---




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 April 30, 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





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OPTIO SOFTWARE, INC.


(Exact name of registrant as specified in its charter)





Georgia

58-1435435(State 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 19,128,332 shares
of the Registrants common stock outstanding as of June 13, 2002.





---



---




OPTIO SOFTWARE, INC.





FORM 10-Q





For the Quarterly Period Ended April 30, 2002





TABLE OF CONTENTS





PagePART IFINANCIAL INFORMATIONItem 1.

Financial Statements

4Item 2.

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

13Item 3.

Quantitative and Qualitative Disclosures About Market Risk

20PART IIOTHER INFORMATIONItem 1.

Legal Proceedings

20Item 2.

Changes in Securities and Use of Proceeds

21Item 3.

Defaults Upon Senior Securities

21Item 4.

Submission of Matters to a Vote of Security Holders

21Item 5.

Other Information

21Item 6.

Exhibits and Reports on Form 8-K

22




2




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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 our 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.




3




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PART IFINANCIAL INFORMATION





ITEM 1.    FINANCIAL STATEMENTS





OPTIO SOFTWARE, INC.





CONSOLIDATED CONDENSED BALANCE SHEETS





January 31, 2002


April 30, 2002(Unaudited)ASSETSCurrent assets:Cash and cash equivalents

$
5,378,000


$
4,799,000Marketable securities


205,000



Accounts receivable, net


6,383,000



4,503,000Prepaid expenses and other current assets


811,000



1,193,000Current portion of notes receivable


360,000



360,000Total current assets


13,137,000



10,855,000Property and equipment, net


1,570,000



1,474,000Other assets:Note receivable and advances to shareholders


127,000



95,000Notes receivable, less current portion


3,640,000



3,550,000Other


128,000



141,000Total assets

$
18,602,000


$
16,115,000LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
1,329,000


$
1,511,000Accrued expenses


3,425,000



3,333,000Current portion of notes payable


53,000



53,000Current portion of capital lease obligations


91,000



91,000Deferred revenue


6,115,000



5,835,000Total current liabilities


11,013,000



10,823,000Capital lease obligations, less current portion


224,000



202,000Deferred revenue


111,000



100,000Shareholders equity:Common stock


50,171,000



50,164,000Accumulated deficit


(42,613,000
)


(44,914,000
)Accumulated other comprehensive loss


(291,000
)


(254,000
)Unamortized stock compensation


(13,000
)


(6,000
)Total shareholders equity


7,254,000



4,990,000Total liabilities and shareholders equity

$
18,602,000


$
16,115,000








See accompanying notes.




4




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OPTIO SOFTWARE, INC.





CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS


(Unaudited)


Three Months Ended April 30,2001


2002Revenue:License fees

$
2,790,000


$
2,669,000Services, maintenance, and other


4,246,000



4,126,0007,036,000



6,795,000Costs of revenue:License fees


150,000



128,000Services, maintenance, and other


3,353,000



2,326,0003,503,000



2,454,0003,533,000



4,341,000Operating expenses:Sales and marketing


5,267,000



3,432,000Research and development


1,158,000



1,243,000General and administrative


1,401,000



1,792,000Depreciation and amortization


308,000



237,0008,134,000



6,704,000Loss from operations


(4,601,000
)


(2,363,000
)Other income (expense):Interest income


79,000



61,000Interest expense


(12,000
)


(12,000
)Write-down of ec-Hub investment


(200,000
)


Other


13,000



60,000(120,000
)


109,000Loss before income taxes


(4,721,000
)


(2,254,000
)Income tax expense






13,000Net loss before discontinued operations


(4,721,000
)


(2,267,000
)Loss from discontinued operations


(1,856,000
)


(34,000
)Net loss

$
(6,577,000
)

$
(2,301,000
)Net loss per sharebasic and diluted

$
(0.36
)

$
(0.12
)Net loss per share from continuing operationsbasic and diluted

$
(0.26
)

$
(0.12
)Net loss per share from discontinued operationsbasic and diluted

$
(0.10
)

$
(0.00
)Weighted average shares outstandingbasic and diluted


18,093,981



18,607,374Comprehensive loss:Net loss

$
(6,577,000
)

$
(2,301,000
)Foreign currency translation adjustment


(79,000
)


37,000Unrealized loss on marketable securities available for sale


(29,000
)


Comprehensive loss


(6,685,000
)

$
(2,264,000
)


See accompanying notes.




