efforts.
ENABLING RAPID DEPLOYMENT AND USE. Optio's software can be installed
quickly by Optio consultants or other third parties with whom Optio has
implementation relationships without the need for extended on-site visits. The
implementation time for Optio's software at a customer site is typically two
weeks. Optio's software is designed to recognize, interpret and utilize
information from many applications including Baan, J.D. Edwards, McKesson HBOC,
Oracle, QAD and SAP. This interoperability enables rapid deployment in these
environments and reduces ongoing maintenance and training costs.
OFFERING SCALABLE ARCHITECTURE. Optio designs its software to scale
effectively when implemented in geographically dispersed enterprise-wide
deployments while maintaining system performance and availability. Optio's
software supports networks composed of multiple operating systems including
Windows NT, UNIX, OS/400 and a variety of applications, databases and services.
Optio's software manages large quantities of information and supports thousands
of users while at the same time minimizing the usage of network and computing
resources. Optio's browser and Java user interfaces effectively leverage the
power of the Internet, significantly reducing the need for client-side
management and administration.
BUSINESS STRATEGY
Optio's objective is to be the leading provider of software and
services that help transition organizations from paper-intensive commerce to
e-business. To achieve these objectives, Optio intends to:
ENHANCE PRODUCT OFFERINGS. Optio will continue to invest in research
and development to improve and enhance its existing software offerings and
introduce new software products designed to solve a greater range of problems
for its customers. In particular, Optio intends to enhance and expand its
software offerings to address the challenges and needs of e-business and to
develop new software that solves problems associated with gathering,
customizing, delivering and exchanging business information. Management believes
that maintaining and enhancing its software is important to its ability to
expand its market share, retain existing customers and acquire new customers.
Optio's research and development expenditures for the years ending January 31,
1998, 1999 and 2000 were $1.6 million, $2.5 million and $3.6 million,
respectively, indicating an increased commitment to research and development
activities.
EXPAND CUSTOMER AWARENESS THROUGH INCREASED MARKETING. Optio intends to
devote significant resources to marketing efforts to increase customer and
industry awareness of its software and services. These increased marketing
efforts will include hiring additional marketing personnel, increasing brand
awareness through advertising, launching a focused press and industry analyst
campaign and expanding participation in related industry events. Through these
marketing efforts,
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Optio intends to demonstrate the value of its software and services to
enterprises and thereby increase its market share.
EXTEND NETWORK OF STRATEGIC RELATIONSHIPS. Optio plans to extend its
existing strategic network and develop new relationships with leading global
systems integrators who specialize in implementing software solutions that
support e-business, ERP and healthcare applications. Optio currently has over 23
strategic implementation relationships, including three new relationships formed
since Optio's initial public offering in December 1999. These include
organizations that install the software purchased by Optio's customers and
provide services that address specific customer needs. These relationships have
allowed Optio to focus on its core competencies while leveraging its strengths
to provide Optio's customers with a complete information customization and
delivery solution. Management believes that these relationships will also
continue to generate additional product sales opportunities.
EXPAND WORLDWIDE SALES. Management believes that international markets
represent a significant growth opportunity as organizations seek global
e-business solutions. Optio currently has a direct sales presence in North
America, the United Kingdom, France, Australia and Singapore. Optio plans to
continue to invest in its worldwide distribution capacity to increase market
share and penetration. This investment will include expanding the direct sales
force and establishing sales offices in other countries in Europe. In addition,
Optio plans to engage local resellers and system integrators and establish joint
marketing agreements with software companies in Japan and the balance of the
Asia Pacific region.
LEVERAGE OPTIO'S SIGNIFICANT CUSTOMER BASE. Management believes its
base of over 3,900 customers provides a significant opportunity for additional
sales of current and future software, as well as ongoing maintenance revenue. A
majority of Optio's customers have not yet purchased Optio's full suite of
software or currently only use Optio's software in specific business units or
locations. Management believes that Optio can sell more deeply into this
customer base by expanding these partial deployments into enterprise-wide
implementations as well as by cross-selling additional software and services.
PURSUE STRATEGIC ACQUISITIONS. Optio's previous acquisitions have
enhanced the business by expanding Optio's product offerings and international
presence. Optio intends to continue pursuing strategic acquisitions that would
provide additional product or service offerings, additional industry expertise,
a broader customer base or an expanded geographic presence. On March 27, 2000,
Optio purchased Muscato Corporation, a provider of business-to-business
e-commerce infrastructure, and its affiliate Translink Solutions Corporation, an
application service provider.
EXTEND TECHNOLOGICAL LEADERSHIP. Optio's software architecture provides
the foundation for the development of new and innovative software and allows
Optio's applications to be easily adapted to new standards, protocols and
platforms. This architecture enables Optio's products to interface with multiple
operating systems, applications, business processes and data sources in a
non-disruptive manner. Management believes that Optio's product capabilities
significantly differentiate Optio from its competitors. Optio intends to advance
our technological leadership by
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investing significantly in research and development and by acquiring and
integrating complementary software and technologies.
PRODUCTS
SOFTWARE
Optio provides suites of software products that enhance the performance
and reliability of its customers' e-business, enterprise, legacy and custom
applications. Optio's software enables the cost-effective, efficient delivery of
highly customized information across the extended enterprise. Our software is
divided into two suites: the Optio Enterprise Suite and the Optio Healthcare
Suite.
The Optio Enterprise Suite is designed to meet the needs of the general
business marketplace. The Optio Healthcare suite is tailored to the special
needs of the Healthcare marketplace.
In each case, Optio's customers may purchase the entire suite or may
purchase one or more of the software products that make up the suite. Typically,
customers buy either Optio DCS or Optio MedForms, as well as one or more other
components of the applicable suite. These other components may include Optio
e.ComPresent, Optio's e-business software. Most of the revenue derived from the
Enterprise Suite is attributable to Optio DCS, and most of the revenue derived
from the Healthcare Suite is attributable to MedForms.
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THE OPTIO ENTERPRISE SUITE
OPTIODCS Forms the foundation of the Optio Enterprise Suite.
It captures information from enterprise, legacy and
other applications by monitoring transactions and
output such as print streams. It then performs
calculations and other data transformations, formats
business information or e-commerce transactions and
delivers them to printers, fax servers, e-mail
servers, web servers, document archives and
e-commerce servers.
OPTIO E.COMPRESENT E-business software that provides secure,
browser-based presentation of customized information.
Information can be grouped in pre-defined or
user-specified folders for easy access. All
information is fully indexed and supports familiar
Internet search techniques. Users are alerted to the
publication of new or updated information with
subscription-based notifications that arrive via
e-mail, pager, fax or printer. e.ComPresent
facilitates the delivery of customized information to
support e-business initiatives like report
distribution, information portals, online bill
presentment and self-service applications.
OPTIO DESIGNSTUDIO Windows based software that allows users to map,
create, model from applications, databases and files,
and create business rules and conditional logic to
automate processing of the information and model the
network of destinations to which the information is
delivered. The design files it creates are then
processed, in real time, by OptioDCS.
OPTIOFAX Software that transmits and receives information
using electronic fax standards and protocols to
support business requirements for distributing
enterprise information.
OPTIO CHECKBOOK An application targeted to the financial payment
needs of the enterprise. Optio Checkbook facilitates
the layout of laser checks, eliminates the need for
pre-printed check stock and provides positive pay
reports to improve accuracy and reduce fraud.
OPTIO ENTERPRISE Substantially complete generic document templates for
PROCESSPACKS common forms such as purchase orders and checks which
facilitate the design of the information
customization and delivery requirements for popular
ERP applications like Baan, J.D. Edwards, Oracle, QAD
and SAP.
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OPTIO E.COMINTEGRATE Optio's next generation server that provides the
(ANNOUNCED MARCH 23, software infrastructure to enable
2000) Business-to-Business ("B2B") integration,
communication, and presentation of critical
information. It builds on the strength of Optio's
core technologies and adds inbound and outbound
processing of XML, enabling organizations to
integrate operations and participate in eMarketplaces
utilizing XML dialects such as CBL, cXML, BizTalk or
ebXML. Organizations seeking to XML enable their
existing applications can map standard purchase
orders, invoices, and shipping advice documents
without application modifications or re-engineering.
OPTIO E.COMPAYMENTS A universal payments platform that enables
(ANNOUNCED APRIL 10, organizations to provide secure, printed or
2000) electronic payments for payroll, travel and expense
reimbursement, vendor payments and other financial
transactions. It also allows remittance advice
documents to be generated and delivered
electronically which reduces the overall cost to
provide payment detail to recipients. When coupled
with Optio e.ComPresent, organizations can provide a
secure web portal and archive for payment
information. This provides an additional cost
savings, as well as enhanced access to payment
history and detail.
THE OPTIO HEALTHCARE SUITE
OPTIO MEDFORMS Forms the foundation of the Optio Healthcare Suite,
is targeted to meet the specialized requirements of
healthcare enterprises. It captures information from
healthcare information systems by monitoring
transactions and output such as print streams. It
then performs calculations and other data
transformations, formats patient, clinical,
diagnostic and business information and delivers it
to printers, fax servers, e-mail servers, web servers
and document archives.
OPTIO MEDFORMSDR Provides routing, reorganization and reproduction of
healthcare information on demand, allowing users
throughout an enterprise to quickly and easily
generate patient documents without expensive
embossers or preprinted labels. Optio MedFormsDR's
temporary data store provides access to vital patient
information if the primary server is interrupted,
which protects data integrity.
OPTIO HL7/CONNECT Enhances Optio MedForms by adding the capability to
detect, process, and customize HL7 messages. HL7 is a
healthcare industry standard that allows healthcare
information systems to exchange data. HL7/Connect
provides intelligent support for healthcare
organizations that have implemented the global HL7
industry standard for interoperability between
healthcare information systems.
OPTIO E.COMPRESENT, Equivalent in functionality to that listed for the
OPTIOFAX, OPTIO CHECKBOOK Optio Enterprise Suite, including Optio e.ComPresent,
our e-business software, but targeted for the
healthcare market.
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OPTIO HEALTHCARE Substantially complete generic document templates for
PROCESSPACKS common functions which facilitate the design of the
information customization and delivery requirements
for specific areas of healthcare operations such as
Admissions, Discharge and Transfer, Patient
Accounting and Business Office and Diagnostic Clinic.
SERVICES
CONSULTING. Optio's consulting services provide customers with
expertise and assistance in evaluating, planning and implementing Optio's
solutions. To ensure a successful implementation of Optio's software,
consultants assist customers with the evaluation, planning and design process,
the initial installation of a system, the integration of Optio's software with
the customer's existing enterprise computing applications and ongoing training
and upgrades. Management believes that consulting services enables rapid
implementation of Optio's software, ensures success with Optio's solution,
strengthens the customer relationship and adds to Optio's industry-specific
knowledge base.
While consulting services are optional, substantially all of Optio's
customers utilize these services to facilitate the rapid implementation of the
software. These services are billed on an hourly or daily basis that varies
based on the type of service provided. Optio plans to continue to increase the
number of consultants to support anticipated growth in product implementations
and upgrades.
As of January 31, 2000, Optio's consulting services group consists of
40 employees comprised of business consultants, systems analysts and technical
personnel devoted to assisting customers in all phases of systems implementation
including evaluation, planning and design, customer-specific configuring of
modules and on-site implementation or conversion from existing systems.
Additionally, eight employees are training staff dedicated to internal, customer
and partner training as well as curriculum development. Optio may increasingly
use third party consultants, such as those from major systems integrators, to
assist in certain implementations.
MAINTENANCE. Optio offers a comprehensive maintenance program which
provides its customers with timely software upgrades offering increased
functionality and technology advances that incorporate emerging e-business and
other industry initiatives. Optio offers customer telephone support during
normal business hours for 18% of the current software license fee per annum and
24 hour maintenance for 30% percent of the current software license fee per
annum. As of January 31, 2000, a majority of Optio's customers had subscribed to
the comprehensive maintenance support program.
13
PRODUCTS OF MUSCATO CORPORATION AND TRANSLINK SOLUTIONS CORPORATION
On March 27, 2000 Optio announced the acquisition of the Muscato
Corporation and its ASP (application service provider) affiliate TransLink
Solutions Corporation. These acquisitions will enhance the overall
capabilities of our software, Optio e.ComIntegrate in particular, and also
add knowledge and expertise to our staff, particularly in the areas of
Message Queuing, XML, Electronic Document Interchange (EDI) based information
exchange and Health Insurance Portability and Accountability Act (HIPAA)
compliant transactions.
Muscato is a provider of B2B infrastructure software and services that
enable the secure, reliable transformation and exchange of e-commerce, financial
and healthcare transactions across diverse trading communities. Their core
products, ENGIN-TM- and EC (Electronic Commerce) are full-featured, standards
compliant offerings that provide message queuing, transaction management and
trading partner administration to support complex, high volume e-business
environments with real-time reliability. The EC Document Warehouse captures and
archives B2B transactions and makes them available for detailed analysis and
reporting.
Muscato's products are being utilized by organizations in the
healthcare, transportation, insurance, telecommunication, financial, and
services industries, as well as by several government agencies in Europe.
Translink, an affiliate of Muscato, currently provides ASP hosting of
ENGIN, EC and EC Document Warehouse for Muscato's healthcare customers under a
recurring revenue licensing model.
We will actively market the Muscato software and services to our
installed base and new customers, as well as market the existing Optio products
to those customers that are utilizing the Muscato products. Over time we intend
to integrate the Muscato products into our e.Com series of products.
TECHNOLOGY
Optio's software architecture provides the foundation for the
development of new and innovative software and allows Optio's applications to be
easily adapted to new standards, protocols and platforms. This architecture
enables Optio to interface with multiple operating systems, applications,
business processes and data sources in a non-disruptive manner. Optio's
architecture also maximizes the benefit of today's complex enterprise networking
environments, including the Internet and e-business applications.
