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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, 1998
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)
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 Registration 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. ___
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 February
10, 1999 as reported on the NASDAQ National Market, was approximately
$21,950,930. 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 February 10, 1999, Registrant had outstanding 7,168,795 shares
of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 20, 1999 is incorporated by
reference in Part III of this Form 10-K to the extent stated herein.
==============================================================================
OPTIKA INC.
1998 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business..........................................................1
Item 2. Properties.......................................................14
Item 3. Legal Proceedings................................................15
Item 4. Submission of Matters to a Vote of Security Holders..............15
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................................16
Item 6. Selected Financial Data..........................................17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................18
Item 8. Financial Statements and Supplementary Data......................25
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure.............................25
PART III
Item 10. Directors and Executive Officers of Registrant...................26
Item 11. Executive Compensation...........................................26
Item 12. Security Ownership of Certain Beneficial Owners and Management...26
Item 13. Certain Relationships and Related Transactions...................26
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.....................................................27
Signatures.......................................................43
PART I
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S 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. ("Optika" or the "Company") is a leading provider of
business-to-business electronic commerce ("e-commerce") solutions. By leveraging
the technology of the World Wide Web, the Company's software bridges the gap
between paper and e-commerce across the enterprise and throughout supply chains.
In March 1998, the Company introduced Optika eMedia(TM), its 32-bit Web-based
software solution that enables organizations with high transaction volumes to
efficiently and inexpensively manage the high-volume flow of paper and
electronic data associated with running today's businesses. Optika eMedia
provides a solution beyond traditional imaging/computer output to laser disc
("COLD")/workflow functionality by also offering multiple client interfaces and
a scalable, extensible 3-tier architecture.
Prior to its introduction of Optika eMedia, Optika developed and distributed
FilePower(R), the first truly integrated client/server imaging, COLD and
workflow software. In the high-performance imaging market, Optika offered server
software that provided core imaging functions, application software for document
image management, COLD, automated workflow transaction processing and associated
development tools. The FilePower software suite was designed for deployment at
the departmental or workgroup level, with scalability throughout the enterprise.
INDUSTRY BACKGROUND
The Company believes the migration of business to e-commerce is being driven
by two trends. First, is the advent of the World Wide Web, which provides a
widely-used established infrastructure for the transactions of communications
and data to customers, suppliers and business partners. According to META Group,
"the applications and business opportunities that fall under the broad,
embryonic heading of e-commerce will fundamentally change the way many
businesses and organizations operate" (META Group, "Electronic Commerce: A
Practical Business Guide" 1998).
The second trend driving e-commerce is the increasing focus on integrating
an organization's business partners, such as vendors and customers, into its
traditional business processes. An organization's set of business partners is
normally referred to as its "value chain" or "supply chain." Although e-commerce
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-commerce in changing the way businesses manage their supply chain partners.
The ubiquitous access and low costs associated with the Internet make it
possible for businesses to leverage it as an infrastructure to develop more
efficient methods of interacting with each other.
E-commerce offers a way for businesses to eliminate paper at its source,
making it particularly important for customers in paper-intensive industries
such as financial services, insurance and retail. However, the high volumes of
paper associated with business transactions will not be replaced easily or
immediately. The transition from paper-based transactions to electronic
transactions over the Internet will likely be gradual and sometimes difficult,
varying greatly from company to company. For this reason the Company believes
that companies will need to maintain dual systems to handle both paper and
electronic transactions over the next few years.
Therefore, the transition to e-commerce will require solutions that manage
the new e-commerce-based business processes, as well as the on-going
paper-intensive processes. One method of accomplishing this objective is using
products that offer both e-commerce and image processing capabilities. Image
processing systems allow documents to be electronically stored, retrieved and
routed, and generally include the following five basic functions: (i) document
capture, (ii) optical storage, (iii) retrieval and display, (iv) document
management and (v) automated transaction processing (workflow).
OPTIKA EMEDIA
The Company believes that Optika eMedia, Optika's recent product entry into
the e-commerce market, addresses organizational needs for managing both
paper-based and electronic business-to-business transactions. Optika eMedia
became commercially available in September 1998.
Optika eMedia is a 32-bit Internet-based software suite that manages the
full range of documents supporting business transactions within an organization,
across the Internet and throughout the supply chain. Optika eMedia provides
businesses with a Web-based electronic infrastructure for conducting business
with its suppliers and customers. The Optika software solution supplies
on-demand access to the entire context of business-to-business relationships,
including the ability to find and view all electronic data (such as electronic
data interchange or "EDI" and XML-based electronic forms), documents, images and
electronic communications and negotiations associated with a business
transaction. With Optika eMedia, a company can manage all of its interactions
within its supply chain in an efficient and context-rich manner.
Optika eMedia consists of the following:
o A scalable, extensible 3-tier architecture built on industry standards
that combines image management, document management, workflow and COLD,
deployed and maintained over the Internet;
o Multiple, user-configurable clients for retrieving and viewing documents
of virtually any type as well as processing work in a workflow. Clients
include an Optika production interface, a standard browser interface and
Optika eMedia tools integrated with a line-of-business application;
o A new concept called "Galleries" which allows business analysts, not
programmers, to customize user interfaces specific to business functions;
o Tools that enable organizations to collaborate on business transactions
and settle differences in out-of-tolerance transactions;
o Inter-company visual workflow software to manage value chain processes;
and
o Technology adoption methodology to successfully implement the paper
automation and paper elimination processes.
With Optika eMedia's component-based architecture, end-user solutions are
constructed from a set of modular components. Because Optika eMedia is designed
to work with industry-standard technologies and platforms, such as Windows NT
and Web browsers, the Company believes that Optika eMedia lowers the cost for
businesses to implement information management solutions and enables businesses
to achieve the highest possible return on investment by extending the benefits
of technology to their partners. Optika eMedia uses standard TCP/IP protocols to
deliver a fully functional 32-bit product accessible to any Web user.
FILEPOWER SUITE
Prior to its introduction of Optika eMedia, Optika historically developed a
fully integrated client/server imaging software suite called FilePower, which
provided the following components: server software with core imaging functions;
application software for document image management; COLD; automated workflow
transaction processing; and associated development tools. The Company believes
that the FilePower suite enabled end-users to reduce costs, improve operational
productivity and enhance customer service. For the first time, the Company's
FilePower suite combined image management (FPmulti), COLD (FPreport) and
advanced workflow processing (PowerFlow) into a single, component-based
application. The FilePower suite was designed to provide rapid installation,
ease of use, enterprise-wide scalability and ease of customization.
SALES & MARKETING
Sales
Optika employs a blended sales model, consisting of a worldwide network of
approximately 170 Advantage Partners ("APs") and 5 Original Equipment
Manufacturers ("OEMs"), in addition to a direct sales force that covers 16 North
American territories and territories in South America, Asia and Europe. Optika
also uses a Solution Services team of system architects and program managers to
support its account executives and APs in enterprise system design, planning,
implementation, and rollout. License revenues from APs and OEMs accounted for
69% and 10%, respectively, of the Company's license revenues for the year ended
December 31, 1998.
Advantage Partners. APs are Value Added Resellers (VARs) responsible for
identifying potential end-users, selling the Company's products to the end-users
as part of a complete hardware and software solution, customizing and
integrating the Company's products at the end-users sites, and providing support
and maintenance to the end-users following the sale. The Company's APs currently
include large organizations selling a wide variety of products, smaller
organizations focused on imaging, application-oriented organizations and
geographically-focused organizations. The Company establishes relationships with
APs through written agreements. These agreements establish a price at which the
AP is eligible to purchase the Company's software for resale to end-users, the
maintenance fee revenues which must be remitted back to the Company, and other
material terms and conditions. Such 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 the Company's
software. However, contracts may be terminated at the election of the Company if
specified sales targets and end-user satisfaction goals are not attained. Actual
sales contracts are between the APs and the end-users, although the end-user
directly licenses the software from the Company through acceptance of a standard
shrink-wrapped license agreement. The Company supports its APs through dedicated
personnel at its headquarters in Colorado Springs and a network of fifteen field
offices. Services range from joint marketing efforts to assistance with pricing
and proposals to technical product support.
The Company's strategy is to target its marketing activities toward its most
productive APs, and to recruit additional APs in key geographical and vertical
markets. The Company's Advantage Partner program is a crucial element of this
strategy. The Eye on Partnership program is designed to promote long-term
relationships between the Company and its APs by awarding silver, gold and
platinum status to APs, based on their sales, training and customer service
achievements. This program includes extended support and free training, as well
as marketing assistance with seminars, programs and co-op marketing funds.
OEMs. The Company has also established relationships with certain OEMs who
resell the Company's software under their names to their end-user customers as
part of their own imaging software solution. Unlike the Company's AP
relationships, the OEMs actively compete with the Company and its APs. Optika's
OEM agreements establish a price at which the OEM is eligible to purchase the
Company's software for resale to its customers, and the maintenance fees
received by the OEM to be remitted back to Optika. OEMs generally have a higher
sales volume and require considerably less post-sale support than the Company's
APs. The Company's strategy is to continue to recruit OEMs in key vertical
markets such as healthcare, transportation and financial services.
Solution Services. The Company's Solution Services team focuses on
developing relationships with large corporate end-users with multiple geographic
locations. The Solution Services team initiates contact directly with the
end-user, but relies heavily on the Company's APs to provide installation and
integration services at the end-user's site and provide end-user support and
maintenance following sales.
International Sales
For the years ended December 31, 1997 and 1998, Optika generated
approximately 23% and 24%, respectively, of its total revenues from
international sales. The Company currently maintains offices in London and
Munich to support its 33 European APs, an office in Brazil to support its 22
Latin American APs, and offices in Singapore and Malaysia to support its 32
Asian APs. The Company is actively seeking to expand and strengthen its network
of foreign APs.
Marketing
The Company has an integrated marketing program that supports its sales
strategy. The Company's marketing efforts are organized into marketing
communications, product marketing, strategic alliances, marketing programs,
channel marketing and Web service programs. The Company supports these efforts
by issuing frequent announcements to the press, advertising in industry
periodicals and magazines, communicating with key industry analysts,
participating in trade shows, telemarketing and direct mailing to prospective
customers and developing and maintaining Web services. The Company also unites
with channel partners in joint marketing efforts. The targeted audience is
Fortune 1000 and Global 2000 companies in the retail, financial services
(mortgage lending and banking) and insurance sectors.
CUSTOMERS
The Company has already established, as of December 31, 1998, a base of
over 40 Optika eMedia customers through its blended sales model of APs and
direct sales force. Set forth below is a partial list of end-users that have
generated revenues for the Company by purchasing Optika eMedia:
AmeriTrade National Bank Commerce
ARVEST Bank Group Promea Ausgleichakasse
Australian Passport Office Pulte Mortgage Corporation
Automatic Data Processing ReliaStar
Boston Edison TCI of Pennsylvania
Clear Channel Communications The Home Depot
Coram Prescriptions University of Colorado
Greenlee Textron Veterans Administration - Philadelphia
JDEdwards Warner-Lambert Company
Kuwait Stock Exchange Washington State University
Lawrence Livermore National Lab
As of December 31, 1998, the Company had licensed approximately 105,000
clients of its products to over 1,500 end-users worldwide. Set forth below is a
partial list of FilePower end-users that have generated revenues for the Company
and have acquired licenses for a minimum of five users. The Company believes
that these end-users are currently using the Company's products and are
representative of the Company's overall end-user base.