5




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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








(2,301,000
)










(2,301,000
)Foreign currency translation adjustment












37,000







37,000Comprehensive loss




















(2,264,000
)Change in deferred compensation related to     stock option terminations




(8,000
)










1,000



(7,000
)Amortization of deferred compensation
















6,000



6,000Exercise of stock options

45,100


1,000















1,000Balance at April 30, 2002

18,627,498

$
50,164,000


$
(44,914,000
)

$
(254,000
)

$
(6,000
)

$
4,990,000











See accompanying notes.




6




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OPTIO SOFTWARE, INC.





CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS


(Unaudited)





Three Months Ended April 30,2001


2002Cash flows from operating activities:Net loss

$
(6,577,000
)

$
(2,301,000
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation


336,000



238,000Amortization of intangible assets


1,832,000



Provision for doubtful accounts


88,000



(60,000
)Write-down of ec-Hub investment


200,000



Gain on sale of marketable securities


(18,000
)


Loss on disposal of property and equipment


3,000



Non-cash compensation and interest


125,000



(2,000
)Changes in operating assets and liabilities:Accounts receivable


348,000



1,955,000Prepaid expenses and other current assets


79,000



(338,000
)Accounts payable


(571,000
)


156,000Accrued expenses


16,000



(138,000
)Income taxes payable


147,000



25,000Deferred revenue


(79,000
)


(316,000
)Net cash used in operating activities


(4,071,000
)


(781,000
)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


(214,000
)


(125,000
)Repayment of notes receivable






90,000(Advances to)/repayments from related parties and shareholders under notes receivable


(1,000
)


32,000Net cash (used in) provided by investing activities


(167,000
)


202,000Cash flows from financing activities:Payments of notes payable and capital lease obligations


(54,000
)


(22,000
)Proceeds from exercise of stock options


538,000



1,000Net cash provided by (used in) financing activities


484,000



(21,000
)Impact of foreign currency rate fluctuations on cash


22,000



21,000Net decrease in cash


(3,732,000
)


(579,000
)Cash at beginning of period


8,748,000



5,378,000Cash at end of period

$
5,016,000


$
4,779,000Supplemental disclosures of cash flow information:Cash paid (refunded) during the year for:Interest

$
14,000


$
12,000Income taxes

$



$
13,000








See accompanying notes.




7




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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, Europe and the Asia Pacific region. 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 ended April 30, 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 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and of
Long-Lived Assets to be Disposed Of. SFAS 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




8




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OPTIO SOFTWARE, INC.





NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS




Extraordinary, Unusual and Infrequently Occurring Events and Transactionswith 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, the Company adopted SFAS 144. Under the provisions of SFAS 144, the disposal of the Companys Muscato Corporation
(Muscato) and TransLink Solutions Corporation (Translink) components 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.





Pursuant to the provisions of SFAS 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 months ended April 30, 2001
was $1,518,000. Pre-tax loss included in discontinued operations for the three months ended April 30, 2001 and 2002 was $1,856,000 and $34,000, respectively.





4.    Net Loss per Share





The following
table sets forth the computation of net loss per share:





Three months ended April 30,2001


2002Net loss

$
(6,577,000
)

$
(2,301,000
)Weighted average shares outstandingbasic and diluted


18,093,981



18,607,374Net loss per sharebasic and diluted

$
(0.36
)

$
(0.12
)Potentially dilutive stock options, excluded from diluted weighted average shares outstanding


3,495,407



1,769,065




9




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OPTIO SOFTWARE, INC.





NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS







5.    Investment in ec-Hub (formerly ecIndx)





In 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.





During the year ended January 31, 2002, 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.





6.    Segment
and Geographic Information





The Company is organized around geographic areas. The Company operates in three
geographic segments, the United States, Europe and Asia Pacific. The foreign locations principally function as distributors of products developed by the Company in the United States. The accounting policies as described in the summary of significant
accounting policies are applied consistently across the segments. Intersegment sales are based on intercompany transfer prices to achieve a reasonable margin upon distribution.





