10-Q 1 form10qv1.txt QUARTERLY REPORT ON FORM-10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 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, CO (Zip Code) (Address of principal executive offices) (719) 548-9800 (Registrant's telephone number, including area code) 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes . No X . ------ ------- 9,206,036 shares of the registrant's common stock, $0.001 par value per share, were outstanding as of November 12, 2003. INDEX PAGE PART I - FINANCIAL INFORMATION Item 1 - Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002 (Unaudited) 1 Condensed Consolidated Statements of Operations for the three- month and nine-month periods ended September 30, 2003 and 2002 (Unaudited) 2 Condensed Consolidated Statements of Cash Flows for the nine- month periods ended September 30, 2003 and 2002 (Unaudited) 3 Notes to Condensed Consolidated Financial Statements (Unaudited) 4 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 15 Item 4 - Controls and Procedures 15 PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K 16 Signatures 17

OPTIKA INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The unaudited condensed consolidated financial statements included herein reflect all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary to fairly present our consolidated financial position, results of operations, and cash flows for the periods presented. Certain information and footnote disclosures normally included in audited financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission's (SEC's) rules and regulations. The consolidated results of operations for the periods ended September 30, 2003 are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year ending December 31, 2003. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2002, included in the Annual Report on Form 10-K of Optika Inc. (the "Company"). 2. Net Income (Loss) Per Common Share Basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted loss per share is computed using the weighted average number of common shares outstanding plus all dilutive potential common shares outstanding. During the first nine months of 2003, 397,000 options to purchase our common stock were granted. During the first nine months of 2002, 275,500 options to purchase our common stock were granted. The following is the reconciliation of the numerators and denominators of the basic and diluted income (loss) per share computations (in thousands except per share data): Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 ---- ---- ---- ---- Basic Net Income (loss) Per Share: Net income (loss)................ $ 183 $ 45 $ (663) $ (552) Basic weighted average common shares outstanding.............. 8,917 8,314 8,601 8,280 Basic net income (loss) per common share.................... $ 0.02 $ 0.01 $ (0.08) $ (0.07) Effect of dilutive securities Dilutive effect of stock options. 830 71 -- -- Assumed conversion of preferred stock.......................... 1,097 878 -- -- ------ ------ ------ ------ Diluted weighted average common shares outstanding.............. 10,845 9,263 8,601 8,280 Diluted net income (loss) per common share.................... $ 0.02 $ 0.00 $ (0.08) $ (0.07) For the three months ended September 30, 2003 and 2002, 1.2 million and 2.5 million options and warrants to purchase our common stock, respectively, were excluded from the dilutive stock calculation because of their antidilutive effect on net income per share. For the nine months ended September 30, 2003 and 2002, 3.3 million and 2.9 million options and warrants to purchase our common stock, respectively, were excluded from the dilutive stock calculation because of their antidilutive effect on net loss per share. Stock Based Compensation We apply the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations including FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25," to account for our fixed plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. SFAS No. 123, "Accounting for Stock-Based Compensation," establishes accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans, as amended by SFAS No. 148, "Accounting for Stock Based Compensation - Transition and Disclosure - an Amendment to SFAS 123." As allowed by SFAS No. 123, we have elected to continue to apply the intrinsic value-based method of accounting described above, and have adopted the disclosure requirements of SFAS No. 123, as amended by SFAS No. 148. Had compensation cost for our stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, our pro-forma net loss and pro-forma net loss per share would have been as follows: (In thousands, except per share data) Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 ---- ---- ---- ---- Net income (loss): As reported $ 183 $ 45 $ (663) $ (552) SFAS No. 123 Pro-forma (104) (323) (1,488) (1,656) Basic net income (loss) per share As reported $ 0.02 $ 0.01 $ (0.08) $ (0.07) SFAS No. 123 Pro-forma (0.01) (0.04) (0.17) (0.20) Diluted net income (loss) per share As reported $ 0.02 $ 0.00 $ (0.08) $ (0.07) SFAS No. 123 Pro-forma (0.01) (0.03) (0.17) (0.20) 3. Goodwill and Intangible Assets In May 2003, we acquired Select Technologies, Inc., a developer of records management solutions headquartered in Boise, Idaho. This acquisition strengthens our ability to provide solutions that allow customers to be in compliance with the record retention, control and disposition requirements imposed by recent regulatory initiatives. Operations of the acquired Select Technologies, Inc. business, as well as assets and liabilities of the acquired business, are included in the unaudited condensed consolidated financial statements from the date of acquisition. The impact on operations was insignificant from the acquisition date to September 30, 2003 Under the terms of the acquisition agreement we paid approximately $1.415 million for the privately held company, consisting of 500,000 shares of our common stock valued at $1.38 per share, which was the average closing price from the three days prior to the closing date, and $725,000 cash. Additionally, the sellers have the ability to earn up to an additional $600,000 over the