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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2001
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
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OPTIO SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
GEORGIA 58-1435435
(State or 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 (Zip Code)
offices)
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. / /
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 24,
2001 as reported by the Nasdaq National Market System, was approximately
$5,451,394. 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 18,500,532 shares of the Registrant's common stock outstanding as
of April 24, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Registrant's Definitive Proxy Statement on Schedule 14A for its
2001 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.
2001 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 16
Item 3. Legal Proceedings........................................... 16
Item 4. Submission of Matters to a Vote of Security Holders......... 16
Item 4A. Executive Officers of the Registrant........................ 17
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 17
Item 6. Selected Financial Data..................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 19
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 27
Item 8. Financial Statements and Supplementary Data................. 28
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 28
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......................................................... 28
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** 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, 2001.
i
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, and competition. 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, risks
relating to the potential delisting of our stock, or risks associated with
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 Form 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 has filed. 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 Software, Inc. provides e-business infrastructure software that
enables business-to-business (B2B) integration and information exchange between
an Optio customer and the trading partners and computer systems of that
customer. Optio's software can improve the quality of an organization's
communications with customers, suppliers, partners and employees by customizing,
delivering and exchanging information over a global network of digital
destinations. Optio's products are being used to integrate diverse information
processing applications requiring high availability and throughput, as
infrastructure for B2B commerce and to tailor the information from enterprise,
e-business and legacy applications for delivery and exchange as XML, EDI, web
content and customized documents according to individualized requirements.
Optio's solutions are non-intrusive and can be deployed without modifying the
software or the business processes that created the original information.
Historically, Optio's software delivered this customized information by fax,
printer and e-mail. With the acquisition of Muscato Corporation in March, 2000
Optio acquired and further developed e-business infrastructure software to allow
companies to deliver and exchange information across the Internet. 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. This level of communication is impractical using just 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.
2
Optio, which was founded in 1981, currently also includes operations
conducted 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 ("Muscato"), located
in Orlando, Florida. Muscato provided Optio with a new business-to-business
("B2B") infrastructure software and technology. While Muscato Corporation
remains a wholly-owned subsidiary, it has been incorporated into the sales and
support of not only Muscato's former products, but all of Optio's existing
products as well.
SEGMENT INFORMATION
Optio is organized around geographic areas. Optio's U.S. 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, Optio operated in one geographic segment. During fiscal year
1999, Optio 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 Optio in the United States. The accounting policies, as
described in the summary of significant accounting policies in Optio's financial
statements, 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, 2000 and 2001 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
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
YEAR ENDED JANUARY 31, 2000 UNITED 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
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
UNITED
YEAR ENDED JANUARY 31, 2001 UNITED STATES FRANCE KINGDOM AUSTRALIA COMBINED ELIMINATIONS CONSOLIDATED
- -------------------------------- ------------- ---------- ---------- --------- ----------- ------------ ------------
Revenue from external customers:
License fees.................. $ 13,971,000 $1,033,000 $ 770,000 $ 206,000 $15,980,000 $ -- $15,980,000
Services, maintenance and
other....................... 18,977,000 1,025,000 766,000 82,000 20,850,000 -- 20,850,000
Intersegment revenue............ 429,000 190,000 -- -- 619,000 (619,000) --
------------ ---------- ---------- --------- ----------- ----------- -----------
Total revenue................. 33,377,000 2,248,000 1,536,000 288,000 37,449,000 (619,000) 36,830,000
Segment net income (loss)....... (14,211,000) (449,000) 529,000 (977,000) 15,108,000 -- 15,108,000
Total segment assets............ 55,366,000 2,078,000 1,193,000 277,000 58,914,000 (3,076,000) 55,838,000
Optio's foreign operations generated revenue from licenses and services to
customers of $3.9 million in the year ended January 31, 2001, representing 11%
of total revenue compared to $4.2 million in the year ended January 31, 2000,
representing 13% of total revenue and revenue of $986,000 in the year ended
January 31, 1999, representing 5% of total revenue.
RISKS INHERENT IN FOREIGN OPERATIONS
Optio's international operations pose 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.
4
INDUSTRY
GROWTH OF THE INTERNET AND ELECTRONIC BUSINESS
Organizations are constantly seeking ways to use information to operate more
productively and cost-effectively. The Internet has sparked a drive for business
to connect to suppliers, customers, employees and other constituencies in order
to electronically conduct business-to-business commerce. Increased collaboration
implies greater efficiency and the ability to leverage brand loyalty, retain
customers, strengthen customer and trading partner relationships to drive
revenue or reduce costs. Many companies are striving to be able to
electronically conduct business through a variety of uniform standards. This
term is referred to as business-to-business integration or B2Bi for short.
However, B2Bi value propositions offered by software and solution firms are as
powerful as they are varied. The marketplace for B2Bi solutions has moved at
varying rates of successful integration. Businesses have improved inventory
management and reduced production cycle times through tighter vendor
coordination enabled through B2B integration. Increased collaboration means
demand and supply chain systems will need to interoperate, and third-party
services including financial and credit services, logistics, shipping, and
fulfillment, need to be connected to support more complex business interactions.
Many larger companies have been able to operate more efficiently and create new
sources of revenue by establishing integrated hubs for customers, suppliers, and
partners. Research has documented 5 to 15 times return on investments for B2Bi
projects with payback periods on the order of weeks or months. 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.
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 or other time-inefficient manual entry 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
5
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 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 in early 2001, AMR
Research anticipates that:
- integration will be one of the top priorities in 2001, making it easier
for the customer to unify channels, process, and data. B2B services will
see rapid growth involving market readiness, strategy, and solutions
integration;
- combined spending on commerce platform software technologies and services,
including operating systems, pervasive computing, and data communications,
will total more than $56 billion by 2005; and
- one out of every three companies over $1 Billion in sales will implement a
Private Trading Exchange by 2005.
Optio's management believes that B2Bi and ERP vendors are also increasingly
enhancing their systems to facilitate e-business.
Many companies continue to struggle with the compelling possibilities
presented by B2B applications, Internet-based services, and exchanges, including
possible solutions for some of the shortcomings of some ERP solutions. Unlike
with ERP vendors, this new assembly of applications more commonly draws upon
several vendor packages including e-procurement, with Customer Relationship
Management, plus Supply Chain Management, plus a Private Trading Exchange with a
Consortium Trading Exchange. While the goal many times is to reduce the amount
of paperwork, redundant processes, and people and create savings, nonetheless,
these applications continue to generate substantial amounts of information
created by these various 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 and simultaneously achieve electronic
integration with their trading partners. 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.
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- 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.
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 into 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 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 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.
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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, IBM's AIX and AS400, Compaq Himalaya 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 e-business infrastructure
software that enables business-to-business integration and information exchange
between an Optio customer and the trading partners and computer systems of that
customer. 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, 1999, 2000 and 2001
were $2.5 million, $3.6 million and $5.5 million, respectively, indicating an
increased commitment to research and development activities.
EXPAND CUSTOMER AWARENESS THROUGH COMPREHENSIVE MARKETING PROGRAMS. Over the
past several years, Optio has devoted significant resources to marketing efforts
to increase customer and industry awareness of its software and services. These
investments in increased marketing efforts have and will continue to include
hiring competent marketing personnel, increasing brand awareness through
targeted advertising campaigns, and expanding participation in related industry
events. Through these marketing efforts, Optio intends to demonstrate the value
of its software and services to enterprises and thereby increase its market
presence and revenues.
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 16
active strategic implementation relationships. 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 continues to believe that international
markets represent a significant growth opportunity as organizations seek global
e-business solutions. Optio
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currently has a direct sales presence in North America, the United Kingdom,
France and Australia. Optio plans to continue to evaluate its investments in its
worldwide distribution capacity to increase market share and penetration. In
addition, Optio plans to engage local resellers and system integrators and
establish joint marketing agreements with software companies in all geographies
the Company believes are strategic.
LEVERAGE OPTIO'S SIGNIFICANT CUSTOMER BASE. Management believes its base of
over 4,000 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.
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 its
technological leadership by 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 may be replaced by e.ComIntegrate
which allows bi-directional XML capabilities. Other components of the suite may
include OptioFax, OptioDesignStudio, MedFormsDR (Healthcare only), HL7/Connect
(Healthcare only) and 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 PROCESSPACKS.......... Substantially complete generic document templates for
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.
OPTIO E.COMINTEGRATE................... Optio's next generation server that provides the software
infrastructure to enable business-to-business 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.
10
OPTIO E.COMENGINE...................... Provides trading partner management, data routing,
translation and transaction management for enterprises
desiring to integrate data intra-and inter-enterprise.
OPTIO E.COMPAYMENTS.................... A universal payments platform that enables organizations
to provide secure, printed or 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, E.COMINTEGRATE,
E.COMINTEGRATE, E.COMENGINE,
OPTIOFAX, OPTIO CHECKBOOK............ Equivalent in functionality to that listed for the Optio
Enterprise Suite, but targeted for the healthcare market.