Optio's software architecture provides the foundation for us to develop
new and innovative software and allows our applications to be easily adapted to
new standards, protocols and platforms. This architecture enables us to
interface with multiple operating systems, applications, business processes and
data sources in a non-disruptive manner. Our architecture also maximizes the
benefit of today's complex enterprise networking environments, including the
Internet and e-business
14
applications.
Business rules are specified in the Optio Document Customization
Language, a special purpose programming language designed to solve the unique
problem of information gathering and document customization and delivery. The
OptioDCS software is highly optimized to execute programs written using these
business rules, giving it the ability to process large volumes of information.
Its advanced design allows these business rules to control not only the flow of
information through the system but to dynamically change which business rules
are executed based on the information itself. This provides users with a high
degree of control over the automatic creation, formatting and delivery of
documents on a global basis.
The software contains components for: communicating with Optio's visual
design software; collecting information from other enterprise application
programs or databases; performing calculations and other types of data
transformations; formatting the information into human-readable documents,
e-business documents or database transactions; distributing information to a
wide variety of digital destinations including web servers, fax servers, e-mail
servers, alphanumeric pagers, printers, document archives and e-commerce
application servers; maintaining and executing recipient specified rules for
information notification and document delivery; and securely controlling the
distribution and processing of information between multiple computers within the
same network and over the Internet.
Optio's software supports many industry standards for document formats,
document delivery and data access from enterprise databases and other data
sources. Optio's software also supports many of the proprietary formats of
documents and information produced by the software of third parties with whom
Optio has strategic relationships and other enterprise application software
vendors.
The software generates human-readable documents that include a variety
of graphical design elements. E-business documents are generated as Electronic
Data Interchange files or as any of the commercial document standard formats
that use XML. Optio's XML support enables Optio's software to work with existing
or future e-business applications.
TECHNICAL ADVANTAGES
Optio's technology provides users with the following advantages:
- TRANSPARENCY. Optio's technology works with the existing
business processes of an enterprise and is completely
transparent to the user.
- PRESERVATION OF APPLICATION BUSINESS LOGIC. Enterprise
applications use many business rules to validate and control
business information. Optio's software works directly with the
information produced by the execution of these business rules,
which preserves the value and integrity of the original
application business logic and security and maintains the
consistency of the information.
15
- ABILITY TO WORK WITH TIME SENSITIVE DATA. Optio's software
works with business data as it is generated, not only after it
has been stored in a database. Applications can therefore
process time sensitive information much more effectively,
getting the right information to the right person at the right
time.
- POWERFUL LANGUAGE. Optio's Document Customization Language
enables Optio's software to address many complicated business
information processing problems requiring large volumes of
data. This same language allows Optio's software to address
many problems in the areas of e-business and information
delivery that other programming languages and application
servers cannot.
- EASE OF USE. The visual design approach used by Optio
DesignStudio harnesses the power of Optio's Document
Customization Language and puts it into the hands of less
technical users without limiting access to the power of our
technology.
- SCOPE OF SOLUTION. The ability of Optio's software to handle a
wide variety of information sources, document formats and
digital destinations, without requiring third party software.
- SECURE INTERNET ARCHITECTURE. Optio's software utilizes a
proprietary technology built on industry standards which allow
our software to securely distribute and control the processing
of information on the Internet.
SALES AND MARKETING
To date, approximately 80% of Optio's revenue has been generated
through Optio's direct sales force. As of January 31, 2000, Optio had 47
domestic sales representatives, divided into teams that:
- directly market to potential customers based on the ERP system
that they are implementing or have implemented;
- directly market to potential customers in the healthcare
industry; and
- sell to resellers and distributors.
The domestic sales force is split between Optio's East Coast and West
Coast offices. As of January 31, 2000, Optio's international sales organization,
focused on Europe and the Asia Pacific region, was comprised of six sales
representatives. Important resellers or distributors of Optio's products include
Epicor Software Corporation, NxTrend Technology, Inc. and Ross Systems Inc.
Optio also benefits from sales referred to Optio under commercial relationships
with Baan and McKesson HBOC. Optio plans to continue to invest significantly in
expanding our sales, support, services and marketing organizations.
16
STRATEGIC RELATIONSHIPS
Optio has strategic relationships with third parties that help market,
sell, implement, support and enhance Optio's solutions that include:
RESELLER RELATIONSHIPS. Optio has relationships with approximately 100
resellers who market and resell Optio's software as a component of their own
solutions and who provide software related education, implementation and
customization services as well. These resellers have their own software
solutions that typically address a specific market sector and they utilize
Optio's software to enhance the functionality of their own solution. Optio's
software may be sold along with their own solutions under the original Optio
brand name or embedded within the reseller's software and relabeled with their
own name. Because resellers who embed Optio's products within their solutions
provide substantially all of the sales and marketing efforts and the initial
support services with respect to this embedded software, they receive price
discounts on Optio's software.
IMPLEMENTATION RELATIONSHIPS. Optio has relationships with 23
consulting organizations to provide value added services that assist customers
in implementing Optio's software. Optio trains and tests these organizations'
consultants to install and use Optio's software and certify them once they have
demonstrated their proficiency in delivering complete solutions that meet the
needs of the customers.
REFERRAL RELATIONSHIPS. Optio has relationships with Whittman-Hart,
Baan and McKesson HBOC to refer prospects to Optio that may have an interest in
licensing Optio's solution. As part of a defined process, Optio validates that
it is not currently working with that prospect and if Optio secures a licensing
agreement with that prospect within a fixed period of time, Optio will pay a
referral compensation. Referral fees are typically in the range of 10-20% of the
license fee. In addition, Optio has relationships with other referral partners
for which no referral fee is paid. Such relationships include Optio's newest
partner, KPMG Consulting. In the past, these referral relationships have
resulted in significant revenues and Optio expect that they will continue to do
so in the foreseeable future.
VENDOR RELATIONSHIPS. Optio has relationships with six major ERP and
healthcare software vendors, which are Baan, J.D. Edwards, McKesson HBOC,
Oracle, QAD and SAP, whereby Optio has demonstrated that its solutions are
compatible with their applications and provide complimentary functionality. As a
result, these vendors will include descriptions of Optio products' key features
and benefits in their directories which are published periodically and on their
web sites. Optio can also feature their logos in its advertising and promotional
materials, participate in vendor sponsored trade shows, marketing programs and
other events. In the past, these vendor relationships have resulted in
significant revenues and Optio expects that they will continue to do so in the
foreseeable future.
17
CUSTOMERS
Optio's customers consist of enterprises across a broad spectrum of
industries, and include a number of organizations focused on the medical and
healthcare industry. As of January 31, 2000, we licensed our products for use by
more than 3,900 customers, which management believes makes Optio a leading
provider of information customization and delivery software relative to Optio's
competitors.
No single customer accounted for 10% or more of Optio's total revenue
during the years ended January 31, 1998, 1999 or 2000.
COMPETITION
The market for Optio's software and services is intensely competitive,
quickly evolving and subject to rapid technological change. Management expects
competition to intensify in the future. Optio's potential competitors vary in
size and in the scope and breadth of the products and services offered. Our
competitors fit into three separate areas. The first is custom software
developers. The second is comprised of output management solutions from
organizations such as AFP Technology, Dazel, StreamServe, and Tivoli. The third
is comprised of e-business enablement organizations, which we believe we will
compete with increasingly in the future, such as Actuate Software, BottomLine
Technology, Quest Software, and webMethods.
Management believes that Optio is differentiated relative to its
competitors due to its software's ability to combine information customization
capabilities, output management capabilities, information integration and
exchange capabilities and e-business enablement capabilities in one solution.
Management believes that, to the best of its knowledge, none of Optio's
competitors provide all of this functionality in a single solution. Management
believes that Optio also competes on the basis of its software's ability to
operate across multiple operating systems. With respect to the Optio Healthcare
Suite, management believes that Optio compares favorably to its competitors
because Optio offers a vertically-oriented solution to address the needs of the
healthcare marketplace.
Management believes that the principal competitive factors present in
Optio's market include: a significant base of reference customers; a breadth and
depth of product functionality; cost of solution; product quality; and
performance, customer service, core technology, product features, ease of
implementation and extent of value derived from solution.
Although management believes that Optio's products and services
currently compete favorably with respect to each of these factors, Optio's
market is evolving rapidly. Optio may not be able to maintain its competitive
position against current and potential competitors.
18
INTELLECTUAL PROPERTY
Optio distributes its products under software license agreements,
which generally grant clients perpetual licenses to use, rather than own,
Optio's products. These licenses contain various provisions protecting our
ownership and the confidentiality of the underlying technology. The software
is protected from unauthorized use through electronic activation keys tied to
the system on which the software is licensed to operate. The source code, or
the intellectual property underlying Optio's software, is protected as a
trade secret and as unpublished copyrighted work. Optio has registered
"Optio" and "MedForms" as trademarks in the United States. Optio has used the
"Optio" trademark in the European Economic Community since as early as 1997,
but has not registered the mark there. Optio is now aware of an EEC
registration of the same mark which was filed after Optio began using the
mark. Optio has also received notice from a company in the United Kingdom
that has alleged it uses a similar "Optio" mark. No assurance can be given
that Optio will be able to register the "Optio" mark in these markets or that
the existing EEC registration or United Kingdom use will not ultimately have
an adverse affect on Optio's ability to use its "Optio" marks in those
markets.
Optio protects its proprietary rights by relying on copyright, trade
secret, trademark, confidentiality procedures and contractual provisions. Some
of Optio's software, documentation and other written materials are protected
under the federal copyright law. Optio also relies on trade secret laws of the
state of Georgia and the states in which it does business to protect its
software designs and other proprietary information. In addition, non-disclosure
agreements contained in employment contracts protect Optio's proprietary
information from disclosure by current and former employees.
Optio has not applied for any U.S. patents. It is possible that any
patent applications Optio files in the future will not result in the issuance of
patents and that any patents issued may later be successfully challenged. It is
also possible that Optio may not develop proprietary products or technologies
that are patentable, that any patent issued to Optio may not provide Optio with
any competitive advantages, or that the patents of others will seriously harm
our ability to do business.
Despite Optio's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of Optio's products or to obtain and use
information that Optio regards as proprietary. Policing unauthorized use of
Optio's products is difficult, and while Optio is unable to determine the extent
to which piracy of Optio's software products exists, software piracy can be
expected to be a persistent problem. In addition, the laws of some foreign
countries do not protect Optio's proprietary rights to as great an extent as do
the laws of the United States. Optio's means of protecting its proprietary
rights may not be adequate and Optio's competitors may independently develop
similar technology, duplicate Optio's products or design around patents issued
to Optio or Optio's other intellectual property.
There has been a substantial amount of litigation in the software and
Internet industries regarding intellectual property rights. It is possible that
in the future third parties may claim that Optio or its current or potential
future products infringe their intellectual property. Management expects that
software product developers and providers of e-commerce solutions will
increasingly be subject to infringement claims as the number of products and
competitors in the industry segment grows and the functionality of products in
different industry segments overlaps. Any claims, with or without merit, could
be time-consuming, result in costly litigation, cause product shipment delays or
require Optio to enter into royalty or licensing agreements. Royalty or
licensing agreements, if required, may not be available on terms acceptable to
Optio or at all, which could seriously harm our business.
19
EMPLOYEES
As of January 31, 2000, Optio had 208 employees. No employees are
covered by any collective bargaining agreements. Optio considers its
relationships with its employees to be good.
ITEM 2. PROPERTIES
Optio's principal corporate offices are located in approximately 62,000
square feet at 3015 Windward Plaza, Windward Fairways II, Atlanta, Georgia. The
term of this lease is through December 31, 2006. Offices are also located in
California, France and the United Kingdom, providing us with an additional
11,000 square feet.
Optio leases all of its properties with remaining terms between one
and seven years. Management believes that its facilities are adequate for its
current needs and that suitable additional space will be available as required.
ITEM 3. LEGAL PROCEEDINGS
Optio is from time to time involved in routine litigation incidental to
the conduct of its business. Optio is not currently a party to any material
legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Optio and certain information about them are
as follows:
NAME AGE POSITION
------------------------------------ --- ---------------------------------------------
C. Wayne Cape....................... 45 Chairman of the Board of Directors, Chief
Executive Officer and President
G. Robert Beck...................... 41 Senior Vice President-- Sales and Client Services
F. Barron Hughes.................... 42 Chief Financial Officer, Secretary and Treasurer
Daryl G. Hatton..................... 38 Chief Technology Officer
Steven E. Kaye...................... 47 Senior Vice President-- Strategic Marketing
John L. Kopcke...................... 44 Senior Vice President-- Development
Mark White.......................... 38 Vice President-- Information Systems
C. WAYNE CAPE, the founder of Optio, has served as Chief Executive
Officer and President of Optio since its inception in 1981. Mr. Cape became
Chairman of the Board in September 1999.
20
Prior to launching Optio, Mr. Cape was an employee at Digital Communication
Associates from 1974 to 1981 where he served in a variety of technical, sales
and regional sales management positions.
G. ROBERT BECK has served as Senior Vice President, Sales and Client
Services of Optio since April 1996. From January 1996 to April 1996, Mr. Beck
worked as an independent consultant for Sales Builders, Inc., an Atlanta based
sales and consulting management organization. From 1992 to December 1995, Mr.
Beck also served as President of U.S. Operations for Cray Systems, a UK based
provider of application software for tour operators, and from 1989 to 1992, Mr.
Beck served as Vice President of Sales for Computron Technologies, Inc., a
leading provider of financial workflow solutions, which is now a publicly traded
company.
