##### Table of Contents

---







UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549








FORM 10-Q








(Mark One)


|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------------




| |  | For the quarterly period ended July 31, 2002
| |  | --------------------------------------------




OR





| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------




| |  | For the transition period from
 to
| |  | ----------------------------------







Commission File Number: 1-15529








OPTIO SOFTWARE, INC.


(Exact name of registrant
as specified in its charter)








Georgia

58-1435435State of other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification
No.)





3015 Windward Plaza, Fairways II, Alpharetta, GA

30005(Address of principal executive offices)

(Zip Code)





Registrants telephone number, including area code: (770) 576-3500








Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No  ̈





There were 19,127,498 shares of the Registrants common stock outstanding as of September 12, 2002.








---



---

##### Table of Contents

OPTIO SOFTWARE, INC.





FORM 10-Q





For the Quarterly Period Ended July 31,2002





TABLE OF CONTENTS





PagePART IFINANCIAL INFORMATIONItem 1.

Financial Statements

3Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

14Item 3.

Quantitative and Qualitative Disclosures About Market Risk

25PART IIOTHER INFORMATIONItem 1.

Legal Proceedings

25Item 2.

Changes in Securities and Use of Proceeds

26Item 3.

Defaults Upon Senior Securities

26Item 4.

Submission of Matters to a Vote of Security Holders

26Item 5.

Other Information

27Item 6

Exhibits and Reports on Form 8-K

27













2




---

##### Table of Contents




FORWARD-LOOKING STATEMENTS





In addition to historical information, this Form 10-Q contains forward-looking statements that involve risks and uncertainties. Such forward-looking statements are
made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933 and are made based on managements current expectations or beliefs as well as
assumptions made by, and information currently available to, management. These forward-looking statements include, among other things, statements regarding Optio Software, Inc.s (Optio) anticipated costs and expenses, Optios
capital needs and financing plans, product and service development, Optios growth strategies, market demand for Optios products and services, relationships with Optios strategic marketing alliances, and competition. These
forward-looking statements include, among others, those statements including the words expects, anticipates, intends, believes and similar language. Optios actual results may differ significantly
from those projected in the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, risks associated with Optios reliance on strategic marketing and reseller relationships,
fluctuations in operating results because of acquisitions or dispositions, changes in competition, delays in developing new software, market acceptance of new products, expectation of achieving and sustaining operating profits and earnings,
including the timing of such company performance, disputes regarding Optios intellectual property, risks relating to the potential delisting of its stock, possible adverse results of pending or future litigation, or risks associated with
Optios international operations. These and additional factors are set forth in the Safe Harbor Compliance Statement for Forward-Looking Statements included as Exhibit 99.1 to this Quarterly Report on Form 10-Q. You should carefully
review these risks and additional risks described in other documents Optio files from time to time with the Securities and Exchange Commission, including the latest Annual Report on Form 10-K that Optio has filed. You are cautioned not to place
undue reliance on the forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Optio undertakes no obligation to publicly release any revisions to the forward-looking statements or reflect events or
circumstances after the date of this document.





PART IFINANCIAL INFORMATION





ITEM 1.    
FINANCIAL STATEMENTS




3




---

##### Table of Contents




Optio Software, Inc.





Consolidated Condensed Balance Sheets





January 31, 2002


July 31, 2002(Unaudited)ASSETSCurrent assets:Cash and cash equivalents

$
5,378,000


$
4,013,000Marketable securities


205,000



Accounts receivable, net


6,383,000



4,831,000Prepaid expenses and other current assets


811,000



1,101,000Current portion of notes receivable


360,000



360,000Total current assets


13,137,000



10,305,000Property and equipment, net


1,570,000



1,320,000Other assets:Note receivable from and advances to shareholders


127,000



97,000Notes receivable, less current portion


3,640,000



3,460,000Other


128,000



146,000Total assets

$
18,602,000


$
15,328,000LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
1,329,000


$
1,865,000Accrued expenses


3,425,000



3,142,000Notes payable


53,000



53,000Current portion of capital lease obligations


91,000



81,000Deferred revenue


6,115,000



5,888,000Total current liabilities


11,013,000



11,029,000Capital lease obligations, less current portion


224,000



193,000Deferred revenue


111,000



115,000Shareholders equity:Common stock


50,171,000



50,264,000Accumulated deficit


(42,613,000
)


(46,150,000
)Accumulated other comprehensive loss


(291,000
)


(123,000
)Unamortized stock compensation


(13,000
)


Total shareholders equity


7,254,000



3,991,000Total liabilities and shareholders equity

$
18,602,000


$
15,328,000





See accompanying notes.







4




---

##### Table of Contents




Optio Software, Inc.





Consolidated Condensed Statements of Operations


(Unaudited)





Three Months Ended July 31,2001


2002Revenue:License fees

$
3,503,000


$
2,737,000Services, maintenance, and other


4,527,000



4,649,0008,030,000



7,386,000Costs of revenue:License fees


112,000



130,000Services, maintenance, and other


2,530,000



2,189,0002,642,000



2,319,0005,388,000



5,067,000Operating expenses:Sales and marketing


4,134,000



3,678,000Research and development


990,000



1,132,000General and administrative


2,104,000



1,776,000Depreciation and amortization


348,000



235,0007,576,000



6,821,000Loss from operations


(2,188,000
)


(1,754,000
)Other income (expense):Interest income


66,000



62,000Interest expense


(49,000
)


(8,000
)Other






(25,000
)17,000



29,000Loss before income taxes and loss from discontinued operations


(2,171,000
)


(1,725,000
)Income tax benefit






498,000Loss from continuing operations


(2,171,000
)


(1,227,000
)Loss from discontinued operations


(1,849,000
)


(9,000
)Net loss

$
(4,020,000
)

$
(1,236,000
)Loss per share from continuing operationsbasic and diluted

$
(0.12
)

$
(0.06
)Loss per share from discontinued operationsbasic and diluted

$
(0.10
)

$
(0.01
)Net loss per share  basic and diluted

$
(0.22
)

$
(0.07
)Weighted average shares outstandingbasic and diluted


18,500,532



18,977,498Comprehensive loss:Net loss

$
(4,020,000
)

$
(1,236,000
)Foreign currency translation adjustment


20,000



131,000Unrealized loss on marketable securities available for sale


(14,000
)


Comprehensive loss

$
(4,014,000
)

$
(1,105,000
)





See accompanying notes.




5




---

##### Table of Contents




Optio Software, Inc.