next three years based on attainment of certain revenue targets from the Acorde Records Manager product. In accordance with SFAS No. 141, "Business Combinations," the acquisition was accounted for using the purchase method of accounting. Based on the purchase price of approximately $1.415 million, plus direct acquisition costs of approximately $95,000 and the assumption of approximately $299,000 in net liabilities, the purchase price was allocated as follows (in thousands): Goodwill $ 1,166 Customer Relationships 283 Intellectual Property 300 Non-Compete Agreements 60 Net Liabilities Assumed (299) ---------- $ 1,510 The amount assigned to intellectual property and non-compete agreements is being amortized on a straight-line basis over five years. The amount assigned to customer relationships is being amortized on a straight-line basis over ten years. Goodwill will be evaluated annually for impairment in accordance with SFAS No. 142, "Goodwill and Intangible Assets." Amortization expense for intangible assets was $33,000 for the nine months ended September 30, 2003. Estimated amortization expense for the remainder of 2003 and the five succeeding fiscal years is as follows (in thousands): Estimated Amortization Expense 2003 (remainder) $ 25 2004 100 2005 100 2006 100 2007 100 2008 58 4. Contingencies We are, from time to time, subject to certain claims, assertions or litigation by outside parties as part of our ongoing business operations. The outcome of any such contingencies are not expected to have a material adverse effect upon our business, results of operations and financial condition. Other than as described below, we are currently not a party to any significant legal proceedings. 5. New Accounting Pronouncements In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based Compensation--Transition and Disclosure--as Amendment to FAS 123." SFAS No. 148 provides two additional transition methods for entities that adopt the preferable method of accounting for stock based compensation. Further, the statement requires disclosure of comparable information for all companies regardless of whether, when or how an entity adopts the preferable, fair value based method of accounting. As we continued to disclose the fair value of stock option compensation only, SFAS No. 148 did not have any impact on our financial position or results of operations. In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and is effective for financial instruments entered into or modified after May 31, 2003. We do not expect the adoption of this standard to have a material impact on our results of operations or financial position. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as information contained elsewhere in this Report, contains statements that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include statements regarding the intent, belief or current expectations of us, our directors or our officers with respect to future events and financial performance.. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those projected in the forward-looking statements as a result of various factors, including those described below under the caption "Business Risks", which could cause actual results to differ materially from historical results or those anticipated. Overview Optika(R) Inc. is a leading enterprise content management ("ECM") provider of imaging, workflow, collaboration and records management software. Optika's Acorde family of ECM software solutions, including Acorde Context(TM), Acorde Process(TM), Acorde Resolve(TM), Acorde Application Link and Acorde Records Manager(TM), allows our customers to streamline their business processes, eliminate paper and increase operational efficiencies. Acorde provides the ability to access and store multiple formats of business content, both digital and non-digital; automate processes across the organization and externally with partners and customers; and enable online collaboration around these paper-intensive or complex processes in real and near time. Built on a three-tier, scalable and extensible platform, Acorde delivers a variety of client desktops, including Windows and Web-based desktops, and easily integrates with third-party applications such as enterprise resource planning systems. The Acorde product family allows organizations to improve processing efficiency, reduce operating costs and increase customer and partner service and satisfaction, resulting in significant return on investment. The license of our software products is typically an executive-level decision by prospective end-users and generally requires our sales staff and/or our third-party resellers, or "Advantage Partners" ("APs"), to engage in a lengthy and complex sales cycle (typically between six and twelve months from the initial contact date). We distribute our products through a direct sales force and a network of APs. For 2002, approximately 48% of our license revenues were derived from our APs and the remaining license fees were derived from direct sales. However, no individual customer accounted for more than 10% of our total revenues. For the years ended December 31, 2002, 2001 and 2000, we generated approximately 9%, 12% and 15%, respectively, of our total revenues from international sales. Our revenues consist primarily of license revenues, which are comprised of one-time fees for the license of our products, service revenues, and maintenance revenues, which are comprised of fees for upgrades and technical support. Our APs, which are responsible for the installation and integration of the software for their customers, enter into sales agreements with the end-user, and license software directly from us. We license software directly to the end-user through software license agreements. Annual maintenance agreements are also entered into between the APs and the end-user, and the APs then purchase maintenance services directly from us. For 2002 and 2001, approximately 32% and 38%, respectively, of our total revenues were derived from software licenses and approximately 43% of our total revenues were derived from maintenance agreements. For 2002 and 2001, other revenues, which