OPTIO HEALTHCARE PROCESSPACKS.......... Substantially complete generic document templates for
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.
11
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 enable 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.
Consulting services are optional and are billed on an hourly or daily basis
that varies based on the type of service provided.
Optio employs it's own staff of 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. In addition, Optio utilizes third party consultants, such as those from
major systems integrators, to assist in certain implementations. During the year
ended January 31, 2001, Optio outsourced approximately 65% of its consulting
services efforts while maintaining a staff of 57 employees who primarily consist
of consultants and project managers, but who also consist of implementations
specialists and designers. Separately, 12 employees are training staff dedicated
to internal, customer and partner training as well as to development of
curriculum materials for training programs.
MAINTENANCE. Optio offers a comprehensive maintenance program which
provides customer telephone support as well as 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 25% percent of the current software
license fee per annum. As of January 31, 2001, a majority of Optio's customers
had subscribed to the comprehensive maintenance support program.
TECHNOLOGY
Optio's software architecture provides the foundation for us to develop new
and innovative solutions and allows our applications to be easily adapted to new
standards, protocols and platforms. This architecture enables us to interface
and integrate 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 applications.
Our Document Customization and Integration suites of products allow 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 message
transformation and routing as well as the automatic creation, formatting and
delivery of information to and from systems and people on a global basis.
The software contains components for: communicating with Optio's visual
design software; collecting, transforming, and routing 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
12
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 file, message and
document formats, document delivery methods and data access from enterprise
databases and other data sources. Optio's software also supports many of the
proprietary formats for data, documents and information produced by the software
of third parties with whom Optio has strategic relationships and other common
enterprise application software vendors.
For example, e-business documents may be generated as Electronic Data
Interchange files or as any of the commercial standard formats and transformed
to 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 transparent and non-intrusive 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.
- 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. Optio's software ability 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
During the year ended January 31, 2001, approximately 88% of Optio's
software revenue was generated through Optio's direct sales force, while in
prior years, Optio's internally generated sales approximated 80% of total
software revenue. As of January 31, 2001, Optio had 85 domestic sales
representatives and sales support staff, divided into teams that:
- directly market to potential customers based on geographic regions in the
Manufacturing, Retail and Distribution ("MRD") industry;
13
- directly market to potential customers in the e-markets industry;
- directly market to potential customers in the healthcare industry; and
- sell to resellers and distributors.
As of January 31, 2001, Optio's international sales organization, focused on
Europe and the Asia Pacific region, was comprised of 10 sales representatives.
Important resellers or distributors of Optio's products include Epicor
Software Corporation, Software Solutions, Inc. and Phoenix Systems. Optio also
benefits from sales referred to Optio under commercial relationships with
J.D.Edwards, Oracle and McKesson HBOC. Optio plans to continue to invest
prudently to hire and train professionals for its sales, support, services and
marketing organizations.
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 70
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 or include 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 active relationships with 16
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 established relationships with over 15
partners including Baan and McKesson HBOC, as well as two new relationships with
Broughton Systems and Profit Concepts, 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 as with KPMG
Consulting and Cap Gemini Ernst & Young U.S. LLC. In the past, these referral
relationships have resulted in approximately 6-9% of Optio's software license
revenues and Optio expects 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.
14
CUSTOMERS
Optio's customers consist of enterprises across a broad spectrum of
industries, most specifically MRD, healthcare and e-markets. As of January 31,
2001, we licensed our products for use by more than 4,000 customers, which
management believes makes Optio a leading provider of information customization,
delivery and e-business infrastructure 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, 1999, 2000 or 2001.
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 JetForms, AFP Technology, Dazel, StreamServe, and Tivoli.
The third is comprised of e-business enablement organizations such as Actuate
Software, BottomLine Technology, Mercator, Quest Software, Tibco 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.
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 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 has registered "Optio", as well as its
product's names such as "e.ComIntegrate" 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. During 1999, Optio was
made 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
15
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 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.
EMPLOYEES
As of January 31, 2001, Optio had 350 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 66,000
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
Florida, California, France, Australia and the United Kingdom, providing us with
an additional 34,000 square feet.
Optio leases all of its properties with remaining terms between one and six
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.
16
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.......................... 46 Chairman of the Board of Directors, Chief Executive
Officer and President
David Dunn-Rankin...................... 42 Senior Vice President--Sales and Marketing
F. Barron Hughes....................... 43 Chief Financial Officer, Secretary and Treasurer
Daryl G. Hatton........................ 39 Chief Technology Officer
Mark White............................. 39 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. 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.
DAVID DUNN-RANKIN has served as Senior Vice President--Sales and Marketing
since December 2000 and has served as a Director of the Company since
October 1999. Prior to joining Optio as the Senior Vice President--Sales and
Marketing, Mr. Dunn-Rankin served as President of ecIndX, Inc. Prior to
accepting this position, he served as Chief Executive Officer for The UniLink
Group, LLC from October 1997 until 2000. From June 1995 to September 1997, he
served as partner at Bridges and Dunn-Rankin, a certified public accounting and
consulting firm. Mr. Dunn-Rankin also serves on the board of directors for Sun
Coast Media Group and Classic Real Estate Systems.
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.
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 1993, Mr. White
served as Vice President of Operations for Millard Wayne, Inc., a physician
practice software company.
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 16, 2001, the closing price
of the common stock on the Nasdaq National Market was $0.63. The following
17
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, 2001............................ $ 2.875 $0.3125
Quarter Ended October 31, 2000............................ $ 4.625 $1.4375
Quarter Ended July 31, 2000............................... $9.4688 $ 4.25
Quarter Ended April 30, 2000.............................. $22.875 $ 5.125
Quarter Ended January 31, 2000 (since December 15,
1999)................................................... $ 29.25 $ 14.00
HOLDERS
As of April 16, 2001, there were approximately 46 holders of record and
approximately 6,300 beneficial owners of Optio's common stock.
DIVIDENDS
Optio did not pay any dividends during the year ended January 31, 2001.
Optio intends to retain all of its earnings to finance the expansion of its
business and for general corporate purposes and does not anticipate paying any
cash dividends on its common stock for the foreseeable future.
CHANGES IN SECURITIES AND USE OF PROCEEDS
On December 15, 1999, the Company commenced an initial public offering of
its Common Stock. The net proceeds from the offering to the Company after
deducting the discounts, commissions, fees and expenses were $47.0 million.
Optio's periodic filings since the offering have included descriptions of prior
uses of these proceeds. Pending use of the net proceeds, Optio has invested the
funds in government money market funds and used them for general corporate
purposes, including working capital. In December 2000, Optio loaned $400,000 in
the form of a note receivable to a potential strategic investment company.
Subsequent to January 31, 2001, this company filed for bankruptcy and the
$400,000 was fully reserved as uncollectible. Other than the investment of
$2.1 million in ecIndX, Inc., a company in which David Dunn-Rankin, a director
of Optio, has an equity interest, none of the foregoing or previously disclosed
uses of proceeds 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 Form 10-K
entitled "Management's Discussion and Analysis of Financial Condition and
18
Results of Operations." The selected financial data as of and for the years
ended January 31, 1997, 1998, 1999, 2000, and 2001 have been derived from the
audited financial statements of Optio.
YEARS ENDED JANUARY 31,
----------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA (IN THOUSANDS):
Revenue:
License fees.............................. $ 5,802 $ 9,150 $12,014 $17,114 $ 15,980
Services, maintenance and other........... 3,200 4,419 7,525 15,719 20,850
------- ------- ------- ------- --------
Total revenue......................... 9,002 13,569 19,539 32,833 36,830
Costs of revenue:
License fees.............................. 642 1,088 913 980 917
Services, maintenance and other........... 1,814 2,214 4,089 7,997 14,209
------- ------- ------- ------- --------
Total cost of revenue................. 2,456 3,302 5,002 8,977 15,126
Gross profit.................................. 6,546 10,267 14,537 23,856 21,704
Operating expenses:
Sales and marketing....................... 3,674 5,901 7,534 11,863 17,611
Research and development.................. 891 1,551 2,530 3,559 5,495
General and administrative................ 1,143 1,886 2,884 3,848 6,584
Depreciation and amortization............. 144 806 941 1,227 7,318
------- ------- ------- ------- --------
Total operating expenses.............. 5,852 10,144 13,889 20,497 37,008
Income from operations........................ 694 123 648 3,359 (15,304)
Other income (expense):
Interest income........................... 71 32 104 363 973
Interest expense.......................... (42) (77) (257) (120) (480)
Other..................................... -- 8 (46) (9) 42
------- ------- ------- ------- --------
Income before income taxes.................... 723 86 449 3,593 (14,769)
Income tax expense............................ 304 64 99 1,601 339
------- ------- ------- ------- --------
Net income.................................... $ 419 $ 22 $ 350 $ 1,992 $(15,108)
======= ======= ======= ======= ========
Net income per share--basic................... $ 0.03 $ 0.00 $ 0.03 $ 0.16 $ (0.86)
Net income per share--diluted................. $ 0.03 $ 0.00 $ 0.02 $ 0.10 $ (0.86)
Weighted average shares outstanding--basic.... 12,380 12,891 12,825 12,586 17,475
Weighted average shares outstanding --
diluted..................................... 15,478 16,424 17,305 20,442 17,475
AT JANUARY 31,
----------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
BALANCE SHEET DATA (IN THOUSANDS):
Cash and cash equivalents..................... $ 1,646 $ 1,507 $ 1,129 $46,826 $ 8,748
Working capital (deficiency).................. 880 (152) (1,650) 45,948 9,837
Total assets.................................. 4,905 6,978 10,738 60,642 55,838
Long-term obligations......................... 292 246 1,208 38 8,261
Stockholders' equity.......................... 1,320 1,624 9 48,999 35,047
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.