Consolidated Condensed Statements of Operations


(Unaudited)





Six Months Ended July 31,2001


2002Revenue:License fees

$
6,293,000


$
5,406,000Services, maintenance, and other


8,773,000



8,775,00015,066,000



14,181,000Costs of revenue:License fees


262,000



258,000Services, maintenance, and other


5,883,000



4,515,0006,145,000



4,773,0008,921,000



9,408,000Operating expenses:Sales and marketing


9,402,000



7,110,000Research and development


2,149,000



2,375,000General and administrative


3,504,000



3,568,000Depreciation and amortization


656,000



472,00015,711,000



13,525,000Loss from operations


(6,790,000
)


(4,117,000
)Other income (expense):Interest income


145,000



123,000Interest expense


(61,000
)


(20,000
)Write-down of ec-Hub investment


(200,000
)


Other


13,000



35,000(103,000
)


138,000Loss before income taxes and loss from discontinued operations


(6,893,000
)


(3,979,000
)Income tax benefit






485,000Loss from continuing operations


(6,893,000
)


(3,494,000
)Loss from discontinued operations


(3,705,000
)


(43,000
)Net loss

$
(10,598,000
)

$
(3,537,000
)Loss per share from continuing operationsbasic and diluted

$
(0.38
)

$
(0.19
)Loss per share from discontinued operationsbasic and diluted

$
(0.20
)

$
Net loss per sharebasic and diluted

$
(0.58
)

$
(0.19
)Weighted average shares outstandingbasic and diluted


18,300,626



18,795,093Comprehensive loss:Net loss

$
(10,598,000
)

$
(3,537,000
)Foreign currency translation adjustment


(61,000
)


168,000Unrealized loss on marketable securities available for sale


(61,000
)


Comprehensive loss

$
(10,720,000
)

$
(3,369,000
)





See accompanying notes.







6




---

##### Table of Contents




Optio Software, Inc.





Consolidated Condensed Statement of Shareholders Equity


(Unaudited)





Common Stock


Accumulated Deficit


Accumulated Other Comprehensive (Loss) Income


Unamortized Stock
Compensation


Total Shareholders EquityShares

AmountBalance at February 1, 2002

18,582,398

$
50,171,000


$
(42,613,000
)

$
(291,000
)

$
(13,000
)

$
7,254,000Comprehensive loss, net of tax:Net loss








(3,537,000
)










(3,537,000
)Foreign currency translation adjustment












168,000







168,000Comprehensive loss




















3,885,000Change in deferred compensation related to stock option terminations




(8,000
)










1,000



(7,000
)Amortization of deferred compensation
















12,000



12,000Exercise of stock options

545,100


101,000















101,000Balance at July 31, 2002

19,127,498

$
50,264,000


$
(46,150,000
)

$
(123,000
)

$



$
3,991,000





See accompanying notes.




7




---

##### Table of Contents




Optio Software, Inc.





Consolidated Condensed Statements of Cash Flows


(Unaudited)





Six Months Ended July 312001


2002Cash flows from operating activities:Net loss

$
(10,598,000
)

$
(3,537,000
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation


656,000



472,000Amortization of intangible assets


3,724,000



Provision for doubtful accounts


280,000



(134,000
)Write-down of ec-Hub investment


200,000



Gain on sale of marketable securities


(18,000
)


Loss on disposal of property and equipment


4,000



26,000Non-cash compensation and interest


257,000



5,000Changes in operating assets and liabilities:Accounts receivable


1,796,000



1,806,000Prepaid expenses and other current assets


(78,000
)


(254,000
)Accounts payable


(1,584,000
)


469,000Accrued expenses


654,000



(292,000
)Income taxes receivable


1,437,000



(33,000
)Deferred revenue


(122,000
)


(321,000
)Net cash used in operating activities


(3,392,000
)


(1,793,000
)Cash flows from investing activities:Purchases of marketable securities


(20,000
)


Proceeds from the sale of marketable securities


68,000



205,000Purchases of property and equipment


(309,000
)


(212,000
)Repayment of notes receivable






180,000(Advances to)/repayments from related parties and shareholders under notes receivable


(2,000
)


30,000Net cash (used in) provided by investing activities


(263,000
)


203,000Cash flows from financing activities:Payments of notes payable and capital lease obligations


(108,000
)


(41,000
)Advances on the line of credit


7,975,000



Payments on the line of credit


(7,251,000
)


Proceeds from exercise of stock options


538,000



101,000Net cash provided by financing activities


1,154,000



60,000Impact of foreign currency rate fluctuations on cash


53,000



165,000Net decrease in cash and cash equivalents


(2,448,000
)


(1,365,000
)Cash and cash equivalents at beginning of period


8,748,000



5,378,000Cash and cash equivalents at end of period

$
6,300,000


$
4,013,000Supplemental disclosures of cash flow information:Cash paid (received) during the year for:Interest

$
58,000


$
14,000Income taxes

$



$
(485,000
)





See accompanying notes.




8




---

##### Table of Contents




Optio Software, Inc.





Notes to the Consolidated Condensed Financial Statements


(Unaudited)





1.    Description of Business





Optio Software, Inc. (Optio or the Company) develops, sells and supports software that captures, transforms and delivers information and data to
allow automated processes 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.    Basis of Presentation





Interim Financial Information





The accompanying
interim consolidated condensed financial statements of the Company have been prepared in accordance with the instructions for Form 10-Q. Accordingly, certain information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. In the opinion of management, all adjustments necessary for a fair presentation of the financial information for the interim
period reported have been made.





The accompanying financial statements should be read in conjunction with the
Companys audited consolidated financial statements for the year ended January 31, 2002, included in the Companys Annual Report on Form 10-K, filed with the Securities and Exchange Commission on May 1, 2002. Results of
operations for the three months and six months ended July 31, 2002 are not necessarily indicative of the results for the year ending January 31, 2003.





New Pronouncements





In July 2001, the Financial
Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 141, Business Combinations (SFAS 141) and No. 142, Goodwill and Other Intangible Assets
(SFAS 142). SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations and changes the criteria to recognize intangible assets apart from goodwill. Under SFAS 142, goodwill and indefinite
lived intangible assets are no longer amortized, but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized
over their useful lives. Companies are required to immediately adopt the amortization provisions of SFAS 142 as it relates to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, companies are required to adopt SFAS 142 in their fiscal year beginning after December 15, 2001. The Company adopted SFAS 142 on February 1, 2002 in accordance with the provisions of the
statement. The adoption of SFAS 142 did not have a material affect on the Companys financial position or results of operations as the Company does not currently have goodwill and other intangible assets.





The Financial Accounting Standards Board issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
which supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and of Long-Lived Assets to be Disposed Of. SFAS No. 144 supersedes the provisions of APB Opinion No. 30, Reporting the Results of
OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions with regard to reporting the




9




---

##### Table of Contents

effects of a disposal of a segment of a business. The statement provides a single accounting model for long-lived assets to be disposed of and
significantly changes the criteria required to classify an asset as held-for-sale. Under this statement, more dispositions will qualify for discontinued operations treatment in the income statement and expected future operating losses from
discontinued operations will be displayed in discontinued operations in the period in which the losses are incurred. The standard is effective for fiscal years beginning after December 15, 2001. Early adoption is allowed. Effective November 1, 2001,
the Company adopted SFAS No. 144. Under the provisions of SFAS No. 144, the disposal of the Companys Muscato Corporation (Muscato) and TransLink Solutions Corporation (TransLink) business units qualified for
discontinued operations treatment. As a result, the results of operations of these two components are reflected as discontinued operations in the Companys consolidated statements of operations.





3.    Discontinued Operations





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. The Company originally acquired the Muscato and TransLink business units on March 27, 2000.





Pursuant to the provisions of SFAS No. 144, the financial statements have been reclassified to reflect the discontinuation of these
components. Accordingly, the revenues, costs and expenses of these divested units have been segregated in the consolidated statements of operations. The net operating results of these segments have been reported as discontinued operations in the
consolidated statements of operations.