F. BARRON HUGHES has served as Chief Financial Officer and Secretary of
Optio since September 1994. Prior to joining Optio, Mr. Hughes served as Chief
Financial Officer of Millennium Healthcare, Inc. from 1991 to September 1994 and
served as Chief Financial Officer of HealthQuest, a subsidiary of HBO & Co.,
which provides health information solutions from 1985 to 1991. Mr. Hughes is a
Certified Public Accountant.
DARYL G. HATTON has served as Chief Technology Officer for Optio since
February, 1997. From October 1993 to February 1997, he served as director of
research for Optio. From 1988 through 1993, Mr. Hatton was a co-founder and
president of Pacific Genesys Development, Inc., a Canadian corporation in the
electronic forms software development industry, which was acquired by Optio in
1993. Prior to that, Mr. Hatton was Vice President of Product Development for
Modatech Systems, Inc., a publicly traded software developer of sales force
automation solutions.
STEVEN E. KAYE is Senior Vice President of Strategic Marketing for
Optio. Mr. Kaye joined Optio in May 1999. Prior to joining Optio, Mr. Kaye
served as Vice President of Marketing at Softlab, Inc., a BMW company, from
February 1998 to April 1999. Softlab is a vendor of application development
strategies and a provider of knowledge based solutions. From June 1996 to
February 1998, Mr. Kaye served as Senior Vice President of Business Development
for KnowledgeX, Inc., a provider of knowledge management software solutions,
which was acquired by IBM in 1998. From December 1994 to April 1996 Mr. Kaye
served as Vice President of Products and Technology for Deloitte Consulting's
SAP practice and was also Vice President of ISV/OEM Sales for KnowledgeWare,
Inc.
JOHN L. KOPCKE is Senior Vice President of Development for Optio. Mr.
Kopcke joined Optio in March 1999. Mr. Kopcke is responsible for our production
develop organization, including managing and overseeing all future product
development for existing solutions and research and development for new product
introductions. Prior to joining Optio, Mr. Kopcke was Chief Technology Officer
at Softlab, Inc. from January 1996 to March 1999. Prior to that, Mr. Kopcke
served as Chief Technology Officer for Pilot Software from June 1991 to January
1996. From 1987 to 1991, Mr. Kopcke served as President and founder of Kopcke
and Associates, a software development company specializing in specification
implementation of software for software companies. Kopcke and Associates was
acquired by Pilot Software in October 1996.
21
MARK WHITE has served as Vice President of Information Systems for
Optio since February 1998. From March 1993 to February 1998, Mr. White served as
the Director of Development for Optio. From September 1990 to March 19993, Mr.
White served as Vice President of Operations for Millard Wayne, Inc., a
physician practice software company.
22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
On December 15, 1999, Optio's common stock began trading on the Nasdaq
National Market under the symbol "OPTO". Prior to such date, there was no
established trading market for Optio's common stock. The initial public offering
price per share of common stock was $10.00. On April 26, 2000, the closing price
of the common stock on the Nasdaq National Market was $8.9375. The following
table reflects the range of high and low selling prices of Optio's common stock
by quarter, for each quarter since Optio's initial public offering.
HIGH LOW
Quarter Ended January 31, 2000
(since December 15, 1999).................... $ 29.25 $ 14.00
HOLDERS
As of April 26, 2000, there were approximately 34 holders of record
and approximately 8,200 beneficial owners of Optio's common stock.
DIVIDENDS
Optio did not pay any dividends during the year ended January 31, 2000.
Optio intends to retain all of its earnings to finance the expansion of its
business and for general corporate purposes, including future acquisitions, and
does not anticipate paying any cash dividends on its common stock for the
foreseeable future.
23
CHANGES IN SECURITIES AND USE OF PROCEEDS
On December 15, 1999, Optio commenced an initial public offering of its
Common Stock. The registration statement relating to this offering (File No.
333-89181) was declared effective on December 15, 1999. Merrill Lynch & Co.,
Bear, Stearns & Co. Inc. and The Robinson-Humphrey Company were the managing
underwriters of the offering. The number of shares registered, the aggregate
price of the offering amount registered, the amount sold and the aggregate
offering price of the shares were sold were as follows:
Shares of Aggregate Price Amount of Amount Of
Common of Shares Shares Sold Shares Sold Aggregate Price
Registered Registered by Registrant by Shareholders of Shares Sold
----------- ---------------- ------------- --------------- ----------------
5,750,000 $57,500,000 5,215,000 535,000 $57,500,000
Optio incurred the following expenses with respect to the offering
through January 31, 2000:
Underwriting
Discounts
and Finders' Underwriters'
Commissions Fees Expenses Other Expenses Total Expenses
------------ -------- ------------- -------------- --------------
$3,651,000 $0 $0 $1,543,000 $5,194,000
The net proceeds from the offering to Optio after deducting the
foregoing discounts, commissions, fees and expenses were $47.0 million.
Approximately $1.2 million of the proceeds were used for the repayment of our
indebtedness to three former shareholders incurred in connection with the
repurchase of their common stock in December 1998. In March 2000, $20 million of
the proceeds were used for the acquisition of all of the capital stock of
Muscato Corporation and an additional $5 million was used to acquire the assets
of TransLink Solutions Corporation. Pending use of the net proceeds, Optio has
invested the funds in commercial paper and Federal Home Loan Discount Notes and
used them for general corporate purposes, including working capital. None of the
foregoing expenses constituted direct or indirect payments to our directors,
officers, general partners or their associates or to persons owning 10% or more
of any class of our equity securities or to our affiliates.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth the selected historical financial data
of Optio Software, Inc. The selected financial data should be read together with
the financial statements and related notes and the section of this From 10-K
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The selected financial data as of and for the years
ended
24
January 31, 1996, 1997, 1998, 1999, and 2000 have been derived from the audited
financial statements of Optio.
Years Ended January 31,
--------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
Statement of Operations Data (in thousands):
Revenue:
License fees $ 4,806 $ 5,802 $ 9,150 $ 12,014 $ 17,114
Services, maintenance and
other 1,984 3,200 4,419 7,525 15,719
-------- -------- -------- -------- --------
Total revenue 6,790 9,002 13,569 19,539 32,833
Costs of revenue:
License fees 589 642 1,088 913 980
Services, maintenance and
other 981 1,814 2,214 4,089 7,997
-------- -------- -------- -------- --------
Total cost of revenue 1,570 2,456 3,302 5,002 8,977
Gross profit 5,220 6,546 10,267 14,537 23,856
Operating expenses:
Sales and marketing 2,470 3,674 5,901 7,534 11,863
Research and development 790 891 1,551 2,530 3,559
General and administrative 1,175 1,143 1,886 2,884 3,848
Depreciation and amortization 761 144 806 941 1,227
-------- -------- -------- -------- --------
Total operating expenses 5,196 5,852 10,144 13,889 20,497
Income from operations 24 694 123 648 3,359
Other income (expense):
Interest income 76 71 32 104 363
Interest expense (42) (42) (77) (257) (120)
Other -- -- 8 (46) (9)
-------- -------- -------- -------- --------
Income before income taxes 58 723 86 449 3,593
Income tax expense 48 304 64 99 1,601
-------- -------- -------- -------- --------
Net income $ 10 $ 419 $ 22 $ 350 $ 1,992
======== ======== ======== ======== ========
Net income per share - basic $ 0.00 $ 0.03 $ 0.00 $ 0.03 $ 0.16
Net income per share - diluted $ 0.00 $ 0.03 $ 0.00 $ 0.02 $ 0.10
Weighted average shares outstanding -
basic 12,095 12,380 12,891 12,825 12,586
Weighted average shares outstanding -
diluted 14,991 15,478 16,424 17,305 20,442
25
At January 31,
------------------------------------------------------
1996 1997 1998 1999 2000
BALANCE SHEET DATA (IN THOUSANDS):
Cash and cash equivalents $ 1,751 $ 1,646 $ 1,507 $ 1,129 $ 45,948
Working capital (deficiency) 645 880 (152) (1,650) 46,548
Total assets 4,226 4,905 6,978 10,738 60,642
Long-term obligations 254 292 246 1,208 38
Stockholders' equity 702 1,320 1,624 9 48,999
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements and related notes thereto and "Item 6. Selected Financial
Data" appearing elsewhere in the report.
OVERVIEW
Optio was incorporated in Georgia in 1981 as Technology Marketing,
Inc., and changed its name to Xpoint Corporation in 1982, then to Optio
Software, Inc. in 1997. For most of Optio's operating history, its primary
business consisted of providing software and services that addressed
organizations' needs for customized information delivered via print, fax and
e-mail to users of enterprise and healthcare applications. Optio has been
profitable since 1996.
Over the past year, Optio has invested in all areas of its business
with a particular emphasis on sales, marketing and research and development. To
date, most of our revenue has been derived from software that was not originally
designed to facilitate e-business, but rather to deliver customized information
by fax, printer and e-mail. During fiscal year 2000, Optio began expanding its
business plan to develop new software and services that would help its customers
move from paper-intensive commerce to e-business. In June 1999, Optio tested its
first e-business product, Optio e.ComPresent, which was then released in
September 1999. In March 2000, Optio announced the initial release of its
e.ComIntegrate -TM- product which provides organizations with the ability to
conduct business-to-business e-commerce and participate in e-marketplaces
through the creation, transformation and exchange of XML documents. In April
2000, Optio announced e.ComPayments-TM-, the third product offering in its
e.ComSeries-TM-. Optio e.ComPayments represents Optio's full-scale payment
platform providing comprehensive support for electronic and traditional
payments.
Optio markets and sells its software primarily through its direct sales
force and certified resellers. As of January 31, 2000, Optio had 53 sales
personnel and approximately 100 resellers. Optio also offers consulting services
which provide customers with implementation assistance and training. In order to
better service customers and support the growth of its consulting business,
Optio has established the Optio Alliance Program. This program certifies
independent consulting
26
companies that help deliver consulting services to Optio's customer base. As of
January 31, 2000, Optio had over 3,900 customers worldwide using Optio's
software and services. No single customer accounted for 10% or more of Optio's
revenue for the years ended January 31, 1998, 1999, or 2000.
Optio's growth has, in part, been supplemented by acquisitions. On
February 28, 1997 Optio acquired the assets of Devcom Mid-America, Inc. This
acquisition strengthened Optio's software offerings by providing it with a
server-based fax solution. On August 26, 1998 Optio acquired the stock of
Competence Software Europe S.A., which prior to the acquisition was a
distributor of Optio's software. This acquisition provided us entry into
European markets and became Optio's wholly-owned subsidiary, Optio Software,
Europe S.A. ("Optio Europe"). Both acquisitions were accounted for using the
purchase method of accounting and the associated goodwill from these
acquisitions is being amortized over three to five years. In November 1998,
Optio Europe expanded by founding a wholly subsidiary in the United Kingdom
known as Optio Software, UK Pvt. Limited. In May 1999, Optio entered the Asia
Pacific market by establishing a subsidiary in Australia, Optio Software, Asia
Pacific. By opening these offices and acquiring Competence Software Europe,
S.A., Optio further enhanced its presence in the worldwide marketplace. Now, in
addition to operations in the United States, Optio operates three international
offices involved in the direct sales, marketing and support activities of Optio
products throughout France, Germany, the United Kingdom, Australia, Japan,
Singapore and other countries.
REVENUE RECOGNITION. Optio derives its revenue from the sales of
software licenses, services and maintenance. Revenue for license fees is
typically recognized on delivery of our software when: Optio has a signed,
noncancellable license agreement with the customer; the license fee is fixed and
determinable; Optio can objectively allocate the total fee among all elements of
the arrangement; and the collection of the license fee is probable.
Revenue from services, maintenance and other includes fees for
consulting, implementation, training and technical support. Optio recognizes
revenue from services as they are performed. Revenue from maintenance is
recognized ratably over the term of the contract with the customer, typically
one year.
COSTS OF REVENUE. Costs of revenue from license fees consist of costs
relating to the manufacturing, packaging and distribution of software and
related documentation and third party license and referral fees. Costs of
revenue from services, maintenance and other consists of personnel and direct
expenses relating to the cost of providing consulting, implementation, training,
technical support and allocable overhead. Costs of revenue from services,
maintenance and other will vary depending on the mix of services Optio provides
among consulting, implementation, training and support.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
sales and marketing personnel compensation and benefits, direct expenditures
such as travel, trade shows, direct mail, online marketing, advertising and
promotion and allocable overhead.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of
27
salaries, benefits, equipment and allocable overhead for software engineers,
pre-production quality assurance personnel, program managers and technical
writers. Research and development expenses also include expenses associated with
independent contractors Optio uses to augment its research and development
efforts. Research and development expenses relate to activities performed prior
to commercial production of a product. To date Optio has not capitalized any
development costs because Optio's short development cycle has historically
resulted in only immaterial amounts of development costs that were eligible for
capitalization.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries, benefits and related costs for executive, finance,
administrative and human resource functions. General and administrative expenses
also include legal, other professional fees and allocable overhead.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
consist of depreciation of property and equipment and amortization of intangible
assets related to acquisitions.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. Optio recorded deferred
compensation of $373,000 during the year ended January 31, 2000 in connection
with grants of employee share purchase options with exercise prices lower than
the deemed fair market value of Optio's common shares on the date of grant.
Optio is amortizing this amount over the period in which the options vest,
generally three to four years. Optio recognized $77,000 in compensation expense
in the year ended January 31, 2000 and currently expects to recognize $115,000,
$115,000, $61,000, and $5,000 in the years ending January 31, 2001, 2002, 2003
and 2004, respectively.