19
OVERVIEW
Optio Software, Inc. is engaged primarily in the development, sale and
support of document customization and e-business infrastructure software to
companies located principally in the United States, Europe and Australia. 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. 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. Finally, with the purchase of Muscato Corporation in
March 2000, Optio added e.ComEngine, which provides trading partner management,
data routing, translation and transaction management for enterprises desiring to
integrate data intra-and inter-enterprise.
Optio markets and sells its software and services throughout the United
States, Europe, and the Asian Pacific through its direct sales force and
certified resellers. As of January 31, 2001, Optio had 95 sales and sales
support personnel and approximately 70 resellers. Optio also offers consulting
services, which provide customers with implementation assistance and training.
Optio outsources approximately 65% of its consulting services work to certified
consulting partners. As of January 31, 2001, Optio had over 4,000 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, 1999, 2000, or
2001.
Optio's growth has, in part, been supplemented by acquisitions. 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"). 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.
In March 2000, Optio purchased Muscato Corporation, located in Orlando,
Florida, providing Optio with a new business-to-business infrastructure software
and technology, e.ComEngine. Although Muscato Corporation remains a wholly-owned
subsidiary, it has been fully incorporated into the sales and support of not
only Muscato Corporation's former products, but all of Optio's existing products
as well.
The acquisitions of Muscato Corporation and Competence Software Europe, S.A.
were both accounted for as purchase transactions and thus, their results are
reflected after their respective acquisition dates. The goodwill and other
intangibles associated with these acquisitions are being amortized over periods
of two to five years.
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
20
determinable; Optio can objectively allocate the total fee among all elements of
the arrangement; and the collection of the license fee is probable. With the
introduction of e.ComEngine, some contracts may require significant production,
modification or customization. Revenue on these contracts is recognized on a
percentage of completion basis using actual costs incurred as a percentage of
expected total costs.
Monthly application service provider fees are consideration for access to
the application software hosted and maintained on the Company's or customer's
servers and are recognized monthly as services are provided.
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, outsourced
consultants and direct expenses relating to the cost of providing consulting,
implementation, training, technical support and allocable overhead. Costs of
revenue from services 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 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 $89,000 and $77,000 in
compensation expense in the years ended January 31, 2001 and 2000, respectively,
and currently expects to recognize $39,000 and $15,000 in the years ending
January 31, 2002 and 2003, 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.
21
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.
YEAR ENDED
JANUARY 31,
------------------------------
1999 2000 2001
-------- -------- --------
Revenue:
License fees.............................................. 61% 52% 43%
Services, maintenance and other........................... 39 48 57
--- --- ---
Total revenue........................................... 100 100 100
=== === ===
Costs of revenue:
License fees.............................................. 5 3 2
Services, maintenance and other........................... 21 24 39
--- --- ---
Total cost of revenue................................... 26 27 41
--- --- ---
Gross profit................................................ 74 73 59
Operating expenses:
Sales and marketing....................................... 38 36 47
Research and development.................................. 13 11 15
General and administrative................................ 15 12 18
Depreciation and amortization............................. 5 4 20
--- --- ---
Total operating expenses................................ 71 63 100
--- --- ---
Income from operations...................................... 3 10 (41)
Interest and other income................................... (1) 1 1
--- --- ---
Income before income taxes.................................. 2 11 (40)
Income taxes................................................ -- 5 1
--- --- ---
Net income.................................................. 2% 6% (41)%
=== === ===
Total revenue increased 12% to $36.8 million in 2001 from $32.8 million in
2000 and 68% to $32.8 million in 2000 from $19.5 million in 1999.
Optio's foreign operations generated revenue from licenses and services to
customers of $3.9 million in the year ended January 31, 2001, representing 11%
of total revenue compared to revenue of $4.2 million in the year ended
January 31, 2000, representing 13% of total revenue.
License fee revenue decreased 7% to $16.0 million in 2001 from
$17.1 million in 2000, however it increased 43% to $17.1 million in 2000 from
$12.0 million in 1999.
License fee revenue decreased from 2000 to 2001 due to the following
factors:
- The primary contributing factor to the decrease in revenues was
re-staffing of Optio's sales organization. As Optio continues to build its
e-business products, a more technical, more solutions-based sales
organization is needed. Optio had difficulty integrating the sales efforts
for the new e.ComSeries of products with the existing distributed output
management ("DOM") products. As a result, Optio experienced significant
turnover as some sales personnel could not make the transition to the
e-business market. Optio determined that the sales department was not
properly structured in light of the changes that were taking place in the
Enterprise Resource Planning ("ERP") marketplace. To move into the
business-to-business integration space, Optio
22
determined that a geographically aligned sales force, as opposed to an ERP
aligned sales force, would be better suited for the market;
- Optio's referral business followed the ERP market, which was down
significantly from the explosive growth that occurred in 1999. In
response, in August 2000, Optio initiated its geographically aligned sales
model and began to re-staff the sales organization to allow the sales
people to be nearer to the customer base that they would pursue. As a
result of the turnover and of the restructuring of the sales organization,
revenues declined;
- Optio's core product sales suffered due to a market shift in product
requirements from DOM systems to e-business projects;
- These factors were slightly offset by the fact that Muscato Corporation
and TransLink Solution Corporation's revenues were included subsequent to
their acquisition dates. However, the introduction of Muscato
Corporation's products to Optio's sales force created confusion of sales
focus and execution, causing sales of Optio's core products to suffer.
- Despite the decline in license fee revenue, Optio's average selling price
began to rise, particularly with the introduction of its e-business
products such as e.ComEngine.
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;
- Optio's growth in the European market; and
- Optio's expansion into the Asian Pacific market in May 1999.
Revenue from services, maintenance and other increased 33% to $20.9 million
in 2001 from $15.7 million in 2000 and 109% to $15.7 million in 2000 from
$7.5 million in 1999. While license revenue decreased during the year ended
January 31, 2001, services, maintenance and other increased due to the following
factors:
- Maintenance revenue increased $4.0 million, or 81% due to the growth in
Optio's customer base;
- the introduction of approximately $500,000 in processing fee revenue to
Optio's revenue stream resulting from the purchase of TransLink Solutions
Corporation. Optio now provides application service provider (ASP) hosting
of e.ComEngine for which a monthly fee is charged;
- the sale of hardware related to a specific contract of approximately
$350,000 in the three months ended July 31, 2000;
- the acquisition of Muscato Corporation and TransLink Solutions
Corporation, contributing revenue subsequent to their acquisition dates of
over $1.0 million; partially offset by
- a slight decline in services to implement Optio's core product's service
revenue due to the associated slowing sales.
The increase in revenues from service, maintenance and other during the year
ended January 31, 2000 was 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 43%, 52%, and 61% of total revenue in 2001,
2000, and 1999, respectively. Services and other revenue constituted 31%, 33%,
and 19% of total revenue in 2001, 2000 and 1999, respectively. Maintenance
revenue constituted 24%, 15%, and 19% of total revenue in 2001,
23
2000, and 1999, respectively. The fiscal year 2001 sales mix shifted towards
maintenance revenue as Optio's customer base grew, yet license fees declined and
services revenue remained stable during the year. The sales mix shift towards
services revenue during the year ended January 31, 2000 was due to an increased
focus by management on the marketing of services to Optio's customers who had
purchased software licenses as an additional source of revenue. In addition, as
Optio's products became more sophisticated, additional consulting services and
training was required, thus increasing services revenue as a percentage of total
revenue.
COSTS OF REVENUE
Costs of revenue from license fees decreased 6% to $917,000 in 2001 from
$980,000 in 2000 and increased 7% to $980,000 in 2000 from $913,000 in 1999. The
decrease in costs of revenue from license fees in 2001 was primarily the result
of a decrease in sales through independent agents and thus, a decrease in
independent agent fees. These fees decreased from $718,000 in 2000 to $446,000
in 2001. This was offset by an increase in royalties paid for inclusion of
others' products within Optio's products. 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 to $718,000 in 2000 from $602,000 in 1999. Costs of revenue from
license fees represented 6% of total license revenue in 2001, 6% in 2000, and 8%
in 1999.