During the year ended January 31, 2002, the Company recorded a loss of
$10.5 million related to the disposition of Muscato and TransLink.





Revenue included in discontinued operations
for the three and six months ended July 31, 2001 was $1.4 million and $2.9 million, respectively. Pre-tax loss included in discontinued operations for the three and six months ended July 31, 2001 was $1.8 million and $3.7 million, respectively.
Pre-tax loss included in discontinued operations for the three and six months ended July 31, 2002 was $9,000 and $43,000, respectively.





4.    Net Loss per Share





The following tables set forth the
computation of net loss per share:





Three months ended July 31,2001


2002Net loss

$
(4,020,000
)

$
(1,236,000
)Weighted average shares outstanding  basic and diluted


18,500,532



18,977,498Net loss per share  basic and diluted

$
(0.22
)

$
(0.07
)Potentially dilutive stock options, excluded from diluted weighted average shares outstanding


1,841,558



1,430,295




10




---

##### Table of Contents




Six months ended July 31,2001


2002Net loss

$
(10,598,000
)

$
(3,537,000
)Weighted average shares outstanding  basic and diluted


18,300,626



18,795,093Net loss per share  basic and diluted

$
(0.58
)

$
(0.19
)Potentially dilutive stock options, excluded from diluted weighted average shares outstanding


2,491,130



1,596,694





5.    Investment in ec-Hub (formerly ecIndx)





During the year ended January 31, 2001, the Company invested $2.0 million in ec-Hub, Inc. (formerly ecIndX, Inc.), a supply
chain collaboration vendor, in exchange for a minority interest in the company. An additional $209,000 of costs incurred related to making the investment were added to the basis of the investment. In conjunction with the investment, ec-Hub entered
into the Companys standard software license agreement to purchase $1.0 million in software and related services.





The Company continually assessed the value of its investment in ec-Hub. In April 2001, the Company wrote down its investment in ec-Hub by $200,000 to reflect the value of the Companys investment based upon the price per share
paid by a recent investor. In January 2002, the Company wrote down the remaining $2,009,000 carrying value of the investment to zero. The Company based this write-down on several factors including business changes that took place at ec-Hub during
the fourth quarter of fiscal 2002, the Companys assessment of ec-Hubs viability for the future, ec-Hubs financial performance, the value of the Companys new percentage of ownership following the merger of ecIndX into ec-Hub,
and valuations of other companies similar to ec-Hub. ec-Hub was founded and was partly owned by David Dunn-Rankin, who was a director and employee of the Company at the time of the Companys investment. In addition, Wayne Cape, a member of
Optios board of directors also serves on the board of directors of ec-Hub.





6.    Segment and Geographic
Information





The Company is organized around geographic areas. As of July 31, 2002, the Company operated in
three geographic segments, the United States, Europe and Australia. The foreign locations principally function as distributors of products developed by the Company in the United States. On August 9, 2002, the Company closed its Australian subsidiary
and transitioned the operations to an independent reseller. 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.





The Company previously reported four geographic
segments, with the current Europe segment representing two segments, France and the United Kingdom. Segment information for the six months ended July 31, 2001 has been restated to combine the previous France and United Kingdom segments into the
Europe segment.




11




---

##### Table of Contents




Segment information for the six months ended July 31, 2001 and 2002 is summarized
below.





Six Months ended July 31,
2001

United States


Europe


Australia


Combined


Eliminations


ConsolidatedRevenue from external customers:License fees

$
5,631,000


$
646,000


$
16,000


$
6,293,000


$



$
6,293,000Services, maintenance and other


7,817,000



906,000



50,000



8,773,000







8,773,000Inter-segment revenue


149,000



54,000







203,000



(203,000
)


Total revenue


13,597,000



1,606,000



66,000



15,269,000



(203,000
)


15,066,000Interest income


134,000



11,000







145,000







145,000Interest expense


51,000



10,000







61,000







61,000Depreciation and amortization


617,000



34,000



5,000



656,000







656,000Income tax expense






















Segment net loss including loss from discontinued operations


(9,787,000
)


(494,000
)


(317,000
)


(10,598,000
)






(10,598,000
)Total segment assets including assets of discontinued operations


46,325,000



2,760,000



238,000



49,323,000



(3,639,000
)


45,684,000Expenditures for long-lived assets


240,000



67,000



2,000



309,000







309,000Six Months ended July 31,
2002

United States


Europe


Australia


Combined


Eliminations


ConsolidatedRevenue from external customers:License fees

$
4,467,000


$
884,000


$
55,000


$
5,406,000


$



$
5,406,000Services, maintenance and other


7,715,000



1,015,000



45,000



8,775,000







8,775,000Inter-segment revenue


218,000



61,000







279,000



(279,000
)


Total revenue


12,400,000



1,960,000



100,000



14,460,000



(279,000
)


14,181,000Interest income


123,000











123,000







123,000Interest expense


17,000







3,000



20,000







20,000Depreciation and amortization


432,000



36,000



4,000



472,000







472,000Segment net loss including loss from discontinued operations


(2,474,000
)


(830,000
)


(233,000
)


(3,537,000
)






(3,537,000
)Total segment assets


16,493,000



2,700,000



168,000



19,361,000



(4,033,000
)


15,328,000Expenditures for long-lived assets


189,000



21,000



2,000



212,000







212,000





7.    Note Receivable from M2 Systems Corporation





On April 29, 2002, the Company received notice that M2 Systems, purchaser of the Companys Muscato and TransLink business
units, was claiming certain purchase price adjustments and breaches of representations and warranties by the Company relating to the accounts receivable, fixed assets and business transferred. M2




12




---

##### Table of Contents

Systems demanded approximately $3.3 million as a purchase price adjustment and indemnification for the Companys alleged breaches of
representations and warranties.





On May 31, 2002, the Company received a letter from M2 Systems indicating that it
was withholding payment on the promissory notes issued to the Company for the acquisition of Muscato and TransLink in an attempt to setoff the payment against these indemnification claims. M2 Systems withheld the payment due on June 3, 2002 and was
thus in default on the promissory notes. The Company notified M2 Systems in writing of its default on June 6, 2002. M2 Systems subsequently paid the required installment on July 1, 2002.





Effective September 12, 2002, M2 Systems and the Company entered into a settlement and release agreement covering the purchase price adjustment claims made by M2 Systems.
In exchange for M2 Systems agreement to release the Company from such claims, the Company has agreed to a purchase price adjustment in the amount of $193,944.50. Of this amount, the Company has agreed to apply $90,000 to satisfy the payment
due on September 1, 2002 by M2 Systems on the promissory notes issued to the Company in connection with the sale of Muscato and TransLink, and to remit the remaining $103,944.50 to M2 Systems. The settlement and release agreement does not resolve
any other claims M2 Systems has made against the Company. The Company intends to dispute the remaining claims made by M2 Systems. To date, no lawsuit has been filed with regard to this matter.





