Microsoft Word - OPSY Edited Final

8/14/2019 Microsoft Word - OPSY Edited Final

1/28

Optical Systems, Inc.

Rating: Speculative Buy

Market Data July 8, 2008Symbol OPSYExchange OTCPKCurrent Price $0.16Price Target $0.50

RatingSpeculative

BuyOutstanding Shares 94.6 million

Market Cap. $15.1 millionAverage Volume NA

Source: Yahoo Finance, Analyst estimates

Company Overview

Optical Systems Inc. (OPSY), through its wholly owned

subsidiary, Automotive Software Designers, Inc., provides frontoffice software for automotive dealerships nationwide. OPSYs

save-a-deal software has been shown to significantly improve

dealer efficiency by automating workflow within a dealership,

eliminating manual forms and reducing the time needed to desk

and finance a deal. The Company further differentiates its

software from industry competitors products by providing

value-added services such as management consulting, network

support and business development call center services to clients.

At present, OPSY has 21 franchised automotive dealerships using

its front office software. In June 2008, the Company announced


2/28

the opening of a business development call center which will

further support its save-a-deal customers. Integrated with OPSYs

sales information system the business development call center

will help auto dealers convert more leads into showroom sales bypromptly responding to customer enquiries.

The Company has installed its save-a-deal software at Frank Kent

Honda, one of the oldest and largest Honda dealers in Teas. This

and other dealer relationships are enhancing the Companys

visibility and multiplying its sales opportunities. More recently,

OPSY announced a marketing partnership with Alphatrade.com,a media and marketing company, where Alphatrade will assist

OPSY with digital marketing, media and networking. The

Company has raised $2.4 million in capital since its inception and

is contemplating a $2 million strategic financing arrangement

with potential partners. These funds would be used for

marketing purposes and expanding the Companys customerbase.

In November 2007, the Company, formerly known as Optical

Systems Holdings, acquired 100% of the issued and outstanding

stock of Automotive Software Designers, Inc (ADS), which owned

the save-a-deal software. Prior to closing this deal, ADSs owner

B.J. Grisaffi acquired a majority stake in OPSY. Mr. Grisaffi hasmore than 30 years of automotive dealership and related

experience and currently serves as OPSYs President, CEO and a

director. In addition, two prominent directors have been added

in 2008. Keith Orr, a legendary figure in the automotive industry


3/28

and CEO/co-owner of Orr Automotive, recently joined OPSYs

board. So has William Mokry, an automotive industry veteran

who held executive management positions with two major U.S.

auto manufacturers. Mr. Mokry currently owns and manages amulti-location sub-prime automobile sales and finance company.

Management believes the new business development call center

the Company opened last month significantly enhances the value

proposition OPSY offers customers since it frees dealership sales

professionals to focus on selling and closing car sales, rather than

chasing down leads. The save-a-deal business development callcenter is unique in that it is staffed by trained vehicle sales

professionals and not the more typical low-skill call center

workers. Preliminary results suggest that save-a-deal dealerships

utilizing the services of the business development call center can

expect to more than double closing rates for their stores.

Investment Highlights

Auto dealerships seek competitive advantages through bettersales tools

The Company serves a competitive, highly fragmented

automotive dealership market consisting of some 21,800

franchised dealers nationwide and tens of thousands of

independent dealers. Intense competition for customers has given

car buyers strong bargaining power. As a result, industry profit

margins are under pressure. Unable to boost prices on most

vehicle models, dealers are focusing instead on maintaining


4/28

margins through greater efficiency. OPSYs save-a-deal front

office software enables dealers to significantly improve efficiency

by automating workflow, eliminating paper forms and

streamlining deal financing.

Dealers desperate for sales follow-up tools

OPSY is addressing an unmet market need by developing call

centers that provide customer follow-up calls for save-a-deal

dealers. The ability to offer this highly profitable service is a

natural offshoot of the save-a-deal package since the system

requires the dealers sales associate to acquire a customers

information at the point of sale. Auto dealerships are in desperate

need of efficient, reliable sales follow-up tools and the Companys

call centers are uniquely positioned to fill that need.

