Item 1.
Business
Item 1A.
Item 1A.
Risk Factors
Item 1B.
Item 1B.
Unresolved Staff Comments
Item 2.
Item 2. PROPERTIES
Optio’s principal corporate offices are located in approximately 51,000 square feet at 3015 Windward Plaza, Windward Fairways II, Atlanta, Georgia, 30005. The term of this lease is through December 31, 2012. Sales offices are also located in France, Germany and the United Kingdom, providing Optio with an additional 3,000 square feet.
Optio leases all of its properties with remaining terms between one and seven years. Management believes that its facilities are adequate for its current needs and that suitable additional space will be available as required.
Item 3.
Item 3. LEGAL PROCEEDINGS
On November 13, 2001, a lawsuit styled Kevin Dewey vs. Optio Software, Inc., et. al. was filed in the United States District Court for the Southern District of New York. The complaint was filed against the underwriters in the Company’s initial public offering as well as Optio and certain officers and directors of Optio, by a single plaintiff purportedly on behalf of persons purchasing Optio’s common stock between December 14, 1999 and December 6, 2000. The lawsuit also seeks class action status. Optio is a co-defendant with approximately 300 other issuers in this suit. The complaint includes allegations of violations of (i) Section 11 of the Securities Act of 1933, as amended (the “Securities Act”), by all named defendants, (ii) Section 12(a)(2) of the Securities Act by the underwriter defendants, (iii) Section 15 of the Securities Act by the individual defendants, and (iv) Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder by the underwriter defendants. The complaint alleges that Optio’s prospectus was materially false and misleading because it failed to disclose, among other things, that: (i) the underwriters had solicited and received excessive and undisclosed commissions from certain investors in exchange for which the underwriters allocated to those investors material portions of a limited number of Optio shares issued in connection with the Optio initial public offering; and (ii) the underwriters had entered into agreements with customers whereby the underwriters agreed to allocate Optio shares to those customers in the Optio initial public offering in exchange for which the customers agreed to purchase additional Optio shares in the aftermarket at pre-determined prices. The complaint seeks unspecified amounts as compensatory damages as a result of Optio’s alleged actions, as well as punitive damages and reimbursement for the plaintiffs’ attorneys’ fees and associated costs and expenses of the lawsuit. A proposal to settle the claims against Optio and other companies and individual defendants in the litigation was conditionally accepted by Optio. The completion of the settlement is subject to a number of conditions, including Court approval. The Court preliminarily approved the settlement on February 15, 2005, subject to certain modifications which are currently pending approval by the defendants. Under the settlement, the plaintiffs will dismiss and release all claims against participating defendants in exchange for a contingent payment guaranty by the insurance companies collectively responsible for insuring the issuers in the action. Optio may still have yet undetermined exposure to the underwriters pursuant to indemnification provisions in the underwriting agreement entered into at the time of the initial public offering. Under the guaranty, all of the insurers for all the issuers will be required to pay an amount equal to $1.0 billion less any amounts ultimately collected by the plaintiffs from the underwriter defendants in all of the pending cases. A settlement fairness hearing was held on April 24, 2006, however no ruling has been issued yet by the Court. There can be no assurance that this proposed settlement will be approved and implemented in its current form, or at all. On December 5, 2006, the United States Court of Appeals for the Second Circuit overturned the District Court’s certification of the class of plantiffs who are pursuing the claims that would be settled in the settlement against the underwriter defendants. Plantiffs filed a Petition for Rehearing and Rehearing En Banc with the Second circuit on January 5, 2007 in response to the Second Circuit’s decision. The Petition for Rehearing and Rehearing En Banc was denied on April 6, 2007. Plantiffs have informed the District Court that they would like to be heard as to whether the settlement may still be approved even though the Petition for Rehearing was denied. The District Court indicated that it would defer consideration of final approval of the settlement pending plantiffs’ request for further appellate review. The disposition of this matter is limited to Optio’s $300,000 corporate insurance deductible. The Company has completed payment of the insurance deductible through payment of legal fees. Optio will have no additional exposure unless the insurance companies become insolvent or unless Optio’s liability exceeds its policy limits through this matter or other matters. Optio’s insurance companies
currently have an A or AA rating. The range of loss, if any, cannot be estimated and thus no potential loss is reflected in Optio’s consolidated financial statements.
Management believes that it has meritorious defenses in the foregoing matter and intends to pursue its position vigorously. While litigation is inherently subject to many uncertainties, management does not believe that the outcome of this case will have a material adverse effect on the financial position of Optio. However, depending on the amount and timing of an unfavorable resolution of the lawsuit, it is possible that Optio’s financial condition, results of operation or liquidity could be materially affected.
In addition, Optio is party to routine litigation or administrative proceedings incidental to its business, none of which is believed by the Company to be likely to have a material effect on the financial condition, results of operations or liquidity of the Company.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
On December 15, 1999, Optio’s common stock began trading on the Nasdaq National Market under the symbol “OPTO” until June 19, 2002, when Optio’s common stock began trading on the Nasdaq SmallCap Market. Effective January 8, 2003, Optio failed to meet the qualifications for listing on the Nasdaq SmallCap Market and began trading on the Over-the-Counter Bulletin Board under the symbol “OPTO.OB”. On April 18, 2007, the closing price of the common stock on the Over-the-Counter Bulletin Board was $1.46.
The following table reflects the range of high and low sale prices of Optio’s common stock by quarter, for the two most recent fiscal years. Bid prices reflect inter dealer prices without retail mark-up, mark-down or commissions.
Holders
As of April 18, 2007, there were approximately 111 holders of record of Optio’s common stock.
Stock Performance Graph
The following line-graph provides a comparison of the cumulative total shareholder return on the Company’s Common Stock for the period from January 31, 2002 through January 31, 2007, against the cumulative shareholder return during such period achieved by the Nasdaq Stock Market (U.S. Companies) Index and the Standard and Poor’s Application Software Index. The graph assumes that $100 was invested on January 31, 2002 in each of the comparison indices and in the Common Stock. All amounts have been calculated as if all dividends were reinvested.
$100 invested on 1/31/02 in stock or index-including reinvestment of dividends. Fiscal year ending January 31.
The preceding Stock Performance Graph shall be deemed incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act or the Exchange Act (collectively, the “Acts”), except to the extent that the Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under the Acts.
Repurchases
On January 5, 2007, Optio announced a share repurchase plan under which we could repurchase up to $2.0 million of our common stock over a next twelve-month period. During fiscal 2007, we purchased a total of 40,000 shares at an average purchase price of $1.50 per share, or approximately $60,000 in the aggregate. The repurchased shares were held and not cancelled. As of January 31, 2007, the dollar value of shares that remained available for repurchase under this program was approximately $1,940,000. The repurchases for the fiscal year ended January 31, 2007 are reflected in the following table:
(1) Last repurchase date was January 31, 2007.
Dividends
Optio did not pay any dividends during the years ended January 31, 2005, 2006 or 2007. Optio intends to retain all of its earnings to finance the expansion of its business and for general corporate purposes and does not anticipate paying any cash dividends on its common stock for the foreseeable future. In addition, Optio’s line of credit contains a covenant that prohibits the payment of dividends.
Recent Sales of Unregistered Securities
None.
Securities Authorized Under Equity Compensation Plans
See Item 12, which incorporates by reference to the Proxy Statement relating to our 2007 Annual Meeting of Shareholders, the information concerning securities authorized for issuance under our equity compensation plans.
Item 6.
Item 6. SELECTED FINANCIAL DATA
The following table sets forth the selected historical financial data of Optio. The selected financial data should be read together with the consolidated financial statements and related notes and the section of this Annual Report entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The selected financial data as of and for the years ended January 31, 2003, 2004, 2005, 2006 and 2007 have been derived from the audited consolidated financial statements of Optio.
(a) Includes the results of operations of VertiSoft since acquisition, for the period August 10, 2004 to January 31, 2005 and for the full years ended January 31, 2006, and January 31, 2007, respectively.
(b) Includes the effect of the adoption of Statement of Financial Standards No. 123R, Share-Based Payments, for the year ended January 31, 2007.
Item 7.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements and related notes thereto and “Item 6. Selected Financial Data” appearing elsewhere in this Annual Report.
Overview
Optio is engaged primarily in the development, sale and support of infrastructure software that enhances the form, content, delivery and availability of business critical information. Optio’s primary business consists of providing software and services that address organizations’ needs for document output management, forms automation, print management and imaging solutions in the enterprise and healthcare industries.
Optio markets and sells its software and services throughout the United States and Europe, and in the Asia Pacific region, through its direct sales force and certified resellers. Optio also offers consulting services, which provide customers with implementation assistance and training. As of January 31, 2007, Optio had over 5,000 customers worldwide using Optio’s software and services. No single customer accounted for 10% or more of Optio’s revenue for the years ended January 31, 2005, 2006, or 2007.
Management Summary
Optio’s strategic initiatives for fiscal year 2007 were as follows: (i) enhance our business process solution credentials with the right combination of products, messaging, sales and successful implementations, (ii) prepare the organization to meet the challenges of the business process solution market, and (iii) strengthen the focus and performance of our healthcare division in the urban and rural hospital market.
Several factors contributed to Optio’s focus on expanding the product line to a document-centric business process solution from its historical document output management solutions. In fiscal 2005, the consolidation of the large ERP vendors such as J.D. Edwards and Oracle, negatively impacted Optio’s revenue. In addition, the large ERP vendors are beginning to introduce limited functionality document output management solutions of their own, which could impact the Company’s revenue. The average sales price for document output management solutions has continued to decline, thus inhibiting Optio’s revenue growth. Recognizing these factors, Optio’s management began a strategic initiative to evolve the Company’s product line to include business process solutions that address such functions as procure-to-pay and order-to-cash, as well as other document-intensive business processes. In December 2004, Optio introduced Optio Imaging Solutions™, its intelligent data capture, imaging and Internet-accessible archive and the first of our Optio Business Process Solution™ suite of products. We also partnered with various consulting groups to help develop application specific adapters to the Optio Imaging Solution, thus enabling us to provide specific strategic document automation solutions for Oracle, QAD and SAP endusers. Optio gained immediate traction for this product, both to existing customers and new customers, during the year ended January 31, 2006, with sales of these solutions contributing six percent of Optio’s license revenue and contributing to a 20% increase in the average sale price during fiscal year 2006. To continue Optio’s transition to a company that helps customers manage the entire life-cycle of documents, in fiscal 2007, Optio focused significant development efforts on its ProCentra product, our new business process management solution. While significant time was spent developing the product during 2007, it will not be released until fiscal 2008. As a result, Optio continued to focus on the sale of its document output management, print management and imaging solutions. Optio continued to feel downward pressure in the document output management market, primarily resulting from certain ERP vendors introducing basic similar functionality and from Optio’s competitors continuing to offer declining prices, making it difficult to compete at a higher average sales price. In the print management and imaging solutions space, Optio
faced longer sales cycles, primarily because these products have a higher average sale price. While sales of these products increased slightly between 2006 and 2007, Optio’s overall license revenue sales declined from 2006 to 2007.