Costs of revenue from services and maintenance increased 78% to
$14.2 million in 2001 from $8.0 million in 2000 and 96% to $8.0 million in 2000
from $4.1 million in 1999. The increase in 2001 was due to the following
factors:
- an emphasis on customer satisfaction that has resulted in increased
headcount in the project management and implementation areas;
- increased training and mentoring of subcontracted consulting solution
providers;
- the costs associated with holding training classes at various locations in
the United States; and
- a significant increase in the use of subcontractors during 2001, which
typically provide a slightly lower gross margin.
The increase during 2000 was due to improved training and scheduling of
internal staff and an increase in the number of personnel 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 68%, 51%, and 54% of total service and maintenance
revenue in 2001, 2000 and 1999, respectively.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses increased 48% to
$17.6 million in 2001 from $11.9 million in 2000 and 58% to $11.9 million in
2000 from $7.5 million in 1999. The increase 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. In August 2000, Optio re-aligned its sales force into geographical
territories as opposed to ERP related alignments and thus expanded it's sales
force from 64 in 2000 to 95 in 2001. In addition, Optio hosted its first annual
Users Group Conference, adding an additional $350,000 to sales and marketing
expenses. The associated headcount in sales and marketing was 111, 76, and 60
for the years 2001, 2000 and 1999, respectively. Sales and marketing expenses
represented 47% of total revenue in 2001, 36% in 2000, and 38% in 1999.
24
RESEARCH AND DEVELOPMENT. Research and development expenses increased 54%
to $5.5 million in 2001 from $3.6 million in 2000 and 41% to $3.6 million in
2000 from $2.5 million in 1999. 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 2001. In addition, Optio added approximately 17
research and development staff with the acquisition of Muscato Corporation,
which now assist in the continued development of e.ComEngine, as well as the
other e.ComSeries of products. The research and development staff totaled 53 at
January 31, 2001 and 35 at January 31, 2000. Research and development expenses
represented 15%, 11%, and 13% of total revenue in 2001, 2000 and 1999,
respectively.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
71% to $6.6 million in 2001 from $3.8 million in 2000 and increased 33% to
$3.8 million in 2000 from $2.9 million in 1999. The increase in general and
administrative expenses was the result of a) increased costs associated with the
growth of Optio's business during these periods, including increased hiring of
administrative personnel and increased expenses related to being a public
company, b) the inclusion of expenses of Muscato Corporation subsequent to its
acquisition date of March 2000, and c) an increase in bad debt expense of
$1.0 million from 2001 to 2000, resulting primarily from the write off of a
$400,000 receivable from a potential strategic investment which subsequently
filed for bankruptcy. General and administrative expenses represented 18%, 12%,
and 15% of total revenue in 2001, 2000 and 1999, respectively.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased 496% to $7.3 million in 2001 from $1.2 million in 2000 and increased
30% to $1.2 million in 2000 from $941,000 in 1999. The increase in 2001 was
principally due to the amortization of the intangible assets related with the
Muscato Corporation and TransLink Solutions Corporation purchases in
March 2000. The amortization expense related to these acquisitions was
$6.0 million. The increase in 2000 was the result of an increase of $94,000 in
the amortization of intangible assets from acquisitions and an increase of
$192,000 in depreciation due to increased capital expenditures. Depreciation and
amortization expenses represented 20%, 4%, and 5% of total revenue in 2001, 2000
and 1999, respectively.
INTEREST AND OTHER INCOME (LOSS)
Interest and other income increased to $535,000 in 2001 from $234,000 in
2000 and increased to income of $234,000 in 2000 from a loss of $199,000 in
1999. The increase in 2001 was the result of the increased interest income
resulting from the investment of the remaining net proceeds of Optio's initial
public offering in December 1999. This income was offset by interest expense
associated with the $8.0 million note payable to the former owners of Muscato
Corporation. 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 in December 1999 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.
INCOME TAXES
Income tax expense decreased 79% to $339,000 in 2001 from $1.6 million in
2000 and increased 1,517% to $1.6 million in 2000 from $99,000 in 1999.
Despite Optio's consolidated loss for fiscal year 2001, Optio's European
operations had a profit, accounting for the income tax expense for the year, and
the majority of the U.S. tax benefit recorded in 2001 related to stock option
activity and was recorded in equity and not income tax benefit. For fiscal year
2000, the effective tax rate was 45%. The costs related to the expansion into
the Asian Pacific market were non-deductible, which was the primary contributing
factor to the 45% tax rate for fiscal
25
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.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 2001 and 2000 Optio had $8.7 million and $46.8 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,
----------------------------------------
1999 2000 2001
----------- ----------- ------------
Net cash provided by (used in) operations............. $ 3,062,000 $ 1,847,000 $ (8,730,000)
Net cash used in investing activities................. (1,451,000) (1,196,000) (29,134,000)
Net cash provided by (used in) financing activities... (2,022,000) 45,037,000 (16,000)
Net increase (decrease) in cash and cash
Equivalents..................................... (378,000) 45,697,000 (38,078,000)
Cash used in operating activities for 2001 resulted primarily from the net
loss of $15.1 million, offset by non-cash charges of $9.8 million, including
depreciation and amortization of $7.3 million and the tax benefit of stock
options exercised of $1.2 million, and changes in working capital which resulted
in a $3.4 million use of cash. The major components of such working capital
changes were a $1.8 million decrease in accrued expenses, including those
assumed in the Muscato acquisition, and a $1.5 million change from income taxes
payable to income taxes receivable. 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. 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 of 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.
Cash used in investing activities for 2001 represented $1.5 million in
purchases of property and equipment, $2.2 million paid for a strategic
investment in ecIndX, Inc., and $25.0 million paid for the acquisition of
Muscato Corporation and TransLink Solutions Corporation. Investing activities
during 2000 consisted primarily of the purchase of approximately $1.1 million of
property and equipment. Investing activities for 1999 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 flows used in financing activities for 2001 included payments of
$275,000 on debt and capital leases, offset by proceeds received of $259,000 for
the exercise of stock options. Cash flows from financing activities for 2000
included proceeds 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. Cash used in financing activities for 1999 represented payments of
$2.0 million for notes payable to related parties and capital leases.
As of January 31, 2001, Optio had notes payable of $8,053,000, of which
$53,000 is payable upon demand and $8,000,000 is payable in March 2030. Optio
also had a $10.0 million line of credit arrangement with First Union National
Bank, which was terminated effective March 29, 2001. As of
26
January 31, 2001, Optio was not in compliance with the required financial ratios
under the First Union line of credit and was, therefore, in default. There were
no borrowings outstanding under the line.
On March 29, 2001, Optio entered into a new line of credit agreement with
Branch Banking and Trust Company for a $5,000,000 line of credit. The line of
credit bears interest at prime rate plus 0.50% and is collateralized by accounts
receivable, equipment, general intangibles and other assets as defined in the
agreement. Optio may borrow up to the lesser of $5,000,000 or 70% of Optio's
eligible receivables, as defined in the agreement. The agreement contains
various covenants, including tangible net worth and EBITDA (earnings before
interest, taxes, depreciation, and amortization) requirements and restrictions
on dividends. There have been no borrowings under the line of credit.
Management believes that the existing cash and cash equivalents, together
with the new line of credit, will provide adequate cash to fund its anticipated
cash needs at least through the next twelve months. We may attempt 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.
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, which were adopted by the Company effective February 1,
2000, did not have a material effect 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 effective for the Company's fiscal year beginning February 1,
2001. Management believes that the adoption of this standard will not have a
material effect on the Company's financial position or results of operations.
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. 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
27
U.S. dollar or the weakening of these local currencies could make Optio's
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, 2001.
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.
None.
28
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 1st day of May,
2001.
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
------------------------------------------- Executive Officer (Principal May 1, 2001
C. Wayne Cape Executive Officer)
/s/ F. BARRON HUGHES Chief Financial Officer and
------------------------------------------- Secretary (Principal Financial May 1, 2001
F. Barron Hughes and Accounting Officer)
/s/ MITCHEL LASKEY Director
------------------------------------------- May 1, 2001
Mitchel Laskey
/s/ DAVID DUNN-RANKIN Director
------------------------------------------- May 1, 2001
David Dunn-Rankin
/s/ JAMES FELCYN Director
------------------------------------------- May 1, 2001
James Felcyn
29
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
------- -----------
1.1** Form of Underwriting Agreement.
2.1***(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***(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***(3) Promissory Note dated March 27, 2000 in the amount of
$4,000,000 issued by the Company to Michael Muscato.
2.4***(4) Promissory Note dated March 27, 2000 in the amount of
$2,000,000 issued by the Company to Nicholas Muscato.
2.5***(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.
5.1** Opinion of Morris, Manning & Martin, L.L.P.
