We engage primarily in the development, sale and support of software for companies located principally in the United States and Europe. In Optio’s first 18 years, the Company’s 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. The type of solution that provides this functionality was traditionally known as a distributed output management solution.
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In August 1998, Optio acquired Optio Software Europe, S.A., a software product distributor in Europe, providing Optio’s first entry into the European markets. Optio Software, Asia Pacific was established in May 1999, but was subsequently closed in September 2002.
In addition to its distributed output management solutions, in 1999 Optio began pursuing the e-business market created by the evolution of the Internet. In September 1999, Optio introduced the first of its e.ComSeries of products, Optio e.ComPresent TM , a browser-based software solution allowing document presentation to the web. In December 1999, Optio completed its initial public offering, raising $47.0 million in capital. In March 2000, Optio introduced its second product in the e.ComSeries of products, Optio e.ComIntegrate ® . Also in March 2000, Optio purchased Muscato Corporation (“Muscato”) and TransLink Solutions Corporation (“Translink”), further expanding its breadth into the e-commerce market. Muscato offered a product, e.ComEngine, which enabled the real-time exchange of information between systems utilizing dissimilar formats and protocols. Unfortunately, Optio was unsuccessful in the integration of these two companies and subsequently disposed of the two companies and the e.ComEngine product in December 2001. Since the disposal of Muscato and Translink, Optio has focused on expanding its core products and increasing the capability of its integrated solutions.
Most recently, Optio has focused on expanding from managing output only to managing the lifecycle of transactional documents. Optio has focused its development on features and functionality that enhance a customer’s ability to manage documents, thus positioning the Company as a provider of document centric business process solutions. In 2003, Optio introduced Optio Print Manager TM , enabling reliable print delivery and a centralized management console for accessing printers and monitoring their status. In 2004, Optio introduced Optio Imaging Solutions TM , the Company’s intelligent data capture, imaging and web-accessible archive solution that allows documents to be scanned, indexed and archived according to a customer’s defined needs, and extracts transactional data and integrates it with enterprise systems. During fiscal year 2006, we partnered with various consulting groups to help develop application specific adapters to the Optio Imaging Solutions, thus enabling Optio to provide specific strategic document automation solutions for Oracle, QAD and SAP endusers, including, for example, procure-to-pay and order-to-cash solutions. These products represent the foundation of the Optio Business Process Solution TM . Optio Business Process Solutions allow customers to automate manual processes, transform documents into automated transactions and provides on-line access to critical business information. Optio Business Process Solution are specifically designed to streamline error-prone manual processes associated with invoices and other paper documents and help customers achieve faster, more accurate procure-to-pay, order-to-cash and other document-intensive business processes.
To address the needs of our healthcare market, in August 2004, Optio acquired VertiSoft Corporation (“VertiSoft”), bringing with it the Optio QuickRecord Suite TM of products. These products automate the collection and distribution of healthcare documents, whether they be printed documents collected through scanning and indexing, on-line forms or data streams; create a central repository with web-enabled access by medical personnel or financial services; and provide physicians with the ability to electronically sign patient care documents with the product’s e-signature capability.
Internet Website
Optio’s Internet website can be found at www.optiosoftware.com or www.optio.com. We also maintain a healthcare specific website at www.optiohealthcare.com. We make available free of charge or through our internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, our proxy statements and Forms 3, 4 and 5 filed by directors and executive officers and amendments to those reports as soon as reasonably practicable after such material is filed or furnished to the SEC. These filings may be accessed by clicking on the Investor Relations page under “Company” on our home page, and then by clicking on “SEC Filings” for a direct link to Optio’s SEC filings on the SEC website, at www.sec.gov. Additionally, Optio’s Code of Ethics for Financial Officers may be found on the Optio website. From time to time, corporate governance materials on our website may be updated to comply with rules issued by the SEC or as desirable to promote the effective governance of Optio. In addition, amendments to the Code of Ethics and any grant of a waiver from a provision of the Code of Ethics requiring disclosure under applicable SEC rules will be disclosed on our website. Any stockholder wishing to receive, without charge, a copy of any of the Optio SEC filings or the Code of Ethics should write to the Secretary, Optio Software, Inc., 3015 Windward Plaza, Windward Fairways II, Atlanta, Georgia 30005.
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The reference to our website address does not constitute incorporation by reference of the information contained on the website and should not be construed as part of this Annual Report.
Wholly-Owned Subsidiaries
Optio currently has two wholly-owned foreign subsidiaries, Optio Software Europe, S.A. (“Optio Europe”) and VertiSoft Limited (“VertiSoft UK”). Optio Europe, a software product distributor in Europe, was acquired in August 1998, providing an entry into European markets. Optio Europe is directly involved in the sales, marketing and support activities for Optio’s products throughout mainland Europe and the United Kingdom through its wholly-owned subsidiaries Optio Software Deutschland GmbH (“Optio Germany”), formed in December 2002, and Optio Software UK, Pvt. Limited (“Optio UK”). VertiSoft UK was directly involved in the sales and marketing activities for certain customers acquired with VertiSoft, but has since assigned those contracts to Optio UK and ceased operations. VertiSoft UK was acquired as a subsidiary of VertiSoft. VertiSoft merged into Optio on September 15, 2004. Optio previously had a wholly-owned foreign subsidiary in Australia, Optio Software, Asia Pacific (“Optio Australia”), which was closed in September 2002, and legally terminated in December 2004. The Company continues to market in the Asian Pacific region through various software resellers.
Segment Information
Optio is organized around geographic areas. Optio’s U.S. operations and European operations, which includes Optio Europe and VertiSoft UK, represent Optio’s current two reportable segments. Optio’s former Australian subsidiary is classified as “Other”. The foreign locations principally function as distributors of products developed by Optio in the United States. Optio attributes revenue to its operating segments based upon the location of the subsidiary originating the sale, which is typically the geographic location where the software is installed. The accounting policies, as described in the summary of significant accounting policies in Optio’s consolidated financial statements, are applied consistently across the segments. Intersegment sales are based on intercompany transfer prices to achieve a reasonable margin upon distribution.
Segment information for the fiscal years ended January 31, 2004, 2005 and 2006 is summarized below.
