ITEM 1. BUSINESS
Introduction
Optika(R) Inc. is a leading enterprise content management (ECM) provider of imaging, workflow, collaboration and records management software. Optika's Acorde family of ECM software solutions, including Acorde Context(TM), Acorde Process(TM), Acorde Resolve(TM), Acorde Application Link and Acorde Records Manager(TM), allows companies to manage complex business processes and transactions efficiently and effectively leverage their enterprise resource planning (ERP) and line-of-business (LOB) systems. Acorde provides the ability to access and store multiple formats of business content, both digital and non-digital; automate processes across the organization and externally with partners and customers; and enable online collaboration around these paper-intensive or complex processes in real and near time. Built on a three-tier, scalable and extensible platform, Acorde delivers a variety of client desktops, including Windows and Web and easily integrates with third-party applications such as ERP systems. The Acorde product family allows organizations to improve processing efficiency, reduce operating costs and increase customer and partner service and satisfaction, resulting in significant return on investment.
Background
Over the past few years, companies have felt increasing pressure to deliver process efficiency and service improvements. These companies have attempted to optimize core transaction processes to respond to competition, enhance service to customers and vendors and improve their operating margins. Our goal is to answer this marketplace need and make organizations more efficient by decreasing the cost of business transactions and their associated cycle-times and increasing the productivity of their workforces.
We are able to achieve this goal by leveraging and integrating ERP and other critical LOB applications with context and process solutions, and extending them outside the organization with collaboration tools. By doing this, we help our customers leverage the strategic investments they have made in business systems, reduce their cost of operations, and provide security for their critical business documents. This not only has a large favorable impact on the financial aspects of our customers' businesses, but it also helps our customers increase vendor and customer satisfaction.
We are able to achieve these benefits for organizations that have high volumes of transactions as well as those that have the need to manage and store data and documents in multiple formats in a variety of locations throughout their organizations.
Business drivers are those factors that compel a customer to look for a solution such as Optika's Acorde to satisfy their business requirements. Business drivers are often described by chief financial officers, chief information officers and business managers as follows:
o Increase process and transaction efficiency. This need is defined in terms of lowered costs of doing business and generating higher levels of service. This especially applies to processes that have high transaction volumes along with content and supporting documents beyond the transaction itself. o Reduce transaction cycle times. Time is money and the ability to process transactions in an expedited fashion is imperative. Due to the enormous costs involved, this is particularly important when dealing with transactions that are out of tolerance or need to be addressed in a unique fashion. o Reduce operating expenses. Many organizations are facing limited or stagnant growth. When shareholder value cannot be enhanced by growing revenues, it becomes necessary to focus on improving business processes to drive down costs and improve profit margins. o Accomplish the same amount of work with fewer people or more work with the same number of people. Obviously, this goal cannot be achieved without an improvement in business process management. o Control the proliferation of paper. Some companies are virtually drowning in a sea of paper and need to evolve to electronic methods to speed processes and reduce storage requirements. This is not only a cost imperative, but a security imperative as well. o Manage multiple sources of business data. It is not unusual to find companies where the transaction data needs to be supported by documents and data from several additional systems. The task of managing this data and the multiple systems that contain it can be daunting. o Protect critical business assets - corporate information. Organizations in every industry must protect corporate information through records management. Factors driving companies to deploy a records management strategy include: o Litigation o Risk Management o Mergers & Acquisitions o Globalization o Security o Privacy o Public and Private Sector Access Policies
Another important business driver is the increasing focus on integrating an organization's key business partners, such as vendors and customers, into the organization's traditional business processes. Although e-business was initially thought of as a revolutionary way to market, sell and purchase goods and services, the industry is now realizing the even greater potential of e-business in changing the way businesses work with their supply chain partners as well as provide information and interaction for employees, customers and partners. Therefore, companies must now find ways to not only manage their electronic and paper-intensive transactions more efficiently, but to involve each constituency by extending enterprise applications to remote users via the Internet. We believe that collaborative tools, Web services and portals are emerging as key components in any organization's strategic technology plan. By providing solutions that enable more efficient processes, seamless integration with existing infrastructures and interaction among all related participants, we are delivering operational savings throughout the back-office.
OPTIKA ACORDE
The Acorde product family is changing the way organizations process, fulfill and support business transactions through the following solutions:
Acorde Context
To efficiently conduct business transactions, both between internal departments and externally with vendors and customers, businesses need immediate access to all relevant transaction information, regardless of how it is executed. Acorde Context enables companies to securely capture, store, retrieve and display transaction documents and information, regardless of source or type. Acorde Context can manage both paper and electronic documents, as well as electronic (COLD) reports, and provide seamless integration to a company's critical LOB applications. Acorde Context allows organizations to increase user productivity and improve information sharing across the enterprise.
Acorde Process
Many companies have pared resources to the point that they have driven employees to a level of frustration that few deem tolerable. Corporate executives and stockholders consistently want more: more revenues, more profitability and "more with less" from all departments. To help organizations achieve operational efficiency and cost savings, Optika provides Acorde Process, sophisticated workflow technology for automating processes and delivering business transaction information within the enterprise and over the Web to external users. Acorde Process helps organizations process more transactions with fewer resources, resulting in more effective back-office operations and significantly enhanced transaction efficiency.
Acorde Resolve
Analyst reports show that approximately 11% of organizations' business transactions have problems or discrepancies, such as short shipments, quantity mismatches and substitutions. The resolution of these failures typically requires time-intensive, manual processes involving research and approval on a number of levels within multiple organizations. In addition, the cost to process these problem transactions is nearly equal to the cost to process all transactions that complete successfully. Acorde Resolve allows businesses to build collaboration hubs, which deliver interactive tools in a virtual office environment, for resolving and collaborating around transactions and their inherent discrepancies internally and with trading partners. As a result, companies can more efficiently resolve transaction issues to cut costs and improve relationships with key customers and vendors.
Acorde Application Link
Leveraging industry standards and providing a variety of client desktops, Acorde also enables companies to integrate with LOB and third party applications such as ERP systems. With pre-built integrations for J.D. Edwards OneWorld, WorldSoftware, XE and ERP 8; Oracle E-Business Suite; Microsoft Business Solutions and PeopleSoft, Optika delivers a seamless way to extend the functionality of these enterprise business applications with minimal implementation time and effort. Acorde Application Link also allows organizations to seamlessly integrate with any existing infrastructure or system, enabling them to cost-effectively take advantage of and leverage the investments they have already made in their crucial business systems.
Acorde Records Manager
Due to recent corporate financial scandals, Sarbanes-Oxley legislation and many new SEC regulations, records management is a crucial issue for many companies. Optika's Acorde Records Manager responds to this critical need by enabling the identification, classification, tracking and management of all forms of information from inception through destruction or archival. With Acorde Records Manager, companies can achieve legal compliance with the maintenance and destruction of business records.
SALES AND MARKETING
Sales
We employ a blended sales model, consisting of a worldwide indirect sales network of Advantage Partners, or APs, and a direct sales force that covers North American territories and territories in South America and Europe. We also use a Solution Services team of system architects and program managers to support our account executives and APs in enterprise system design, planning, implementation, and rollout. License revenues from APs accounted for 48% of our license revenues for the year ended December 31, 2002.
Indirect Sales
Our APs are value added resellers responsible for identifying potential end-users, selling our products to the end-users as part of a complete hardware and software solution, customizing and integrating our products at the end-users' sites, and providing support and maintenance to the end-users following the sale. Our APs currently include large organizations selling a wide variety of products, smaller organizations focused on imaging, application-oriented organizations and geographically-focused organizations. Our written agreements with our APs establish a price at which the AP is eligible to license our software for resale to end-users, the maintenance fee revenues which must be remitted back to us, and other material terms and conditions. These agreements generally do not grant exclusivity to APs, do not prevent APs from carrying competing product lines and do not require APs to sell any particular dollar amount of our software. However, the agreements may be terminated at our election if specified annual sales targets are not attained. Actual sales contracts are between the APs and the end-users, although we directly license our software to end-users through their acceptance of a standard shrink-wrapped license agreement. We support our APs through dedicated personnel at our headquarters in Colorado Springs, Colorado, and a network of field offices. Services range from joint marketing efforts to assistance with pricing and proposals to technical product support. Our strategy is to target our marketing activities toward our most productive APs, and to recruit additional APs in key geographical and vertical markets. Our AP program is a crucial element of our business strategy.
Direct Sales
Our North American direct sales team focuses on developing relationships with large corporate end-users. The direct sales team is divided into regional territories that cover the United States. The direct sales force typically sells to a different customer base than our indirect sales force. Included in our direct sales force is our solution services team that initiates contact directly with the end-user, but often works with our APs to provide installation and integration services at the end-user's site.
International Sales
For the years ended December 31, 2002, 2001 and 2000, we generated approximately 9%, 12% and 15%, respectively, of our total revenues from international sales. We currently maintain an office in the United Kingdom to support our European APs and an office in Brazil to support our Latin American APs.
Marketing
Optika has a fully integrated marketing program to support our sales strategy. Marketing efforts are organized into marketing communications, product marketing, strategic alliances, lead generation, channel marketing and Internet marketing. We support these efforts by issuing frequent announcements to the press, communicating with key industry analysts, participating in tradeshows, telemarketing and direct mailing to prospective customers, developing and maintaining Internet services, and advertising in industry periodicals and magazines. We also participate with channel partners in joint marketing efforts. The targeted audience is Fortune 1000 and Global 2000 companies in the manufacturing, retail, distribution, architecture/engineering/construction, financial services, higher education, and public sector industries.
Customers
As of February 28, 2003, we have sold to an established base of over 2,000 Optika customers through our blended sales model of APs and direct sales force. Our solutions are applicable and have been installed in a wide variety of industries to process, fulfill and support business transactions.
No AP or end-user accounted for more than 10% of our total revenues for the year ended December 31, 2002.
SERVICE AND SUPPORT
We believe that a high level of customer service and support is critical to our performance. We provide technical support, maintenance, training and consulting to our APs, who are in turn primarily responsible for providing technical support services directly to end-users. We also provide such support directly to our end-users on an as-needed basis. These services are designed to increase end-user satisfaction, provide feedback to us as to end-users' demands and requirements, and generate recurring revenue. We plan to continue expanding our services and support programs as the depth and breadth of our products increase.
AP Support
We maintain pre-sales technical support personnel who work directly with the APs to provide technical responses to sales inquiries. We offer educational and training programs, as well as customized consulting services, to our APs. Fees for training and consulting services are generally charged on a per diem basis. We also provide product information bulletins on an ongoing basis, including bulletins posted on our Internet site and through periodic informational updates about the products installed. These bulletins generally answer frequently asked questions and provide information about new product features.
Technical Support and Software Maintenance
In conjunction with our APs, we offer end-users a software maintenance program. The maintenance program includes software updates provided by us to the end-user, and technical support provided by the AP. We provide telephone consultation services to the AP to respond to end-user technical questions that the AP is unable to answer. Internet support services are also available that provide access to important technical support information, streamline the process of interacting with the support organization and provide access to the technical support knowledge base. An AP typically charges the end-user a fee for maintenance and support of the entire system, including software and hardware. In turn we charge the AP a fee of between 10% and 17% on an annual basis of the then-current list prices of the licensed software.
Warranty
We generally include a 90-day limited warranty with the software license. During the warranty period, the end-user is entitled to corrections for documented program errors.
RESEARCH AND DEVELOPMENT
We have committed, and expect to continue to commit, substantial resources to research and development. Our research and development organization is based on the product team concept. Each product team has an engineering team leader, a product manager, development engineers and quality assurance engineers. The team is entirely responsible for the design, implementation and quality of our products. Product development efforts are directed at increasing product functionality, improving product performance, and expanding the capabilities of the products to integrate with third-party software and hardware. In particular, we devote substantial development resources to develop additional functionality for our products, and the capability to support additional platforms, databases, graphical user interfaces, toolsets and emerging technologies.
As of February 28, 2003, our research and development organization consisted of 32 full-time employees in Colorado Springs, Colorado. During 2002, 2001 and 2000, research and development expenses were $5.1, $5.6 and $8.4 million, respectively. As of December 31, 2002, we had expensed all of our internal software development costs as incurred.
