<PAGE>
Filed Pursuant
to Rule 424(b)(1)
2,200,000 SHARES
[LOGO OF OPTIKA IMAGING SYSTEMS, INC. APPEARS HERE]
OPTIKA IMAGING SYSTEMS, INC.
COMMON STOCK
----------------
All of the shares of Common Stock offered hereby are being sold by Optika
Imaging Systems, Inc. ("Optika" or the "Company"). Prior to this offering,
there has been no public market for the Common Stock of the Company. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price. The Common Stock has been approved for listing
subject to official notice of issuance on The Nasdaq National Market under the
symbol "OPTK." Following the consummation of this offering, directors and
executive officers of the Company will beneficially own approximately 56% of
the Common Stock of the Company.
----------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............................... $6.00 $0.42 $5.58
- --------------------------------------------------------------------------------
Total(3)................................ $13,200,000 $924,000 $12,276,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) The Company and certain stockholders of the Company (the "Selling
Stockholders") have agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses, payable by the Company, estimated at
$1,000,000.
(3) The Selling Stockholders have granted the Underwriters a 30-day option to
purchase up to an aggregate of 330,000 additional shares of Common Stock,
on the same terms and conditions as set forth above, solely to cover over-
allotments, if any. If the Underwriters exercise this option in full, the
total Price to Public, Underwriting Discounts and Commissions and Proceeds
to Selling Stockholders will be $15,180,000, $1,062,600 and $1,841,400,
respectively. See "Underwriting."
----------------
The shares of Common Stock are offered by the several Underwriters named
herein, subject to prior sale, when, as and if accepted by them and subject to
certain conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected
that certificates for the shares of Common Stock will be available for
delivery at the offices of Volpe, Welty & Company, One Maritime Plaza, San
Francisco, California, on or about July 31, 1996.
VOLPE, WELTY & COMPANY
PIPER JAFFRAY INC.
NEEDHAM & COMPANY, INC.
The date of this Prospectus is July 25, 1996
<PAGE>
[GRAPHICAL REPRESENTATION OF THREE COMPUTER SCREENS AND ONE CD-ROM APPEARS
HERE]
Optika(R) and FilePower(R) are registered trademarks of the Company.
FPreport, FPdisc, FPmulti, FPocr, FPtext, FPtransact, FPprint, FPfax,
FPenhance, PowerFlow, FPengine and MediPower are trademarks of the Company.
This Prospectus contains other product names, trade names, service marks and
trademarks of the Company and of other organizations.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Prospectus. Prospective investors should consider carefully
the information discussed under "Risk Factors." This Prospectus contains
forward-looking statements which involve substantial risks and uncertainties.
The Company's actual results could differ materially from the results discussed
in these forward-looking statements. Factors that could cause or contribute to
such differences include those discussed in "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" and elsewhere in this Prospectus.
THE COMPANY
Optika Imaging Systems, Inc. ("Optika" or the "Company") is a leading
provider of high-performance, client/server, integrated imaging software
designed to meet the needs of paper intensive industries such as healthcare,
financial services, insurance and retail. The Company's FilePower Suite is
comprised of server software, which provides core imaging functions,
application software for document image management, computer output to laser
disc ("COLD") and automated workflow transaction processing, and associated
development tools. The FilePower Suite is easy to install, use and integrate
with end-users' existing information systems and is designed to be deployed at
the departmental or workgroup level and then scale throughout the enterprise.
The Company believes that the FilePower Suite enables end-users to reduce
costs, improve operational productivity and enhance customer service. The
Company has licensed over 27,000 seats to its end-users, which include John
Hancock Mutual Life Insurance Company, Merrill Lynch, Pierce, Fenner & Smith
Inc., Mitsubishi Finance International Plc, Pascack Valley Hospital, Price
Costco, Inc. and St. Elizabeth Medical Center.
The open client/server architecture of the FilePower Suite enables it to be
tailored for industry-specific applications. The Company believes it is one of
the leading providers of imaging solutions to the healthcare industry, based on
over 80 installations of the FilePower Suite, although healthcare revenues
compromised approximately 9% of the Company's total revenue during the first
six months of 1996. The Company is seeking to capitalize on the size of the
installed base of the FilePower Suite in the healthcare industry through the
development of an integrated patient accounting and medical records software
suite (the "MediPower Suite") designed to enable hospitals and other healthcare
organizations to manage large amounts of patient related documents. The
MediPower Suite incorporates document image management, COLD and automated
workflow transaction processing technologies and is designed to provide fast
and efficient access to patient information from workstations located
throughout the enterprise, including the point of patient care.
The growth of the market for document image processing systems is being
driven by: (i) improved price/performance characteristics of client/server
distributed computing systems, (ii) the widespread deployment of client/server
computing systems connected to an infrastructure of local and wide area
networks ("LANS" and "WANS") and (iii) increased competitive pressures for
businesses to improve productivity and reduce costs, especially in paper-
intensive industries. The production segment of the document imaging market
includes applications that handle large volumes of paper and perform structured
business functions such as patient records management, insurance claim
processing, loan processing and accounts payable processing. According to a
study by BIS Strategic Decisions, the software component of the North American
production imaging segment has grown from approximately $264 million in 1993 to
approximately $366 million in 1995 and is projected to grow to approximately
$682 million by 1998.
The Company distributes its products through a two-tiered distribution model
consisting of a worldwide network of approximately 170 value-added resellers
("VARs"), distributors and systems integrators referred to as Business
Solutions Partners ("BSPs") and three original equipment manufacturers
("OEMs"), Lanier Worldwide, Inc., Alltel Healthcare Information Services, Inc.
and Anacomp, Inc. The Company's BSPs and
3
<PAGE>
OEMs are responsible for identifying potential end-users, selling the Company's
products to end-users as part of a complete hardware and software solution,
customizing and integrating the Company's products at the end-users' sites and
supporting end-users following the sale. The Company's software products
operate on a variety of open computing platforms, including Windows 3.x,
Windows 95 and Windows NT on the client desktop, Windows NT and Novell Netware
as servers and UNIX for SQL database support. The Company's strategy is to
extend its position as a technology leader in developing and marketing open
architecture, client/server imaging software solutions, strengthen its network
of BSPs and OEMs in targeted domestic and international markets, focus on
scalable solutions, lower the cost of ownership to its customers and capitalize
on opportunities in the healthcare and other vertical markets.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered........................ 2,200,000 shares
Common Stock outstanding after this
offering................................... 6,547,494 shares(1)
Use of proceeds............................. Repayment of indebtedness,
working capital and other general
corporate purposes. See "Use of
Proceeds."
Nasdaq National Market symbol............... OPTK
</TABLE>
- --------
(1) Based on the number of shares outstanding as of June 30, 1996. Excludes
1,981,370 shares of Common Stock issuable upon exercise of stock options
and warrants outstanding as of June 30, 1996 at a weighted average exercise
price of $2.08 per share, and 545,431 shares of Common Stock reserved for
grant of future options as of June 30, 1996 under the Company's 1994 Stock
Option/Issuance Plan (the "1994 Stock Plan"). Since June 30, 1996, the
Company has not granted additional options to purchase Common Stock or
issued any shares of Common Stock. Also excludes 250,000 shares of Common
Stock reserved for issuance pursuant to the Employee Stock Purchase Plan.
See "Capitalization," "Management," "Description of Capital Stock" and
Notes 7 and 10 of Notes to Consolidated Financial Statements.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------- ----------------
1991 1992 1993 1994 1995(2) 1995 1996
------ ------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA(1):
Revenues................ $2,686 $4,771 $9,043 $ 9,252 $10,468 $ 4,433 $ 6,960
Gross profit............ 2,359 3,883 6,499 6,950 8,329 3,487 5,816
Income (loss) from
operations............. 152 118 545 (1,875) (522) (720) 48
Net income (loss)....... 101 (39) 27 (1,732) (962) (756) 45
Pro forma net income
(loss) per common
share(3)............... $ (0.20) $ (0.16) $ 0.01
Pro forma weighted
average number of
common shares
outstanding(3)......... 4,811 4,787 5,730
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------
PRO FORMA
ACTUAL AS ADJUSTED(4)
-------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA(1):
Cash.................................................... $ 603 $11,729
Working capital......................................... 1,839 13,077
Total assets............................................ 7,022 18,148
Long-term debt, excluding current portion............... 341 303
Convertible preferred stock............................. 4,804 --
Total stockholders' equity (deficit).................... (1,916) 14,164
</TABLE>
- --------
(1) All financial information reflects the merger of TEAMWorks Technologies,
Inc. in January 1994, which was accounted for as a pooling of interests.
(2) In December 1995, the Company purchased certain assets and assumed certain
liabilities from IPRS Asia (S) Pte Ltd., a Singapore company, and Intuit
Development Limited, a Hong Kong company. The results of operations for
such companies are included in the Company's consolidated results of
operations since the date of the acquisitions.
(3) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the calculation of the pro forma weighted average number of common
shares outstanding.
(4) Pro forma as adjusted to reflect the sale of 2,200,000 shares of Common
Stock by the Company, the application of the estimated net proceeds
therefrom and the automatic conversion of all outstanding shares of the
Series A, B and C Convertible Preferred Stock into 1,500,464 shares of
Common Stock. See "Use of Proceeds" and "Capitalization."
----------------
Except as otherwise indicated, all information contained in this Prospectus (i)
assumes that the Underwriters' over-allotment option is not exercised, (ii)
except in the Consolidated Financial Statements, reflects the conversion of all
outstanding shares of Series A, B and C Convertible Preferred Stock of the
Company (collectively, the "Convertible Preferred Stock") into 1,500,464 shares
of Common Stock upon the closing of this offering and (iii) except in the
Consolidated Financial Statements, reflects the effectiveness of the Company's
reincorporation in the State of Delaware in July 1996.