In the healthcare market, we set forth to grow our subscription-based revenue model. Initially, sales of our electronic health record product were focused on a community health model, in which we targeted larger hospital systems desiring to share patient data among physicians and caregivers and multiple, unrelated facilities. While we continue to market to these types of facilities, we found that the subscription-based revenue model lends itself to wider acceptance in the urban and rural healthcare market, allowing such customers to overcome capital budget constraints and more rapidly adopt the technology solutions they need today. As a result, Optio began a focus on the urban and rural hospital market, creating partnerships with advocacy organizations for rural hospitals, such as HomeTown Health LLC. These partnerships actively market Optio’s electronic health record solution, on a subscription basis, to the hospitals within its group. By focusing on the rural hospitals, during fiscal year 2007, Optio closed contracts which will bring over $2.0 million in subscription revenue over the next several years. Optio also discovered that the length of time until the products are installed, which is when the Company can begin recognizing the monthly subscription fee, is often longer than we anticipated. As a result, there was not a dramatic impact on revenue from these contracts during fiscal year 2007.
Even with a focus to move a greater percentage of our healthcare revenues to the subscription-based model, which increased in 2007 in nominal terms, healthcare perpetual license fees remained consistent between 2006 and 2007 due mainly to the obtaining of a new significant customer.
To continue to strengthen our healthcare revenue sources for the future, Optio has focused on the enhancement of our existing products and the introduction of new products to establish a fully integrated electronic health record-enabling solution. In February 2005, Optio introduced version 1.2 of Optio MedEx, which provides improved performance, navigation and search capabilities, new HL7 message support and integration to Optio Print Manager. Also in fiscal year 2006, Optio introduced its new Optio Patient Signature Capture™ solution that enables patients to electronically sign documents using an e-signature tablet. In fiscal 2007, Optio introduced Optio Deficiency Management™ , which allows individuals to electronically view a patient’s chart for completion or mark deficiencies in the chart, and Optio QuickTablet™. which allows physicians to write patient information on a Tablet PC and electronically capture the information into a patient’s chart.
A primary strategy initiated in fiscal 2006 and continuing in 2007 was to strengthen our European revenue sources. This strategy had previously been affected by turnover in our European organization compounded by legal employment constraints in changing the workforce. In 2007, selective replacements of new personnel, including a new Managing Director, contributed to an increase in revenues of $215,000 from our European group.
Total license revenues decreased 22% between the years ended January 31, 2006 and 2007, primarily the result of declining enterprise revenues, in both the United States and Europe, resulting from the decline of the document output management space and longer sales cycles for the print management and imaging solutions. Our healthcare perpetual licenses remained consistent between 2006 and 2007. In 2006, subscription revenue for the entire year totaled $2.2 million. In fiscal 2007, with a minimal amount of additional new subscription contracts, subscription fees increased to $2.4 million.
Critical Accounting Policies and Use of Estimates
Optio has identified the following significant accounting policies and estimates that are critical to the understanding of its consolidated financial statements.
Revenue Recognition
Overview
The Company’s revenue consists of perpetual license fees of the Company’s software products, maintenance, consulting services, customer training and subscription fees covering the licensing of the Company’s software products and maintenance. The Company generally charges fees for licenses of its software products either based on the number of Central Processing Units (“CPUs”) on which the product is installed or, to a lesser extent, based on the number of persons or hospital beds registered to use the product. The Company’s revenue recognition policies are in accordance with Statement of Position (“SOP”) No. 97-2, Software Revenue Recognition, as amended by SOP No. 98-9, Software Revenue Recognition, With Respect to Certain Transactions, and the SEC’s Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements, as amended by SAB 104, Revenue Recognition.
License Fees
The Company licenses its products through its direct sales force and indirectly through resellers. In general, software license revenues are recognized when a non-cancelable license agreement has been signed and the customer acknowledges an unconditional obligation to pay, the software product has been delivered, there are no significant uncertainties surrounding product acceptance, the fees are fixed or determinable, collection is considered probable, the remaining elements such as future services are not considered essential to the functionality of the software and the Company has a legally enforceable claim not subject to refund or forfeiture if future services are not rendered. Delivery is considered to have occurred when title and risk of loss have been transferred to the customer, which generally occurs when media containing the licensed programs is provided to a common carrier. In case of electronic delivery, delivery occurs when the customer is given access to the licensed programs. If collectibility is not considered probable, revenue is recognized when the fee is collected. The Company enters into reseller arrangements that typically provide for sublicense fees payable based upon a percentage of list price. The Company does not grant its resellers the right of return.
The Company recognizes revenue using the residual method pursuant to the requirements of SOP No. 97-2, as amended by SOP No. 98-9. Revenues recognized from multiple-element software arrangements are allocated to each element of the arrangement based on the fair values of the elements, such as licenses for software products, maintenance, consulting services or customer training. The determination of fair value is based on objective evidence, which is specific to the Company and can differ from amounts contained in the customer arrangement. The Company limits its assessment of objective evidence for each element to either the price charged when the same element is sold separately or the price established by management having the relevant authority to do so, for an element not yet sold separately. If evidence of fair value of all undelivered elements exists but evidence does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue.
The Company records deferred revenue for software license agreements when cash has been received from the customer and the agreement does not qualify for revenue recognition under the Company’s revenue recognition policy. The Company records accounts receivable for software license agreements when the agreement qualifies for revenue recognition but cash or other consideration has not been received from the customer.
Subscription Revenue
The Company also licenses certain of its products in the form of a subscription service contract, with terms typically ranging from three to five years. Subscription revenue, which includes a license of the
software product, technical support and future unspecified enhancements to the software product, is recognized on a daily basis over the term of the agreement. Unlike license fee revenue, subscription service contracts include licenses that are not perpetual in duration.
Services, Maintenance and Other Revenue
Consulting services revenue and customer training revenue are recognized as such services are performed, as they are incidental to the functionality of the software. Maintenance revenues, which include revenues bundled with software license agreements that entitle the customers to technical support and future unspecified enhancements to the Company’s products, are deferred and recognized ratably over the related term of the agreement, which is generally twelve months. In accordance with Emerging Issues Task Force release 01-14, Income Statement Characterization of Reimbursements Received for Out of Pocket Expenses Incurred, the Company recognizes reimbursable expenses as revenue and as an expense in cost of revenue in all periods presented.
Accounts Receivable
Optio maintains allowances for doubtful accounts for estimated losses resulting from customers’ inability to make payments required under their contracts. The amount of Optio’s reserve is based on historical experience and Optio’s specific review and analysis of the receivables outstanding. Management reviews its accounts receivable on a regular basis to determine if any such amounts may be potentially uncollectible. The Company includes any balances that are determined to be uncollectible, along with a general reserve at varying percentages of 2% for domestic and 3% for international balances less than 30 days old, to 50% for international accounts more than 90 days old, in its overall allowance for doubtful accounts. Based on historical experience, management believes the Company’s allowance for doubtful accounts is adequate as presented; however, the amount of the reserve could be different under different conditions or using varying assumptions. If the percentage of the general reserve were to increase by 1%, an additional $35,000 reserve would be required. If the financial condition of Optio’s customers were to deteriorate, resulting in their inability to make payments, additional reserves would be required, increasing Optio’s bad debt expense included in general and administrative expenses.
Impairment Assessments
Optio adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, on February 1, 2002. This standard requires that goodwill no longer be amortized and instead be tested for impairment on a periodic basis.
Pursuant to SFAS 142, Optio is required to test goodwill for impairment upon adoption and annually or more often if events or changes in circumstances indicate that the asset might be impaired. SFAS 142 provides for a two-stage approach to determining whether and by how much goodwill has been impaired. The first stage requires a comparison of the fair value of the reporting unit, in our case, the former VertiSoft business, to its net book value. If the fair value is greater than book value, no impairment is deemed to have occurred. If the fair value is less than book value, then the second stage must be completed to determine the amount, if any, of actual impairment. Optio has selected August 1 as its annual impairment testing date for its goodwill. The Company performed an analysis as of August 1, 2005 and 2006, respectively, comparing the fair value of the reporting units with the carrying value of such reporting units, including goodwill, and determined that no impairment of its goodwill existed. While no impairment charge was determined to be necessary in the current year, the Company’s future assessments could lead management to determine that the goodwill is completely impaired, which would require the Company to record an impairment charge of $2.3 million.
The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment decisions. In estimating our fair value, we will make estimates and judgments about future revenues and cash flows. Our forecasts will be based upon assumptions that are consistent with the plans and estimates we are using to manage our business. Changes in these estimates could change our conclusion regarding impairment of goodwill and potentially result in a non-cash goodwill impairment charge for all or a portion of the goodwill balance. For long-lived assets, accounting standards dictate that assets become impaired when the undiscounted future cash flows expected to be generated by them are less than their carrying amounts. In such cases, the affected assets are written down to their estimated fair value.
Foreign Currencies
The financial position and results of operations of the Company’s foreign subsidiaries are generally measured using local currencies as the functional currencies, including the British pound and the Euro. Assets and liabilities of these subsidiaries are translated into U.S. dollars at the exchange rate in effect at each year-end. Income and expense items are translated at average exchange rates for the year. The resulting translation adjustments are recorded in the foreign currency translation adjustment account. Optio and its subsidiaries conduct their business locally, thus the effects of changes in foreign currency exchange rates have had a minimal effect on the Company’s results of operations to date.
Results of Operations
The following table sets forth certain items from Optio’s statements of operations as a percentage of total revenue for the periods indicated.
Revenue
Total revenue decreased 3% to $28.7 million in fiscal 2007 from $29.6 million in fiscal 2006 and increased 4% to $29.6 million in 2006 from $28.4 million in fiscal 2005. The decrease in revenues in 2007 was primarily the result of a decrease in license fees of $2.2 million partially offset by increases in maintenance and other fees of $1.1 million and subscription fees of $0.2 million. The increase in revenues in 2006 was primarily the result of an increase in subscription fees of $1.2 million. Optio added a new revenue source, in the form of subscription fees, as a result of its acquisition of VertiSoft in August 2004. For the year ended January 31, 2005, subscription fees were reflected from the period of August 10, 2004, the date of acquisition, through January 31, 2005. However, subscription fees were reflected for the full year ended January 31, 2006. This fact, coupled with an additional subscription customers, accounted for the $1.2 million increase in subscription fees between fiscal years 2005 and 2006.
License fees revenue decreased 22% to $7.7 million in 2007 from $10.0 million in 2006 and decreased 2% to $10.0 million from $10.2 million in 2005.
Optio’s license revenues from its European operations decreased 20% to $1.6 million in 2007 from $2.0 million in 2006. License revenue declined in each of our European subsidiaries, primarily due to turnover in our sales staff, especially in Germany, and a significant decline in our business through resellers. Optio’s license revenues from its European operations declined 7% to $2.0 million in 2006 from $2.1 million in 2005. Revenue from Optio’s German subsidiary nearly doubled from $480,000 in 2005 to $790,000 in 2006, the result of strong reseller relationships and a single significant new SAP customer. Revenues from both the UK and French subsidiaries declined $400,000 from fiscal 2005 to fiscal 2006, the result of turnover in sales staff and difficulty in replacing employees due to labor law issues.