COMPETITION
The market for Optika's Acorde product is intensely competitive and can be significantly affected by new product introductions and other market activities of industry participants. We believe that the principal competitive factors affecting our market include product features such as adaptability, scalability, ability to integrate with third-party products, functionality, ease of use, product reputation, quality, performance, price, customer service and support, effectiveness of sales and marketing efforts, and company reputation. Our principal direct competitors for our Acorde products include FileNet Corporation, IBM Corporation, Legato Systems Inc. (formerly OTG Software Inc.) and Hyland Software Inc. We also compete with industry-specific application vendors. Numerous other software vendors also compete in each product area. Potential competitors include, without limitation, providers of document management software products, providers of document archiving products, and Relational Database Management System, or RDBMS, vendors. In addition, we may face competition from other established and emerging companies in new market segments, such as e-business.
Many of our current and potential competitors have longer operating histories, greater resources and name recognition, and a larger installed base of customers than we do. As a result, these competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their products, than we can. We also face indirect competition from value added resellers, distributors and system integrators. We rely on a number of these resellers for implementation and other customer support services, as well as recommendations of our products during the evaluation stage of the purchase process. Although we seek to maintain close relationships with these resellers, many of these third parties have similar, and often more established, relationships with our principal competitors.
PROPRIETARY RIGHTS
We rely upon a combination of trade secret, copyright and trademark laws, software licenses and nondisclosure agreements, to establish and protect our proprietary rights in our products. We enter into confidentiality and/or license agreements with all of our employees and distributors, as well as with our customers and potential customers seeking proprietary information, and limit access to and distribution of, our software, documentation and other proprietary information. Despite these precautions, it may be possible for unauthorized third parties to copy aspects of our products or to obtain and use information that we regard as proprietary. We have certain registered and other trademarks. We believe that our products, trademarks and other proprietary rights do not infringe the proprietary rights of third parties. We cannot assure you, however, that third parties will not assert infringement claims in the future.
EMPLOYEES
At February 28, 2003, we had 123 full-time employees in 16 cities. Of these employees, 32 were involved in research and development, 62 in sales and marketing, 18 in technical support and training, and 11 in administration and finance. No employees are covered by any collective bargaining agreements. We believe that our relationship with our employees is good.
EXECUTIVE OFFICERS OF THE COMPANY
Optika's executive officers and key employees, and their ages as of February 28, 2003 are:
Name Age Position ----------------------- --- ----------------------------------- Mark K. Ruport 50 President, Chief Executive Officer and Chairman of the Board of Directors Steven M. Johnson 41 Executive Vice President, Chief Financial Officer and Secretary Thomas M. Rafferty 57 Vice President--Research and Development, Engineering and Customer Support Christopher J. Ryan 48 Vice President--Marketing James A. Franklin 46 Vice President--North American Direct Sales Michael J. Rodsater 58 Vice President--North American Indirect Sales
Mark K. Ruport has served as our President and Chief Executive Officer and a Director since February 1995. He has served as Chairman of the Board of Directors since May 1996. From June 1990 to July 1994, Mr. Ruport served as President and Chief Operating Officer, and later Chief Executive Officer, of Interleaf, Inc., a publicly held software and services company that develops and markets document management, distribution and related software. From 1989 to 1990, Mr. Ruport was Senior Vice President of Worldwide Sales of Informix Software, where he was responsible for direct and indirect sales and original equipment manufacturers. From 1985 to 1989, Mr. Ruport served as Vice President North American Operations for Cullinet Software.
Steven M. Johnson has served as our Executive Vice President--Chief Financial Officer since February 2001, and as our Secretary since May 1996. He also served as our Vice President--Finance and Administration and Chief Financial Officer from September 1992 to February 2001, as our interim Chief Executive Officer from October 1994 to February 1995 and as our interim Vice President of North American Channel Sales from July 1998 through December 1998. Prior to joining us, from February 1988 to September 1992, Mr. Johnson was Vice President-Finance and Chief Financial Officer, of Insurance Auto Auctions, Inc., a publicly held company.
Thomas M. Rafferty has served as our Vice President--Research and Development, Engineering and Customer Support since February 2001. He also served as our Vice President--Research and Development from March 1999 through February 2001. Prior to joining us, Mr. Rafferty was Vice President of Engineering at Regenisys Corporation, a Phoenix software company specializing in rules-finding products from August 1997 to March 1999. From August 1994 to July 1997, Mr. Rafferty was Vice President of Engineering for Data Research Associates, a leading vendor of library automation software. From October 1991 to July 1994, Mr. Rafferty was a founder of Integrated Technologies, Inc., a software company that built a framework development architecture based on object-oriented technology providing for rapid integration of new technologies and applications.
Christopher J. Ryan has served as our Vice President--Marketing since July 2001. Prior to joining us, Mr. Ryan was Vice President of Worldwide Product Marketing for FrontRange, Inc., an international supplier of CRM solutions from October 2000 to June 2001. From August 1998 to September 2000, he served as Co-founder and Chief Marketing Officer of deuxo, Inc. (formerly Saligent Software, Inc.), a supplier of lead management and marketing automation software. From October 1997 to August 1998, Mr. Ryan was Director of Industry and Integrated Marketing for PeopleSoft, Inc., a supplier of human resource management and enterprise resource planning solutions. From May 1993 to October 1997, he served as Director of Field Marketing and Director of Product Marketing for Sybase, Inc., a $1 billion supplier of database and middleware solutions. From February 1988 to October 1993, Mr. Ryan served as President of IdeaWorks Marketing, a direct marketing services firm he co-founded.
James A. Franklin has served as Vice President--North American Direct Sales West since February 2001. He also served as our Western Regional Vice President of Sales from January 1999 to February of 2001. Prior to joining us, Mr. Franklin was the Western Region District Manager for GIGA Information Group, Inc., a publicly held information technology analyst firm from 1996 to 1998. From 1994 to 1996, Mr. Franklin was the Director of Business Development for Geo/SQL Corporation, a leading vendor of enterprise geographic information systems, in Denver, Colorado. Mr. Franklin was responsible for direct and OEM sales. From 1988 to 1994, Mr. Franklin held senior sales and executive management positions for multiple information technology consulting and software firms.
Michael J. Rodsater has served as our Vice President--North American Indirect Sales since October 1999. Prior to joining us, Mr. Rodsater was Director of Sales for EIS International, a leading provider of call center software, from October 1997 to September 1999. From September 1995 to June 1997, Mr. Rodsater was Director of Indirect Sales for Houston Cellular, a wireless communications company. From March 1994 to September 1995, Mr. Rodsater was Director of Retail Development for United States Cellular Corporation, a wireless communications company. From March 1993 to March 1994, Mr. Rodsater was Director of Sales and Marketing for Onyx Graphics Corporation, an imaging software and printing solutions company.
BUSINESS RISKS
In evaluating our business, you should carefully consider the business risks discussed in this section.
Operating Result Fluctuations. Our sales and other operating results have varied significantly in the past and may vary significantly in the future as a result of potential factors such as:
o The size and timing of significant orders and their fulfillment o Rate of rollout, demand and customer adoption of our product offerings o Ability of third party products embedded or to be embedded in our products and our ability to negotiate license agreements with such third parties on favorable terms o Changes in pricing policies by us or our competitors o The number, timing and significance of product enhancements and new product announcements by us and our competitors o Changes in the level of our operating expenses o Warranty and customer support expenses o Changes in our end-users' financial condition and budgetary processes o Changes in our sales, marketing and distribution channels o Product life cycles o Software bugs and other product quality problems o The cancellation of licenses during the warranty period or nonrenewal of maintenance agreements o Customization and integration problems with the end-user's legacy system o Changes in our business strategy o Changes in accounting pronouncements o The level of international expansion and foreign currency exchange rates o Seasonal trends
A significant portion of our revenues have been, and we believe will continue to be, derived from a limited number of orders, and the timing of such orders and their fulfillment have caused, and are expected to continue to cause, material fluctuations in our operating results. Revenues are also difficult to forecast because the markets for our products are rapidly evolving, and our sales cycle and the sales cycle of our APs is lengthy and varies substantially from end-user to end-user. To achieve our quarterly revenue objectives, we depend upon obtaining orders in any given quarter for shipment in that quarter. Product orders are typically shipped shortly after receipt. Consequently, order backlog at the beginning of any quarter has in the past represented only a small portion of that quarter's revenues. Furthermore, we have often recognized most of our revenues in the last month, or even in the last weeks or days, of a quarter. Accordingly, a delay in shipment near the end of a particular quarter may cause revenues in a particular quarter to fall significantly below our expectations and may materially adversely affect our operating results for such quarter. Conversely, to the extent that significant revenues occur earlier than expected, operating results for subsequent quarters may fail to keep pace with results of previous quarters or even decline. We also have recorded generally lower sales in the first quarter than in the immediately preceding fourth quarter, as a result of, among other factors, end-users' purchasing and budgeting practices and our sales commission practices. To the extent that future international operations constitute a higher percentage of total revenues, we anticipate that we may also experience relatively weaker demand in the third quarter as a result of reduced sales in Europe during the summer months. Significant portions of our expenses are relatively fixed in the short term. Accordingly, if revenue levels fall below expectations, operating results are likely to be disproportionately and adversely affected. As a result of these and other factors, we believe that our quarterly operating results will vary in the future, and that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. Furthermore, due to all of the foregoing factors, it is likely that in some future quarter our operating results will be below the expectations of public market analysts and investors. In such event, the price of our common stock would likely decline and such decline could be significant.
Product Offerings. The Optika Acorde family of products account for substantially all of our current license revenue. Our future financial performance will depend in general on the acceptance of our product offerings, and in particular on the successful development, introduction and customer acceptance of new and enhanced versions of our products.
Capital Requirements. We believe that our existing cash balances and liquid resources will be sufficient to fund our operating activities, capital expenditures and other obligations through at least the next twelve months. Recently capital market conditions have materially and adversely affected the ability of many technology companies to raise additional capital in both private and public markets. If market conditions do not improve and we are not successful in generating sufficient cash flow from operations or in raising additional capital when required in sufficient amounts and on terms acceptable to us, we may be required to reduce our planned expenditures and scale back the scope of our business plan.
Key Employees. Most of our senior management team has joined us within the last five years. These individuals may not be able to achieve and manage growth, if any, or build an infrastructure necessary for us to operate. Our ability to compete effectively and to manage any future growth will require that we continue to assimilate new personnel and to train and manage our work force. Our future performance depends to a significant degree upon the continuing contributions of our key management, sales, marketing, customer support, and product development personnel. We have at times experienced, and continue to experience, difficulty in recruiting qualified personnel, particularly in sales, software development and customer support. We believe that there may be only a limited number of persons with the requisite skills to serve in those positions, and that it may become increasingly difficult to hire such persons. Competitors and others have in the past, and may in the future, attempt to recruit our employees. We have from time to time experienced turnover of key management, sales and technical personnel. The loss of key management, sales or technical personnel, or the failure to attract and retain key personnel, could harm our business.
Sales and Distribution Channels. Our future results of operations will depend on the success of our marketing and distribution strategy, which relies, to a significant degree, upon APs to sell and install our software, and provide post-sales support. These relationships are usually established through formal agreements that generally do not grant exclusivity, do not prevent the distributor from carrying competing product lines and do not require the distributor to purchase any minimum dollar amount of our software. Some APs may not continue to represent Optika or sell our products. Other APs, some of which have significantly greater financial, marketing and other resources than we have, may develop or market software products that compete with our products or may otherwise discontinue their relationship with, or support of, us. Some of our APs are small companies that have limited financial and other resources that could impair their ability to pay us. Selling through indirect channels may hinder our ability to forecast sales accurately, evaluate customer satisfaction or recognize emerging customer requirements. Our future results of operations also depend on the success of our efforts to build a direct sales force.
Product Updates and Releases. The markets for our products are characterized by rapid technological change, changes in customer requirements, frequent new product introductions and enhancements, and emerging industry standards. Our future performance will depend in significant part upon our ability to respond effectively to these developments. The introduction of products embodying new technologies and the emergence of new industry standards can render existing products obsolete, unmarketable or noncompetitive. We are unable to predict the future impact of such technology changes on our products. Moreover, the life cycles of our products are difficult to estimate. Our future performance will depend in significant part upon our ability to enhance current products, and to develop and introduce new products and enhancements that respond to evolving customer requirements. The inability, for technological or other reasons, to develop and introduce new products or enhancements in a timely manner in response to changing customer requirements, technological change or emerging industry standards, or maintain compatibility with heterogeneous computing environments, would have a material adverse effect on our business and results of operations.