5
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing the shares of Common Stock offered hereby.
History of Losses; Accumulated Deficit; Future Results of Operations
Uncertain. The Company was founded in January 1988 and did not ship an
integrated version of the FilePower Suite until the third quarter of 1995.
Since its inception, the Company has incurred substantial costs to develop and
improve its software products, establish sales, marketing and distribution
channels and recruit and train its employees. As a consequence, the Company
has incurred net losses in three of its past five fiscal years and incurred an
operating loss for the year ended December 31, 1995. In addition, the Company
experienced virtually no revenue growth between 1993 and 1995. As of June 30,
1996, the Company had an accumulated deficit of approximately $2.7 million.
There can be no assurance that the Company will achieve revenue growth or will
be profitable on a quarterly or annual basis. See "Selected Consolidated
Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Dependence on Windows NT. The Company is largely dependent on the
development and growth in the market for Windows NT operating systems and the
migration of imaging and workflow server software to such operating systems.
There can be no assurance that this market will grow or that the Company will
be able to respond effectively to the evolving requirements of this market.
UNIX-based operating systems currently account for most current client/server-
based production imaging operating systems, and the Company's software
interoperates with UNIX-based operating systems to only a very limited extent.
There can be no assurance that UNIX will not continue to be the dominant
operating platform in the future or that the introduction of other operating
systems will not adversely affect the deployment of Windows NT. The failure of
Windows NT operating systems to achieve market acceptance over the next
several years would have a material adverse effect on the Company's business,
results of operations and financial condition. In addition, certain
performance characteristics of the Company's products are currently limited by
the Windows NT architecture, including the ability to be deployed throughout
the largest enterprises.
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, the level of international
expansion and seasonal trends. A significant portion of the Company's revenues
have 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 its BSPs 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, and 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 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
6
<PAGE>
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 expects this pattern to continue in future years. To
the extent 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 adversely
affected. As a result of these and other factors, the Company believes that
its quarterly operating results will vary in the future and 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Risks Associated with the MediPower Suite. The Company's future performance
will depend in significant part upon its ability to complete the development
of and achieve commercial acceptance for the MediPower Suite, its first
software product tailored for an industry-specific application. The MediPower
Suite is being developed in response to an order by St. Elizabeth Medical
Center ("SEMC"), and only a limited number of end-users have purchased any of
the software modules contained in this suite. To date, five of the seven
software modules currently comprising the MediPower Suite have been developed
and the remaining two modules are under development and are currently expected
to be completed by the end of 1996. In addition, an eighth module will be
added to the MediPower Suite, and is expected to be delivered to SEMC by mid-
1997. Delays in the completion of the remaining modules could occur due to a
variety of factors such as turnover among software engineers, software bugs or
other product quality problems. The Company may add additional software
modules to extend the functionality of the MediPower Suite. Three of the
developed modules have been installed at SEMC's site. If the Company fails to
complete the MediPower Suite to SEMC's satisfaction in a timely manner, the
Company's ability to market its products to other prospective end-users in the
healthcare industry would be materially impaired and the Company's business,
results of operations and financial condition would be materially adversely
affected. The MediPower Suite has not achieved widespread customer acceptance
which acceptance will depend, in part, on the Company's ability to complete
and market this software successfully.
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 relies, to a
significant degree, upon BSPs and OEMs to sell and install the Company's
software and provide post-sales support. In 1995, the Company's top 34 BSPs
accounted for approximately 80% of its revenues, and substantially all of the
Company's total revenues were derived from sales by BSPs and OEMs. 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 them to purchase any minimum dollar
amount of the Company's software. There can be no assurance that any BSPs will
continue to represent the Company or sell its products. Furthermore, there can
be no assurance that other BSPs, 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 relationships with or support of the Company. Some
of the Company's BSPs 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 BSPs has not had a
material adverse effect on the Company's business, results of operations or
financial condition. The Company's OEMs currently compete with the Company and
its BSPs. 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. The
Company's strategy of marketing its products indirectly through BSPs and OEMs
may result in distribution channel conflicts. To the extent different BSPs and
OEMs target the same customers, they may come into conflict with each other.
7
<PAGE>
Although the Company has attempted to allocate certain territories for its
products among its distribution channels in a manner to avoid potential
conflicts, there can be no assurance that channel conflict will not materially
adversely affect its relationships with existing BSPs or OEMs or adversely
affect its ability to attract new BSPs and OEMs. The loss by the Company of a
number of its more significant BSPs or OEMs, the inability of the Company to
obtain qualified new BSPs or OEMs or to obtain access to the channels of
distribution offering software products to the Company's targeted markets or
the failure of BSPs 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. See "Business--Sales and Marketing."
Rapid Technological Change; Dependence on New Product Development. The
market for imaging software 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. For example, new technologies based
on the Internet, such as Java, could alter generally accepted conventions for
document creation, distribution and management. However, the use of Internet
protocols for imaging applications is presently in the developmental stage,
and the Company is unable to predict the future impact of such protocols 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 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business."
Product Concentration; Dependence on Emerging Market for Integrated Imaging
Systems. To date, substantially all of the Company's revenues have been
attributable to sales of the FilePower Suite and individual software modules
which comprise the FilePower Suite and the MediPower Suite. The Company
currently expects the FilePower and the MediPower Suite to account for
substantially all of its future revenues. As a result, factors adversely
affecting the pricing of or demand for such products, such as competition or
technological change, could have a material adverse effect on the Company's
business, results of operations and financial condition. The Company's future
financial performance will depend in general on growth in the relatively small
and emerging market for imaging software products, and in particular on the
successful development, introduction and customer acceptance of new and
enhanced versions of its existing software products such as the FilePower
Suite, along with the successful development, marketing and market acceptance
of new industry-specific products such as the MediPower Suite. There can be no
assurance that such market will 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 document imaging
software market fails to grow or grows more slowly than the Company currently
anticipates, the Company's business, results of operations and financial
condition would be materially adversely affected. See "Business."
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 the
Company and its BSPs or 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 imaging 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
8
<PAGE>
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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Sales and Marketing."
Intense Competition. The market for the Company's products is intensely
competitive and 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 imaging
software solutions. The Company's principal direct competitors include
BancTec, Inc. ("BancTec"), FileNet Corporation ("FileNet"), International
Business Machines Corporation ("IBM"), Unisys Corporation, ViewStar
Corporation ("ViewStar") and Wang Laboratories, Inc. ("Wang"). The Company
also competes with industry-specific application vendors such as IMNET
Systems, Inc. ("IMNET") and LanVision Systems, Inc. ("LanVision"). Numerous
other software vendors also compete in each product area. Potential
competitors include providers of document management software, providers of
document archiving products and relational database management systems
("RDBMS") vendors. The Company also faces competition from VARs, OEMs,
distributors and systems integrators, some of which are BSPs or OEMs for the
Company. See "--Reliance on Indirect Distribution Channels; Potential for
Channel Conflict."
Many of the Company's current and potential competitors are substantially
larger than the Company and 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 imaging software market, the Company expects additional
competition from established and emerging companies as the market for
integrated imaging products 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 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. See
"Business--Competition."
Risks Associated with Acquisitions. Optika has consummated several recent
acquisitions, including the acquisitions of TEAMWorks Technologies, Inc.
("TEAMWorks") in 1994 (the "TEAMWorks Acquisition"), and IPRS Asia (S) Pte
Ltd., a Singapore company ("IPRS"), and Intuit Development Limited, a Hong
Kong company ("Intuit"), in 1995 (the "IPRS/Intuit Acquisition")
(collectively, the "Acquisitions"), and continues to evaluate potential
acquisitions of businesses, products and technologies. In 1995, the Company
terminated all
9
<PAGE>
of the operations of TEAMWorks due to the failure of the TEAMWorks products to
achieve market acceptance and the Company's lack of experience in selling such
products. The Company is in the process of integrating the operations acquired
in the IPRS/Intuit Acquisition with its own. There can be no assurance that
the anticipated benefits of the IPRS/Intuit Acquisition will be realized.
Acquisitions involve numerous risks, including difficulties in the
assimilation of the operations, technologies and products of the acquired
companies, potentially dilutive issuances of equity securities, accounting
charges, operating companies in different geographic locations with different
cultures, the potential loss of key employees of the acquired company, the
diversion of management's attention from other business concerns and the risks
of entering markets in which the Company has no or limited direct prior
experience. There can be no assurance that suitable acquisition candidates
will be identified, that any acquisitions can be consummated or that any
acquired businesses or products can be successfully integrated into the
Company's operations. In addition, there can be no assurance that the
Acquisitions or any future acquisitions will not have a material adverse
effect upon the Company's business, results of operations or financial
condition, particularly in the quarters immediately following the consummation
of such transactions due to operational disruptions, severance expenses,
unexpected expenses and accounting charges which may be associated with the
integration of such acquisitions. No acquisitions are currently planned or
being negotiated as of the date of this Prospectus. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Management Changes; No Assurance of Successful Expansion of Operations. Most
of the Company's senior management team have joined the Company within the
last two 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 the Company to 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 field offices, the
Acquisitions and potential acquisitions, significant 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 adversely affected. Expansion of the Company's operations has
caused and is continuing to impose a significant strain on the Company's
management, financial and other resources. The Company's ability to manage its
recent and any future growth, should it occur, will depend upon a significant
expansion of its internal management systems and the implementation and
subsequent improvement of a variety of systems, procedures and controls. Any
failure to expand these areas and implement and improve such systems,
procedures and controls in an efficient manner at a pace consistent with the
Company's business could have a material adverse effect on the Company's
business, financial condition and results of operations. In this regard, any
significant revenue growth will be dependent in significant part upon the
Company's expansion of its marketing, sales and BSP 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.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Management."
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 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 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. See
"Business--Research and Development" and "--Employees" and "Management."