The Companys management continues to assess these promissory notes as collectible and accordingly no reserves have been recorded against these promissory notes.
Managements assessment is based primarily on its belief that the remaining indemnification claims of M2 Systems will be resolved in the Companys favor and that if not, the Company will exercise its rights under the purchase agreement
which may include reclaiming the Muscato and TransLink assets, including technology, which represent fair value in excess of the carrying value of the promissory notes.





8. Income Taxes





The income tax benefit recognized in the
three and six months ended July 31, 2002 represents a tax refund of $530,000 received by the Company as a result of a tax law change allowing it to take advantage of greater tax loss carrybacks. This refund was partially offset by income taxes paid
for the Companys foreign operations.





9. Subsequent Event





On September 12, 2002, the Company executed a First Loan Modification Agreement to its Loan Agreement with Silicon Valley Bank, the purpose of which was to modify and
clarify the definition of tangible net worth.




13




---

##### Table of Contents




ITEM 2.    
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





OVERVIEW





Optio Software, Inc. (Optio) is engaged primarily in the development, sale and support of
software that captures, transforms, and delivers information and data to allow automated processes to companies located principally in the United States and Europe. Optios primary business has consisted of providing software and services that
addressed organizations needs for customized information delivered via print, fax and e-mail to users of enterprise and healthcare applications.





Optio markets and sells its software and services throughout the United States, Europe, and previously in the Asia Pacific region through its direct sales force and certified resellers. As of July 31,
2002, Optio had 53 sales and sales support personnel and over 50 distributors, value-added resellers, or referral agents. Optio also offers consulting services, which provide customers with implementation assistance and training. As of July 31,
2002, Optio had over 4,600 customers worldwide using Optios software and services. No single customer accounted for 10% or more of Optios revenue for the three or six months ended July 31, 2002.





In addition to operations in the United States, Optio operates two international offices involved in the direct sales, marketing and
support activities of Optio products throughout France, Germany, and the United Kingdom. Optio previously operated a subsidiary office in Australia serving the Asia Pacific market. This office was transitioned to an independent reseller on August 9,
2002.





Significant Accounting Policies and Use of Estimates





Optio has identified significant accounting policies and estimates that are critical to the understanding of its financial statements.





Revenue Recognition





Optio has three types of revenue: software license fees, service fees and maintenance fees. Service fees include fees for consulting and implementation services, education services and reimbursable expenses billed to the
customer. Optio typically recognizes software license fees on delivery of its software to resellers and to end-users directly when: (i) Optio has a signed, noncancellable license agreement with the customer; (ii) the license fee is fixed and
determinable; (iii) Optio can objectively allocate the total fee among all elements of the arrangement; and (iv) the collection of the license fee is probable. Optio does not typically allow customers the right to return products purchased. However,
in instances where contracts are entered into which allow a right of return, or require acceptance testing of the product, revenue is not recognized until the right of return period has expired or acceptance has been documented. In addition,
occasionally Optio enters into contracts that require significant production, modification or customization to its software. When these contracts are entered into, contract revenue is recognized on a percentage of completion basis using actual costs
incurred as a percentage of expected total costs.





Revenue from services, principally consulting, implementation
and training, is recognized as the services are performed. Revenue from maintenance contracts is recognized on a pro-rata basis over the term of each contract. Deferred revenue represents payments received in advance of recognizing the related
revenue.




14




---

##### Table of Contents




Notes Receivable





Optio holds promissory notes from M2 Systems as consideration for the sale of Muscato and TransLink. M2 Systems failed to make the note payment due June 1, 2002 in an
attempt to setoff payments due under the notes against indemnification claims M2 Systems made against Optio with regard to the purchase transaction. Optio notified M2 Systems of its default, after which M2 Systems made the required payment, plus
penalties, on July 1, 2002. In addition, M2 Systems has a limited operating history; however, the credit risk with respect to the notes is partially limited as the notes are secured by all outstanding shares of M2 Systems common stock and its
assets, including cash, accounts receivable, fixed assets, and intangible assets. Optios management continues to assess these notes as collectible and accordingly no reserves have been recorded against these notes. Managements assessment
is based primarily on the proven success of the shareholders of the acquirer, the collateral of the notes, and the expectation that the remaining indemnification claims of M2 Systems will be resolved in Optios favor, otherwise, Optio will
exercise its rights under the purchase agreement which may include reclaiming the Muscato and TransLink assets, including technology, which represent fair value in excess of the carrying value of the promissory notes. The amount of the notes
recorded could be materially different under different conditions or using different assumptions, including the assumption that repayment of the notes could be dependent upon the future successful operations of M2 Systems. If M2 Systems defaults on
the notes and the collateral for the amount due proves to be of no value to Optio, Optio would incur a loss of $3.8 million.





Effective September 12, 2002, M2 Systems and Optio entered into a settlement and release agreement covering purchase price adjustment claims made by M2 Systems. Optio has agreed to apply $90,000 of such adjustment amount totaling
$193,944.50 to satisfy the promissory note payment due on September 1, 2002 by M2 Systems.





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. 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 which is included in general and administrative expenses.





Investment in ec-Hub





In the year ended January 31, 2001, Optio invested $2.0 million in ec-Hub, Inc. (formerly ecIndX, Inc.), a supply chain collaboration vendor, in exchange for a minority interest in the company. An additional $209,000 of
costs incurred related to making the investment were added to the basis of the investment. In conjunction with the investment, ec-Hub entered into Optios standard software license agreement to purchase $1.0 million in software and related
services.





During the year ended January 31, 2002, Optio continually assessed the value of its investment in
ec-Hub. In April 2001, Optio wrote down its investment in ec-Hub by $200,000 to reflect the value of Optios percentage of ownership based upon the price per share paid by a recent investor. In January 2002, Optio wrote down the remaining
$2,009,000 carrying value of the investment to zero. Optio based this mark down on several factors including business changes that took place at ec-Hub during the fourth quarter of fiscal 2002, ec-Hubs financial performance, Optios
assessment of the companys future viability, the value of Optios new percentage of ownership following the merger of ecIndX into ec-Hub, and valuations of other companies similar to ec-Hub.





ec-Hub was founded and was partly owned by David Dunn-Rankin, who was a director and employee of Optio at the time of Optios
investment. In addition, Wayne Cape, a member of Optios board of directors also serves on the board of directors of ec-Hub.




15




---

##### Table of Contents




Note Receivable from Shareholders





As of July 31, 2002, Optio had notes receivable from shareholders of approximately $97,000. This balance represented a note from a
shareholder in the amount of $10,000 and a note receivable from Wayne Cape, a member of Optios board of directors, in the amount of $87,000. The note receivable from the individual shareholder was subsequently paid in full in August 2002. The
note receivable from Wayne Cape requires monthly payments through July 31, 2003. All required payments have been made under this agreement.





RESULTS OF OPERATIONS





Three Months Ended July 31, 2002 Compared to Three Months
Ended July 31, 2001





Revenues





The following table sets forth certain items from Optios statements of operations as a percentage of total revenue for the periods indicated.