Domestically, license fee revenues declined to $6.2 million in 2007 from $8.0 in 2006. Direct sales declined to $4.7 million in 2007 from $5.9 million in 2006. License revenues in Optio’s healthcare division remained consistent between 2006 and 2007; however, in Optio’s enterprise division, including our European operations, Optio continues to face pressure in the document output management market in its enterprise industry as ERP vendors begin to offer basic similar functionality and competitors continue to offer lower-cost solutions. In addition, our business process management solutions have not generated revenue as quickly as we anticipated. Sales of Optio’s newer products, including Optio Imaging Solutions, require a longer sales cycle than our traditional output solutions products. Sales through resellers declined to $1.4 million 2007 from $2.1 million in 2006. During fiscal year 2006, Optio entered into several significant reseller transactions while no such transactions existed during fiscal year 2007.
License fees declined slightly to $10.0 million in 2006 from $10.2 million in 2005. License fees from new direct customers increased by $500,000 in 2006. In the prior year, sales of Optio’s products to new customers were somewhat impacted by the ERP industry consolidation, causing delays in decisions and causing sales to new customers to decline by approximately $800,000 from 2004. The impact of the ERP consolidation was somewhat minimized in 2006. In addition, sales of Optio’s Imaging Solution products, introduced in December 2004, continued to increase sales between 2005 and 2006, also increasing the average sale price per deal between these years by 20%.
License fee revenue from existing customers remained consistent between 2006 and 2005. Sales of newly introduced and additional products to existing customers helped to provide an overall increase in Optio’s ERP license revenues. In addition, Optio’s domestic non-healthcare, indirect partner sales remained consistent between 2006 and 2005. Finally, Optio’s healthcare license revenue declined by $500,000 from 2005 to 2006 as Optio continued the transition to a subscription-based licensing model.
Revenue from services, maintenance and other increased 6% to $18.6 million in 2007 from $17.5 million in 2006 and increased 1% to $17.5 million in 2006 from $17.3 million in 2005. Maintenance revenue increased 10% to $13.0 million in 2007 from $11.8 million in 2006 and increased 4% to $11.8 million in
2006 from $11.4 million in 2005. Services revenue decreased 2% to $5.6 million in 2007 from $5.7 million in 2006 and decreased 3% to $5.7 million in 2006 from $5.9 million in 2005. Optio’s maintenance revenue increased in both 2006 and 2007 due to growth in and preservation of the customer base, coupled with slightly increased maintenance rates. The decline in license revenue contributed to the associated decline in services revenue from 2006 to 2007. In 2006, Optio experienced a decline in training revenue, especially in Optio’s healthcare group, a result of the delay in the roll-out of the new version of MedEx, accounting for $150,000 of the decline in services revenue between 2005 and 2006.
Optio added a new revenue source in the form of subscription revenue as a result of the acquisition of VeritSoft in August 2004. For the year ended January 31, 2005, the subscription revenue totaled $930,000. In 2006 and 2007, Optio reflected subscription revenue for the entire year. This, coupled with a minimal amount of additional new subscription contracts recognized, accounted for the $1.2 million increase in subscription fees to $2.2 million in 2006 and the further $0.2 million increase in 2007.
License fee revenue constituted 27%, 34% and 36% of total revenue in 2007, 2006 and 2005, respectively. Subscription fees were new in fiscal year 2005 and represented only 3% of revenue in that year; subscription fees constituted 8% and 7% of total revenue in 2007 and 2006, respectively. Services and other revenue constituted 20%, 19% and 21% of total revenue in 2007, 2006 and 2005, respectively. Maintenance revenue constituted 45% of total revenue in 2007 and 40% in each of the years 2006 and 2005. In 2005, with the introduction of subscription fee revenues, and in 2006 and 2007 with the inclusion of subscription fee revenues for an entire year, license fee revenues and services revenue as a percentage of the total declined. Maintenance revenue, however, increasing 10% and 4% in 2007 and 2006, respectively, increased from 40% of total revenues in 2006 to 45% of total revenues in 2007.
Costs of Revenue
License fees. Costs of revenue from license fees, which excludes depreciation and amortization shown separately and discussed below, decreased 12% to $678,000 in 2007 from $769,000 in 2006 and increased 18% to $769,000 in 2006 from $650,000 in 2005. Commissions paid to referral agents decreased by $55,000 from 2006 to 2007. Royalties paid to Optio’s OEM partners increased $10,000 in 2007, a result of slightly increased sales of Optio’s newly introduced products which include OEM technology. In 2006, commissions paid to referral agents decreased by $75,000. Royalties paid to Optio’s partners increased $198,000 in 2006 from 2005. Costs of revenue from license fees represented 9% of total license revenue in 2007, 8% in 2006 and 6% in 2005.
Services, Maintenance and Other. Costs of revenue from services, maintenance and other increased 6% to $6.8 million in 2007 from $6.4 million in 2006 and increased 9% to $6.4 million in 2006 from $5.9 million in 2005. The cost of outsourcers increased $300,000 between 2007 and 2006 as Optio relied more heavily on the use of outsourcers to implement the software. In addition, the cost of internal resources increased slightly due to salary increases. The cost of outsourcers increased by $500,000 between 2006 and 2005.
Costs of revenue from services, maintenance and other represented 37%, 37% and 34% of total services, maintenance and other revenue in 2007, 2006 and 2005, respectively.
Operating Expenses
Sales and Marketing. Sales and marketing expenses decreased 10% to $10.3 million in 2007 from $11.4 million in 2006 and increased 4% to $11.4 million from $11.0 million in 2005. The decrease in sales and marketing expenses in 2007 resulted primarily from (i) lower commissions and bonuses of approximately $700,000, due to decreased sales and a modification of the compensation plans providing for lower commission rates and (ii) reduced sales personnel during a portion of the year in both the U.S. and Europe. Advertising and marketing expenses between 2006 and 2007 remained consistent. The increase
from 2005 to 2006 was the result of a $175,000 increase in domestic sales salaries due to the increase of sales personnel from 36 employees as of January 31, 2005 to 38 employees as of January 31, 2006, (iii) a $253,000 increase in domestic commissions and bonuses, primarily due to the increase in U.S. revenue of approximately $1.5 million between 2005 and 2006, and offset by (iv) a decrease in sales and marketing expenses of $166,000 in Europe due to reducing headcount by two individuals and slightly reduced marketing expenditures.
Research and Development. Research and development expenses consist primarily of salaries, employee-related benefit costs and consulting fees incurred in association with the development of our products. Costs incurred for the research and development of new software products are expensed as incurred until such time that technological feasibility, in the form of a working model, is established at which time such costs are capitalized. The costs incurred subsequent to the establishment of a working model but prior to general release of the product have not been significant and have been expensed.
Research and development costs increased $419,000, or 8%, from $5.1 million in 2006 to $5.5 million in 2007. The increase in research and development expenses was primarily the result of additional salaries and benefits. In addition, consulting costs increased by $13,000 over the previous year.
Research and development costs increased $483,000, or 10%, from $4.6 million in 2005 to $5.1 million in 2006. The increase in research and development expenses was primarily the result of $430,000 of additional salaries and $45,000 of additional maintenance expense related to software used in the quality assurance process. While headcount in research and development remained consistent between the years ended January 31, 2005 and 2006, fiscal 2006 included the VertiSoft employees for a full year while fiscal 2005 included the VertiSoft employees only for the period of August 10, 2004 through January 31, 2005. This accounted for additional $430,000 in research and development salaries between the two fiscal years.
Our planned research and development activities for fiscal 2008 are discussed more fully in Part I, Item 1 “Business-Research and Development” of this Annual Report.
General and Administrative. General and administrative expenses increased 24% to $5.4 million in 2007 from $4.4 million in 2006. The increase in general and administrative expenses is due to (i) $470,000 of compensation expense related to stock options with the adoption of SFAS No. 123R, (ii) an increase of $162,000 in recruiting fees related to sales and accounting staff augmentation, (iii) increased bad debt expense of $107,000, and (iv) increased salaries of approximately $135,000 for additional accounting and administrative staff.
General and administrative expenses increased 6% to $4.4 million in 2006 from $4.1 million in 2005. The increase in general and administrative expenses is due to (i) a $125,000 increase in salaries due primarily to the addition of certain human resources and information systems functions, (ii) increased legal and accounting fees of $180,000 and (iii) the inclusion of approximately $90,000 in severance costs related to the termination of administrative personnel in France.
Reversal of valuation reserve of M2 note. In accordance with FAS 114, as amended by FAS 118, when there is a change in the value of the collateral that would indicate the value of the loan has increased (is no longer impaired), the net carrying value of the loan should be adjusted to such valuation. The collateral supporting the M2 Systems note was sold in an arms-length, third party transaction, thereby providing a basis for valuing the collateral based upon market prices which was in excess of the $2.8 million owed to Optio. As a result, the carrying value of the M2 Systems note was effectively written up to its full face value and the impairment charge previously recorded by Optio relating to the M2 Systems note was eliminated. Optio recognized an adjustment to the valuation reserve of $900,000 that was a reduction of the Company’s third quarter operating expenses. The note was paid in full during the year ended January 31, 2007.
Depreciation and Amortization. Depreciation and amortization increased 6% to $916,000 in 2007 from $861,000 in 2006. The increase was primarily due to Optio’s renegotiation of the lease for Optio’s headquarters in which the landlord contributed $1.0 million towards the improvements of the space. These leasehold improvements, as well as an additional approximate $800,000 purchased directly by Optio, are being depreciated over the term of the new lease or the expected life of the assets, as appropriate. This increase was partly offset by a decrease in amortization expense as intangibles are amortized over the estimated useful life of the asset using the cash flow method, which results in a greater expense in the earlier periods and reduced expense in the later periods. This resulted in a greater expense in periods prior to fiscal year 2007.
Depreciation and amortization increased 40% to $861,000 in 2006 from $613,000 in 2005. The increase in 2006 is primarily the result of a $200,000 increase in amortization of intangibles associated with the inclusion of the VertiSoft acquisition for the full year of 2006, which was included for only the period of August 10, 2004 through January 31, 2005 of the prior year. In addition, depreciation expense increased $50,000 due to the addition of the VertiSoft assets and additional purchases throughout the year.
Interest and Other Income (Expense)
Interest and other income increased 73% to $414,000 in 2007 from $240,000 in 2006 and increased 5% to $240,000 in 2006 from $228,000 in 2005. Optio earned interest income of $431,000 in 2007, $269,000 in 2006 and $187,000 in 2005, primarily from interest on the M2 Systems note receivable. Optio incurred interest expense on its capital leases of $13,000 in 2007, $14,000 in 2006 and $12,000 in 2005.
Income Taxes
The income tax expense of $86,000 in 2007 is primarily the result of tax expense required to record the deferred tax liability associated with a temporary difference between the book and tax treatment of the approximate $2.3 million of goodwill acquired in the Vertisoft acquisition. Such goodwill is deductible for tax purposes over its estimated 15-year useful life, whereas for book purposes it is not amortized but rather evaluated for impairment on an annual basis in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. Due to the indeterminate reversal period of the underlying cumulative difference for book purposes, the associated deferred tax liability has not been netted against the Company’s deferred tax assets for purposes of estimating its deferred tax valuation allowance at January 31, 2007. Rather the associated deferred tax liability has been recorded at its gross value until such time that the related temporary difference reverses for book purposes, if ever. Optio will continue to record such deferred tax liability associated with this temporary difference in future periods and thus incur income tax expense
The income tax expense of $57,000 in 2006 was also primarily the result of tax expense required to record the deferred tax liability associated with a temporary difference between the book and tax treatment of the goodwill acquired in the Vertisoft acquisition.