Banco Nacional de Costa Rica Lillian Vernon
Banco Safra Lloyds Bank StockBrokers
Bank of Scotland MCI/WorldCom
BankBoston Michelin
Blue Cross/Blue Shield Navistar
British Railways Packard-Bell
Casio Payless Cashways
Chase Manhattan Bank PharMor
Children's Hospital Phillips-Van Heusen
Citibank Smith Barney
Coca-Cola Company Sony
Deutsche Bank Speigel
Diners Club International Standard & Poor's
Eddie Bauer State of New Mexico
Ernst & Young State of Washington
Far East Bank Subaru
Federal Reserve Bank Texas Woman's University
Fidelity Brokerage The Walt Disney Company
Georgia-Pacific Corporation Tokyo Mitsubishi International
GMAC Commercial Mortgage Turner Broadcasting
Guardian Life Insurance Company Union Bank of Switzerland
Indiana Department of Motor Vehicles University of Notre Dame
J. Crew Volvo Car UK Limited
No AP, OEM or end-user accounted for more than 10% of the Company's
total revenues for the year ended December 31, 1998.
SERVICE & SUPPORT
The Company believes that a high level of customer service and support is
critical to the Company's performance. The Company provides technical support,
maintenance, training and consulting to its APs, which are in turn primarily
responsible for providing technical support services directly to end-users. The
Company also provides such support directly to its end-users on an as-needed
basis. These services are designed to increase end-user satisfaction, provide
feedback to the Company as to end-users' demands and requirements, and generate
recurring revenue. The Company plans to continue to expand its services and
support programs as the depth and breadth of the products offered by the Company
increases.
AP Support
The Company maintains pre-sales technical support personnel who work
directly with the APs to provide technical responses to sales inquiries. The
Company offers educational and training programs, as well as customized
consulting services, to its APs. Fees for training and consulting services are
generally charged on a per diem basis. The Company also provides product
information bulletins on an ongoing basis, including bulletins posted on its
Internet web 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 & Software Maintenance
The Company, in conjunction with its APs, offers end-users a software
maintenance program. The maintenance program includes software updates provided
by the Company to the end-user, and technical support provided by the AP.
Telephone consultation services are provided by the Company to the AP to respond
to end-user technical questions that the AP is unable to answer. Web Support
services are also now 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, the Company, on an annual
basis, charges the AP a fee of between 8% and 12% of the then-current list
prices of the licensed software.
Warranty
The Company generally includes 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 & DEVELOPMENT
The Company has committed, and expects to continue to commit, substantial
resources to research and development. Optika's research and development
organization is organized along 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 its products. Product development efforts are
directed at increasing product functionality, improving product performance, and
expanding the capabilities of the products to interoperate with third-party
software and hardware. In particular, the Company is devoting substantial
development resources to develop additional functionality for its products, and
the capability to support additional platforms, databases, graphical user
interfaces, toolsets and emerging technologies. The Company believes that the
modular architecture of Optika eMedia will provide the foundation for future
enhancements to the Company's e-commerce solution.
As of December 31, 1998, the Company's research and development organization
consisted of 51 full-time employees in Colorado Springs, Colorado. During 1998,
research and development expenses were $5.3 million. As of December 31, 1998,
the Company had expensed all of its software development costs as incurred.
COMPETITION
The market for the Company's products is intensely competitive and can be
significantly affected by new product introductions and other market activities
of industry participants. The Company believes that the principal competitive
factors affecting its 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.
Although the Company believes that it currently competes favorably with respect
to such factors, there can be no assurance that the Company can maintain its
competitive position against current and potential competitors. The Company's
principal direct competitors for its product include FileNet Corporation,
International Business Machines Corporation, and Eastman Software. The Company
also competes 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 RDBMS ("Relational Database
Management System") vendors. In addition, the Company may face competition from
other established and emerging companies in new market segments, such as
e-commerce, resulting from the introduction of Optika eMedia.
Many of the Company's current and potential competitors have longer
operating histories, greater resources and name recognition, and a larger
installed base of customers than the Company. 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 can the Company. The Company also
faces indirect competition from VARs, OEMs, distributors and system integrators.
The Company relies on a number of these resellers for implementation and other
customer support services, as well as recommendations of its products during the
evaluation stage of the purchase process. Although the Company seeks to maintain
close relationships with these resellers, many of these third parties have
similar, and often more established, relationships with the Company's principal
competitors.
PROPRIETARY RIGHTS
The Company relies on a combination of trade secret, copyright and trademark
laws, software licenses and nondisclosure agreements, to establish and protect
its proprietary rights in its products. The Company enters into confidentiality
and/or license agreements with all of its employees and distributors, as well as
with its customers and potential customers seeking proprietary information, and
limits access to and distribution of, its software, documentation and other
proprietary information. Despite these precautions, it may be possible for
unauthorized third parties to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. The Company
has certain registered and other trademarks. The Company believes that its
products, trademarks and other proprietary rights do not infringe the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not assert infringement claims in the future.
EMPLOYEES
At December 31, 1998, the Company had 173 full-time employees in 21 cities.
Of these employees, 51 were involved in research and development, 77 in sales
and marketing, 27 in technical support and training, and 18 in administration
and finance. No employees are covered by any collective bargaining agreements.
The Company believes that its relationship with its employees is good.
EXECUTIVE OFFICERS
The Company's executive officers and key employees, and their ages as of
February 10, 1999 are:
Name Age Position
--------------------- --- ------------------------------------
Mark K. Ruport....... 46 President, Chief Executive Officer &
Chairman of the Board of Directors
Steven M. Johnson.... 37 Vice President- Finance &
Administration, Chief Financial
Officer & Secretary
Marc R. Fey.......... 43 Senior Vice President - Engineering
& Customer Support Services
Jeanne Logozzo....... 35 Vice President- Marketing
Greg D. Cooke........ 35 Vice President- North American Sales
Paul Carter.......... 44 Chief Product Architect, Co-Founder
& Director
Mark K. Ruport has been President and Chief Executive Officer and a Director
of the Company since February 1995. He has served as Chairman of the Board of
Directors since May 1996. From June 1990 to July 1994, Mr. Ruport was President
and Chief Operating Officer, and most recently Chief Executive Officer, of
Interleaf, Inc., a publicly-held software and services company that develops and
markets solutions for content and document management and high-end publishing.
From July 1994 to February 1995, Mr. Ruport pursued personal interests. From
1989 to 1990, Mr. Ruport was Senior Vice President of Worldwide Sales of
Informix Software, where he had responsibility for direct and indirect sales and
OEMs.
Steven M. Johnson has served as Vice President--Finance and Administration
and Chief Financial Officer of the Company since September 1992, and as its
Secretary since May 1996. He also served as interim Chief Executive Officer of
the Company from October 1994 to February 1995 and as interim Vice President of
North American Channel Sales from July 1998 through December 1998. Prior to
joining the Company, 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.
Marc R. Fey has served as the Company's Senior Vice President--Engineering
and Customer Support Services since February 1996. Mr. Fey previously held the
position of Vice President--Development from July 1994 to February 1996. Prior
to joining the Company, from September 1991 to June 1994, Mr. Fey was President
of The Fey Company, which provided consulting services for software companies
and venture investors on technology, acquisitions, strategic planning and
general operations. Mr. Fey co-founded XA Systems Corporation, where from 1982
to 1991 he served in various capacities, including President, and most recently,
Chairman and Chief Technology Officer. Prior to 1982, Mr. Fey was a manager with
Andersen Consulting.
Jeanne Logozzo has served as Vice President--Marketing since October 1997.
Prior to joining Optika, Ms. Logozzo served as an independent consultant from
May 1997 to October 1997. Ms. Logozzo was Senior Director of Marketing at Open
Text Corporation from May 1996 to May 1997, where she was responsible for
marketing that company's intranet collaborative product suite. From June 1994 to
May 1996, Ms. Logozzo was Manager of Strategic Marketing for Ciros, a new
subsidiary of R.R. Donnelley & Sons. Ms. Logozzo held various marketing
positions at Interleaf Corporation from 1986 to 1994.
Greg D. Cooke has served as Vice President of North American Sales since
February 1999 . While at Optika, Mr. Cooke has held a variety of sales and
business development positions. Prior to joining Optika in 1991, Mr. Cooke was
the Vice President of Sales and Marketing for FSE Corporation, a leading
financial services systems integration company and Optika business partner in
Dallas, Texas. He also held a sales management position at The Synergistic
Group, where he was responsible for the sales of business planning software
packages to leading manufacturers, wholesale distributors and retailers.
Paul Carter is a co-founder of the Company and has served as a Director
since its inception. Since July 1994, he has served as Chief Product Architect,
and he served as the Company's Secretary from 1988 to May 1996. From July 1990
to June 1994, Mr. Carter was Director of Research and Development of the
Company, and from January 1988 to June 1990 he was its Vice President--Research
and Development.
BUSINESS RISKS
IN EVALUATING THE COMPANY'S BUSINESS, READERS SHOULD CAREFULLY CONSIDER THE
BUSINESS RISKS DISCUSSED IN THIS SECTION, IN ADDITION TO THE OTHER INFORMATION
PRESENTED IN THIS ANNUAL REPORT ON FORM 10-K.
Significant Fluctuations in Operating Results. The Company's sales and other
operating results have varied significantly in the past and will vary
significantly in the future as a result of factors such as: the size and timing
of significant orders and their fulfillment; demand for the Company's products;
changes in pricing policies by the Company or its competitors; the number,
timing and significance of product enhancements and new product announcements by
the Company and its competitors; changes in the level of operating expenses;
customer order deferrals in anticipation of new products or otherwise; foreign
currency exchange rates; warranty and customer support expenses; changes in its
end-users' financial condition and budgetary processes; changes in the Company's
sales, marketing and distribution channels; delays or deferrals of customer
implementation; product life cycles; software bugs and other product quality
problems; discounts; the cancellation of licenses during the warranty period or
nonrenewal of maintenance agreements; customization and integration problems
with the end-user's legacy system; changes in the Company's strategy; changes in
accounting pronouncements; potential acquisitions; changes in customer buying
patterns as a result of Year 2000 concerns; the level of international
expansion; and seasonal trends. A significant portion of the Company's revenues
has been, and the Company believes 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 the
Company's operating results. Revenues are also difficult to forecast because the
markets for the Company's products are rapidly evolving, and the sales cycle of
the Company and of its APs and OEMs, from initial evaluation to purchase, is
lengthy and varies substantially from end-user to end-user. To achieve its
quarterly revenue objectives, the Company depends 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, the Company has often recognized most of its 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 the Company's expectations and
may materially adversely affect the Company's 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. The Company also has recorded
generally lower sales in the first quarter than in the immediately preceding
quarter, as a result of, among other factors, end-users' purchasing and
budgeting practices and the Company's sales commission practices, and the
Company expects this pattern to continue in future years. To the extent that
future international operations constitute a higher percentage of total
revenues, the Company anticipates that it may also experience relatively weaker
demand in the third quarter as a result of reduced sales in Europe during the
summer months. A significant portion of the Company's 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, the Company believes that its quarterly
operating results will vary in the future, and that period-to-period comparisons
of its 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 the Company's
operating results will be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock would likely
be materially adversely affected.