Three Months Ended July 31,2001


2002Revenue:License fees

44
%

37
%Services, maintenance and other

56


63Total revenue

100


100Costs of revenue:License fees

1


2Services, maintenance and other

32


30Total cost of revenue

33


32Gross profit

67


68Operating expenses:Sales and marketing

51


50Research and development

12


15General and administrative

26


24Depreciation and amortization

4


3Total operating expenses

93


92Loss from operations

(26
)

(24
)Interest and other income




Income tax benefit




7Loss from continuing operations

(26
)

(17
)Loss from discontinued operations

(23
)

Net loss

(49
%)

(17
%)





Revenues





Total revenues decreased 8% to $7.4 million from $8.0 million for the three months ended July 31, 2002 and 2001, respectively.




16




---

##### Table of Contents




License fees





Revenues from licenses decreased 22% to $2.7 million from $3.5 million for the three months ended July 31, 2002 and 2001, respectively. Management believes that the decline
in revenues from license fees over the previous year was attributable to the slowed economy over the past year. Optio, like other software companies, experienced a challenging economic and corporate sales condition during the three months ended July
31, 2002. Corporate spending continues to be tight and technology spending appears to be lagging any economic improvements in other industries. Despite the weak economy, Optios European operations increased their license revenue by 34% to
$510,000 during the three months ended July 31, 2002 from $382,000 for the same period in the prior year, a result of adding new customers with a higher average sales price per transaction.





Approximately $840,000 of Optios software license revenue during the three months ended July 31, 2002 was from reseller, value-added distributor or OEM relationships,
representing 31% of license fees for Optio. During the three months ended July 31, 2001, Optio generated $770,000 of its software license revenue through partners, representing 22% of Optios license revenue. In September 2001, Optio expanded
its partner program, focusing on establishing better business planning and larger scale integration with partners, allowing both the partner and Optio to increase revenues.





Services, maintenance and other





Revenues from services, maintenance and other increased to $4.6 million in the three months ended July 31, 2002 from $4.5 million in same period of the prior year. Services revenue decreased $490,000 to $2.1 million in the three
months ended July 31, 2002 from $2.6 million in the three months ended July 31, 2001. The decline in software license revenue over the previous quarters has affected Optios consulting services business group. As the services backlog declined,
services revenue declined slightly. In addition, as implementation becomes more simplified with improvements in Optios products, either fewer services are purchased by customers or they may use outsourcers to install the products. Maintenance
revenue increased $600,000 to $2.5 million in the three months ended July 31, 2002 from $1.9 million in the three months ended July 31, 2001. Maintenance revenue continues to increase as Optio adds to its over 4,600 customer base and increases the
price of its annual maintenance fees. In addition, Optio is actively pursuing customers that have previously terminated maintenance.





Revenue Mix





Revenues from licenses represented 37% and 44% of total revenue for
the three months ended July 31, 2002 and 2001, respectively, a reflection of the decrease in license revenue due to the economy, while maintenance revenue continues to increase with additional customers and increased annual fees.





Costs of Revenues





Total costs of revenues decreased 12% to $2.3 million from $2.6 million in the three months ended July 31, 2002 and 2001, respectively.





Licenses





Costs of revenues from licenses consists of costs
related to the packaging and distribution of the products, fees paid for integration of third-party software products and fees paid to referral partners. Costs of




17




---

##### Table of Contents

revenues from licenses as a percentage of revenue increased slightly, primarily due to the decrease in software license revenue.





Services, maintenance and other





Costs of revenues from services, maintenance and other consists of personnel, subcontracting and other expenses relating to the cost of providing customer support, education and consulting and
implementation services. Costs of revenue from services, maintenance and other decreased 13% to $2.2 million from $2.5 million in the three months ended July 31, 2002 and 2001, respectively. Costs of revenues from services, maintenance and other
decreased as a percentage of total revenue to 30% in 2002 from 32% in 2001. The decrease was primarily the result of the following: a) a decrease of approximately $135,000 of costs related to the use of outsourcers to assist in implementations, b) a
decrease in the number of internal staff as a result of a reduction in force from 56 employees to 41 employees, and c) an associated decline in travel expenses and other costs as a result of fewer employees. Although there has been reduction in
staff, the productivity of Optios internal staff has improved. Optios use of outsourcers decreased to approximately 41% in the three months ended July 31, 2002 from approximately 46% of the revenue in the three months ended July 31,
2001. In addition, Optio was able to secure lower daily rates from some of its outsourcers, allowing it to decrease costs.





Operating
Expenses





Sales and Marketing





Sales and marketing expenses consist primarily of salaries, commissions, bonuses and benefits earned by sales and marketing personnel, direct expenditures such as travel,
communication and occupancy and marketing expenditures related to direct mail, trade shows and other advertising.





Sales and marketing expenses decreased 11% to $3.7 million from $4.1 million for the three months ended July 31, 2002 and 2001, respectively. Sales and marketing expenses were 50% and 51% of total revenue for the same periods.
Optios sales and marketing staff was reduced to 52 employees at July 31, 2002 from 63 employees at July 31, 2001. The cost savings from having fewer employees, including reduced travel expenses, was slightly offset by approximately $170,000 of
severance costs recorded in the three months ended July 31, 2002 for terminations of several marketing employees. In addition, Optio eliminated approximately $300,000 of advertising and marketing expenses related to trade shows and other advertising
between the three months ending July 31, 2001 and the three months ended July 31, 2002.





Research and
Development





Research and development expenses consists primarily of salaries, benefits and equipment for
software developers, quality assurance personnel, and product managers.





Research and development expenses
increased 14% to $1.1 million for the three months ended July 31, 2002 from $1.0 million for the three months ended July 31, 2001. During the three months ended July 31, 2002, Optio invested in its research and development group by using independent
contractors to assist with the development and quality assurance of new versions of its existing products and its anticipated MedexFlex product. During the three months ended July 31, 2002, Optio announced the general availability of a new version
of its fax product, OptioFax 4.0. This product provides enhancements to the user interface, and is Windows 2000 ® compatible. In addition, Optio is in Beta trial with its e.ComIntegrate 7.7 product. This product is expected to be generally available around late October 2003.




18




---

##### Table of Contents




General and Administrative





General and administrative expenses consist primarily of salaries, benefits and related costs for executive, finance, human resources and
information services personnel. General and administrative expenses also include legal, accounting, insurance and other professional services.





General and administrative expenses decreased 16% to $1.8 million from $2.1 million for the three months ended July 31, 2002 and 2001, respectively. These expenses represent 24% and 26% of total
revenue for the same periods. In the three months ended July 31, 2001, Optio wrote off certain customer accounts receivable in the amount of $650,000, thus significantly increasing general and administrative expenses for the period. During the three
months ended July 31, 2002, Optio incurred charges of approximately $40,000 in connection with closing its Australian subsidiary and approximately $300,000 in legal fees primarily associated with Optios pending litigation as discussed in Part
IIOther Information, Item 1, Legal Proceedings of this Form 10-Q.





Depreciation and Amortization





Depreciation and amortization expense decreased to $235,000 from $348,000 for the three months ended July 31,
2002 and 2001, respectively. This decrease is due to Optios European subsidiarys goodwill becoming fully amortized and a greater number of Optios fixed assets becoming fully depreciated during the year ended January 31, 2002.