As a professional sales and value-added services organization, the
Company responds to the product opportunities and service demands from its
clients. Accordingly, the Company has limited control over the timing and
circumstances under which its products and services are provided. Therefore, the
Company can experience volatility in its operating results from quarter to
quarter and year to year. The operating results for any quarter or year are not
necessarily indicative of the results for any future periods.
28
RESULTS OF OPERATIONS
REVENUES
The following table sets forth certain items from Optio's statements of
operations as a percentage of total revenue for the periods indicated.
1998 1999 2000
------ ------ ------
Year Ended January 31,
----------------------
Revenue:
License fees........................................................................ 67% 61% 52%
Services, maintenance and other..................................................... 33 39 48
--- --- ---
Total revenue.................................................................. 100 100 100
Costs of revenue:
License fees........................................................................ 8 5 3
Services, maintenance and other..................................................... 16 21 24
--- --- ---
Total cost of revenue.......................................................... 24 26 27
--- --- ---
Gross profit.............................................................................. 76 74 73
Operating expenses:
Sales and marketing................................................................. 44 38 36
Research and development............................................................ 11 13 11
General and administrative.......................................................... 14 15 12
Depreciation and amortization....................................................... 6 5 4
--- --- ---
Total operating expenses....................................................... 75 71 63
--- --- ---
Income from operations.................................................................... 1 3 10
Interest and other income................................................................. - (1) 1
--- --- ---
Income before income taxes................................................................ 1 2 11
Income taxes.............................................................................. 1 - 5
--- --- ---
Net income................................................................................ -% 2% 6%
--- --- ---
--- --- ---
Total revenue increased 68% to $32.8 million in 2000 from $19.5 million
in 1999 and 44% to $19.5 million in 1999 from $13.6 million in 1998.
License fee revenue increased 43% to $17.1 million in 2000 from $12.0
million in 1999 and 31% to $12.0 million in 1999 from $9.2 million in 1998.
License fee revenue grew significantly from 1999 to 2000 due to the
following factors:
- growing market acceptance of Optio's software;
- continued expansion of Optio's sales and marketing
organization from 56 employees in 1999 to 76 employees in
2000;
- the introduction of Optio's e.ComPresent software in
September 1999;
29
- Optio's growth in the European market; and
- Optio's expansion into the Asian Pacific market in May 1999.
Optio's foreign operations generated revenue from licenses and services
to customers of $4.2 million in the year ended January 31, 2000, representing
13% of total revenue compared to revenue of $986,000 in the year ended January
31, 1999, representing 5% of total revenue.
License revenue increased from 1998 to 1999 as a result of greater
market acceptance of Optio's software, expansion of the sales organization,
introduction of Optio's fax software and Optio's expansion into international
markets through the acquisitions of Optio's European subsidiary in August 1998
and the formation of Optio's United Kingdom subsidiary in November 1998.
Revenue from services, maintenance and other increased 109% to $15.7
million in 2000 from $7.5 million in 1999 and 70% to $7.5 million in 1999 from
$4.4 million in 1998. The increase in revenues from service, maintenance and
other is due to increased sales of software licenses to Optio's customers
resulting in increased implementation, training, and technical support of those
products.
License fee revenue constituted 52%, 61%, and 67% of total revenue in
2000, 1999, and 1998, respectively. Services revenue constituted 33%, 19%, and
16% of total revenue in 2000, 1999 and 1998, respectively. Maintenance revenue
constituted 15%, 19%, and 15% of total revenue in 2000, 1999, and 1998,
respectively. The sales mix shift towards services revenue was due to an
increased focus by management on the marketing of services to Optio's customers
who have purchased software licenses as an additional source of revenue. In
addition, as Optio's products have become more sophisticated, additional
consulting services and training is required, thus increasing services revenue
as a percentage of total revenue.
COSTS OF REVENUE
Costs of revenue from license fees increased 7% to $980,000 in 2000
from $913,000 in 1999 and decreased 16% to $913,000 in 1999 from $1.1 million in
1998. The increase in costs of revenue from license fees in 2000 was the result
of increased referral fees paid to third party vendors associated with the
increase in license revenue. These fees increased from $602,000 in 1999 to
$718,000 in 2000. However, costs of revenue from licenses decreased as a
percentage of license revenue from 8% in 1999 to 6% in 2000. This was the result
of fewer partner software license sales requiring a referral fee. The decrease
in costs of revenue from license fees during 1999 was primarily attributable to
a decrease in the total referral fees paid to third party vendors to $602,000 in
1999 from $826,000 in 1998, as Optio received a higher percentage of referrals
from third party vendors entitled to referral fees at lower rates. Costs of
revenue from license fees represented 6% of total license revenue in 2000, 8% in
1999, and 12% in 1998.
Costs of revenue from services and maintenance increased 96% to $8.0
million in 2000 from $4.1 million in 1999 and 85% to $4.1 million in 1999 from
$2.2 million in 1998. The increase was due to improved training and scheduling
of internal staff and an increase in the number of personnel
30
providing consulting, training and technical support to customers, both directly
and via subcontract, in an effort to fulfill the obligations associated with the
increased services and maintenance revenue over these periods. Costs of revenue
from services and maintenance represented 51%, 54%, and 50% of total service and
maintenance revenue in 2000, 1999 and 1998, respectively.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses increased 58% to
$11.9 million in 2000 from $7.5 million in 1999 and 28% to $7.5 million in 1999
from $5.9 million in 1998. The increase in 2000 was primarily due to additional
hiring to support Optio's expansion of both its North American and international
operations and Optio's expansion of its product base to include Optio's
e.ComSeries. The increase in sales and marketing expenses in 1999 was due to
additional hiring as Optio expanded its sales and marketing operations. The
associated headcount in sales and marketing was 76, 60, and 46 for the years
2000, 1999 and 1998, respectively. Sales and marketing expenses represented 36%
of total revenue in 2000, 38% in 1999, and 44% in 1998.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
41% to $3.6 million in 2000 from $2.5 million in 1999 and 63% to $2.5 million in
1999 from $1.6 million in 1998. The growth in research and development expenses
was due to additional hiring of research and development personnel to assist in
the development of Optio's e.ComSeries of products and other e-business
development efforts in 2000 and Optio's fax product in 1999. Research and
development expenses represented 11%, 13%, and 11% of total revenue in 2000,
1999 and 1998, respectively. Management expects to continue to significantly
increase research and development expenditures with a particular emphasis on
projects related to expanding Optio's e-business effort.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased 33% to $3.8 million in 2000 and increased 53% to $2.9 million in 1999
from $1.9 million in 1998. The increase in general and administrative expenses
was the result of increased costs associated with the growth of Optio's business
during these periods, including increased hiring of administrative personnel, as
well as a $700,000 non-recurring charge in 1999 due to a stock repurchase.
General and administrative expenses represented 12%, 15%, and 14% total revenue
in 2000, 1999 and 1998, respectively.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased 30% to $1.2 million in 2000 and increased 17% to $941,000 in 1999 from
$806,000 in 1998. The increase was principally due to an increase of $94,000 in
2000 and $49,000 in 1999 in the amortization of intangible assets from
acquisitions and an increase of $192,000 in 2000 and $86,000 in 1999 in
depreciation due to increased capital expenditures. Depreciation and
amortization expenses represented 4%, 5%, and 6% of total revenue in 2000, 1999
and 1998, respectively.
31
INTEREST AND OTHER INCOME (LOSS)
Interest and other income increased to $234,000 in 2000 from a loss of
$199,000 in 1999 and declined to a loss of $199,000 in 1999 from a loss of
$37,000 in 1998. The increase in 2000 was due to a combination of increased
interest income resulting from the investment of the $47.0 million net proceeds
of Optio's initial public offering and a decrease in interest expense due to the
pay-off of notes payable to related parties with the proceeds of the initial
public offering. The principal reason for the decline in 1999 was $173,000 of
additional interest expense associated with indebtedness relating to Optio's
stock repurchase in January 1999.
INCOME TAXES
Income tax expense increased 1,517% to $1.6 million in 2000 from
$99,000 in 1999 and 55% to $99,000 in 1999 from $64,000 in 1998. The effective
tax rates for the years ended 2000, 1999, and 1998 were 45%, 22%, and 74%,
respectively. For fiscal year 2000, the costs related to the expansion into the
Asian Pacific market were non-deductible. This was the primary contributing
factor of the 45% tax rate for fiscal year 2000. The 22% effective tax rate for
fiscal 1999 is principally the result of the benefit of a relatively high level
of research and development credits compared to the level of pretax income. The
74% effective tax rate for fiscal 1998 is principally the result of the impact
of non-deductible expenses in relation to the low level of pretax income.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, Optio has primarily financed its operations and met
its capital expenditure requirements through cash flows from operations and
short and long-term borrowings. At January 31, 2000 and 1999 Optio had $46.8 and
$1.1 million, respectively, of cash and cash equivalents.
The following table sets forth certain selected statements of cash flow
information for the periods presented:
Year Ended January 31,
--------------------------------------------------
1998 1999 2000
----------- ----------- -----------
Net cash provided by operations $ 1,149,000 $ 3,062,000 $ 1,847,000
Net cash used in investing activities (578,000) (1,451,000) (1,196,000)
Net cash provided by (used in) financing activities (710,000) (2,022,000) 45,037,000
Net increase (decrease) in cash and cash
equivalents (139,000) (378,000) 45,697,000
Cash provided by operating activities for 2000 resulted primarily
from net income of $2.0 million, non-cash charges of $1.1 million, and
changes in working capital which resulted in a $1.7 million use of cash. The
major components of such working capital changes were an increase in accrued
expenses of $1.1 million, reduced by an increase in accounts receivable of
$4.1 million. The increase in accrued expenses and accounts payable is
primarily the result of significant growth in the volume of sales and related
business expenses. Investing activities during 2000 consisted primarily of
the purchase of approximately $1.1 million of property and equipment. Cash
flows from financing activities for 2000 included proceeds
32
of approximately $47.0 million from Optio's initial public offering in December
1999, netted with payments of approximately $1.9 million of Optio's debt.
For the year ended January 31, 1999, Optio generated net income of
$350,000. Combined with the adjustments to reconcile net income to cash of
$1.8 million, the effect of an increase in accounts receivable of $2.6
million and an increase in deferred revenue of $3.1 million, operating
activities added $3.0 million to cash flows. Accounts receivable increased as
a result of the revenue increase from 1998 to 1999. Deferred revenue
increased as a result increased service revenue and the timing of these
consulting projects in progress at January 31, 1999, and an increase in the
number of customers on maintenance agreements. Investing activities included
the purchase of $571,000 of fixed assets in the ordinary course of business
and advances to a related party of $525,000. Cash used in financing
activities represented payments of $2.0 million for notes payable to related
parties and capital leases.
For the year ended January 31, 1998, the Optio generated net income of
$22,000. Combined with the adjustments to reconcile net income to cash of $1.0
million, the effect of an increase in accounts receivable of $1.0 million, and
an increase in deferred revenue of $793,000, operating activities added $1.1
million to cash flows. Accounts receivable increased as a result of the revenue
increase from 1997 to 1998. Deferred revenue increased as a result of timing of
consulting projects in progress at January 31, 1998.
Optio has notes payable to related parties as of January 31, 2000 of
$228,000, all of which are payable during the year ended January 31, 2001. Optio
also had a line of credit from Premier Lending Corporation at a rate of prime
plus 1% if the average daily loan balance during the month is greater than $1.0
million, and prime plus 2% if the average daily loan balance during the month is
less than $1.0 million. This line of credit was closed effective April 25, 2000.
At January 31, 2000, there was no outstanding balance under this line of credit.
None of these credit agreements contained any material restrictions on Optio's
ability to make expenditures or dividends or require Optio to maintain any
material financial ratios.
Subsequent to January 31, 2000, Optio consummated the acquisitions of
Muscato Corporation and Translink Solutions Corporation. The purchase price for
the common stock of Muscato Corporation was $20,000,000 in cash and an
additional payment of $8,000,000 to be paid on March 27, 2030, pursuant to
promissory notes. The promissory notes provide for mandatory acceleration of
payments of $4,000,000 to be paid on March 27, 2001 and $4,000,000 to be paid on
March 27, 2002, providing certain provisions are met. The purchase price for the
assets acquired from Translink was $5,000,000 in cash. The cash component of
each purchase price was paid out of the net proceeds of Optio's initial public
offering.
Also subsequent to January 31, 2000, Optio entered into a $10.0 million
line of credit arrangement with First Union National Bank. The line of credit
matures on April 14, 2001. The line of credit bears interest at LIBOR plus
1.75%. This debt instrument is due on April 14, 2001 and is collateralized by
accounts receivable of Optio. The agreement contains customary events of default
and a number of customary covenants including certain financial ratios and
restrictions on dividends.
33
Management believes that the net proceeds from the initial public
offering in December 1999, together with the line of credit, existing cash and
cash equivalents and future funds generated from operations will provide
adequate cash to fund its anticipated cash needs at least through the next
twelve months. To the extent that these amounts are insufficient, we will be
required to raise additional funds through equity or debt financing. There can
be no assurance that we will be able to raise additional funds on favorable
terms, or at all.
YEAR 2000 READINESS
Optio spent considerable internal and external resources from 1997
through 1999 preparing for the "Year 2000" computer issue. The Year 2000 issue
relates to the ability of a computer system to properly process data beginning
on January 1, 2000. The Company's efforts were spent to ensure that its computer
products were "Year 2000 Ready," as defined, and that its internal core
information technology (IT) and non-IT systems were Year 2000 Ready.