OPSYs integrated software is supported by valued-addedservices

The Companys save-a-deal software combines sales prospecting,

CRM, deal desking and inventory management functionalities in

one integrated tool. OPSY also offers its dealer customers value-

added services such as management consulting, networking

solutions and business development call center support. The

Companys feature-rich software and related services

differentiates OPSYs product from the competition. Other

software vendors serving this niche market offer software limited

to only one particular application such as desking, inventory

management or Internet CRM.


5/28

Installed dealership base and new marketing partnership

The Company has installed its save-a-deal software at 21

dealerships nationwide and recently completed a software

installation at Frank Kent Honda, one of the oldest and largest

Honda dealerships in Texas. The Company plans to further boost

its brand visibility and sales prospects through a marketing

partnership with Alphatrade.com. This marketing company is

known for its ability to tailor its programs to target specific

demographics in a cost-effective manner. Brand awareness in the

automotive industry is essential to OPSYs long-term success;Alphatrade is designing a marketing program specifically tailored

to achieving this objective.

OPSY anticipates robust revenue growth and profitability in2008

With all the development work on its principal software package

essentially completed, the Companys 2008 R&D spending

requirements are minimal and OPSY is free to redirect its

resources towards marketing and sales. Management targets 50%

quarter-over-quarter growth over the next several quarters and

estimates 2008 revenues will fall in a $0.7 million range. High

gross margins on both software and business development call

center sales (i.e. 95% margins) enabled OPSY to turn profitable inthe first quarter of 2008 and we anticipate the Company will

report a modest net profit for full-year 2008.

Experienced management team directs OPSYs growth


6/28

Company President/CEO, B.J. Grisaffi, has more than 30 years of

experience managing automobile dealerships. He, along with his

team, pioneered the save-a-deal program and led the

development of the software. Keith Orr, who recently joined theCompany as a director, is a legendary figure in the automotive

industry He was the CEO and majority owner of Orr Automotive

Group. and brings to OPSY substantial marketing, sales, product

development and dealership management experience. In July,

William Mokry, an automotive industry veteran who held

executive management positions with two major U.S. automanufacturers, was added to the board. Mr. Mokry currently

owns and manages a multi-location, sub-prime automobile sales

and finance company.


7/28

Automotive Dealership Market

Highly fragmented and competitive market

The vast majority of new car sales in the U.S. are generated bysome 21,800 franchised automotive dealerships nationwide which

have combined annual revenues of approximately $675 billion.

The industry is highly fragmented, with the top dealerships

accounting for less than 10% of industry revenues. However, the

automotive dealership industry has begun to consolidate in

recent years due to declining new vehicle sales, competition fromon-line sources, and other competitive challenges which have

resulted in pricing and margin pressure. Unable to raise vehicle

prices, car dealers are focusing instead on improving efficiencies

as a means for boosting profits. This scenario is creating demand

for integrated software products that can help improve front

office efficiency. Vendors of value-added software and services

such as Optical Systems, Inc. are uniquely well-positioned to

address the evolving needs of this niche market.

Exhibit 1: State-by-state breakdown of auto dealerships


8/28

Alabama

345

Arizona 256

Montana 132

Washi ngton 383

Orego n 274

Idaho 123

Nevada 118

Utah 153

New Mexico 140

Colo rado 284

California

1,594

Texas 1,346

Oklahoma 299

Kansas 258

Wyo ming 70

North Dakota96

Arkansas267

Nebraska 213

South Dakota117

Minnesota38

Iowa

369

Missouri494

Louisiana

337

Mississippi

242

Tennessee420

Kentucky

298

Wisconsin597

Michigan

759

Illinois934

Indiana521

Ohio

958 WestVirginia

169

Pennsylvania

1,161

New York1,112

Virginia

551

North Carolina

692

Georgia603

South

Carolina326

Florida

948

Maine

144Vermont

97

New Hampshire 169

Massachusetts 478

Maryland 358

Rhod e Island 63

New Jersey 574

Delaware 65

Conn ecticut 320

Alaska 38

Hawaii 66

D.C. 1

Source: NADA

Exhibit 2: Breakdown of U.S. auto dealerships, by volume of new-unitsales

0

2,500

5,000

7,500

10,000

0-149 150-399 400-749 750+

Numberofdealerships

1988 1998 2008


9/28

Source: NADA Industry Analysis Division

More vehicles on the road today than ever before

The number of vehicles operating in the United States grew to

more than 248 million in June, 2007. The number of vehicles on

the road increased 2% annually between 2000 and 2007.