10
<PAGE>
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 measures 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. The Company is not aware that it is infringing any proprietary
rights of third parties. In August 1994, a third party notified the Company
that it believes that one of the Company's products is infringing a patent
held by such third party. The Company subsequently notified such third party
that it does not believe that such product infringed such patent. Neither
party has communicated with the other since January 1995. If the third party
should file suit against the Company, and should it be determined that its
patent is valid and infringed by the Company's product, the Company may
redesign the allegedly infringing product or seek to obtain a license from
such third party. Any redesign may be costly and time consuming, may not avoid
litigation and would materially adversely affect the Company's business,
results of operations and financial condition. If it becomes necessary to seek
a license from such third party, there can be no assurance that the Company
will be able to obtain such a license on acceptable terms. Moreover, there can
be no assurance that additional 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 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 OCR 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 arrangements with each of such parties 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 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. See "Business--Proprietary Rights" and "--Sales and
Marketing."
International Operations. Sales outside the United States accounted for
approximately 7%, 13%, 15% and 24% of the Company's revenues in 1993, 1994,
1995 and for the six months ended June 30, 1996, respectively.
11
<PAGE>
An important 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 and marketing and distributing its products
internationally. 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 adversely affect the Company's
business, results of operations and financial condition. The Company's
international revenues may be denominated in foreign or United States
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 United States dollar could result in losses from transactions
denominated in foreign currencies, 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. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business--Sales and
Marketing."
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 software products
generally. Although the Company's business has not been materially adversely
affected by any such errors, 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 "Business--Research and Development."
Uncertainty in Healthcare Industry; Government Regulation. The healthcare
industry is undergoing significant and rapid changes, including consolidation
of hospitals and other healthcare providers to form larger
12
<PAGE>
integrated healthcare networks as well as market-driven or government
initiatives to reform healthcare, which the Company anticipates will affect
the operations and procurement processes of healthcare providers, and which
could force the Company to reduce prices for its software. As the number of
hospitals and other healthcare providers decreases due to further industry
consolidation, each potential sale of the Company's software will become more
significant and competition for each sale will be greater. Further, healthcare
providers may react to proposed reform measures and cost containment pressures
by curtailing or delaying investments, including purchases of the Company's
software and related services. In addition, numerous proposals relating to
healthcare reform have been, and additional proposals are expected to be,
introduced in the United States Congress and state legislatures. Although the
effects of federal and state initiatives for healthcare reform are unknown,
the Company believes that competitive factors in the healthcare industry will
continue to drive reform of healthcare delivery. The Company cannot predict
with any certainty what impact, if any, such market or government initiatives
might have on its business, financial condition and results of operations. The
United States Food and Drug Administration ("FDA") has issued a draft guidance
document addressing the regulation of certain computer products as medical
devices under the Federal Food, Drug and Cosmetic Act. To the extent that
computer software is a medical device under the policy, the manufacturers of
such products could be required, depending on the product, to: (i) register
and list their products with the FDA, (ii) notify the FDA and demonstrate
substantial equivalence to other products on the market before marketing such
products or (iii) obtain FDA approval by filing a premarket application that
establishes the safety and effectiveness of the product. The Company expects
that the FDA is likely to become increasingly active in regulating computer
software that is intended for use in healthcare settings, although the FDA
does not currently regulate computer software products for medical records.
The FDA, if it chooses to regulate such software, can impose extensive
requirements governing pre- and post-market conditions such as device
investigation, approval, labeling and manufacturing. In addition, any
substantial reduction in price, failure of the Company to sell its software to
hospitals and other healthcare providers or increased government regulation
could have a material adverse effect on the Company's business, results of
operations and financial condition. Such products would be subject to the
Federal Food, Drug and Cosmetic Act's general provisions, including those
relating to good manufacturing practices and adverse experience reporting. The
Company is also subject to the risks inherent in selling its products to end-
users in other heavily regulated industries, such as insurance, banking and
financial services. See "Business--Industry Background."
No Prior Public Market; Potential Volatility of Stock Price; Dilution. Prior
to this offering there has been no public market for the Company's Common
Stock, and there can be no assurance that an active public market for the
Company's Common Stock will develop or be sustained after the offering. See
"Underwriting" for a discussion of the factors considered by the Company and
the Underwriters in determining the initial public offering price. The market
price of the 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,
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. In
addition, investors participating in this offering will incur immediate,
substantial dilution. To the extent outstanding options and warrants to
purchase the Company's Common Stock are exercised, there will be further
dilution. See "Dilution" and "Underwriting."
13
<PAGE>
Shares Eligible for Future Sale; Registration Rights. Sales of a substantial
number of shares of Common Stock in the public market following this offering
could materially adversely affect the market price for the Company's Common
Stock. The number of shares of Common Stock available for sale in the public
market is limited by restrictions under the Securities Act of 1933, as amended
(the "Securities Act"), and lock-up agreements under which the holders of such
shares have agreed not to sell or otherwise dispose of any of their shares for
a period of 180 days after the date of this Prospectus without the prior
written consent of Volpe, Welty & Company. While Volpe, Welty & Company may,
in its sole discretion and at any time without notice, release all or any
portion of the securities subject to lock-up agreements, it has advised the
Company that it currently has no intention of releasing any portion of the
securities subject to lock-up agreements prior to the expiration of the 180-
day period. Based on shares outstanding and options granted as of June 30,
1996, assuming no options are exercised between June 30, 1996 and the date of
this Prospectus, the following shares of Common Stock will be eligible for
future sale. On the date of this Prospectus, 100,000 shares in addition to the
2,200,000 shares offered hereby will be eligible for sale. Approximately
3,432,000 additional shares will be eligible for sale 180 days after the date
of this Prospectus, of which approximately 3,294,000 shares will be eligible
for sale in reliance on Rule 144 promulgated under the Securities Act and
approximately 138,000 shares will be eligible for sale in reliance on Rule 701
promulgated under the Securities Act 90 days after the date of this
Prospectus. In addition, the Company intends to register on a registration
statement on Form S-8, within 30 days following the effective date of this
offering, a total of approximately 2,682,000 shares of Common Stock subject to
outstanding options or reserved for issuance under the 1994 Stock Plan and
under the Employee Stock Purchase Plan. Upon expiration of the lock-up
agreements referred to above, holders of approximately 4,295,000 shares of
Common Stock will be entitled to certain registration rights with respect to
such shares. If such holders, by exercising their registration rights, cause a
large number of shares to be registered and sold in the public market, such
sales could have a material adverse effect on the market price for the
Company's Common Stock. See "Shares Eligible for Future Sale."
Control by Existing Stockholders; Effects of Certain Anti-Takeover
Provisions. Following the completion of this offering, 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, will beneficially own approximately 56% of the
outstanding shares of Common Stock of the Company. Accordingly, these
stockholders would, 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.
See "Management--Directors and Executive Officers," "Certain Transactions,"
"Principal and Selling Stockholders" and "Description of Capital Stock."
Management's Discretion Over Proceeds of the Offering. The primary purposes
of this offering are to create a public market for the Common Stock, to
facilitate future access to public markets and to obtain additional equity
capital. As of the date of this Prospectus, the Company has no specific plans
as to the use of the net proceeds from this offering, other than to repay
approximately $150,000 of outstanding debt; accordingly, the Company's
management will have broad discretion as to the application of such net
proceeds. Pending any such uses, the Company plans to invest the net proceeds
in short-term, investment grade, interest-bearing securities. See "Use of
Proceeds."
14
<PAGE>
THE COMPANY
Optika Imaging Systems, Inc. was incorporated in January 1988 in the State
of California. In July 1996, the Company was reincorporated in the State of
Delaware. References in this Prospectus to "Optika" and the "Company" include
the Delaware corporation, its predecessors and its subsidiaries, unless
otherwise stated or indicated by the context. The Company's principal
executive offices are located at 5755 Mark Dabling Boulevard, Suite 100,
Colorado Springs, Colorado 80919. Its telephone number is (719) 548-9800. The
Company's home page is located at http://www.optika.com on the World Wide Web.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,200,000 shares of
Common Stock offered hereby, after deducting the underwriting discounts and
commissions and estimated expenses payable in connection with this offering,
are estimated to be approximately $11,276,000 based on the public offering
price of $6.00 per share. The principal purposes of this offering are to
create a public market for the Company's Common Stock, to facilitate future
access by the Company to public equity markets and to increase the Company's
equity capital. The Company will use a portion of the proceeds to repay
$150,000 in outstanding indebtedness under a non-interest bearing promissory
note payable in 24 equal monthly installments in the original aggregate
principal amount of $225,000 issued in settlement of litigation which will be
due and payable upon consummation of this offering or in December 1997. The
Company expects to use the balance of the net proceeds for working capital and
other general corporate purposes. A portion of the net proceeds may also be
used for the acquisition of businesses, products and technologies that are
complementary to those of the Company. No acquisitions are currently planned
or being negotiated as of the date of this Prospectus. Pending such uses, the
Company intends to invest the net proceeds from this offering in short-term
investment grade, interest-bearing securities.
DIVIDEND POLICY
The Company has never paid any cash dividends on its capital stock and does
not expect to pay cash dividends in the foreseeable future. In addition, the
Company's bank credit agreement currently prohibits the Company from paying
cash dividends.