The Company has provided a valuation allowance on substantially all of its net deferred tax assets. The Company will continue to monitor the realizability of these net deferred tax assets and will reverse some or all of the valuation allowance as appropriate. In making this determination, the Company considers a number of factors including whether there is a historical pattern of consistent and significant profitability in combination with the Company’s assessment of forecasted profitability in the future periods. Such patterns and forecasts allow us to determine whether our most significant deferred tax assets such as net operating loss and research and development credit carryforwards will more likely than not be realizable in future years, in whole or in part. These deferred tax assets in particular will require us to generate significant taxable income in the applicable jurisdictions in future years in order to recognize their economic benefits. At this point, the Company does not believe that it has enough positive evidence to conclude that some or all of the valuation allowance on deferred tax assets should be reversed. Realization
of the Company’s capital loss carryforward would further require the generation of capital gain income, which management believes to be unlikely prior to expiration of the federal capital loss carryforward during the upcoming year. However, facts and circumstances could change in future years and at such point the Company will reverse the allowance as appropriate.
Liquidity and Capital Resources
At January 31, 2007 and 2006, Optio had $11.9 million and $8.0 million, respectively, of cash and cash equivalents.
The following table sets forth certain selected statements of cash flow information for the periods presented:
Cash provided by operating activities in 2007 was primarily the result of net income of $282,000, plus a $916,000 add-back of non-cash depreciation and amortization expense, a $470,000 add-back of non-cash stock compensation, an increase in the provision for doubtful accounts of $137,000, an increase in the provision for deferred taxes of $65,000, plus overall changes in working capital resulting in a $908,000 inflow of cash, less the deduction of a $900,000 non-cash gain on the reversal of impairment on the M2 Systems note. The major component of such working capital changes was a reduction in accounts receivable of $874,000 due to enhanced collection activities and slightly lower sales. Payments owed to vendors increased by $144,000, notably in EMEA, also benefiting cash provided by operations. Partly offsetting this favorability was a decrease in income taxes payable of $49,000, an increase in spending for prepaids of $38,000, and a decrease in deferred revenue of $29,000.
Cash provided by operating activities in 2006 resulted primarily from net income of $898,000, adjusted for the add-back of depreciation and amortization expense of $861,000, plus changes in working capital which resulted in a $672,000 inflow of cash, for a total of $2.5 million cash provided by operating activities. The major components of the working capital increase were an increase in accounts receivable of $228,000, an increase in prepaid expenses of $323,000, an increase in accounts payable, accrued expenses and income taxes payable of $215,000 and an increase in deferred revenue of $1.0 million. The increase in accounts receivable was primarily the result of the increase in sales in the fourth quarter of 2006 over the fourth quarter of 2005. The increase in prepaid expenses was primarily due to the deposits paid for the Company’s new multi-year lease for its main headquarters, increased deposits required for various marketing tradeshows booth space and for increased prepaid maintenance contracts for the Company’s various software packages used internally. The increase in accounts payable and accrued expenses was primarily the result of increased accrued commissions and bonuses and accrued sales taxes. Finally, the increase in deferred revenue is the result of a $775,000 increase in deferred maintenance revenue and a $200,000 increase in deferred subscription revenue. The increase in deferred maintenance revenue results from an overall increase in the number of customers and an increase in maintenance fees. The increase in deferred subscription revenue is the result of billing an additional month in advance in 2006 over 2005.
Cash provided by operating activities in 2005 resulted primarily from net income of $1.7 million, adjusted for the add-back of depreciation and amortization expense of $613,000, then offset by changes in working capital which resulted in a $964,000 use of cash, for a total of $1.4 million cash provided by operating activities. The major components of the working capital decrease were a decrease in accounts
receivable of $738,000 and a decrease in accrued expenses of $1.4 million. The $738,000 decrease in accounts receivable was primarily the result of improved collections procedures achieved through dedicating an employee to the collections effort, resulting in an improvement in Optio’s day’s sales outstanding from 62 as of January 31, 2004 to 56 as of January 31, 2005. Optio’s accrued expenses declined primarily as a result of the pay-out of approximately $600,000 of the Company’s 2004 year-end bonuses and approximately $700,000 of accrued expenses, including severance, assumed in the VertiSoft acquisition.
Cash provided by investing activities in 2007 totaled approximately $1.7 million. Optio received $2.9 million in payments on the receivable from M2 Systems representing payment in full of the note, purchased $1.2 million of property and equipment, of which $422,000 of such assets were acquired under a capital lease, primarily related to the remodeling of Optio’s headquarter’s office space and paid $75,000 in conditional payments related to the purchase of VertiSoft corporation.
Cash used in investing activities in 2006 included the purchase of $373,000 in property and equipment for general business purposes, the payment of an additional $97,000, primarily representing a single contingency payment of $75,000 plus another $22,000 of additional transactional expenses relating to the acquisition of VertiSoft, offset by the receipt of $318,000 on the M2 note receivable.
Cash used in investing activities during 2005 included the purchase of $470,000 in property and equipment for general business purposes, the payment of $348,000 for the acquisition of VertiSoft, offset by the receipt of $325,000 on the M2 Systems note.
Cash provided by financing activities in 2007 included receipts of $419,000 from the exercise of stock options partly offset by purchases of treasury stock of $60,000 and payments under capital leases totaling $40,000.
Cash provided by financing activities in 2006 included the proceeds from the exercise of stock options of $337,000, offset by the payment of $92,000 on capital leases.
Cash used in financing activities in 2005 included the payment of $1.2 million on notes payable and capital leases, primarily those assumed in the VertiSoft acquisition, offset by proceeds from the exercise of stock options of $279,000.
Optio’s only material long-term contractual obligations as of January 31, 2007 consisted primarily of obligations under capital and operating leases as indicated below:
On April 26, 2007, Optio extended its existing line of credit through April 19, 2008. The line of credit bears interest at prime rate, subject to increase based on Optio’s performance relative to certain financial ratios. Optio may borrow up to $4.0 million, or such lesser amount as may be determined based on the level of eligible accounts receivable. Currently, Optio has estimated that approximately $1.9 million would be available for borrowings based upon Optio’s historical accounts receivable balance. Accounts receivable, equipment, general intangibles and other assets, as defined in the agreement, collateralize the line of credit. The agreement contains various covenants, including liquidity and earnings before interest, taxes, depreciation and amortization (“EBITDA”) requirements and restrictions on the payment of
dividends. As of January 31, 2006 and 2007, Optio was in compliance with the required financial ratios. There were no borrowings under the line of credit as of January 31, 2007.
Management believes that the existing cash and cash equivalents, together with the line of credit, will provide adequate cash to fund its anticipated cash needs at least through the next twelve months. Optio intends to expand its product line, which may require acquisitions of companies or products that enhance the Company’s product line. As a result, Optio may attempt to raise additional funds through equity or debt financing. There can be no assurance that Optio will be able to raise additional funds on favorable terms, or at all. Although not anticipated, a dramatic decrease in demand for Optio’s products or services, or a dramatic change in technology related to Optio’s products or services offered, could have a negative impact on Optio’s liquidity. This risk may include the potential for Optio not meeting its debt covenant requirements, making any borrowings under the line of credit unavailable.
Off-Balance Sheet Financing
Optio does not have any off-balance sheet financing arrangements or any relationships with “structured finance” or “special purpose” entities. Other than our non-cancelable capital and operating leases for office space and equipment, we do not have any contractual obligations that would impact our liquidity.
Related Party Transactions
The Company purchased VertiSoft in August 2004. Barron Hughes, a member of the Company’s Board of Directors, served as the former Chief Financial Officer of VertiSoft until its acquisition by the Company. In accordance with the purchase agreement governing the acquisition, Mr. Hughes was paid severance of $165,000. In addition, VertiSoft had a note payable to Mr. Hughes in the amount of $138,000. Effective as of the closing, the Company immediately repaid Mr. Hughes the full amount of the note payable. Further, in connection with the acquisition, Mr. Hughes was issued options to purchase 96,975 shares of the common stock of the Company.
New Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of SFAS No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with SFAS No. 109, and recommends a recognition threshold and measurement characteristic for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The differences between a tax position taken in a tax return and amounts recognized in the financial statements may result in an increase in a liability for income taxes payable, a reduction of an income tax refund receivable, a reduction in a deferred tax asset or an increase in a deferred tax liability. FIN 48 also provides guidance on classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 16, 2006, with early adoption encouraged. The Company has not yet determined the effects of adopting FIN 48.
In September 2006, the FASB issued FASB No. 157, “Fair Value Measurements” (“FASB 157”). FASB 157 redefines fair value, establishes a framework for measuring fair value and expands the disclosure requirements regarding fair value measurement. FASB 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not expect that the adoption of FASB 157 will have a material impact on its results of operations or financial position; however, additional disclosures will be required under FASB 157.
In February 2007, the FASB issued FASB No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FASB 159”). The standard requires companies to provide additional information
that will help investors and other users of financial statements to more easily understand the effect of the company’s choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. The Statement is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. The Company does not expect FASB 159 to have a material impact on the Company’s future results of operations or financial position.
Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Optio provides its services to customers primarily in the United States and, to a lesser extent, in Europe and elsewhere throughout the world. As a result, Optio’s financial results could be affected by factors, such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. All sales are currently made in both U.S. dollars and local currencies. A strengthening of the U.S. dollar or the weakening of these foreign local currencies could make Optio’s products less competitive in foreign markets. Based upon the relative size of Optio’s foreign operations, Optio believes its exposure to foreign currency fluctuations is not a material risk. Optio’s interest income and expense are sensitive to changes in the general level of U.S. interest rates. Based on Optio’s cash equivalents balance, outstanding notes receivable and the nature of its outstanding debt, Optio believes its exposure to interest rate risk is not material.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Financial Statements on page. The supplementary data is included in Part IV, Item 15.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A.
Item 9A. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of January 31, 2007, and have concluded that, as of such date, our disclosure controls and procedures are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Our management is responsible for establishing and maintaining adequate internal audit controls over financial reporting, as such term is defined in the Exchange Act, Rule 13a-15(f). Our Chief Executive Officer and Chief Financial Officer concluded that, as of January 31, 2007, our disclosure controls and procedures are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Changes in Internal Controls
There were no changes in our internal controls over financial reporting that occurred during the quarter ended January 31, 2007, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Item 9B.
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements - see index on Page herein.
(a) (2) Schedule II - Valuation and Qualifying Accounts - See page S-1 herein.
Other financial statements and schedules are not presented because they are either not required or the information required by such financial statements or schedules is presented elsewhere.
(b) The exhibits filed as part of this Report as required by Item 601 of Regulation S-K are included in the Index to Exhibits at page E-1 included elsewhere in this Annual Report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 1st day of May, 2007.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Optio Software, Inc.
Index to Consolidated Financial Statements
Page
Number
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of January 31, 2006 and 2007
Consolidated Statements of Operations for the years ended January 31, 2005, 2006 and 2007
Consolidated Statements of Shareholders’ Equity for the years ended January 31, 2005, 2006 and 2007
Consolidated Statements of Cash Flows for the years ended January 31, 2005, 2006 and 2007
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Optio Software, Inc.:
We have audited the accompanying consolidated balance sheets of Optio Software, Inc. (the “Company”) as of January 31, 2006 and 2007 and the related statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended January 31, 2007. We have also audited the financial statement schedule listed in the accompanying Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform our audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement and schedule presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Optio Software, Inc. as of January 31, 2006 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2007 in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, the schedule for each of the three years in the period ended January 31, 2007 presents fairly, in all material respects, the information set forth therein.