| Year ended January 31, 2004 |
United States | Europe | Other | Combined | Eliminations | Consolidated | ||||||||||||||||
| Revenue from external customers: |
||||||||||||||||||||||
| License fees |
$ | 8,476,000 | $ | 1,729,000 | — | $ | 10,205,000 | $ | — | $ | 10,205,000 | |||||||||||
| Services, maintenance and other |
14,633,000 | 2,469,000 | 8,000 | 17,110,000 | — | 17,110,000 | ||||||||||||||||
| Intersegment revenue |
481,000 | 133,000 | — | 614,000 | (614,000 | ) | — | |||||||||||||||
| Total revenue |
23,590,000 | 4,331,000 | 8,000 | 27,929,000 | (614,000 | ) | 27,315,000 | |||||||||||||||
| Interest income |
171,000 | — | — | 171,000 | — | 171,000 | ||||||||||||||||
| Interest expense |
17,000 | — | — | 17,000 | — | 17,000 | ||||||||||||||||
| Depreciation and amortization |
489,000 | 64,000 | — | 553,000 | — | 553,000 | ||||||||||||||||
| Income tax expense (benefit) |
(205,000 | ) | 3,000 | — | (202,000 | ) | — | (202,000 | ) | |||||||||||||
| Segment income (loss) before income taxes |
1,623,000 | (460,000 | ) | 6,000 | 1,169,000 | — | 1,169,000 | |||||||||||||||
| Segment net income (loss) |
1,828,000 | (463,000 | ) | 6,000 | 1,371,000 | — | 1,371,000 | |||||||||||||||
| Total segment assets |
15,648,000 | 3,088,000 | 87,000 | 18,823,000 | (4,577,000 | ) | 14,246,000 | |||||||||||||||
| Expenditures for long-lived assets |
157,000 | 7,000 | — | 164,000 | — | 164,000 |
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| Year ended January 31, 2005 |
United States | Europe | Other | Combined | Eliminations | Consolidated | ||||||||||||||
| Revenue from external customers: |
||||||||||||||||||||
| License fees |
$ | 8,050,000 | $ | 2,125,000 | $ | — | $ | 10,175,000 | $ | — | $ | 10,175,000 | ||||||||
| Subscription fees |
894,000 | 36,000 | — | 930,000 | — | 930,000 | ||||||||||||||
| Services, maintenance and other |
14,467,000 | 2,795,000 | — | 17,262,000 | — | 17,262,000 | ||||||||||||||
| Intersegment revenue |
447,000 | 202,000 | — | 649,000 | (649,000 | ) | — | |||||||||||||
| Total revenue |
23,858,000 | 5,158,000 | — | 29,016,000 | (649,000 | ) | 28,367,000 | |||||||||||||
| Interest income |
182,000 | 5,000 | — | 187,000 | — | 187,000 | ||||||||||||||
| Interest expense |
12,000 | — | — | 12,000 | — | 12,000 | ||||||||||||||
| Depreciation and amortization |
596,000 | 17,000 | — | 613,000 | — | 613,000 | ||||||||||||||
| Income tax expense |
83,000 | 12,000 | — | 95,000 | — | 95,000 | ||||||||||||||
| Segment income (loss) before income taxes |
2,132,000 | (384,000 | ) | — | 1,748,000 | — | 1,748,000 | |||||||||||||
| Segment net income (loss) |
2,049,000 | (396,000 | ) | — | 1,653,000 | — | 1,653,000 | |||||||||||||
| Total segment assets |
16,892,000 | 3,690,000 | — | 20,582,000 | (3,087,000 | ) | 17,495,000 | |||||||||||||
| Expenditures for long-lived assets |
773,000 | 45,000 | — | 818,000 | — | 818,000 | ||||||||||||||
| Year ended January 31, 2006 |
United States | Europe | Other | Combined | Eliminations | Consolidated | ||||||||||||||
| Revenue from external customers: |
||||||||||||||||||||
| License fees |
$ | 7,993,000 | $ | 1,965,000 | $ | — | $ | 9,958,000 | $ | — | $ | 9,958,000 | ||||||||
| Subscription fees |
2,125,000 | 40,000 | — | 2,165,000 | — | 2,165,000 | ||||||||||||||
| Services, maintenance and other |
14,795,000 | 2,703,000 | — | 17,498,000 | — | 17,498,000 | ||||||||||||||
| Intersegment revenue |
351,000 | 120,000 | — | 471,000 | (471,000 | ) | — | |||||||||||||
| Total revenue |
25,264,000 | 4,828,000 | — | 30,092,000 | (471,000 | ) | 29,621,000 | |||||||||||||
| Interest income |
269,000 | — | — | 269,000 | — | 269,000 | ||||||||||||||
| Interest expense |
14,000 | — | — | 14,000 | — | 14,000 | ||||||||||||||
| Depreciation and amortization |
824,000 | 37,000 | — | 861,000 | — | 861,000 | ||||||||||||||
| Income tax expense |
52,000 | 5,000 | — | 57,000 | — | 57,000 | ||||||||||||||
| Segment income (loss) before income taxes |
1,214,000 | (259,000 | ) | — | 955,000 | — | 955,000 | |||||||||||||
| Segment net income (loss) |
1,162,000 | (264,000 | ) | — | 898,000 | — | 898,000 | |||||||||||||
| Total segment assets |
19,333,000 | 3,788,000 | — | 23,121,000 | (3,423,000 | ) | 19,698,000 | |||||||||||||
| Expenditures for long-lived assets |
407,000 | 63,000 | — | 470,000 | — | 470,000 |
Optio’s European operations generated revenue from licenses, subscription fees and services to customers, excluding intersegment revenue, of $4.7 million in the year ended January 31, 2006, representing 16% of total revenue, compared to $5.0 million in the year ended January 31, 2005, representing 17% of total revenue and compared to $4.2 million in the year ended January 31, 2004, representing 15% of total revenue.
Industry
Organizations are increasingly being driven to enhance the cost-effectiveness of their existing systems and overall productivity of the organization by sharing vital business information, in the proper format, with the proper users. Their objective is to improve the efficiency of mission-critical business processes such as procurement, manufacturing, warehousing, shipping, invoicing and collections, patient registration and billing, and patient care. This objective can be met by enhancing the form, content, distribution and availability of documents and content that enable these processes, thus reducing their cost and complexity and improving overall efficiency. To achieve these objectives, organizations must deliver focused, business-ready information derived from a multitude of sources across the enterprise, to employees, customers, suppliers and strategic partners. In addition, many organizations are embracing e-business to enhance their productivity and cost-savings. 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
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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. Specifically, this environment has created the need for a comprehensive software solution that gathers information on a real-time basis from multiple sources, including enterprise, healthcare, legacy and custom applications, external databases and files; enhances the information to improve its suitability for business purposes; customizes and formats the information to meet business objectives; provides timely and reliable delivery of the information formats to the appropriate destinations, including the Internet, e-mail, printers, faxes and wireless devices; and provides a universal, web-enabled access point for all documents and information. Most business relationships pair buyers and sellers, providers and consumers, and care givers and patients in a series of interactions or transactions over a period of time. As a result these parties tend to exchange information in the form of documents and this has created the need for solutions that will accept documents created by other organizations, scan and capture their image, extract relevant data and integrate it into a company’s enterprise systems.
These needs have created a market for software that performs cost effective management of the transformation and delivery of information from various enterprise computing systems. The Gartner Group (“Gartner”) defines the markets that provide software solutions described above as the Distributed Output Management (“DOM”) Market and the Integrated Document Archive and Retrieval Systems (“IDARS”) Market. Gartner forecasts these two market segments will converge by the end of 2005. Gartner described DOM and IDARS as part of a more comprehensive market that is known as the Content Management (“CM”) Market. On March 11, 2005, Gartner further noted that they believed that IDARS will cease to be a stand-alone market and will become an integral component of a CM suite by 2007. The Meta Group stated in a report dated January 7, 2004 that this same market, which they call Enterprise Content Management (“ECM”) will grow to $9.3 billion (software and services) by 2007. This represents a compound annual growth rate of 15%.
Further research conducted by the Company through its Customer Advisory Board (“CAB”) indicates that extending the current solution set to manage more elements and interactions that comprise an organization’s document-intensive business processes (e.g. inbound and outbound documents and interactions relating to procurement processes) would be of value. This approach, which is known collectively as business process management, is a further extension of the Content Management market and per International Data Corporation’s figures quoted in a May 2004 article in Information Week, grew to over $1 billion dollars in 2004; a growth rate of more than 100%.
Technology
Optio’s suite of products is used to enhance business critical documents and information, their subsequent distribution and the integration of corresponding documents received from other organizations into an organization’s business processes. It provides an organization’s systems and applications with the ability to share information, transfer documents and conduct business transactions with customers, suppliers and employees, in the proper format, with the appropriate content and at the time and location required. Optio’s 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 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 extracted from existing enterprise application output and transformed into XML, Adobe PDF and many other standard electronic document formats.
Certain components of Optio’s technology have been developed by other manufacturers. In some cases, these other manufacturers, also known as Original Equipment Manufacturers (“OEM”), have granted Optio a license to embed their technology within Optio’s products for re-licensing to end-users. In other cases, Optio has a value-added reseller agreement in place, which allows Optio to resell the manufacturer’s product as a part of Optio’s own solution set. These agreements provide for a minimum two or three-year contractual commitment; however, the contract may be terminated by either party thereafter with 90 days written notice. Termination of these agreements could have a material impact on Optio’s product offerings, strategic initiatives and results of operations.