Optio believes it successfully implemented its Year 2000 program, as
evidenced by the continued successful operations of its computer products and
core internal IT and non-IT systems. Optio has not encountered significant
problems with its third-party customers, financial institutions, vendors and
others with whom it conducts business. Optio will continue to monitor its
product performance and core IT and non-IT systems throughout 2000 to ensure
ongoing performance. While there can be no assurance that no Year 2000 related
issues will arise, as of January 31, 2000, management believes, based on
information currently available, that Year 2000-related events are not likely to
have a material effect on Optio's results of operation, financial condition or
liquidity.
Optio did not separately track expenditures to achieve Year 2000
readiness. Those expenditures were absorbed within the development organization.
To date, costs related to Year 2000 readiness have not been material relative to
Optio's overall development expenditures. Furthermore, based on Optio's
experience to date, Optio does not anticipate that costs associated with
remediating non-compliant products or internal systems will be material.
Despite the measures Optio is taking, Optio cannot assure you that the
Year 2000 issues will not be discovered in Optio's software or internal software
systems. If Year 2000 issues are discovered, Optio cannot assure you that its
contingency plan will be adequate to deal with them effectively, or that the
costs of making Optio's software and systems Year 2000 ready will not have a
material adverse effect on its business, operating results and financial
condition. Although Optio has not been a party to any litigation or arbitration
proceeding to date involving its software or services related to Year 2000
compliance issues, there can be no assurance that Optio will not in the future
be required to defend its software or services in such proceedings, or to
negotiate resolutions of claims based on Year 2000 issues. The costs of
defending and resolving Year 2000-related disputes, regardless of the merits of
such disputes, would harm Optio's business.
34
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the AICPA issued Statement of Position 98-4, DEFERRAL OF
THE EFFECTIVE DATE OF A PROVISION OF SOP 97-2, SOFTWARE REVENUE RECOGNITION,
which delayed for one year the effective date of the provisions within SOP 97-2
that set forth the definition of "vendor-specific objective evidence" of fair
value. In December 1998, the AICPA issued Statement of Position 98-9 ("SOP
98-9"), MODIFICATION OF SOP 97-2, SOFTWARE REVENUE RECOGNITION, WITH RESPECT TO
CERTAIN TRANSACTIONS." SOP 98-9 extended the effective date to apply the
definition of "vendor-specific objective fair evidence" of fair value under SOP
97-2 through fiscal years beginning on or before March 15, 1999 and introduced
the requirement to recognize revenue using the "residual method" to value
delivered elements of multiple-element contracts under certain circumstances.
The provisions of SOP 98-9 have been adopted by the Company effective February
1, 2000, which did not have a material effect on the Company's financial
position or results of operations.
In 1997, the Financial Accounting Standards Board issued SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("SFAS
131"). The Company adopted SFAS 131 effective February 1, 1998. The Company has
made the financial statement disclosures necessary to conform to SFAS 131, which
has had no impact on the Company's financial position or results of operations.
In 1998, the AICPA issued Statement of Position 98-1, ACCOUNTING FOR
THE COSTS OF COMPUTER SOFTWARE DEVELOPMENT OR OBTAINED FOR INTERNAL USE ("SOP
98-1"). The Company adopted SOP 98-1 effective February 1, 1999. The adoption of
this standard did not have a material effect on the Company's financial position
or results of operations.
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which established
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure these instruments at fair value.
SFAS No. 133 is expected to be effective for the Company's fiscal year beginning
February 1, 2001. The Company is currently evaluating what impact, if any, SFAS
No. 133 may have on its consolidated financial statements.
On December 3, 1999, the SEC issued Staff Accounting Bulletin No. 101,
REVENUE RECOGNITION IN FINANCIAL STATEMENTS, or SAB 101. SAB 101 summarizes
specific areas of the Staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements and will be adopted
by Optio on May 1, 2000. Management believes that its current revenue
recognition principles comply with SAB 101.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Optio provides its services to customers primarily in the United States
and, to a lesser extent, in Europe and elsewhere throughout the world. As a
result, Optio's financial results could be affected by factors, such as changes
in foreign currency exchange rates or weak economic conditions in foreign
markets. All sales are currently made in both U.S. dollars and local currencies.
A strengthening of the U.S. dollar or the weakening of these local currencies
could make Optio's
35
products less competitive in foreign markets. Optio's interest income and
expense is sensitive to changes in the general level of U.S. interest rates.
Based on Optio's cash equivalents balance and the nature of its outstanding
debt, Optio believes its exposure to interest rate risk is not material. Optio's
available for sale marketable securities are carried at fair value and subject
to the risks of general market fluctuations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Financial Statements on page F-1. The supplementary data is
included in Part IV, Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The information required by Items 10, 11, 12 and 13 of Part III is
hereby incorporated by reference to the Registrant's Definitive Proxy Statement
on Schedule 14A to be filed not more than 120 days after the year ended January
31, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements - see index on Page F-1 herein.
(a)(2) Schedule II - Valuation and Qualifying Accounts - See
page F-26 herein. Other financial statements and schedules
are not presented because they are either not required or the
information required by statements or schedules is presented
elsewhere.
(a)(3) The exhibits filed as part of this Report as required by
Item 601 of Regulation S-K are included in the Index to
Exhibits included elsewhere in this report.
(b) Reports on Form 8-K.
A Current Report on Form 8-K was filed with the Securities
and Exchange Commission on April 10, 2000, to disclose Optio's acquisition of
Muscato Corporation and Translink Solutions Corporation.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 28th day of
April, 2000.
OPTIO SOFTWARE, INC.
By: /s/ C. Wayne Cape
--------------------------
C. Wayne Cape
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ C. Wayne Cape Chairman of the Board and Chief April 28, 2000
- ------------------------ Executive Officer (Principal
C. Wayne Cape Executive Officer)
/s/ F. Barron Hughes Chief Financial Officer and April 28, 2000
- ------------------------ Secretary (Principal Financial
F. Barron Hughes and Accounting Officer)
/s/ Mitchel Laskey Director April 28, 2000
- ------------------------
Mitchel Laskey
/s/ David Dunn-Rankin Director April 28, 2000
- ------------------------
David Dunn-Rankin
/s/ James Felcyn Director April 28, 2000
- ------------------------
James Felcyn
37
INDEX TO EXHIBITS
Exhibit Description
- ------- -----------
1.1** Form of Underwriting Agreement.
2.1** Stock Purchase Agreement dated as of March 27, 2000, by and among Optio
Software, Inc., Muscato Corporation, the Shareholders of Muscato
Corporation, Michael A. Muscato and Nicholas Muscato.
2.2** Asset Purchase Agreement dated as of March 27, 2000, by and among Optio
Software, Inc., TransLink Solutions Corporation, the Shareholders of
TransLink Solutions Corporation, Michael A. Muscato and Nicholas
Muscato.
2.3** Promissory Note dated March 27, 2000 in the amount of $4,000,000 issued
by the Company to Michael Muscato.
2.4** Promissory Note dated March 27, 2000 in the amount of $2,000,000 issued
by the Company to Nicholas Muscato.
2.5** Promissory Note dated March 27, 2000 in the amount of $2,000,000 issued
by the Company to Brian Newton.
3.1** Amended and Restated Articles of Incorporation of the Registrant.
3.2** Amended and Restated Bylaws of the Registrant.
4.1** See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated
Articles of Incorporation and Amended and Restated Bylaws of the
Registrant defining rights of the holders of Common Stock of the
Registrant.
4.2** Specimen Stock Certificate.
10.1** Optio Software, Inc. Stock Incentive Plan dated as of January 1, 1997.
10.2** Optio Software, Inc. Outside Director Stock Option Plan dated as of
October 13, 1999.
10.3** Lease Agreement by and between Weeks Realty, L.P. and X-Point
Corporation dated March 18, 1996.
10.4** Sublease Agreement by and between HBO & Company and Optio Software,
Inc. dated March 22, 1999.
10.5** Promissory note by and between Optio Software, Inc. and Premier Lending
Corporation dated January 31, 1999.
10.6** Equipment Security Agreement by and between Optio Software, Inc. and
Premier Lending Corporation dated January 31, 1999.
10.7** Security Agreement by and between Optio Software, Inc. and Premier
Lending Corporation dated January 31, 1999.
10.8** Guaranty Agreement by and between Optio Software, Inc. and Premier
Lending Corporation dated January 31, 1999.
10.9** Promissory note by and between Optio Software, Inc. and David
Dunn-Rankin dated October 13, 1999.
10.10** Stock Option Pledge and Security Agreement by and between Optio
Software, Inc. and David Dunn-Rankin dated October 13, 1999.
10.11** Promissory note by and between Optio Software, Inc. and C. Wayne Cape
dated December 31, 1998.
10.12 Credit Agreement dated as of April 14, 2000, by and among Optio
Software, Inc., as Borrower, and First Union Nation Bank, as Lender.
21.1 List of Subsidiaries.
23.2** Consent of Morris, Manning & Martin (included in Exhibit 5.1).
24.1** Powers of Attorney (included on signature page).
27.1 Financial Data Schedule.
99.1** Consent of James J. Felcyn, Jr.
99.2** Consent of Port Huron Hospital.
99.3** Consent of Schlumberger, Ltd.
99.4** Consent of The Home Depot, Inc.
99.5** Consent of AMR Research, Inc.
38
99.6** Consent of International Data Corporation.
99.7** Press Release concerning the Acquisition of Muscato Corporation and
TransLink Solutions Corporation.
99.8 Safe Harbor Compliance Statement for Forward-Looking Statements
- ----------
** Filed as an Exhibit to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-89181) filed with the Commission on
October 15, 1999, as amended and incorporated herein by reference.
39
Optio Software, Inc.
Index to Financial Statements
Page
Number
Report of Independent Auditors.................................................. F-2
Consolidated Balance Sheets as of January 31, 1999 and 2000..................... F-3
Consolidated Statements of Income for the years ended January 31, 1998,
1999, and 2000............................................................... F-4
Consolidated Statements of Shareholders' Equity for the
years ended January 31, 1998, 1999, and 2000................................. F-5
Consolidated Statements of Cash Flows for the years ended January 31, 1998,
1999 and 2000................................................................ F-6
Notes to Consolidated Financial Statements...................................... F-7
F-1
Report of Independent Auditors
The Board of Directors and Shareholders
Optio Software, Inc.
We have audited the accompanying consolidated balance sheets of Optio
Software, Inc. as of January 31, 1999 and 2000, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended January 31, 2000. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Optio
Software, Inc. at January 31, 1999 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
January 31, 2000 in conformity with accounting principles generally accepted in
the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly, in all material respects the information set forth
therein.
Ernst & Young LLP
February 25, 2000, except for Note 15, as to
which the date is April 14, 2000
Atlanta, Georgia
F-2
OPTIO SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
January 31,
----------------------------
1999 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,129,000 $ 46,826,000
Marketable securities 372,000 386,000
Accounts receivable, less allowance for doubtful accounts of $118,000 and 5,691,000 9,268,000
$286,000, respectively
Prepaid expenses and other current assets 239,000 670,000
Income tax receivable 171,000 --
Deferred income taxes 175,000 229,000
------------ ------------
Total current assets 7,777,000 57,379,000
Property and equipment:
Property and equipment 1,886,000 2,990,000
Accumulated depreciation (833,000) (1,472,000)
------------ ------------
1,053,000 1,518,000
Other assets:
Notes receivable from related party 525,000 600,000
Note receivable and advances to shareholders 116,000 120,000
Deferred income taxes 297,000 495,000
Intangible assets, net of accumulated amortization of $919,000 and $176,000, 872,000 400,000
respectively
Other 98,000 130,000
============ ============
Total assets $ 10,738,000 $ 60,642,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Accounts payable $ 696,000 $ 1,388,000
Accrued expenses 1,860,000 2,986,000
Income taxes payable -- 452,000
Current portion of notes payable to related parties 913,000 228,000
Current portion of capital lease obligations 45,000 45,000
Deferred revenue 5,913,000 6,332,000
------------ ------------
Total current liabilities 9,427,000 11,431,000
Notes payable to related parties, less current portion 1,124,000 --
Capital lease obligations, less current portion 84,000 38,000
Deferred revenue 94,000 174,000
Shareholders' equity:
Preferred stock, no par value; 20,000,000 shares authorized, none issued or -- --
outstanding
Common stock, no par value: 100,000,000 shares authorized; 11,918,640 and
17,133,640 shares issued and outstanding, respectively 1,033,000 48,362,000
(Accumulated deficit) retained earnings (1,071,000) 921,000
Accumulated other comprehensive income 47,000 12,000
Unamortized stock compensation -- (296,000)
------------ ------------
Total shareholders' equity 9,000 48,999,000
============ ============
Total liabilities and shareholders' equity $ 10,738,000 $ 60,642,000
============ ============
SEE ACCOMPANYING NOTES.
F-3
Optio Software, Inc.
Consolidated Statements of Income
YEAR ENDED JANUARY 31,
---------------------------------------------
1998 1999 2000
------------ ------------ ------------
Revenue:
License fees $ 9,150,000 $ 12,014,000 $ 17,114,000
Services, maintenance, and other 4,419,000 7,525,000 15,719,000
------------ ------------ ------------
13,569,000 19,539,000 32,833,000
Cost of revenue:
License fees 1,088,000 913,000 980,000
Services, maintenance, and other 2,214,000 4,089,000 7,997,000
------------ ------------ ------------
3,302,000 5,002,000 8,977,000
------------ ------------ ------------
10,267,000 14,537,000 23,856,000
Operating expenses:
Sales and marketing 5,901,000 7,534,000 11,863,000
Research and development 1,551,000 2,530,000 3,559,000
General and administrative 1,886,000 2,884,000 3,848,000
Depreciation and amortization 806,000 941,000 1,227,000
------------ ------------ ------------
10,144,000 13,889,000 20,497,000
------------ ------------ ------------
Income from operations 123,000 648,000 3,359,000
Other income (expense):
Interest income 32,000 104,000 363,000
Interest expense (77,000) (257,000) (120,000)
Other 8,000 (46,000) (9,000)
------------ ------------ ------------
(37,000) (199,000) 234,000
------------ ------------ ------------
Income before income taxes 86,000 449,000 3,593,000
Income tax expense 64,000 99,000 1,601,000
------------ ------------ ------------
Net income $ 22,000 $ 350,000 $ 1,992,000
============ ============ ============
Net income per share-basic $ 0.00 $ 0.03 $ 0.16
============ ============ ============
Net income per share-diluted $ 0.00 $ 0.02 $ 0.10
============ ============ ============
Weighted average shares outstanding - basic 12,890,904 12,824,532 12,586,037
============ ============ ============
Weighted average shares outstanding - diluted 16,423,952 17,304,829 20,441,759
============ ============ ============
SEE ACCOMPANYING NOTES.