Interest Income





Interest income decreased to $62,000 from $66,000 in the three months ended July 31, 2002 and 2001, respectively. Optio invested an average cash balance of approximately $4.1 million during the three
months ended July 31, 2002 as compared to approximately $5.4 million in the same period of 2001. The lower available cash for investment and lower interest rates accounted for the decrease in interest income.





Interest Expense





Interest expense decreased to $8,000 from $49,000 in the three months ended July 31, 2002 and 2001, respectively. Interest expense in the three months ended July 31, 2001 included interest on borrowings against Optios
line of credit. No borrowings were outstanding in the three months ended July 31, 2002. Interest expense in the three months ended July 31, 2002 primarily represents the interest paid on Optios capital leases.





Income Tax Expense





The income tax benefit in the three months ended July 31, 2002 represents a tax refund of $530,000 received by Optio as a result of a tax law change allowing it to take advantage of greater tax loss carrybacks. This refund
was partially offset by $35,000 in income taxes paid for Optios foreign operations.





Six Months Ended
July 31, 2002 Compared to Six Months Ended July 31, 2001





Revenues





The following table sets forth certain items from Optios statements of operations as a percentage of total revenue for the periods indicated.




19




---

##### Table of Contents




Six Months Ended July 31,2001


2002Revenue:License fees

42
%

38
%Services, maintenance and other

58


62Total revenue

100


100Costs of revenue:License fees

2


2Services, maintenance and other

39


32Total cost of revenue

41


34Gross profit

59


66Operating expenses:Sales and marketing

63


50Research and development

14


17General and administrative

23


25Depreciation and amortization

4


3Total operating expenses

104


95Loss from operations

(45
)

(29
)Interest and other income (expense)

(1
)

1Write down of ec-Hub

(1
)

Income tax benefit




3Loss from continuing operations

(47
)

(25
)Loss from discontinued operations

(24
)

Net loss

(71
%)

(25
%)





Revenues





Total revenues decreased 6% to $14.2 million from $15.1 million for the six months ended July 31, 2002 and 2001, respectively.





License fees





Revenues from licenses decreased 14% to $5.4 million from $6.3 million for the six months ended July 31, 2002 and 2001, respectively. Management believes that the decline in revenues from license fees over the previous year
was attributable to the slowed economy over the past year. Optio, like other software companies, experienced a challenging economic and corporate sales condition during the six months ended July 31, 2002. Corporate spending continues to be tight and
technology spending appears to be lagging any economic improvements in other industries. Despite the weak economy, Optios European operations increased their license revenue by 37% to $884,000 during the six months ended July 31, 2002 from
$646,000 for the same period in the prior year, a result of a higher average sales price per transaction.




20




---

##### Table of Contents




Approximately $1.6 million of Optios software license revenue during the
six months ended July 31, 2002 was from reseller, value-added distributor or OEM relationships, with approximately $350,000 resulting from a large purchase from a partner for multiple licenses in advance of identified end-users. This $1.6 million
represented 30% of license fees for Optio. During the six months ended July 31, 2001, $1.4 million of Optios software license revenue was generated by its partners, representing 21% of its license revenue. In September 2001, Optio expanded its
partner program, focusing on establishing better business planning and larger scale integration with partners, allowing both the partner and Optio to increase revenues.





Services, maintenance and other





Revenues from services, maintenance and other remained consistent at $8.8 million for both the six months ended July 31, 2002 and 2001. Services revenue decreased $930,000 to $3.9 million in the three months ended July 31, 2002 from
$4.9 million in the six months ended July 31, 2001. The decline in software license revenue over the previous quarters has affected Optios consulting services business group. As the services backlog declined, services revenue declined. In
addition, as implementation becomes more simplified with the improvements in Optios products, either fewer services are purchased by customers or they are using outsourcers to install the products. Maintenance revenue increased $900,000 to
$4.8 million in the six months ended July 31, 2002 from $3.9 million in the six months ended July 31, 2001. Maintenance revenue continues to increase as Optio adds to its over 4,600 customer base and increases the price of its annual maintenance
fees.





Revenue Mix





Revenues from licenses represented 38% and 42% of total revenue for the six months ended July 31, 2002 and 2001, respectively, a reflection of the decrease in license revenue due to the economy, while
maintenance revenue continues to increase with additional customers and increased annual fees.





Costs of Revenues





Total costs of revenues decreased 22% to $4.8 million from $6.1 million in the six months ended July 31, 2002 and 2001,
respectively.





Licenses





Costs of revenues from licenses consist of costs related to the packaging and distribution of the products, fees paid for integration of third-party software products and
fees paid to referral partners. Costs of revenues from licenses remained consistent as a percentage of revenue.





Services, maintenance and other





Costs of revenues from services, maintenance and other
consist of personnel, subcontracting and other expenses relating to the cost of providing customer support, education and consulting and implementation services. Costs of revenue from services, maintenance and other decreased 23% to $4.5 million
from $5.9 million in the six months ended July 31, 2002 and 2001, respectively. Costs of revenues from services, maintenance and other decreased as a percentage of total revenue to 32% in 2002 from 39% in 2001. The decrease was primarily the result
of the following: a) a decrease of approximately $470,000 of costs related to the use of outsourcers to assist in implementations, b) a decrease in the number of internal staff as a result of a reduction in force to 41




21




---

##### Table of Contents

employees from 56 employees, and c) an associated decline in travel expenses and other costs as a result of fewer employees. Although there has
been reduction in staff, the productivity of Optios internal staff has improved. Optios use of outsourcers decreased to approximately 41% of service, maintenance and other revenue in the six months ended July 31, 2002 from approximately
53% of the revenue in the six months ended July 31, 2001. In addition, Optio was able to secure lower daily rates from some of its outsourcers, allowing it to decrease costs.





Operating Expenses





Sales and Marketing





Sales and marketing expenses consist primarily of salaries, commissions, bonuses and benefits earned by sales
and marketing personnel, direct expenditures such as travel, communication and occupancy and marketing expenditures related to direct mail, trade shows and other advertising.





Sales and marketing expenses decreased 24% to $7.1 million from $9.4 million for the six months ended July 31, 2002 and 2001, respectively. Sales and marketing expenses
were 50% and 63% of total revenue for the same periods. Optios sales and marketing staff was reduced to 52 employees at July 31, 2002 from 63 employees at July 31, 2001. The cost savings from having fewer employees, including reduced travel
expenses, was slightly offset by approximately $170,000 of severance costs recorded in the six months ended July 31, 2002 for terminations of several marketing employees. In addition, Optio eliminated approximately $800,000 of advertising and
marketing expenses related to trade shows and other advertising between the six months ended July 31, 2001 and the six months ended July 31, 2002.





Research and Development





Research and development expenses
consist primarily of salaries, benefits and equipment for software developers, quality assurance personnel, and product managers.





Research and development expenses increased 11% to $2.4 million for the six months ended July 31, 2002. During the six months ended July 31, 2002, Optio invested in its research and development group by adding additional staff and
using independent contractors to assist with the development and quality assurance of new versions of its existing products and its anticipated MedexFlex product. During the three months ended July 31, 2002, Optio announced the general availability
of a new version of its fax product, OptioFax 4.0. This product provides enhancements to the user interface, and is Windows 2000 ® compatible. In addition, Optio is in Beta trial with its e.ComIntegrate 7.7 product. This product is expected to be generally available around late October 2003.