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Technical Advantages
Optio’s technology provides customers with the following advantages:
• Transparency. Optio’s technology works with the existing hardware/software infrastructure and 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 appropriate person at the right time.
• Powerful Language. Optio’s proprietary Document Customization Language, the programming language that allows for documents or other output to be customized to the user’s needs, 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 TM harnesses the power of Optio’s Document Customization Language and puts it into the hands of less technically savvy users without limiting access to the power of our technology.
• Scope of Solution. Optio’s software can handle a wide variety of information sources, document formats and digital destinations, without requiring third party software.
• Secure Internet Architecture. Optio’s software utilizes custom developed technology built on industry standards that allows the Company’s software to securely distribute and control the processing of information on the Internet.
Strategic Initiatives
Optio’s objective is to be a global innovator and the leading provider of solutions that transform and exchange vital business information. Optio is dedicated to helping its customers achieve long term success by reducing the cost and complexity of their document-centric business processes while extending the value of existing technology investments. To achieve these objectives, Optio intends to:
• Establish our Business Process Solution Credentials with the Right Combination of Products, Messaging, Sales and Successful Implementations. In fiscal year 2004, Optio set forth its strategy to expand from managing output only, to managing the lifecycle of transactional documents. This meant that Optio might expand its product offering from products that enhance the flow of information from systems to people, to products that enhance the flow of information between systems and people. In other words, improved document formats and distribution may no longer be the sole intended result. Instead, overall improvement of document-intensive processes will require more collaboration and interaction. Comprehensive management of document-intensive processes is the goal, rather than mere document creation and delivery. With this strategy in mind, Optio set forth to create its Optio Business Process Solution suite. Optio introduced its Optio Imaging Solutions, its intelligent data capture, imaging and web-accessible archive and the first of its Optio Business Process Solution suite. We also partnered with various consulting groups to help develop application specific adapters to the Optio Imaging Solution, thus enabling Optio to provide specific strategic document automation solutions for Oracle, QAD and SAP end users. In fiscal 2007, Optio’s development team intends to focus on a new business process management product with multi-step interactive process functionality and enhanced document repository. With this combination of products,
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Optio can build various process model solutions, beyond procure-to-pay and order-to cash. With the timely marketing of the unprecedented speed, accuracy, quality and financial savings resulting from the successful implementations of the Optio Imaging Solution already completed, Optio can uniquely position itself within the business process solution market to offer its customers a set of attractive software solutions.
• Prepare the Organization to Meet the Challenges of the Business Process Solution Market. To meet the challenges of the business process solution (“BPS”) market, Optio has reorganized its sales force for fiscal year 2007, creating a team specifically focused on BPS sales. In addition, necessary training and hiring of qualified, BPS knowledgeable employees will be important to the successful implementation of our BPS strategy.
• Strengthen the Focus and Performance of our Healthcare Division in the Urban and Rural Hospital Market. With the purchase of VertiSoft in August 2004, Optio acquired a subscription-based revenue model requiring customers to pay monthly contractual fees for the duration of long-term contracts, providing a more stable revenue recognition pattern. Optio continues to offer this subscription-based contract model for all of its healthcare products in an attempt to drive the subscription-based revenues in this market. The subscription-based revenue model lends itself to wider acceptance in the urban and rural healthcare markets, allowing the participants in such markets to overcome capital budget constraints and more rapidly adopt the technology solutions they need today. While Optio’s healthcare group will not exclusively focus on the urban and rural hospital markets, we intend to strengthen our marketing focus in these areas to increase our revenue.
Products
Software
Optio solutions manage and enhance mission-critical output from virtually any platform or operating system. Our products support output from initial design through the full document lifecycle and smoothly scale to meet new processing demands. Our software is divided into several solution sets: Output Solutions, Business Process Solutions and Healthcare Solutions.
Optio’s Output and Business Process Solutions are designed to meet the needs of the general business marketplace and Optio’s Healthcare Solutions are tailored to the special needs of the healthcare marketplace.
Optio’s Output Solutions include Optio e.ComIntegrate, Optio DesignStudio, Optio Fax, Optio Advanced Labeling and Optio Print Manager. Optio’s Business Process Solutions include Optio e.ComPresent, Optio Imaging Solutions and Optio’s Business Process Adapters.
Optio’s Healthcare Solutions include Optio MedForms, Optio DesignStudio, Optio Fax, Optio MedEx, Optio Advanced Labeling, Optio Patient Signature Capture and the Optio QuickRecord Suite.
In each case, Optio’s customers may purchase the entire solution or may purchase one or more of the software products that make up the particular solution. Typically, customers buy either Optio e.ComIntegrate or Optio MedEx as well as one or more other components of the applicable solution. The Optio e.ComIntegrate solution sets are designed for companies of different sizes and with varying functional needs across industries. Optio offers tiered solution sets that include Optio’s server technology, Optio e.ComIntegrate, and design tool, Optio DesignStudio, along with services and training to implement the solution. As advanced functions are required, customers can add support for XML, double-byte characters and presenting documents and reports to the web. Other components of the suite of products may include OptioFax TM , our fax server product; Optio e.ComPresent, our web accessible document repository; Optio Print Manager, our application providing assured delivery and printer definition management; and Optio Imaging Solutions, our intelligent data capture, image and archive solution. Most of the revenue derived from the enterprise suite is attributable to Optio e.ComIntegrate, and most of the revenue derived from the healthcare suite is attributable to Optio Medex.
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Optio Output Solutions
Optio e.ComIntegrate® Optio’s e.ComIntegrate is the foundation of the Optio Enterprise Suite, providing the necessary software infrastructure to enable business-to-business transformation, and distribution of critical information. The software builds on the strength of Optio’s core technologies. Customers can add additional modules such as inbound and outbound processing of XML, enabling organizations to integrate operations and participate in e-marketplaces utilizing XML dialects such as CBL, cXML or ebXML, Double-Byte languages and Binary Large Object (“BLOB”). Organizations seeking to XML-enable their existing applications can map standard purchase orders, invoices, and shipping advice documents without requiring enterprise application modifications. OptioDCS TM OptioDCS is the precursor to Optio e.ComIntegrate and it provides the baseline capabilities for the creation of documents from application print streams. 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 and delivers it to printers, fax servers, e-mail servers, web servers, document archives and e-commerce servers. This product serves our reseller base of customers only, and targets customers needing reduced functionality. Optio DesignStudio TM Windows based software that allows users to model the map of information from applications, databases and files, create business rules and conditional logic to automate processing of the information, and then model the network of destinations to which the information is delivered. The Optio Enterprise or Healthcare Suite then processes, in real time, the design files it creates. OptioFax TM Software that transmits and receives information using electronic fax standards and protocols to support business requirements for distributing enterprise information. OptioReprint TM Software that allows the user to browse, view and reprint recently submitted print jobs. OptioReprint allows users to quickly and easily reprint a document, set of documents or portion of a document to any printer without reconfiguring or returning to the original application. Optio Print Manager TM Provides reliable delivery of business critical documents and information across the entire enterprise printing infrastructure. In addition, it allows for the management of the printing infrastructure, load balancing of print jobs, provides failover capability and measures the performance of the print assets from a central management console. Optio Advanced Labeling TM Allows organizations to generate thermal, bar-code and radio frequency identification (“RFID”) labels and print them on-demand from desktop computers and mobile devices. 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 enterprise resource planning (“ERP”) applications like Oracle, QAD, PeopleSoft and others.
Optio Business Process Solutions
Optio Imaging Solutions TM Automatically reads, indexes and extracts information – including table and line item data - from unfamiliar, unstructured or semi-structured documents and business correspondence; and then automatically indexes and stores images in a centralized, web-accessible archive.