Risks Associated with the Introduction of Optika eMedia. In March 1998, the
Company announced plans to introduce Optika eMedia, its 32-bit Web-based
software solution that enables organizations with high transaction volumes to
efficiently and inexpensively manage the high-volume flow of paper and
electronic data associated with running today's businesses. In July 1998, Optika
announced the controlled shipment of Optika eMedia to initial user sites that
included Fortune 1000 companies and other large organizations. Optika eMedia
became commercially available in late September 1998. Because the market for
Optika eMedia is new and evolving, it is difficult to assess or predict with any
assurance the growth rate and size of this market. There also can be no
assurance that the market for Optika eMedia will continue to develop. If the
market continues to develop more slowly than expected or becomes saturated with
competitors, or if the product does not achieve market acceptance, the Company's
business, results of operations and financial condition may be materially
adversely affected.
Optika eMedia has not been fully implemented in customers' environments and
as a result, there can be no assurance that Optika eMedia will not require
substantial software enhancements or modifications to satisfy performance
requirements of customers or to fix design defects of previously undetected
errors. Further, it is common for complex software programs such as Optika
eMedia to contain undetected errors when first released, which are discovered
only after the product has been used over time with different computer systems
and in varying applications and environments. While the Company is not aware of
any significant technical problems with Optika eMedia, there can be no assurance
that errors will not be discovered, or if discovered, that they will be
successfully corrected on a timely basis, if at all. The Company's future
business growth is substantially dependent on the continued development,
introduction and market acceptance of Optika eMedia. If customers experience
significant problems with implementation of Optika eMedia or are otherwise
dissatisfied with the functionality or performance of Optika eMedia, or if it
fails to achieve market acceptance for any other reason, the Company's business,
results of operations and financial condition may be materially adversely
affected.
Reliance on Indirect Distribution Channels; Potential for Channel Conflict.
The Company's future results of operations will depend on the success of its
marketing and distribution strategy, which has relied, to a significant degree,
upon APs and OEMs to sell and install the Company's 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 the Company's software.
There can be no assurance that any APs will continue to represent the Company or
sell its products. Furthermore, there can be no assurance that other APs, some
of which have significantly greater financial marketing and other resources than
the Company, will not develop or market software products which compete with the
Company's products or will not otherwise discontinue their relationship with, or
support of, the Company. Some of the Company's APs are small companies that have
limited financial and other resources which could impair their ability to pay
the Company. To date, the Company's inability to receive payments from such APs
has not had a material adverse effect on the Company's business, results of
operations or financial condition. The Company's OEMs occasionally compete with
the Company and its APs. Selling through indirect channels may also hinder the
Company's ability to forecast sales accurately, evaluate customer satisfaction,
provide quality service and support or recognize emerging customer requirements.
During 1998, the Company altered its sales strategy with the introduction of
a direct sales team. Although the Company has recruited a direct sales staff,
the Company has limited experience in marketing and selling its products on a
direct sales basis. Consequently, there can be no assurance the Company will be
successful in achieving a significant level of direct sales on a timely basis,
or at all. The Company's strategy of marketing its products directly and
indirectly (through APs and OEMs) may result in distribution channel conflicts.
To the extent that the Company, APs and OEMs target the same customers, they may
come into conflict with each other. Although the Company has attempted to avoid
potential conflicts, there can be no assurance that channel conflict will not
materially and adversely affect its relationship with existing APs and OEMs, or
adversely affect its ability to attract new APs and OEMs. The loss by the
Company of a number of its more significant APs or OEMs, the inability of the
Company to obtain qualified new APs or OEMs, or to obtain access to the channels
of distribution offering software products to the Company's targeted markets, or
the failure of APs or OEMs to pay the Company for its software, could have a
material adverse effect on the Company's business, results of operations, or
financial condition.
Rapid Technological Change: Dependence on New Product Development. The
market for the Company's products is characterized by rapid technological
change, changes in customer requirements, frequent new product introductions and
enhancements, and emerging industry standards. The Company's future performance
will depend in significant part upon its 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. The Company is unable to predict the future
impact of such technology changes on the Company's products. Moreover, the life
cycles of the Company's products are difficult to estimate. The Company's future
performance will depend in significant part upon its ability to enhance current
products, and to develop and introduce new products and enhancements that
respond to evolving customer requirements. The Company has in the recent past
experienced delays in the development and commencement of commercial shipments
of new products and enhancements, resulting in customer frustration and delay or
loss of revenues. The inability of the Company, 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 the Company's
business, results of operations and financial condition.
Product Concentration. To date, the majority of the Company's revenues have
been attributable to sales of the FilePower Suite and individual software
modules which comprise the FilePower Suite. Optika eMedia became generally
available in September 1998. The Company expects Optika eMedia and the FilePower
Suite to account for substantially all of its future revenues. The Company's
future financial performance will depend in general on the continued transition
from imaging software to e-commerce, and in particular on the successful
development, introduction and customer acceptance of new and enhanced versions
of its existing software products such as Optika eMedia. There can be no
assurance that such market will continue to grow or that the Company will be
successful in developing and marketing these or any other products, or that any
of these products will achieve widespread customer acceptance. If the e-commerce
software market grows more slowly than the Company currently anticipates, the
Company's business, results of operations, and financial condition would be
materially and adversely affected.
Lengthy and Complex Sales and Implementation Cycles; Dependence on Capital
Spending. The license of the Company's software products is typically an
executive-level decision by prospective end-users, and generally requires for
the Company and its APs and OEMs 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 the products offered by the Company
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
the Company has little or no control. The Company's future performance also
depends upon the capital expenditure budgets of its customers and the demand by
such customers for the Company's products. Certain industries to which the
Company sells its products, such as the financial services industry, are highly
cyclical. The Company's 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. There can be no assurance that such factors will not have a
material adverse effect on the Company's business, results of operations, and
financial condition.
Intense Competition. The market for the Company's products is intensely
competitive and can be significantly affected by new product introductions and
other market activities of industry participants. The Company's competitors
offer a variety of products and services to address the emerging market for
e-commerce solutions. The Company's principal direct competitors for its product
include FileNet Corporation, International Business Machines Corporation and
Eastman Kodak Company. The Company also competes with industry-specific
application vendors. Numerous other software vendors also compete in each
product area. Potential competitors include providers of document management
software, providers of document archiving products, and RDBMS ("Relational
Database Management Systems") vendors. In addition, the Company may face
competition from other established and emerging companies in new market segments
created by the release of Optika eMedia.
Many of the Company's current and potential competitors are substantially
larger than the Company, 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 the Company. Because the Company's products are designed to
operate in non-proprietary computing environments and because of low barriers to
entry in the e-commerce market, the Company expects additional competition from
established and emerging companies, as the market for e-commerce continues to
evolve. The Company expects its 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. Successful new
product introductions or enhancements by the Company's competitors could cause a
significant decline in sales or loss of market acceptance of the Company's
products and services, result in continued intense price competition, or make
the Company's products and services or technologies obsolete or noncompetitive.
To be competitive, the Company will be required to continue to invest
significant resources in research and development, and in sales and marketing.
There can be no assurance that the Company will have sufficient resources to
make such investments or that the Company will be able to make the technological
advances necessary to be competitive. In addition, 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 the Company's prospective customers. In addition, several
competitors have recently made, or attempted to make, acquisitions to enter the
market or increase their market presence. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any of which would
have a material adverse effect on the Company's business, results of operations
and financial condition. There can be no assurance that the Company will be able
to compete successfully against current or future competitors, or that
competitive pressures will not have a material adverse effect on the Company's
business, results of operations, and financial condition.
Management Changes; No Assurance of Successful Expansion of Operations. Most
of the Company's senior management team have joined the Company within the last
five years. There can be no assurance that these individuals will be able to
achieve and manage growth, if any, or build an infrastructure necessary to
operate the Company. The Company's ability to compete effectively and to manage
any future growth will require that the Company continue to assimilate new
personnel and to expand, train and manage its work force. The Company intends to
continue to increase the scale of its operations significantly to support
anticipated increases in revenues, and to address critical infrastructure and
other requirements. These increases have included and will include the leasing
of new space, the opening of additional foreign offices, potential acquisitions,
increases in research and development to support product development, and the
hiring of additional personnel in sales and marketing. The increased scale of
operations has resulted in significantly higher operating expenses, which are
expected to continue to increase significantly in the future. If the Company's
revenues do not correspondingly increase, the Company's results of operations
would be materially and adversely affected. Expansion of the Company's
operations may impose a significant strain on the Company's management,
financial and other resources. In this regard, any significant revenue growth
will be dependent in significant part upon the Company's expansion of its
marketing, sales and AP support capabilities. This expansion will continue to
require significant expenditures to build the necessary infrastructure. There
can be no assurance that the Company's efforts to expand its marketing, sales
and customer support efforts will be successful or will result in additional
revenues or profitability in any future period.
Dependence on Key Personnel. The Company's future performance depends to a
significant degree upon the continuing contributions of its key management,
sales, marketing, customer support, and product development personnel. The
Company has at times experienced, and continues to experience, difficulty in
recruiting qualified personnel, particularly in software development and
customer support. The Company believes 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 the Company's
employees. The Company has from time to time experienced turnover of key
management and technical personnel. The loss of key management or technical
personnel, or the failure to attract and retain key personnel, could have a
material adverse effect on the Company's business, results of operations, and
financial condition.
Dependence on Proprietary Technologies; Risk of Infringement. The Company's
performance depends in part on its ability to protect its proprietary rights to
the technologies used in its principal products. The Company relies on a
combination of copyright and trademark laws, trade secrets, confidentiality
provisions and other contractual provisions to protect its proprietary rights,
which are measures that afford only limited protection. Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy aspects of the Company's products, or to obtain and use information that
the Company regards as proprietary. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights as fully as do the
laws of the United States. There can be no assurance that the Company's means of
protecting its proprietary rights in the United States or abroad will be
adequate, or that competitors will not independently develop similar
technologies. There can be no assurance that third parties will not claim
infringement by the Company's products of their intellectual property rights.
The Company expects that software product developers will increasingly be
subject to infringement claims if the number of products and competitors in the
Company's 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 the Company to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on terms acceptable to the Company, if at all. In the event of a
successful claim of infringement against the Company's products and the failure
or inability of the Company to license the infringed or similar technology, the
Company's business, results of operations, and financial condition would be
materially and adversely affected.
The Company also licenses software from third parties, which is incorporated
into its products, including software incorporated into its viewer, image
decompression software and optical character recognition, and full-text engines.
These licenses expire from time to time. There can be no assurance that these
third-party software licenses will continue to be available to the Company on
commercially reasonable terms. While the Company believes that all of such
third-party software is available from alternate vendors, and the Company
maintains standard software escrow agreements with each of such parties,
agreements which provide the Company with access to the source code in the event
of their bankruptcy or insolvency, 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 the Company's business,
results of operations, and financial condition. In addition, the Company
generally does 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,
the Company may be forced to expend significant time and development resources
to replace the licensed software. Such an event would have a material adverse
effect upon the Company's business, results of operations, and financial
condition. The Company has entered into source code escrow agreements with a
limited number of its customers and resellers, requiring release of source code
in certain circumstances. Such agreements generally provide that such parties
will have a limited, non-exclusive right to use such code in the event that
there is a bankruptcy proceeding by or against the Company, if the Company
ceases to do business, or if the Company fails to provide timely responses to
identified product defects.
International Operations. Sales outside the United States accounted for
approximately 29%, 23% and 24% of the Company's revenues in 1996, 1997 and 1998,
respectively. An element of the Company's strategy is to expand its
international operations, including the development of certain third-party
distributor relationships and the hiring of additional sales representatives,
each of which involves a significant investment of time and resources. There can
be no assurance that the Company will be successful in expanding its
international operations. In addition, the Company has only limited experience
in developing localized versions of its products. There can be no assurance that
the Company will be able to successfully localize, market, sell and deliver its
products internationally. The inability of the Company to successfully expand
its international operations in a timely manner could materially and adversely
affect the Company's business, results of operations, and financial condition.