F-4
Optio Software, Inc.
Consolidated Statements of Shareholders' Equity
ACCUMULATED OTHER
COMMON STOCK RETAINED EARNINGS COMPREHENSIVE
----------------------- (ACCUMULATED (LOSS)
SHARES AMOUNT DEFICIT) INCOME
-------------------------------------------------------------
Balance at February 1, 1997 12,430,230 $ 404,000 $ 931,000 $ (15,000)
Comprehensive income (loss), net of tax:
Net income -- -- 22,000 --
Unrealized loss on marketable securities available for sale -- -- -- (18,000)
Comprehensive income
Issuance of common stock 500,000 300,000 -- --
---------- ------------ ------------ ------------
Balance at January 31, 1998 12,930,230 704,000 953,000 (33,000)
Comprehensive income, net of tax:
Net income -- -- 350,000 --
Foreign currency translation adjustment -- -- -- 1,000
Unrealized gain on marketable securities available for sale -- -- -- 79,000
Comprehensive income
Issuance of common stock:
Acquisition of business 200,000 160,000 -- --
Exercise of stock options and related tax benefit 500,000 301,000 -- --
Issuance to employee 10,000 15,000 -- --
Purchase and retirement of common stock (1,721,590) (147,000) (2,374,000) --
---------- ------------ ------------ ------------
Balance at January 31, 1999 11,918,640 1,033,000 (1,071,000) 47,000
Comprehensive income, net of tax:
Net income -- -- 1,992,000 --
Foreign currency translation adjustment -- -- -- (40,000)
Unrealized gain on marketable securities available for sale -- -- -- 5,000
Comprehensive income
Issuance of common stock in initial public
offering, net of issuance costs of $5,194,000 5,215,000 46,956,000 -- --
Compensation related to stock option grants -- 373,000 -- --
---------- ------------ ------------ ------------
Balance at January 31, 2000 17,133,640 $ 48,362,000 $ 921,000 $ 12,000
========== ============ ============ ============
UNAMORTIZED
STOCK TOTAL SHAREHOLDERS'
COMPENSATION EQUITY
----------------------------------
Balance at February 1, 1997 $ -- $ 1,320,000
Comprehensive income (loss), net of tax:
Net income -- 22,000
Unrealized loss on marketable securities available for sale -- (18,000)
------------
Comprehensive income 4,000
Issuance of common stock -- 300,000
---------- ------------
Balance at January 31, 1998 -- 1,624,000
Comprehensive income, net of tax:
Net income -- 350,000
Foreign currency translation adjustment -- 1,000
Unrealized gain on marketable securities available for sale -- 79,000
------------
Comprehensive income 430,000
Issuance of common stock:
Acquisition of business -- 160,000
Exercise of stock options and related tax benefit -- 301,000
Issuance to employee -- 15,000
Purchase and retirement of common stock -- (2,521,000)
---------- ------------
Balance at January 31, 1999 -- 9,000
Comprehensive income, net of tax:
Net income -- 1,992,000
Foreign currency translation adjustment -- (40,000)
Unrealized gain on marketable securities available for sale -- 5,000
------------
Comprehensive income 1,957,000
Issuance of common stock in initial public
offering, net of issuance costs of $5,194,000 -- 46,956,000
Compensation related to stock option grants (296,000) 77,000
---------- ------------
Balance at January 31, 2000 $ (296,000) $ 48,999,000
========== ============
SEE ACCOMPANYING NOTES.
F-5
Optio Software, Inc.
Consolidated Statements of Cash Flows
YEAR ENDED JANUARY 31,
--------------------------------------------
1998 1999 2000
------------ ------------ ------------
OPERATING ACTIVITIES
Net income $ 22,000 $ 350,000 $ 1,992,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 366,000 457,000 649,000
Amortization of intangible assets 440,000 484,000 578,000
Provision for doubtful accounts 373,000 227,000 473,000
Gain on sale of marketable securities -- (55,000) (18,000)
Loss on sale of property and equipment -- -- 1,000
Non-cash compensation and interest -- 888,000 77,000
Deferred income taxes (225,000) (199,000) (255,000)
Change in assets and liabilities:
Accounts receivable (1,028,000) (2,581,000) (4,138,000)
Prepaid expenses and other assets 67,000 (116,000) (533,000)
Accounts payable (36,000) (156,000) 714,000
Accrued expenses 125,000 742,000 1,141,000
Income taxes payable 252,000 (115,000) 629,000
Deferred revenue 793,000 3,136,000 537,000
------------ ------------ ------------
Net cash provided by operating activities 1,149,000 3,062,000 1,847,000
INVESTING ACTIVITIES
Purchase of marketable securities (27,000) (302,000) (176,000)
Proceeds from sale of marketable securities -- 166,000 188,000
Purchases of property and equipment (544,000) (571,000) (1,135,000)
Proceeds from sale of property and equipment -- -- 6,000
Advances to shareholders (7,000) 4,000 (4,000)
Advances to related party -- (525,000) (75,000)
Acquisition of business, net of cash acquired -- (223,000) --
------------ ------------ ------------
Net cash used in investing activities (578,000) (1,451,000) (1,196,000)
FINANCING ACTIVITIES
Payments of notes payable to related parties and capital
lease obligations (710,000) (2,028,000) (1,919,000)
Proceeds from exercise of stock options -- 1,000 --
Issuance of common stock -- -- 46,956,000
Other -- 5,000 --
------------ ------------ ------------
Net cash (used in) provided by financing activities (710,000) (2,022,000) 45,037,000
Impact of foreign currency rate fluctuations on cash -- 33,000 9,000
Net (decrease) increase in cash and cash equivalents (139,000) (378,000) 45,697,000
Cash and cash equivalents at beginning of year 1,646,000 1,507,000 1,129,000
------------ ------------ ------------
Cash and cash equivalents at end of year $ 1,507,000 $ 1,129,000 $ 46,826,000
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 48,000 $ 221,000 $ 122,000
============ ============ ============
Cash paid for income taxes $ 127,000 $ 416,000 $ 1,037,000
============ ============ ============
SEE ACCOMPANYING NOTES.
F-6
Optio Software, Inc.
Notes to Consolidated Financial Statements
JANUARY 31, 2000
1. DESCRIPTION OF BUSINESS
Optio Software, Inc. (the "Company") is engaged primarily in the
development, sale and support of document customization software to companies
located principally in the United States and Europe. The industry in which the
Company operates is subject to rapid change due to development of new
technologies and products. Effective March 11, 1997, the Company changed its
name from Xpoint Corporation to Optio Software, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's French, British, and
Australian subsidiaries have been translated into United States dollars in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 52,
FOREIGN CURRENCY TRANSLATION, which generally provides for the use of current
exchange rates in translating financial statements. The foreign currency
translation adjustment is included in shareholders' equity.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company typically recognizes software license fee revenue from
sales to end users as well as from sales to resellers and distributors upon
delivery when there is persuasive evidence of an arrangement, the fee is fixed
and determinable and collection of the license fee is probable. For sales to
resellers and distributors, products are delivered either directly to the end
user or to the
F-7
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reseller when the reseller has an identified end user. No customers have the
right to return products purchased. When contracts requiring significant
production, modification or customization are entered into, contract revenue is
recognized on a percentage of completion basis using actual costs incurred as a
percentage of expected total costs. Revenue from maintenance contracts is
recognized on a pro-rata basis over the term of each contract, and revenue from
other services, principally training, is recognized as the services are
performed. Deferred revenue represents payments received in advance of
recognizing the related revenue.
Prior to February 1, 1998, the Company recognized revenue in accordance
with the American Institute of Certified Public Accountants ("AICPA") Statement
of Position 91-1, SOFTWARE REVENUE RECOGNITION ("SOP 91-1"). In October 1997 the
AICPA issued Statement of Position 97-2, SOFTWARE REVENUE RECOGNITION ("SOP
97-2"), which superseded SOP 91-1, to clarify guidance on applying generally
accepted accounting principles to software transactions and to provide guidance
on when revenue should be recognized and in what amounts for licensing, selling,
leasing, or otherwise marketing computer software. Effective February 1, 1998,
the Company adopted SOP 97-2, as amended by Statement of Position 98-4, DEFERRAL
OF THE EFFECTIVE DATE OF CERTAIN PROVISIONS OF SOP 97-2. Such adoption did not
have a material effect on the Company's methods of recognizing revenue.
ADVERTISING COSTS
Advertising costs are expensed in the period incurred. Total
advertising expense amounted to approximately $887,000, $1,147,000, and
$1,413,000 during the years ended January 31, 1998, 1999 and 2000, respectively.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Cash equivalents at
January 31, 2000 consists primarily of investments in commercial paper totaling
$40,146,000, and mature in three months or less. The carrying amounts of the
Company's investments in commercial paper approximate their fair values due to
the short maturities of these instruments.
MARKETABLE SECURITIES
The Company's investments in marketable securities are classified as
available-for-sale and are carried at fair value. Unrealized holding gains and
losses on these investments are reported as a separate component of accumulated
other comprehensive income, which is included in shareholders' equity, and are
not reported in earnings until realized or until a decline in fair value below
cost is deemed to be other than temporary. The aggregate costs of marketable
securities held as of January 31, 1999 and 2000 are $297,000 and $305,000,
respectively.
F-8
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation expense is
calculated over the estimated useful lives of the related assets (generally
three to seven years) using the straight-line method for financial reporting
purposes and accelerated methods for income tax purposes. Amortization of assets
recorded under capital leases is included in depreciation expense.
Property and equipment at January 31, 1999 and 2000 consisted of the
following:
JANUARY 31,
--------------------------
1999 2000
----------- -----------
Equipment $ 1,159,000 $ 1,820,000
Furniture and fixtures 242,000 439,000
Purchased software 401,000 559,000
Leasehold improvements 84,000 172,000
----------- -----------
1,886,000 2,990,000
Less accumulated depreciation (833,000) (1,472,000)
----------- -----------
Net property and equipment $ 1,053,000 $ 1,518,000
=========== ===========
INTANGIBLE ASSETS
Intangible assets represent the excess of cost over the fair value of
net tangible assets acquired and include goodwill and other intangible assets,
principally the value of an existing customer base acquired. Intangible assets
are being amortized using the straight-line method over periods of three to five
years for goodwill and three years for other intangible assets.
LONG-LIVED ASSETS
The Company continually monitors events and changes in circumstances
that would indicate the carrying amounts of property, equipment and intangible
assets may not be recoverable. When such events or changes in circumstances are
present, the Company assesses the recoverability of the respective asset by
determining whether the carrying value of such asset will be recovered through
undiscounted expected future cash flows. Should the Company determine that the
carrying values of the respective assets are not recoverable, the Company would
record a charge to reduce the carrying values of such assets to their fair
values.
F-9
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for tax purposes. Such amounts are
measured using enacted tax rates and laws that are expected to be in effect when
the differences reverse.
EMPLOYEE STOCK OPTIONS
The Company accounts for stock based awards using the intrinsic
value method under Accounting Principles Board Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES ("APB 25") and related interpretations. The pro
forma effect on the accompanying consolidated statements of income of
applying the fair value method under SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION ("SFAS 123"), is presented in Note 8.
NON-CASH TRANSACTIONS
Non-cash investing activities during the year ended January 31, 2000
included the issuance of debt in the amount of $89,000 in accordance with the
purchase agreement of Competence Software Europe, S.A. The agreement called for
additional amounts as part of the purchase price if certain aggregate gross
revenue thresholds were met. The additional $89,000 to be paid under the
agreement was charged to goodwill.
COMPREHENSIVE INCOME
As of February 1, 1998, the Company adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME ("SFAS 130"). SFAS 130 establishes new rules for the
reporting and display of comprehensive income and its components; however, the
adoption of this statement had no impact on the Company's net income or
shareholders' equity. SFAS 130 requires unrealized gains or losses on the
Company's available-for-sale securities and the foreign currency translation
adjustments, which prior to adoption were reported separately in shareholders'
equity, to be included in other comprehensive income. The consolidated financial
statements for the year ended January 31, 1998 have been reclassified to conform
to the requirements of Statement 130. Unrealized gains on marketable securities
as of January 31, 1999 and 2000 are net of income taxes of $28,000 and $31,000,
respectively.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the AICPA issued Statement of Position 98-4, DEFERRAL OF
THE EFFECTIVE DATE OF A PROVISION OF SOP 97-2, SOFTWARE REVENUE RECOGNITION,
which delayed for one year the effective date of the provisions within SOP 97-2
that set forth the definition of "vendor-specific objective
F-10
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
evidence" of fair value. In December 1998, the AICPA issued Statement of
Position 98-9 ("SOP 98-9"), MODIFICATION OF SOP 97-2, SOFTWARE REVENUE
RECOGNITION, WITH RESPECT TO CERTAIN TRANSACTIONS." SOP 98-9 extended the
effective date to apply the definition of "vendor-specific objective fair
evidence" of fair value under SOP 97-2 through fiscal years beginning on or
before March 15, 1999 and introduced the requirement to recognize revenue using
the "residual method" to value delivered elements of multiple-element contracts
under certain circumstances. The provisions of SOP 98-9 have been adopted by the
Company effective February 1, 2000, which did not have a material effect on the
Company's financial position or results of operations.