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***(6) Credit Agreement dated as of April 14, 2000, by and among
Optio Software, Inc., as Borrower, and First Union Nation
Bank, as Lender.
10.13***(7) Form of Option Grant Agreement prior to adoption of the
Optio Software, Inc. Stock Incentive Plan
10.14***(8) Amendment to Credit Agreement dated as of April 14, 2000, by
and among Optio Software, Inc., as Borrow, and First Union
National Bank, as Lender
30
10.15 Loan and Security Agreement, dated as of March 29, 2001, by
and between Optio Software, Inc., as Borrower and Branch
Banking and Trust Company, as Lender.
10.16 Revolving Credit Promissory Note by and between Optio
Software, Inc. and Branch Banking and Trust Company dated
March 29, 2001.
21.1** List of Subsidiaries
23.1 Consent of Ernst & Young LLP
23.2** Consent of Morris, Manning & Martin (included in Exhibit
5.1).
24.1** Powers of Attorney (included on signature page).
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.
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.
***(1) Incorporated by Reference to Exhibit 2.1 to the Company's Form 8-K, dated
March 27, 2000, filed on April 10, 2000.
***(2) Incorporated by Reference to Exhibit 2.2 to the Company's Form 8-K, dated
March 27, 2000, filed on April 10, 2000.
***(3) Incorporated by Reference to Exhibit 2.3 to the Company's Form 8-K, dated
March 27, 2000, filed on April 10, 2000.
***(4) Incorporated by Reference to Exhibit 2.4 to the Company's Form 8-K, dated
March 27, 2000, filed on April 10, 2000.
***(5) Incorporated by Reference to Exhibit 2.5 to the Company's Form 8-K, dated
March 27, 2000, filed on April 10, 2000.
***(6) Incorporated by Reference to Exhibit 10.12 to the Company's Annual Report
for the period ended January 31, 2000, filed on April 28, 2000.
***(7) Incorporated by Reference to Exhibit 10.3 to the Company's Form S-8,
dated June 9, 2000, filed on June 9, 2000.
***(8) Incorporated by Reference to Exhibit 10.1 to the Company's Quarterly
Report for the period ended October 31, 2000, filed on December 15, 2000.
31
OPTIO SOFTWARE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
NUMBER
--------
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of January 31, 2000 and
2001...................................................... F-3
Consolidated Statements of Operations for the years ended
January 31, 1999, 2000, and 2001.......................... F-4
Consolidated Statements of Shareholders' Equity for the
years ended January 31, 1999, 2000, and 2001.............. F-5
Consolidated Statements of Cash Flows for the years ended
January 31, 1999, 2000 and 2001........................... 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, 2000 and 2001, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended January 31, 2001. 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, 2000 and 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
January 31, 2001 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
Atlanta, Georgia
March 7, 2001, except for Note 17, as to
which the date is March 29, 2001
F-2
OPTIO SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 31,
--------------------------
2000 2001
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $46,826,000 $ 8,748,000
Marketable securities..................................... 386,000 339,000
Accounts receivable, less allowance for doubtful accounts
of $286,000 and $823,000, respectively.................. 9,268,000 9,962,000
Prepaid expenses and other current assets................. 670,000 1,225,000
Notes receivable from related party....................... -- 600,000
Income taxes receivable................................... -- 1,415,000
Deferred income taxes..................................... 229,000 --
----------- ------------
Total current assets........................................ 57,379,000 22,289,000
Property and equipment:
Property and equipment.................................... 2,990,000 4,998,000
Accumulated depreciation.................................. (1,472,000) (2,342,000)
----------- ------------
1,518,000 2,656,000
Other assets:
Notes receivable from related party....................... 600,000 --
Note receivable and advances to shareholders.............. 120,000 123,000
Investment in ecIndX...................................... -- 2,209,000
Deferred income taxes..................................... 495,000 --
Goodwill related to acquisitions, net of accumulated
amortization of $101,000 and $5,382,000, respectively... 325,000 26,674,000
Other intangible assets, net of accumulated amortization
of $75,000 and $953,000, respectively................... 75,000 1,762,000
Other..................................................... 130,000 125,000
----------- ------------
Total assets................................................ $60,642,000 $ 55,838,000
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,388,000 $ 2,682,000
Accrued expenses.......................................... 2,986,000 2,623,000
Income taxes payable...................................... 452,000 --
Current portion of notes payable to related parties....... 228,000 53,000
Current portion of capital lease obligations.............. 45,000 125,000
Deferred revenue.......................................... 6,332,000 6,969,000
----------- ------------
Total current liabilities................................... 11,431,000 12,452,000
Capital lease obligations, less current portion............. 38,000 261,000
Notes payable to related parties, less current portion...... -- 8,000,000
Deferred revenue............................................ 174,000 78,000
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;
17,133,640 and 17,641,032 shares issued and outstanding,
respectively............................................ 48,362,000 49,557,000
Retained earnings (accumulated deficit)................... 921,000 (14,187,000)
Accumulated other comprehensive income (loss)............. 12,000 (266,000)
Unamortized stock compensation............................ (296,000) (57,000)
----------- ------------
Total shareholders' equity.................................. 48,999,000 35,047,000
----------- ------------
Total liabilities and shareholders' equity.................. $60,642,000 $ 55,838,000
=========== ============
SEE ACCOMPANYING NOTES.
F-3
OPTIO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JANUARY 31,
----------------------------------------
1999 2000 2001
----------- ----------- ------------
Revenue:
License fees........................................ $12,014,000 $17,114,000 $ 15,980,000
Services, maintenance, and other.................... 7,525,000 15,719,000 20,850,000
----------- ----------- ------------
19,539,000 32,833,000 36,830,000
Cost of revenue:
License fees........................................ 913,000 980,000 917,000
Services, maintenance, and other.................... 4,089,000 7,997,000 14,209,000
----------- ----------- ------------
5,002,000 8,977,000 15,126,000
----------- ----------- ------------
14,537,000 23,856,000 21,704,000
Operating expenses:
Sales and marketing................................. 7,534,000 11,863,000 17,611,000
Research and development............................ 2,530,000 3,559,000 5,495,000
General and administrative.......................... 2,884,000 3,848,000 6,584,000
Depreciation and amortization....................... 941,000 1,227,000 7,318,000
----------- ----------- ------------
13,889,000 20,497,000 37,008,000
----------- ----------- ------------
Income (loss) from operations......................... 648,000 3,359,000 (15,304,000)
Other income (expense):
Interest income..................................... 104,000 363,000 973,000
Interest expense.................................... (257,000) (120,000) (480,000)
Other............................................... (46,000) (9,000) 42,000
----------- ----------- ------------
(199,000) 234,000 535,000
----------- ----------- ------------
Income (loss) before income taxes..................... 449,000 3,593,000 (14,769,000)
Income tax expense.................................... 99,000 1,601,000 339,000
=========== =========== ============
Net income (loss)..................................... $ 350,000 $ 1,992,000 $(15,108,000)
=========== =========== ============
Net income (loss) per share--basic.................... $0.03 $0.16 $(0.86)
=========== =========== ============
Net income (loss) per share--diluted.................. $0.02 $0.10 $(0.86)
=========== =========== ============
Weighted average shares outstanding--basic............ 12,824,532 12,586,037 17,474,852
=========== =========== ============
Weighted average shares outstanding--diluted.......... 17,304,829 20,441,759 17,474,852
=========== =========== ============
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, 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 -- --
Deferred compensation related to stock option grants.... -- 373,000 -- --
Amortizaton of deferred compensation.................... -- -- -- --
----------- ----------- ------------ ---------
Balance at January 31, 2000............................... 17,133,640 48,362,000 921,000 12,000
Comprehensive loss, net of tax:
Net loss.............................................. -- -- (15,108,000) --
Foreign currency translation adjustment............... -- -- -- (168,000)
Unrealized loss on marketable securities available for
sale................................................ -- -- -- (110,000)
Comprehensive loss......................................
Costs of issuance of common stock in initial public
offering.............................................. -- (29,000) -- --
Issuance of common stock from the exercise of stock
options and related tax benefit....................... 507,392 1,470,000 -- --
Amortization of deferred compensation................... -- -- -- --
Change in deferred compensation related to stock option
terminations.......................................... -- (246,000) -- --
----------- ----------- ------------ ---------
Balance at January 31, 2001............................... 17,641,032 $49,557,000 $(14,187,000) $(266,000)
=========== =========== ============ =========
UNAMORTIZED
STOCK TOTAL SHAREHOLDERS'
COMPENSATION EQUITY
------------ -------------------
Balance at February 1, 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
Deferred compensation related to stock option grants.... (373,000) --
Amortizaton of deferred compensation.................... 77,000 77,000
--------- -----------
Balance at January 31, 2000............................... (296,000) 48,999,000
Comprehensive loss, net of tax:
Net loss.............................................. -- (15,108,000)
Foreign currency translation adjustment............... -- (168,000)
Unrealized loss on marketable securities available for
sale................................................ -- (110,000)
-----------
Comprehensive loss...................................... (15,386,000)
Costs of issuance of common stock in initial public
offering.............................................. -- (29,000)
Issuance of common stock from the exercise of stock
options and related tax benefit....................... -- 1,470,000
Amortization of deferred compensation................... 89,000 89,000
Change in deferred compensation related to stock option
terminations.......................................... 150,000 (96,000)
--------- -----------
Balance at January 31, 2001............................... $ (57,000) $35,047,000
========= ===========
SEE ACCOMPANYING NOTES.