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Optio e.ComPresent TM 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. Optio 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 Business Process Adapters TM Provide integration of inbound data to and direct access to transactional business documents from enterprise applications such as Oracle E-business Suite, J.D. Edwards EnterpriseOne, QAD MFG/PRO and SAP mySAP Business Suite.
Optio Healthcare Solutions
Optio MedForms TM Forms the foundation of the Optio Healthcare Suite and 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 MedEx TM Built on the foundation of Optio MedForms, but includes the HIPAA-Smart TM Technology which securely routes documents based on HL7 messages to various devices, and addresses HIPAA concerns such as audit logging, content filtering, and patient privacy and confidentiality. It also provides routing, reorganization and reproduction of healthcare information on demand, allowing users throughout a healthcare organization to quickly and easily generate patient documents without expensive embossers or preprinted labels, and provides temporary storage and access to patient information when primary healthcare systems are inoperative or unavailable.
Optio QuickRecord Intelligent Hub TM
Consolidates documents into a logical view by patient for shared access throughout the enterprise. It also provides modular capabilities for accessing, delivering and completing the patient record, thus providing the basis for a complete composite patient view. Optio QuickChart ® Intranet and remote access via the Internet, providing physicians and caregivers with a secure 24/7 self-service to all patient documents. Optio QuickDelivery TM Automated document delivery of critical documents to point of need. Optio QuickScan TM Desktop imaging for scanning paper documents. Optio QuickSign TM Electronic signature authentication for physicians. Optio Patient Signature Capture TM Enables patients to sign documents using an electronic signature clipboard. The signature is embedded into an electronic document and then delivered to the input queue of a document repository such as the Optio QuickRecord Suite.
Optio e.ComPresent, Optio e.ComIntegrate, OptioFax, OptioReprint, Optio Print Manager, Optio Imaging Solutions
Equivalent in functionality to the products included in the Optio Enterprise Suite, but targeted to the healthcare market.
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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.
Services
Consulting. Optio’s consulting services provide customers with expertise and assistance in evaluating, planning and implementing Optio’s software products. To ensure a successful implementation of Optio’s software products, the Company’s consultants assist customers with the evaluation, planning and design process, the initial installation of a system, the integration of Optio’s software products 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 products, ensure success with the Optio solutions, strengthen the customer relationship and add to Optio’s industry-specific knowledge base.
While consulting services are optional and not essential to the functionality of the software, substantially all of Optio’s customers utilize these services to facilitate the rapid implementation of the software. These services are billed on an hourly or daily basis that varies based on the type of service provided.
Optio employs its 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. For the year ended January 31, 2004, Optio outsourced approximately 50% of its services business. During the year ended January 31, 2005, Optio reduced its internal consulting staff to 12 employees from 15 employees in fiscal year 2004. In addition, select employees within the consulting services organization were given opportunities elsewhere within the Company, requiring us to rehire their positions and train the new employees. This required us to increase our use of outsourcers during fiscal year 2005. During the year ended January 31, 2006, Optio used a large majority of its internal consultants to test products and to perform installations of the latest release of MedEx, version 1.2, to its existing customers. As a result, we were required to further increase our use of outsourcers to meet the implementation demands of new customers. Approximately 70% of Optio’s consulting revenue during fiscal year 2006 was performed by outsourcers. Separately, seven additional employees are dedicated as training staff for internal, customer and partner training, as well as to developing curriculum materials for training programs.
Maintenance
Optio offers a comprehensive maintenance program that provides customer telephone support, as well as timely software updates and designated upgrades offering increased functionality and technology advances. Optio offers these services for a fee equal to a percentage of the current software license fee per annum. As of January 31, 2006, a majority of Optio’s customers had subscribed to the comprehensive maintenance support program. However, for customers who pay on a subscription basis, the maintenance fee is included in their subscription payments.
Research and Development
Overview
To maintain Optio’s competitive position, Optio must continually enhance its current products and introduce new features or functionality, specifically those which build upon the Company’s business process management strategy. Product development activities for the year ended January 31, 2006 were focused on (i) the introduction of Optio Patient Signature Capture, (ii) the development of a new business process management product with multi-step interactive process functionality and enhanced document repository, (iii) a new release of Optio e.ComPresent, version 2.2, (iv) a new release of the QuickRecord Suite, (v) a new design tool and document server platform and (vi) the introduction of various adapters to the Optio Imaging Solutions, which enable the product to perform application specific business processes. A project to re-architect Optio’s core design platform technology was terminated during the year due to the cost and the diversion of resources from marketable products. This core design platform technology was originally being developed in hopes of building a foundation, or core, that would speed the development of future products. When the desired results were not being achieved, the project was terminated. Although we may not achieve increased speed in the development process, the termination of this project will not hinder the development of future products.
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During the year ended January 31, 2006, Optio spent $5.1 million, or 17% of revenue, on research and development activities, an increase from $4.6 million, or 16% of revenue, spent in the prior year. Optio has estimated that during the year ended January 31, 2006, personnel time spent on the above projects, and thus the associated percentage of the total $5.1 million spent on research and development, was divided as follows: 3% allocated to the introduction of Optio Patient Signature Capture; 14% to the development of a new business process management product; 3% to a new release of Optio e.comPresent, version 2.2; 29% to a new release of the QuickRecord Suite; 44% to a new design tool and document server platform; and 7% to the introduction of various adapters to the Optio Imaging Solutions.
Current development projects as of January 31, 2006 include (i) a new version of e.comPresent, scheduled for release in the second quarter of 2006, (ii) a complete QuickRecord Suite release which includes chart completion and deficiency management, scheduled for release in the first and second quarters of 2007, (iii) Optio’s new business process management solution with multi-step interactive process functionality, to be released in the third quarter of 2007, and (iv) a new design tool and document server platform, scheduled for release in the second quarter of 2007.
All of Optio’s research and development employees are located in the U.S. The products sold by Optio are developed in the U.S. and distributed to Optio’s foreign segments for resale.
Future Product Development Activities
In addition to completing the current development projects discussed above, product development activities for fiscal year 2006 and beyond are focused on supporting Optio’s strategic initiatives. In general, Optio intends to offer new features focused on improving business processes, partner alignment and seamless integration with partners, creating application transparency.
A major initiative for the year ending January 31, 2007 is the ongoing development of Optio’s new business process management solutions. On this platform, Optio will be able to design products which address multiple business process models. In addition, Optio intends to focus on product development that can be readily adapted for software as a service. In other words, multiple customers would be provided with remote access and management of Optio’s products located on a central server. To address Optio’s healthcare market, Optio intends to develop additional features for its QuickRecord Suite, including business process management support for QuickChart, coders work queue, tablet form entry and community health initiatives. Finally, Optio will continue to produce maintenance releases to repair software defects, to modify products to accommodate changes to partner software design and upgrade vendor supported application programming interfaces.
Retirement
In the future, Optio intends to no longer offer or support certain older versions of our existing products and the operating systems on which they operate. Optio is in the process of developing migration paths for our customers on these products and intends to retire certain products once the migration path is defined and communicated to our customer base.
Sales and Marketing
During the year ended January 31, 2006, approximately 73% of Optio’s software revenue was generated through Optio’s direct sales force, compared to 74% in the year ended January 31, 2005. Optio had 37, 36 and 38 U.S. sales representatives and sales support staff as of January 31, 2004, 2005, and 2006, respectively. Optio’s U.S. sales representatives are divided into teams that:
• directly market to potential customers based on geographic regions in the manufacturing, retail and distribution industries, and other market segments;
• directly market to potential customers in the healthcare industry; and
• sell to resellers and distributors.
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Optio’s international sales organization, focused on Europe, was composed of 10, 11, and 10 sales representatives as of January 31, 2004, 2005 and 2006, respectively.