are comprised of training, consulting and implementation services, and third-party hardware and software products, accounted for 25% and 19%, respectively, of our total revenues. Critical Accounting Policies Our significant accounting policies are described in Note 1 in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2002. The accounting policies used in preparing our interim consolidated financial statements for the three and nine months ended September 30, 2003 are the same as those described in our Annual Report on Form 10-K. Our critical accounting policies are those having the most impact to the reporting of our financial condition and results and those requiring significant judgments and estimates. These policies include those related to (1) revenue recognition, (2) accounting for income taxes and (3) accounting for preferred stock. Our critical accounting policies are described in more detail in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2002. With respect to these critical accounting policies, our management believes that the application of judgments and assessments is consistently applied and produces financial information that fairly depicts the results of operations for all periods presented. Results of Operations Three and Nine Months Ended September 30, 2003 Compared to the Three and Nine Months Ended September 30, 2002 Revenues Total revenues increased 10% to $14.4 million for the nine months ended September 30, 2003 from $13.0 million for the nine months ended September 30, 2002. Total revenues increased 15% to $5.4 million for the three months ended September 30, 2003 from $4.7 million for the three months ended September 30, 2002. Licenses. License revenues increased 20% to $4.8 million, for the nine months ended September 30, 2003, from $3.9 million for the nine months ended September 30, 2002, and increased 22% to $2.0 million for the three months ended September 30, 2003 from $1.6 million for the three months ended September 30, 2002. License revenues represented 33% and 30% of total revenues for the nine months ended September 30, 2003 and 2002, respectively, and represented 37% and 35% for the three months ended September 30, 2003 and 2002, respectively. The increase in license revenues for the first nine months of 2003 is primarily due to increases in sales made within North America by our APs and direct networks, compared to the first nine months of 2002. License revenues generated outside of the United States accounted for approximately 15% of our total license revenues for the nine months ended September 30, 2003, compared to 9% for the same period in 2002, and 17% and 8% for the three months ended September 30, 2003 and 2002, respectively. The increase in international license revenues as a percentage of total license revenue is a result of better than expected Asian license revenues in the third quarter of 2003. Maintenance and Other. Maintenance revenues, exclusive of other revenue, increased 23% to $7.0 million for the nine months ended September 30, 2003 from $5.7 million for the nine months ended September 30, 2002, and increased 23% to $2.4 million for the three months ended September 30, 2003 from $2.0 million for the three months ended September 30, 2002. Maintenance revenue represented 49% and 44% of total revenues for the nine months ended September 30, 2003 and 2002, respectively, and represented 46% and 43% of total revenues for the three months ended September 30, 2003 and 2002, respectively. This increase was primarily a result of increased pricing for value-added services provided to our customer base and the addition of new customers. Other revenues, consisting primarily of consulting services, training and consulting fees, represented 18% and 26% of total revenues for the nine months ended September 30, 2003 and 2002, respectively, and 21% and 22% of total revenues for the three months ended September 30, 2003 and 2002, respectively. The decrease in other revenue as a percentage of total revenue for the first nine months of 2003 was primarily due to decreased service contracts to our direct customer base. Cost of Revenues Licenses. Cost of licenses consists primarily of royalty payments to third-party vendors and costs of product media, duplication, packaging and fulfillment. Cost of licenses increased to $547,000, or 12% of license revenues, from $432,000, or 11% of license revenues, for the nine months ended September 30, 2003 and 2002, respectively, and decreased to $195,000, or 10% of license revenues, from $214,000, or 13% of license revenues, for the three months ended September 30, 2003 and 2002, respectively. The absolute dollar decrease in cost of licenses for the three months ended September 30, 2003 is attributable to decreased software sales that included third party products. The absolute dollar increase in costs of licenses for the nine months ended September 30, 2003 is attributable to increased software sales that included third party products. Maintenance and Other. Costs of maintenance and other costs consists of the direct and indirect costs of providing software maintenance and support, training and consulting services to our APs, OEMs and end-users, and the cost of third-party software products. Cost of maintenance and other costs remained constant at $2.7 million, or 28% and 30% of maintenance and other revenues, for the nine months ended September 30, 2003 and 2002, respectively. Cost of maintenance and other costs decreased to $909,000, or 27% of maintenance and other revenues, from $911,000, or 30% of maintenance and other revenues, for the three months ended September 30, 2003 and 2002, respectively. Cost of maintenance and other costs decreased as a percentage of maintenance and other revenue as a result of decreased third-party contracting to fulfill consulting service contracts for the first nine months of 2003. Operating Expenses Sales and Marketing. Sales and marketing expenses consist primarily of salaries, commissions and other related expenses for sales and marketing personnel, and marketing, advertising and promotional expenses. Sales and marketing expenses increased to $6.9 