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at June 30,
1996: (i) on an actual basis, (ii) on a pro forma basis after giving effect to
the automatic conversion of all outstanding shares of the Convertible
Preferred Stock upon closing of this offering and the effectiveness of the
Company's reincorporation in the State of Delaware and (iii) on a pro forma as
adjusted basis, to reflect the sale by the Company of 2,200,000 shares of
Common Stock offered hereby and the application of the estimated net proceeds
therefrom as described under "Use of Proceeds." This table should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------------------
PRO PRO FORMA
ACTUAL FORMA(1) AS ADJUSTED(2)
------- -------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long-term debt(3).......... $ 383 $ 383 $ 271
======= ======= =======
Long-term debt, excluding current portion(3).. $ 341 $ 341 $ 303
------- ------- -------
Mandatorily Redeemable Series A, B and C
Convertible Preferred Stock; no par value,
1,493,024 shares authorized, 1,492,201 shares
issued and outstanding actual; $.001 par
value, no shares authorized, issued or
outstanding, pro forma and pro forma
as adjusted.................................. 4,804 -- --
Common Stockholders' equity (deficit):
Preferred Stock; $.001 par value, 2,000,000
shares authorized, none issued or
outstanding, pro forma and pro forma
as adjusted................................ -- -- --
Common Stock; no par value, 6,320,000 shares
authorized, 2,847,030 shares issued and
outstanding, actual; $.001 par value,
6,320,000 shares authorized, 4,347,494
shares issued and outstanding, pro forma;
$.001 par value, 25,000,000 shares
authorized, 6,547,494 shares issued and
outstanding, pro forma as adjusted(4)...... 805 4 7
Additional paid-in capital.................... -- 5,605 16,878
Accumulated deficit........................... (2,721) (2,721) (2,721)
------- ------- -------
Total stockholders' equity (deficit)...... (1,916) 2,888 14,164
------- ------- -------
Total capitalization.................... $ 3,229 $ 3,229 $14,467
======= ======= =======
</TABLE>
- --------
(1) Gives effect to the conversion of all outstanding shares of the
Convertible Preferred Stock and the effectiveness of the Company's
reincorporation in Delaware. See "Description of Capital Stock."
(2) Pro forma, as provided in footnote (1) above, and as adjusted to reflect
the sale of 2,200,000 shares of Common Stock by the Company and the
application of the estimated net proceeds therefrom. See "Use of
Proceeds."
(3) See Note 5 of Notes to Consolidated Financial Statements for information
concerning the Company's indebtedness.
(4) Excludes 1,981,370 shares of Common Stock issuable upon exercise of stock
options and warrants outstanding as of June 30, 1996 at a weighted average
exercise price of $2.08 per share, and 545,431 shares of Common Stock
reserved for grant of future options as of June 30, 1996 under the 1994
Stock Plan. Since June 30, 1996, the Company has not granted additional
options to purchase Common Stock or issued any shares of Common Stock.
Also excludes 250,000 shares of Common Stock reserved for issuance
pursuant to the Employee Stock Purchase Plan. See "Management,"
"Description of Capital Stock" and Notes 7 and 10 of Notes to Consolidated
Financial Statements.
16
<PAGE>
DILUTION
The pro forma net tangible book value of the Company at June 30, 1996 was
approximately $2,581,000, or $0.59 per share of Common Stock. Pro forma net
tangible book value per share represents the amount of the Company's net
tangible assets less total liabilities, divided by the number of shares of
Common Stock outstanding after giving effect to the conversion of all
outstanding shares of Convertible Preferred Stock into 1,500,464 shares of
Common Stock. After giving effect to the sale of 2,200,000 shares of Common
Stock offered hereby by the Company at the initial public offering price of
$6.00 per share, and after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by the Company, the
Company's pro forma net tangible book value at June 30, 1996, would have been
$13,857,000, or $2.12 per share. This represents an immediate increase in net
tangible book value of $1.53 per share to the Company's existing stockholders
and an immediate dilution of $3.88 per share to new investors purchasing
shares of Common Stock in this offering. The following table illustrates this
dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share........................ $6.00
Pro forma net tangible book value per share as of June 30,
1996........................................................ $0.59
Increase per share attributable to the offering.............. 1.53
-----
Pro forma net tangible book value per share after the offer-
ing........................................................... 2.12
-----
Net tangible book value dilution per share to new investors.... $3.88
=====
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1996,
the differences in the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company and the average price per
share paid by existing stockholders and by new investors at the initial public
offering price of $6.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)... 4,347,494 66.4% $ 5,755,000 30.4% $1.32
New investors(1)........... 2,200,000 33.6 13,200,000 69.6 $6.00
--------- ----- ----------- -----
Total.................... 6,547,494 100.0% $18,955,000 100.0%
========= ===== =========== =====
</TABLE>
- --------
(1) The net effect of the exercise of the Underwriters' over-allotment option
of 330,000 shares owned by the Selling Stockholders will further reduce
the percentage held by existing stockholders to 61.4% and increase the
percentage held by new investors to 38.6%. See "Principal and Selling
Stockholders."
The foregoing tables assume no exercise of outstanding options or warrants.
As of June 30, 1996, there were outstanding stock options to purchase an
aggregate of 1,886,370 shares of Common Stock at a weighted average exercise
price of $2.09 per share, of which 1,797,870 options were then exercisable and
655,923 options were vested. In addition, there were outstanding warrants to
acquire an aggregate of 95,000 shares of Common Stock at a weighted average
exercise price of $1.875 per share, all of which were then exercisable and
fully vested. Assuming that all of these options and warrants were deemed to
be exercised and proceeds were received therefrom, net tangible book value
dilution per share to new investors would be $3.89. See "Management--1994
Stock Option/Stock Issuance Plan," "Description of Capital Stock--Warrants"
and Note 7 of Notes to Consolidated Financial Statements.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data are qualified by
reference to and 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
elsewhere in this Prospectus. The selected consolidated financial data set
forth below for the years ended December 31, 1993, 1994, and 1995 and as of
December 31, 1994 and 1995 have been derived from the Company's consolidated
financial statements, which have been audited by Price Waterhouse LLP,
independent accountants, and which are included elsewhere in this Prospectus.
The selected consolidated financial data set forth below for the year ended
December 31, 1992 and as of December 31, 1992 and 1993 have been derived from
audited financial statements not included in this Prospectus. The selected
consolidated financial data for the year ended December 31, 1991 and for the
six-month periods ended June 30, 1995 and 1996 and as of December 31, 1991 and
June 30, 1996 have been derived from the unaudited consolidated financial
statements of the Company. The unaudited consolidated financial statements
have been prepared on the same basis as the audited consolidated financial
statements and, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
statement of the information set forth therein. Operating results for the six
months ended June 30, 1996 are not necessarily indicative of the results that
may be expected for the entire year.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------- --------------
1991 1992 1993 1994 1995(2) 1995 1996
------ ------ ------ ------- ------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA(1):
Revenues:
Licenses............... $2,483 $3,531 $6,924 $ 7,562 $ 8,333 $3,444 $5,648
Maintenance and other.. 203 1,240 2,119 1,690 2,135 989 1,312
------ ------ ------ ------- ------- ------ ------
Total revenues......... 2,686 4,771 9,043 9,252 10,468 4,433 6,960
Cost of revenues:
Licenses............... 196 275 471 413 316 104 278
Maintenance and other.. 131 613 2,073 1,889 1,823 842 866
------ ------ ------ ------- ------- ------ ------
Total cost of
revenues.............. 327 888 2,544 2,302 2,139 946 1,144
------ ------ ------ ------- ------- ------ ------
Gross profit............ 2,359 3,883 6,499 6,950 8,329 3,487 5,816
Operating expenses:
Sales and marketing.... 634 1,466 2,585 4,200 3,732 1,595 2,927
Research and
development........... 1,186 1,454 2,332 3,112 3,658 1,781 2,229
General and
administrative........ 387 845 1,037 1,513 1,461 831 612
------ ------ ------ ------- ------- ------ ------
Total operating
expenses.............. 2,207 3,765 5,954 8,825 8,851 4,207 5,768
------ ------ ------ ------- ------- ------ ------
Income (loss) from
operations............. 152 118 545 (1,875) (522) (720) 48
Other expenses.......... 28 53 476(3) 25 411(3) 23 3
------ ------ ------ ------- ------- ------ ------
Income (loss) before
provision (benefit) for
income taxes........... 124 65 69 (1,900) (933) (743) 45
Provision (benefit) for
income taxes........... 23 104 42 (168) 29 13 --
------ ------ ------ ------- ------- ------ ------
Net income (loss)....... $ 101 $ (39) $ 27 $(1,732) $ (962) $ (756) $ 45
====== ====== ====== ======= ======= ====== ======
Pro forma net income
(loss) per common
share(4)............... $ (0.20) $(0.16) $ 0.01
======= ====== ======
Pro forma weighted
average number of
common shares
outstanding(4)......... 4,811 4,787 5,730
======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------ JUNE 30,
1991 1992 1993 1994 1995(2) 1996
---- ------ ------ ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA(1):
Cash........................... $163 $ 110 $1,741 $ 771 $ 1,415 $ 603
Working capital................ 362 632 2,151 1,338 1,841 1,839
Total assets................... 928 2,223 5,102 4,450 6,182 7,022
Long-term debt, excluding
current portion............... 607 546 353 353 266 341
Convertible preferred stock.... -- 411 2,346 3,343 4,804 4,804
Total stockholders' equity
(deficit)..................... (54) 159 213 (1,497) (1,967) (1,916)
</TABLE>
- -------
(1) All financial information reflects the merger of TEAMWorks in January 1994
which was accounted for as a pooling of interests. See Note 2 of Notes to
Consolidated Financial Statements.
(2) In December 1995, the Company purchased certain assets and assumed certain
liabilities from IPRS and Intuit. The results of operations for such
companies are included in the Company's results of operations since the
date of the IPRS/Intuit Acquisition. See Note 2 of Notes to Consolidated
Financial Statements.
(3) During 1993 and 1995, the Company settled certain litigation as discussed
in Note 3 of Notes to Consolidated Financial Statements.
(4) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the calculation of the pro forma weighted average number of
common shares outstanding.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Optika is a leading provider of high-performance, client/server, integrated
imaging software designed to meet the needs of paper intensive industries such
as healthcare, financial services, insurance and large retail organizations.