The percentage of Optio’s license revenues generated through its worldwide reseller network remained consistent between the year ended January 31, 2005 and 2006, increasing only 1% from 26% in the prior year to 27% in the current year.
Optio’s marketing activities during the year ended January 31, 2006 were principally focused on trade shows and webinars where the Company was able to demonstrate its products and their capabilities. Other marketing promotions included direct mail and electronic media campaigns, editorial placements in various trade magazines, as well as distribution of product brochures and other literature to inform new and existing customers about our new product offerings.
Strategic Relationships
Optio has strategic relationships with third parties that help to market, sell, implement, support and enhance Optio’s solutions. These strategic relationships are discussed in the following paragraphs.
Distributor Relationships. Optio has relationships with distributors who market and resell Optio’s software. These distributors may also provide education, implementation and customization services for their customers. Optio’s major distributors include Harvest Technology and Deloitte Consulting Product Services LLC.
Independent Software Vendor/Value-Added Reseller Relationships. Optio has relationships with resellers that market and resell Optio’s software as a component of their own solutions and who often provide software-related education, implementation and customization services to their customers. These resellers have their own software solutions that typically address a specific market sector and utilize Optio’s software to enhance the functionality of their own solutions. Optio’s software is sold along with their own solutions under the Optio brand name. Optio’s major value-added resellers include Infor Global Solutions, Epicor, SunGuard Pentamation Inc. and Strategic Information Group.
OEM Relationships. Certain companies may choose to embed Optio’s software within their software and re-label the software 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.
Referral Relationships. Optio has established relationships with over 30 partners including QAD, Inc. (“QAD”), Rapidigm and QHR (formerly Quorum Health Resources, LLC), 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 fee to the referring partner.
Implementation Relationships. Optio has active relationships with 10 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 certifies them once they have demonstrated their proficiency in delivering complete solutions that meet the needs of the customers.
Vendor Relationships. Optio has relationships with major ERP and healthcare software vendors where Optio has demonstrated that its solutions are compatible with their applications and provide complementary functionality. These vendors include Oracle Corporation, QAD and SAP. In most cases, Optio’s products are certified as to their compatibility with these vendors. As a result, these vendors will include descriptions of Optio products’ key features and benefits in their directories that are published periodically in print and on their web sites. Optio can also feature the vendors’ logos in its advertising and promotional materials and 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 future.
Customers
Optio’s customers consist of enterprises across a broad spectrum of industries; however, healthcare, manufacturing, retail and distribution customers represent approximately 60% of Optio’s customers. Other customer industry segments include technology, banks, financial institutions and the public sector. As of January 31, 2006, Optio licensed its products for use by more than 5,000 customers.
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No single customer accounted for 10% or more of Optio’s total revenue during the years ended January 31, 2004, 2005 or 2006.
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 potential competitors fit into three separate categories. The first category includes custom software developers. The second is comprised of distributed output management, imaging or print management solutions from organizations such as Adobe Systems Incorporated, AFP Technology (Formscape), Documentum, Inc. (now part of EMC Corporation), Bottomline Technologies, The Hewlett Packard Company, StreamServe, McKesson Corporation, Standard Register, Cypress Corporation (now owned by ASG Software Solutions), FormFast, and Evergreen. The third category consists of the potential competition from the Company’s ERP or healthcare software vendor partners. If these partners enhance their own software products to include functionality currently supplied by Optio, such partners would become direct competitors to the Company.
Some ERP vendors have begun to recognize their end-users’ requirement for better output from their ERP applications. Thus, select ERP vendors have begun to include minimal functionality to address their customer needs and now compete with Optio’s core technology. This has put pressure on Optio to expand its product offerings to address the full range of business process solutions and document management, rather than simply output management, which we believe is a differentiating factor.
Management believes that Optio is differentiated from its competitors by its software’s ability to combine various capabilities, including information customization, distributed output management, information integration and exchange, print management, imaging, business process management and e-business enablement, into one integrated solution. To the best of management’s knowledge, none of Optio’s competitors provides such functionality in a single integrated 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 with its competitors because Optio offers a vertically oriented solution to address the needs of the healthcare marketplace, including new HIPAA regulatory concerns. In addition, a subscription-based licensing model, pursuant to which customers pay a monthly fee for use of our software and support, makes our products very competitive in the small to mid-size hospital facility market.
Management believes that the principal competitive factors present in Optio’s market include: product performance, quality, functionality and features; cost of solution; customer service; core technology; ease of implementation and use; and value derived from the 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 and it 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 or subscription-based 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 majority of Optio’s software products are 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, and trademark laws, confidentiality agreements and contractual obligations. Some of Optio’s software, documentation and other written materials are protected under the federal copyright law. Optio has registered “Optio” and its accompanying logo, as well as its products’ names such as “Optio e.ComIntegrate” as trademarks in the United States and in certain countries in which Optio sells its products. Optio has used the “Optio” trademark in the European Community since 1997, but has not obtained trademark registration even though applications for such registration have been filed. During 1999, Optio was made aware of an EEC registration of a mark similar to Optio’s which was filed after Optio began using the mark. Two
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oppositions have been filed against Optio’s attempt to register the mark in the EEC. In each case, Optio has reached an agreement in principal with the opposing party that will enable Optio to register and use the mark in the EEC. The documentation of the agreement and the registration is expected to be completed in 2007. In addition, Optio has received a notice from a third party claiming registration and ownership of the trademark “QuickScan” in the United States. The parties have reached an agreement in principle whereby the use of the word QuickScan must always be combined with the word Optio (for example, Optio QuickScan).
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.
While Optio has not applied for any U.S. patents, the Company acquired a patent in the acquisition of VertiSoft, patent number 5,437,024, which relates to a method for distributing reports. It is 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 the Company’s 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 Optio proprietary information. Policing the 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 on their intellectual property. Management expects that software product developers and providers of e-commerce solutions will be increasingly subject to infringement claims as the number of products and competitors in the industry grows and the functionality of products in different industry segments overlap. 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
Optio had 153, 167 and 170 employees as of January 31, 2004, 2005 and 2006, respectively. The Company’s employees are not covered by any collective bargaining agreements. Optio considers its relationships with its employees to be good.
Executive Officers of the Registrant
As of the date of this Annual Report, the following individuals serve as executive officers of Optio:
Name
Age
Position
C. Wayne Cape 52 President, Chief Executive Officer and Chairman of the Board of Directors Paul O’Callaghan 50 Senior Vice President of Sales Steve Kaye 53 Senior Vice President of Marketing and Product Management Donald French 56 Senior Vice President of Research and Development Daryl G. Hatton 44 Chief Technology Officer Caroline Bembry 35 Chief Financial Officer
C. Wayne Cape, the founder of Optio, served as Chief Executive Officer and President of Optio from its inception in 1981 through June 2001 and again since February 2003. Mr. Cape has acted as a member of Optio’s Board of Directors since the Company’s inception and 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.
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Paul O’Callaghan has served as Senior Vice President of Sales since February 2003. He also previously held this position from May 2001 to July 2001. Prior to joining Optio, from June 2000 to May 2001, Mr. O’Callaghan served as SVP Sales and Services for Idapta, Inc., a B2B solutions company providing electronic trading exchanges to major consortium organizations. From 1998 to 2000 Mr. O’Callaghan was Vice President of Sales for startup XACCT Technologies, which delivered internet-based, IP mediation software solutions to telecommunications industry leaders. Mr. O’Callaghan has also served in senior executive positions with Cisco Systems, IMNET Systems and Network Systems Corporation. Effective as of April 30, 2006, Mr. O’Callaghan has resigned from his current position with the Company. The Company has commenced a search for a new head of sales and hopes to have Mr. O’Callaghan’s replacement in shortly after his departure.