Although new vehicles registrations have declined modestly in

recent years, the used car market remains robust, providing

automotive dealers with ample opportunities for increasing sales

volume In addition to selling cars, most dealers now generate

significant incremental profits from selling insurance and

financing services to their customers. The increasing complexity

of automotive dealership operations has created the need for

software tools that can streamline and automate several

processes.

Exhibit 3: Total Vehicles in operation by year

180

200

220

240

260

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Millions

Source: The Polk Co. & NADA


10/28

Exhibit 4: Aftermarket income (As % of new- and used-vehicledepartment gross profit)

0%

5%

10%

15%

20%

25%

30%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Finance and insurance Service contract and other Source: NADA Industry Analysis Division

Margin gains targeted through efficiencies

Intense competition among automotive dealers has led to

declining industry profits. The profitability of new vehicles sales

has been adversely impacted by lower sales volume, large

inventories, generous consumer incentives and higher floor plan

and energy costs. In the last two years, net profits on new vehicle

sales have fallen below the breakeven level for most automotive

dealers. As a result, auto dealers must now rely on used car sales

to generate more of their profits. Although net profits on used car

sales have declined marginally in recent years, these sales remain

very attractive compared to new car sales. NADA (National


11/28

Automobile Dealers Association) claims that despite lower

profits, dealer gross margins have remained relatively stable; it is

only net margins that have declined. To improve net margins,

automotive dealers are seeking way to reduce overhead andautomate processes, installing software and other efficiency tools

that can provide a rapid return on investment.

Exhibit 5: New-vehicle departmentnet profit

Exhibit 6: Used-vehicle departmentnet profit

-50

0

50

100

150

200

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

'000s$

0

40

80

120

160

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

'000s$

Source: NADA Industry Analysis Division

Cluttered software competitive landscape

Many vendors have developed software with applications for

automotive dealerships; product offerings range from pure CRM-

related software to Internet-based applications and database

management services. This niche software market is characterized

by rapidly changing technology needs, continuous innovations

and a growing emphasis on ease of use. Factors that determine

the most successful software vendors are the size of the installed


12/28

customer base, hassle-free usage, strong branding and product

functionality.

OPSY offers the industrys most complete end-to-end software

solutions for car sales and dealership front office operations. The

Company further differentiates its product with value-added

services such as management consulting, networking solutions

and business development call center services for save-a-deal

dealerships.


13/28

Exhibit 7: OPSY competitive advantage.

Source: Company Reports

Product Strategy

OPSY has developed a superior software solution that provides a

broad range of functionalities. The Company markets the

industrys only integrated lead sourcing, Internet CRM, desking

and inventory management tool. In addition to feature-richsoftware, OPSY supports its save-a-deal customers with business

development call center, management consulting and network

solution services. OPSYs President/ CEO B.J. Grisaffi, and new

directors Keith Orr and William Mokry have extensive dealership

Optical Systems, Inc Software Solutions ManagementConsultin

Network Solutions Call Center Solutions

The Reynolds &Reynolds Company Software Solutions Professional Services IT Solutions

Automatic DataProcessing

Business Outsourcingsolutions

DealerstrackHoldings Inc. Software Solutions

Cobalt Internet Advertisingand Marketing services


14/28

management backgrounds and have imparted their accumulated

wisdom in the Companys feature-rich software.