As a result of growth in its core imaging business, the Company generated
revenues of approximately $4.8 million and $9.0 million during 1992 and 1993,
respectively, and operating income of approximately $118,000 and $545,000.
During 1994, under the direction of its former senior management team, the
Company sought to diversify beyond its core business by entering the market
for lower-end imaging systems by acquiring TEAMWorks. Concurrently, the
Company attempted to enter the market for large customized imaging solutions
by forming a complex imaging group. The Company believed that it could market
the TEAMWorks products to end-users through direct mail and that the complex
imaging group could market large customized imaging solutions to end-users
through a direct sales force. In order to execute this new strategy, the
Company created a direct sales and marketing infrastructure and implementation
team to support the complex imaging group, while maintaining corporate
facilities in both Massachusetts and Colorado to support the TEAMWorks
products. Neither strategy proved to be successful because the TEAMWorks
products did not achieve market acceptance and the Company lacked experience
in selling such products, and the complex imaging group's direct sales force
created conflict in the Company's distribution channels. In addition, issues
associated with the integration of TEAMWorks and other problems led to
significant senior management distraction and delayed the release of new
versions of the Company's core products. As a result of the foregoing factors,
the Company's 1994 revenues increased only 2% to $9.3 million from $9.0
million in the prior year, and the Company incurred an operating loss of $1.9
million. At the end of 1994, under the direction of an interim CEO, the
Company eliminated its direct sales and support infrastructure and dissolved
the complex imaging group.
Commencing in February 1995, under the direction of Mark K. Ruport, its new
President and CEO, the Company replaced a majority of its senior management
team and refocused its sales, marketing and research and development efforts
on its core imaging products. During the first six months of 1995, the Company
also began to develop a decentralized sales staff to support its indirect
distribution channels, eliminated the TEAMWorks infrastructure and focused on
the development of its integrated product suite.
During the second half of 1995 and continuing into 1996, the Company began
to implement a strategy based on extending its technology leadership in open
component-based imaging solutions, integrating its core imaging software
products into the FilePower Suite, strengthening its indirect distribution
channels, focusing on imaging solutions which scale from workgroups to
enterprises, lowering the total cost of ownership to its customers and
developing the MediPower Suite for the healthcare market. In August 1995, the
Company released the FilePower Suite, its first integrated imaging product
suite. The Company also began to commit substantial resources to strengthen
its indirect distribution channel of OEMs and BSPs. Sales and marketing
expenses increased from $1.6 million in the first six months of 1995 to $2.1
million during the last six months of 1995, and to $2.9 million in the first
six months of 1996, an increase of 34% and 84%, respectively. The Company
believes that these efforts were significant factors in its recent revenue
growth, including a 57% growth in total revenues during the first six months
of 1996 from the corresponding prior period. Healthcare revenues increased
from approximately 5% of total revenues in 1994 to approximately 9% of total
revenues during the first six months of 1996. On an overall basis, revenue
increased from $9.3 million in 1994 to $10.5 million in 1995, an increase of
13%. After experiencing operating losses in 1994 and the first two quarters of
1995, the Company returned to operating profitability in the third quarter of
1995 and has achieved an operating profit in each of the four subsequent
quarters. There can be no assurance, however, that such profitability will be
maintained in the future. See "Risk Factors--History of Losses; Accumulated
Deficit; Future Results of Operations Uncertain," "--Significant Fluctuations
in Operating Results" and "--Management Changes; No Assurance of Successful
Expansion of Operations."
19
<PAGE>
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 BSPs 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 worldwide network of approximately 170 BSPs
and three OEMs. For 1995 and the six months ended June 30, 1996, approximately
89% and 87%, respectively, of the Company's total revenues were derived from
its BSPs and approximately 11% and 13%, respectively, of its total revenues
were derived from sales by OEMs. In 1995, the Company's top 34 BSPs accounted
for approximately 80% of its total revenues. However, no individual BSP
accounted for greater than 10% of the Company's total revenues. For the year
ended December 31, 1995 and the six months ended June 30, 1996, the Company
generated approximately 15% 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 BSPs 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
BSPs and OEMs and the end-user, and the BSPs and OEMs then purchase
maintenance services directly from the Company. For 1995 and the six months
ended June 30, 1996, approximately 80% and 81%, respectively, of the Company's
total revenues were derived from software licenses and approximately 11% and
14%, 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 5%, respectively, of the Company's total
revenues.
License revenues are generally recognized upon shipment when no significant
vendor obligations remain and collectibility is probable. License revenues
related to contracts with significant post-delivery performance obligations
are recognized when the Company's obligations are no longer significant or
when the customer accepts the product, as applicable. Maintenance revenues are
deferred and recognized ratably over the maintenance period, which is
generally one year. Other revenues are recognized as services are performed.
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. See
Note 1 of Notes to Consolidated Financial Statements.
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. However, if other rights of return are granted, revenue
recognition is deferred until such rights lapse. The Company's aggregate
product returns have historically been insignificant. The Company's terms of
sales generally range from 30 to 60 days from date of shipment for BSPs and
OEMs. Terms of sales on major accounts are generally based on the achievement
of installation milestones and final system acceptance.
20
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data of the
Company expressed as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- -------------
1993 1994 1995 1995 1996
------- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Licenses........................ 76.6% 81.7% 79.6% 77.7% 81.1%
Maintenance and other........... 23.4 18.3 20.4 22.3 18.9
------- ------- ------- ----- -----
Total revenues................ 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Licenses........................ 5.2 4.5 3.0 2.3 4.0
Maintenance and other........... 22.9 20.4 17.4 19.0 12.4
------- ------- ------- ----- -----
Total cost of revenues........ 28.1 24.9 20.4 21.3 16.4
------- ------- ------- ----- -----
Gross margin...................... 71.9 75.1 79.6 78.7 83.6
Operating expenses:
Sales and marketing............. 28.6 45.4 35.7 36.0 42.1
Research and development........ 25.8 33.6 34.9 40.2 32.0
General and administrative...... 11.5 16.3 14.0 18.7 8.8
------- ------- ------- ----- -----
Total operating expenses...... 65.9 95.3 84.6 94.9 82.9
------- ------- ------- ----- -----
Income (loss) from operations..... 6.0 (20.2) (5.0) (16.2) 0.7
Other expenses.................... 5.3 0.3 3.9 0.6 --
------- ------- ------- ----- -----
Income (loss) before provision
(credit) for income taxes........ 0.7 (20.5) (8.9) (16.8) 0.7
Provision (credit) for income
taxes............................ 0.5 (1.8) 0.3 0.3 --
------- ------- ------- ----- -----
Net income (loss)................. 0.2% (18.7)% (9.2)% (17.1)% 0.7%
======= ======= ======= ===== =====
</TABLE>
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1996 TO JUNE 30, 1995
Revenues
Total revenues increased 57% from $4.4 million for the six months ended June
30, 1995 to $7.0 million for the six months ended June 30, 1996.
Licenses. License revenues increased 64% from $3.4 million for the six
months ended June 30, 1995 to $5.6 million for the six months ended June 30,
1996, representing approximately 78% and 81% of total revenues in their
respective periods. This increase was primarily the result of increased unit
sales of the FilePower Suite, increased international revenues as a result of
the IPRS/Intuit Acquisition and increased revenues from software sales to the
healthcare industry.
Maintenance and Other. Maintenance revenues increased 103% from
approximately $489,000 during the six months ended June 30, 1995 to $1.0
million for the six months ended June 30, 1996, representing approximately 11%
and 14% of total revenues in the respective periods. 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.
Cost of Revenues
Licenses. Cost of licenses consists 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
21
<PAGE>
increased from $104,000, or 3% of license revenues, for the six months ended
June 30, 1995 to $ 278,000 or 5% of license revenues, for the six months ended
June 30, 1996, primarily as a result of increased commissions paid under the
Company's product author program.
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 BSPs, OEMs and end-users, and the cost of
third-party software products. Cost of maintenance and other increased from
$842,000, or 85% of maintenance and other revenues, for the six months ended
June 30, 1995 to $866,000, or 66% of maintenance and other revenues, for the
six months ended June 30, 1996. This increase was primarily due to increased
staffing for customer support, partially offset by a decreased third-party
software component, which has a lower gross profit margin, in the six months
ended June 30, 1996.
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 $1.6 million, or 36% of total revenues, for
the six months ended June 30, 1995 to $2.9 million, or 42% of total revenues,
for the six months ended June 30, 1996. This increase was primarily
attributable to increased staffing for sales and marketing activities and the
opening of six regional sales offices during mid-1995. The Company anticipates
that sales and marketing expenses will continue to increase in absolute
dollars in 1996 as the Company continues to build and expand its network of
BSPs and OEMs.
Research and Development. Research and development expenses consist
primarily of salaries and other related expenses for research and development
personnel, as well as the cost of facilities and equipment. Research and
development expenses increased from $1.8 million, or 40% of total revenues,
for the six months ended June 30, 1995 to $2.2 million, or 32% of total
revenues, for the six months ended June 30, 1996. The increase was primarily
due to increased staffing in order to develop enhancements to the FilePower
Suite and to continue the development of the MediPower Suite. The Company
expects research and development expenses to continue to increase in absolute
dollars in 1996 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 decreased from $831,000 or 19% of total revenues, for
the six months ended June 30, 1995 to $612,000, or 9% of total revenues for
the six months ended June 30, 1996. The decrease was primarily due to the
Company incurring severance payments and recruiting and relocation expenses in
connection with the senior management reorganization during the first six
months of 1995. This was partially offset by increased staffing and related
expenditures. General and administrative expenses are expected to increase in
absolute dollars in 1996 as the Company expands its staffing to support
expanded operations and to comply with the responsibilities of a public
company.