Steve Kaye has served as Senior Vice President of Marketing and Product Management since January 2004. From July 2003 to January 2004, Mr. Kaye served as Senior Vice President of Marketing. Since September 2002 and prior to joining Optio, Mr. Kaye served as a consultant to various public and private companies. From November 2000 until September 2002, Mr. Kaye was employed by Lombardi Software, Inc., as Vice President of Global Alliances. From May 1999 until November 2000, Mr. Kaye served as Senior Vice President of Marketing and Business Development for Optio. From February 1998 until April 1999, Mr. Kaye served as Vice President of Marketing for Softlab, Inc. Previously, Mr. Kaye served in executive positions with KnowledgeWare and Deloitte Consulting.
Donald French has served as Senior Vice President of Research and Development since February 2005. Previously, Mr. French served as the Company’s Senior Vice President of Product Development – Healthcare Products from August 2004, when he joined the Company with the acquisition of VertiSoft. Mr. French was the founder and president of VertiSoft in 1988, a healthcare pioneer in clinical document management systems. Prior to that, Mr. French founded Epic Development, a company based upon the concept of streamlining information access and distribution for physicians and hospital administrators. Mr. French originally became involved in healthcare solutions as the founder of FMG Corp., established in 1978. Prior to establishing FMG Corp., he was instrumental in developing the Tandy TRS-80 microcomputer, as well as other software and hardware for Radio Shack.
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 the Company. 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.
Caroline Bembry has served as Optio’s Chief Financial Officer since August 2003. From December 2002 to August 2003, Ms. Bembry served as the Vice President of Finance of Optio and from November 1999 to December 2002, she served as the Controller of Optio. Prior to joining Optio, Ms. Bembry was Assistant Corporate Controller for WebMD Medical Manager from June 1997 to November 1999. Prior to serving at WebMD Medical Manager, Ms. Bembry held various positions with Coopers & Lybrand LLP. Ms. Bembry is certified as a Certified Public Accountant in Florida.
Item 1.A. RISK FACTORS
You should carefully consider the following factors in evaluating us and our business. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or that are similar to those faced by other companies in our industry or business in general, may affect our business operations. If any of the following risks actually occur, our business, financial condition or results of future operations could be materially and adversely affected.
Risks Related To Our Business
We have incurred losses and may need to raise additional capital.
We achieved net income of $898,000, $1.7 million and $1.4 million for the twelve months ended January 31, 2006, 2005 and 2004, respectively. At January 31, 2006, we had an accumulated deficit of approximately $43.5 million. We may incur significant operating losses in the future. We may need to increase revenues or decrease expenses to maintain profitability,
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which may impact our business, and we cannot assure you that we will be able to do so. We cannot assure you that we can sustain or increase profitability or positive cash flows from future operating activities. Based on our current available cash reserves, if we cannot maintain profitability and a positive cash flow position, we may need to raise additional capital or obtain additional financing to fund our operations and expand our business. If we need to raise additional capital or obtain additional financing, there can be no assurance that we will be successful in raising such additional capital on favorable terms, or at all. Failure to raise such capital could result in a material adverse effect on our ability to meet our business objectives.
Collection risk on accounts receivable and note receivable.
We maintain allowances for doubtful accounts or collection risks on accounts and notes receivable. M2 Systems Corporation (“M2 Systems”) owes us $2.9 million on a secured note receivable. Although the Company has assessed the level of its reserve for doubtful accounts and the collectibility of the M2 Systems’ note receivable, there are no assurances that such levels are adequate or that the M2 Systems’ note receivable is fully collectible to the extent it is being carried on our consolidated financial statements (after taking into account a $900,000 write down of the M2 Systems’ note receivable in fiscal 2004). If a substantial amount of our accounts or the M2 Systems’ note receivable becomes uncollectible, it will have a material adverse impact on our income and cash position. In addition, on September 15, 2004 we notified M2 Systems of certain non-monetary defaults under the M2 Systems’ note. M2 Systems disputed these defaults. We did not accelerate the indebtedness under the M2 Systems’ note but the parties negotiated to modify the current loan documents to address the alleged defaults by M2 Systems to give us additional collateral. On May 18, 2005, the parties executed modified and additional security documents granting us a security interest in the assets of certain M2 Systems’ affiliates and placing greater restrictions on the use of the collateral. If we were to commence and complete a collection action, the adequacy of the collateral would need to be determined immediately, and we may be required to commence litigation in an attempt to collect on the collateral.
Our subscription revenue model may force us to terminate subscription agreements with collection risks, thereby decreasing our future revenue.
In connection with the acquisition of VertiSoft Corporation on August 10, 2004, we now earn subscription-based revenue, where customers pay monthly subscription fees for certain software and maintenance rights, typically pursuant to three to five-year contracts. We may also have additional subscription-based revenue in the future, particularly for software sales in the healthcare industry.
If we increase our subscription-based sales, the quarterly revenue of the Company may initially decrease. Under a perpetual license model, all of the revenue from the sale is usually recognized in the quarter in which the sale occurs. However, in a standard subscription-based software sale, the revenue is recognized monthly over the term of the underlying agreement.
Further, due to this delayed payment method, the collection risk may be greater; however, we would cancel the software license if the customer fails to pay the monthly subscription fee. While VertiSoft’s history shows very low early termination of subscription agreements, there are no assurances that such trend will continue in the future.
We rely on our strategic marketing relationships to generate customer referrals; if we do not successfully develop and maintain these relationships, our revenue will decline.
We expect sales of our software and services based on customer referrals generated through strategic marketing relationships will continue to account for a significant portion of our revenue. The loss of a significant number of these relationships would cause our revenue to decrease. Most of our revenue from these relationships is derived from strategic marketing relationships with two types of entities: large software vendors and consulting firms. Large software vendors, such as Oracle Corporation (“Oracle”) and QAD, may recommend our products to their customers or provide us with customer referrals. Consulting firms, such as Deloitte Consulting Product Services LLC, may recommend our software to their customers. Some of these organizations receive referral fees for these sales and others do not. We receive license fees from the customers in these sales. We expect that a limited number of our strategic marketing relationships, such as those with Oracle and QAD, will account for a substantial portion of our customer referrals and, therefore, revenue over time. Our strategic relationships are generally terminable by either party upon 30 to 90 days’ notice. Therefore, the continuation of these relationships is uncertain. Furthermore, software manufacturers may decide to promote technologies and standards that are not compatible with our software or that compete with our software, or they may lose market share for their products, which could cause our revenues to decline.
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We rely in part on third party reseller relationships to generate revenue; if we do not continue to develop and maintain these relationships, our revenue will decrease.
During the twelve months ended January 31, 2006, 2005 and 2004, approximately 27%, 26% and 31%, respectively, of our software license revenue was derived from partners, such as resellers, value-added distributors or OEM relationships. We intend to augment our indirect sales channel through such additional third-party reseller arrangements. As a result, we may become more dependent on these types of relationships. We may not be able to successfully augment these arrangements, and the expansion of indirect resale methods, even if successful, may not increase revenue. As a result, we may incur expenses that do not promote the growth of our business, which could have a material adverse effect on our financial condition, results of operations and cash flows.
We rely on our ability to retain our existing key personnel and attract additional key personnel; if we are unable to do so, we may not be able to effectively manage and expand our business.
Our future performance depends on the continued services of our senior management, product development and sales personnel. The loss of the services of one or more of our key personnel could seriously harm our ability to manage and expand our business. In particular, we rely on the experience and knowledge of our President, Chief Executive Officer, Chairman and founder, C. Wayne Cape.
Our future success also depends on our continuing ability to attract, hire, train and retain a substantial number of highly skilled managerial, technical, sales, marketing and customer support personnel. We are particularly dependent on hiring additional personnel to increase our direct sales, healthcare expansion and research and development efforts. In addition, new hires frequently require extensive training before they achieve desired levels of productivity. Competition for qualified personnel is intense and we may fail to retain our key employees or to attract or retain other highly qualified personnel. If we fail to attract and retain such personnel, we may not be able to effectively manage and expand our business.