The Company's international revenues may be denominated in foreign or the U.S.
dollar currency. The Company does 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, could make the Company's software less price-competitive,
and could have a material adverse effect upon the Company's business, results of
operations, and financial condition. In addition, the Company's international
business is, and will continue to be, subject to a variety of risks, including:
delays in establishing international distribution channels; difficulties in
collecting international accounts receivable; increased costs associated with
maintaining international marketing and sales efforts; unexpected changes in
regulatory requirements, tariffs and other trade barriers; political and
economic instability; limited protection for intellectual property rights in
certain countries; lack of acceptance of localized products in foreign
countries; difficulties in managing international operations, potentially
adverse tax consequences including, restrictions on the repatriation of
earnings; and the burdens of complying with a wide variety of foreign laws.
There can be no assurance that such factors will not have a material adverse
effect on the Company's future international revenues and, consequently, the
Company's results of operations. Although the Company's products are subject to
export controls under United States laws, the Company believes it has obtained
all necessary export approvals. However, the inability of the Company to obtain
required approvals under any applicable regulations could adversely affect the
ability of the Company to make international sales.
Product Liability; Risk of Product Defects. The Company's license
agreements with its customers typically contain provisions designed to limit the
Company's exposure to potential product liability claims. However, it is
possible that the limitation of liability provisions contained in the Company's
license agreements may not be effective under the laws of certain jurisdictions.
Although the Company has not experienced any product liability claims to date,
the sale and support of products by the Company may entail the risk of such
claims, and there can be no assurance that the Company will not be subject to
such claims in the future. A successful product liability claim brought against
the Company could have a material adverse effect upon the Company's business,
results of operations, and financial condition. Software products such as those
offered by the Company frequently contain errors or failures, especially when
first introduced or when new versions are released. Although the Company
conducts extensive product testing, the Company has in the past released
products that contained defects, and has discovered software errors in certain
of its new products and enhancements after introduction. The Company could in
the future lose or delay recognition of revenues as a result of software errors
or defects, the failure of its products to meet customer specifications or
otherwise. The Company's products are typically intended for use in applications
that may be critical to a customer's business. As a result, the Company expects
that its customers and potential customers have a greater sensitivity to product
defects than the market for general software products. Although the Company's
business has not been materially and adversely affected by any such errors, or
by defects or failure to meet specifications, to date, there can be no assurance
that, despite testing by the Company and by current and potential customers,
errors or defects will not be found in new products or releases after
commencement of commercial shipments, or that such products will meet customer
specifications, resulting in loss or deferral of revenues, diversion of
resources, damage to the Company's reputation, or increased service and warranty
and other costs, any of which could have a material adverse effect upon the
Company's business, operating results, and financial condition. (See Year 2000
discussion).
Potential Volatility of Stock Price. The market price of shares of Common
Stock is likely to be highly volatile and may be significantly affected by
factors such as: actual or anticipated fluctuations in the Company's operating
results; announcements of technological innovations; new products or new
contracts by the Company or its competitors; sales of Common Stock by
management; sales of significant amounts of Common Stock into the market;
developments with respect to proprietary rights; conditions and trends in the
software and other technology industries; adoption of new accounting standards
affecting the software industry; changes in financial estimates by securities
analysts and others; general market conditions; and other factors that may be
unrelated to the Company or its 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 the Company's 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. There can be no
assurance that such litigation will not occur in the future with respect to the
Company. Such litigation, regardless of its outcome, would result in substantial
costs and a diversion of management's attention and resources which could have a
material adverse effect upon the Company's business, results of operations, and
financial condition.
Control by Existing Stockholders; Effects of Certain Anti-Takeover
Provisions. Members of the Board of Directors, and the executive officers of the
Company, together with members of their families and entities that may be deemed
affiliates of, or related to, such persons or entities, beneficially own
approximately 38% of the outstanding shares of Common Stock of the Company.
Accordingly, these stockholders could, if acting in concert, be able to elect
all members of the Company's Board of Directors and determine the outcome of
corporate actions requiring stockholder approval, such as mergers and
acquisitions. Certain provisions of the Company's Certificate of Incorporation,
equity incentive plans, Bylaws, and Delaware law may also discourage certain
transactions involving a change in control of the Company. This level of
ownership by such persons and entities, when combined with the Company's
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 control of the Company
and may adversely affect the voting and other rights of other holders of Common
Stock.
ITEM 2. PROPERTIES
The Company's 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. The Company occupies these
premises under a lease expiring March 2007. In support of its field sales and
support organization, the Company also leases facilities and offices in 20 other
locations in the United States, and one office in each of the following
locations: the United Kingdom, Germany, Brazil, Singapore, and Malaysia.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently not a party to any material litigation, and is
currently not aware of any pending or threatened litigation that could have a
material adverse effect upon the Company's business, operating results, or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded over-the-counter on the NASDAQ National
Market under the symbol "OPTK" The Company commenced its initial public
offering of Common Stock on July 25, 1996 at a price of $6 per share. Prior to
such date, there was no public market for the Common Stock. The following table
sets forth the high and low closing sale prices for the Common Stock for the
periods indicated, as reported on the NASDAQ National Market.
HIGH LOW
Quarter ended December 31, 1998 $ 3.88 $ 2.00
Quarter ended September 30, 1998 $ 3.69 $ 2.50
Quarter ended June 30, 1998 $ 3.88 $ 2.44
Quarter ended March 31, 1998 $ 4.25 $ 2.81
Quarter ended December 31, 1997 $ 5.75 $ 3.00
Quarter ended September 30, 1997 $ 5.94 $ 3.63
Quarter ended June 30, 1997 $ 5.75 $ 4.50
Quarter ended March 31, 1997 $ 7.13 $ 4.75
Quarter ended December 31, 1996 $ 8.25 $ 5.02
Quarter ended September 30, 1996 (from July
25,1996) $ 9.00 $ 4.88
The Company has not paid any cash dividends on its capital stock since its
inception, and does not expect to pay cash dividends on its Common Stock in the
foreseeable future. The Company's bank line of credit currently prohibits the
payment of cash dividends without the consent of the bank. Certain information
required by this item is included in the Company's Proxy Statement for the 1999
Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's consolidated financial statements and related
notes thereto, and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in Item 7. The consolidated statement of
operations data for each of the three years in the period ended December 31,
1998 and the consolidated balance sheet data at December 31, 1997 and 1998, are
derived from the audited consolidated financial statements included in Item 8.
The consolidated statement of operations data for each of the two years in the
period ended December 31, 1995, and the consolidated balance sheet data at
December 31, 1994, 1995 and 1996, are derived from audited consolidated
financial statements not included in this Annual Report on Form 10-K.
Year Ended December 31,
-----------------------------------------
1998 1997 1996 1995 1994
------- -------- -------- -------- --------
CONSOLIDATED STATEMENT OF (in thousands, except per share amounts)
OPERATIONS DATA:
Revenues:
Licenses........................ $ 11,128 $ 15,912 $ 13,406 $ 8,333 $ 7,562
Maintenance and other........... 7,419 5,751 3,297 2,135 1,690
------- -------- -------- -------- -------
Total revenues................ 18,547 21,663 16,703 10,468 9,252
Cost of revenues:
Licenses........................ 434 737 585 316 413
Maintenance and other........... 3,274 2,845 1,930 1,823 1,889
------- -------- -------- -------- -------
Total cost of revenues........ 3,708 3,582 2,515 2,139 2,302
------- -------- -------- -------- -------
Gross profit...................... 14,839 18,081 14,188 8,329 6,950
Operating expenses:
Sales and marketing............. 12,972 10,666 7,332 3,732 4,200
Research and development........ 5,332 4,978 4,624 3,658 3,112
General and administrative...... 2,714 1,829 1,367 1,461 1,513
Restructuring charges (1)....... 425 885 -- -- --
------- -------- -------- -------- -------
Total operating expenses...... 21,443 18,358 13,323 8,851 8,825
------- -------- -------- -------- -------
Income (loss) from operations..... (6,604) (277) 865 (522) (1,875)
Other (income) expense............ (218) (442) (229) 411 25
------- -------- -------- -------- -------
Income (loss) before provision
(benefit) for income taxes....... (6,386) 165 1,094 (933) (1,900)
Provision (benefit) for
income taxes..................... (1,276) -- (813) 29 (168)
------- -------- -------- -------- -------
Net income (loss)................. $ (5,110) $ 165 $ 1,907 $ (962)$(1,732)
======= ======== ======== ======== ========
Net income (loss) per common
share (2)........................ $ (0.73) $ 0.02 $ 0.45 $ (0.37)$ (0.67)
Weighted average number of common
shares outstanding (2)........... 6,989 6,782 4,246 2,620 2,581
Diluted net income (loss)per
common share (2)................. $ (0.73) $ 0.02 $ 0.30 $ (0.37)$ (0.67)
Diluted weighted average number
of common shares outstanding (2). 6,989 7,661 6,349 2,620 2,581
December 31,
------- -------- -------- ------- --------
1998 1997 1996 1995 1994
------- -------- -------- ------- --------
CONSOLIDATED BALANCE SHEET DATA: (in thousands)
Cash, cash equivalents and
short-term investments........... $ 7,811 $ 8,600 $ 11,499 $ 1,415 $ 771
Working capital................... 6,176 12,747 13,817 1,841 1,338
Total assets...................... 18,537 21,886 20,258 6,182 4,450
Long-term debt, excluding current
portion.......................... -- -- 136 266 353
Convertible preferred stock....... -- -- -- 4,804 3,343
Total stockholders' equity
(deficit)........................ 11,820 16,492 15,849 (1,967) (1,497)
(1) See Note 8 of Notes to Consolidated Financial Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements.
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 THE
COMPANY'S 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 provider of business-to-business electronic
commerce ("e-commerce") solutions. By leveraging the technology of the World
Wide Web, the Company's software bridges the gap between paper and electronic
commerce across the enterprise and throughout supply chains.
The license of the Company's software products is typically an
executive-level decision by prospective end-users and generally requires the
Company and its APs or OEMs to engage in a lengthy and complex sales cycle
(typically between six and twelve months from the initial contact date). The
Company distributes its products through a direct sales force and worldwide
network of approximately 170 APs and 5 OEMs. For 1998, approximately 69% of the
Company's license revenues were derived from its APs, approximately 10% of its
license revenues were derived from sales by OEMs and the remaining license fees
were derived from direct sales. However, no individual AP accounted for more
than 10% of the Company's total revenues. For the years ended December 31, 1996,
1997 and 1998, the Company generated approximately 29%, 23% and 24%,
respectively, of its total revenues from international sales.
The Company's revenues consist primarily of license revenues, which are
comprised of one-time fees for the license of the Company's products; and
maintenance revenues, which are comprised of fees for upgrades and technical
support. The APs and OEMs, which are responsible for the installation and
integration of the software, enter into sales agreements with the end-user, and
purchase software directly from the Company. The software is licensed directly
to the end-user by the Company through a standard shrink-wrapped license
agreement. Annual maintenance agreements are also entered into between the APs
and OEMs and the end-user, and the APs and OEMs then purchase maintenance
services directly from the Company. For 1997 and 1998, approximately 73% and
60%, respectively of the Company's total revenues were derived from software
licenses and approximately 18% and 28%, respectively, of the Company's total
revenues were derived from maintenance agreements. Other revenues, which are
comprised of training, consulting and implementation services, and third-party
hardware and software products, accounted for 9% and 12%, respectively, of the
Company's total revenues.