F-5
OPTIO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JANUARY 31,
----------------------------------------
1999 2000 2001
----------- ----------- ------------
OPERATING ACTIVITIES
Net income (loss)........................................... $ 350,000 $ 1,992,000 $(15,108,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation.............................................. 457,000 649,000 1,052,000
Amortization of goodwill and other intangible assets...... 484,000 578,000 6,266,000
Provision for doubtful accounts........................... 227,000 473,000 705,000
Gain on sale of marketable securities..................... (55,000) (18,000) (10,000)
Loss (gain) on sale of property and equipment............. -- 1,000 (14,000)
Non-cash compensation and interest........................ 888,000 77,000 443,000
Deferred income taxes..................................... (199,000) (255,000) (101,000)
Tax benefit of exercise of stock options.................. 300,000 -- 1,212,000
Change in assets and liabilities:
Accounts receivable..................................... (2,581,000) (4,138,000) 283,000
Prepaid expenses and other assets....................... (116,000) (533,000) (663,000)
Accounts payable........................................ (156,000) 714,000 823,000
Accrued expenses........................................ 742,000 1,141,000 (1,460,000)
Income taxes payable.................................... (415,000) 629,000 (1,541,000)
Deferred revenue........................................ 3,136,000 537,000 (617,000)
----------- ----------- ------------
Net cash provided by (used in) operating activities......... 3,062,000 1,847,000 (8,730,000)
INVESTING ACTIVITIES
Purchase of marketable securities........................... (302,000) (176,000) (120,000)
Proceeds from sale of marketable securities................. 166,000 188,000 --
Purchases of property and equipment......................... (571,000) (1,135,000) (1,527,000)
Proceeds from sale of property and equipment................ -- 6,000 14,000
Advances to shareholders.................................... 4,000 (4,000) (3,000)
Advances to related party................................... (525,000) (75,000) --
Advances to unrelated party................................. -- -- (400,000)
Investment in ecIndX........................................ -- -- (2,209,000)
Acquisition of business, net of cash acquired............... (223,000) -- (24,889,000)
----------- ----------- ------------
Net cash used in investing activities....................... (1,451,000) (1,196,000) (29,134,000)
FINANCING ACTIVITIES
Payments of notes payable to related parties and capital
lease obligations......................................... (2,028,000) (1,919,000) (274,000)
Proceeds from exercise of stock options..................... 1,000 -- 258,000
Issuance of common stock.................................... -- 46,956,000 --
Other....................................................... 5,000 -- --
----------- ----------- ------------
Net cash (used in) provided by financing activities......... (2,022,000) 45,037,000 (16,000)
Impact of foreign currency rate fluctuations on cash........ 33,000 9,000 (198,000)
Net (decrease) increase in cash and cash equivalents........ (378,000) 45,697,000 (38,078,000)
Cash and cash equivalents at beginning of year.............. 1,507,000 1,129,000 46,826,000
----------- ----------- ------------
Cash and cash equivalents at end of year.................... $ 1,129,000 $46,826,000 $ 8,748,000
=========== =========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest...................................... $ 221,000 $ 122,000 $ 25,000
=========== =========== ============
Cash paid for income taxes.................................. $ 416,000 $ 1,037,000 $ 569,000
=========== =========== ============
SEE ACCOMPANYING NOTES.
F-6
OPTIO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2001
1. DESCRIPTION OF BUSINESS
Optio Software, Inc. (the "Company") is engaged primarily in the
development, sale and support of document customization and e-business
infrastructure 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.
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 accounting
principles generally accepted in the United States 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 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 implementation and training, is
recognized as the services are performed. Deferred revenue represents payments
received in advance of recognizing the related revenue. Monthly application
service provider fees are consideration for access to the application software
hosted and maintained on the Company's or customer's servers and are recognized
monthly as services are provided.
F-7
OPTIO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2001
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS
Advertising costs are expensed in the period incurred. Total advertising
expense amounted to approximately $1,147,000, $1,413,000, and $3,076,000 during
the years ended January 31, 1999, 2000 and 2001, 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, 2001 consist primarily of investments in municipal money market
funds, and mature in three months or less. The carrying amounts of the Company's
investments in cash equivalents 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, 2000 and 2001 are $305,000 and $432,000,
respectively.
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, 2000 and 2001 consisted of the
following:
JANUARY 31,
-------------------------
2000 2001
----------- -----------
Equipment.......................................... $ 1,820,000 $ 3,198,000
Furniture and fixtures............................. 439,000 630,000
Purchased software................................. 559,000 925,000
Leasehold improvements............................. 172,000 245,000
----------- -----------
2,990,000 4,998,000
Less accumulated depreciation...................... (1,472,000) (2,342,000)
----------- -----------
Net property and equipment......................... $ 1,518,000 $ 2,656,000
=========== ===========
F-8
OPTIO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2001
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets represent the excess of cost over the
fair value of net tangible assets acquired. Other intangible assets consist
principally of the value of an existing customer base acquired, assembled
workforce acquired, and technology acquired. Intangible assets are being
amortized using the straight-line method over five years for goodwill and
periods of two to five 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, goodwill and other
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.
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 operations 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 financing activities during the year ended January 31, 2001
included the acquisition of equipment through a capital lease in the amount of
$167,000 for equipment used in the development of the Company's software.
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 recorded as additional goodwill.
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
F-9
OPTIO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2001
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, which were adopted by
the Company effective February 1, 2000, did not have a material effect 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 effective for the Company's fiscal year beginning February 1,
2001. Management believes that the adoption of this standard will not have a
material effect on the Company's financial position or results of operations.
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. The adoption of SAB
101 as of November 1, 2000 did not have a material effect on the Company's
financial position or results of operations.
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.
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, 2001 of $6,297,000
represented investments in municipal money market funds.
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
F-10
OPTIO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2001
3. FINANCIAL INSTRUMENTS (CONTINUED)
returns of products sold. Bad debt expense for the years ended January 31, 1999,
2000, and 2001 amounted to $227,000, $473,000 and $1,513,000, respectively.
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 values. The
fair values of marketable equity securities are based on quoted market prices.
4. NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties consisted of the following:
JANUARY 31,
---------------------
2000 2001
-------- ----------
Notes payable to a shareholder and employee for the purchase
of Competence Software Europe, S.A. (see Note 10) in the
original amounts of $239,000, accruing interest at 5%, and
was paid in 2001.......................................... $164,000 $ --
Notes payable to three former shareholders of Muscato
Corporation for the purchase of Muscato Corporation (see
Note 10) in the amount of $8,000,000 due March 27, 2030
and accruing interest at 6.75%............................ -- 8,000,000
Other notes payable to related parties...................... 64,000 53,000
-------- ----------
228,000 8,053,000
Less current portion........................................ 228,000 53,000
-------- ----------
$ -- $8,000,000
======== ==========
5. CAPITAL LEASES AND LINES OF CREDIT
The Company leases telecommunications equipment, computer equipment and
vehicles under capital leases. Assets under capital leases included in property
and equipment are as follows:
JANUARY 31,
-------------------
2000 2001
-------- --------
Equipment............................................... $215,000 $564,000
Less accumulated amortization........................... 135,000 190,000
-------- --------
$ 80,000 $374,000
======== ========
F-11
OPTIO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2001
5. CAPITAL LEASES AND LINES OF CREDIT (CONTINUED)
Future minimum lease payments under capital leases consist of the following
at January 31, 2001:
2002........................................................ $ 163,000
2003........................................................ 116,000
2004........................................................ 106,000
2005........................................................ 55,000
2006........................................................ 9,000
---------
Total minimum lease payments................................ 449,000
Less amounts representing interest.......................... (63,000)
---------
Present value of net minimum lease payments................. 386,000
Less current portion........................................ (125,000)
---------
$ 261,000
=========
On January 31, 1999, the Company entered into a line of credit with a bank
under which it could 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.
On April 14, 2000, the Company entered into a line of credit with a bank
under which it could borrow up to $10,000,000, limited by the amount of liquid
capital, including cash and securities maintained by the Company, through
April 14, 2001. The line of credit bears interest at LIBOR plus 1.75% (5.856% at
January 31, 2001). This line is collateralized by the Company's accounts
receivable. The agreement contains customary events of default and covenants
including certain financial ratios and restrictions on dividends. As of
January 31, 2001, the Company was not in compliance with the required financial
ratios and was in default on the line of credit. There were no borrowings
outstanding under the line at January 31, 2001.