As discussed in Note 8 to the consolidated financial statements, effective February 1, 2006, the Company adopted Statement of Financial Standards No. 123(R), Share-Based Payments.
/s/ BDO SEIDMAN, Llp
Atlanta, Georgia
April 30,
OPTIO SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
OPTIO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to consolidated financial statements.
OPTIO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
See accompanying notes to consolidated financial statements.
OPTIO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements
OPTIO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Optio Software, Inc. and subsidiaries (the “Company” or “Optio” or “Optio Software, Inc.”), provides document automation and electronic health record solutions that enable organizations to achieve speed, accuracy, functionality and quality in their inbound and outbound documents. The Company’s infrastructure software and services enhance the form, content, distribution and availability of business critical information. The Company markets primarily to companies located principally in the United States and Europe. The industry in which the Company operates is subject to rapid change due to development of new technologies and products.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, intangibles, goodwill and notes receivable; valuation allowances for receivables and deferred tax assets; and litigation contingencies. Actual results could differ from those estimates.
Revenue Recognition
Overview
The Company’s revenue consists of perpetual license fees for the Company’s software products, maintenance fees, consulting services fees and customer training and subscription fees which cover licensing of the Company’s software products and maintenance. The Company generally charges fees for licenses of its software products either based on the number of Central Processing Units (“CPUs”) on which the product is installed or, to a lesser extent, based on the number of persons or hospital beds registered to use the product. The Company’s revenue recognition policies are in accordance with Statement of Position (“SOP”) No. 97-2, Software Revenue Recognition, as amended; SOP No. 98-9, Software Revenue Recognition, With Respect to Certain Transactions, and the Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements, as amended by SAB 104, Revenue Recognition.
License Fees
The Company licenses its products through its direct sales force and indirectly through resellers. In general, software license revenues are recognized when a non-cancelable license agreement has been signed and the customer acknowledges an unconditional obligation to pay, the software product has been delivered, there are no significant uncertainties surrounding product acceptance, the fees are fixed or determinable, collection is considered probable, the remaining elements such as future services are not considered essential to the functionality of the software, and the Company has a legally enforceable claim
OPTIO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
not subject to refund or forfeiture if future services are not rendered. Delivery is considered to have occurred when title and risk of loss have been transferred to the customer, which generally occurs when media containing the licensed programs is provided to a common carrier. In case of electronic delivery, delivery occurs when the customer is given access to the licensed programs. If collectibility is not considered probable, revenue is recognized when the fee is collected. The Company enters into reseller arrangements that typically provide for sublicense fees payable based upon a percentage of list price or a contractually negotiated fixed fee. The Company does not grant its resellers the right of return.
The Company recognizes license revenue using the residual method pursuant to the requirements of SOP No. 97-2, as amended by SOP No. 98-9. Revenues recognized from multiple-element software arrangements are allocated to each element of the arrangement based on the fair values of the elements, such as licenses for software products, maintenance, consulting services or customer training. The determination of fair value is based on objective evidence, which is specific to the Company and can differ from amounts contained in the customer arrangement. The Company limits its assessment of objective evidence for each element to either the price charged when the same element is sold separately or the price established by management having the relevant authority to do so, for an element not yet sold separately. If evidence of fair value of all undelivered elements exists but evidence does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue.
The Company records deferred revenue for software license agreements when cash has been received from the customer and the agreement does not qualify for revenue recognition under the Company’s revenue recognition policy. The Company records accounts receivable for software license agreements when the agreement qualifies for revenue recognition but cash or other consideration has not been received from the customer.
Subscription fees
The Company also licenses certain of its products in the form of subscription service contracts, with terms typically ranging from 3 to 5 years. Subscription revenue, which includes a license of the software product, technical support and future unspecified enhancements to the software product, is recognized on a daily basis over the agreement period once the product has been installed. Unlike license fee revenue, subscription service contracts include licenses that are not perpetual in duration.
Services, Maintenance and Other Revenue
Consulting services revenues and customer training revenues are recognized as such services are performed as they are incidental and not essential to the functionality of the software. Maintenance revenues, which include revenues bundled with software license agreements that entitle the customers to technical support and future unspecified enhancements to the Company’s products, are deferred and recognized ratably over the related agreement period, generally twelve months. In accordance with Emerging Issues Task Force release 01-14, Income Statement Characterization of Reimbursements Received for Out of Pocket Expenses Incurred, the Company recognizes reimbursable expenses as revenue and as an expense in cost of sales in all periods presented.
OPTIO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Long-Lived Assets
The Company continually monitors events and changes in circumstances that would indicate the carrying amounts of property, equipment, and intangible assets may not be recoverable. When such events or changes in circumstances are present, the Company assesses the recoverability of the respective asset by determining whether the carrying value of such asset will be recovered through undiscounted future cash flows. Should the Company determine that the carrying values of the respective assets are not recoverable, the Company would record a charge to reduce the carrying values of such assets to their fair values.
Research and Development and Software Development Costs
Under the criteria set forth in Statement of Financial Accounting Standards (“SFAS”) No. 86, Accounting for the Cost of Computer Software to be Sold, Leased or Otherwise Marketed, development costs incurred in the research and development of new software products are expensed as incurred until technological feasibility in the form of a working model has been established at which time such costs are capitalized and recorded at the lower of unamortized cost or net realizable value. The costs incurred subsequent to the establishment of a working model but prior to general release of the product have not been significant. To date, the Company has not capitalized any costs related to the development of software for external use.
Advertising Costs
Advertising costs are expensed in the period incurred. Total advertising expense amounted to approximately $822,000, $926,000 and $922,000 during the years ended January 31, 2005, 2006 and 2007, respectively.
Shipping Fees and Handling Costs
In accordance with Emerging Issues Task Force 00-10, Accounting for Shipping and Handling Charges, the Company records all shipping fees and handling costs associated with transporting the licensed software to customers as costs of revenue. The revenues associated with customer billings for these charges is reported in services, maintenance and other revenue.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents at January 31, 2007 consisted primarily of investments in money market funds. The carrying amounts of the Company’s investments in cash equivalents approximate their fair values due to the short maturities of these instruments.
Property and Equipment
Property and equipment are stated at cost. Depreciation expense is calculated over the estimated useful lives of the related assets (generally three to seven years) using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. Amortization of assets recorded under capital leases is included in depreciation expense. Leasehold improvements are amortized using the straight-line method over the shorter of the terms of the related leases or the respective useful lives of the assets.
OPTIO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Property and equipment at January 31, 2006 and 2007 consisted of the following:
Accrued Expenses
Accrued expenses as of January 31, 2006 and 2007 included the following:
Costs of Revenue
Costs of revenue from license fees consist of costs relating to the manufacturing, packaging and distribution of software and related documentation and third party license and referral fees. Costs of revenue from services, maintenance and other, consists of personnel, outsourced consultants and direct expenses relating to the cost of providing consulting, implementation, training, technical support and allocable overhead.
Goodwill and Other Intangible Assets
The Company acquired goodwill and other intangible assets in connection with the acquisition of VertiSoft Corporation (“VertiSoft”) in August 2004. Under the purchase method of accounting pursuant to SFAS 141, Business Combinations, the total purchase price was allocated to the acquired entity’s net tangible and intangible assets based on their estimated fair values as of the date of the completion of the acquisition. Any excess of the purchase price over the fair value of the net tangible assets/liabilities and identifiable intangible assets acquired was recorded as goodwill. In accordance with SFAS 142, Goodwill and Other Intangible Assets, goodwill and intangible assets with indefinite lives resulting from business combinations have not been amortized but instead will be tested for impairment at least annually (more frequently if certain indicators are present) while identifiable intangible assets with finite lives are amortized over their estimated useful lives. In the event that the Company’s management determines that the value of goodwill or intangible assets has become impaired, the Company will incur an accounting charge for the amount of impairment during the fiscal quarter in which the determination is made. The Company has selected August 1 as its annual impairment testing date for its goodwill. For goodwill, the
OPTIO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
impairment determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of a reporting unit and compares it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with FASB Statement No. 141, Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.
The Company performed this analysis as of August 1, 2005 and 2006, respectively, and determined that no impairment of its goodwill existed.
Goodwill and Intangible assets and the related accumulated amortization as of January 31, 2006 and 2007 were as follows:
The increase in Goodwill in fiscal year 2007 from fiscal year 2006 is due to the payment of contingent consideration of $456,000 associated with the Vertisoft acquisition described above and as specified in the purchase agreement.
Amortization expense was $208,000, $415,000, and $364,000, for the years ended January 31, 2005, 2006 and 2007, respectively. Expected amortization expense for the next five years is as follows:
As of January 31, 2007, the total unamortized balance of all amortizable intangible assets was $1,251,000.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Such amounts are measured using
OPTIO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
enacted tax rates and laws that are expected to be in effect when the differences reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.
Employee Stock Options
Prior to February 1, 2006, the Company accounted for its stock-based employee compensation arrangements under the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), as allowed by SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. As a result, no expense was recognized for options that were granted with an exercise price equal to quoted market price at the date of grant. In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R, Share-Based Payment, which amended SFAS No. 123 and supersedes APB No. 25. SFAS No. 123R requires measurement of the cost of share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim or annual period after June 15, 2005. Subsequent to the effective date, the pro forma disclosures previously permitted under SFAS No. 123 are no longer an alternative to financial statement recognition. Effective February 1, 2006, the Company has adopted SFAS No. 123R using the modified prospective method. Under this method, compensation cost recognized during the year ended January 31, 2007 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of February 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 amortized over the employees’ requisite service period (typically the options’ vesting period) and (b) compensation cost for all share-based payments granted subsequent to February 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R amortized ratably over the options’ vesting period.
For periods prior to adoption of SFAS No. 123R, companies were required to calculate the estimated fair value of options and could elect to either include the estimated cost in earnings or disclose the pro forma effect in the footnotes to their financial statements. The Company chose to disclose the pro forma effect.
The fair value of the options used for the application of SFAS No. 123R disclosures is estimated at the date of grant using the Black-Scholes option pricing model. In determining the fair value of options using the Black-Scholes option pricing model, various assumptions such as expected life, volatility, risk-free interest rate, dividend yield and forfeiture rates are used. The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company determines the expected life using the “simplified method” in accordance with SAB No. 107. Using the Black-Scholes option valuation model, the Company estimates the volatility of our common stock at the date of grant based on the historical volatility of our common stock. Optio bases the risk-free interest rate used in the Black-Scholes option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award. Optio has not paid any cash dividends on our common stock in the last ten years and we do not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company used an expected dividend yield of zero in the Black-Scholes option valuation model. Finally, the Company uses historical data to estimate pre-vesting option forfeitures. Stock-based compensation is recorded for only those awards that are expected to vest. The following weighted-average assumptions were used for the years ended January 31, 2005, 2006 and 2007: risk-free interest rate of 3.96%, 4.3%, and 4.95%, respectively; no dividend yield; volatility of 145%, 136%
OPTIO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
and 119%, respectively; a forfeiture rate of 0%, 0% and 19.9%, repsectively; and an expected life of the options of 7.11, 5.55 and 5.33 years, respectively.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the service period, which is generally the options’ vesting period. The following table illustrates the effect on net income and net income per share had the Company applied the fair value recognition provisions of SFAS No. 123 to account for our employee stock option plan for the years ended January 31, 2005 and 2006, because stock-based employee compensation was not accounted for using the fair value recognition method during that period :
The historical pro forma impact of applying the fair value method prescribed by SFAS No. 123 is not representative of the impact that may be expected in the future due to changes resulting from additional grants in future years and changes in assumptions such as volatility, interest rates and expected life used to estimate fair value of the grants in future years.