Third Party Software. We license software from third parties, which is incorporated into our products. These licenses expire from time to time. These third-party software licenses may not continue to be available to us on commercially reasonable terms. The loss of, or inability to maintain, any such software licenses could result in shipment delays or reductions until equivalent software could be developed, identified, licensed and integrated, which in turn could materially and adversely affect our business and financial condition. In addition, we generally do not have access to source code for the software supplied by these third parties. Certain of these third parties are small companies that do not have extensive financial and technical resources. If any of these relationships were terminated or if any of these third parties were to cease doing business, we may be forced to expend significant time and development resources to replace the licensed software.
Sales Cycle. The license of our software products is typically an executive-level decision by prospective end-users, and generally requires our APs and us to engage in a lengthy and complex sales cycle (typically between six and twelve months from the initial contact date). In addition, the implementation by customers of our products may involve a significant commitment of resources by such customers over an extended period of time. For these and other reasons, the sales and customer implementation cycles are subject to a number of significant delays over which we have little or no control. Our future performance also depends upon the capital expenditure budgets of our customers and the demand by such customers for our products. Certain industries to which we sell our products, such as the financial services industry, are highly cyclical. Our operations may in the future be subject to substantial period-to-period fluctuations as a consequence of such industry patterns, domestic and foreign economic and other conditions, and other factors affecting capital spending. Such factors may have a material adverse effect on our business and results of operations.
Competition. The market for our product offerings is intensely competitive and can be significantly affected by new product introductions and other market activities of industry participants. We anticipate that the collaborative commerce market will also be highly competitive and subject to competitive forces that do not currently exist. Our competitors offer a variety of products and services to address the document management market and the emerging market for e-business solutions. Because our products are designed to operate in non-proprietary computing environments and because of low barriers to entry in the marketplace, we expect additional competition from established and emerging companies, as the market for our products continues to evolve. Current and potential competitors have established or may establish cooperative relationships among themselves or with third parties, to increase the ability of their products to address the needs of our prospective customers. In addition, several competitors have recently made, or attempted to make, acquisitions to enter the market or increase their market presence. Accordingly, new competitors or alliances among competitors may emerge and rapidly acquire significant market share. Increased competition may result in price reductions, reduced gross margins and loss of market share.
Many of our current and potential competitors are substantially larger than we are, have significantly greater financial, technical and marketing resources and have established more extensive channels of distribution. As a result, such competitors may be able to respond more rapidly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their products than we can. We expect our competitors to continue to improve the performance of their current products and to introduce new products or new technologies that provide added functionality and other features. Our failure to keep pace with our competitors through new product introductions or enhancements could cause a significant decline in our sales or loss of market acceptance of our products and services, result in continued intense price competition, or make our products and services or technologies obsolete or noncompetitive. To be competitive, we will be required to continue to invest significant resources in research and development, and in sales and marketing.
Intellectual Property. Our performance depends in part on our ability to protect our proprietary rights to the technologies used in our principal products. We rely on a combination of copyright and trademark laws, trade secrets, confidentiality provisions and other contractual provisions to protect our proprietary rights, which are measures that afford only limited protection. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products, or to obtain and use information that we regard as proprietary. In addition, the laws of some foreign countries do not protect our proprietary rights as fully as do the laws of the United States. Our means of protecting our proprietary rights in the United States or abroad may not be adequate, and competitors may independently develop similar technologies. Third parties may claim infringement by our products of their intellectual property rights. We expect that software product developers will increasingly be subject to infringement claims if the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, and regardless of the outcome of any litigation, will be time consuming to defend, result in costly litigation, divert management's attention and resources, cause product shipment delays, or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us, if at all. A successful claim of infringement against our products and failure or inability to license the infringed or similar technology may adversely affect our business and results of operations.
International Operations. Sales outside the United States accounted for approximately 9%, 12% and 15% of our revenues in 2002, 2001 and 2000, respectively. We have only limited experience in developing localized versions of our products and we may not be able to successfully localize, market, sell and deliver our products internationally. Our inability to successfully expand our international operations in a timely manner, or at all, could materially and adversely affect our business and results of operations. Our international revenues may be denominated in foreign currencies or the U.S. dollar. We do not currently engage in foreign currency hedging transactions; as a result, a decrease in the value of foreign currencies relative to the U.S. dollar could result in losses from transactions denominated in foreign currencies and could make our software less price-competitive.
Product Liability. Our license agreements typically contain provisions designed to limit our exposure to potential product liability claims. These limitations of liability provisions may not be effective under the laws of certain jurisdictions. The sale and support of our products may entail the risk of such claims, and we could be subject to such claims in the future. A successful product liability claim against us could have a material adverse effect upon our business and results of operations. Software products such as those we offer frequently contain errors or failures, especially when first introduced or when new versions are released. We have in the past released products that contained defects, and have discovered software errors in certain of our new products and enhancements after introduction. We could in the future lose or delay recognition of revenues as a result of software errors or defects, the failure of our products to meet customer specifications or otherwise. Our products are typically intended for use in applications that may be critical to a customer's business. As a result, we expect that our customers and potential customers have a greater sensitivity to product defects than the market for general software products. Despite our testing and testing by current and potential customers, errors or defects may be found in new products or releases after commencement of commercial shipments, and our products may not meet customer specifications, resulting in loss or deferral of revenues, diversion of resources, damage to our reputation, or increased service and warranty and other costs.
Common Stock Price Volatility. Effective February 4, 2003 our common stock began trading on the NASDAQ Small Cap Market under the symbol "OPTK." Previously, our stock was traded on the NASDAQ National Market under the same symbol. The market price of our shares of common stock has been, and is likely to continue to be, highly volatile and may be significantly affected by factors such as:
o Actual or anticipated fluctuations in our operating results o Announcements of technological innovations o New products or new contracts by us or our competitors o Sales of common stock by management, directors or other related parties o Sales of significant amounts of common stock into the market o Potential for less liquidity in our stock as traded on the Small Cap Market o Developments with respect to proprietary rights o Conditions and trends in the software and other technology industries o Adoption of new accounting standards affecting the software industry o Changes in financial estimates by securities analysts and others o General market conditions o Other factors that may be unrelated to us or our performance
In addition, the stock market has from time to time experienced significant price and volume fluctuations that have particularly affected the market prices for the common stock of technology companies. These broad market fluctuations may adversely affect the market price of our common stock. In the past, following periods of volatility in the market price of a particular company's securities, securities class action litigation has often been brought against such company. Such litigation may be brought against us in the future. Such litigation, regardless of its outcome, would result in substantial costs and a diversion of management's attention and resources that could have a material adverse effect upon our business and results of operations.
Change In Company Control. Certain provisions of our certificate of incorporation, equity incentive plans, bylaws, and Delaware law may discourage certain transactions involving a change in control of our company, even if such a transaction would be in the best interest of our stockholders. Our classified Board of Directors and the ability of the Board of Directors to issue "blank check" preferred stock without further stockholder approval, may have the effect of delaying, deferring or preventing a change in our control and may also affect the market price of our stock. We also have a stockholders rights plan under which all stockholders of record as of July 18, 2001 received one right for each share of common stock then owned by them to purchase, upon the occurrence of certain triggering events, one one-hundredth of a share of Series B Preferred Stock at a price of $30, subject to adjustment. The rights are exercisable only if a person or group acquires 15% or more of our common stock in a transaction not approved by our Board of Directors. These provisions and certain other provisions of our Amended and Restated Certificate of Incorporation and certain provisions of our Amended and Restated Bylaws and of Delaware law, could delay or make more difficult a merger, tender offer or proxy contest.
ITEM 2.
ITEM 2. PROPERTIES
Our principal administrative, sales and marketing, research and development and support facilities consist of approximately 39,000 square feet of office space in Colorado Springs, Colorado. We occupy these premises under a lease expiring March 2007. In support of our field sales and support organization, we also lease several facilities in the United States, an office in the United Kingdom and Brazil.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are currently not a party to any material litigation, and are currently not aware of any pending or threatened litigation that we believe would or is reasonably likely to have a material adverse effect upon our business, operating results, or financial condition.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of our security holders during the fourth quarter of the fiscal year ended December 31, 2002.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Effective February 4, 2003 our common stock began trading on the NASDAQ Small Cap Market under the symbol "OPTK." Previously, our stock was traded on the NASDAQ National Market under the same symbol. The following table sets forth the high and low closing sale prices per share of the common stock for the periods indicated, as reported on the NASDAQ National Market.
Quarter Ended HIGH LOW - ------------- ---- --- December 31, 2002.....................................$ 1.20 $ .64 September 30, 2002....................................$ 1.68 $ .85 June 30, 2002.........................................$ 2.34 $ 1.47 March 31, 2002........................................$ 2.74 $ 1.00 December 31, 2001.....................................$ 1.29 $ .69 September 30, 2001....................................$ 1.30 $ .72 June 30, 2001.........................................$ 1.45 $ .93 March 31, 2001........................................$ 2.09 $ .75
As of March 20, 2003 we estimate there were approximately 150 holders of record of our common stock. This does not include the number of persons whose stock is in nominee or "street" name accounts through brokers.
We have never declared or paid any cash dividends on our capital stock since our inception, and do not expect to pay cash dividends on our common stock in the foreseeable future. Our bank line of credit currently prohibits the payment of cash dividends without the consent of the bank.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and related notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this Report. The consolidated statement of operations data for each of the three years in the period ended December 31, 2002 and the consolidated balance sheet data at December 31, 2002 and 2001, are derived from the audited consolidated financial statements included in this Report. The consolidated statement of operations data for the two years ended December 31, 1999 and 1998, and the consolidated balance sheet data at December 31, 2000, 1999 and 1998, are derived from audited consolidated financial statements not included in this Report.
Year Ended December 31, 2002 2001 2000 1999 1998 ------ ------ ------ ------ ------ Consolidated Statement of (in thousands, except per share amounts) Operations: Revenues: Licenses........................ $ 5,655 $ 6,306 $ 5,241 $ 11,457 $ 11,128 Maintenance and other........... 12,218 10,354 10,865 10,585 7,537 ------ ------ ------ ------ ------ Total revenues................ 17,873 16,660 16,106 22,042 18,665 ------ ------ ------ ------ ------ Cost of revenues: Licenses........................ 575 873 562 821 434 Maintenance and other........... 3,674 3,669 4,961 4,224 3,392 ------ ------ ------ ------ ------ Total cost of revenues........ 4,249 4,542 5,523 5,045 3,826 ------ ------ ------ ------ ------ Gross profit...................... 13,624 12,118 10,583 16,997 14,839 ------ ------ ------ ------ ------ Operating expenses: Sales and marketing............. 7,533 8,198 13,672 10,963 12,972 Research and development........ 5,128 5,591 8,434 5,635 5,332 General and administrative...... 1,612 1,792 2,392 1,997 2,714 Restructuring and other charges -- 1,071 -- -- 425 ------ ------ ------ ------ ------ Total operating expenses...... 14,273 16,652 24,498 18,595 21,443 ------ ------ ------ ------ ------ Loss from operations.............. (649) (4,534) (13,915) (1,598) (6,604) Other income...................... 128 368 852 300 218 ------ ------ ------ ------ ------ Loss before income tax expense (benefit)........................ (521) (4,166) (13,063) (1,298) (6,386) Income tax expense (benefit)...... (3) 8 2,978 (454) (1,276) ------ ------ ------ ------ ------ Net loss.......................... (518) (4,174) (16,041) (844) (5,110) Preferred stock dividend.......... -- (447) (1,037) -- -- Accretion of preferred stock and beneficial conversion feature.... -- (250) (5,027) -- -- Increase to income available to common stockholders from the conversion of preferred stock.... -- 6,196 -- -- -- ------ ------ ------ ------ ------ Net income (loss) applicable to common stockholders.............. $ (518)$ 1,325 $(22,105)$ (844) $(5,110) ====== ====== ====== ====== ======
Basic net income (loss) per common share ........................... $ (0.06)$ 0.16 $ (2.78)$ (0.12) $ (0.73) Basic weighted average number of common shares outstanding........ 8,292 8,184 7,948 7,192 6,989 Diluted net loss per common share. $ (0.06)$ (0.46)$ (2.78)$ (0.12) $ (0.73) Diluted weighted average number of common shares outstanding........ 8,292 8,984 7,948 7,192 6,989
December 31, 2002 2001 2000 1999 1998 ------ ------ ------ ------ ------ Consolidated Balance Sheet Data: (in thousands) Cash, cash equivalents and short- term investments................. $ 8,408 $ 7,696 $ 11,704 $ 7,182 $ 7,811 Working capital................... 5,860 5,762 8,512 5,737 6,176 Total assets...................... 13,889 13,901 18,524 18,097 18,537 Redeemable convertible preferred stock............................ -- -- 10,849 -- -- Total stockholders' equity ....... 6,988 7,395 769 11,356 11,820
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This management's discussion and analysis of financial condition and results of operations includes a number of forward-looking statements which reflect our current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those discussed below and those under the caption "Business Risks" in Item 1, that could cause actual results to differ materially from historical results or those anticipated.