million, or 48% of total revenues, for the nine months ended September 30, 2003 from $5.5 million, or 42% of total revenues, for the nine months ended September 30, 2002. Sales and marketing expenses increased to $2.3 million, or 43% of total revenues, for the three months ended September 30, 2003 from $1.9 million, or 40% of total revenues, for the three months ended September 30, 2002. The increase in sales and marketing expenses is due to continued investment in sales and support staff in our North American sales channels. We anticipate that sales and marketing expenses will continue to be slightly higher in future periods as we grow our sales staff and integrate the operations of Select Technologies, Inc. into our organization. Research and Development. Research and development expenses consist primarily of salaries and other related expenses for research and development personnel, contractors, as well as the cost of facilities and equipment. Research and development expenses decreased to $3.6 million, or 25% of total revenues, for the nine months ended September 30, 2003 from $3.8 million, or 30% of total revenues, for the nine months ended September 30, 2002. Research and development expenses decreased to $1.2 million, or 23% of total revenues, for the three months ended September 30, 2003 from $1.3 million, or 27% of total revenues, for the three months ended September 30, 2002. The decrease in research and development is primarily the result of our planned efficiencies in our development organization. We anticipate that research and development expenses will be flat in future quarters. 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 to $1.4 million, or 10% of total revenues, for the nine months ended September 30, 2003 from $1.2 million, or 9% of total revenues, for the nine months ended September 30, 2002. General and administrative expenses increased to $555,000, or 10% of total revenues, for the three months ended September 30, 2003 from $384,000, or 8% of total revenues, for the three months ended September 30, 2002. The increase in general and administrative expenses is primarily due to an increase in our allowance for doubtful accounts during the third quarter of 2003 over the same period in 2002 as well as overall increased insurance costs and administrative costs due to the acquisition of Select Technologies, Inc. We anticipate that general and administrative expenses will continue at approximately this level throughout the year. Other Income, net. Other income, net, consists primarily of interest earned on our investing activities. Other income, net, was $50,000 for the nine months ended September 30, 2003 compared to other income, net, of $108,000 for the nine months ended September 30, 2002. Other income, net, was zero for the three months ended September 30, 2003, compared to other income, net, of $31,000 for the three months ended September 30, 2002. The decrease in other income, net, was the result of decreased interest income due to a lower investment base and a decline in interest rates. Income Taxes. We have recorded a valuation allowance against our carryforward tax benefits to the extent that we believe that it is more likely than not all of such benefits will not be realized. We perform an assessment of benefit realization and the associated valuation allowance on a quarterly basis. Our assessment of this valuation allowance was made using all available evidence, both positive and negative. In particular, we considered both our historical results and our projections of profitability for reasonably foreseeable future periods. Our realization of the recorded net deferred tax assets is dependent on future taxable income and therefore, we cannot be assured that such benefits will be realized. Based on management's current projections, we will continue to evaluate releasing a portion of the valuation allowance if planned operating results are achieved. Liquidity and Capital Resources Cash and cash equivalents, including short-term investments, at September 30, 2003 was $7.9 million, decreasing by approximately $552,000 from December 31, 2002. The decrease in cash and cash equivalents is primarily due to the cash used in the acquisition of Select Technologies, Inc. and our net loss. For the nine months ended September 30, 2003, net cash provided by operating activities was $463,000, compared to net cash provided by operating activities of $252,000 for the nine months ended September 30, 2002. This increase in cash provided by operating activities for the nine months ended September 30, 2002 primarily resulted from improved cash collection on our accounts receivable and an increase in our deferred revenues. Cash used by investing activities was $84,000 for the nine months ended September 30, 2003, compared to cash used by investing activities of $156,000 for the nine months ended September 30, 2002. This decrease in cash used by investing activities is primarily due to the sale of marketable securities during 2003, which was offset by the cash paid for the acquisition of Select Technologies, Inc. Cash used by financing activities was $134,000 for the nine months ended September 30, 2003, compared to cash provided by financing activities of $111,000 for the nine months ended September 30, 2002. This increase in cash used in financing activities resulted primarily from payment of short-term debt assumed in the acquisition of Select Technologies, Inc. net of $189,000 from common stock issuances. At September 30, 2003, our principal sources of liquidity include cash and short-term investments of $7.9 million. In addition, we have a secured credit facility for up to $3.0 million, bearing interest at the bank's prime rate. As of September 30, 2003, we had $2.5 million available for borrowing and no debt outstanding. We believe that our current cash and short-term investments, together with anticipated cash flows from operations and our bank credit facility, will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. Business Risks In evaluating our business, you should carefully consider the business risks discussed in this section. Operating Result