Provision (benefit) for Income Taxes. Income taxes are accounted for in
accordance with Statement of Financial Accounting Standards No. 109. Due to
the Company's history of pre-tax losses and uncertainty surrounding the timing
of realizing the benefits of its favorable tax attributes, the Company has
recorded a valuation allowance against all of its net deferred tax assets as
of June 30, 1996. In reaching the Company's determination of the need to
provide a deferred tax valuation allowance, the Company considered all
available evidence, both positive and negative, as well as the weight and
importance given to such evidence. As required by Statement of Financial
Accounting Standards No. 109, management concluded that a valuation allowance
against deferred tax assets was appropriate at the current time. Specifically,
the Company has had annual losses in each of the last two years and quarterly
losses in six of the last eight quarters in the period ended December 31, 1995
and has had only near breakeven results in the two most recent quarters ended
June 30, 1996.
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 TO DECEMBER 31, 1994
Revenues
Total revenues increased 13% from $9.3 million in 1994 to $10.5 million in
1995. Revenue growth accelerated from 2% during the first six months of 1995,
compared to the first six months of 1994, to 24% during
22
<PAGE>
the last six months of 1995, compared to the last six months of 1994, as the
Company began to implement its new strategy under its new management team.
Licenses. License revenues increased 10% from $7.6 million in 1994 to $8.3
million in 1995, representing 82% and 80% of total revenues in their
respective periods. The increase in license revenues was primarily due to
sales associated with the release of the FilePower Suite in August 1995,
increased sales through indirect distribution channels and increased
international sales in Asia and South America.
Maintenance and Other. Maintenance and other revenues increased 26% from
$1.7 million in 1994 to $2.1 million in 1995, representing 18% and 20% of
total revenues in their respective periods, primarily as a result of an
increase in the number of installed systems and the Company's improved
tracking and monitoring of expiring maintenance contracts.
Cost of Revenues
Licenses. Cost of licenses decreased from $413,000, or 5% of license
revenues, in 1994 to $316,000, or 4% of license revenues, in 1995, primarily
as a result of lower royalty costs on third-party developed software.
Maintenance and Other. Cost of maintenance and other decreased from $1.9
million, or 112% of maintenance and other revenues, in 1994 to $1.8 million,
or 85% of maintenance and other revenues, in 1995, primarily as a result of
the Company's reduction in implementation services associated with the complex
imaging group.
Sales and Marketing. Sales and marketing expenses decreased from $4.2
million, or 45% of total revenues, in 1994 to $3.7 million, or 36% of total
revenues, in 1995, primarily due to the elimination of the complex imaging
group and the sales and marketing infrastructure the Company had built to
market the TEAMWorks products. Sales and marketing expenses increased from
$1.6 million in the first six months of 1995 to $2.1 million during the last
six months of 1995, an increase of 34%, as the Company began to build and
expand its network of BSPs and OEMs.
Research and Development. Research and development expenses increased from
$3.1 million, or 34% of total revenues, in 1994 to $3.7 million, or 35% of
total revenues, in 1995, primarily as a result of additional staff hired in
1995 to develop enhancements to the FilePower Suite and continue the
development of the MediPower Suite.
General and Administrative. General and administrative expenses remained
constant at $1.5 million in 1994 and 1995, representing 16% and 14% of total
revenues, respectively, primarily as a result of the Company discontinuing the
general and administrative functions that were acquired in connection with the
TEAMWorks Acquisition, offset by the costs of restructuring the Company's
senior management team.
Other Expenses. In 1995, other expenses included $373,000 related to the
settlement of outstanding litigation. The expense included settlement costs
and legal fees.
Provision (benefit) for Income Taxes. The Company recognized a tax benefit
of $168,000 in 1994 principally as a result of net operating loss carrybacks.
The Company recognized minimal income tax expense in 1995 resulting from
taxable income in the Company's UK subsidiary. As of December 31, 1995, the
Company's net operating loss carryforwards were approximately $2.3 million and
expire in varying amounts from 2009 through 2010. Additionally, the Company
has various tax credit carryforwards aggregating approximately $341,000, which
expire between 2005 and 2009. The Company's ability to use the net operating
loss carryforwards against taxable income are subject to restrictions and
limitations under the Internal Revenue Code of 1986 (the "Code"), as amended,
in the event of a change of ownership within the meaning of the Code. Due
23
<PAGE>
to the Company's history of pre-tax losses and the uncertainty surrounding the
timing of realizing the benefits of the Company's favorable tax attributes,
the Company has placed a valuation allowance against its net deferred tax
assets. See Note 6 of Notes to Consolidated Financial Statements.
COMPARISON OF YEARS ENDED DECEMBER 31, 1994 TO DECEMBER 31, 1993
Revenues
Total revenues increased 2% from $9.0 million in 1993 to $9.3 million in
1994. The significant decrease in the Company's historical revenue growth rate
was primarily due to the effects of the Company's unsuccessful efforts to
diversify outside of its core imaging business.
Licenses. License revenues increased 9% from $6.9 million in 1993 to $7.6
million in 1994, representing 77% and 82% of total revenues in their
respective periods. The increase in license revenues was primarily due to
increased sales volume of the Company's software products.
Maintenance and Other. Revenues from the sale of maintenance contracts and
third-party products decreased 20% from $2.1 million in 1993 to $1.7 million
in 1994, representing 23% and 18% of total revenues in their respective
periods. The decrease was primarily a result of the absence of third-party
hardware products in 1994 which accounted for approximately $600,000 of 1993
revenues.
Cost of Revenues
Licenses. Cost of licenses decreased from $471,000, or 7% of license
revenues, in 1993 to $413,000, or 6% of license revenues, in 1994, primarily
as a result of lower royalty costs on third-party software.
Maintenance and Other. Cost of maintenance and other decreased from $2.1
million, or 98% of maintenance and other revenues, in 1993 to $1.9 million, or
112% of maintenance and other revenues, in 1994, primarily as a result of the
absence of sales of third-party hardware products in 1994, offset by increased
support requirements for the TEAMWorks products and additional staffing in
connection with the formation of the complex imaging group.
Sales and Marketing. Sales and marketing expenses increased from $2.6
million, or 29% of total revenues, in 1993 to $4.2 million, or 45% of total
revenues, in 1994, primarily due to increased expenses associated with the
TEAMWorks products and the buildup of the direct sales and marketing
infrastructure to support the complex imaging group.
Research and Development. Research and development expenses increased from
$2.3 million, or 26% of total revenues, in 1993 to $3.1 million, or 34% of
total revenues, in 1994, primarily as a result of additional development
efforts required to integrate the products acquired in the TEAMWorks
Acquisition with the Company's core products.
General and Administrative. General and administrative expenses increased
from $1.0 million in 1993, or 12% of total revenues, to $1.5 million, or 16%
of total revenues, in 1994, primarily as a result of the increased general and
administrative expenses incurred in connection with the TEAMWorks Acquisition,
including the cost of maintaining duplicative corporate and administrative
functions for a period of six months after the closing of the TEAMWorks
Acquisition.
Other Expenses. In 1993, other expenses included $458,000 related to the
settlement of outstanding litigation. The expense included settlement costs
and legal fees.
Provision (benefit) for Income Taxes. The Company's provision (benefit) for
income taxes was $42,000 in 1993 and $(168,000) in 1994. The provision in 1993
was primarily for foreign taxes, and the Company's income
24
<PAGE>
tax benefit for 1994 reflects the utilization of operating loss carrybacks and
a valuation allowance recorded against the net operating loss carryforwards
generated during 1994.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain quarterly consolidated results of
operations data for each of the eight quarters ended June 30, 1996, including
such amounts expressed as a percentage of total revenues. This quarterly
information is unaudited, has been prepared on the same basis as the annual
financial statements and, in the opinion of the Company's management, reflects
all normal recurring adjustments necessary for a fair presentation of the
information for the periods presented. Operating results for any quarter are
not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------
SEPT. DEC. MARCH JUNE SEPT. DEC. MARCH JUNE
30, 31, 31, 30, 30, 31, 31, 30,
1994 1994 1995 1995 1995 1995 1996 1996
------ ------ ------ ------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues:
Licenses............... $1,592 $2,511 $1,567 $1,877 $2,132 $2,757 $2,506 $3,142
Maintenance and other.. 359 423 392 597 549 597 600 712
------ ------ ------ ------ ------ ------ ------ ------
Total revenues......... 1,951 2,934 1,959 2,474 2,681 3,354 3,106 3,854
Cost of revenues:
Licenses............... 74 141 51 53 63 149 131 147
Maintenance and other.. 406 450 410 432 480 501 387 479
------ ------ ------ ------ ------ ------ ------ ------
Total cost of
revenues.............. 480 591 461 485 543 650 518 626
------ ------ ------ ------ ------ ------ ------ ------
Gross profit............ 1,471 2,343 1,498 1,989 2,138 2,704 2,588 3,228
Operating expenses:
Sales and marketing.... 1,062 1,011 671 924 893 1,244 1,238 1,689
Research and
development........... 718 801 860 921 841 1,036 1,052 1,177
General and
administrative........ 322 392 273 558 297 333 288 324
------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses.............. 2,102 2,204 1,804 2,403 2,031 2,613 2,578 3,190
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from
operations............. (631) 139 (306) (414) 107 91 10 38
Other expenses
(income)............... 11 14 15 8 6 382 8 (5)
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before
provision (benefit) for
income taxes........... (642) 125 (321) (422) 101 (291) 2 43
Provision (benefit) for
income taxes........... (52) 28 5 8 6 10 -- --
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)....... $ (590) $ 97 $ (326) $ (430) $ 95 $ (301) $ 2 $ 43
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------
SEPT. DEC. MARCH JUNE SEPT. DEC. MARCH JUNE
30, 31, 31, 30, 30, 31, 31, 30,
1994 1994 1995 1995 1995 1995 1996 1996
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL
REVENUES:
Revenues:
Licenses............... 81.6% 85.6% 80.0% 75.9% 79.5% 82.2% 80.7% 81.5%
Maintenance and other.. 18.4 14.4 20.0 24.1 20.5 17.8 19.3 18.5
----- ----- ----- ----- ----- ----- ----- -----
Total revenues......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Licenses............... 3.8 4.8 2.6 2.1 2.3 4.4 4.2 3.8
Maintenance and other.. 20.8 15.3 20.9 17.5 18.0 15.0 12.5 12.4
----- ----- ----- ----- ----- ----- ----- -----
Total cost of
revenues.............. 24.6 20.1 23.5 19.6 20.3 19.4 16.7 16.2
----- ----- ----- ----- ----- ----- ----- -----
Gross margin............ 75.4 79.9 76.5 80.4 79.7 80.6 83.3 83.8
Operating expenses:
Sales and marketing.... 54.4 34.5 34.3 37.3 33.3 37.1 39.9 43.8
Research and
development........... 36.8 27.3 43.9 37.2 31.4 30.9 33.8 30.6
General and
administrative........ 16.5 13.3 13.9 22.6 11.0 9.9 9.3 8.4
----- ----- ----- ----- ----- ----- ----- -----
Total operating
expenses.............. 107.7 75.1 92.1 97.1 75.7 77.9 83.0 82.8
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from
operations............. (32.3) 4.8 (15.6) (16.7) 4.0 2.7 0.3 1.0
Other expenses
(income)............... 0.6 0.5 0.8 0.3 0.2 11.4 0.3 0.0
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before
provision (benefit) for
income taxes........... (32.9) 4.3 (16.4) (17.0) 3.8 (8.7) -- 1.0
Provision (benefit) for
income taxes........... (2.7) 1.0 0.3 0.3 0.2 0.3 -- --
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)....... (30.2)% 3.3% (16.7)% (17.3)% 3.6% (9.0)% 0.0% 1.0%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
25
<PAGE>
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, and 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 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 expects this pattern to continue in future years. To
the extent 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 adversely
affected because a proportionately small amount of the Company's expenses
varies with its revenues. As a result of these and other factors, the Company
believes that its quarterly operating results will vary in the future and
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through cash
generated from operations, private sales of preferred stock totaling $4.8
million, equipment lease financings and periodic borrowings under its credit
facilities. At June 30, 1996, the Company had approximately $603,000 in cash.
