SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
Commission File Number 0-28672
Optika Inc.
(Exact name of registrant as specified in its charter)
Delaware 95-4154552
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7450 Campus Drive, 2nd Floor 80920
Colorado Springs, Colorado (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (719) 548-9800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(Title of Class)
Series B Preferred Stock Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
---------- --------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
----------- ----------
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the common stock on June 28,
2002 as reported on the NASDAQ National Market, was approximately $11,338,402.
Shares of common stock held by each officer and director and by each person who
owns 5% or more of the outstanding common stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes. As of March
20, 2003, the registrant had outstanding 8,362,799 shares of common stock and
731,851 shares of preferred stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on May 8, 2003 are incorporated by
reference in Part III of this Form 10-K to the extent stated herein.
OPTIKA INC.
2002 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
PART I
Item 1 Business..........................................................2
Item 2 Properties.......................................................13
Item 3 Legal Proceedings................................................13
Item 4 Submission of Matters to a Vote of Security Holders..............13
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters..........................................................14
Item 6 Selected Financial Data..........................................15
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................16
Item 7A Quantitative and Qualitative Disclosures About Market Risk.......23
Item 8 Financial Statements and Supplementary Data......................23
Item 9 Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................23
PART III
Item 10 Directors and Executive Officers of Registrant...................24
Item 11 Executive Compensation...........................................24
Item 12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters..................................24
Item 13 Certain Relationships and Related Transactions...................24
Item 14 Controls and Procedures..........................................24
PART IV
Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K..25
Signatures...............................................................43
Certifications...........................................................44
PART I
This annual report on Form 10-K contains forward-looking statements that
involve risks and uncertainties. Our actual results may differ materially from
the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed under
the caption "Business Risks" contained herein.
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 $30, subject to adjustment. The rights are exercisable only
if a person or group acquires 15% or more of our common stock in a transaction
not approved by our Board of Directors. These provisions and certain other
provisions of our Amended and Restated Certificate of Incorporation and certain
provisions of our Amended and Restated Bylaws and of Delaware law, could delay
or make more difficult a merger, tender offer or proxy contest.
ITEM 2. PROPERTIES
Our principal administrative, sales and marketing, research and development
and support facilities consist of approximately 39,000 square feet of office
space in Colorado Springs, Colorado. We occupy these premises under a lease
expiring March 2007. In support of our field sales and support organization, we
also lease several facilities in the United States, an office in the United
Kingdom and Brazil.
ITEM 3. LEGAL PROCEEDINGS
We are currently not a party to any material litigation, and are currently
not aware of any pending or threatened litigation that we believe would or is
reasonably likely to have a material adverse effect upon our business, operating
results, or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of our security holders during the
fourth quarter of the fiscal year ended December 31, 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Effective February 4, 2003 our common stock began trading on the NASDAQ
Small Cap Market under the symbol "OPTK." Previously, our stock was traded on
the NASDAQ National Market under the same symbol. The following table sets forth
the high and low closing sale prices per share of the common stock for the
periods indicated, as reported on the NASDAQ National Market.
Quarter Ended HIGH LOW
- ------------- ---- ---
December 31, 2002.....................................$ 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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 Stockholders' Equity and Comprehensive Income (Loss)
(In thousands, except share amounts)
Series A-1 Accumulated
Preferred Additional Other Total
Common Stock Stock Paid-in Accumulated Comprehensive Stockholders'
Shares Amount Shares Amount Capital Deficit Income (Loss) Equity
--------- ------ ------- ------ ---------- ----------- ------------- ------------
Balances at December 31, 1999 7,307,678 $ 7 -- $ -- $ 18,101 $ (6,648) $ (104) $ 11,356
Common stock issued upon
exercise of stock options 760,042 1 -- -- 1,357 -- -- 1,358
Common stock issued pursuant
to employee stock purchase
plan 39,429 -- -- -- 124 -- -- 124
Issuance of warrants in
connection with preferred
stock offering -- -- -- -- 5,123 -- -- 5,123
Issuance of common stock
options for preferred
stock offering costs -- -- -- -- 376 -- -- 376
Accretion of preferred stock -- -- -- -- (619) -- -- (619)
Preferred stock dividends -- -- -- -- (1,037) -- -- (1,037)
Unrealized gain on investments -- -- -- -- -- -- 129
Net loss -- -- -- -- -- (16,041) --
Total comprehensive loss (15,912)
--------- ------ ------- ------ ---------- ----------- ------------- ------------
Balances at December 31, 2000 8,107,149 8 -- -- 23,425 (22,689) 25 769
Common stock issued pursuant
to employee stock purchase
plan 107,564 -- -- -- 127 -- -- 127
Accretion of preferred stock -- -- -- -- (250) -- -- (250)
Preferred stock dividends -- -- -- -- (447) -- -- (447)
Conversion of Series A to
Series A-1 preferred stock,
net of exchange costs -- -- 731,851 5,199 6,196 -- -- 11,395
Comprehensive loss:
Unrealized gain on investments -- -- -- -- -- -- (25)
Net loss -- -- -- -- -- (4,174) --
Total comprehensive loss (4,199)
--------- ------ ------- ------ ---------- ----------- ------------- ------------
Balances at December 31, 2001 8,214,713 8 731,851 5,199 29,051 (26,863) -- 7,395
Common stock issued upon
exercise of stock options 36,625 -- -- -- 46 -- -- 46
Common stock issued pursuant
to employee stock purchase
plan 75,148 -- -- -- 65 -- -- 65
Net loss -- -- -- -- -- (518) -- (518)
--------- ------ ------- ------ ---------- ----------- ------------- ------------
Balances at December 31, 2002 8,326,486 $ 8 731,851 $5,199 $ 29,162 $ (27,381) $ -- $ 6,988
========= ======= ======= ====== ========== =========== ============= ============
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.