6. OPERATING LEASES
The Company leases office and warehouse space under operating leases. Rent
expense under the Company's operating leases was approximately $314,000,
$839,000, and $1,858,000 during the years ended January 31, 1999, 2000, and
2001, respectively.
F-12
OPTIO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2001
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, 2001:
2002........................................................ $1,530,000
2003........................................................ 1,370,000
2004........................................................ 1,356,000
2005........................................................ 1,325,000
2006........................................................ 1,237,000
Thereafter.................................................. 1,134,000
----------
$7,952,000
==========
7. INCOME TAXES
The provisions for income taxes are summarized below:
YEAR ENDED JANUARY 31,
----------------------------------
1999 2000 2001
--------- ---------- ---------
Current:
Federal.................................. $ 120,000 $1,265,000 $(150,000)
State.................................... 44,000 250,000 (17,000)
Foreign.................................. 134,000 341,000 203,000
--------- ---------- ---------
298,000 1,856,000 36,000
Deferred:
Federal.................................. (178,000) (228,000) 271,000
State.................................... (21,000) (27,000) 32,000
--------- ---------- ---------
(199,000) (255,000) 303,000
--------- ---------- ---------
Total...................................... $ 99,000 $1,601,000 $ 339,000
========= ========== =========
Pre-tax income (loss) attributable to foreign and domestic operations is
summarized below:
YEAR ENDED JANUARY 31,
------------------------------------
1999 2000 2001
-------- ---------- ------------
U.S. operations.......................... $112,000 $3,043,000 $(13,982,000)
French operations........................ 337,000 295,000 (448,000)
U.K. operations.......................... -- 598,000 638,000
Australian operations.................... -- (343,000) (977,000)
-------- ---------- ------------
$449,000 $3,593,000 $(14,769,000)
======== ========== ============
F-13
OPTIO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2001
7. INCOME TAXES (CONTINUED)
A reconciliation of the provision for income taxes to the statutory federal
income tax rate is as follows:
YEAR ENDED JANUARY 31,
------------------------------------
1999 2000 2001
--------- ---------- -----------
Statutory rate of 34% applied to pre-tax income (loss)... $ 153,000 $1,220,000 $(5,021,000)
State income taxes, net of Federal tax effect............ 8,000 120,000 (487,000)
Change in valuation allowance on foreign losses.......... -- 117,000 485,000
Foreign taxes............................................ 20,000 55,000 18,000
Research and development tax credits..................... (116,000) (174,000) --
Meals and entertainment expense.......................... -- 50,000 69,000
Change in valuation allowance on US losses............... -- -- 3,575,000
Tax benefit from employee options recorded in
shareholders' equity................................... 300,000 -- 1,212,000
Goodwill amortizaton..................................... -- 36,000 725,000
Other, net............................................... (266,000) 177,000 (237,000)
--------- ---------- -----------
$ 99,000 $1,601,000 $ 339,000
========= ========== ===========
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,
-----------------------
2000 2001
--------- -----------
Deferred income tax assets:
Goodwill amortization................................... $ 397,000 $ 581,000
Net operating loss carryforwards........................ 117,000 3,362,000
Payroll related accruals................................ 97,000 101,000
Allowance for doubtful accounts......................... 107,000 465,000
Deferred revenue........................................ 66,000 4,000
Other, net.............................................. 88,000 36,000
Valuation allowance..................................... (117,000) (3,575,000)
--------- -----------
Total deferred income tax assets............................ 755,000 974,000
Deferred income tax liabilities:
Intangibles............................................. -- 974,000
Unrealized changes in marketable securities............. 31,000 --
--------- -----------
Total deferred income tax liabilities....................... 31,000 974,000
--------- -----------
Net deferred tax asset...................................... $ 724,000 $ --
========= ===========
For financial reporting purposes, at January 31, 2001, a valuation allowance
has been recognized to reduce the net deferred income tax assets to zero. The
Company has not recognized any benefit from the future use of the deferred tax
assets because management's evaluation of all the available evidence
F-14
OPTIO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2001
7. INCOME TAXES (CONTINUED)
in assessing the realizability of the tax benefits of such loss carryforwards
indicates that the underlying assumptions of the future profitable operations
contain risks that do not provide sufficient assurance to recognize such tax
benefits currently.
The deferred income tax assets include approximately $0 and $391,000 at
January 31, 2000 and 2001 respectively, of assets that were created by or are
subject to valuation allowance as a result of stock option deductions. While
income tax expense will be recorded on any future pre-tax profits from United
States operations, these deferred tax assets would reduce the related income
taxes payable. This reduction in income taxes payable in future periods would be
recorded as common stock.
The Company has approximately $8.8 million of net operating loss
carryforwards for federal income tax purposes that expire in 2021. In addition,
at January 31, 2001, the Company had net operating loss carryforwards of
approximately $1.3 million and $450,000 resulting from its operations in
Australia and France, respectively. For financial reporting purposes, a
valuation allowance has been established to offset the deferred tax assets
related to these carryforwards. The net operating loss carryforwards may be
subject to certain limitations in the event of a change in ownership.
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. Prior to the adoption of the Plan, options which had no termination
period were granted to certain officers and select employees.
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.
F-15
OPTIO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2001
8. STOCK OPTIONS (CONTINUED)
A summary of stock option activity is as follows:
NUMBER EXERCISE PRICE
OF PER WEIGHTED AVERAGE
SHARES OPTION EXERCISE PRICE
---------- --------------------- ----------------
Outstanding options at February 1, 1998............ 6,292,500 $0.002-$0.80 $0.340
Options granted.................................. 4,099,940 $0.80-$1.50 $0.800
Options exercised................................ (500,000) $0.002 $0.002
Options canceled................................. (790,040) $0.10-$0.80 $0.220
----------
Outstanding options at January 31, 1999............ 9,102,400 $0.002-$1.50 $0.560
Options granted.................................. 1,392,595 $1.00-$10.00 $1.850
Options canceled................................. (906,575) $0.60-$1.70 $0.830
----------
Outstanding options at January 31, 2000............ 9,588,420 $.01-$10.00 $0.720
Options granted.................................. 1,830,494 $0.875-17.563 $8.065
Options exercised................................ (507,392) $0.10-1.70 $0.508
Options canceled................................. (868,579) $0.80-17.563 $6.436
----------
Outstanding options at January 31, 2001............ 10,042,943 $.01-$17.563 $1.567
==========
Exercisable options at January 31, 1999............ 4,625,000 $0.002-$0.80 $0.390
==========
Exercisable options at January 31, 2000............ 5,961,250 $0.002-$10.00 $0.500
==========
Exercisable options at January 31, 2001............ 6,312,400 $0.01-$10.00 $0.561
==========
The following table summarizes information concerning options outstanding
and exercisable as of January 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------------- ----------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE WEIGHTED
NUMBER CONTRACTUAL EXERCISE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ----------- --------- ----------- --------------
$0.002-0.10 1,600,000 N/A $ 0.03 1,600,000 $0.03
$0.20-1.00 6,377,851 6.74 $ 0.70 4,578,233 $0.66
$1.375-2.00 1,242,663 8.93 $ 1.70 84,167 $1.51
$2.875-$10.00 488,911 9.26 $ 7.87 50,000 $8.74
$12.50-17.5625 333,518 9.05 $ 15.84 0 $ --
---------- ---------
10,042,943 7.30 $ 1.57 6,312,400 $0.56
========== =========
The Company has reserved 12,264,108 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
F-16
OPTIO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2001
8. STOCK OPTIONS (CONTINUED)
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 or loss 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. For those options granted
subsequent to December 15, 1999, the fair value of each option was estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for the years ended January 31,
1999, 2000 and 2001: risk-free interest rates of 5.61%, 6.34% and 6.16%
respectively; no dividend yield; volatility factors of 1.88% for 2000, and 1.65%
for 2001; and an expected life of the options of 7.05 years.
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 years ended
January 31, 1999, 2000 and 2001 equaled $0.23, $0.72 and $8.07 per share,
respectively. 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,
------------------------------------
1999 2000 2001
-------- ---------- ------------
Pro forma net income (loss).............................. $123,000 $1,437,000 $(19,235,000)
Pro forma net income (loss) per share--basic............. 0.01 0.11 (1.10)
Pro forma net income (loss) per share--diluted........... 0.01 0.07 (1.10)
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 and $89,000 in compensation expense was recognized in the
year ended January 31, 2000 and 2001, respectively.
9. SHAREHOLDERS' EQUITY
On May 1, 1998 the Company issues 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 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-17
OPTIO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2001
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 Shareholders 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 years ended January 31, 1999 and 2001, the holders of certain
non-qualified options covering 500,000 and 350,000 shares of the Company's
common stock exercised such options. As a result, the Company recorded a tax
benefit of $300,000 and $1.2 million in common stock.