General and Administrative





General and administrative expenses consist primarily of salaries, benefits and related costs for executive, finance, human resources and information services personnel. General and administrative expenses also include legal,
accounting, insurance and other professional services.





General and administrative expenses increased 1% to $3.6
million from $3.5 million for the six months ended July 31, 2002 and 2001, respectively. These expenses represent 25% and 23% of total revenue for the same periods. In the six months ended July 31, 2001, Optio wrote off certain customer accounts
receivable in the amount of $650,000, thus significantly increasing general and administrative expenses for the six months ended July 31, 2001. During the six months ended July 31, 2002, Optio incurred charges of approximately $40,000 in




22




---

##### Table of Contents

connection with closing its Australian subsidiary, approximately $475,000 in legal fees primarily associated with Optios pending
litigation as discussed in Part IIOther Information, Item 1, Legal Proceedings of this Form 10-Q, as well as increased insurance fees of approximately $130,000.





Depreciation and Amortization





Depreciation and amortization expense decreased to $472,000 from $656,000 for the six months ended July 31, 2002 and 2001, respectively. This decrease is due to Optios European subsidiarys goodwill becoming fully
amortized and a greater number of Optios fixed assets becoming fully depreciated during the year ended January 31, 2002.





Interest Income





Interest income decreased to $123,000 from $145,000 in the six months
ended July 31, 2002 and 2001, respectively. Optio invested an average cash balance of approximately $4.5 million during the six months ended July 31, 2002 as compared to approximately $5.5 million in the same period of 2001. The lower available cash
for investment and lower interest rates accounted for the decrease in interest income.





Interest Expense





Interest expense decreased to $20,000 from $61,000 in the six months ended July 31, 2002 and 2001,
respectively. Interest expense in the six months ended July 31, 2001 included interest on borrowings against Optios line of credit. No borrowings were outstanding in the six months ended July 31, 2002. Interest expense in the six months ended
July 31, 2002 primarily represents the interest paid on the Optios capital leases.





Income Tax Expense





The income tax benefit in the six months ended July 31, 2002 represents a tax refund of $530,000 received by
Optio as a result of a tax law change allowing it to take advantage of greater tax loss carrybacks. This refund was partially offset by $35,000 in income taxes paid for Optios foreign operations.





Write-down of Investment in ec-Hub





In the year ended January 31, 2001, Optio invested $2.0 million in ec-Hub, Inc. (formerly ecIndX, Inc.), a supply chain collaboration vendor, in exchange for a minority interest in the company. An
additional $209,000 of costs incurred related to making the investment were added to the basis of the investment. In conjunction with the investment, ec-Hub, Inc. entered into Optios standard software license agreement to purchase $1.0 million
in software and related services.





During the year ended January 31, 2002, Optio continually assessed the value of
its investment in ec-Hub. In April 2001, Optio wrote down its investment in ec-Hub by $200,000 to reflect the value of Optios percentage of ownership based upon the price per share paid by a recent investor.





LIQUIDITY AND CAPITAL RESOURCES





At July 31, 2002 and 2001 Optio had $4.0 million and $6.3 million, respectively, in cash and cash equivalents.





The following table sets forth certain selected statements of cash flow information for the six months




23




---

##### Table of Contents

ended July 31, 2002:





Net cash used in operations

$
(1,793,000
)Net cash provided by investing activities


203,000Net cash provided by financing activities


60,000Net decrease in cash and cash equivalents


(1,365,000
)





Cash used in operations was the result of a $3.5 million loss which
was offset by the add-back of non-cash depreciation and amortization expense of $472,000 during the three months ended July 31, 2002. Optio improved collections on accounts receivable, resulting in a cash inflow of $1.8 million. Optios days
sales outstanding, a measure of the number of days to collect accounts receivable, decreased to 57 in the three months ended July 31, 2002 from 59 in the three months ended July 31, 2001. In addition, Optio expended approximately $300,000 in cash
for prepaid assets including prepaid commercial insurance. In investing activities, Optio received approximately $200,000 on the sale of marketable securities and $210,000 as payments on notes receivable. These receipts were offset by disbursements
of approximately $212,000 for the purchase of property and equipment in the ordinary course of business. Optios financing activities included payments of capital lease obligations of $41,000 and the receipt of approximately $101,000 in
proceeds from the exercise of stock options.





On April 25, 2002, Optio entered into a line of credit agreement
with a bank for a line of credit of up to $5.0 million. 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 $5.0 million, or such lesser
amount as may be determined based on such ratios. As of July 31, 2002, Optio could borrow up to $2.2 million against the line of credit. 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 tangible net worth requirements and restrictions on dividends. There were no borrowings outstanding on the line of credit as of July 31, 2002.





Management believes that the existing cash and cash equivalents, together with Optios line of credit, will provide
adequate cash to fund its anticipated cash needs at least through the next twelve months. Optio may attempt to raise additional funds through equity or debt financing to expand operations. There can be no assurance that Optio will be able to raise
additional funds on favorable terms, or at all.





NEW PRONOUNCEMENTS





In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 141, Business Combinations
(SFAS 141) and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations and changes the criteria to recognize intangible
assets apart from goodwill. Under SFAS 142, goodwill and indefinite lived intangible assets are no longer amortized, but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are
not deemed to have an indefinite life will continue to be amortized over their useful lives. Companies are required to immediately adopt the amortization provisions of SFAS 142 as it relates to goodwill and intangible assets acquired after June 30,
2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, companies are required to adopt SFAS 142 in their fiscal year beginning after December 15, 2001. Optio adopted SFAS 142 in accordance with the provisions of the
statement on February 1, 2002. The adoption of SFAS 142 did not have a material affect on Optios financial position or results of operations as Optio does not currently have goodwill and other intangible assets.




24




---

##### Table of Contents




The Financial Accounting Standards Board issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and of Long-Lived Assets to be Disposed Of . SFAS No. 144 supersedes the provisions of APB Opinion No. 30,
Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions with regard to reporting the effects of a disposal of a segment of a
business. The statement provides a single accounting model for long-lived assets to be disposed of and significantly changes the criteria required to classify an asset as held-for-sale. Under this statement, more dispositions will qualify for
discontinued operations treatment in the income statement and expected future operating losses from discontinued operations will be displayed in discontinued operations in the period in which the losses are incurred. The standard is effective for
fiscal years beginning after December 15, 2001. Early adoption is allowed. Effective November 1, 2001, Optio adopted SFAS No. 144. Under the provisions of SFAS No. 144, the disposal of Optios Muscato and TransLink business units qualified for
discontinued operations treatment. As a result, the results of operations of these two components are reflected as discontinued operations in Optios consolidated statements of operations.





ITEM 3.    
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.





Optio provides its services to
customers primarily in the United States and, to a lesser extent, in Europe and elsewhere throughout the world. As a result, Optios financial results could be affected by factors, such as changes in foreign currency exchange rates or weak
economic conditions in foreign markets. All sales are currently made in both U.S. dollars and local currencies. A strengthening of the U.S. dollar or the weakening of these local currencies could make Optios products less competitive in
foreign markets. Optios interest income and expenses are sensitive to changes in the general level of U.S. interest rates. Based on Optios cash equivalents balance and the nature of its outstanding debt, Optio believes its exposure to
interest rate risk is not material.