Fluctuations. Our sales and other operating results have varied significantly in the past and may vary significantly in the future as a result of potential factors such as: o The size and timing of significant orders and their fulfillment o Rate of rollout, demand and customer adoption of our product offerings o Ability of third party products embedded or to be embedded in our products and our ability to negotiate license agreements with such third parties on favorable terms o Changes in pricing policies by us or our competitors o The number, timing and significance of product enhancements and new product announcements by us and our competitors o Changes in the level of our operating expenses o Warranty and customer support expenses o Changes in our end-users' financial condition and budgetary processes o Changes in our sales, marketing and distribution channels o Product life cycles o Software bugs and other product quality problems o The cancellation of licenses during the warranty period or nonrenewal of maintenance agreements o Customization and integration problems with the end-user's legacy system o Changes in our business strategy o Changes in accounting pronouncements o The level of international expansion and foreign currency exchange rates o Seasonal trends A significant portion of our revenues have been, and we believe will continue to be, derived from a limited number of orders, and the timing of such orders and their fulfillment have caused, and are expected to continue to cause, material fluctuations in our operating results. Revenues are also difficult to forecast because the markets for our products are rapidly evolving, and our sales cycle and the sales cycle of our APs is lengthy and varies substantially from end-user to end-user. To achieve our quarterly revenue objectives, we depend upon obtaining orders in any given quarter for shipment in that quarter. Product orders are typically shipped shortly after receipt. Consequently, order backlog at the beginning of any quarter has in the past represented only a small portion of that quarter's revenues. Furthermore, we have often recognized most of our revenues in the last month, or even in the last weeks or days, of a quarter. Accordingly, a delay in shipment near the end of a particular quarter may cause revenues in a particular quarter to fall significantly below our expectations and may materially adversely affect our operating results for such quarter. Conversely, to the extent that significant revenues occur earlier than expected, operating results for subsequent quarters may fail to keep pace with results of previous quarters or even decline. We also have recorded generally lower sales in the first quarter than in the immediately preceding fourth quarter, as a result of, among other factors, end-users' purchasing and budgeting practices and our sales commission practices. To the extent that future international operations constitute a higher percentage of total revenues, we anticipate that we may also experience relatively weaker demand in the third quarter as a result of reduced sales in Europe during the summer months. Significant portions of our expenses are relatively fixed in the short term. Accordingly, if revenue levels fall below expectations, operating results are likely to be disproportionately and adversely affected. As a result of these and other factors, we believe that our quarterly operating results will vary in the future, and that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. Furthermore, due to all of the foregoing factors, it is likely that in some future quarter our operating results will be below the expectations of public market analysts and investors. In such event, the price of our common stock would likely decline and such decline could be significant. Product Offerings. The Optika Acorde family of products account for substantially all of our current license revenue. Our future financial performance will depend in general on the acceptance of our product offerings, and in particular on the successful development, introduction and customer acceptance of new and enhanced versions of our products. Capital Requirements. We believe that our existing cash balances and liquid resources will be sufficient to fund our operating activities, capital expenditures and other obligations through at least the next twelve months. Recently capital market conditions have materially and adversely affected the ability of many technology companies to raise additional capital in both private and public markets. If market conditions do not improve and we are not successful in generating sufficient cash flow from operations or in raising additional capital when required in sufficient amounts and on terms acceptable to us, we may be required to reduce our planned expenditures and scale back the scope of our business plan. Key Employees. Most of our senior management team has joined us within the last five years. These individuals may not be able to achieve and manage growth, if any, or build an infrastructure necessary for us to operate. Our ability to compete effectively and to manage any future growth will require that we continue to assimilate new personnel and to train and manage our work force. Our future performance depends to a significant degree upon the continuing contributions of our key management, sales, marketing, customer support, and product development personnel. We have at times experienced, and continue to experience, difficulty in recruiting qualified personnel, particularly in sales, software development and customer support. We believe that there may be only a limited number of persons with the requisite skills to serve in those positions, and that it may become increasingly difficult to hire such persons. Competitors and others have in the past, and may in the future, attempt to recruit our employees. We have from time to time experienced turnover of key management, sales and technical personnel. The loss of key management, sales or technical personnel, or the failure to attract and retain key personnel, could harm our business. Sales and Distribution Channels. Our future