Cash used in operating activities was $1.3 million and $127,000 in 1994 and
1995, respectively, and $772,000 for the six months ended June 30, 1996. The
Company generated cash from operations of $9,000 in 1993.
Cash used in investing activities was $72,000, $158,000 and $208,000 in
1993, 1994 and 1995, respectively. During the six months ended June 30, 1996,
the Company used cash of $321,000 in investing activities. Uses of cash
consisted solely of purchases of property and equipment, partially offset by
cash acquired in the IPRS/Intuit Acquisition.
Cash provided from financing activities was $1.7 million, $0.5 million and
$1.0 million in 1993, 1994 and 1995, respectively. Cash provided from
financing activities was $281,000 for the first six months of 1996. Cash from
financing activities resulted primarily from private sales of preferred stock,
and proceeds from and repayments of bank borrowings and capital leases.
At June 30, 1996, the Company's principal sources of liquidity included cash
of $603,000. In addition, the Company had a secured credit facility for up to
$1.5 million which expired on such date. There were no amounts outstanding
under the working capital line at such time. The Company has received a
commitment letter for a new credit facility consisting of a working capital
line of credit pursuant to which the Company would be able to draw up to $3.0
million for one year bearing interest at the bank's prime rate plus .75%.
However, there can be no assurance that a new credit facility can be
established based on such terms or at all. Pursuant to the commitment letter,
any loans under the bank credit facility would be secured by all of the
Company's assets with the exception of its intellectual property. The Company
also has a term facility of $0.3 million to finance capital expenditures,
which bears interest at the bank's prime rate plus 2.0%. Pursuant to the term
facility, $271,000 was outstanding. The term facility is repayable in 30 equal
installments of principal and accrued interest commencing July 1996. In
addition, the Company has outstanding a two-year secured note with a principal
balance of $253,000 at June 30, 1996, bearing interest at 10.75%. See Note 4
of Notes to the Consolidated Financial Statements.
26
<PAGE>
The Company's aggregate product returns have historically been insignificant
to date. The liquidity characteristics of accounts receivable have a
significant impact on the Company's short-term liquidity, and a lesser impact
on the Company's long-term liquidity. The inability to collect accounts
receivable when due can have a material adverse effect on the Company's
working capital and financial condition at any point in time. This risk is
substantial because of the significance of accounts receivable relative to the
total assets of the Company.
As of June 30, 1996, the Company also had outstanding approximately $150,000
in indebtedness under a non-interest bearing promissory note in the original
aggregate principal amount of $225,000 which was issued in settlement of
litigation. A portion of the net proceeds of this offering will be used to
repay this note in full. See "Use of Proceeds."
The Company's principal commitments consist of leases on its office
facilities and obligations under its bank credit facility. The Company
currently has no material commitments for capital expenditures. The Company
believes that the net proceeds from this offering, 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. Depending on the Company's future growth and acquisitions, if
any, it may become necessary to secure additional sources of financing before
or after such time period.
27
<PAGE>
BUSINESS
Optika is a leading provider of high-performance, client/server, integrated
imaging software designed to meet the needs of paper intensive industries such
as healthcare, financial services, insurance and retail. The Company's
FilePower Suite is comprised of server software, which provides core imaging
functions, application software for document image management, COLD and
automated workflow transaction processing, and associated development tools.
The FilePower Suite is easy to install, use and integrate with end-users'
existing information systems, and is designed to be deployed at the
departmental or workgroup level and then scale throughout the enterprise. The
Company believes that the FilePower Suite enables end-users to reduce costs,
improve operational productivity and enhance customer service. Additionally,
the Company believes it is one of the leading providers of imaging solutions
to the healthcare industry, based on over 80 installations of the FilePower
Suite, although healthcare revenues comprised approximately 9% of the
Company's total revenues during the first six months of 1996. The Company is
seeking to capitalize on the success of the FilePower Suite in the healthcare
industry through the development of the MediPower Suite which is designed to
enable hospitals and other healthcare organizations to manage large amounts of
patient related documents. The MediPower Suite incorporates document image
management, COLD and automated workflow transaction processing technologies
and is designed to provide fast and efficient access to patient information
from workstations located throughout the enterprise, including the point of
patient care.
INDUSTRY BACKGROUND
The Document Image Processing Industry
Document 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). Document capture is the conversion of paper documents into
digitized images and generally includes batch preparation, scanning, image
enhancement, quality assurance and indexing of images to long-term storage,
including optical disks, CD-ROM and magnetic media. Optical storage is the
storage of images on optical drives and jukeboxes and includes platter
management, volume management and hierarchical storage management. Retrieval
and display is the retrieval of document images via either standard searches
(using the indices stored during capture) or full-text indexing for display,
annotation and routing. Document management is the centralized management and
administration of large volumes of documents and typically provides a file
cabinet and file folder metaphor for retrieving documents. Workflow is the
automation of routine work processes, usually by automatic routing of images
as a replacement for manual routing of paper.
For paper intensive industries, such as healthcare, financial services,
insurance and retail, electronic document image processing offers several
advantages over paper or microfilm, including: (i) faster and easier file
access, because document images are located and retrieved by entering a few
key-words into a computer database rather than by searching through file
cabinets for paper folders or microfilm, (ii) fewer misfiled documents,
because database software is used to track the location of document images,
(iii) concurrent file access, since multiple users have the ability to access
a document simultaneously, (iv) remote distribution and access, because
document images are easily transmitted to standard facsimile equipment or
remote computer terminals over commercial telephone lines, and (v) less
expensive storage, because electronic storage generally requires less floor
space and clerical overhead than paper-based storage, thereby reducing overall
document storage costs. Once documents have been converted to an electronic
format, they can be automatically routed from one workgroup or task to
another. By implementing the automated workflow approach, companies can
improve operating efficiencies compared to traditional paper-based document
processing tasks. Several typical uses of document imaging systems include:
Patient Records Management. The effectiveness of many existing healthcare
information systems is limited because many aspects of a patient's medical
record are on paper and may be located in several different departments or at
off-site storage facilities. Hospitals and other healthcare providers can use
imaging solutions to create a respository for a patient's complete medical
record, including paper-based documents, such as doctors'
28
<PAGE>
orders and notes, consent forms and progress notes, and computer generated
information, such as lab reports, transcriptions and patient demographics. In
addition, medical images, such as X-rays and CAT scans, may be stored on the
system. The availability of timely and complete patient information can enable
healthcare providers to control costs while improving the quality of patient
care.
Insurance Claim Processing. Insurance companies use document imaging systems
to speed claim processing. Documents associated with the claim are imaged and
indexed, so that a service representative can retrieve the documents quickly
when a customer calls, rather than having the documents delivered and calling
the customer back. This can resolve claims more quickly and improve customer
service.
Loan Processing. Loan processing at financial institutions usually involves
a large folder of documents that must be approved by many departments, a
process that can take several weeks when done manually. By implementing
document imaging, loan documents can be routed electronically to multiple
departments, including remote offices, and approvals can be collected more
quickly, increasing the institution's operating efficiencies.
Accounts Payable Processing. Accounts payable processing for retailers and
distributors with multiple geographic locations and high transaction volumes
usually involves a large number of paper-based steps and significant costs for
document storage. Imaging solutions permit accounts payable personnel to
access invoices, purchase orders and related documents from their desktop
computers and can significantly reduce the number of costly paper-based steps.