The Company previously reported four geographic segments, with the current Europe segment representing two segments, France and the United Kingdom. Segment information for
the three months ended April 30, 2001 has been restated to combine the previous France and United Kingdom segments into the Europe segment.




10




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OPTIO SOFTWARE, INC.





NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS







Segment information for the three months ended April 30, 2001 and
2002 is summarized below.





Three Months ended April 30, 2001

United States


Europe


Asia Pacific


Combined


Eliminations


ConsolidatedRevenue from external customers:License fees

$
2,524,000


$
264,000


$
2,000


$
2,790,000


$



$
2,790,000Services, maintenance and other


3,780,000



450,000



16,000



4,246,000







4,246,000Intersegment revenue


64,000



17,000







81,000



(81,000
)


Total revenue


6,368,000



731,000



18,000



7,117,000



(81,000
)


7,036,000Interest income


76,000



3,000







79,000







79,000Interest expense


7,000



5,000







12,000







12,000Depreciation and amortization


292,000



14,000



2,000



308,000







308,000Income tax expense






















Segment net loss including loss from discontinued operations


(6,006,000
)


(350,000
)


(221,000
)


(6,577,000
)






(6,577,000
)Total segment assets including assets of discontinued operations


49,587,000



2,831,000



228,000



52,646,000



(3,357,000
)


49,289,000Expenditures for long-lived assets


192,000



22,000







214,000







214,000





Three Months ended April 30, 2001

United States


Europe


Asia Pacific


Combined


Eliminations


ConsolidatedRevenue from external customers:License fees

$
2,277,000


$
374,000


$
18,000


$
2,669,000


$



$
2,669,000Services, maintenance and other


3,663,000



434,000



29,000



4,126,000







4,126,000Intersegment revenue


92,000



23,000







115,000



(115,000
)


Total revenue


6,032,000



831,000



47,000



6,910,000



(115,000
)


6,795,000Interest income


61,000











61,000







61,000Interest expense


9,000







3,000



12,000







12,000Depreciation and amortization


219,000



16,000



2,000



237,000







237,000Segment net loss


(1,870,000
)


(378,000
)


(53,000
)


(2,301,000
)






(2,301,000
)Total segment assets


16,752,000



3,003,000



244,000



19,999,000



(3,884,000
)


16,115,000Expenditures for long-lived assets


116,000



7,000



2,000



125,000







125,000




11




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OPTIO SOFTWARE, INC.





NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS







7.    Subsequent Events





M2 Systems, purchaser of the Companys Muscato and TransLink business units, is 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 Systems is withholding payment on the promissory notes issued to the Company for the acquisition of Muscato and
TransLink in an attempt to setoff its indemnification claims against its obligations under the promissory notes. The Company has notified M2 Systems of its default, after which M2 Systems has a limited time to cure the default. If the default is not
cured, the Company intends to take action in accordance with the promissory notes. In addition, the Company intends to dispute the purchase price adjustments and indemnification demands by M2 Systems.





Management continues to assess these promissory notes as collectible and accordingly no reserves have been recorded against the notes.
Managements assessment is based primarily on the expectation that the claims of M2 Systems will be resolved in the Companys favor, otherwise, the Company will repossess the Muscato and TransLink assets, including technology, which
represent fair value in excess of the carrying value of the promissory notes.




12




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





Overview





Optio Software, Inc. 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, Europe and the Asia Pacific region. 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 the Asia Pacific region through its direct sales force and certified resellers.
As of April 30, 2002, Optio had 49 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 April 30, 2002, Optio believes it has approximately 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 months ended April 30, 2002.





In addition to operations in the United States, Optio operates three international offices involved in the direct sales,
marketing and support activities of Optio products throughout France, Germany, the United Kingdom, Australia, Japan, Singapore and other countries. On August 26, 1998, Optio acquired the stock of Competence Software Europe S.A., which prior to the
acquisition was a distributor of Optios software. This acquisition provided us entry into European markets and Competence Software Europe S.A. became Optios wholly-owned subsidiary, Optio Software, Europe S.A. (Optio Europe).
In November 1998, Optio Europe expanded by founding a wholly-owned subsidiary in the United Kingdom known as Optio Software, UK Pvt. Limited. In May 1999, Optio entered the Asia Pacific market by establishing a subsidiary in Australia, Optio
Software, Asia Pacific. By opening these offices and acquiring Competence Software Europe, S.A., Optio enhanced its presence in the worldwide marketplace.