In 1997, the Financial Accounting Standards Board issued SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("SFAS
131"). The Company adopted SFAS 131 effective February 1, 1998. The Company has
made the financial statement disclosures necessary to conform to SFAS 131, which
has had no impact on the Company's financial position or results of operations.
In 1998, the AICPA issued Statement of Position 98-1, ACCOUNTING FOR
THE COSTS OF COMPUTER SOFTWARE DEVELOPMENT OR OBTAINED FOR INTERNAL USE ("SOP
98-1"). The Company adopted SOP 98-1 effective February 1, 1999. The adoption of
this standard did not have a material effect on the Company's financial position
or results of operations.
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS 133"), which
established accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure these instruments
at fair value. SFAS 133 is expected to be effective for the Company's fiscal
year beginning February 1, 2001. The Company is currently evaluating what
impact, if any, SFAS 133 may have on its consolidated financial statements.
On December 3, 1999, the SEC issued Staff Accounting Bulletin No. 101,
REVENUE RECOGNITION IN FINANCIAL STATEMENTS, or SAB 101. SAB 101 summarizes
specific areas of the Staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements and will be adopted
by the Company on May 1, 2000. Management believes that its current revenue
recognition policies comply with SAB 101.
3. FINANCIAL INSTRUMENTS
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash and cash
equivalents, marketable securities, trade accounts receivable, and notes
receivable from a related party.
F-11
3. FINANCIAL INSTRUMENTS (CONTINUED)
The Company maintains cash and cash equivalents at various financial
institutions. Company policy is designed to limit exposure at any one
institution. The Company performs periodic evaluations of the relative credit
standing of those financial institutions which are considered in the Company's
investment strategy. Cash equivalents at January 31, 2000 of $40,146,000
represented investments in the commercial paper of a large U.S. company and a
Federal Home Loan Bank Discount Note.
Concentrations of credit risk with respect to trade accounts receivable
are limited due to the large number of entities comprising the Company's
customer base. The Company performs periodic credit evaluations of its
customers' financial condition and generally does not require collateral.
Receivables generally are due within 30 days, and management records estimates
of expected credit losses and returns of products sold. Bad debt expense for the
years ended January 31, 1998, 1999, and 2000 amounted to $377,000, $227,000 and
$473,000, respectively. Credit risk with respect to the note receivable from
related party is limited as the note is secured by options to purchase 500,000
shares of the Company's common stock.
FAIR VALUES
The carrying amounts reported in the consolidated balance sheets for
cash and cash equivalents, accounts receivable, notes receivable from a related
party, accounts payable and long-term debt approximate their fair value. The
fair values of marketable equity securities are based on quoted market prices.
F-12
4. NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties consisted of the following:
JANUARY 31,
-----------------------
1999 2000
---------- ----------
Note payable to a shareholder resulting for the purchase of Devcom Mid-America,
Inc. (see Note 10), in the original amount of $379,000 due in monthly
installments of $11,000 including interest at 10%,
through February 2000 $ 141,000 $ 11,000
Notes payable to a shareholder and employee for the purchase of Competence
Software Europe, S.A. (see Note 10) in the original amount of $150,000 due in
two annual payments of $75,000 and accruing interest at 5%. An additional
$89,000 became payable in January 2000 as a result of the achievement of
certain revenue thresholds as defined in the purchase
agreement and is due February 2000 150,000 164,000
Notes payable to three former shareholders and employees for the purchase of
common stock and options to purchase common stock (see Note 9), in the
original amount of $3,283,000, of which $1,612,000 was paid in January 1999,
with the remaining balance due in quarterly installments of $183,000
including interest at 7%, through July 2001. The note was
repaid in December 1999 1,671,000 --
Other notes payable to related parties 75,000 53,000
---------- ----------
2,037,000 228,000
Less current portion 913,000 228,000
---------- ----------
$1,124,000 $ --
========== ==========
5. CAPITAL LEASES AND LINES OF CREDIT
The Company leases telecommunications, computer equipment and vehicles
under capital leases. Assets under capital leases included in property and
equipment are as follows:
JANUARY 31,
-------------------
1999 2000
-------------------
Equipment $215,000 $215,000
Less accumulated amortization 85,000 135,000
-------- --------
$130,000 $ 80,000
======== ========
F-13
5. CAPITAL LEASES AND LINES OF CREDIT (CONTINUED)
Future minimum lease payments under capital leases consist of the following at
January 31, 2000:
2001 $ 53,000
2002 38,000
--------
Total minimum lease payments 91,000
Less amounts representing interest (8,000)
--------
Present value of net minimum lease payments 83,000
Less current portion (45,000)
--------
$ 38,000
========
The Company had a note payable to a bank in the original amount of
$550,000 due in monthly installments of $11,000 including interest at prime rate
plus .75% (9.0% at January 31, 1998), which was fully paid in November 1998. The
note was secured by substantially all assets, and personally guaranteed by the
majority shareholder.
On May 9, 1997, the Company entered into a line of credit with a bank
under which it could borrow up to $1,500,000 subject to certain limitations,
through May 11, 1998. The line bore interest at the prime rate (8.25% at January
31, 1998). As of January 31, 1998, there were no borrowings outstanding under
the line.
On January 31, 1999, the Company entered into a line of credit with a
bank under which it may borrow up to $2,000,000 subject to certain limitations,
through January 31, 2001. This line of credit was closed effective April 25,
2000. The line bore interest at the prime rate plus one to two percent based on
the balance outstanding under the line of credit (9.5% to 10.5% at January 31,
2000). Virtually all assets were pledged as collateral under the line of credit.
As of January 31, 1999 and 2000, there were no borrowings outstanding under the
line.
6. OPERATING LEASES
The Company leases office and warehouse space under operating leases.
Rent expense under the Company's operating leases was approximately $253,000,
$314,000, and $839,000 during the years ended January 31, 1998, 1999, and 2000,
respectively.
F-14
6. OPERATING LEASES (CONTINUED)
Future minimum lease payments under noncancellable operating leases,
with initial terms of at least one year at the time of inception, are as follows
at January 31, 2000:
2001 $1,491,000
2002 1,389,000
2003 1,276,000
2004 1,272,000
2005 1,253,000
Thereafter 2,233,000
----------
$8,914,000
==========
7. INCOME TAXES
The provisions for income taxes are summarized below:
YEAR ENDED JANUARY 31,
1998 1999 2000
-----------------------------------------
Current:
Federal $ 222,000 $ 120,000 $ 1,265,000
State 39,000 44,000 250,000
Foreign 28,000 134,000 341,000
----------- ----------- -----------
289,000 298,000 1,856,000
Deferred:
Federal (202,000) (178,000) (228,000)
State (23,000) (21,000) (27,000)
----------- ----------- -----------
(225,000) (199,000) (255,000)
----------- ----------- -----------
Total $ 64,000 $ 99,000 $ 1,601,000
=========== =========== ===========
F-15
7. INCOME TAXES (CONTINUED)
Pre-tax income attributable to foreign and domestic operations is
summarized below:
YEAR ENDED JANUARY 31,
1998 1999 2000
---------------------------------------
U.S. operations $ 86,000 $ 112,000 $ 3,043,000
French operations -- 337,000 295,000
U.K. operations -- -- 598,000
Australian operations -- -- (343,000)
----------- ----------- -----------
$ 86,000 $ 449,000 $ 3,593,000
=========== =========== ===========
A reconciliation of the provision for income taxes to the statutory
federal income tax rate is as follows:
YEAR ENDED JANUARY 31,
1998 1999 2000
-----------------------------------------
Statutory rate of 34% applied to pre-tax income $ 29,000 $ 153,000 $ 1,220,000
State income taxes, net of Federal tax benefit 7,000 8,000 120,000
Valuation reserve on Australian loss -- -- 117,000
Foreign taxes 28,000 20,000 55,000
Research and development tax credits (56,000) (116,000) (174,000)
Meals and entertainment expense -- -- 50,000
Goodwill amortization -- -- 36,000
Other, net 56,000 34,000 177,000
----------- ----------- -----------
$ 64,000 $ 99,000 $ 1,601,000
=========== =========== ===========
F-16
7. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
JANUARY 31,
-------------------
1999 2000
-------------------
Deferred income tax assets:
Goodwill amortization $289,000 $397,000
Net operating loss carryforwards -- 117,000
Payroll related accruals 104,000 97,000
Allowance for doubtful accounts 43,000 107,000
Deferred revenue 36,000 66,000
Other, net 28,000 88,000
Valuation allowance -- (117,000)
-------- --------
Total deferred income tax assets 500,000 755,000
Deferred income tax liabilities:
Unrealized changes in marketable securities 28,000 31,000
-------- --------
Total deferred income tax liabilities 28,000 31,000
-------- --------
Net deferred tax asset $472,000 $724,000
======== ========
At January 31, 2000, the Company had net operating loss
carryforwards of approximately $346,000 resulting from its Australian
operations. For financial reporting purposes, a valuation allowance has been
established to offset the deferred tax assets related to these carryforwards.
8. STOCK OPTIONS
Effective January 1, 1997, the Company adopted a stock incentive plan
(the "Plan") for employees and key persons which provides for the issuance of
stock incentives covering up to 12,500,000 shares of common stock. The Plan
provides for the grant of incentive stock options, non-qualified stock options,
restricted stock awards and stock appreciation rights. The terms and conditions
of stock incentives granted under the Plan, including the number of shares, the
exercise price and the time at which such options become exercisable are
determined by the Board of Directors. The term of options granted under the Plan
may not exceed 10 years and generally vest over periods ranging from three to
five years.
On October 15, 1999, the Company adopted a Directors' Stock Option
Plan for directors of the Company who are not officers or employees of the
Company. The Directors' Plan provides for issuance of options to purchase the
Company's common stock at an exercise price equal to fair market value on the
date of grant and expiring 10 years after issuance. The options will become
fully vested as of the date of issuance. The Company has reserved 300,000
shares of the Company's common stock for issuance under the Directors' Plan.
The Company granted options to purchase 30,000 shares of common stock at a
per share price equal to the initial public offering price per share to
directors under the Directors' Plan.
F-17
8. STOCK OPTIONS (CONTINUED)
A summary of stock option activity is as follows:
EXERCISE PRICE WEIGHTED
NUMBER PER AVERAGE
OF OPTION EXERCISE
SHARES PRICE
---------------------------------------
Outstanding options at February 1, 1997 5,692,500 $0.002-$0.64 $ 0.27
Options granted 975,000 $0.60-$0.80 $ 0.65
Options cancelled (375,000) $0.03-$0.60 $ 0.27
---------
Outstanding options at January 31, 1998 6,292,500 $0.002-$0.80 $ 0.34
Options granted 4,099,940 $0.80-$1.50 $ 0.80
Options exercised (500,000) $0.002 $ 0.002
Options canceled (790,040) $0.10-$0.80 $ 0.22
---------
Outstanding options at January 31, 1999 9,102,400 $0.002-$1.50 $ 0.56
Options granted 1,392,595 $1.00-$10.00 $ 1.85
Options canceled (906,575) $0.60-$1.70 $ 0.83
---------
Outstanding options at January 31, 2000 9,588,420 $.01-$10.00 $ 0.72
=========
Exercisable options at January 31, 1998 3,840,000 $0.002-$0.80 $ 0.22
=========
Exercisable options at January 31, 1999 4,625,000 $0.002-$0.80 $ 0.39
=========
Exercisable options at January 31, 2000 5,961,250 $0.002-$10.00 $ 0.50
=========
F-18
8. STOCK OPTIONS (CONTINUED)
The following table summarizes information concerning options
outstanding and exercisable as of January 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------ ------------------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE WEIGHTED
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER AVERAGE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE EXERCISE PRICE
- ------------------- ------------------ ------------------ -------------- ----------------- ------------------
$0.002-0.20 2,350,000 4.75 $ 0.07 2,350,000 $ 0.07
$0.60-1.00 6,030,695 7.46 $ 0.74 3,575,000 $ 0.70
$1.50-1.70 1,157,725 9.02 $ 1.54 6,250 $ 1.50
$10.00 50,000 9.83 $ 10.00 30,000 $ 10.00
--------- ---------
9,588,420 7.54 $ 0.72 5,961,250 $ 0.50
========= =========
The Company has reserved 12,500,000 shares of common stock for issuance
upon exercise of stock options under the Stock Incentive Plan and 300,000 shares
of common stock for issuance upon exercise of stock options under the Directors'
Stock Option Plan.
The Company has elected to follow APB 25 in accounting for its stock
options because, as discussed below, the alternative fair value accounting
provided for under SFAS 123 requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, when the
exercise price of the Company's stock options equals or exceeds the market price
of the underlying stock on the date of grant, no compensation expense is
recorded.
Pro forma information regarding net income is required by SFAS 123,
which also requires that the information be determined as if the Company has
accounted for its employee stock options granted subsequent to December 31, 1994
under the fair value method. The fair value for these options was estimated at
the date of grant using the minimum value method through December 15, 1999, the
date of the Company's initial public offering. The following weighted-average
assumptions were used for the years ended January 31, 1998, 1999 and 2000:
risk-free interest rates of 6.28%, 5.61% and 6.34% respectively; no dividend
yield; and an expected life of the options of 4.99 years.