PART IIOTHER INFORMATION





ITEM 1.    
LEGAL PROCEEDINGS





Optio is from time to time involved in routine litigation incidental to
the conduct of its business.





On June 19, 2001, a lawsuit styled Wagner, et al v. Optio Software, Inc., was filed
in the United States District Court for the Southern District of Ohio, Western Division. The lawsuit alleges breach of contract, promissory estoppel and promissory fraud filed by 19 shareholders of Prograde Technologies, Inc. f/k/a Prograde, Inc.
Optio believes the lawsuit is without merit. Thus, Optio intends to vigorously defend the lawsuit. The plaintiffs are seeking $3,759,500 in compensatory damages as a result of Optios alleged actions, as well as reimbursement for the
plaintiffs attorneys fees and associated costs and expenses of the lawsuit.





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 Optios initial public offering as
well as 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 and seeks class action status. The complaint includes
allegations of violations of (i) Section 11 of the Securities Act of 1933 by all named defendants, (ii) Section 12(a)(2) of the Securities Act of 1933 by the underwriter defendants, (iii) Section 15 of the Securities Act of 1933 by the individual
defendants, and (iv) Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by the underwriter defendants. Optio believes the lawsuit is without merit. Thus, Optio intends to defend vigorously against the
plaintiffs claims. The complaint seeks unspecified amounts as compensatory damages as a result of Optios




25




---

##### Table of Contents

alleged actions, as well as punitive damages and reimbursement for the plaintiffs attorneys fees and associated costs and expenses
of the lawsuit.





M2 Systems Corporation, purchaser of Optios Muscato and TransLink business units, is
claiming certain purchase price adjustments and breaches of representations and warranties by Optio relating to the accounts receivable, fixed assets and business transferred. M2 Systems demanded approximately $3.3 million as a purchase price
adjustment and indemnification for Optios alleged breaches of representations and warranties. Effective September 12, 2002, M2 Systems and Optio entered into a settlement and release agreement covering the purchase price adjustment claims made
by M2 Systems. In exchange for M2 Systems agreement to release Optio from such claims, Optio has agreed to a purchase price adjustment in the amount of $193,944.50. The settlement and release agreement does not resolve any other claims M2
Systems has made against Optio. Optio intends to dispute the remaining claims made by M2 Systems. To date, no lawsuit has been filed with regard to this matter.





Management believes that it has meritorious defenses in each of the foregoing matters and intends to pursue its positions vigorously. Litigation is inherently subject to many uncertainties; however,
depending on the amount and timing of an unfavorable resolution(s) of the contingencies, it is possible that Optios future results of operations or cash flows could be materially affected.





ITEM 2.    
CHANGES IN SECURITIES AND USE OF PROCEEDS





On December 15, 1999, Optio commenced an initial
public offering of its common stock. The net proceeds from the offering to Optio after deducting the discounts, commissions, fees and expenses were approximately $47.0 million. Approximately $1.2 million of the proceeds were used for the repayment
of Optios indebtedness to three former shareholders incurred in connection with the repurchase of their common stock in December 1998. In March 2000, $20 million of the proceeds were used for the acquisition of all of the capital stock of
Muscato and an additional $5 million was used to acquire the assets of TransLink. In August 2000, Optio invested $2.2 million in ec-Hub, a supply chain collaboration vendor, in exchange for a minority interest in the company. In December 2000, Optio
issued a note receivable in the amount of $400,000 to Prograde Technologies, Inc. Subsequent to January 31, 2001, Prograde Technologies, Inc. filed for bankruptcy and the $400,000 was fully reserved as uncollectible. Pending use of the net proceeds,
Optio invested the funds in money market funds and used them for general corporate purposes, including working capital.





ITEM 3.    
DEFAULTS UPON SENIOR SECURITIES





None.





ITEM 4.    
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





| | (a) |  | The Company held its Annual Meeting of Shareholders on June 26, 2002. There were present at the Annual Meeting, in person or by proxy, holders of 17,534,182
shares of common stock entitled to vote.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (b) |  | The following directors were elected to hold office for a three-year term or until their successors are elected and qualified, with the vote for each director
being reflected below:
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



26




---

##### Table of Contents




Name

Votes For

Votes WithheldMitchell Laskey

16,187,265

1,346,917Warren K. Neuburger

9,121,125

8,413,057





| | (c) |  | The appointment of Ernst & Young LLP as Optio Software, Inc.s independent public accountants for the fiscal year ending January 31, 2003, was ratified
with 15,071,001 affirmative votes cast, 2,459,486 negative votes cast and 3,695 abstentions.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




ITEM 5.    
OTHER INFORMATION





Optios common stock is quoted on the Nasdaq SmallCap Market System.
In order to remain listed on this market, Optio must meet Nasdaqs listing maintenance standards. Optio is not in compliance with the minimum bid price requirement of Nasdaq Marketplace Rule 4310(c)(8)(B), which requires that the minimum bid
price for the common stock be at least $1.00 per share. On August 14, 2002, Optio received notice from Nasdaq that its common stock had failed to maintain a $1.00 minimum bid price for 30 consecutive trading days and Nasdaq intends to proceed with
delisting its common stock. Optio filed an appeal of this determination and requested a hearing before a Nasdaq Listing Qualifications Panel. Optio was granted the appeal and the delisting process was stayed pending the outcome of the hearing. The
hearing is to be held on September 19, 2002.





ITEM 6.    
EXHIBITS AND REPORTS ON FORM 8-K





|(a) |  | Exhibits
|--- |  | --------




10.1 First Loan Modification Agreement, dated as of September 12, 2002, by and between Silicon Valley Bank and Optio Software, Inc.





| | 99.1 |  | Safe Harbor Compliance Statements for Forward Looking Statements
| | ---- |  | ----------------------------------------------------------------




|(b) |  | Reports on Form 8-K
|--- |  | -------------------




None.




27




---

##### Table of Contents




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 13 th day of September, 2002.





OPTIO SOFTWARE, INC.By:

/s/    HARVEY A.
WAGNERHarvey A. Wagner Chief
Financial Officer




28




---

##### Table of Contents

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,


AS ADOPTED PURSUANT TO


SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002





In connection with the Optio Software, Inc. (the Company) Quarterly Report on Form 10-Q for the period ended July 31, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the Report), I, Warren K. Neuburger, Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that,
to the best of my knowledge:





| | (1) |  | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------




| | (2) |  | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------




Date:

September 13, 2002



By:

/s/    WARREN K.
NEUBURGERWarren K. Neuburger Chief
Executive Officer




---

##### Table of Contents

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,


AS ADOPTED PURSUANT TO


SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002





In connection with the Optio Software, Inc. (the Company) Quarterly Report on Form 10-Q for the period ended July 31, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the Report), I, Harvey A. Wagner, Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to
the best of my knowledge:





| | (1) |  | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------




| | (2) |  | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------




Date:

September 13, 2002



By:

/s/    HARVEY A.
WAGNERHarvey A. Wagner Chief
Financial Officer