Note that the above pro forma disclosure was not presented for the year ended January 31, 2007 because stock-based employee compensation has been accounted for using the fair value recognition method under SFAS No. 123R for this period. Implementation of SFAS No. 123R resulted in $470,000 of share-based compensation expense in the year ended January 31, 2007, reflected entirely within the general and administrative line item of the Consolidated Statement of Operations and Comprehensive Income. No income tax benefit nor any deferred tax asset was recognized during the year ended January 31, 2007 due to the valuation allowance placed on the Company’s deferred tax assets. The adoption of SFAS No. 123R had no impact on cash flows from operations or financing activities.
Non-cash Transactions
Non-cash activities during the year ended January 31, 2005 consisted of certain assets and liabilities assumed with the acquisition of VertiSoft discussed more fully in Note 12.
During the second quarter of the current fiscal year, Optio entered into a capital lease for telephone equipment in the amount of $422,000. In addition, Optio renegotiated the lease for its headquarter’s facilities. As part of the new lease agreement, the landlord contributed $1.0 million towards the improvements of the space. This $1.0 million in leasehold improvements is reflected as a fixed asset, with an offsetting lease incentive liability of $1.0 million, which will reduce future rent expense on a pro rata basis over the continual life of the lease. The lease incentive liability has been recorded on Optio’s consolidated balance sheet. Also during the current fiscal year, 310,000 shares of Optio common stock were released from escrow. These shares related to the purchase of VertiSoft by the Company and had been held in escrow for 18 months to secure the indemnification obligations of the shareholders of VertiSoft.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Comprehensive Income
Comprehensive income represents net income plus the results of certain shareholders’ equity changes not reflected in the consolidated statements of operations. The items in accumulated other comprehensive income relate principally to foreign currency translation adjustments.
Translation of Foreign Currencies
The financial position and results of operations of the Company’s foreign subsidiaries are measured generally using local currencies as the functional currency. Assets and liabilities of these subsidiaries are translated into U.S. dollars at the exchange rate in effect at each year-end. Income and expense items are translated at average exchange rates for the year. The resulting translation adjustments are recorded in the foreign currency translation adjustment account.
New Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of SFAS No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with SFAS No. 109, and recommends a recognition threshold and measurement characteristic for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The differences between a tax position taken in a tax return and amounts recognized in the financial statements may result in an increase in a liability for income taxes payable, a reduction of an income tax refund receivable, a reduction in a deferred tax asset or an increase in a deferred tax liability. FIN 48 also provides guidance on classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 16, 2006, with early adoption encouraged. The Company has not yet determined the effects of adopting FIN 48.
In September 2006, the FASB issued FASB No. 157, “Fair Value Measurements” (“FASB 157”). FASB 157 redefines fair value, establishes a framework for measuring fair value and expands the disclosure requirements regarding fair value measurement. FASB 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not expect that the adoption of FASB 157 will have a material impact on its results of operations or financial position; however, additional disclosures will be required under FASB 157.
In February 2007, the FASB issued FASB No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FASB 159”). The standard requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the company’s choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. The Statement is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. The Company does not expect FASB 159 to have a material impact on the Company’s future results of operations or financial position.
Fiscal Year
The Company maintains a fiscal year ending January 31st. References to 2007, 2006 and 2005 represent the years ended January 31, 2007, 2006 and 2005, respectively.
Reclassifications
Certain prior year amounts have been changed to conform with the current year presentation.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Notes Receivable
On March 27, 2000, the Company acquired all the outstanding shares of Muscato and substantially all of the assets of TransLink, an affiliate of Muscato. Subsequently, on December 4, 2001, the Company sold its Muscato and TransLink business units to M2 Systems Corporation (“M2 Systems”), a company owned by certain of the former shareholders of Muscato and TransLink. The stock of Muscato was sold for consideration of $250,000 cash, a $3.25 million promissory note, and the retirement of the long-term notes in the aggregate amount of $8.9 million in principal and interest related to the original purchase of Muscato. The assets of the TransLink business unit were sold for a $750,000 promissory note. These two notes were subsequently consolidated into a single $3,640,000 promissory note.
In 2003, the Company executed a Settlement and Release Agreement with M2 Systems covering the remainder of the indemnification claims made by M2 Systems. In exchange for M2 System’s agreement to release the Company from such claims, the Company amended the promissory notes related to the TransLink and Muscato divestiture, calling for a modified payment schedule of a combined note. The modified payment schedule of the combined note required four quarterly installments of $100,000, including interest calculated at the prime rate, up to a maximum rate of 6.75% (5.25% and 6.75% as of January 31, 2005 and 2006, respectively) through January 31, 2004, four quarterly payments of $115,000, including interest, through January 31, 2005, and eleven quarterly payments of $120,000 through October 31, 2007. The balance of the note, plus any additional accrued interest, was to be paid in the quarter ending January 31, 2008, however, the balance was paid in full earlier than scheduled, as described below.
During the third quarter of 2004, as a result of M2 Systems’ failure to make timely payments, management determined that this was an indication that it was probable that Optio would be unable to collect all amounts due according to the contractual terms of the note. At that time, the loan was considered impaired and was written down to the assessed fair value of the collateral. As of October 31, 2003, the collateral, including technology, accounts receivable, fixed assets and the discounted net cash flows of maintenance contracts was estimated to have an approximate fair value of $2.8 million, substantially less than the $3.7 million note receivable balance as of October 31, 2003. Thus, Optio recorded an impairment charge of $900,000 during the year ended January 31, 2004.
On November 6, 2006, Optio received approximately $2,758,000 in cash, representing full repayment of the M2 Systems note receivable, plus accrued interest. Such repayment represents an early retirement of the note, originally due December 1, 2007. As a result, the valuation reserve previously recorded by Optio relating to the M2 Systems’ note was reversed. Optio recognized an adjustment to the valuation reserve of $900,000 that was a reduction of the Company’s operating expenses during the year ended January 31, 2007. In connection with such repayment, Optio released its lien on the assets of M2 systems, its subsidiaries and related entities and the parties executed mutual releases.
4. Financial Instruments
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable.
The Company maintains cash and cash equivalents at various financial institutions. Company policy is designed to limit exposure at any one institution. The Company performs periodic evaluations of the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
relative credit standing of those financial institutions that are considered in the Company’s investment strategy. Cash equivalents at January 31, 2007 of $11.9 million represented investments in money market funds.
Concentrations of credit risk with respect to trade accounts receivable are generally limited due to the large number of entities comprising the Company’s customer base; however, the Company generates between 25% and 35% of its domestic revenues from healthcare organizations, with the remainder, including its international revenues, generated by a wide array of industries. In addition, the Company generates portions of its revenues from the end-users of large enterprise resource planning (“ERP”) system vendors such as Oracle Corporation and QAD, Inc. Over 30% of the Company’s domestic license revenues may be generated from the end-users of a single ERP vendor at any given point in time. The Company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral. Receivables generally are due within 30 days, and management records estimates of expected credit losses. Management reviews its accounts receivable on a regular basis to determine if any such amounts may be potentially uncollectible. The Company includes any balances that are determined to be uncollectible, along with a general reserve, in its overall allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Based on management’s best estimate, it believes the Company’s allowance for doubtful accounts is adequate as presented. Historically, the Company has not experienced significant losses related to receivables from groups or customers in any particular industry or geographic area. Bad debt expense for the years ended January 31, 2005, 2006 and 2007 amounted to $67,000, $30,000 and $137,000, respectively. Materially different amounts of bad debt expense and allowance for doubtful accounts could be reported under different conditions or using different assumptions.
Fair Values
The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents and accounts receivable approximate their fair values. The fair value estimates were based on market information available to management as of January 31, 2006 and 2007. The Company does not have financial instruments with off-balance sheet risk. The Company’s financial instruments consist primarily of accounts receivable, accounts payable, and accrued expenses. The carrying amounts of these instruments approximate their fair value because of the short-term maturity of such instruments.
5. Capital Leases and Lines of Credit
The Company leases telecommunications and computer equipment under capital leases. Assets under capital leases included in property and equipment are as follows:
OPTIO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Future minimum lease payments under capital leases consist of the following at January 31, 2007:
For the years ended January 31, 2005, 2006 and 2007, the Company had a bank line of credit of up to $4.0 million. The line of credit expired on April 21, 2007 and bears interest at the prime rate (8.25% at January 31, 2007), subject to increase based on the Company’s performance relative to certain financial ratios. Subsequently, on April 26, 2007, Optio extended the line of credit through April 19, 2008. Optio may borrow up to $4.0 million, or such lesser amount as may be determined based on the level of accounts receivable. The Company has estimated that approximately $1.9 million would be available for borrowings based upon the Company’s historical accounts receivable balance. Accounts receivable, equipment, general intangibles and other assets as defined in the agreement collateralize the line of credit. The agreement contains various covenants, including liquidity and EBITDA requirements and restrictions on dividends. As of January 31, 2006 and 2007, Optio was in compliance with the required financial ratios; however, in March 2005, Optio was in violation of the required financial covenants and was in default on the line of credit. The bank issued a waiver of non-compliance on April 22, 2005. There were no borrowings under the line of credit as of January 31, 2006 and 2007.
6. Operating Leases
The Company leases office space and equipment under operating leases. Rent expense under the Company’s operating leases was approximately $1,443,000, $1,559,000 and $1,201,000 during the years ended January 31, 2005, 2006, and 2007, respectively.
Future minimum lease payments under noncancellable operating leases, with initial terms of at least one year at the time of inception, are as follows at January 31, 2007:
OPTIO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Income Taxes
The provisions for income taxes are summarized below:
Pre-tax income (loss) attributable to foreign and domestic operations is summarized below:
A reconciliation of the provision for income taxes to the statutory federal income tax rate is as follows:
OPTIO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred income taxes reflect the net effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:
At January 31, 2007, the Company has recorded a $100,000 deferred tax liability associated with a temporary difference between the book and tax treatment of the approximate $2.3 million of goodwill acquired in the Vertisoft acquisition. Such goodwill is deductible for tax purposes over a 15-year period, whereas for book purposes it is not amortized but rather evaluated for impairment on an annual basis in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. Due to the indeterminate reversal period of the underlying cumulative difference for book purposes, the associated deferred tax liability has not been netted against the Company’s deferred tax assets for purposes of estimating its deferred tax valuation allowance at January 31, 2007. Rather, the associated deferred tax liability has been recorded at its gross value until such time that the related temporary difference reverses for book purposes, if ever. This amount is included in other long-term liabilities at January 31, 2007.