Save-a-deal software

The Companys save-a-deal software offers customers the

following:

-Document and source all sales prospects from the Internet,

telephone, walk-in traffic and appointments;

- Facilitate, control and monitor follow-up with the CRM tool;

- Control and monitor the sales process with a customized desk

dealing tool;

-Control new and used vehicle inventories with inventory

management tools.

Exhibit 8: Products and services

Optical Systems Inc. Products and Services

Products Services

Save-A-Deal Software

Deal Deskings Sales DepartmentOne Piece

FinanceDepartment Menu

InventoryManagement

BusinessDevelopment Center

Solutions

Save-A-DealReports

Internet CRMCapabilities

Drivers LicenseScanner

DMS Integration

Management

Consulting

Network Solutions


15/28

Source: Company Reports

The Company also provides management consulting to

dealerships on a weekly basis, drawing on the experience of

personnel who have held positions such as General Manager,

Sales Manager and Finance and Insurance Manager. Recognizing

the industrys desperate need for customer follow-up calls, OPSY

has integrated its save-a-deal software with a businessdevelopment call center that will enable automotive dealers to

convert more leads into showroom sales.

The Company also provides network services that help

automotive dealers solve their complex IT problems. Few

dealerships have the in-house technical expertise to address

network issues.

Business Strategy

The Companys business strategy encompasses every aspect of

its operations from product development and positioning to

marketing, brand building and funding strategies.

Call center solution enhances customer acquisition andretention

OPSY is enhancing its value proposition to automotive

dealerships by leveraging the customer leads gathered through


16/28

the front office software with business development call centers

which convert leads into showroom sales. Preliminary results

indicate that dealers using the support services of the business

development call center can expect to more than double closingrates for their stores. The call center frees dealership sales

personnel from mundane, low value tasks such as handling

incoming preliminary sales inquiries, making outbound follow

up calls to customers and qualified prospects, and

calling\emailing prospective Internet leads. The Company staffs

its call center with trained vehicle sales personnel instead of theinexperienced, low skill workers typically associated with call

center operations.

Management consulting services and network services furtherenhance offerings

OPSY makes management consulting services available to its auto

dealer customers and also uses its contacts with senior networkengineers to assist customers in solve complex network issues.

Plans shift from R&D to revenue generation

With product development essentially complete, OPSY is shifting

its focus from research and development to product sales and

marketing. Management targets growth averaging 50% per

quarter over the next several quarters and shifting its marketing

plan into high gear with Alphatrades help.

Creating brand awareness


17/28

The Company recognizes that brand awareness within the

automotive marketplace is essential for its longer-term success.

Accordingly, OPSY is partnering with marketing guru

Alphatrade to create and roll out a highly targeted and effectivemarketing campaign.

Plans to raise funds via an equity private placement

The Company currently has 21 franchised dealers using its save-

a-deal software and is discussing a strategic financing

arrangement with potential partners which could raise $2.0

million in additional capital and fund further expansion of its

marketing efforts and customer base.

Exhibit 9: Business Strategy

Source: Beacon Equity Research

BusinessStrategy

Creatingbrand

awareness

Raising fundsvia privateplacement

Call center servicesfor customeracquisition andretention,

Shift fromR&D torevenue

generation.


18/28

Competitive Analysis

OPSYs closest direct competitor, DealerTrack Holdings,

generates annual sales approaching $250 million. DealerTrack

Holdings and other competitors are described below:

DealerTrack Holdings Inc

DealerTrack Holdings provides on-demand software and data

solutions for U.S. automotive dealerships. The company utilizes

the Internet to link automotive dealers with banks, finance

companies, credit unions and other financing sources, and also

other service and information providers, such as the major credit

reporting agencies. As of December 31, 2007, DealerTrack

Holdings had more than 22,000 automotive dealers

(approximately 90% of all franchised dealers) in its network andover 450 financing sources as well as other service and

information providers. The company is headquartered in Lake

Success, New York and primarily operates in the U.S. and

Canada.