The Company adopted the provisions of Statement of Position 97-2, Software
Revenue Recognition (SOP 97-2), for transactions entered into after January 1,
1998. Under SOP 97-2, the Company generally recognizes 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 and
determinable and collectibility is probable. 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 of
fair value exists. Maintenance revenues are deferred and recognized ratably over
the maintenance period, which is generally one year. Other revenues are
recognized as services are performed.
The Company generally 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 30-day rights of return if an end-user does not accept the terms of the
software license, nor does it provide provisions for price adjustments or
rotation rights.
Based on the Company's research and development process, costs incurred
between the establishment of technological feasibility and general release of
the software products have not been material and therefore have not been
capitalized in accordance with Statement of Financial Accounting Standards No.
86. All research and development costs have been expensed as incurred.
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 TO DECEMBER 31, 1997
Revenues
Total revenues decreased 14.4% from $21.7 million for the year ended
December 31, 1997 to $18.5 million for the year ended December 31, 1998.
Licenses. License revenues decreased 30.1% from $15.9 million for the year
ended December 31, 1997 to $11.1 million for the year ended December 31, 1998,
representing approximately 73% and 60%, respectively of total revenues in both
periods. Management believes that the decrease is primarily a result of
customers choosing to delay purchase decisions of the Company's product until
the general release of Optika eMedia, which became commercially available in
late September 1998. License revenues generated outside of the United States
increased from approximately 23% of license revenues for the year ended December
31, 1997 to approximately 32% of license revenues for the year ended December
31, 1998.
Maintenance and Other. Maintenance revenues, exclusive of other revenues,
increased 40%, from approximately $3.7 million during the year ended December
31, 1997, to $5.2 million for the year ended December 31, 1998, representing
approximately 18% of total revenues for the year ended December 31, 1997 and 28%
of total revenues for the year ended December 31, 1998. This increase was
primarily a result of an increase in the number of installed systems. Other
revenue, consisting primarily of consulting services and training, represented
9% and 12% of total revenue for the years ended December 31, 1997 and 1998,
respectively. The increase in other revenues as a percentage of total revenues
was primarily due to increased consulting, project management and implementation
services resulting from the Company's direct sales effort which began in April
1998.
Cost of Revenues
Licenses. Cost of licenses consist primarily of royalty payments to
third-party software vendors and costs of product media, duplication, packaging
and fulfillment. Cost of licenses decreased from $737,000, or 5% of license
revenues, for the year ended December 31, 1997, to $434,000, or 4% of license
revenues, for the year ended December 31, 1998, primarily as a result of the
decreased license revenue sold during the period.
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 the Company's APs, OEMs and end-users, and the cost of
third-party software products. Cost of maintenance and other increased from $2.8
million, or 49% of maintenance and other revenues, for the year ended December
31, 1997, to $3.3 million, or 44% of maintenance and other revenues, for the
year ended December 31, 1998. The decrease as a percentage of maintenance and
other revenues is primarily a result of the leverage received from utilizing
existing resources to service the Company's increased maintenance base.
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 increased from $10.7 million, or 49% of total revenues, for the year
ended December 31, 1997, to $13.0 million, or 70% of total revenues, for the
year ended December 31, 1998. This increase was primarily attributable to
additional costs resulting from the launch of eMedia, the expansion of the North
American sales staff and the further expansion of staff during the year in sales
offices in Brazil and Germany. In addition, during 1998, the Company began
paying commissions to AP's on direct sales. The Company anticipates that sales
and marketing expenses will continue to increase in absolute dollars in future
quarters as the Company continues to expand its North American sales force.
Research and Development. Research and development expenses consist
primarily of salaries and other related expenses for research and development
personnel, and of the cost of facilities and equipment. Research and development
expenses increased from $5.0 million, or 23% of total revenues, for the year
ended December 31, 1997, to $5.3 million, or 29% of total revenues, for the year
ended December 31, 1998. The Company expects research and development expenses
to continue to increase slightly in absolute dollars in 1999 to fund the
development of new products and product enhancements.
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 increased from $1.8 million, or 8% of total revenues,
for the year ended December 31, 1997, to $2.7 million, or 15% of total revenues,
for the year ended December 31, 1998. The increase was primarily due to the
Company writing off or reserving Asian accounts receivable during 1998. General
and administrative expenses are expected to decrease in absolute dollars in 1999
as the Company does not anticipate the need for any further accounts receivable
write-offs.
Restructuring of Asian Operations. Due to the current economic status and
instability in the Asian markets, the Company made the decision to shut down two
of its four Asian offices in the third quarter of 1998, thus reducing future
operational risks and cash outflows into the region. This restructuring resulted
in a $425,000 one-time write-off including $125,000 of goodwill, $200,000 of
severance costs and $100,000 of lease termination and other costs. All actions
relating to the restructuring plan were completed during 1998 and no
restructuring accruals remain as all cash payments have been made as of December
31, 1998.
Restructuring of Healthcare Operations. During the fourth quarter of 1997,
the Company made the decision to exit the vertical healthcare market. The
restructuring plan involved the closure of the Company's Boston facility, and
the termination of approximately 14 employees. The Company incurred a 1997
restructuring charge of $885,000 related to this restructuring consisting of
$422,000 of severance and benefits for terminated employees, $312,000 of asset
write-downs and leased facility executory costs, and $ 151,000 of other costs
related to the restructuring consisting principally of legal and other
miscellaneous costs. All actions relating to the restructuring plan were
completed during 1998 and no restructuring accruals remain as all cash payments
have been made as of December 31, 1998.
Other income, net. Other income, net consists primarily of interest earned
on the Company's investing activities offset by interest expense on the
Company's capitalized lease obligations, and other debt, and foreign currency
translation adjustments. The Company incurred a net other income of $442,000
during the year ended December 31, 1997, compared to a net other income of
$218,000 during the year ended December 31, 1998. Other income for 1997 and 1998
was primarily a result of interest income derived from the investment of the
Company's initial public offering proceeds offset by foreign currency
translation losses.
Benefit from Income Taxes. The Company has recorded a partial 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.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 TO DECEMBER 31, 1996
Revenues
Total revenues increased 30% from $16.7 million for the year ended December
31, 1996 to $21.7 million for the year ended December 31, 1997.
Licenses. License revenues increased 19% from $13.4 million for the year
ended December 31, 1996 to $15.9 million for the year ended December 31, 1997,
representing approximately 80% and 73%, respectively of total revenues in both
periods. This increase was primarily the result of increased sales of components
of the FilePower Suite. The increase in license revenues was primarily the
result of increased sales in the United States compared to the prior year.
License revenues generated outside of the United States decreased from
approximately 31% of license revenues for the year ended December 31, 1996 to
approximately 23% of license revenues for the year ended December 31, 1997.
Maintenance and Other. Maintenance revenues, exclusive of other revenues,
increased 55%, from approximately $2.4 million during the year ended December
31, 1996, to $3.7 million for the year ended December 31, 1997, representing
approximately 14% of total revenues for the year ended December 31, 1996 and 18%
of total revenues for the year ended December 31, 1997. This increase was
primarily a result of an increase in the number of installed systems and the
Company's improved tracking and monitoring of expiring maintenance contracts.
Other revenue, consisting primarily of consulting services and training,
represented 6% and 9% of total revenue for the years ended December 31, 1996 and
1997, respectively. The increase in other revenues was primarily due to
increased revenues from the Company's Solution Services group.
Cost of Revenues
Licenses. Cost of licenses consist primarily of royalty payments to
third-party software vendors; product author commissions, whereby certain of the
Company's software developers are entitled to receive a specified percentage of
product sales; and costs of product media, duplication, packaging and
fulfillment. Cost of licenses increased from $585,000, or 4% of license
revenues, for the year ended December 31, 1996, to $737,000, or 5% of license
revenues, for the year ended December 31, 1997, primarily as a result of the
increased license revenue sold during the period.
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 the Company's APs, OEMs and end-users, and the cost of
third-party software products. Cost of maintenance and other increased from $1.9
million, or 59% of maintenance and other revenues, for the year ended December
31, 1996, to $2.8 million, or 49% of maintenance and other revenues, for the
year ended December 31, 1997. The decrease as a percentage of maintenance and
other revenues is primarily a result of the leverage received from utilizing
existing resources to service the Company's increased maintenance base.
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 increased from $7.3 million, or 44% of total revenues, for the year
ended December 31, 1996, to $10.7 million, or 49% of total revenues, for the
year ended December 31, 1997. This increase was primarily attributable to
additional costs resulting from the establishment of sales offices in Australia,
Brazil, Germany and the expansion of the North American sales staff.
Research and Development. Research and development expenses consist
primarily of salaries and other related expenses for research and development
personnel, and of the cost of facilities and equipment. Research and development
expenses increased from $4.6 million, or 28% of total revenues, for the year
ended December 31, 1996, to $5.0 million, or 23% of total revenues, for the year
ended December 31, 1997.
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 increased from $1.4 million, or 8% of total revenues,
for the year ended December 31, 1996, to $1.8 million, or 8% of total revenues,
for the year ended December 31, 1997. The increase was primarily due to the
Company incurring additional expenses as a public company and costs to support
expanding worldwide operations.
Other income, net. Other expenses consist primarily of interest expense on
the Company's capitalized lease obligations, and other debt, offset by interest
earned on the Company's financing activities. The Company incurred a net other
income of $229,000 during the year ended December 31, 1996, compared to a net
other income of $442,000 during the year ended December 31, 1997. Other income
for 1996 and 1997 was primarily a result of interest income derived from the
investment of the Company's initial public offering proceeds.
Provision (benefit) for Income Taxes. Due to the Company's history of
pre-tax losses, and to the uncertainty surrounding the timing of realizing
benefits of its favorable tax attributes, the Company had recorded a valuation
allowance against all of its favorable tax assets as of December 31, 1995. As
required by Statement of Financial Accounting Standards No. 109, management
concluded that a valuation allowance against deferred tax assets was no longer
appropriate as of December 31, 1996. Specifically, during 1996, the Company
generated four straight quarters of profitability and pre-tax income of $1.1
million. and consequently released the valuation allowance resulting in a
favorable effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments at December 31, 1998 were $7.8 million,
decreasing $800,000 from December 31, 1997. The decrease in cash and short-term
investments is primarily due to the Company's net loss for the year, capital
expenditures associated with computer equipment, largely offset by accounts
receivable collections.
For the year ended December 31, 1997, net cash used in operating activities
was $733,000, compared to net cash provided of $106,000 for the year ended
December 31, 1998. The decrease in cash used from operating activities was due
to an increase in accounts receivable collections.
Cash provided by investing activities was $384,000 for the year ended
December 31, 1997 compared to cash provided of $3,080,000 for the year ended
December 31, 1998. The increase in cash provided by investing activities
consisted primarily of sales of short-term securities offset by purchases of
property and equipment.
Cash provided from financing activities was $77,000 for the year ended
December 31, 1997 compared to cash provided from financing activities of
$423,000 for the year ended December 31, 1998. Cash provided from financing
activities resulted primarily from proceeds of the Company's issuance of common
stock under the Company's employee stock purchase plan and stock option
exercises.