results of operations will depend on the success of our marketing and distribution strategy, which relies, to a significant degree, upon APs to sell and install our software, and provide post-sales support. These relationships are usually established through formal agreements that generally do not grant exclusivity, do not prevent the distributor from carrying competing product lines and do not require the distributor to purchase any minimum dollar amount of our software. Some APs may not continue to represent Optika or sell our products. Other APs, some of which have significantly greater financial, marketing and other resources than we have, may develop or market software products that compete with our products or may otherwise discontinue their relationship with, or support of, us. Some of our APs are small companies that have limited financial and other resources that could impair their ability to pay us. Selling through indirect channels may hinder our ability to forecast sales accurately, evaluate customer satisfaction or recognize emerging customer requirements. Our future results of operations also depend on the success of our efforts to build a direct sales force. Product Updates and Releases. The markets for our products are characterized by rapid technological change, changes in customer requirements, frequent new product introductions and enhancements, and emerging industry standards. Our future performance will depend in significant part upon our ability to respond effectively to these developments. The introduction of products embodying new technologies and the emergence of new industry standards can render existing products obsolete, unmarketable or noncompetitive. We are unable to predict the future impact of such technology changes on our products. Moreover, the life cycles of our products are difficult to estimate. Our future performance will depend in significant part upon our ability to enhance current products, and to develop and introduce new products and enhancements that respond to evolving customer requirements. The inability, for technological or other reasons, to develop and introduce new products or enhancements in a timely manner in response to changing customer requirements, technological change or emerging industry standards, or maintain compatibility with heterogeneous computing environments, would have a material adverse effect on our business and results of operations. Third Party Software. We license software from third parties, which is incorporated into our products. These licenses expire from time to time. These third-party software licenses may not continue to be available to us on commercially reasonable terms. The loss of, or inability to maintain, any such software licenses could result in shipment delays or reductions until equivalent software could be developed, identified, licensed and integrated, which in turn could materially and adversely affect our business and financial condition. In addition, we generally do not have access to source code for the software supplied by these third parties. Certain of these third parties are small companies that do not have extensive financial and technical resources. If any of these relationships were terminated or if any of these third parties were to cease doing business, we may be forced to expend significant time and development resources to replace the licensed software. Sales Cycle. The license of our software products is typically an executive-level decision by prospective end-users, and generally requires our APs and us to engage in a lengthy and complex sales cycle (typically between six and twelve months from the initial contact date). In addition, the implementation by customers of our products may involve a significant commitment of resources by such customers over an extended period of time. For these and other reasons, the sales and customer implementation cycles are subject to a number of significant delays over which we have little or no control. Our future performance also depends upon the capital expenditure budgets of our customers and the demand by such customers for our products. Certain industries to which we sell our products, such as the financial services industry, are highly cyclical. Our operations may in the future be subject to substantial period-to-period fluctuations as a consequence of such industry patterns, domestic and foreign economic and other conditions, and other factors affecting capital spending. Such factors may have a material adverse effect on our business and results of operations. Competition. The market for our product offerings is intensely competitive and can be significantly affected by new product introductions and other market activities of industry participants. We anticipate that the collaborative commerce market will also be highly competitive and subject to competitive forces that do not currently exist. Our competitors offer a variety of products and services to address the document management market and the emerging market for e-business solutions. Because our products are designed to operate in non-proprietary computing environments and because of low barriers to entry in the marketplace, we expect additional competition from established and emerging companies, as the market for our products continues to evolve. Current and potential competitors have established or may establish cooperative relationships among themselves or with third parties, to increase the ability of their products to address the needs of our prospective customers. In addition, several competitors have recently made, or attempted to make, acquisitions to enter the market or increase their market presence. Accordingly, new competitors or alliances among competitors may emerge and rapidly acquire significant market share. Increased competition may result in price reductions, reduced gross margins and loss of market share. Many of our current and potential competitors are substantially larger than we are, have significantly greater financial, technical and marketing resources and have established more extensive channels of distribution. As a result, such competitors