Automatic Data Processing

Automatic Data Processing, Inc. provides computerized

transaction processing, data communication and information

services. ADP also provides payroll processing (including full

departmental outsourcing) and human resource administration


19/28

services in Canada and Europe. It also offers wage and tax

collection, and remittance services in Canada. ADP was

incorporated in 1961, and is headquartered in Roseland, New

Jersey. It operates primarily in the U.S. and has 46,000 employees.

Reynolds and Reynolds Company

Reynolds and Reynolds Company is an integrated solutions

provider to automotive retailers. The company provides a range

of services such as information technology, software solutions

and professional services to the automotive segment. It also offers

products and services for original equipment manufacturers. It is

a private company operating primarily in the U.S. and Canada

and employing about 4,300 people.

Cobalt Group

Cobalt Group provides Internet advertising and marketing

services such as lead management, inventory marketing, imagemarketing advanced vehicle search, pre-owned marketing and

Spanish-language marketing to automobile dealers and

manufacturers. The company's services enable auto

manufacturers and dealers to build brands through marketing

and Internet advertising. Privately-owned Cobalt works with

more than 27 manufacturers and 12,000 franchised dealers across

the U.S.

Financial Analysis


20/28

Financial Record

OPSY had sales totaling $60,491 in 2007. The Company became

active in November 2007 when it acquired Automotive Software

Designers, Inc. For the quarter ending March 2008, the Company

posted revenues of $134,680.

Operating expenses totaled $157,013 in 2007, with payroll and

related costs accounting for about 59.0% of the total and

administrative expenses and selling & marketing expenses

constituting 24.6% and 14.3%, respectively. The Company plans

to increase sales and marketing expenditures in 2008 as its focus

shifts from research and development to revenue generation.

OPSY recorded a net loss of $109,522 in 2007. Net income turned

positive in the first quarter of 2008 as a result of revenue growth

that allowed for improved absorption of overhead costs.

Exhibit 10: Selected income statement data

First quarterended March

31, 2008*

Year ended

December 31,2007

Revenue $134,680 $60,491

Total OperatingExpenses

$127,190$157,013

Operating Income $7,940 (109,522)

Net Income / (Loss) $7,940 ($109,522)

EBITDA ($10,546) ($106,047)

Source: Company Reports, Pink Sheets


21/28

Liquidity and capital requirements

As of March 31, 2008, the Company had cash and equivalents of$124,475 and no long-term liabilities. However, OPSY had a

working capital deficit (excluding cash) of approximately $11,484.

The Company will likely need to raise additional external

financing to fund its 2008/09 business plan and is contemplating

a $2 million strategic financing arrangement.

Exhibit 11: Selected balance sheet data

March 31,2008

Cash & cash equivalents $124,475

Net working capital (excluding cash)

($11,484)

Total assets $ 714,137

Total long term liabilities N/A

Total current liabilities $90,211

Stock holders Equity (deficit )

$633,868

Source: Company 10-Q, Pink Sheets


22/28

Revenue Outlook

With development work on its software product essential

completed, OPSY is switching its focus to revenue generation.

The Company is already off to a strong start in 2008, recording

first quarter sales of $134,680 and a modest first quarter net profit.

Management is targeting 50% quarter-over-quarter sales growth

for the next several quarters. We expect OPSY to generate 2008

revenues in a $0.7-0.9 million range, which will consist of $0.2-0.4

million in business development call center sales and around $0.5

million in software sales.


23/28

The Companys principal competitor, DealerTrack Holdings,

produces annual revenues in a $250 million range supplying a

limited software product to around 90% of the nations franchise

auto dealers. Simply capturing 10% of that market creates a $25

million market opportunity for OPSY. Going forward, we

anticipate growth in OPSYs revenues to around $3.5 million in

2009 and $7 million in 2010, with sales rising to $17.5 million by

2012. Recurring revenues from the business development call

centers provides a powerful tool for leverage software sales.Reflecting its high gross margins and lean operating structure, we

expect OPSY to remain solidly profitable for full-year 2008 and

beyond.

Valuation Analysis

OPSYs competitors were recently trading at Price/Sales

multiples averaging around 2.6 times revenues and forward

Price/Sales multiples averaging about 2.5 times revenues.