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 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 was made 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, was 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 statement of operations
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 year ended January 31, 1999, assuming the above acquisition
of Competence had occurred at the beginning of the year for the immediately
preceding period:
Net revenue................................................. $19,899,000
Net income.................................................. 307,000
Pro forma net income per share--basic and diluted........... 0.02
F-18
OPTIO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2001
10. ACQUISITIONS (CONTINUED)
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.
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"), an affiliate of Muscato. The consideration
paid for the shares of Muscato was $28.0 million, of which $20.0 million was
paid in cash. The Company issued promissory notes for the remaining
$8.0 million, which are due and payable on March 27, 2030. The purchase price
for the assets acquired from TransLink was $5.0 million in cash.
Each of the acquisitions was accounted for as a purchase transaction for
financial accounting purposes, and accordingly, the results of operations of
Muscato and TransLink have been included in the Company's results of operations
from the date of acquisition.
The purchase price was preliminarily allocated to the assets acquired and
liabilities assumed based on their respective fair values on the date of
acquisition as follows:
Tangible assets acquired.................................... $ 1,808,000
Liabilities assumed......................................... (3,103,000)
Technology.................................................. 1,600,000
Assembled workforce......................................... 685,000
Customer base............................................... 280,000
Goodwill.................................................... 31,730,000
-----------
$33,000,000
===========
The final purchase price allocation is subject to settlement of any
identified unrecorded liabilities relating to the period prior to the purchase
date. Such liabilities will be deducted from the notes payable to the former
shareholders in accordance with the purchase agreement.
The technology is being amortized over an average estimated life of two
years. The assembled workforce and customer base are being amortized over an
estimated life of five years. Goodwill is being amortized over an estimated life
of five years.
The following represents the unaudited pro forma consolidated results of
operations for the years ended January 31, 2000 and 2001, assuming the above
acquisitions of Muscato and TransLink had occurred at the beginning of the year
for each year:
2000 2001
----------- ------------
Net revenue....................................... $39,787,000 $ 37,989,000
Net loss.......................................... (5,452,000) (16,088,000)
Pro forma net loss per share--basic and diluted... $ (0.43) $ (0.92)
The 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-19
OPTIO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2001
11. INVESTMENT IN ECINDX
The Company invested $2.0 million in ecIndX, Inc., a supply chain
collaboration vendor, in exchange for a minority interest in the company. An
additional $209,000 of costs incurred related to making the investment were
added to the basis of the investment. In conjunction with the investment,
ecIndX, Inc. entered into the Company's standard software license agreement to
purchase $1.0 million in software and related services. ecIndX, Inc. was founded
and is partly owned by an individual who is a director and shareholder of the
Company and who holds options to purchase 500,000 shares of the Company's common
stock (see Note 13).
12. 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
$127,000, $263,000 and $291,000 during the years ended January 31, 1999, 2000
and 2001, respectively.
13. RELATED PARTY TRANSACTIONS
The Company has notes receivable and advances to shareholders for general
personal purposes of $120,000 and $123,000 at January 31, 2000 and 2001,
respectively. Included in these amounts are notes amounting to $35,000 as of
January 31, 2000 and 2001, 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 and shareholder 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, 2000 and 2001, $600,000 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. The advances are classified
as short-term as the amounts are due and expected to be repaid October 31, 2001.
14. NET INCOME (LOSS) PER SHARE
Net income (loss) 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-20
OPTIO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2001
14. NET INCOME (LOSS) PER SHARE (CONTINUED)
The following table sets forth the computation of basic and diluted net
income (loss) per share:
YEAR ENDED JANUARY 31,
----------------------------------------
1999 2000 2001
----------- ----------- ------------
Net income (loss)..................................... $ 350,000 $ 1,992,000 $(15,108,000)
----------- ----------- ------------
Weighted average shares outstanding--basic............ 12,824,532 12,586,037 17,474,852
Effect of dilutive stock options...................... 4,480,297 7,855,722 --
----------- ----------- ------------
Weighted average shares outstanding--diluted.......... 17,304,829 20,441,759 17,474,852
----------- ----------- ------------
Net income (loss) per share--basic.................... $ 0.03 $ 0.16 $ (0.86)
=========== =========== ============
Net income (loss) per share--diluted.................. $ 0.02 $ 0.10 $ (0.86)
=========== =========== ============
Potentially dilutive stock options, excluded from
diluted weighted average shares outstanding......... 8,183,564
============
15. SEGMENT AND GEOGRAPHIC INFORMATION
The Company is organized around geographic areas. 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.
F-21
OPTIO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2001
15. SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
Segment information for the years ended January 31, 1999, 2000 and 2001 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
Long-lived assets........................................ 1,842,000 83,000 1,925,000 -- 1,925,000
Expenditures for long-lived assets....................... 1,004,000 107,000 1,111,000 -- 1,111,000
UNITED
YEAR ENDED JANUARY 31, 2000 UNITED 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
Long-lived assets............... 1,851,000 61,000 3,000 3,000 1,918,000 -- 1,918,000
Expenditures for long-lived
assets........................ 1,094,000 38,000 -- 3,000 1,135,000 -- 1,135,000
UNITED
YEAR ENDED JANUARY 31, 2001 UNITED STATES FRANCE KINGDOM AUSTRALIA COMBINED ELIMINATIONS CONSOLIDATED
- --------------------------- ------------- ---------- ---------- --------- ----------- ------------ ------------
Revenue from external customers:
License fees.................. $13,971,000 $1,033,000 $ 770,000 $206,000 $15,980,000 $ -- $ 15,980,000
Services, maintenance and
other....................... 18,977,000 1,025,000 766,000 82,000 20,850,000 -- 20,850,000
Intersegment revenue............ 429,000 190,000 -- -- 619,000 (619,000) --
----------- ---------- ---------- -------- ----------- ----------- ------------
Total revenue................. 33,377,000 2,248,000 1,536,000 288,000 37,449,000 (619,000) 36,830,000
Interest income................. 972,000 -- -- 1,000 973,000 -- 973,000
Interest expense................ (478,000) (2,000) -- -- (480,000) -- (480,000)
Depreciation and amortization... 7,274,000 33,000 5,000 6,000 7,318,000 -- 7,318,000
Income tax expense.............. 229,000 1,000 109,000 -- 339,000 -- 339,000
Segment net income (loss)....... (14,211,000) (449,000) 529,000 (977,000) (15,108,000) -- (15,108,000)
Total segment assets............ 55,366,000 2,078,000 1,193,000 277,000 58,914,000 (3,076,000) 55,838,000
Long-lived assets............... 30,958,000 74,000 16,000 44,000 31,092,000 -- 31,092,000
Expenditures for long-lived
assets........................ 26,297,000 69,000 -- 50,000 26,416,000 -- 26,416,000
F-22
OPTIO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2001
16. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Summarized quarterly results for the two years ended January 31, 2000 and
2001 are as follows:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
FOR THE YEAR ENDED JANUARY 31, 2000 -------- -------- -------- --------
Revenue................................................ $6,384 $ 8,173 $ 8,645 $ 9,631
Gross Profit........................................... 4,665 5,916 6,210 7,065
Income from operations................................. 187 1,177 986 1,009
Net income............................................. 113 660 537 682
Net income per basic share............................. $ 0.01 $ 0.05 $ 0.05 $ 0.05
Net income per diluted share........................... $ 0.01 $ 0.03 $ 0.03 $ 0.03
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
FOR THE YEAR ENDED JANUARY 31, 2001 -------- -------- -------- --------
Revenue................................................ $9,343 $10,228 $ 8,351 $ 8,908
Gross Profit........................................... 6,451 6,160 4,538 4,555
Loss from operations................................... (299) (3,375) (5,144) (6,486)
Net loss............................................... (143) (3,335) (5,133) (6,497)
Net loss per basic and diluted share................... $(0.01) $ (0.19) $ (0.29) $ (0.37)
17. SUBSEQUENT EVENTS
On March 29, 2001, the Company entered into a new line of credit agreement
with Branch Banking and Trust Company for a $5.0 million line of credit. The
line of credit bears interest at prime rate plus 0.50% and is collateralized by
accounts receivable, equipment, general intangibles and other assets as defined
in the agreement. The Company may borrow up to the lesser of $5,000,000 or 70%
of the Company's eligible receivables, as defined in the agreement. The
agreement contains various covenants, including tangible net worth and earnings
before interest, taxes, depreciation and amortization requirements and
restrictions on dividends.
F-23
OPTIO SOFTWARE, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND ACQUIRED END OF
PERIOD EXPENSES RESERVES DEDUCTIONS PERIOD
------------ ---------- -------- ---------- ----------
Year ended January 31, 1999
Allowance for doubtful accounts....... $ 89,000 $227,000 $ 0 $198,000 $118,000
Year ended January 31, 2000
Allowance for doubtful accounts....... $118,000 $473,000 $ 0 $305,000 $286,000
Year ended January 31, 2001
Allowance for doubtful accounts....... $286,000 $917,000 $221,000 $601,000 $823,000
F-24