F-19
8. STOCK OPTIONS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting periods. The
weighted-average fair value of options granted during the year ended January
31, 1998 equaled $0.20 per share for options whose exercise price equaled the
estimated stock value on the grant date and $0.15 per share for options whose
exercise price exceeded the estimated stock value on the grant date. The
weighted-average fair value of options granted during the year ended January
31, 1999 equaled $0.23 per share. The weighted average fair value of options
granted during the year ended January 31, 2000 equaled $0.72 per share. The
Company's pro forma information as determined using the fair value method of
accounting of SFAS 123, was as follows:
YEAR ENDED JANUARY 31,
1998 1999 2000
-----------------------------------------
Pro forma net income (loss) $ (31,000) $ 123,000 $ 1,437,000
Pro forma net income per share - basic 0.00 0.01 0.11
Pro forma net income per share - diluted 0.00 0.01 0.07
Since SFAS 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 2000.
The Company recorded deferred compensation of $373,000 during the year
ended January 31, 2000 in connection with grants of employee share purchase
options with exercise prices lower than the deemed fair market value per share
of the Company's common stock on the date of grant. Such amounts are being
amortized over the period in which the options vest, generally three to four
years, and accordingly, $77,000 in compensation expense was recognized in the
year ended January 31, 2000.
9. SHAREHOLDERS' EQUITY
On May 1, 1998, the Company issued a note payable for $50,000 to an
employee in exchange for 75,000 shares of the Company's common stock.
Shareholders' equity was reduced by the $50,000 repurchase price.
In December 1998, the Company entered into an agreement (the
"Agreement") with two of its former key employees and a former advisor (the
"Former Shareholders"), whereby the Company paid cash of $60,000 and issued
notes payable totaling $3,283,000 in exchange for 1,646,590 shares of the
Company's common stock, forfeiture of options to purchase 500,000 shares of the
Company's common stock, and accrued interest of $173,000. Shareholders' equity
was reduced by the $1.50 per share purchase price for the 1,646,590 repurchased
shares.
F-20
9. SHAREHOLDERS' EQUITY (CONTINUED)
The Company recorded compensation expense of $700,000, which is
included in general and administrative expenses for the year ended January 31,
1999, as a result of the $1.40 per share price paid to the Former Employees for
the options to purchase 500,000 shares of the Company's common stock. The $1.40
price paid represents the estimated fair value of a share of the Company's
common stock of $1.50 less the $0.10 per share exercise price of these options.
During the year ended January 31, 1999, the holder of certain
non-qualified options covering 500,000 shares of the Company's common stock
exercised such options in exchange for the exercise price of $0.002 per share.
As a result the Company recorded a tax benefit of $300,000 in common stock
relative to the difference between the estimated fair value of the Company's
common stock on the exercise date of $1.50 per share and the exercise price paid
of $0.002 per share.
In connection with the agreement, the Company executed an escrow
agreement between the Former Employees and a bank whereby the shares of common
stock purchased by the Company were held in escrow as security for the repayment
of the issued promissory notes. The escrowed shares were released from escrow
upon the pay off of the notes (see Note 4). Such escrowed shares remaining in
escrow at January 31, 1999 were not included as outstanding shares of common
stock. Such shares were cancelled upon the repayment of the notes and are not
included as outstanding shares of common stock at January 31, 2000.
On October 15, 1999, the Company's Board of Directors declared a
5-for-1 common stock split. All common stock and option information, weighted
average shares and net income per share information has been retroactively
restated to reflect the stock split.
10. ACQUISITIONS
On February 28, 1997 the Company acquired all the assets and assumed
all the liabilities of Devcom Mid-America, Inc. ("Devcom"). The purchase price
amounted to $1,671,000 consisting of 500,000 shares of the Company's common
stock valued at $300,000 and assumed liabilities (including notes payable) of
$1,371,000. The transaction was accounted for using the purchase method of
accounting and all assets and liabilities were recorded at fair value. The
excess of purchase price over the net assets acquired is recorded as goodwill of
approximately $1,285,000 which was amortized over a three-year period. The
goodwill was fully amortized as of January 31, 2000. The results of operations
of Devcom have been included in the Company's income statement since the
effective date of the transaction.
The pro forma consolidated results of operations for the year ended
January 31, 1998, assuming the above acquisition had occurred at the beginning
of the year, was not materially different from the Company's consolidated
results of operations for the year ended January 31, 1998.
F-21
10. ACQUISITIONS (CONTINUED)
On August 26, 1998, the Company acquired all the outstanding shares of
Competence Software Europe, S.A ("Competence"), a software product distributor
in Europe for consideration valued at approximately $730,000 consisting of notes
payable of $150,000, 200,000 shares of the Company's common stock valued at
$160,000 and cash and related acquisition costs of approximately $351,000 and
$69,000 respectively. In accordance with the purchase agreement, the Company
accrued an additional $89,000 as part of the purchase price, based on the
achievement of certain aggregate gross revenue thresholds during the twenty-two
month period ended January 31, 2000. Payment is due in February 2000. In
connection with the transaction, the Company and the seller (the "Seller")
entered into a shareholder agreement whereby the Seller, who received 200,000
shares of the Company's common stock as part of the purchase price, is subject
to certain restrictions on the transfer or sale of shares, including the
Company's right of first refusal to purchase shares to be sold, through March
27, 2000.
The transaction was accounted for using the purchase method of
accounting and its results have been included in the Company's income statement
since the effective date of the acquisition. The Company recorded intangible
assets of approximately $487,000 which represents the excess of the purchase
price over the fair value of assets acquired. The intangible assets were further
allocated $150,000 to the existing customer base, which is being amortized over
three years, and $337,000 to goodwill, which is being amortized over five years.
The additional $89,000 of purchase price accrued at January 31, 2000 was
allocated to goodwill and is being amortized over the remaining life of the
original goodwill.
The following represents the unaudited pro forma consolidated results
of operations for the years ended January 31, 1998 and 1999, assuming the above
acquisition of Competence had occurred at the beginning of the year for the
immediately preceding period:
YEAR ENDED JANUARY 31,
1998 1999
----------------------------
Net revenue $ 14,167,000 $ 19,899,000
Net loss (70,000) 307,000
Pro forma net (loss) income per share - basic and diluted (0.01) 0.02
These unaudited pro forma consolidated results do not purport to be
indicative of the results or trends that actually would have been obtained if
the operations were combined during the periods presented, and is not intended
to be a projection of future results or trends.
F-22
11. EMPLOYEE BENEFIT PLAN
The Company has a combined profit sharing and 401(k) plan (the "Plan")
which covers substantially all employees meeting specified age and
length-of-service requirements. The Company may make a discretionary matching
contribution each year. The Company recognized expense related to the Plan of
approximately $136,000, $127,000 and $263,000 during the years ended January 31,
1998, 1999 and 2000, respectively.
12. RELATED PARTY TRANSACTIONS
The Company has notes receivable and advances to shareholders for
general personal purposes of $116,000 and $120,000 at January 31, 1999 and 2000,
respectively. Included in these amounts are notes amounting to $35,000 as of
January 31, 1999 and 2000, which bear interest at rates ranging from 9.5% to
10% with the principal and interest thereon due upon demand. The remaining
advances do not accrue interest and are due upon demand. The advances and note
receivable are classified as long-term as the shareholders do not intend to
repay the balances within the next fiscal year.
During the year ended January 31, 1999, the Company advanced $525,000
for general personal purposes to an individual who is a director of the Company
and who holds options to purchase 500,000 shares of the Company's common stock.
An additional $75,000 was advanced to this individual during the year ended
January 31, 2000. At January 31, 1999 and 2000, $525,000 and $600,000,
respectively, was owed to the Company from this individual as a result of these
advances. Such advances are secured by the options held by the individual.
13. NET INCOME PER SHARE
Net income per share has been computed in accordance with SFAS 128,
EARNINGS PER SHARE, which requires disclosure of basic and diluted earnings per
share. Basic earnings per share excludes any dilutive effects of stock options.
Diluted earnings per share includes the impact of potentially dilutive
securities.
F-23
13. NET INCOME PER SHARE (CONTINUED)
The following table sets forth the computation of basic and diluted net
income per share:
YEAR ENDED JANUARY 31,
1998 1999 2000
Net income $ 22,000 $ 350,000 $ 1,992,000
=========== =========== ===========
Weighted average shares outstanding - basic 12,890,904 12,824,532 12,586,037
Effect of dilutive stock options 3,533,048 4,480,297 7,855,722
----------- ----------- -----------
Weighted average shares outstanding - diluted 16,423,952 17,304,829 20,441,759
=========== =========== ===========
Net income per share - basic $ 0.00 $ 0.03 $ 0.16
=========== =========== ===========
Net income per share - diluted $ 0.00 $ 0.02 $ 0.10
=========== =========== ===========
14. SEGMENT AND GEOGRAPHIC INFORMATION
The Company is organized around geographic areas. Prior to fiscal 1999,
the Company operated in one geographic segment. During fiscal year 1999, the
Company operated in two geographic segments, the United States and France, and
expanded into the United Kingdom and Australia subsequent to January 31, 1999.
The foreign locations principally function as distributors of products developed
by the Company in the United States. The accounting policies as described in the
summary of significant accounting policies are applied consistently across the
segments. Intersegment sales are based on intercompany transfer prices to
achieve a reasonable margin upon distribution.
Segment information for the years ended January 31, 1999 and 2000 is
summarized below.
YEAR ENDED JANUARY 31, 1999 UNITED STATES FRANCE COMBINED ELIMINATIONS CONSOLIDATED
- --------------------------------------------------------------------------------------------------------------------
Revenue from external customers:
License fees $11,442,000 $ 572,000 $ 12,014,000 $ - $ 12,014,000
Services, maintenance and other 7,111,000 414,000 7,525,000 - 7,525,000
Intersegment revenue 19,000 - 19,000 (19,000) -
------------------------------------------------------------------------------
Total revenue 18,572,000 986,000 19,558,000 (19,000) 19,539,000
Interest income 102,000 2,000 104,000 - 104,000
Interest expense (257,000) - (257,000) - (257,000)
Depreciation and amortization 917,000 24,000 941,000 - 941,000
Income tax expense (benefit) (35,000) 134,000 99,000 - 99,000
Segment net income (loss) 166,000 203,000 369,000 (19,000) 350,000
Total segment assets 9,554,000 1,184,000 10,738,000 - 10,738,000
Expenditures for long-lived assets 1,004,000 107,000 1,111,000 - 1,111,000
F-24
14. SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
UNITED UNITED
YEAR ENDED JANUARY 31, 2000 STATES FRANCE KINGDOM AUSTRALIA COMBINED ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------------------
Revenue from external customers:
License fees $ 14,521,000 $1,689,000 $ 796,000 $ 108,000 $17,114,000 $ - $ 17,114,000
Services, maintenance and
other 14,107,000 1,121,000 467,000 24,000 15,719,000 - 15,719,000
Intersegment revenue 599,000 194,000 - - 793,000 (793,000) -
--------------------------------------------------------------------------------------------------
Total revenue 29,227,000 3,004,000 1,263,000 132,000 33,626,000 (793,000) 32,833,000
Interest income 363,000 - - - 363,000 - 363,000
Interest expense (119,000) - - (1,000) (120,000) - (120,000)
Depreciation and amortization 1,177,000 47,000 2,000 1,000 1,227,000 - 1,227,000
Income tax expense 1,260,000 133,000 208,000 - 1,601,000 - 1,601,000
Segment net income (loss) 1,783,000 162,000 390,000 (343,000) 1,992,000 - 1,992,000
Total segment assets 59,195,000 1,875,000 755,000 106,000 61,931,000 (1,289,000) 60,642,000
Expenditures for long-lived
assets 1,094,000 38,000 - 3,000 1,135,000 - 1,135,000
15. SUBSEQUENT EVENTS
On March 27, 2000, the Company acquired all the outstanding shares of
Muscato Corporation ("Muscato"), and substantially all of the assets of
Translink Solutions Corporation ("Translink"). The purchase price for the shares
of Muscato was $20.0 million in cash and promissory notes of $8.0 million. The
notes provide for repayment on March 27, 2030, except that mandatory
acceleration of payments of $4.0 million on March 27, 2001 and $4.0 million on
March 27, 2002 shall occur, providing employment of the seller by the Company is
maintained. The purchase price for the assets acquired from Translink was $5.0
million in cash. The cash component of each purchase price was paid out of the
net proceeds of the Company's initial public offering. The transactions will be
accounted for using the purchase method of accounting. The acquired assets
consist primarily of accounts receivable, technology, software, machinery,
equipment, furniture and fixtures, cash, and all of the interests, rights and
benefits accruing under any sales orders, sales contracts, and services
agreements. In connection with the acquisitions, the Company also assumed
selected liabilities of the acquired companies, consisting primarily of accounts
payable, accrued payroll, and service agreements.
Effective April 14, 2000, the Company entered into a $10.0 million
line of credit arrangement with First Union National Bank. The line of credit
matures on April 14, 2001. The line of credit bears interest at LIBOR plus
1.75%. This debt instrument is due on April 14, 2001 and is collateralized by
the Company's accounts receivable. The agreement contains customary events of
default and a number of customary covenants including certain financial
ratios and restrictions on dividends.
F-25
OPTIO SOFTWARE, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO CHARGED BALANCE AT
BEGINNING OF COSTS AND TO OTHER END OF
PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
------ -------- -------- ---------- ------
Year ended January 31, 1998
Allowance for doubtful accounts............... $126,000 $373,000 $0 $410,000 $ 89,000
Year ended January 31, 1999
Allowance for doubtful accounts............... $ 89,000 $227,000 $0 $198,000 $118,000
Year ended January 31, 2000 $118,000 $473,000 $0 $305,000 $286,000
Allowance for doubtful accounts..................
F-26