OVERVIEW
Optika(R) Inc. is a leading enterprise content management (ECM) provider of imaging, workflow, collaboration and records management software. Optika's Acorde family of ECM software solutions, including Acorde Context(TM), Acorde Process(TM), Acorde Resolve(TM), Acorde Application Link and Acorde Records Manager(TM), allows companies to manage complex business processes and transactions efficiently and effectively leverage their enterprise resource planning (ERP) and line-of-business (LOB) systems. Acorde provides the ability to access and store multiple formats of business content, both digital and non-digital; automate processes across the organization and externally with partners and customers; and enable online collaboration around these paper-intensive or complex processes in real and near time. Built on a three-tier, scalable and extensible platform, Acorde delivers a variety of client desktops, including Windows and Web and easily integrates with third-party applications such as ERP systems. The Acorde product family allows organizations to improve processing efficiency, reduce operating costs and increase customer and partner service and satisfaction, resulting in significant return on investment.
The license of our software products is typically an executive-level decision by prospective end-users and generally requires our sales staff and/or our Advantage Partners (APs) to engage in a lengthy and complex sales cycle (typically between six and twelve months from the initial contact date). We distribute our products through a direct sales force and a network of APs. For 2002, approximately 48% of our license revenues were derived from our APs and the remaining license fees were derived from direct sales. However, no individual customer accounted for more than 10% of our total revenues. For the years ended December 31, 2002, 2001 and 2000, we generated approximately 9%, 12% and 15%, respectively, of our total revenues from international sales. Our revenues consist primarily of license revenues, which are comprised of one-time fees for the license of our products, service revenues, and maintenance revenues, which are comprised of fees for upgrades and technical support. Our APs, which are responsible for the installation and integration of the software for their customers, enter into sales agreements with the end-user, and license software directly from us. We license software directly to the end-user through software license agreements. Annual maintenance agreements are also entered into between the APs and the end-user, and the APs then purchase maintenance services directly from us. For 2002 and 2001, approximately 32% and 38%, respectively, of our total revenues were derived from software licenses and approximately 43% of our total revenues were derived from maintenance agreements. For 2002 and 2001, other revenues, which are comprised of training, consulting and implementation services, and third-party hardware and software products, accounted for 25% and 19%, respectively, of our total revenues.
CRITICAL ACCOUNTING POLICIES
This section discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period.
On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, income taxes, bad debts, restructuring charges, contingencies and litigation. We base our estimates and judgments on historical experience, forecasts and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
We earn our revenue primarily from software licenses and related service. Our revenue is recognized in accordance with Statement of Position 97-2 (SOP 97-2), as amended by Statement of Position 98-9. For sales made either through our APs or by us, we generally recognize license revenue upon shipment when a non-cancelable license agreement has been signed or a purchase order has been received, delivery has occurred, the fee is fixed or determinable and collectibility is probable. The license fees are not assumed to be fixed or determinable if the fees are due more than 12 months after delivery or are based on achievement of a milestone. Where applicable, fees from multiple element arrangements are unbundled and recorded as revenue as the elements are delivered to the extent that vendor specific objective evidence, or VSOE, of fair value exists for the various elements. We establish VSOE of fair value on maintenance and professional services elements based on prices charged when the same elements are sold in separate transactions. We have not established VSOE on license elements. Revenue on undelivered and delivered elements is recorded using the residual method in accordance with SOP 97-2, as amended.
Software maintenance revenues are deferred and recognized ratably over the maintenance period, which is generally one year. The unrecognized portion of software maintenance revenues is recorded in the accompanying balance sheets as deferred revenue. Other revenues are recognized as services are performed.
We generally do not grant rights to return products, except for defects in the performance of the products relative to specifications and pursuant to standard industry shrink-wrapped license agreements which provide for a 30-day right of return if an end-user does not accept the terms of the shrink-wrapped license agreements. The 30-day right of return begins upon product shipment. Our software license agreements generally do not provide price adjustments or rotation rights. We generally include a 90-day limited warranty with the software license, which entitles the end-user to corrections for documented program errors.
Accounting for Income Taxes
We have recorded a valuation allowance against our carryforward tax benefits to the extent that we believe that it is more likely than not all of such benefits will not be realized in the near term. We perform our assessment of benefit realization and the associated valuation allowance on a quarterly basis. Our assessment of this valuation allowance was made using all available evidence, both positive and negative. In particular we considered both our historical results and our projections of profitability for only reasonably foreseeable future periods. Our realization of the recorded net deferred tax assets is dependent on future taxable income and therefore, we cannot be assured that such benefits will be realized. Based on management's current projections, we will continue to evaluate releasing a portion of the valuation allowance over the next year if planned operating results are achieved.
Accounting for Preferred Stock
In 2000 we completed the sale of 731,851 shares of Series A Convertible Preferred Stock, and warrants to purchase an aggregate of 307,298 shares of our common stock to an investor group consisting principally of Thomas Weisel Capital Partners and affiliated entities for an aggregate purchase price of $15 million. The preferred stock was subject to mandatory redemption provisions on the eighth anniversary of the issuance for cash equal to the stated liquidation preference plus accumulated unpaid dividends. The preferred stock was convertible to common stock at the holder's option based upon the conversion formula as defined in the preferred stock Certificate of Designation. The $15 million in gross proceeds received was allocated as follows: approximately $5.5 million for the preferred stock, approximately $4.4 million for the beneficial conversion feature, and approximately $5.1 million for the warrants. The initial carrying amount of the preferred stock was increased by periodic accretions so that the carrying amount would have been equal to the redemption amount ($15 million) at the redemption date in 2008. The periodic increases in the carrying amount were effected by charges against additional paid in capital. As the preferred stock was convertible into common stock at any time, the beneficial conversion amount was accreted in its entirety at the date of issuance of the preferred stock. The warrants were to expire in 2008 and as of May 7, 2001 no warrants were exercised. The fair value of the warrants was separately recorded as warrants for the purchase of our common stock and as a reduction to the Series A Convertible Preferred Stock.
On May 7, 2001, we entered into an Exchange Agreement with Thomas Weisel Capital Partners L.P., a Delaware limited partnership, certain of its affiliates and RKB Capital, L.P. (the "Purchasers") pursuant to which we have issued Series A-1 Convertible Preferred Stock, having the terms and provisions set forth in the Certificate of Designation designating the Series A-1 Convertible Preferred Stock, on a one-for-one basis, in return for the exchange, surrender and cancellation of the Series A Redeemable Convertible Preferred Stock. The Series A-1 Preferred issued in exchange for the Series A Preferred is substantially identical to the Series A Preferred. The Series A-1 Preferred contains certain changes from the Series A which include eliminating the dividend and redemption requirements and modifying the protective and liquidation provisions thereof. In connection with this transaction, we also purchased the warrants associated with the Series A Preferred for an aggregate of $0.01. The Series A-1 Preferred is convertible to common stock at the holders' option based upon the conversion formula as defined in the Certificate of Designation. Upon the occurrence of a change of control event, such as a sale of assets or merger in which the consideration to be received consists solely of stock , the holders of the Series A-1 Preferred Stock are entitled to receive the greater of (i) a liquidation preference of approximately $22.5 million in stock or (ii) the amount of stock they would have otherwise received upon conversion to common stock, prior to any distribution to the holders of our common stock. Upon the occurrence of any change of control event which includes a cash component, the holders of the Series A-1 Preferred Stock are entitled to convert their shares into enough common shares to enable them to receive at least $22.5 million in cash following such conversion. The holders of the Series A-1 Preferred must approve any stock or cash based change of control event in which they would not receive at least $22.5 million in the form of a liquid security, provided that in the event that the holders of the Series A-1 Preferred stock elect not to approve a change of control event, we have the option of repurchasing the Series A-1 Preferred Stock for $22.5 million and proceeding with the transaction. As of February 23, 2003 the conversion formula was 1.5 shares of common for every share of preferred.
The Series A-1 Preferred was recorded in stockholders' equity at its fair value. The difference between the carrying value of the Series A Preferred at the time of the exchange and the fair value of the Series A-1 Preferred of $5.35 million (as determined by an independent valuation) was recorded as an increase in additional paid-in capital and as a one-time adjustment to net income (loss) applicable to common stockholders. As a result of the Exchange Agreement, future periods will not have adjustments to income for accumulating dividends or allocations of the discounts associated with the Series A Preferred Stock.
Accounting for Restructuring Activities
During February 2001, we reduced our workforce by approximately 25%. This reduction in force resulted in approximately $1.1 million of restructuring charges to earnings in the first quarter of 2001; primarily to cover severance and severance related costs. We realized both expense savings and reduced cash outflows during fiscal year 2001 from the reduction in salary costs, office space and related overhead expenses as a result of the restructuring plan.
RESULTS OF OPERATIONS
Comparison of Years Ended December 31, 2002 to December 31, 2001
Revenues
Total revenues increased 7% to $17.9 million for the year ended December 31, 2002, from $16.7 million for the year ended December 31, 2001.
Licenses. License revenues decreased 10% to $5.7 million for the year ended December 31, 2002, from $6.3 million for the year ended December 31, 2001, representing approximately 32% and 38% respectively, of total revenues for the applicable period. The decrease in license revenues during the year ended December 31, 2002 from December 31, 2001 is primarily due to decreases in sales made by APs in North America as a result of the sluggish economy. License revenues generated outside of the United States decreased to approximately 10% of license revenues for the year ended December 31, 2002, from approximately 13% of license revenues for the year ended December 31, 2001. This decrease is attributable to decreased European license revenue in 2002.
Maintenance and Other. Maintenance revenues, exclusive of other revenues, increased to $7.8 million for the year ended December 31, 2002, from approximately $7.2 million during the year ended December 31, 2001, representing approximately 43% of total revenues for the years ending December 31, 2002 and 2001. This absolute dollar annual increase was primarily a result of the maintenance revenues received from new customers and the impact of an overall pricing increase implemented at the beginning of 2002. Other revenue, consisting primarily of consulting services and training, represented 25% and 19% of total revenue for the years ended December 31, 2002 and 2001, respectively. The increase in other revenue as a percentage of total revenue was primarily due to increased consulting, project management and implementation services resulting from our strong direct license revenue in 2002.
Cost of Revenues
Licenses. Cost of licenses consists primarily of royalty payments to third-party software vendors and costs of product media, duplication, packaging and fulfillment. Cost of licenses decreased to $575,000, or 10% of license revenues, for the year ended December 31, 2002, from $873,000, or 14% of license revenues, for the year ended December 31, 2001, primarily as a result of the decreased license revenue for the year ended December 31, 2001 and the elimination of certain fixed third party royalty payments associated with our Acorde Resolve product during the year ended December 31, 2001.
Maintenance and Other. Cost of maintenance and other consists of the direct and indirect costs of providing software maintenance and support, training and consulting services, to our APs and end-users. Cost of maintenance and other remained flat at $3.7 million, or 30% of maintenance and other revenues, for the year ended December 31, 2002, from $3.7 million, or 35% of maintenance and other revenues, for the year ended December 31, 2001. Cost of maintenance and other decreased as a percentage of maintenance and other revenue as a result of flat internal costs to fulfill increased maintenance and other revenue in 2002.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of salaries, commissions and other related expenses for sales and marketing personnel, marketing, advertising, and promotional expenses. Sales and marketing expenses decreased to $7.5 million, or 42% of total revenues, for the year ended December 31, 2002, from $8.2 million, or 49% of total revenues, for the year ended December 31, 2001. This decrease in sales and marketing expenses is due to our restructuring activities in February 2001. We currently anticipate that sales and marketing expenses are likely to increase in absolute dollars in the foreseeable future as we invest in our ability to grow revenue.
Research and Development. Research and development expenses consist primarily of salaries and other related expenses for research and development personnel, and the cost of facilities and equipment. Research and development expenses decreased in absolute dollars to $5.1 million, or 29% of total revenues, for the year ended December 31, 2002, from $5.6 million, or 34% of total revenues, for the year ended December 31, 2001. The decrease in research and development is primarily the result of restructuring activities in February 2001. We currently anticipate that our research and development costs are expected to remain flat in the foreseeable future.