At December 31, 1998, the Company's principal sources of liquidity included
cash and short-term investments of $7.8 million. In addition, the Company has a
secured credit facility for up to $3.0 million, bearing interest at the bank's
prime rate. As of December 31, 1998, the Company had $2.8 million available for
borrowing.
The Company believes that its current cash and short-term investments,
together with anticipated cash flow from operations and its bank credit
facility, will be sufficient to meet its working capital and capital expenditure
requirements for at least the next 12 months. Thereafter, the Company may
require additional funds to support such activity through public or private
equity financings or from other sources. There can be no assurance that
additional financing will be available at all or that, if available, such
financing will be obtainable on terms favorable to the Company and would not be
dilutive.
YEAR 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the Year 2000 approaches. Many currently installed
computer and software products are coded to accept only two digit entries in the
date code field. These date code fields will need to accept four digit entries
to distinguish 21st century dates from 20th century dates. As a result, in less
than one year, computer systems and/or software used by many companies may need
to be upgraded to comply with such "Year 2000" requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance. The Company believes that the purchasing
patterns of customers and potential customers may be significantly affected by
Year 2000 issues. Moreover, the Company believes some companies may delay
software purchasing decisions until after January 1, 2000, in hopes that Year
2000 issues will have been identified and corrected prior to their purchase.
Many companies are expending significant resources to correct or patch their
current software systems for Year 2000 compliance. These expenditures may result
in reduced funds available to purchase products or services such as those
offered by the Company. Additionally, Year 2000 issues could cause a significant
number of companies, including current customers of the Company; to reevaluate
their current system needs, and as a result, consider switching to other systems
or suppliers. This could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company is currently taking steps to address its Year 2000 readiness
issues in the following areas:
1. The Company's products (including embedded software technology)
2. Internal systems (includes information technologies and non-information
technologies)
3. Readiness of third parties with whom the Company has business relationships
The Company has assigned two dedicated Year 2000 cross functional teams
(CFT's), one CFT to address the Company's products and one CFT to address
internal systems and third parties. Each CFT has an executive sponsor and meets
regularly to carry out the process of identifying potential Year 2000 issues,
assessing their impact on the Company, putting in place an action plan to
address the problem (which will include contingency planning) and following
through to ensure the plan was carried out and tested.
The Company's Products
The Company designs its products and services to be Year 2000 compatible.
Nevertheless the Company has performed initial Year 2000 compliance testing on
both Optika eMedia and FilePower product suites. During the testing of the
FilePower product suite, a few minor deficiencies were found in the product. The
Company is currently addressing these deficiencies and a product patch is
expected to be introduced during first quarter of 1999. This patch will be
available electronically to customers who have maintenance agreements with the
Company. Costs to address these deficiencies are expected to include only
internal development staff time, which has not been separately tracked, and is
expected to have no effect on the Company's operating results. No current
projects have been delayed or are expected to be delayed due to using internal
staff on this issue.
The Company has developed the eMedia product with Year 2000 compliance in
mind. Testing of the product has been performed throughout the development cycle
for Year 2000 compliance. In addition, the Company is currently working with a
third-party to extensively test the Year 2000 compliance of the product. This
testing is currently expected to be completed during the first quarter of 1999.
While the Company is not aware of any current deficiencies that would result in
the product not being compliant, it is possible that deficiencies may be
discovered during the testing process or even subsequent to the testing process.
Costs to address these deficiencies are expected to include only internal
development staff time, which will not be separately tracked, and is expected to
have no material effect on the Company's operating results.
To help ensure Year 2000 compliance, the Company plans to perform
additional tests on its FilePower and Optika eMedia product suites. The
additional testing is expected to be completed during the first quarter of 1999.
Any issues found through the additional tests will be addressed in the first
half of 1999.
Although the Company has designed its products and services to be Year
2000 capable and tests its products and services, including third-party software
that is incorporated into its products and services, specifically for Year 2000
compliance, there can be no assurance that the Company's products and services,
particularly when such products and services incorporate third-party software,
contain all necessary date code changes. To the extent that the Company's
software does not comply with Year 2000 requirements, it will be necessary for
the Company to commit the necessary resources to correct the software. Although
the costs cannot be reasonably estimated, there can be no assurance that
potential system interruptions or the cost necessary to update the software will
not have a material adverse effect on the Company's business, financial
condition and results of operations.
Internal Systems
The Company's internal systems include both its information technology
("IT") and non-IT systems. The Company conducted an assessment of its internal
IT systems including third-party software and hardware technology and its non-IT
systems (such as its security system, building equipment, and phone systems).
The Company has identified its Mission Critical Systems and reviewed them for
Year 2000 compliance by contacting each vendor and requesting documentation on
Year 2000 readiness. The Company will do testing of its Mission Critical Systems
in the second quarter of 1999. It is estimated that the testing of the Mission
Critical Systems will cost approximately $121,000 during 1999. The bringing of
the Mission Critical Systems to Year 2000 readiness will be covered under
software/hardware maintenance agreements and/or normal product upgrades.
However, any failure of one or more of the Company's mission critical IT systems
to become Year 2000 compliant due to unanticipated problems could limit access
of employees to critical information, require the Company to process information
manually or result in other inconveniences or inefficiencies for the Company and
its customers that may divert management's time and attention, as well as
financial and personnel resources from normal business activities. The majority
of the Company's IT software applications are produced by Microsoft. Any failure
by Microsoft to address the Year 2000 issue will have a material impact on the
Company's operations. All non-Mission Critical Systems are deemed to be
non-essential to the business and will be upgraded or replaced if a Year 2000
issue exists. Year 2000 compliance issues relating to non-Mission Critical
Systems are not expected to have a material financial impact on operations or
the Company's ability to carry out its operations.
Third Parties
The Company has documentation on the Year 2000-compliance status of its
key vendors. The key third parties to which the Company is concerned are its
investing, banking, and payroll vendors. The Company will attempt to obtain Year
2000-compliance status from certain other third parties by the second quarter of
1999. If the Company's current or future vendors, including investing and
banking relationships, fail to achieve Year 2000 compliance or if they divert
substantial technology expenditures to address the Year 2000 issue, thus
impacting their ability to serve the Company, the Company will move its
relationships to another vendor that is Year 2000 compliant. Management believes
there will be no material adverse affect on the Company of this potential
action.
Disclaimer
The discussion of the Company's efforts, and management's expectations,
relating to Year 2000 compliance are forward-looking statements. The Company's
ability to achieve Year 2000 compliance and the level of incremental costs
associated therewith could be adversely impacted by, among other things, the
availability and cost of programming and testing resources, vendors' abilities
to modify proprietary software, unanticipated problems in the ongoing compliance
review and failure by the Company to identify a critical Year 2000 compliance
problem.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company has determined that the adoption of the recently issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," No. 131, "Disclosures about Segments of an Enterprise and
Related Information,", No. 132, "Employer's Disclosures about Pensions and Other
Postretirement Benefits", and No. 133, "Accounting for Derivative Instruments
and Hedging Activities" will not have a material impact on the Company's
financial statements or footnote disclosures.
The Company adopted Statement of Position 97-2, "Software Revenue
Recognition" (SOP 97-2) for transactions entered into by the Company beginning
in 1998. On December 31, 1998 Statement of Position 98-9, "Modification of SOP
97-2, Software Revenue Recognition, with respect to certain transactions" (SOP
98-9), was issued superseding SOP 98-4 and is effective for transactions entered
into in fiscal years beginning after to March 15, 1999. If the Company's future
business practices involve the granting of specified upgrade rights to future
releases, extended payment terms, rights to additional products, subscription
licensing arrangements or other provisions impacted by SOP 97-2, as amended by
SOP 98-4 and SOP 98-9, the SOP may have a material impact on the timing of the
Company's revenue recognition and could result in the deferral of significant
amounts of revenues.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14(a) for an index to the financial statements and supplementary
financial information which are attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
Certain information required by Part III is omitted from this Annual Report
on Form 10-K in that the Registrant 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
which specifically address the items set forth herein are incorporated by
reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
The information required by this item relating to the Company's directors
and nominees 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 "Compliance with Section 16(a) of the Securities Exchange Act of
1934" in the Company's Proxy Statement for the 1999 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" in Part I of the Report on Form
10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included under the caption
"Executive Compensation and Related Information" in the Company's Proxy
Statement for the 1999 Annual Meeting of the Stockholders and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is included under the caption "Stock
Ownership of Certain Beneficial Owners and Management" in the Company's Proxy
Statement for the 1999 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 the Company's Proxy Statement for the 1999 Annual Meeting of
Stockholders and is incorporated herein by reference.
PART IV
ITEM 14. 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 Accountants...............................28
Consolidated Balance Sheet as of December 31, 1998 and 1997.....29
Consolidated Statement of Operations for each of the three
years in the period ended December 31, 1998....................30
Consolidated Statement of Stockholders' Equity (Deficit) for
each of the three years in the period ended December 31, 1998..31
Consolidated Statement of Cash Flows for each of the three
years in the period ended December 31, 1998....................32
Notes to Consolidated Financial Statements......................33
2. Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts for the
three years in the period ended December 31, 1998..............42
Schedules not listed above have been omitted because they are not
required, not applicable, or the required information is shown in the
financial statements and related notes thereto.
3. Exhibits - See Item 14 (c) below.
(b) Reports on Form 8-K
Optika Inc. filed a report on Form 8-K dated December 8, 1998
announcing under Item 5 the name change from Optika Imaging
Systems, Inc. to Optika Inc.
(c) Exhibits
See Exhibit Index on page 45
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Optika Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in stockholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of Optika Inc. and its subsidiaries at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
January 25, 1999
Broomfield, Colorado
OPTIKA INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except share and per share amounts)
December 31, December 31,
1998 1997
Assets ------------ ------------
Current assets:
Cash and cash equivalents......................... $ 6,811 $ 3,202
Short-term investments............................ 1,000 5,398
Accounts receivable, net of allowance for
doubtful accounts of $443 and $212 at December
31, 1998 and 1997, respectively.................. 4,571 8,555
Other current assets.............................. 511 986
---------- ----------
Total current assets .......................... 12,893 18,141
---------- ----------
Fixed assets, net.................................. 3,136 2,721
Deferred tax asset................................. 2,438 728
Other assets, net of accumulated amortization of
$0 and $317 at December 31, 1998 and 1997,
respectively...................................... 70 296
---------- ----------
$ 18,537 $ 21,886
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt................. $ -- $ 15
Accounts payable ................................. 710 742
Accrued expenses.................................. 1,446 1,166
Accrued compensation expense...................... 1,206 735
Restructuring reserve............................. -- 291
Deferred revenue ................................. 3,355 2,445
---------- ----------
Total current liabilities ..................... 6,717 5,394
---------- ----------
Commitments and contingencies (Notes 4 and 9)
Common stockholders' equity:
Common stock; $.001 par value; 25,000,000 shares
authorized; 7,114,573 and 6,890,724 shares issued
and outstanding at December 31, 1998 and 1997,
respectively..................................... 7 7
Additional paid-in capital........................ 17,617 17,179
Accumulated deficit............................... (5,804) (694)
---------- ----------
Total stockholders' equity .................... 11,820 16,492
---------- ----------
$ 18,537 $ 21,886
========== ==========
The accompanying notes are an integral part of these financial statements.