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. Optio typically recognizes software license fees on delivery of our 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 our 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.




13




---




Revenue from consulting services, principally 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.





Notes Receivable





Optio holds promissory notes from M2 Systems as consideration for the sale of Muscato and Translink. M2 Systems has 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 has made against Optio with regard to the purchase transaction. Optio has notified M2 Systems of its default, after which M2 Systems has a limited time to cure the default. In addition, M2
Systems has a limited operating history. 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 claims of M2 Systems will be resolved in Optios favor, otherwise, Optio will repossess the Muscato and TransLink assets, including technology, which
represents 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 $4.0 million.





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 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, our 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.




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Results of Operations





Three Months Ended April 30, 2002 Compared to Three Months Ended April 30, 2001





Revenues





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





Three Months Ended April 30,2001


2002Revenue:License fees

40
%

39
%Services, maintenance and other

60


61Total revenue

100


100Costs of revenue:License fees

2


2Services, maintenance and other

48


34Total cost of revenue

50


36Gross profit

50


64Operating expenses:Sales and marketing

75


51Research and development

16


18General and administrative

20


26Depreciation and amortization

4


4Total operating expenses

115


99Loss from operations

(65
)

(35
)Interest and other income

(2
)

2Net loss before discontinued operations

(67
)

(33
)Loss from discontinued operations

(26
)

(1
)Net loss

(93
%)

(34
%)





Revenues





Total revenues decreased 3% from $7.0 million to $6.8 million for the three months ended April 30, 2001 as compared to the same period in 2002.





License fees





Revenues from licenses decreased 4% from $2.8 million for the three months ended April 30, 2001 to $2.7 million for the three months ended April 30, 2002. The slight decline over the previous year can be attributed to the
slowed economy. By the nature of our sales cycle, our product sales generally lag those of our partners, in that corporations generally purchase our products toward the end of or following other ERP systems implementation. Some of our partners
announced improved results in their corresponding first quarter over severe declines last year. Others announced that their sales still trail over recent quarters.




15




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Approximately $800,000 of Optios software license revenue during the three
months ended April 30, 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. Such purchases in
advance of identified end-users are common practice within the software industry and do not allow for a right of refund.





Services, maintenance and other





Revenues from services, maintenance and other decreased to
$4.1 million in the three months ended April 30, 2002 from $4.2 million for the corresponding period in 2001. Services revenue decreased $400,000 from $2.2 million in the three months ended April 30, 2001 to $1.8 million in the three months ended
April 30, 2002. The decline in software license revenue over previous quarters is beginning to affect our consulting services business group. As the services backlog declined, services revenue declined slightly. In addition, a significant portion of
Optios software fees during the three months ended April 30, 2002 was recorded in the last two weeks of the quarter, allowing little time for the implementation services to be performed for the quarter. Maintenance revenue increased $300,000
from $2.0 million in the three months ended April 30, 2001 to $2.3 million in the three months ended April 30, 2002. Maintenance revenue continues to increase as Optio increases its customer base.





Revenue Mix





Revenues from licenses represented 40% and 39% of total revenue for the three months ended April 30, 2001 and 2002, respectively.





Costs of Revenues





Total costs of revenues decreased 30% from $3.5 million in the three
months ended April 30, 2001 to $2.5 million in the same period in 2002.





Licenses





Costs of revenues from licenses consists of costs related to the packaging and distribution of the products, fees paid for incorporation
of third-party software products and fees paid to referral partners. Costs of revenues from licenses remained consistent at 2% of revenue.