Because of its higher projected revenue growth and recurring

revenues from call center operations, we believe OPSY shares

warrant a premium multiple relative to DealerTrack Holdings.

We value OPSY shares at a 3.0 times forward Price/Sales

multiple.

Exhibit 12: Peer group


24/28

CompanyName

Ticker

Symb

ol

Share

Price

Market Cap.

($Millio

n)

PE P/S

2007200

8

200

9

200

7

200

8

20

09

DealerTrackHoldingsInc TRAK

$14.7628 21.7

35.4

12.0 2.3 2.5 2.4

AutomaticData

Processing Inc ADP

$42.62,213 19.4

19.1

17.7 2.5 2.6 2.5

Peer Avg 20.527.2

14.9

2.4 2.6 2.5

OpticalSystems,Inc

OPSY

$0.16 15.1

Source: Reuters (Share price as on July 9, 2008)

By multiplying our $17.5 million 2012 revenue estimate by a 3.0

times forward Price/sales multiple, we derive a $52.5 million

market capitalization target for OPSY shares. We assume 10%

share dilution resulting from the proposed strategic financing and

divide the market capitalization target by 105 million fully

diluted shares outstanding to derive our $0.50 price target.Accordingly, we are initiating coverage of Optical Systems, Inc.

with a Speculative Buy rating and a $0.50 price target. With its

feature-rich software and value-added call center services, we

think OPSY is well-positioned to rapidly garner share in the


25/28

automotive dealer software market. We caution investors,

however, that OPSY must confront and overcome many obstacles

in achieving its market penetration goals. Some of the principal

risks faced by the Company are discussed below.

Risk Factors

Reliance on automotive industry

The Companys software and services address the specific needs

of automotive dealerships. At present, OPSY is entirely

dependent on automotive dealers for product sales. The U.S.

economic slowdown has created a difficult sales environment for

automotive dealer and high crude oil prices are adversely

impacting sales of gas-guzzling vehicle models.

Technology risks

The Company also faces risks related to technology innovation.

Its product may become outdated and the possibility exists that a

competitor may introduce more feature-rich software. OPSYs

ability to adapt to changing technology and the evolving needs of

its market niche will determine the Companys future growth.

Brand loyalty

DealerTrack Holdings has relationships with nearly 90% of

automotive dealerships. Although OPSY offers a more feature

rich product as well as valued-added services, customers may be


26/28

hesitant to switch vendors and brand loyalty to DealerTrack

Holdings may limit OPSYs ability to garner market share.

Lack of financing

The Company has a working capital deficit and will likely need to

raise additional third party financing to implement its 2008/09

business plan. A $2.0 million strategic financing is contemplated;

however, there is no guarantee that OPSY will be able to raise the

necessary capital. An equity sale dilutes the ownership interests

of existing shareholders while debt financing increases the

Companys finance risk and debt servicing requirements.


27/28

Management

B. J. Grisaffi, Chairman, President and Chief Executive Officer

B. J. Grisaffi has more than 30 years experience managingautomobile dealerships. He and his team pioneered the save-a-

deal program, introducing the only integrated automotive

dealership front office software available in the market today.

Mr. Grisaffi was the owner of Automotive Software Designers

and acquired a majority stake in OPSY before the two companies

were merged. He currently serves as President, CEO and adirector of the merged business.

Keith Orr, Director

Keith Orr is a legendary figure in the automotive industry. He

was the CEO and majority owner of Orr Automotive Group. Mr.

Orrs experience encompasses senior roles in marketing, sales,

product development and dealership management. Mr. Orr holdsa Bachelors degree in Business Management from the University

of Texas at Arlington.

William Mokry, Director

Mr. Mokry joined OPSYs board of directors in July 2008. This

automotive industry veteran has held senior executive positions

with two major U.S. auto manufacturers as well as ownership

intererts in retail dealerships. He currently owns and manages a

multi-location, , sub-prime auto sales and finance company.


28/28

Documents

Microsoft Word - OPSY Edited Final