OPTIKA INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
Year Ended December 31,
1998 1997 1996
-------- -------- --------
Revenues:
Licenses................................ $ 11,128 $ 15,912 $ 13,406
Maintenance and other................... 7,419 5,751 3,297
-------- -------- --------
Total revenues........................ 18,547 21,663 16,703
Cost of revenues:
Licenses................................ 434 737 585
Maintenance and other................... 3,274 2,845 1,930
-------- -------- --------
Total cost of revenues................ 3,708 3,582 2,515
-------- -------- --------
Gross profit............................. 14,839 18,081 14,188
Operating expenses:
Sales and marketing..................... 12,972 10,666 7,332
Research and development................ 5,332 4,978 4,624
General and administrative.............. 2,714 1,829 1,367
Restructuring charges................... 425 885 --
-------- -------- --------
Total operating expenses............. 21,443 18,358 13,323
-------- -------- --------
Income (loss) from operations............ (6,604) (277) 865
Other income, net........................ (218) (442) (229)
-------- -------- --------
Income (loss) before benefit from
income taxes............................ (6,386) 165 1,094
Benefit from income taxes................ (1,276) -- (813)
-------- -------- --------
Net income (loss)........................ $ (5,110) $ 165 $ 1,907
======== ======== ========
Net income (loss) per share.............. $ (0.73) $ 0.02 $ 0.45
Weighted average number of
common shares outstanding............... 6,989 6,782 4,246
Diluted net income (loss) per share...... $ (0.73) $ 0.02 $ 0.30
Diluted weighted average number
of common shares outstanding............ 6,989 7,661 6,349
The accompanying notes are an integral part of these financial statements.
OPTIKA INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands except share amounts)
Total
Common
Common Stock Additional Stockholders'
Paid-in Accumulated Equity
Shares Amount Capital Deficit (Deficit)
---------- ------- ----------- -------------- ------------
Balance at December 31, 1995. 2,843,930 $ 799 $ -- $ (2,766) $ (1,967)
Company reincorporation (796) 796
Common stock issued upon
exercise of stock options.. 125,925 102 102
Common stock issued upon
initial public offering.... 2,200,000 2 11,001 11,003
Manditorily redeemable
preferred stock converted
to common stock............ 1,500,464 2 4,802 4,804
Net income.................. 1,907 1,907
---------- ------- ----------- -------------- ------------
Balance at December 31, 1996. 6,670,319 7 16,701 (859) 15,849
Common stock issued upon
exercise of stock options.. 115,445 172 172
Common stock issued pursuant
to employee stock purchase
plan....................... 70,760 306 306
Common stock issued upon
exercise of warrants....... 34,200
Net income.................. 165 165
---------- ------- ----------- -------------- ------------
Balance at December 31, 1997. 6,890,724 7 17,179 (694) 16,492
Common stock issued upon
exercise of stock options.. 151,961 266 266
Common stock issued pursuant
to employee stock purchase
plan....................... 71,888 172 172
Net loss.................... (5,110) (5,110)
---------- ------- ----------- -------------- ------------
Balance at December 31, 1998. 7,114,573 $ 7 $ 17,617 $ (5,804) $ 11,820
========== ======= =========== ============== ============
The accompanying notes are an integral part of these financial statements.
OPTIKA INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Year Ended December 31,
1998 1997 1996
--------- --------- ---------
Cash Flows From Operating Activities
Net income (loss)........................ $ (5,110) $ 165 $ 1,907
Adjustments to reconcile net income (loss)
to net cash provided by (used) in
operating activities:
Depreciation and amortization........... 1,018 599 492
Loss on disposal of assets.............. 75 16 4
Deferred tax benefit.................... (1,403) (90) (885)
Change in assets and liabilities:
Accounts receivable, net.............. 3,984 (2,789) (2,566)
Other assets.......................... 204 (20) (453)
Accounts payable...................... (32) (66) 182
Accrued expenses...................... 460 866 597
Deferred revenue...................... 910 586 313
--------- --------- ---------
Net cash provided by (used) in operations 106 (733) (409)
--------- --------- ---------
Cash Flows From Investing Activities
Capital expenditures..................... (1,318) (2,243) (585)
Sale (purchase) of short-term investments 4,398 2,627 (8,025)
--------- --------- ---------
Net cash provided by (used) in
investing activities.................... 3,080 384 (8,610)
--------- --------- ---------
Cash Flows From Financing Activities
Principal payments on long-term debt..... (15) (401) (456)
Proceeds from issuance of long-term debt. -- -- 429
Proceeds from issuance of common stock... 438 478 11,105
--------- --------- ---------
Net cash provided by financing activities 423 77 11,078
--------- --------- ---------
Net increase (decrease) in cash and
cash equivalents........................ 3,609 (272) 2,059
Cash and cash equivalents at beginning
of period............................... 3,202 3,474 1,415
--------- --------- ---------
Cash and cash equivalents at
end of period........................... $ 6,811 $ 3,202 $ 3,474
========= ========= =========
Supplemental Disclosure of Non-cash
Transactions
Interest paid............................ $ -- $ 30 $ 50
Income taxes paid........................ -- 37 --
The accompanying notes are an integral part of these financial statements.
Optika Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Summary of Significant Accounting Policies
Optika Inc. (formerly Optika Imaging Systems, Inc.), a Delaware corporation,
and its subsidiaries ("Optika" or the "Company") was formed in 1988 and is a
leading provider of business-to-business electronic commerce solutions. By
leveraging the technology of the World Wide Web, the Company's software bridges
the gap between paper and electronic commerce across the enterprise and
throughout supply chains. The Company licenses its software under license
agreements and provides services including maintenance, training and
implementation.
Summary of Significant Accounting Policies
Principles of Consolidation
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.
Revenue Recognition
The Company adopted the provisions of Statement of Position 97-2,
Software Revenue Recognition (SOP 97-2), for transactions entered into after
January 1, 1998. Under SOP 97-2, the Company generally recognizes 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 and
determinable and collectibility is probable. 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 of
fair value exists. Maintenance revenues are deferred and recognized ratably over
the maintenance period, which is generally one year. Other revenues are
recognized as services are performed. The Company generally 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 30-day rights of return if an end-user does
not accept the terms of the software license, nor does it provide provisions for
price adjustments or rotation rights.
For transactions entered into prior to January 1, 1998 the Company
recognized revenue in accordance with Statement of Position 91-1, Software
Revenue Recognition. The Company recognized license revenues generally upon
shipment when no significant vendor obligations remained and collectibility was
probable. License revenues related to contracts with significant post-delivery
performance obligations were recognized when the Company's obligations were no
longer significant or when the customer accepted the product, as applicable.
Cash Equivalents and Short-term Investments
The Company classifies short-term investments with an original maturity of
three months or less as cash equivalents. Short-term investments consist of
Corporate and U.S. Government obligations maturing within one year. Such
short-term investments are classified as held-to-maturity as defined by
Statement of Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" and accordingly carried at amortized
cost.
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 five years. Leasehold improvements are amortized over the life of
the improvement or lease term, whichever is shorter.
Software Development Costs
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 software development costs.
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 exchange gains or losses included in the
consolidated statements of operations were not material 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 assets. 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,
short-term investments, trade receivables and payables and long-term debt,
approximate their fair values.
Stock Compensation Plans
The Company applies APB Option No. 25, Accounting for Stock Issued to
Employees, in accounting for its stock option and employee stock purchase
plans. The Company has adopted the disclosure provisions of SFAS No. 123,
Accounting for Stock-Based Compensation.
Net Income (Loss) Per Common Share
The FASB issued SFAS No. 128 in February of 1997 and subsequently in
February 1998, the SEC issued SAB 98 which clarified the treatment of nominal
issuances of stock. This pronouncement establishes new standards for computing
and presenting earnings per share ("EPS") on a basis that is more comparable to
international standards and provides for the presentation of basic and diluted
EPS. Basic EPS is computed by dividing net income by the weighted average number
of shares outstanding during the period. Diluted EPS is computed using the
weighted average number of shares outstanding plus all dilutive potential common
shares outstanding. Prior period EPS have been restated to conform with the new
statement.
The following is the reconciliation of the numerators and denominators of
the basic and diluted EPS computations (in thousands, except per share data):
Year Ended
December 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
Earning Per Share:
Net income (loss)................. $ (5,110) $ 165 $ 1,907
Weighted average common shares
outstanding...................... 6,989 6,782 4,246
Net income (loss) per common share $ (.73) $ 0.02 $ 0.45
Effect of Dilutive Securities:
Options and warrants.............. -- 879 2,103
Diluted weighted average common
shares outstanding............... 6,989 7,661 6,349
Diluted net income (loss) per
common share..................... $ (.73) $ 0.02 $ 0.30
In 1998, all options were excluded from the dilutive stock calculation
because of their antidilutive effect on net loss per share. Options of 753,000
and 179,500 were excluded from dilutive stock option calculations for 1997 and
1996, respectively, because their exercise prices were greater than the average
fair market value of the Company's stock for the period, and as such they would
be antidilutive.
Concentration
The Company has historically relied on a limited number of products 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. One AP receivable
accounted for greater than 10% of the accounts receivable balance at December
31, 1998. Receivables from end users are not concentrated in any particular
industry.
2. Property and Equipment
Property and Equipment consisted of the following (in thousands):
December 31,
1998 1997
------- -------
Computer and office equipment.............. $ 3,779 $ 2,973
Leasehold improvements..................... 898 754
Furniture, fixtures and other.............. 642 422
------- -------
5,319 4,149
Less accumulated depreciation and
amortization.............................. (2,183) (1,428)
------- -------
$ 3,136 $ 2,721
======= =======
3. Line of Credit
The Company has a line of credit through October 1999, whereby it is able to
draw up to $3.0 million bearing interest at the bank's prime rate. At December
31, 1998, $2.8 million was available for borrowing thereunder. Pursuant to the
terms of the credit facility, any loans under said facility are secured by all
of the Company's assets, with the exception of intellectual property and would
be subject to certain covenants. The Company has no other debt outstanding at
December 31, 1998.
4. Lease Obligations
The Company has non-cancelable operating lease arrangements for office space
and certain office equipment. Future minimum annual operating lease payments are
as follows (in thousands):
Operating
Lease
Obligations
---------
1999 ............................... $ 761
2000 ............................... 610
2001 ............................... 572
2002 ............................... 580
2003 ............................... 597
Thereafter.......................... 2,122
---------
$ 5,242
=========
Rent expense related to these and other operating leases approximated
$1,103,000, $1,019,000, and $727,000 for the years ended December 31, 1998, 1997
and 1996.
5. Income Taxes
The Company's benefit from income taxes is comprised of the following (in
thousands):
Year Ended
December 31,
-----------------------------
1998 1997 1996
-------- ------- --------
Current:
Federal........................ $ -- $ 6 $ --
State.......................... -- 8 --
Foreign........................ 127 76 72
Deferred:
Federal........................ (1,131) (68) (813)
State.......................... (272) (22) (72)
-------- ------- --------
Total benefit from income taxes $ (1,276) $ -- $ (813)
======== ======= ========
The Company's net deferred income tax assets are comprised of the tax
effects of the following (in thousands):
December 31, December 31,
1998 1997
--------- ---------
Deferred Tax Assets
Net operating loss carryforwards.... $ 2,520 $ 190
Depreciation and amortization....... 141 --
Tax credit carryforwards ........... 945 455
Accrued expenses.................... 352 330
--------- ---------
Deferred tax asset before valuation
allowance.......................... 3,958 975
Valuation allowance................. (1,520) --
--------- ---------
Net deferred tax asset.............. $ 2,438 $ 975
========= =========
The benefit from income taxes differs from the amount computed by applying
the U.S. federal income tax rate of 34% to income (loss) before income taxes as
follows (in thousands):
Year Ended
December 31,
1998 1997 1996
U.S. federal income tax expense
(benefit) at statutory rate......... $(2,171) $ 56 $ 372
Increases (decreases) resulting from:
State taxes, net of federal benefit (224) 5 38
Non-deductible items................ 27 38 93
Increase (decrease) in valuation
allowance.......................... 1,520 -- (1,359)
Foreign tax rate differentials...... (127) (10) 20
Tax credits......................... (420) (87) --
Other............................... 119 (2) 23
------- ------- -------
Benefit from income taxes............ $(1,276) $ -- $ (813)
======= ======= =======
At December 31, 1998, the Company has net operating loss carryforwards of
approximately $6,063,000 which expire beginning in 2009 through 2019.