Services, maintenance and other





Costs of revenues from services, maintenance and
other consist of personnel, subcontract and other expenses relating to the cost of providing customer support, education and professional services. Costs of revenue from services, maintenance and other decreased 31% from $3.4 million in the three
months ended April 30, 2001 to $2.3 million in the same period in 2002. Costs of revenues from services, maintenance and other decreased as a percentage of total revenue from 48% for the three months ended April 30, 2001 to 34% for the three months
ended April 30, 2002. The decrease was primarily the result of the following: a) a decrease of approximately $300,000 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 76 employees to 58 employees, and c) an associated decline in travel expenses and other costs as a result of fewer employees. Optios use of outsourcers represented approximately 60% of our revenue from services,
maintenance and other during the three months ended April 30, 2001, which declined to approximately 45% during the three months ended April 30, 2002.




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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 35% from $5.3 million in the three months
ended April 30, 2001 to $3.4 million, as compared to the same period in 2002. Sales and marketing expenses were 75% and 51% of total revenue for the corresponding periods. Optios sales and marketing staff was reduced from 78 employees at April
30, 2001 to 58 employees at April 30, 2002. In addition, Optio eliminated approximately $500,000 of advertising and marketing expenses related to trade shows and other advertising for the three months ended April 30, 2002 as compared to the
corresponding period in 2001.





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 7% from $1.16 million for the three
months ended April 30, 2001 to $1.24 million for the three months ended April 30, 2002. During the three months ended April 30, 2002, Optio invested in its research and development group by hiring two additional employees and independent contractors
to assist with the development and quality assurance of new versions of our existing products and our anticipated Medex product.





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, other professional services, rent and depreciation for Optios
facilities and computer and communications systems.





General and administrative expenses increased 28% from $1.4
million for the three months ended April 30, 2001 to $1.8 million, as compared to the same period in 2002. These expenses represent 20% and 26% of total revenue for the corresponding periods. The increase in general and administrative expenses as a
percentage of revenue is primarily the result of an approximately $175,000 increase in legal fees in connection with pending lawsuits filed against Optio, in addition to increased insurance costs of approximately $130,000.





Depreciation and Amortization





Depreciation and amortization expense decreased from $308,000 to $237,000 for the three months ended April 30, 2001 as compared to the same period in 2002. This decrease is due to Optios European
entitys goodwill becoming fully amortized in the previous year in addition to a greater number of Optios fixed assets becoming fully depreciated.





Interest Income





Interest income decreased from $79,000 in
the three months ended April 30, 2001 to $61,000 in the three months ended April 30, 2002.




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Optio invested an average cash balance of approximately $5.0 million during the three months ended April 30, 2002. In the same period of 2001,
Optio invested an average cash balance of approximately $5.6 million.





Interest Expense





Interest expense remained consistent at $12,000 for each of the three-month periods ended April 30, 2001 and 2002. Interest
expense primarily represents the interest paid on Optios capital leases.





Write-down of Investment in
ec-Hub





During the year ended January 31, 2002, Optio continually assessed the value of its $2,209,000
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.





Income Tax Expense





The provision for income taxes was $13,000 for the three months ended April 30, 2002, which resulted from Optios foreign operations.





Discontinued Operations





On December 4, 2001, Optio sold its Muscato Corporation (Muscato) and TransLink Solutions Corporation (TransLink) business units to M2 Systems
Corporation (M2 Systems), a company owned by certain of the former shareholders of Muscato. 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.





Pursuant to the provisions of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, 144, the
financial statements have been reclassified to reflect the discontinuation of these components. Accordingly, the revenues, costs and expenses, assets and liabilities of these components have been segregated in the consolidated balance sheets and
statements of operations. The net operating results of these components have been reported as discontinued operations in the consolidated statements of operations. The net assets and liabilities of these divested units have been reported as assets
of discontinued operations and liabilities of discontinued operations in the consolidated balance sheet.





During
the three months ended April 30, 2002, the company recorded a loss from discontinued operations of $34,000 related to expenses incurred in the disposition of Muscato and TransLink. In the three months ended April 30, 2002, the company recorded a
loss on discontinued operations of $1.9 million, representing the net revenues, costs and expenses of Muscato and TransLink.





Liquidity and Capital Resources




18




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At April 30, 2001 and 2002, Optio had $5.0 million and $4.8 million,
respectively, of cash and cash equivalents.