General and Administrative. General and administrative expenses consist primarily of salaries and other related expenses of administrative, executive and financial personnel, and outside professional fees. General and administrative expenses decreased to $1.6 million, or 9% of total revenues, for the year ended December 31, 2002, from $1.8 million, or 11% of total revenues, for the year ended December 31, 2001. The decrease in general and administrative costs primarily is the result of the restructuring activities in February 2001. General and administrative expenses are expected to remain flat in the foreseeable future.
Other income. Other income consists primarily of interest due to our investing activities. We recognized other income, net of $128,000 during the year ended December 31, 2002, compared to other income of $368,000 during the year ended December 31, 2001. The decrease is due to generally lower interest rate returns on our invested balances.
Income Tax Expense. We have recorded a valuation allowance against our carryforward tax benefits to the extent that we believe that it is more likely than not all of such benefits will not be realized in the near term. We perform our assessment of benefit realization and the associated valuation allowance on a quarterly basis. Our assessment of this valuation allowance was made using all available evidence, both positive and negative. In particular we considered both our historical results and our projections of profitability for only reasonably foreseeable future periods. Our realization of the recorded net deferred tax assets is dependent on future taxable income and therefore, we cannot be assured that such benefits will be realized. Based on management's current projections, we will continue to evaluate releasing a portion of the valuation allowance over the next year if planned operating results are achieved.
Comparison of Years Ended December 31, 2001 to December 31, 2000
Revenues
Total revenues increased 3% to $16.7 million for the year ended December 31, 2001, from $16.1 million for the year ended December 31, 2000.
Licenses. License revenues increased 20% to $6.3 million for the year ended December 31, 2001, from $5.2 million for the year ended December 31, 2000, representing approximately 38% and 33%, respectively, of total revenues for the applicable period. The increase in license revenue is attributable to an overall increased demand for our products. License revenues generated outside of the United States decreased to approximately 13% of license revenues for the year ended December 31, 2001, from approximately 22% of license revenues for the year ended December 31, 2000. This decrease is attributable to increased United States license revenue in 2001.
Maintenance and Other. Maintenance revenues, exclusive of other revenues, decreased 4%, to $7.2 million for the year ended December 31, 2001, from approximately $7.5 million during the year ended December 31, 2000, representing approximately 43% of total revenues for the year ended December 31, 2001, and 46% of total revenues for the year ended December 31, 2000 . This absolute dollar decrease was primarily a result of the discontinued maintenance contracts from FilePower (predecessor product to Acorde) customers that elected to discontinue maintenance. This decrease was partially offset by maintenance contracts from new accounts. Other revenue, consisting primarily of consulting services and training, represented 19% and 21% of total revenue for the years ended December 31, 2001 and 2000, respectively. The decrease in other revenues as a percentage of total revenues was primarily due to other revenues remaining stable while total license revenues increased in fiscal year 2001.
Cost of Revenues
Licenses. Cost of licenses consists primarily of royalty payments to third-party software vendors and costs of product media, duplication, packaging and fulfillment. Cost of licenses increased to $873,000, or 14% of license revenues, for the year ended December 31, 2001, from $562,000, or 11% of license revenues, for the year ended December 31, 2000, primarily as a result of the increased license revenue during the period and the increase of third party royalty payments during the year ended December 31, 2001.
Maintenance and Other. Cost of maintenance and other consists of the direct and indirect costs of providing software maintenance and support, training and consulting services, to our APs and end-users. Cost of maintenance and other decreased to $3.7 million, or 35% of maintenance and other revenues, for the year ended December 31, 2001, from $5.0 million, or 46% of maintenance and other revenues, for the year ended December 31, 2000. The decrease as a percentage of maintenance and other revenues is primarily a result of the decrease in allocated overhead expenditures and the reduction of our Solution Services group resulting from the reorganization performed in the first quarter of 2001.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of salaries, commissions and other related expenses for sales and marketing personnel, marketing, advertising, and promotional expenses. Sales and marketing expenses decreased to $8.2 million, or 49% of total revenues, for the year ended December 31, 2001, from $13.7 million, or 85% of total revenues, for the year ended December 31, 2000. This decrease in sales and marketing is primarily attributable to the decrease in our direct sales and marketing organizations in early 2001.
Research and Development. Research and development expenses consist primarily of salaries and other related expenses for research and development personnel, and the cost of facilities and equipment. Research and development expenses decreased in absolute dollars to $5.6 million, or 34% of total revenues, for the year ended December 31, 2001, from $8.4 million, or 52% of total revenues, for the year ended December 31, 2000. The decrease in research and development expenses in 2001 was due to a reduction in headcount, contractors and related expenses.
General and Administrative. General and administrative expenses consist primarily of salaries and other related expenses of administrative, executive and financial personnel, and outside professional fees. General and administrative expenses decreased to $1.8 million, or 11% of total revenues, for the year ended December 31, 2001, from $2.4 million, or 15% of total revenues, for the year ended December 31, 2000. The decrease was primarily due to decreased depreciation and lease costs supporting the decreased headcount in 2001.
Other income. Other income consists primarily of interest due to our investing activities offset by interest expense. We recognized other income of $368,000 during the year ended December 31, 2001, compared to other income, net of $852,000 during the year ended December 31, 2000. The decrease is due to generally lower invested balances and lower interest rates.
Income Tax Expense. In 2001, we recorded a full valuation allowance against our carryforward tax benefits that were generated in 2001, to the extent that we believe it is more likely than not that all of such benefits will not be realized in the near term. Our assessment of this valuation allowance was made using all available evidence, both positive and negative. In particular we considered both our historical results and our projections of profitability for only reasonably foreseeable future periods.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents, including short-term investments, at December 31, 2002 was $8.4 million, increasing by approximately $712,000 from December 31, 2001. For the year ended December 31, 2002, net cash provided by operating activities was $797,000, compared to net cash used in operating activities of $3.9 million for the year ended December 31, 2001. Cash provided by operating activities for the year ended December 31, 2002 is primarily due to the increase in deferred maintenance revenue associated with our prepaid maintenance contracts, the non cash effect of depreciation and amortization offset by our net loss and decrease in accrued expenses and accrued compensation expense. The increase in deferred maintenance revenue is primarily the result of our overall pricing increase implemented at the beginning of 2002, our growth in our base of annual support contracts resulting from new customer sales and sales of additional products to the existing base. Additionally, a significant number of maintenance contracts renew in the fourth quarter and are amortized ratably throughout the following year resulting in the higher balance in deferred maintenance at December 31. The decrease in accrued expenses and accrued compensation expense is primarily the result of finalization of the restructuring activities and lower accruals needed for advertising and royalty expenses on December 31, 2002.
Cash used in investing activities was $196,000 for the year ended December 31, 2002, compared to cash provided by investing activities of $3.5 million for the year ended December 31, 2001. Cash flows from investing activities are primarily due to the purchase and sale of marketable securities offset by capital expenditures. Capital expenditures were $205,000 for the year ended December 31, 2002 as compared to $30,000 for the year ended December 31, 2001.
Cash provided by financing activities was $111,000 for the year ended December 31, 2002. Cash used by financing activities was $24,000 for the year ended December 31, 2001. Cash provided by financing activities in 2002 resulted primarily from the proceeds of sales of common stock through our employee stock purchase and option plans.
At December 31, 2002, our principal sources of liquidity included cash and short-term investments of $8.4 million. In addition, we have a secured credit facility for up to $3.0 million, bearing interest at the bank's prime rate. As of December 31, 2002, we had approximately $2.5 million available for borrowing and no debt outstanding.
As of December 31, 2002, the only significant contractual obligations or commercial commitments consisted of our facility lease commitments totaling $3.0 million (See Note 4 to the Notes to the Consolidated Financial Statements for further details.) We also have a fixed royalty obligation of $100,000 to be paid in 2003. We do not have any other off-balance sheet arrangement that could significantly reduce our liquidity.
We believe that our current cash and short-term investments, together with anticipated cash flows from our operations and the availability of our bank credit facility, will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations", which is effective for fiscal years beginning after June 15, 2002. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The adoption of this standard did not have a material impact on our consolidated financial position, results of operations, or cash flows.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002," which is effective for certain transactions occurring after May 15, 2002 and for financial statements issued on or after May 15, 2002. SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and an amendment of that statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No. 145 also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers." SFAS No. 145 amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The adoption of SFAS No. 145 on May 15, 2002 did not have a material impact on our consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities." This statement addresses the recognition, measurement, and reporting of costs associated with exit and disposal activities. SFAS No. 146 is applicable to restructuring activities and costs related to terminating a contract that is not a capital lease and one time benefit arrangements received by employees who are involuntarily terminated. SFAS 146 supersedes EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Under SFAS No. 146 the cost associated with an exit or disposal activity is recognized in the periods in which it is incurred rather than at the date committed to the exit plan. This statement is effective for exit or disposal activities initiated after December 31, 2002 with earlier adoption encouraged. Previously issued financial statements will not be restated. The provisions of EITF 94-3 shall continue to apply for exit plans initiated prior to the adoption of SFAS No. 146. Accordingly, the adoption of SFAS No. 146 will not have a material impact on our financial position, results of operations, or cash flows. The provisions of SFAS No. 146 could impact the accounting for any future exit and disposal activities, including the period in which exit costs are recorded.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based Compensation--Transition and Disclosure--as Amendment to FAS 123." SFAS No. 148 provides two additional transition methods for entities that adopt the preferable method of accounting for stock based compensation. Further, the statement requires disclosure of comparable information for all companies regardless of whether, when or how an entity adopts the preferable, fair value based method of accounting. As we continued to disclose the fair value of stock option compensation only, SFAS No. 148 did not have any impact on our financial position or results of operations. The transition and annual disclosures of SFAS No. 148 have been disclosed in Notes 1 and 6 to the Consolidated Financial Statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 2002 we had $6.0 million in short-term investments that are sensitive to market risks. Our investment portfolio is used to preserve our capital until it is required to fund operations, including our research and development activities. We do not own any derivative financial instruments. Due to the nature of our investment portfolio we are primarily subject to interest rate risk.
Our investment portfolio includes fixed rate debt instruments that are primarily municipal bonds with maturity periods within one-year. The market value of these bonds is subject to interest rate risk, and could decline in value if interest rates increase. A hypothetical increase or decrease in market interest rates by 10% from December 31, 2002, would cause the fair market value of these short-term investments to change by an insignificant amount. Although the market value of these short-term investments would change due to the interest rate fluctuation, we have the ability to hold the investments to maturity, which would reduce overall market risk.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 15(a) for an index to the financial statements and supplementary financial information that is attached hereto.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Certain information required by Part III is omitted from this Annual Report on Form 10-K in that we will file a definitive proxy statement pursuant to Regulation 14A no later than 120 days after the end of the fiscal year covered by this Report, and certain information included therein is incorporated herein by reference. Only those sections of the Proxy Statement specified below are incorporated by reference.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information required by this item relating to our directors and nominee and disclosure relating to compliance with Section 16(a) of the Securities Exchange Act of 1934 is included under the captions "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in our Proxy Statement for the 2003 Annual Meeting of Stockholders and is incorporated herein by reference. The information required by this item relating to the Company's executive officers and key employees is included under the caption "Executive Officers of the Company" in Part I of this Report on Form 10-K and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption "Executive Compensation and Related Information" in our Proxy Statement for the 2003 Annual Meeting of the Stockholders and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is included under the captions "Ownership of Securities" and "Equity Compensation Plan Information" in our Proxy Statement for the 2003 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the caption "Certain Transactions" in our Proxy Statement for the 2003 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 14.
Item 14. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing of this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Our disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports.
There have been no significant changes in our internal controls or in other factors which could significantly affect internal controls subsequent to the date of our most recent evaluation.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form 10-K: Page 1. Financial Statements: Report of Independent Auditors..................................26 Consolidated Balance Sheets as of December 31, 2002 and 2001....27 Consolidated Statements of Operations for each of the three years in the period ended December 31, 2002....................28 Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) for each of the three years in the period ended December 31, 2002.............................29 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2002....................30 Notes to Consolidated Financial Statements......................31
Schedules have been omitted because they are not required, not applicable, or the required information is shown in the financial statements and related notes thereto.
2. Exhibits - See Exhibit Index on page 46
(b) Reports on Form 8-K
We did not file any Current Reports on Form 8-K during the quarter ended December 31, 2002.