We may expand our international operations; if we do not effectively manage this expansion, our operating results could be adversely affected.
Substantially all of our current international revenue is derived from the operations of our wholly-owned subsidiaries operating in France, Germany and the UK. Our foreign operations generated revenue from licenses and services to customers of $4.7 million in the twelve months ended January 31, 2006, representing 16% of total revenue. Our foreign operations generated revenue from licenses and services to customers of $5.0 million in the twelve months ended January 31, 2005, representing 17% of total revenue, compared to $4.2 million in the twelve months ended January 31, 2004, representing 15% of total revenue. Our international operations may negatively affect our operating results due to difficulties in staffing and managing foreign operations; potential losses or gains from currency fluctuations as a result of transactions and expenses being denominated in foreign currencies; seasonal reductions in business activity in Europe; increased financial accounting and reporting burdens and complexities and potentially adverse tax consequences; delays in delivering language-specific versions of our software due to our limited experience in creating these versions; compliance with a wide variety of complex foreign laws and treaties, including, but not limited to, labor laws and trade restrictions; unstable political and economic international conditions; reduced protection for intellectual property rights in some countries; and licenses, tariffs and other trade barriers.
The expansion of our existing international operations and entry into additional international markets will require significant management attention and financial resources, and will place additional burdens on our management, administrative, operational and financial infrastructure. We cannot be certain that our operations in other countries will produce desired levels of revenue or profitability, thus providing a satisfactory return on investment.
Our software may suffer from defects or errors, which may harm its reputation or subject us to product liability claims.
The software we offer is inherently complex. Despite extensive testing and quality control, current versions, new versions or enhancements of our software may contain errors after commencement of commercial shipments. Any errors may harm the reputation of our software or subject us to product liability claims. Significant technical challenges also arise with our software because our customers purchase and deploy our software across a variety of computer platforms and integrate them with a number of third-party software applications and databases. Any defects or errors that
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are discovered after commercial release of our software could result in the loss of revenue or delay in market acceptance of our software. Moreover, we could face significant product liability claims and higher development costs if our software contains undetected errors, if we fail to meet our customers’ expectations or if a customer’s system experiences failures following the implementation of our software, regardless of our responsibility for such failure. Although we maintain general liability insurance coverage, this coverage may not continue to be available on reasonable terms or at all, or may be insufficient to cover one or more large claims. In addition, a product liability claim, whether or not successful, could adversely affect our business by increasing our costs and diverting our management’s attention.
The third party software on which we rely may suffer from defects or errors or may become obsolete, which would adversely affect our sales.
Our software contains components developed and maintained by third-party software vendors, and we expect that we will incorporate software from third-party vendors in our future software. We may not be able to replace the functionality provided by this third-party software if it becomes obsolete, or is discovered to be defective or incompatible with future versions of our software or if it is not adequately maintained or updated. Any significant interruption in the availability of this third-party software or defects in this software could harm our sales and disrupt our ability to support current customers unless and until we can secure an alternative source. In addition, we have entered into, and plan to continue to enter into, strategic relationships with other companies, whereby we license our software for integration with third party software. If the other companies’ software fails to meet customer expectations or causes a failure in its customers’ systems, the reputation and sales of our software could be adversely affected, even if our software performs in accordance with its functional specifications.
We rely on third parties to provide part of our consulting services; if these third parties do not provide satisfactory services, our reputation could be harmed and our revenue from these services could decrease.
We currently contract with, and may increasingly contract with, third party providers to assist us in providing consulting services to our customers. Services provided by these third parties may include providing assistance to our customers in installing and implementing our software. If we are unable to continue contracting with third parties for these consulting services, or if these third parties do not meet the needs or expectations of our customers, our business and reputation may be harmed and we will have to perform these functions ourselves. Providing these services could place a significant strain on our internal consulting resources, and we may not be able to successfully perform these services on a timely and cost-effective basis, which could have a material adverse effect on our financial condition, results of operations and cash flows.
Disputes regarding our intellectual property could adversely affect our ability to sell our software and services.
We believe that our ability to sell our software and services depends, in significant part, on protecting our proprietary intellectual property and favorably resolving intellectual property claims that may be brought against us. If we fail to adequately protect our intellectual property rights, our ability to sell our software and services may be restricted, and our operating results could be adversely affected.
We rely on a combination of copyright, trademark and trade secret laws and contractual provisions to establish and protect our proprietary rights. We have registered the trademarks for “Optio” and certain of Optio’s product names in the United States and have applied for the United States registration of the trademark for certain other yet un-registered Optio product names. We have applied for trademark registration for “Optio” in certain foreign countries in which we sell our products. We have also registered the domain names “optiosoftware.com” and “HIPAASmart.com.” We have not filed any copyrights or patents for our software, but we have acquired a patent for an improvement in Selective Computer-Generated Information Distribution System by Computer Peripheral Emulation and Use from VertiSoft Corporation, which we acquired in August 2004.
The steps we have taken to protect our proprietary rights may not be adequate. We may not be able to secure trademark or service mark registrations for our marks in the United States or in foreign countries, and third parties may infringe upon or misappropriate our copyrights, trademarks, service marks, domain names and similar proprietary rights. In addition, effective copyright and trademark protection may be unenforceable or limited in foreign countries. Also, our competitors or others may adopt product or service names similar to ours, thereby impeding our ability to build brand identity and possibly leading to customer confusion. In addition, litigation may be necessary to enforce and protect our trade secrets, copyrights and other intellectual property rights. Any litigation would divert management resources, be expensive and may not effectively protect our intellectual property. Our inability to adequately protect our intellectual property rights could adversely affect our business.
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We may be subject to litigation for claims of infringement of the rights of others or to determine the scope and validity of the intellectual property rights of others. Furthermore, adverse determinations in litigation could result in the loss of proprietary rights, subject us to significant monetary liabilities, require us to seek licenses from third parties, or prevent us from selling our products and services. If we are required to obtain new licenses from third parties, we may not be able to obtain them on commercially reasonable terms or at all. Any of these results could reduce the acceptance of the Optio brand, which could adversely affect our business.
We may not meet our covenants under our bank debt arrangements.
At January 31, 2006, we were in compliance with all financial covenants required under our line of credit facility. However, at certain times in the past, we were not in compliance with our loan covenants and received appropriate waivers of default from our lender. We believe it is possible that certain requirements contained in our loan covenants may still not be met during fiscal 2007. If we fail to meet any negative covenant under our loan facility while we have any borrowings outstanding thereunder, our lender has the right to declare the outstanding debt immediately due and payable.
Our international operations may adversely affect our operating results.
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, administrative and reporting burdens and complexities; potentially adverse tax consequences; compliance with a wide variety of complex foreign laws and treaties, including employment laws; adverse changes in economic conditions of foreign countries, caused by various sources, including economic instability and disputes; and reduced protection for intellectual property rights in some countries.
Risks Related To Our Industry
We may make acquisitions in order to remain competitive in our markets; if we are unable to do so, our competitive position could be weakened.
We intend to continuously evaluate our position within our industry, and we may acquire complementary technologies or businesses in the future. However, we may not be able to identify suitable acquisition candidates that are available for sale at reasonable prices. Due to consolidation trends within the technology industry, failure to adopt and successfully implement a long-term acquisition strategy could weaken our competitive position. We may elect to finance future acquisitions with debt financing, which would increase our debt service requirements, or through the issuance of additional common or preferred stock, which could result in dilution of our existing shareholders. In addition, we may not be able to arrange adequate financing for any acquisitions on acceptable terms or at all.