The following table sets forth certain selected statements of cash
flow information for the three months ended April 30, 2002:


Net cash used in operating activies

$
(781,000
)Net cash provided by investing activities


202,000Net cash used in financing activities


(21,000
)Net decrease in cash and cash equivalents


(579,000
)





Cash used in operations was the result of a $2.3 million loss
offset by the add-back of non-cash depreciation expense of $238,000. The Company improved collections on accounts receivable, resulting in a cash inflow of $2.0 million. In addition, the Company expended approximately $300,000 in cash for prepaid
assets including prepaid commercial insurance. In investing activities, the Company received approximately $200,000 on the sale of marketable securities and $125,000 as payments on notes receivable. These receipts were offset by disbursements of
approximately $125,000 for the purchase of property and equipment in the ordinary course of business. The Companys financing activities included payments of capital lease obligations of $22,000.





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 the 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. 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. No borrowings were made on the line of credit during the three months ended April 30, 2002.





Management
believes that the existing cash and cash equivalents, together with the new $5.0 million line of credit, will provide adequate cash to fund its anticipated cash needs at least through the next twelve months. We may attempt to raise additional funds
through equity or debt financing to expand operations. There can be no assurance that we 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 on February 1, 2002 in accordance with the provisions of the statement. 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.




19




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The Financial Accounting Standards Board issued SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and of Long-Lived Assets to be Disposed Of. SFAS 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 Transactionswith 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 144. Under the provisions of SFAS 144, the disposal of Optios Muscato and Translink components 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 expense is sensitive to changes in the general level of U.S. interest rates. Based on Optios cash equivalents balance and the nature of its outstanding
debt, Optio believes its exposure to interest rate risk is not material.





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




20




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against the plaintiffs claims. The complaint seeks unspecified amounts as compensatory damages as a result of Optios alleged
actions, as well as punitive damages and reimbursement for the 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 is demanding approximately $3.03 million as indemnification for Optios alleged breaches of representations and warranties. In addition, M2 Systems is withholding
payment on the promissory notes issued to Optio for the acquisition of Muscato and Translink in an attempt to setoff its indemnification claims against its obligations under the promissory notes. Optio has notified M2 Systems of its default after
which M2 Systems has a limited time to cure the default. If the default is not cured, Optio intends to take action in accordance with the promissory notes. In addition, Optio intends to dispute the purchase price adjustments and indemnification
demands 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, management does not believe that the outcome of these cases,
individually, or in the aggregate, will have a material adverse effect on the financial position of Optio. 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, the Company commenced an initial public offering of its common stock. The net proceeds from the offering to the Company after deducting the discounts, commissions, fees and expenses were approximately $47.0 million. Approximately $1.2
million of the proceeds were used for the repayment of our 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, the Company 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 a company that was considered a potential strategic investment. Subsequent to January 31, 2001, this company filed for bankruptcy and the $400,000
was fully reserved as uncollectible. Pending use of the net proceeds, the Company has 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





None.





ITEM 5.    OTHER INFORMATION





Our common stock is quoted on the
Nasdaq National Market System. On June 13, 2002, the closing price of the common stock on the Nasdaq National Market was $0.39. In order to remain listed on this market,




21




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we 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. Optio has filed an application to transfer the listing of its common stock to the Nasdaq SmallCap Market. However, the
minimum bid price requirement of $1.00 will also apply to the common stock following its transition to the SmallCap Market, therefore, if the minimum bid price of Optios common stock remains below $1.00 per share, or Optio fails to meet any
other continued listing requirement, it may be subject to delisting from the SmallCap Market. If the common stock is not accepted for listing on the SmallCap Market, it may be subject to delisting from the National Market.





ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K





(a)  Exhibits





10.1

Amended and Restated Employment Agreement by and between Optio Software, Inc. and Warren K. Neuburger10.2

Employment Agreement by and between Optio Software, Inc. and Harvey A. Wagner99.1

Safe Harbor Compliance Statements for Forward Looking Statements





(b)  Reports on Form 8-K





On April 11, 2001, the Company filed a Form 8-K to report the resignation of David Dunn-Rankin from the Board of
Directors.




22




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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 14th day of June, 2002.





OPTIO SOFTWARE, INC.By:

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




23