Report of Independent Auditors
The Board of Directors and Stockholders Optika Inc.:
We have audited the accompanying consolidated balance sheets of Optika Inc. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ending December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Optika Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
/S/ KPMG LLP
Denver, Colorado January 23, 2003
OPTIKA INC. AND SUBSIDIARIES Consolidated Balance Sheets
(In thousands, except share and per share amounts)
December 31, December 31, 2002 2001 -------- -------- Assets Current assets: Cash and cash equivalents......................... $ 2,458 $ 1,746 Short-term investments............................ 5,950 5,950 Accounts receivable, net of allowance for doubtful accounts of $107 and $110 at December 31, 2002 and 2001, respectively........................... 3,796 4,035 Other current assets.............................. 557 537 ------- ------- Total current assets .......................... 12,761 12,268 ------- ------- Property and equipment, net........................ 895 1,364 Other assets....................................... 233 269 ------- ------- $ 13,889 $ 13,901 ======= ======= Liabilities and Stockholders' Equity Current liabilities: Accounts payable ................................. $ 379 $ 486 Accrued expenses.................................. 523 1,210 Accrued compensation expense...................... 853 861 Deferred revenue ................................. 5,146 3,949 ------- ------- Total current liabilities ..................... 6,901 6,506 ------- ------- Commitments and contingencies (Notes 4,6,7 and 10)
Stockholders' equity: Common stock; $.001 par value; 25,000,000 shares authorized; 8,326,486 and 8,214,713 shares issued and outstanding at December 31, 2002 and 2001, respectively..................................... 8 8 Series A-1 preferred stock; $.001 par value; 731,851 shares authorized, issued and outstanding at December 31, 2002 and 2001.................... 5,199 5,199 Additional paid-in capital........................ 29,162 29,051 Accumulated deficit............................... (27,381) (26,863) ------- ------- Total stockholders' equity .................... 6,988 7,395 ------- ------- $ 13,889 $ 13,901 ======= =======
The accompanying notes are an integral part of these consolidated financial statements.
OPTIKA INC. AND SUBSIDIARIES Consolidated Statements of Operations
(In thousands, except per share amounts)
Years Ended December 31, 2002 2001 2000 -------- -------- -------- Revenues: Licenses................................ $ 5,655 $ 6,306 $ 5,241 Maintenance and other................... 12,218 10,354 10,865 -------- -------- -------- Total revenues........................ 17,873 16,660 16,106 -------- -------- -------- Cost of revenues: Licenses................................ 575 873 562 Maintenance and other................... 3,674 3,669 4,961 -------- -------- -------- Total cost of revenues................ 4,249 4,542 5,523 -------- -------- -------- Gross profit............................. 13,624 12,118 10,583 -------- -------- -------- Operating expenses: Sales and marketing..................... 7,533 8,198 13,672 Research and development................ 5,128 5,591 8,434 General and administrative.............. 1,612 1,792 2,392 Restructuring and other charges......... -- 1,071 -- -------- -------- -------- Total operating expenses............. 14,273 16,652 24,498 -------- -------- --------
Loss from operations..................... (649) (4,534) (13,915) Other income............................. 128 368 852 -------- -------- -------- Loss before income taxes................. (521) (4,166) (13,063) Income tax expense (benefit)............. (3) 8 2,978 -------- -------- -------- Net loss................................. (518) (4,174) (16,041) Preferred stock dividend ................ -- (447) (1,037) Accretion of preferred stock and beneficial conversion feature........... -- (250) (5,027) Increase to income applicable to common stockholders from the conversion of preferred stock......................... -- 6,196 -- -------- -------- -------- Net income (loss) applicable to common stockholders............................ $ (518) $ 1,325 $(22,105) ======== ======== ========
Basic net income (loss) per common share. $ (0.06) $ 0.16 $ (2.78) Basic weighted average number of common shares outstanding .................... 8,292 8,184 7,948
Diluted net loss per common share........ $ (0.06) $ (0.46) $ (2.78) Diluted weighted average number of common shares outstanding ..................... 8,292 8,984 7,948
The accompanying notes are an integral part of these consolidated financial statements.
OPTIKA INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows
(In thousands)
Years Ended December 31, 2002 2001 2000 -------- -------- -------- Cash Flows from Operating Activities: Net loss................................. $ (518) $ (4,174) $(16,041) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation and amortization........... 667 987 1,230 (Gain) loss on disposal of assets....... (2) 294 23 Deferred tax expense (benefit).......... -- -- 2,946 Changes in assets and liabilities: Accounts receivable, net.............. 239 (1,122) 1,828 Other assets.......................... 16 476 (672) Accounts payable...................... (107) (566) 183 Accrued expenses and accrued compensation expense................. (695) 119 (93) Deferred revenue...................... 1,197 47 75 -------- -------- -------- Net cash provided (used) by operating activities.......................... 797 (3,939) (10,521) -------- -------- -------- Cash Flows from Investing Activities: Capital expenditures..................... (205) (30) (1,260) Proceeds from sale of equipment.......... 9 10 -- Sale and maturities of short-term investments............................. -- 9,637 7,967 Purchase of short-term investments....... -- (6,100) (13,527) -------- -------- -------- Net cash provided (used) by investing activities.......................... (196) 3,517 (6,820) -------- -------- -------- Cash Flows from Financing Activities: Expenditures for preferred stock exchange -- (151) -- Net proceeds from issuance of redeemable convertible preferred stock and warrants -- -- 14,692 Proceeds from issuance of common stock... 111 127 1,482 -------- -------- -------- Net cash provided (used) by financing activities.......................... 111 (24) 16,174 -------- -------- -------- Net increase (decrease) in cash and cash equivalents............................. 712 (446) (1,167) Cash and cash equivalents at beginning of year.................................... 1,746 2,192 3,359 -------- -------- -------- Cash and cash equivalents at end of year. $ 2,458 $ 1,746 $ 2,192 ======== ======== ========
Supplemental Disclosure of Cash Flow Information: Income taxes paid........................ $ -- $ 8 $ 30
The accompanying notes are an integral part of these consolidated financial statements.
OPTIKA INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Optika Inc., a Delaware corporation, and its subsidiaries ("Optika" or the "Company") were formed in 1988 and are an enterprise content management (ECM) provider of imaging, workflow, collaboration and records management software which allows companies to manage complex business processes and transactions and leverage their enterprise resource planning (ERP) and line-of-business systems. Acorde provides the ability to access and store multiple formats of business content, both digital and non-digital; automate processes across the organization and externally with partners and customers; and enable online collaboration around these paper-intensive or complex processes in real and near time.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of Optika Inc. and its wholly owned subsidiaries Optika Imaging Systems Europe, Ltd., Optika Information Systems, LTDA, Optika Imaging Systems, GmbH and Optika Asia, Inc. All significant intercompany accounts and transactions have been eliminated. Certain amounts in the prior years consolidated financial statements have been reclassified to conform to the current year presentation.
Revenue Recognition
The Company earns revenue primarily from software licenses and related services. Revenue is recognized in accordance with Statement of Position 97-2 (SOP 97-2), as amended by Statement of Position 98-9. For sales made either through our Advantage Partners (APs) or by the Company license revenue is generally recognized upon shipment when a non-cancelable license agreement has been signed or a purchase order has been received, delivery has occurred, the fee is fixed or determinable and collectibility is probable. The license fees are not assumed to be fixed or determinable if the fees are due more than 12 months after delivery or are based on achievement of a milestone. Where applicable, fees from multiple element arrangements are unbundled and recorded as revenue as the elements are delivered to the extent that vendor specific objective evidence, or VSOE, of fair value exists for the various elements. The Company establishes VSOE of fair value on maintenance and professional services elements based on prices charged when the same elements are sold in separate transactions. The Company has not established VSOE on license elements. Revenue on undelivered and delivered elements is recorded using the residual method in accordance with SOP 97-2, as amended.
Software maintenance revenues are deferred and recognized ratably over the maintenance period, which is generally one year. The unrecognized portion of software maintenance revenues is recorded in the accompanying balance sheets as deferred revenue. Other revenues are recognized as services are performed.
The Company does not grant rights to return products, except for defects in the performance of the products relative to specifications and pursuant to standard industry shrink-wrapped license agreements which provide for a 30-day right of return if an end-user does not accept the terms of the shrink-wrapped license agreements. The 30-day right of return begins upon product shipment. The Company's software license agreements generally do not provide price adjustments or rotation rights. The Company includes a 90-day limited warranty with the software license, which entitles the end-user to corrections for documented program errors.
Cash Equivalents and Short-term Investments
The Company classifies highly liquid short-term investments with original maturities of three months or less as cash equivalents. For 2002 and 2001, short-term investments consisted of municipal bonds with maturity periods within one-year. Such short-term investments are classified as available-for-sale as defined by Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115) and accordingly are recorded at fair value. Increases or decreases in the fair value of investments classified as available-for-sale are recorded in comprehensive income (loss), net of the related tax effect. Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis. There were no unrealized gains or losses on short-term investments as of December 31, 2002 and 2001. As of December 31, 2002, and 2001 the carrying value of short-term investments equaled fair value.
Depreciation and Amortization
Computer equipment, office equipment and furniture are recorded at cost and depreciated using the straight-line method over estimated useful lives ranging from three to seven years. Leasehold improvements are amortized over the shorter of the estimated useful lives of the improvements or the lease terms.
Software Development Costs
All internal research and development costs are expensed as incurred. Statement of Financial Accounting Standards No. 86 (SFAS No. 86) requires the capitalization of certain software development costs once technological feasibility is established. To date, the period between achieving technological feasibility and the general availability of such software has been short. Consequently, software development costs qualifying for capitalization have been insignificant and therefore, the Company has not capitalized any internal software development costs.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS No. 109). Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. A valuation allowance is recognized to the extent deferred tax assets are not more likely than not be realizable in the reasonably foreseeable future.
Foreign Currency Translation
The U.S. dollar is the functional currency of the consolidated corporation. For the Company's foreign subsidiaries, monetary assets and liabilities are translated into U.S. dollars using the exchange rates in effect at the balance sheet date and non-monetary assets are translated at historical rates. Results of operations are translated using the average exchange rates during the period. Foreign currency translation and transaction gains or losses were not significant in any period presented.
Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as well as the reported amounts of revenue and expenses. Significant estimates have been made by management in several areas, including the collectibility of accounts receivable and the ability to realize deferred tax benefits. Actual results could differ from these estimates, making it reasonably possible that a change in these estimates could occur in the near term.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments including cash and trade receivables and payables, approximate their fair values.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company accounts for long-lived assets in accordance with the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Stock Compensation Plans
The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations including FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25" issued in March 2000, to account for its fixed plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. SFAS No. 123, "Accounting for Stock-Based Compensation," establishes accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 123. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, the Company's pro-forma results of operations and pro-forma net loss per share would have been as follows:
(In thousands, except per share data) 2002 2001 2000 -------- -------- -------- Net income (loss) applicable to common stockholders: As reported $ (518) $ 1,325 $(22,105) SFAS No. 123 Pro-forma (2,011) (400) (24,691) Basic net income (loss) per share: As reported $ (0.06) $ 0.16 $ (2.78) SFAS No. 123 Pro-forma (0.24) (0.05) (3.11) Diluted net loss per share: As reported $ (0.06) $ (0.46) $ (2.78) SFAS No. 123 Pro-forma (0.24) (0.66) (3.11)
Net Income (Loss) Per Common Share
Basic earnings per share (EPS) is computed by dividing net income (loss) applicable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income (loss) applicable to common stockholders adjusted for dilutive effect of securities by the weighted average number of common shares outstanding and the dilutive effect of potential common shares outstanding. Diluted EPS excludes 3,062,000, 2,513,000 and 2,220,000 options and warrants to purchase common stock in 2002, 2001 and 2000, respectively, and 731,851 shares of redeemable convertible preferred stock in 2002 and 2000 because of their antidilutive effect.