may be able to respond more rapidly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their products than we can. We expect our competitors to continue to improve the performance of their current products and to introduce new products or new technologies that provide added functionality and other features. Our failure to keep pace with our competitors through new product introductions or enhancements could cause a significant decline in our sales or loss of market acceptance of our products and services, result in continued intense price competition, or make our products and services or technologies obsolete or noncompetitive. To be competitive, we will be required to continue to invest significant resources in research and development, and in sales and marketing. Intellectual Property. Our performance depends in part on our ability to protect our proprietary rights to the technologies used in our principal products. We rely on a combination of copyright and trademark laws, trade secrets, confidentiality provisions and other contractual provisions to protect our proprietary rights, which are measures that afford only limited protection. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products, or to obtain and use information that we regard as proprietary. In addition, the laws of some foreign countries do not protect our proprietary rights as fully as do the laws of the United States. Our means of protecting our proprietary rights in the United States or abroad may not be adequate, and competitors may independently develop similar technologies. Third parties may claim infringement by our products of their intellectual property rights. We expect that software product developers will increasingly be subject to infringement claims if the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, and regardless of the outcome of any litigation, will be time consuming to defend, result in costly litigation, divert management's attention and resources, cause product shipment delays, or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us, if at all. A successful claim of infringement against our products and failure or inability to license the infringed or similar technology may adversely affect our business and results of operations. International Operations. Sales outside the United States accounted for approximately 9%, 12% and 15% of our revenues in 2002, 2001 and 2000, respectively. We have only limited experience in developing localized versions of our products and we may not be able to successfully localize, market, sell and deliver our products internationally. Our inability to successfully expand our international operations in a timely manner, or at all, could materially and adversely affect our business and results of operations. Our international revenues may be denominated in foreign currencies or the U.S. dollar. We do not currently engage in foreign currency hedging transactions; as a result, a decrease in the value of foreign currencies relative to the U.S. dollar could result in losses from transactions denominated in foreign currencies and could make our software less price-competitive. Product Liability. Our license agreements typically contain provisions designed to limit our exposure to potential product liability claims. These limitations of liability provisions may not be effective under the laws of certain jurisdictions. The sale and support of our products may entail the risk of such claims, and we could be subject to such claims in the future. A successful product liability claim against us could have a material adverse effect upon our business and results of operations. Software products such as those we offer frequently contain errors or failures, especially when first introduced or when new versions are released. We have in the past released products that contained defects, and have discovered software errors in certain of our new products and enhancements after introduction. We could in the future lose or delay recognition of revenues as a result of software errors or defects, the failure of our products to meet customer specifications or otherwise. Our products are typically intended for use in applications that may be critical to a customer's business. As a result, we expect that our customers and potential customers have a greater sensitivity to product defects than the market for general software products. Despite our testing and testing by current and potential customers, errors or defects may be found in new products or releases after commencement of commercial shipments, and our products may not meet customer specifications, resulting in loss or deferral of revenues, diversion of resources, damage to our reputation, or increased service and warranty and other costs. Acquisitions. We have, and we may in the future, acquire businesses, products or technologies that we believe compliment or expand our existing business. In May 2003, we acquired Select Technologies, Inc, a records management software company based in Boise, ID. Our ability to achieve favorable results in 2003 and beyond will be dependent in part upon our ability to continue to successfully integrate the people, products and business lines of our acquisitions. In addition, we will need to work with our acquired companies' customers and business partners, as well as our current customers and business partners, to expand relationships based upon the broader range of products and services available from us. In some instances, we may need to discontinue relationships with business partners whose interests are no longer aligned with ours. We must accomplish the synergies we identified during the acquisition process. Failure to execute on any of these elements and accomplish the favorable financial results from the integration process could adversely affect our business and results of operations. Common Stock Price Volatility. Effective February 4, 2003 our common stock began trading on the NASDAQ Small Cap Market under the symbol "OPTK." Previously, our stock was traded on the NASDAQ National Market under the same symbol. The market price of our shares of common stock has been, and