Additionally, the Company has various tax credit carryforwards aggregating
approximately $945,000 which expire beginning in 2005 through 2019.
The Company has recorded a partial 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
In July 1996 the Company effected a reincorporation from the State of
California into the State of Delaware, which changed the par value of the
Company's stock.
Mandatorily Redeemable Convertible Preferred Stock
Upon the closing of the Company's initial public offering, all Series A, B
and C preferred stock automatically converted to shares of common stock at their
respective conversion rates. Series A and Series C preferred stock converted
into one share of common stock for each share of preferred stock. Series B
converted into approximately 1.011 shares of common stock for each share of
preferred stock.
Stock Compensation Plans
At December 31, 1998 the Company has two stock-based compensation plans. The
Company applies APB Opinion 25 and related Interpretations in accounting for its
plans. Accordingly, no compensation cost has been recognized for its fixed stock
option plan and its employee stock purchase plan. 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
FASB Statement 123, the Company's pro-forma results of operations and pro-forma
net income (loss) per share would have been as follows:
(In thousands, except per share data)
1998 1997 1996
-------- ------- --------
Net income (loss):
As reported $ (5,110) $ 165 $ 1,907
SFAS No. 123 Pro-forma (5,997) (727) 1,403
Net income (loss) per share:
As reported $ (.73) $ 0.02 $ 0.45
SFAS No. 123 Pro-forma (.86) (0.11) 0.33
Diluted net income (loss) per share:
As reported $ (.73) $ 0.02 $ 0.30
SFAS No. 123 Pro-forma (.86) (0.11) 0.22
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 2,790,000
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 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 and warrant grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions used for grants in 1998, 1997 and 1996, respectively; no estimated
dividends; expected volatility of 133% for 1998 and 83% for 1997 and 77% for
1996; risk-free interest rates between 4.23% and 5.64% in 1998, 5.70% and 6.75%
in 1997 and 5.36% and 6.69% in 1996; and expected option terms of 5 years for
all years.
A summary of the status of the Company's listed option plan as of
December 31, 1998, 1997, and 1996 and changes during the years then ending is
presented below. Included in the summary below are 95,000 warrants issued of
which 66,262 were exercised in 1997 in exchange for 34,200 shares of common
stock. At December 31, 1998 and 1997, 28,738 warrants are outstanding and
exercisable. For the year ended, December 31, 1998, 264,500 options to purchase
common stock of the Company were re-priced at $3.18 per option share.
1998 1997 1996
------------------ ------------------- -------------------
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 2,074 $ 2.98 1,933 $ 2.38 1,644 $ 1.56
Granted 723 $ 3.21 604 $ 4.65 492 $ 4.72
Exercised (152) $ 1.75 (181) $ 1.63 (126) $ 0.80
Forfeited (773) $ 4.32 (282) $ 3.53 (77) $ 2.50
------------------ ------------------- -------------------
Outstanding at
end of year 1,872 $ 2.61 2,074 $ 2.98 1,933 $ 2.38
================== =================== ===================
Options and warrants
exercisable at
year end 1,259 $ 2.28 1,385 $ 2.34 729 $ 1.39
Weighted average
fair value of
options granted
during the year $ 2.82 $ 3.27 $ 3.16
The following table summarizes information about fixed stock options and
warrants outstanding at December 31, 1998:
Options and Warrants Outstanding Options and Warrants
Exercisable
-------------------------------------- -------------------------
Number Weighted Weighted Number Weighted
Range of Outstanding Average Average Exercisable Average
Exercise at 12/31/98 Remaining Exercise at 12/31/98 Exercise
Price (000's) Contractual Life Price (000's) Price
---------- ---------------- ---------- ------------- -----------
$ 0.44- 1.87 915 4.7 $ 1.53 906 $ 1.52
$ 2.50- 4.00 833 8.8 $ 3.32 238 $ 3.42
$ 5.00- 7.50 124 7.5 $ 5.90 115 $ 5.86
---------- ----------------- ---------- ------------- -----------
1,872 6.7 $ 2.61 1,259 $ 2.28
========== ================= ========== ============= ===========
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was adopted
by the Board of Directors in May 1996 and approved by the Company's stockholders
in June 1996. Under the Purchase Plan, the Company is authorized to issue up to
250,000 shares of common stock to eligible employees. Under the terms of the
Purchase Plan, 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.
Under the Purchase Plan, the Company sold 71,888 shares to employees in 1998
and 70,760 shares to employees in 1997. 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 1998 and 1997, respectively: no
estimated dividends for both years; expected volatility of 133% and 83%; risk
free interest rates of 5.19% and 5.22% for 1998 and 5.37% and 5.46% for 1997;
and an expected life of 0.5 years for both years. The weighted-average fair
values of those purchase rights granted in 1998 and 1997 were $1.35 and $2.19,
respectively.
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 $163,000 in 1998 and did not contribute
to this plan in 1997 or 1996.
7. Segment Information
In 1998, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 131 "Disclosures About Segments of an Enterprise and Related
Information". The Company has only one segment under the criteria of SFAS
No. 131. The table below presents information by geographic area as of and
for the respective fiscal periods:
(In thousands)
1998 1997 1996
-------- -------- --------
TOTAL REVENUES ATTRIBUTABLE TO:
United States $ 14,076 $ 16,670 $ 11,880
International 4,471 4,993 4,823
-------- -------- --------
Total $ 18,547 $ 21,663 $ 16,703
======== ======== ========
Revenue is classified based on the country in which the Company's Advantage
Partner or customer is located.
8. Restructuring Charges
Restructuring of Asian Operations
Due to the current economic status and instability in the Asian markets, the
Company made the decision to shut down two of its four Asian offices in the
third quarter of 1998, thus reducing future operational risks and cash outflows
into the region. This restructuring resulted in a $425,000 one-time write-off
including $125,000 of goodwill, $200,000 of severance costs and $100,000 of
lease termination and other costs. All actions relating to the restructuring
plan were completed during 1998 and no restructuring accruals remain as all cash
payments have been made as of December 31, 1998.
Restructuring of Healthcare Operations
During the fourth quarter of 1997, the Company made the decision to exit the
vertical healthcare market. The restructuring plan involved the closure of the
Company's Boston facility, and the termination of approximately 14 employees.
The Company incurred a 1997 restructuring charge of $885,000 related to this
restructuring consisting of $422,000 of severance and benefits for terminated
employees, $312,000 of asset write-downs and leased facility executory costs,
and $151,000 of other costs related to the restructuring consisting principally
of legal and other miscellaneous costs. All actions relating to the
restructuring plan were completed during 1998 and no restructuring accruals
remain as all cash payments have been made as of December 31, 1998.
9. 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 letters of credit as
security for performance on certain contracts and, as a result, is contingently
liable in the amount of approximately $220,000 at December 31, 1998.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Beginning Allowance Ending
Balance Increase Write-offs Balance
--------- --------- ---------- -------
Deducted from asset account-
allowance for doubtful accounts
Year ended
December 31, 1998............. $ 212 $ 746 $ 515 $ 443
Year ended
December 31, 1997............. 112 167 67 212
Year ended
December 31, 1996............. 90 35 13 112
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized on
February 22, 1999.
OPTIKA INC.
By: /s/ MARK K. RUPORT
--------------------------------
Mark K. Ruport
President, Chief Executive Officer
and Chairman of the Board
By: /s/ STEVEN M. JOHNSON
--------------------------------
Steven M. Johnson
Chief Financial Officer, Vice President, Finance and
Administration, Secretary and Chief Accounting Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Mark K. Ruport and Steven M. Johnson, and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this Report
on Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, including all amendments thereto, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
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 February 22, 1999:
Signature Title
--------- -----
By: /s/ MARK K. RUPORT Chief Executive Officer and
---------------------------- Chairman of the Board
Mark K. Ruport
By: /s/ STEVEN M. JOHNSON Chief Financial Officer, Vice
---------------------------- President, Finance &
Steven M. Johnson Administration, Secretary and
Chief Accounting Officer
By: /s/ PAUL CARTER Co-Founder and Director
----------------------------
Paul Carter
By: /s/ RICHARD A. BASS Director
----------------------------
Richard A. Bass
By: /s/ JAMES E. CRAWFORD Director
----------------------------
James E. Crawford
By: /s/ ROBERT L. GETT Director
----------------------------
Robert L. Gett
By: /s/ HARRY S. GRUNER Director
----------------------------
Harry S. Gruner
By: /s/ GRAHAM O. KING Director
----------------------------
Graham O. King
EXHIBIT INDEX
-------------
Exhibit
No. Description
- --------- -------------------------------------------------------------
3.1(1) Certificate of Incorporation of the Registrant.
3.1.1 Certificate of Ownership and Merger
3.2(1) Form of First Amended and Restated Certificate of
Incorporation of the Registrant.
3.3(1) Form of Second Amended and Restated Certificate of
Incorporation of the Registrant.
3.4(1) Bylaws of the Registrant.
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.
10.1(1) Form of Indemnification Agreement between the Registrant and
each of its directors and officers.
10.2(1) The Registrant's 1994 Stock Option/Stock Issuance Plan, as
restated and amended.
10.4(1) The Registrant's Employee Stock Purchase Plan.
10.7(1) Employment Agreement by and between the Registrant and
Mr. Mark K. Ruport effective February 18, 1995.
10.8(1) Employment Agreement by and between the Registrant and
Mr. Steven M. Johnson, effective May 15, 1996.
10.9(1) Employment Agreement by and between the Registrant and
Mr. Marc Fey, effective May 4, 1994.
10.10(1) Form of Business Solutions Partner (Reseller) Agreement.
10.11(1) Form of FilePower Suite Software License Agreement.
10.12(1) Technology Transfer Agreement, dated February 20, 1992,
by and between the Registrant, Mr. Paul Carter and Mr.
Malcolm Thomson.
10.16(3) Lease Agreement dated October 11, 1996, by and between the
Registrant and Integrated Property Management, Inc. LLP 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(4) Loan and Security Agreement dated as of October 15, 1998, by
and between the registrant and Silicon Valley Bank.
21.1(1) Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
24.1 Power of Attorney. (Included on Signature Page)
27.1 Financial Data Schedule.
(1) Incorporated by reference to identically numbered exhibits included in
the Registrant's Registration Statement on Form S-1 (File No. 333-03637),
as amended.
(2) 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, 1996.
(3) Incorporated by reference to an exhibit to the Company's Annual Report on
Form 10-K (File No. 001-11751) for the year ended December 31, 1996.
(4) Incorporated by reference to an exhibit to the Company's Quarterly Report
on Form 10-Q (File No. 001-11751) for the quarter ended September 30, 1998.
(5) Incorporate by reference to an exhibit to the Company's Annual Report on
Form 10-K (File No. 001-11751) for the year ended December 31, 1997