The following is the reconciliation of the numerators and denominators of the basic and diluted EPS computations (in thousands, except per share amounts):
Years Ended December 31, 2002 2001 2000 -------- -------- -------- Basic earnings (loss) per share: Net income (loss) applicable to common stockholders $ (518) $ 1,325 $(22,105) Weighted average common shares outstanding 8,292 8,184 7,948 Net income (loss) per common share $ (0.06) $ 0.16 $ (2.78) Diluted loss per share: Net income (loss) applicable to common stockholders $ (518) $ 1,325 $(22,105) Preferred stock dividend, accretion and effect of exchange -- (5,499) -- -------- -------- -------- $ (518) $ (4,174) $(22,105) Weighted average common shares outstanding 8,292 8,184 7,948 Assumed conversion of preferred stock -- 800 -- -------- -------- -------- 8,292 8,984 7,948 Diluted net loss per common share $ (0.06) $ (0.46) $ (2.78)
Concentration
The Company has historically relied on a limited number of products to generate revenues and has concentrated risk related to the continued and future market acceptance of such products. The Company currently has no major customers accounting for more than 10% of its consolidated revenues; however, the Company's accounts receivable are heavily concentrated with resellers of the Company's products. At December 31, 2002 one customer receivable accounted for greater than 10% of the accounts receivable balance. Receivables from end users are not concentrated in any particular industry.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
December 31, 2002 2001 -------- -------- Computer and office equipment $ 4,052 $ 3,924 Leasehold improvements 1,059 1,049 Furniture, fixtures and other 646 638 -------- -------- 5,757 5,611 Less accumulated depreciation and amortization (4,862) (4,247) -------- -------- $ 895 $ 1,364 -------- --------
3. LINE OF CREDIT
The Company has a line of credit expiring in November 2003, whereby it is able to draw up to $3.0 million bearing interest at the bank's prime rate. At December 31, 2002, $2.5 million was available for borrowing thereunder. Pursuant to the terms of the credit facility, any loans under the facility are secured by all of the Company's assets, with the exception of intellectual property and would be subject to certain covenants, including prohibition of the payment of dividends on common stock. The Company has no debt outstanding at December 31, 2002.
4. LEASE OBLIGATIONS
The Company has non-cancelable operating lease arrangements for office space and certain office equipment. Future minimum annual operating lease payments for the years ending December 31 are as follows (in thousands):
Operating Lease Year ending December 31: Obligations ----------- 2003 ............................... $ 763 2004 ............................... 754 2005 ............................... 687 2006 ............................... 653 2007 ............................... 165 ------ $ 3,022 ======
Rent expense related to these and other operating leases approximated $1,107,000, $1,400,000, and $1,423,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
5. INCOME TAXES
The Company's income tax expense (benefit) is comprised of the following (in thousands):
Years Ended December 31, 2002 2001 2000 -------- -------- -------- Current: Federal........................ $ -- $ -- $ -- State.......................... -- 3 2 Foreign........................ (3) 5 30 Deferred: Federal........................ -- -- 2,760 State -- -- 186 -------- -------- -------- Total expense (benefit) from income taxes................... $ (3) $ 8 $ 2,978 ======== ======== ========
The Company's net deferred tax assets are comprised of the tax effects of the following (in thousands):
December 31, December 31, 2002 2001 -------- -------- DEFERRED TAX ASSETS Net operating loss carryforwards.... $ 13,108 $ 12,970 Depreciation and amortization....... 127 110 Tax credit carryforwards ........... 1,720 1,593 Accrued expenses.................... 393 295 -------- -------- Deferred tax asset before valuation allowance.......................... 15,348 14,968 Valuation allowance................. (15,348) (14,968) -------- -------- Net deferred tax asset.............. $ -- $ -- ======== ========
The benefit from income taxes differs from the amount computed by applying the effective U.S. statutory rates to the loss before income taxes as follows (in thousands):
Years Ended December 31, 2002 2001 2000 -------- -------- -------- U.S. federal income tax benefit at statutory rate...................... $ (182) $ (1,458) $ (4,572) Increases (decreases) resulting from: State taxes, net of federal benefit. (21) (349) (1,093) Stock option exercises.............. -- -- (2,554) Non-deductible items................ -- 21 31 Increase in valuation allowance..... 380 1,855 11,593 Foreign tax rate differentials...... 15 15 39 Tax credits......................... (150) (200) (360) Other, net ......................... (45) 124 (106) -------- -------- -------- Expense (benefit) from income taxes $ (3) $ 8 $ 2,978 ======== ======== ========
At December 31, 2002, the Company has net operating loss carryforwards of approximately $33,306,000 that expire beginning in 2009 through 2022. The net operating loss carryforward includes $2,554,000 in deductions relating to stock option exercises which will be credited to additional paid-in capital when the carryforwards are realized. Additionally, the Company has various tax credit carryforwards aggregating approximately $1,720,000 that expire beginning in 2005 through 2022.
The Company has recorded a full valuation allowance against its carryforward tax benefits to the extent that it believes that it is more likely than not all of such benefits will not be realized in the near term. The Company's assessment of this valuation allowance was made using all available evidence, both positive and negative. In particular the Company considered both its historical results and its projections of profitability for only reasonably foreseeable future periods. The Company's realization of its recorded net deferred tax assets is dependent on future taxable income and therefore, the Company is not assured that such benefits will be realized.
6. CAPITAL STOCK AND BENEFIT PLANS
Stock Compensation Plans
At December 31, 2002 the Company has two stock-based compensation plans, a fixed stock option plan and an employee stock purchase plan. The Company applies APB Opinion 25 and related interpretations in accounting for its plans. The Company grants stock options with exercise prices equal to the fair market value of its common stock on the date of grant. Accordingly, no compensation cost has been recognized for its fixed stock option plan and its employee stock purchase plan.
Fixed Stock Option Plan
Under the Company's stock option plan, the Company may grant incentive and non-qualified stock options to its employees and directors for up to 5,114,033 shares of common stock. Under the plan, options are granted at an exercise price not less than the fair market value of the stock on the date of grant. The options generally vest ratably over two to four years and expire ten years after the date of grant. Certain options are subject to accelerated vesting provisions.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 2002, 2001 and 2000, respectively; no estimated dividends; expected volatility of 122% for 2002, 112% for 2001 and 116% for 2000; risk-free interest rates between 2.94% and 4.74% in 2002, 3.91% and 4.93% in 2001, 4,99% and 6.71% in 2000; and expected option terms of 5 years for all years.
A summary of the status of the Company's stock option plan, excluding the warrants issued in connection with the Redeemable Convertible Preferred Stock discussed in note 7, as of December 31, 2002, 2001, and 2000 and changes during the years then ended are presented in the following table. No warrants were outstanding at December 31, 2002.
2002 2001 2000 ------------------ -------------------- ------------------- Weighted- Weighted- Weighted- Average Average Average Shares Exercise Shares Exercise Shares Exercise (000's) Price (000's) Price (000's) Price ------- ---------- --------- ---------- -------- ---------- Outstanding at beginning of year 2,816 $ 3.07 2,220 $ 5.16 2,329 $ 3.22 Granted 446 1.07 1,579 1.25 1,082 8.33 Exercised (37) 1.25 -- -- (431) 8.53 Forfeited (163) 3.58 (983) (4.87) (760) 1.80 ------- ---------- --------- ---------- -------- ---------- Outstanding at end of year 3,062 $ 2.78 2,816 $ 3.07 2,220 $ 5.16 ======= ========== ========= ========== ======== ==========
Options and warrants exercisable at year end 2,023 $ 2.97 1,270 $ 3.10 723 $ 3.45
Weighted average fair value of options grandted during the year $ 1.11 $ 1.01 $ 6.96
The following table summarizes information about fixed stock options outstanding at December 31, 2002:
Options Outstanding Options Exercisable -------------------------------------- ------------------------- Number Weighted Weighted Number Weighted Range of Outstanding Average Average Exercisable Average Exercise at 12/31/02 Remaining Exercise at 12/31/02 Exercise Prices (000's) Contractual Life Price (000's) Price ---------- ---------------- ----------- ------------- ----------- $.75-1.20 660 9.1 $ .95 76 $ .99 $1.31 1,036 8.1 1.31 909 1.31 $1.50-3.81 825 5.0 2.88 681 2.94 $4.00-36.00 541 6.9 7.64 357 5.07 ---------- ---------------- ----------- ------------- ----------- 3,062 7.3 $ 2.78 2,023 $ 2.97 ========== ================ =========== ============= ===========
In connection with the Redeemable Convertible Preferred Stock discussed in note 7, the Company issued options to purchase 25,000 shares of common stock for offering costs to a non-employee. The fair value of this option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions; no estimated dividends; expected volatility of 97%; risk-free interest rate of 5.25%; and an option life of 3 years. The fair value of $376,000 related to this grant was included in the stock offering costs.
Employee Stock Purchase Plan
The Company's 2000 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in March 2000 and approved by the Company's stockholders in May 2000. Under the 2000 Purchase Plan, the Company is authorized to issue up to 300,000 shares of common stock to eligible employees effective August 1, 2000. On July 31, 2000 the Company's previous Employee Stock Purchase Plan terminated as all shares were issued. Under the terms of the Purchase Plans, employees may elect to have up to 10% of their total cash earnings withheld by payroll deduction to purchase the Company's common stock. The purchase price of the stock is 85% of the lower of the market price on the participant's entry date into the Purchase Plan or the semi-annual purchase date.
The Company sold 75,148 and 107,564 shares to employees in 2002 and 2001, respectively, under the Company's 2000 Purchase Plan. Under the previous Purchase Plan, the Company sold 39,429 shares to employees in 2000. The fair market value of each stock purchase plan grant is estimated on the date of grant using the Black-Scholes model with the following assumptions for 2002, 2001 and 2000, respectively; no estimated dividends for all years; expected volatility of 122%, 112% and 116%; risk free interest rates of 3.81% and 4.24% for 2002, 4.76% and 4.86% for 2001 and 4.99% and 6.71% for 2000; and an expected life of 0.5 years for all years. The weighted-average fair values of those purchase rights granted in 2002, 2001 and 2000 was $0.84, $0.58 and $8.26, respectively. As the Purchase Plan is a qualified plan under Internal Revenue Code Section 423, no related compensation cost is recognized in the financial statements.
401(k) Retirement Savings Plan
Effective January 1, 1994, the Company adopted a qualified 401(k) retirement savings plan for all employees. Participants may contribute up to 15% of their gross pay. The Company contributions are discretionary and vest at 20% per year over five years. The Company contributed $228,000 in 2002, $204,000 in 2001 and $271,000 in 2000.
7. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In 2000 we completed the sale of 731,851 shares of Series A Convertible Preferred Stock, and warrants to purchase an aggregate of 307,298 shares of our common stock to an investor group consisting principally of Thomas Weisel Capital Partners and affiliated entities for an aggregate purchase price of $15 million. The preferred stock was subject to mandatory redemption provisions on the eighth anniversary of the issuance for cash equal to the stated liquidation preference plus accumulated unpaid dividends. The preferred stock was convertible to common stock at the holder's option based upon the conversion formula as defined in the preferred stock Certificate of Designation. The $15 million in gross proceeds received was allocated as follows: approximately $5.5 million for the preferred stock, approximately $4.4 million for the beneficial conversion feature, and approximately $5.1 million for the warrants. The initial carrying amount of the preferred stock was increased by periodic accretions so that the carrying amount would have been equal to the redemption amount ($15 million) at the redemption date in 2008. The periodic increases in the carrying amount were effected by charges against additional paid in capital. As the preferred stock was convertible into common stock at any time, the beneficial conversion amount was accreted in its entirety at the date of issuance of the preferred stock. The warrants were to expire in 2008 and as of May 7, 2001 no warrants were exercised. The fair value of the warrants was separately recorded as warrants for the purchase of our common stock and as a reduction to the Series A Convertible Preferred Stock.
On May 7, 2001, we entered into an Exchange Agreement with Thomas Weisel Capital Partners L.P., a Delaware limited partnership, certain of its affiliates and RKB Capital, L.P. (the "Purchasers") pursuant to which we have issued Series A-1 Convertible Preferred Stock, having the terms and provisions set forth in the Certificate of Designation designating the Series A-1 Convertible Preferred Stock, on a one-for-one basis, in return for the exchange, surrender and cancellation of the Series A Redeemable Convertible Preferred Stock. The Series A-1 Preferred issued in exchange for the Series A Preferred is substantially identical to the Series A Preferred. The Series A-1 Preferred contains certain changes from the Series A which include eliminating the dividend and redemption requirements and modifying the protective and liquidation provisions thereof. In connection with this transaction, we also purchased the warrants associated with the Series A Preferred for an aggregate of $0.01. The Series A-1 Preferred is convertible to common stock at the holders' option based upon the conversion formula as defined in the Certificate of Designation. Upon the occurrence of a change of control event, such as a sale of assets or merger in which the consideration to be received consists solely of stock, the holders of the Series A-1 Preferred Stock are entitled to receive the greater of (i) a liquidation preference of approximately $22.5 million in stock or (ii) the amount of stock they would have otherwise received upon conversion to common stock, prior to any distribution to the holders of our common stock. Upon the occurrence of any change of control event which includes a cash component, the holders of the Series A-1 Preferred Stock are entitled to convert their shares into enough common shares to enable them to receive at least $22.5 million in cash following such conversion. The holders of the Series A-1 Preferred must approve any stock or cash based change of control event in which they would not receive at least $22.5 million in the form of a liquid security, provided that in the event that the holders of the Series A-1 Preferred stock elect not to approve a change of control event, we have the option of repurchasing the Series A-1 Preferred Stock for $22.5 million and proceeding with the transaction. As of February 23, 2003 the conversion formula was 1.5 shares of common for every share of preferred.