For financial reporting purposes, at January 31, 2006 and 2007, a valuation allowance has been recognized to reduce the net deferred income tax assets to zero. The Company has not recognized any benefit from the future use of the deferred tax assets because management’s evaluation of all the available evidence in assessing the realizability of the tax benefits of such loss carryforwards indicates that the underlying assumptions of the future profitable operations contain risks that do not provide sufficient assurance to recognize such tax benefits currently.
The Company has approximately $31.7 million of net operating loss carryforwards and $854,000 of research and development credit carryforwards for federal income tax purposes that expire in various years through 2025 and 2026, respectively. Prior capital loss carryforwards of $15.2 million expired in 2006. In addition, at January 31, 2007 the Company had net operating loss carryforwards of approximately $3.5 million resulting from its European operations. For financial reporting purposes, a valuation allowance has
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
been established to offset the deferred tax assets related to these carryforwards. The net operating loss carryforwards may be subject to certain limitations in the event of a change of ownership of the Company.
No deferred taxes have been provided on temporary differences related to investments in foreign subsidiaries because these investments are considered to be permanent. We do not believe it is practicable to determine the amount of these unrecognized deferred taxes at this time.
The Company has provided a valuation allowance on substantially all of its net deferred tax assets. The Company will continue to monitor the realizability of these net deferred tax assets and will reverse some or all of the valuation allowance as appropriate. In making this determination, the Company considers a number of factors including whether there is a historical pattern of consistent and significant profitability in combination with the Company’s assessment of forecasted profitability in the future periods. Such patterns and forecasts allow us to determine whether our most significant deferred tax assets such as net operating loss and research and development credit carryforwards will more likely than not be realizable in future years, in whole or in part. These deferred tax assets in particular will require us to generate significant taxable income in the applicable jurisdictions in future years in order to recognize their economic benefits. At this point, the Company does not believe that it has enough positive evidence to conclude that some or all of the valuation allowance on deferred tax assets should be reversed. Realization of the Company’s capital loss carryforward would further require the generation of capital gain income, which management believes to be unlikely prior to expiration of the federal capital loss carryforward during the upcoming year. However, facts and circumstances could change in future years and at such point the Company will reverse the allowance as appropriate.
8. Stock Options
Effective January 1, 1997, the Company adopted a Stock Incentive Plan (the “Plan”) for employees and key persons that provides for the issuance of stock incentives covering up to 12,500,000 shares of common stock. The Plan provides for the grant of incentive stock options, non-qualified stock options, restricted stock awards and stock appreciation rights. The terms and conditions of stock incentives granted under the Plan, including the number of shares, the exercise price and the time at which such options become exercisable are determined by the Board of Directors. The term of options granted under the Plan may not exceed 10 years and the options generally vest over periods ranging from three to five years. Prior to the adoption of the Plan, options which had no termination period were granted to certain officers and selected employees.
On October 15, 1999, the Company adopted a Directors’ Stock Option Plan (the “Directors’ Plan”) for directors of the Company who are not officers or employees of the Company. The Directors’ Plan provides for issuance of options to purchase the Company’s common stock at an exercise price equal to fair market value on the date of grant and expire 10 years after issuance. The options are fully vested as of the date of issuance.
OPTIO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of stock option activity is as follows:
The following table summarizes information concerning options outstanding and exercisable as of January 31, 2007:
OPTIO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other information pertaining to option activity during the years ended January 31, 2007 and 2006 was as follows:
In November 2005, the FASB issued FASB Staff Position (“FSP”) No. FAS 123(R)-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards (“FSP 123R-3”). We have elected to adopt the alternative transition method provided in the FSP 123R-3 for calculating the tax effects of share-based compensation pursuant to SFAS 123R. The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of employee share-based compensation, and to determine the subsequent impact on the APIC pool and consolidated statements of cash flows of the tax effects of employee share-based compensation awards that are outstanding upon adoption of SFAS 123R.
Prior to the adoption of SFAS 123(R), we presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Statement of Cash Flows. SFAS 123(R) requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows.
As of January 31, 2007, the Company has reserved 11,029,889 shares of common stock for issuance upon exercise of stock options under the Plan, 1,088,900 shares of common stock for issuance upon exercise of stock options outside of the Plan and 230,000 shares of common stock for issuance upon exercise of stock options under the Directors’ Plan.
9. Employee Benefit Plan
The Company has a combined profit sharing and 401(k) plan (the “401K Plan”) that covers substantially all employees meeting specified age and length-of-service requirements. The Company may make a discretionary matching contribution each year. The Company recognized expense related to the 401K Plan of approximately $45,000, $129,000 and $120,000 during the years ended January 31, 2005, 2006 and 2007, respectively.
10. Related Party Transactions
The Company had a note receivable from a shareholder for general personal purposes of $5,000 at both January 31, 2006 and 2007.
As further described in Note 12, the Company purchased VertiSoft in August 2004. Barron Hughes, a member of the Company’s Board of Directors, served as the former Chief Financial Officer of VertiSoft until its acquisition by the Company. In accordance with the VertiSoft purchase agreement, Mr. Hughes was paid severance pay of $165,000. In addition, VertiSoft had a note payable to Mr. Hughes in the amount of $138,000. Effective with the acquisition closing, the Company immediately repaid Mr. Hughes the full amount of the note payable. Further, in connection with the acquisition, Mr. Hughes was issued 96,975 options to purchase the common stock of the Company.
OPTIO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Income Per Share
Income per share has been computed in accordance with SFAS 128, Earnings per Share, which requires disclosure of basic and diluted earnings per share. Basic earnings per share excludes any dilutive effects of stock options. Diluted earnings per share includes the impact of potentially dilutive securities.
The following table sets forth the computation of basic and diluted net income per share:
12. Acquisition of VertiSoft Corporation
On August 10, 2004, the Company consummated the merger of VertiSoft, a privately held Georgia corporation, and Optio Software II, Inc., a wholly owned subsidiary of the Company, whereby VertiSoft became the surviving wholly owned subsidiary of the Company. Subsequently, on September 15, 2004, VertiSoft was merged with and into the Company, with the Company remaining the surviving corporation. The consideration given for all the common stock of VertiSoft included $348,000 in cash, the issuance of 1.5 million shares of Optio common stock, of which 310,000 shares were held in escrow for a period of 18 months to secure the indemnification obligations of the shareholders of VertiSoft, the issuance of options to purchase 340,000 shares of common stock of the Company to certain former VertiSoft executives and employees, and conditional cash payments of up to $225,000 to be paid out in various installments over a two year period, contingent upon the achievement of certain customer retention and product development goals which are included in goodwill when the uncertainties associated with its contingencies are recorded. Two payments of $75,000 each were paid in August 2005 and May 2006, for total contingent consideration of $150,000 and $75,000 of additional contingent consideration to be paid was not earned. The cash component of the consideration given was paid from funds generated from the on-going operations of the Company. The purchase price is as follows:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The value of the common stock issued above was based on the market price of the Company’s common stock on the date of issuance. The 310,000 shares held in escrow were released to the VertiSoft shareholders in February 2006, and the value of the shares based on the market value of the Company’s common stock on that date was added to goodwill.
The acquired assets consisted primarily of accounts receivable, software (not considered in-process research and development), machinery, equipment, furniture and fixtures, cash, and all of the interests, rights and benefits accruing to VertiSoft under any sales orders, sales contracts, service agreements, and purchase orders. In connection with the acquisition, the Company also assumed the liabilities of VertiSoft, consisting primarily of promissory notes payable with an estimated fair value of approximately $1,100,000, accounts payable, accrued payroll, and service agreements.
The purchase price was allocated to the assets and liabilities assumed based on their respective fair values on the date of acquisition as follows:
The technology is being amortized over periods ranging from 3 months to 5 years, the customer relationships are being amortized over 11 years and the non-compete agreement is being amortized over 5 years.
The results of operations of VertiSoft have been included in the Company’s consolidated condensed financial statements from the date of the acquisition, August 10, 2004. The following unaudited pro forma financial information presents the combined results of operations of VertiSoft and Optio as though the acquisition had occurred at the beginning of the period presented. The pro forma financial information does not necessarily represent the results of operations that would have occurred had VertiSoft and Optio been a single company during the period presented, nor does the Company believe that the pro forma financial information presented is necessarily representative of future operating results.
VertiSoft provides document management solutions designed to streamline information access and distribution for physicians and clinical, medical records and financial services staff through a single interface or Composite Patient View™. Its patented electronic document management system,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
QuickRecord, provides secure, individualized access to patient information retrieved from any system, inside or outside a business enterprise. The primary reasons for the acquisition were that the QuickRecord product broadens the Company’s portfolio of healthcare solutions and establishes a subscription-based licensing model for a new line of solutions.
In connection with the transaction described above, the Company entered into a three-year employment agreement with Donald H. French, VertiSoft’s former President and CEO. Mr. French serves as Senior Vice President of Research and Development for the Company. Mr. French’s employment agreement provides for a base salary of $200,000, and an option to acquire 350,000 shares of common stock at $1.10 per share (the “Options”). The Options vest over a period of four years. Upon Mr. French’s resignation for good reason, or termination without cause, as such terms are defined in the employment agreement, the Company will be obligated to pay him his then-current base salary for the remaining term of the employment agreement. If Mr. French’s employment is terminated by reason of disability occurring in the performance of his duties, he will receive his base salary for 12 months less any payments made to him under any long-term or short-term disability insurance policies. If Mr. French is terminated for cause, including resignation, or the mutual consent of the parties, he will receive no severance. Mr. French’s employment agreement includes post-employment restrictive covenants not to compete, solicit the Company’s customers or recruit the Company’s employees.
13. Segment and Geographic Information
The Company’s segments are organized around geographic locations. The Company’s U.S. operations and European operations represent the Company’s two reportable segments. The foreign locations principally function as distributors of products developed by the Company in the United States. The accounting policies as described in the summary of significant accounting policies are applied consistently across the segments. Intersegment sales are based on intercompany transfer prices to achieve a reasonable margin upon distribution. Revenues are attributable to each segment based on the location of the subsidiary originating the sale, which is typically the geographic location where the software is installed.
OPTIO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Segment information as of and for the years ended January 31, 2005, 2006 and 2007 is summarized below.
OPTIO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Quarterly Financial Results (Unaudited)
Summarized unaudited quarterly results for the years ended January 31, 2006 and 2007 were as follows (in thousands, except per share data):
(1) Includes the adjustment of $900,000 for reversal of the valuation reserve on M2 Systems note which reduced third quarter operating expenses.
15. Share Repurchase Plan
On January 5, 2007, Optio announced a share repurchase plan under which we could repurchase up to $2.0 million of our common stock over a twelve-month period. During fiscal 2007, we purchased a total of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
40,000 shares at an average purchase price of $1.50 per share, or approximately $60,000 in the aggregate. The repurchased shares were held and not cancelled. As of January 31, 2007, the dollar value of shares that remained available for repurchase under this program was approximately $1,940,000. The repurchases for the fiscal year ended January 31, 2007 are reflected in the following table:
(1) Last repurchase date was January 31, 2007.