is likely to continue to be, highly volatile and may be significantly affected by factors such as: o Actual or anticipated fluctuations in our operating results o Announcements of technological innovations o New products or new contracts by us or our competitors o Sales of common stock by management, directors or other related parties o Sales of significant amounts of common stock into the market o Potential for less liquidity in our stock as traded on the Small Cap Market o Developments with respect to proprietary rights o Conditions and trends in the software and other technology industries o Adoption of new accounting standards affecting the software industry o Changes in financial estimates by securities analysts and others o General market conditions o Other factors that may be unrelated to us or our performance In addition, the stock market has from time to time experienced significant price and volume fluctuations that have particularly affected the market prices for the common stock of technology companies. These broad market fluctuations may adversely affect the market price of our common stock. In the past, following periods of volatility in the market price of a particular company's securities, securities class action litigation has often been brought against such company. Such litigation may be brought against us in the future. Such litigation, regardless of its outcome, would result in substantial costs and a diversion of management's attention and resources that could have a material adverse effect upon our business and results of operations. Change In Company Control. Certain provisions of our certificate of incorporation, equity incentive plans, bylaws, and Delaware law may discourage certain transactions involving a change in control of our company, even if such a transaction would be in the best interest of our stockholders. Our classified Board of Directors and the ability of the Board of Directors to issue "blank check" preferred stock without further stockholder approval, may have the effect of delaying, deferring or preventing a change in our control and may also affect the market price of our stock. We also have a stockholders rights plan under which all stockholders of record as of July 18, 2001 received one right for each share of common stock then owned by them to purchase, upon the occurrence of certain triggering events, one one-hundredth of a share of Series B Preferred Stock at a price of $30, subject to adjustment. The rights are exercisable only if a person or group acquires 15% or more of our common stock in a transaction not approved by our Board of Directors. These provisions and certain other provisions of our Amended and Restated Certificate of Incorporation and certain provisions of our Amended and Restated Bylaws and of Delaware law, could delay or make more difficult a merger, tender offer or proxy contest. ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of September 30, 2003 we had $5.2 million in short-term investments that are sensitive to market risks. Our investment portfolio is used to preserve our capital until it is required to fund operations. We do not own any derivative financial instruments. Due to the nature of our investment portfolio we are primarily subject to interest rate risk. Our investment portfolio includes fixed rate debt instruments that are primarily municipal bonds with maturity periods within one-year. The market value of these bonds is subject to interest rate risk and could decline in value if interest rates increase. A hypothetical increase or decrease in market interest rates by 10% from September 30, 2003 would cause the fair market value of these short-term investments to change by an insignificant amount. ITEM 4. CONTROLS AND PROCEDURES As of September 30, 2003, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Our disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's (SEC) rules and forms. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC filings. There has been no change in our internal control over financial reporting that occurred during the quarter ended September 30, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Our internal control over financial reporting is designed with the objective of providing reasonable assurance regarding the reliability of our financial reporting and preparation of financial statements for external purposes in accordance with generally accepted accounting principles. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. PART II - OTHER INFORMATION ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K. a) Exhibits. Exhibit No. Description 31.1 Rule 13a-14(a) Certification of Chief Executive Officer 31.2 Rule 13a-14(a) Certification of Chief Financial Officer 32.1 Section 1350 Certification of Chief Executive Officer 32.2 Section 1350 Certification of Chief Financial Officer b) Reports on Form 8-K. We furnished the following Current Report on Form 8-K during the quarter ended September 30, 2003. The information furnished under Item 12. Results of Operations and Financial Condition is not deemed to be "filed" for purposes of Section 18 of the Securities Exchange Act of 1934: - Current Report on Form 8-K dated July 16, 2003, furnished to the Securities and Exchange Commission on July 16, 2003, Under Item 9. Regulation FD Disclosure (Item 12, Results of Operations and Financial Condition). SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. OPTIKA INC. (Registrant) 11/13/2003 /s/ Mark K. Ruport --------------------- ------------------------------------------ (Date) Mark K. Ruport President, Chief Executive Officer and Chairman of the Board 11/13/2003 /s/ Steven M. Johnson --------------------- ------------------------------------------ (Date) Steven M. Johnson Chief Financial Officer, Executive Vice President, Secretary and Chief Accounting Officer Exhibit Index Exhibit No. Description 31.1 Rule 13a-14(a) Certification of Chief Executive Officer. 31.2 Rule 13a-14(a) Certification of Chief Financial Officer. 32.1 Section 1350 Certification of Chief Executive Officer. 32.2 Section 1350 Certification of Chief Financial Officer.

OPTIKA INC 10-Q