The Series A-1 Preferred was recorded in stockholders' equity at its fair value. The difference between the carrying value of the Series A Preferred at the time of the exchange and the fair value of the Series A-1 Preferred of $5.35 million (as determined by an independent valuation) was recorded as an increase in additional paid-in capital and as a one-time adjustment to net income (loss) applicable to common stockholders. As a result of the Exchange Agreement, future periods will not have adjustments to income for accumulating dividends or allocations of the discounts associated with the Series A Preferred Stock.
8. SEGMENT INFORMATION
The Company has only one segment under the criteria of SFAS No. 131. The following table presents information by geographic area as of and for the respective fiscal periods (in thousands):
Years Ended December 31, 2002 2001 2000 -------- -------- -------- Total revenues attributable to: United States $ 16,292 $ 14,726 $ 13,731 International 1,581 1,934 2,375 -------- -------- -------- Total $ 17,873 $ 16,660 $ 16,106 ======== ======== ========
Revenue is classified based on the country in which the Company's Advantage Partner or customer is located. Revenue from International locations is attributable to our presence in the United Kingdom, Latin America and Asia. No International location was responsible for more than 7% of our total revenue for the years ended December 31, 2002, 2001 and 2000. International assets and liabilities are insignificant to the overall presentation of segment information.
9. RESTRUCTURING AND OTHER NON-RECURRING CHARGES
On February 6, 2001, the Company reduced our workforce by 42 employees to align our expenses more closely with revenues. This reduction in force resulted in approximately $1.1 million of restructuring charges in the first quarter of 2001. This restructuring charge consisted of $652,000 of severance costs, $240,000 of lease termination and $179,000 of asset write-offs. All costs were paid before the end of 2002. The table below outlines the restructuring accrual activity through December 31, 2002 (in thousands):
Severance Lease Asset Costs Termination Write-Offs Total --------- ----------- ---------- ----------- Restructuring charge $ 652 $ 240 $ 179 $ 1,071 Usage (632) (141) (179) (952) --------- ----------- ---------- ----------- Balance December 31, 2001 $ 20 $ 99 $ -- $ 119 Usage (20) (99) -- (119) --------- ----------- ---------- ----------- Balance December 31, 2002 $ -- $ -- $ -- $ -- ========= =========== ========== ===========
10. CONTINGENCIES
The Company is, from time to time, subjected to certain claims, assertions or litigation by outside parties as part of its ongoing business operations. The outcomes of any such contingencies are not expected to have a material adverse effect on the financial condition or operations of the Company. In addition, in the ordinary course of business, the Company has issued a letter of credit as security for performance on the operating lease for its headquarters and as a result, is contingently liable in the amount of approximately $220,000 at December 31, 2002 and the Company has set up a cash management service in the amount of $240,000 to cover our bank's potential exposure for the direct deposit of payroll and other services.
11. VALUATION AND QUALIFYING ACCOUNTS
(in thousands) Allowance Beginning Increase Recoveries/ Ending Balance (Decrease) (Write-offs) Balance ---------- ---------- ------------ -------- Deducted from asset account- Allowance for doubtful accounts
Year ended December 31, 2002 $ 110 $ 37 $ (40) $ 107 Year ended December 31, 2001 86 10 14 110 Year ended December 31, 2000 90 48 (52) 86
12. QUARTERLY INFORMATION (UNAUDITED)
The following table presents unaudited quarterly operating results for each of the Company's eight quarters in the two-year period ended December 31, 2002:
(in thousands, except per Quarter Ending share amounts) --------------------------------------------- Mar. 31 June 30 Sept. 30 Dec. 31 --------- --------- --------- --------- FISCAL YEAR 2002 Total revenues $ 3,874 $ 4,475 $ 4,650 $ 4,874 Gross profit 2,923 3,389 3,525 3,787 Income (loss) from operations (560) (117) 14 14 Net income (loss) applicable to common stockholders (526) (74) 45 34 Basic income (loss) per share (0.06) (0.01) 0.01 0.00 Diluted income (loss) per share (0.06) (0.01) 0.01 0.00
FISCAL YEAR 2001 Total revenues $ 3,943 $ 4,262 $ 3,871 $ 4,584 Gross profit 2,717 3,187 2,777 3,437 Income (loss)from operations(1) (3,293) (759) (644) 162 Net income (loss) applicable to common stockholders (2) (3,699) 5,337 (557) 244 Basic income (loss) per share (0.45) 0.65 (0.07) 0.03 Diluted income (loss) per share (0.45) (0.07) (0.07) 0.03
(1) The quarter ended March 31, 2001 includes a restructuring charge of $1.1 million for the severance of 42 employees, termination of leases and write-offs of related assets.
(2) In connection with the conversion of the Series A Redeemable Convertible Preferred Stock into Series A-1 Preferred Stock in May 2001, the Company recorded a one-time $6.2 million increase to net income applicable to common stockholders representing the difference between the carrying value of the Series A Preferred Stock and the fair value of the Series A-1 Preferred Stock at the conversion date.
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 March 21, 2003.
OPTIKA INC.
By: /s/ MARK K. RUPORT ------------------------------------ Mark K. Ruport President, Chief Executive Officer and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 21, 2003:
Signature Title
By: /s/ MARK K. RUPORT Chief Executive Officer and --------------------------- Chairman of the Board Mark K. Ruport (principal executive officer)
By: /s/ STEVEN M. JOHNSON Chief Financial Officer, --------------------------- Executive Vice President, Steven M. Johnson Secretary and Chief Accounting Officer (principal financial and accounting officer)
By: /s/ ALAN B. MENKES Director --------------------------- Alan B. Menkes
By: /s/ JAMES T. ROTHE Ph.D Director --------------------------- James T. Rothe Ph.D
By: /s/ CHARLES P. SCHNEIDER Director --------------------------- Charles P. Schneider
By: /s/ EDWIN C. WINDER Director --------------------------- Edwin C. Winder
CERTIFICATIONS
I, Mark K. Ruport, President and Chief Executive Officer of Optika Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Optika Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors:
(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 21, 2003 /s/ Mark K. Ruport --------------------------------------- Mark K. Ruport President and Chief Executive Officer
I, Steven M. Johnson, Executive Vice President and Chief Financial Officer of Optika Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Optika Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors
(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 21, 2003 /s/ Steven M. Johnson --------------------------------------- Steven M. Johnson Executive Vice President and Chief Financial Officer
EXHIBIT INDEX
Exhibit No. Description 3.1(2) Certificate of Ownership and Merger. 3.2(1) Second Amended and Restated Certificate of Incorporation of the Registrant. 3.3(10) Amended and Restated Bylaws of the Registrant. 3.4(3) Certificate of Designation, designating the Series A Convertible Preferred Stock. 3.5(13) Certificate of Designation, designating the Series A-1 Convertible Preferred Stock. 3.6(11) Certificate of Designation, designating the Series B Preferred Stock. 4.1(1) Specimen Common Stock certificate. 4.2(1) Amended and Restated Shareholders' Agreement dated November 25, 1995, by and among the Registrant and the entities named therein. 4.3(1) Amended and Restated Registration Agreement, dated November 22, 1995, by and among the Registrant and the entities named therein, including the First Amendment thereto. 4.4(1) Form of Warrant to purchase Common Stock dated November 1, 1995. 4.5(12) Amended and Restated Rights Agreement dated as of July 29, 2002, between the Registrant and Computershare Trust Company, Inc., as Rights Agent. 10.1(1) Form of Indemnification Agreement between the Registrant and each of its directors and officers. * 10.2(8) The Registrant's 1994 Stock Option/Stock Issuance Plan, as restated and amended through May 2000. 10.3(8) The Registrant's 2000 Employee Stock Purchase Plan. 10.4(1) Employment Agreement by and between the Registrant and Mr. Mark K. Ruport effective February 18, 1995.* 10.5(1) Employment Agreement by and between the Registrant and Mr. Steven M. Johnson, effective May 15, 1996.* 10.7(8) The Registrant's 2000 Non-Officer Stock Incentive Plan. 10.12(1) Technology Transfer Agreement dated February 20, 1992, by and between the Registrant, Mr. Paul Carter and Mr. Malcolm Thomson. 10.16(4) Lease Agreement dated October 11, 1996, by and between the Registrant and Woodmen Office Campus II JV LLC for office space at 7450 Campus Drive, Suite 200, Colorado Springs, Colorado. 10.17(5) Amendment to Loan and Security Agreement dated as of March 2, 1998, by and between the Registrant and Silicon Valley Bank. 10.18(6) Loan and Security Agreement dated as of October 15, 1998, by and between the Registrant and Silicon Valley Bank. 10.18.1(7) Loan and Security Modification Agreement dated as of October 15, 1999, by and between the Registrant and Silicon Valley Bank. 10.18.2(9) Loan Modification Agreement dated as of October 15, 2000, by and between the Registrant and Silicon Valley Bank. 10.18.3 Amended and Restated Loan and Security Agreement dated as of November 6, 2002, by and between the Registrant and Silicon Valley Bank. 10.19(3) Securities Purchase Agreement dated as of February 9, 2000, by among the Registrant, Thomas Weisel Capital Partners L.P. and certain of its affiliates and RKB Capital, L.P. 10.20(3) Registration Rights Agreement dated February 23, 2000 by and between the Registrant, the Purchasers and the other parties signatory thereto. 10.21(13) Exchange Agreement dated as of May 7, 2001, by and between the Registrant, Thomas Weisel Capital Partners L.P. and certain of its affiliates and RKB Capital L.P. 10.22(13) First Amendment to Registration Rights Agreement dated May 7, 2001 by and between the Registrant, Thomas Weisel Capital Partners L.P. and certain of its affiliates and RKB Capital, L.P. 10.23(13) Mutual Agreement regarding future treatment of Series A-1 Preferred Stock dated May 7, 2001 by and between the Registrant, Thomas Weisel Capital Partners L.P. and certain of its affiliates and RKB Capital, L.P. 21.1(1) Subsidiaries of the Registrant. 23.1 Consent of Independent Accountants. 99.1 Certification of Chief Executive Officer. 99.2 Certification of Chief Financial Officer.
*Represents a management compensation arrangement. (1) Incorporated by reference to identically numbered exhibits included in the Company's Registration Statement on Form S-1 (File No. 333-04309), as amended. (2) Incorporated by reference to an exhibit to the Company's Annual Report on Form 10-K (File No. 0-28672) for the year ended December 31, 1998. (3) Incorporated by reference to an exhibit to the Company's Current Report on Form 8-K (File No. 0-28672) dated February 23, 2000. (4) Incorporated by reference to an exhibit to the Company's Annual Report on Form 10-K (File No. 0-28672) for the year ended December 31, 1996. (5) Incorporated by reference to an exhibit to the Company's Annual Report on Form 10-K (File No. 0-28672) for the year ended December 31, 1997. (6) Incorporated by reference to an exhibit to the Company's Quarterly Report on Form 10-Q (File No. 0-28672) for the quarter ended September 30, 1998. (7) Incorporated by reference to an exhibit to the Company's Quarterly Report on Form 10-Q (File No. 0-28672) for the quarter ended September 30, 1999. (8) Incorporated by reference to an exhibit to the Company's Annual Report on Form 10-K (File No. 0-28672) for the year ended December 31, 2000. (9) Incorporated by reference to an exhibit to the Company's Quarterly Report on Form 10-Q (File No. 0-28672) for the quarter ended September 30, 2000. (10) Incorporated by reference to an exhibit to the Company's Annual Report on Form 10-K (File No. 0-28672) for the year ended December 31, 1999. (11) Incorporated by reference to an exhibit to the Company's Registration Statement on Form 8-A filed with the Securities and Exchange Commission on July 18, 2001. (12) Incorporated by reference to an exhibit to the Company's Current Report on Form 8-K (File No. 0-28672) dated July 29, 2002. (13) Incorporated by reference to an exhibit to the Company's Quarterly Report on Form 10-Q (File No. 0-28672) for the quarter ended March 31, 2001.