16. Contingencies
On November 13, 2001, a lawsuit styled Kevin Dewey vs. Optio Software, Inc., et. al. was filed in the United States District Court for the Southern District of New York. The complaint was filed against the underwriters in the Company’s initial public offering as well as Optio and certain officers and directors of Optio, by a single plaintiff purportedly on behalf of persons purchasing Optio’s common stock between December 14, 1999 and December 6, 2000. The lawsuit also seeks class action status. Optio is a co-defendant with approximately 300 other issuers in this suit. The complaint includes allegations of violations of (i) Section 11 of the Securities Act of 1933, as amended (the “Securities Act”), by all named defendants, (ii) Section 12(a)(2) of the Securities Act by the underwriter defendants, (iii) Section 15 of the Securities Act by the individual defendants, and (iv) Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder by the underwriter defendants. The complaint alleges that Optio’s prospectus was materially false and misleading because it failed to disclose, among other things, that: (i) the underwriters had solicited and received excessive and undisclosed commissions from certain investors in exchange for which the underwriters allocated to those investors material portions of a limited number of Optio shares issued in connection with the Optio initial public offering; and (ii) the underwriters had entered into agreements with customers whereby the underwriters agreed to allocate Optio shares to those customers in the Optio initial public offering in exchange for which the customers agreed to purchase additional Optio shares in the aftermarket at pre-determined prices. The complaint seeks unspecified amounts as compensatory damages as a result of Optio’s alleged actions, as well as punitive damages and reimbursement for the plaintiffs’ attorneys’ fees and associated costs and expenses of the lawsuit. A proposal to settle the claims against Optio and other companies and individual defendants in the litigation was conditionally accepted by Optio. The completion of the settlement is subject to a number of conditions, including Court approval. The Court preliminarily approved the settlement on February 15, 2005, subject to certain modifications which are currently pending approval by the defendants. Under the settlement, the plaintiffs will dismiss and release all claims against participating defendants in exchange for a contingent payment guaranty by the insurance companies collectively responsible for insuring the issuers in the action. Optio may still have yet undetermined exposure to the underwriters pursuant to indemnification provisions in the underwriting agreement entered into at the time of the initial public offering. Under the guaranty, all of the insurers for all the issuers will be required to pay an amount equal to $1.0 billion less any amounts ultimately collected by the plaintiffs from the underwriter defendants in all of the pending cases. A settlement fairness hearing was held on April 24, 2006, however no ruling has been issued yet by the Court. There can be no assurance that this proposed settlement will be approved and implemented in its current form, or at all. On December 5, 2006, the United States Court of Appeals for
OPTIO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the Second Circuit overturned the District Court’s certification of the class of plantiffs who are pursuing the claims that would be settled in the settlement against the underwriter defendants. Plantiffs filed a Petition for Rehearing and Rehearing En Banc with the Second circuit on January 5, 2007 in response to the Second Circuit’s decision. The Petition for Rehearing and Rehearing En Banc was denied on April 6, 2007. Plaintiffs have informed the District Court that they would like to be heard as to whether the settlement may still be approved even though the Petition for Rehearing was denied. The District Court indicated that it would defer consideration of final approval of the settlement pending plantiffs’ request for further appellate review. The disposition of this matter is limited to Optio’s $300,000 corporate insurance deductible. The Company has completed payment of the insurance deductible through payment of legal fees. Optio will have no additional exposure unless the insurance companies become insolvent or unless Optio’s liability exceeds its policy limits through this matter or other matters. Optio’s insurance companies currently have an A or AA rating. The range of loss, if any, cannot be estimated and thus no potential loss is reflected in Optio’s consolidated financial statements.
Management believes that it has meritorious defenses in the foregoing matter and intends to pursue its position vigorously. While litigation is inherently subject to many uncertainties, management does not believe that the outcome of this case will have a material adverse effect on the financial position of Optio. However, depending on the amount and timing of an unfavorable resolution of the lawsuit, it is possible that Optio’s financial condition, results of operation or liquidity could be materially affected.
In addition, Optio is party to routine litigation or administrative proceedings incidental to its business, none of which is believed by the Company to be likely to have a material effect on the financial condition, results of operations or liquidity of the Company.
Indemnification
Most of the Company’s software license agreements indemnify our customers in the event that the software sold infringes upon the intellectual property rights of a third party. These agreements typically provide that in such event, Optio will either modify or replace the software so that it becomes non-infringing or procure for the customer the right to use the software. The Company has recorded no liability associated with these indemnifications, as management is not aware of any pending or threatened infringement actions that are possible losses. Optio believes the estimated fair value of these intellectual property indemnification clauses is minimal.
Optio Software, Inc.
Schedule II-Valuation and Qualifying Accounts
(a) Includes a combination of the allowance for doubtful accounts and the impairment reserve reversal in 2007 of $900,000 related to the note receivable from M2 Systems.
S-1
EXHIBIT INDEX
2.1
Stock Purchase Agreement, dated as of March 27, 2000, by and among Optio Software, Inc., Muscato Corporation, the Shareholders of Muscato Corporation, Michael A. Muscato and Nicholas Muscato (incorporated by reference to Exhibit 2.1 to Form 8-K filed April 10, 2000).
2.2
Asset Purchase Agreement dated as of March 27, 2000, by and among Optio Software, Inc., TransLink Solutions Corporation, the Shareholders of TransLink Solutions Corporation, Michael A. Muscato and Nicholas Muscato (incorporated by reference to Exhibit 2.2 to Form 8-K filed April 10, 2000).
2.3
Agreement and Plan of Reorganization, dated as of August 10, 2004, by and among Optio Software, Inc., Optio Software II, Inc., VertiSoft Corporation and Shareholders of VertiSoft Corporation (incorporated by reference to Exhibit 2.1 to Form 8-K filed August 13, 2004).
2.4
Amendment No. 1 to Agreement and Plan of Reorganization, dated as of August 1, 2005, by and among Optio Software, Inc., Optio Software II, Inc., by Optio as a successor-in-interest, VertiSoft Corporation, by Optio as a successor-in-interest, and Donald H. French, on behalf of himself on behalf of all the Other Shareholders (incorporated by reference to Exhibit 2.1 to Form 10-Q filed December 15, 2005).
2.5
Amendment No. 2 to Agreement and Plan of Reorganization, by and among Optio Software, Inc., Optio Software II, Inc., VertiSoft Corporation and Shareholders of Vertisoft Corporation, dated May 19, 2006 (incorporated by reference to Exhibit 2.1 to Form 10-Q filed June, 14,2006).
3.1
Amended and Restated Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to Form S-1 filed October 15, 1999).
3.2
Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to Form S-1 filed October 15, 1999).
4.1
See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated Articles of Incorporation and Amended and Restated Bylaws of the Registrant defining rights of the holders of Common Stock of the Registrant (incorporated by reference to Exhibit 4.1 to Form S-1 filed October 15, 1999).
10.1
Form of Option Grant Agreement prior to adoption of the Optio Software, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to Form S-8 filed June 9, 2000).
10.2
Optio Software, Inc. Stock Incentive Plan, dated as of January 1, 1997 (incorporated by reference to Exhibit 10.1 to Form S-1 filed October 15, 1999).
10.3
Optio Software, Inc. Outside Directors’ Stock Option Plan, dated as of October 13, 1999 (incorporated by reference to Exhibit 10.2 to Form S-1 filed October 15, 1999).
10.4
Amendment No. 1 to Optio Software, Inc. Outside Directors’ Stock Option Plan, dated as of December 19, 2003 (incorporated by reference to Exhibit 10.4 to Form 10-K filed April 21, 2004).
10.5
Amendment No. 2 to Optio Software, Inc. Outside Directors’ Stock Option Plan, dated as of November 2, 2005 (incorporated by reference to Exhibit 10.1 to Form 8-K filed November 8, 2005)
10.6
Sublease Agreement by and between HBO & Company and Optio Software, Inc., dated March 22, 1999 (incorporated by reference to Exhibit 10.4 to Form S-1 filed October 15, 1999).
10.7
Office Lease Agreement between Gateway Windward, Inc., as landlord, and Optio Software, Inc. as tenant, dated December 21, 2005 (incorporated by reference to Exhibit 10.1 to Form 8-K filed December 23, 2005).
10.8
Stock Purchase Agreement, dated December 4, 2001, by and between Optio Software, Inc. and M2 Systems Corporation (incorporated by reference to Exhibit 10.1 to Form 10-Q filed December 14, 2001).
10.9
Agreement for Sale and Purchase of Assets, dated as of December 4, 2001, by and between Optio Software, Inc. and M2 Systems Corporation (incorporated by reference to Exhibit 10.2 to Form 10-Q filed December 14, 2001).
10.10
M2 Systems Corporation $3,250,000 Non-Negotiable Promissory Note (incorporated by reference to Exhibit 10.3 to Form 10-Q filed December 14, 2001).
10.11
M2 Systems Corporation $750,000 Non-Negotiable Promissory Note (incorporated by reference to Exhibit 10.4 to Form 10-Q filed December 14, 2001).
10.12
M2 Systems Corporation $3,640,000 Amended, Restated and Consolidated Promissory Note (incorporated by reference to Exhibit 10.22 to Form 10-K filed May 1, 2003).
10.13
Amended and Restated Loan and Security Agreement, dated April 26, 2007, by and between Silicon Valley Bank and Optio Software, Inc.
10.14
Consulting Agreement, dated as of March 17, 2003, by and between Steven E. Kaye and Optio Software, Inc. (incorporated by reference to Exhibit 10.27 to Form 10-K filed May 1, 2003).
10.15
Letter Agreement, dated December 21, 2004 between Optio Software, Inc. and Caroline Bembry (incorporated by reference to Exhibit 10.1 to Form 8-K filed December 27, 2004)
10.16
Letter Agreement, dated December 23, 2004 between Optio Software, Inc. and Paul O’Callaghan (incorporated by reference to Exhibit 10.2 to Form 8-K filed December 27, 2004)
10.17
Letter Agreement, dated December 21, 2004 between Optio Software, Inc. and Terry Kraft (incorporated by reference to Exhibit 10.3 to Form 8-K filed December 27, 2004)
10.18
Letter Agreement, dated December 27, 2004 between Optio Software, Inc. and Daryl Hatton (incorporated by reference to Exhibit 10.4 to Form 8-K filed December 27, 2004)
10.19
Letter Agreement, dated December 27, 2004 between Optio Software, Inc. and Steve Kaye (incorporated by reference to Exhibit 10.5 to Form 8-K filed December 27, 2004)
10.20
Employment Agreement by and between Optio Software, Inc. and C. Wayne Cape, dated as of August 1, 2003 (incorporated by reference to Exhibit 10.1 to Form 10-Q filed September 15, 2003).
10.21
Employment Agreement, dated as of August 10, 2004, by and between Optio Software, Inc. and Donald H. French (incorporated by reference to Exhibit 2.2 to Form 8-K filed August 13, 2004).
10.22
Letter Agreement dated June 23, 2006 between Optio Software, Inc. and Chris Beecroft (incorporated by reference to Exhibit 10.1 to Form 8-K filed June 27, 2006).
10.23
Letter Agreement dated June 23, 2006 between Optio Software, Inc. and Michael McGuire (incorporated by reference to Exhibit 10.1 to Form 8-K filed June 27, 2006).
21.1
List of Subsidiaries.
23.1
Consent of BDO Seidman, LLP.
31.1
Certification of CEO pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2
Certification of CFO pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1
Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification by CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.