Acquisitions may be difficult to integrate into our business, may limit our ability to manage our operations and may result in adverse accounting treatment.
We may be unable to obtain a satisfactory return on our investments in acquisitions as a result of various factors, including, but not limited to, difficulties in assimilating the operations, products, technology, information systems and personnel of the acquired company with our operations; the diversion of our management’s attention from other business concerns; the impairment of relationships with our employees, affiliates and organizations with which we have strategic marketing relationships; difficulties maintaining uniform standards, controls, procedures and policies; our lack of direct prior experience in the markets of the acquired company; and the loss of key employees of the acquired company. Future acquisitions may also involve large one-time write-offs related to goodwill and other intangible assets. The failure to obtain a satisfactory return on our investments in acquisitions could have a material adverse effect on our financial condition, results of operations and cash flows.
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We face intense competition in our industry; if we are unable to compete successfully, we may not be able to sell our software and services, which would harm our operating results.
If we are unable to satisfy our customers’ requirements, we may lose those customers to our competitors, which would harm our operating results. The market for our software and services is intensely competitive, fragmented and constantly changing. Our customers’ requirements and the technology available to satisfy those requirements continually change. We expect competition to persist and further intensify in the future.
We believe that our competitors fit into three segments. The first segment is custom software development. The second segment is comprised of output management, imaging and print management solutions from organizations such as AFP Technology Ltd. (Formscape); The Hewlett-Packard Company; StreamServe, Inc.; BottomLine Technologies; Documentum, Inc. (now part of EMC Corporation); Adobe Systems Incorporated; McKesson Corporation; Standard Register and Evergreen. The third segment is comprised of the ERP or healthcare software vendor partners with which we typically partner and which may enhance their own software products to include functionality currently handled by us, thus directly competing with us.
Some ERP vendors have already begun to recognize their end-users’ requirement for better output from their ERP applications. Thus, select ERP vendors have begun to include minimal functionality to address their customers’ needs and now compete with our core technology. This development has put pressure on us to expand our offerings to address the full range of business process and document management solutions, rather than simply output management. Any competition with our partners would negatively impact our ongoing relationships with select ERP vendors.
We expect to face increased competition from our current competitors. In addition, new competitors, alliances among existing and future competitors, or acquisitions by or consolidations of our competitors may emerge and rapidly gain significant market share.
Some of these companies, as well as some other competitors, have longer operating histories and significantly greater financial, marketing and other resources than we do. Many of these companies can also leverage extensive customer bases and adopt aggressive pricing policies to increase their market shares. In addition, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market shares.
Competitive pressures may make it difficult to acquire and retain clients and may require us to reduce the price of our software. We cannot be certain that we will be able to compete successfully with existing or new competitors. If we fail to compete successfully, our financial condition, results of operations and cash flows could be adversely affected.
We may experience delays in enhancing existing software and in developing new software; these delays may adversely affect our competitiveness and cause us to lose market share.
Our competitiveness and ability to maintain or increase our market share will depend, in part, on our ability to develop, test, market, sell and support enhancements to our current and new software on a timely basis in response to changing customers’ needs, competition, technological developments and emerging industry standards. Our failure to successfully adapt our software and services to this rapidly changing market could reduce our revenue and adversely affect our operating results. The software industry is characterized by rapidly changing technology, evolving industry standards, emerging competition and frequent introductions of new products and services. These developments could limit the marketability of our software and services and could render our software and services obsolete. We may not successfully identify new product opportunities or develop and bring new and enhanced products and services to the market in a cost-effective and timely manner. If we fail to release new software and upgrades on time or if our products and/or services fail to achieve market acceptance, we may experience customer dissatisfaction, cancellation of orders and license agreements and loss of revenue.
Risks Related To Our Common Stock
Our operating results may fluctuate in future periods; as a result, we may fail to meet expectations of investors and our stock price may decline.
Our revenue and operating results may vary from quarter to quarter. As a result, we may fail to meet the expectations of our investors, which may cause our stock price to decline. These fluctuations may occur as a result of any of the following factors, including, but not limited to, variations in market acceptance of and demand for our software;
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the size and timing of our customer orders; increased expenses, whether related to sales and marketing, product development or administration; delays in introducing new software or software enhancements; new software introductions or changes in pricing policies by our competitors; costs related to acquisitions of technologies or businesses; and the amount and timing of expenditures related to expansion of our operations.
The purchase of our software involves a significant commitment of resources, recurring expenses and attendant delays frequently associated with approving capital expenditures and reviewing new technologies that affect key operations. The decision-making processes of our customers’ senior management require us to provide a significant level of training to prospective customers regarding the use and benefits of our software. We may expend substantial funds and management resources during the sales cycle and fail to consummate the sale. Accordingly, our results of operations for a particular period may be adversely affected if the sales forecasted for a particular period are delayed or do not otherwise occur.
Future issuances of shares of our common stock could cause our stock price to decline.
Future issuances of shares of our common stock may depress our stock price. Sales of a substantial number of shares of our common stock in the public market could adversely affect the market price of our common stock. In addition, our management and affiliates control more than 45% of our issued and outstanding common stock and own a significant number of options convertible into shares of common stock. Our investors will likely experience further dilution upon the exercise of such outstanding stock options.
The low price of our common stock could result in difficulty in trading our common stock.
Our common stock is currently quoted on the Over-the-Counter Bulletin Board (the “Bulletin Board”) and is no longer listed on the NASDAQ Market. As a result, trading our shares may be more difficult for investors, leading to further declines in share price. Such declines could also make it more difficult for us to raise additional capital. We would also incur additional costs under state blue sky laws if we completed an offering of our common stock. Further, the Bulletin Board may be terminated, in which case we would either attempt to list its common stock on some other exchange or it may cause our common stock to further decline and lower our trading volume. There are no assurances that we would be able to qualify for another exchange.
Our management and affiliates control more than 45% of our issued and outstanding common stock and will therefore be able to significantly influence the outcome of any shareholder vote.
In excess of 45% of our issued and outstanding common stock is controlled by our management and affiliates. This may discourage a potential acquirer from offering to purchase or otherwise attempting to obtain control of our company, which in turn could reduce our stock price or prevent our shareholders from realizing a premium over our stock price.
Outside investors may accumulate large portions of our common stock.
Several groups of outside investors have acquired a substantial amount of shares of our common stock. These investors have filed Schedules 13D with the SEC and have not indicated that they intend to take control of our company. However, if these investors and their affiliates continue to accumulate shares of our common stock, they could attempt to change our Board of Directors and/or management.
Our articles of incorporation and bylaws, and certain provisions of the Georgia law, may prevent or delay a future takeover, thus preventing investors from realizing a premium on our stock price.
Our articles of incorporation, bylaws and certain provisions of the Georgia law, could make it more difficult for a third party to acquire us, even if a change in control would be beneficial to our shareholders. For example, our articles of incorporation and bylaws provide, among other things, that our Board of Directors, without shareholder approval, has the authority to issue preferred stock with rights superior to the rights of the holders of common stock; that shareholders must comply with advance notice provisions contained in our bylaws to make proposals at shareholder meetings and to nominate candidates for election to our Board of Directors; that our Board of Directors is classified and directors serve staggered terms; and that the shareholders may call a special meeting only upon request of 50% of the votes entitled to be cast on each issue to be considered at the special meeting. Georgia law also contains “business combination” and “fair price” provisions that may have the effect of delaying, deterring or preventing a change in control of our company.
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We do not intend to pay dividends in the foreseeable future.
We have never declared or paid dividends on our common stock. We intend to retain our earnings, if any, for use in the operation and expansion of our business. In addition, our credit facility contains a negative covenant that prohibits us from paying a dividend on our common stock. Therefore, we do not anticipate declaring or paying any dividends in the foreseeable future.
Item 1.B. UNRESOLVED STAFF COMMENTS
Not applicable.