The growth of the market for document image processing systems is being
driven by: (i) improved price/performance characteristics of client/server
distributed computing systems which have provided increased computing power at
the desktop and higher bandwidth LANs and WANs, (ii) the widespread deployment
of client/server computing systems connected to an infrastructure of LANs and
WANs and (iii) increased competitive pressures for businesses to improve
productivity and reduce costs, especially in paper-intensive industries. The
production segment of the document imaging market includes applications that
handle large volumes of paper and perform structured business functions such
as patient records management, insurance claim processing, loan processing and
accounts payable processing. According to a study by BIS Strategic Decisions,
the software component of the North American production imaging segment has
grown from approximately $264 million in 1993 to approximately $366 million in
1995 and is projected to grow to approximately $682 million by 1998.
The Evolution of Document Imaging Technology and Systems
In the mid-1980s, the first generation of document image processing systems
was introduced. The hardware components of these systems included optical
scanners, optical disks and digital compression technologies which provided
the technological foundation for processing and managing paper documents in
image form. These early systems employed proprietary minicomputer
architectures and closed, proprietary software and were sold by direct sales
organizations to address high-end production applications. These systems
generally required a significant amount of custom integration before they
could interface with the customer's existing legacy systems. The first
generation systems were typically priced in excess of $1 million.
Commencing in the early 1990s, the market for enterprise-wide computing
systems used by large commercial organizations has undergone a significant
transformation as advances in hardware, software and networking technologies
have led to a shift from mainframe and other "host-based" computer
architectures to networked, client/server architectures in which computing
tasks are distributed among numerous computers throughout the network. The
flexibility, computing power and cost-effectiveness of distributed processing
in an open systems environment has encouraged numerous large organizations to
move many mission-critical computer applications to client/server systems from
mainframes. In particular, the widespread adoption of client/server computing
systems has significantly reduced the investment required to install,
implement and operate mission-critical imaging and workflow applications. Most
client/server production imaging systems are currently based on UNIX operating
systems. However, a 1996 study by International Data Corporation predicts that
while shipments of UNIX servers will grow from 462,000 in 1994 to 766,000 in
1998, a 13% annual growth
29
<PAGE>
rate, shipments of Windows NT servers will grow from 115,000 in 1994 to
1,170,000 in 1998, a 79% annual growth rate, challenging UNIX as the leading
server software. Windows NT operating systems are expected to experience
significant growth due to the large installed base of Windows NT-ready
personal computers, its user friendliness and its relatively low user cost
compared to the cost of UNIX systems. With the emergence of Windows NT-based
operating systems, an alternative technological infrastructure to UNIX is now
in place to offer high performance imaging systems using standard desktop
hardware and software which can be installed and integrated in weeks or
months.
Certain challenges facing the healthcare industry illustrate the market
potential for client/server based imaging solutions. Competition and cost-
containment measures imposed by governmental and private payors have created
substantial pressures on healthcare providers to control healthcare costs
while providing quality patient care. At the same time, the healthcare
delivery system is experiencing a shift from a highly fragmented group of non-
allied healthcare providers to integrated delivery networks which combine
payors, hospitals, and outpatient facilities. These integrated delivery
networks are better suited to improve care and enhance operating efficiencies
in the increasingly competitive healthcare environment. Traditional healthcare
information systems have proven to be inadequate because (i) they do not
capture large amounts of paper-based records which are stored in various sites
throughout the enterprise, (ii) they usually cannot share computerized patient
data which have been generated using disparate systems and (iii) they cannot
access medical images such as X-rays and CAT scans at the point of care. In
order to address these concerns, hospitals and other healthcare providers are
demanding comprehensive, cost-effective information systems that deliver rapid
access to a fully updated and complete computer-based patient record ("CPR").
While healthcare information system ("HCIS") vendors have made progress
integrating many of the components necessary to construct a CPR, a complete
CPR must also contain all current and historical patient information and
information generated and stored outside of the local computer network.
Document imaging and COLD technologies are essential elements of a CPR because
they allow paper-based documents, computer generated information and medical
images to be stored, accessed and delivered to the provider at the point of
patient care. Hospitals and other healthcare providers are increasingly
seeking integrated imaging systems with a standards-based architecture and
custom interfaces designed to accept current medical interface formats to
increase productivity, reduce costs of administration and increase cash flow.
Other paper intensive industries face cost containment and productivity
challenges similar to those confronting the healthcare industry. An increasing
number of companies in these industries are seeking cost-effective image
processing solutions that leverage their existing technological investments.
THE OPTIKA SOLUTION
Optika has developed the FilePower Suite of integrated client/server imaging
software comprised of server software, which provides core imaging functions,
application software for document image management, COLD and automated
workflow transaction processing, and associated development tools. The Company
believes that the FilePower Suite enables end-users to reduce costs, improve
operational productivity and enhance customer service. The Company's
integrated imaging software combines image management, COLD and advanced
workflow processing into a single component-based application. The FilePower
Suite is designed to provide the following key benefits:
Rapid Installation and Ease of Use. The FilePower Suite is contained on a
single compact disk ("CD") which includes on-line documentation and on-line
help, and is designed for push-button installation and rapid integration into
the end-user's existing information system. The Company's products offer a
convenient user interface so that users can move easily between imaging, COLD
and workflow applications as well as other graphical applications. The
FilePower Suite uses common viewing technology for the integrated products
that allows end-users to work with a common environment to manage all of the
folder-based data in the imaging and COLD systems. Standard programming
languages can be used to integrate existing information systems and other
management information technologies with the FilePower Suite.
Enterprise-Wide Scalability. The Company's products can be deployed via LANs
and WANs, and are designed for enterprise-wide scalability throughout large
organizations. Thus, organizations can deploy solutions
30
<PAGE>
that meet the needs of workgroups and departments and can later scale across
an entire enterprise. Small workgroups can take advantage of enterprise
functionality such as volume input and storage, disaster recovery and security
while large enterprises can implement systems based on departmental return on
investment calculations.
Compatibility with Heterogeneous Computing Environments. Since inception,
the Company's products have been designed to operate on Windows-based
platforms. The Company's software products currently operate on a variety of
open computing platforms, including Windows 3.x, Windows 95 and Windows NT on
the client desktop, Windows NT and Novell Netware as servers and UNIX for SQL
database support. The Company's products also operate on many common hardware,
software and database platforms, including SQL databases from Oracle, Sybase
and Microsoft. Because different types of data can be accessed from a variety
of platforms without the need for reformatting, the Company's products can be
deployed in an enterprise which has heterogeneous platforms without
necessitating a restructuring of the organization's existing computing
environment.
Ease of Customization and Extension. The open client/server architecture of
the Company's products enables end-users to customize the software for
industry-specific vertical applications which can then be integrated into
existing computing environments through a custom user interface. The Company's
network of BSPs and OEMs are able to build industry-specific customized
applications which interoperate with the Company's open, component-based
software using Microsoft's Object Linking and Embedding ("OLE") and Open
Database Connectivity standards. The MediPower Suite is an example of a
customized application being developed by the Company based on the FilePower
Suite.
The Company believes it is one of the leading providers of imaging solutions
to the healthcare industry, although healthcare revenues comprised
approximately 9% of the Company's total revenues during the first six months
of 1996. The Company is seeking to capitalize on the installed base of over 80
installations of the FilePower Suite in the healthcare industry through the
development of the MediPower Suite. The MediPower Suite is designed to (i)
capture and store electronic data from disparate hospital information systems
through real-time, computerized interfaces, (ii) provide applications for
efficiently scanning and automatically indexing paper-based records, (iii)
facilitate the storage of digitized medical images such as X-rays and CAT
scans, (iv) allow storage of a patient's lifetime medical record on low cost
optical disks, (v) enable workflow re-engineering of business processes and
(vi) incorporate user-oriented interfaces that allow the provider to easily
locate and retrieve patient information in the hospital or clinical setting.
The following are examples of end-user applications of the Company's
products. The benefits achieved by the following end-users will not
necessarily be achieved by every end-user.
Healthcare: A 500-bed hospital with two facilities in Kentucky was
experiencing significant growth in out-patient volumes and associated billing
and cash collection processing, and wanted an imaging solution that would
streamline the patient intake function and ultimately create a complete CPR
for its physicians. In conjunction with one of its BSPs, the Company installed
the FilePower Suite and is currently in the process of installing the
MediPower Suite at the end-user's site to provide medical records and patient
billing document storage, workflow processes for patient billing and chart
completion, auto-indexing of documents, bursting and filing of reports from
existing healthcare information systems and automated bulk remittance
processing. Three of the seven software modules included in the MediPower
Suite have been installed and are currently operational at the end-user's
facilities.
Financial Services: A leading financial services firm needed to automate its
post-loan closing process at one of its three U.S. service centers. Prior to
the installation of the FilePower Suite, this process consisted of 155 total
steps, 22 of which were manual decisions and 109 of which were paper-based,
including mail, setup, audit, assignment, copying and filing. In conjunction
with one of its BSPs, Optika installed and integrated the FilePower Suite with
the end-user's existing legacy system in under 90 days. Following the
installation of the FilePower Suite, the number of paper-based steps and the
total number of steps were each reduced by over 50%, providing significant
productivity improvements. The Company is currently in the process of
installing the FilePower Suite at the end-user's second U.S. service center
and two international service centers.
31
<PAGE>
Banking: A leading U.S. financial institution sought to improve the quality
of customer service provided by its Sioux Falls, South Dakota operations
center which managed the customer service operations of 40 banks and to reduce
the space required to store paper-based files such as account applications,
powers-of-attorney, signature cards and correspondence. In conjunction with a
local BSP, the Company installed the FilePower Suite to enable customer
service employees at the operations center to store and retrieve customer
information formerly contained in paper-based files from their desktop
computers. Following the installation of the Company's software, the average
time that a bank has had to wait for information from the operations center
has been reduced from an average of 3.5 minutes to under one minute, hundreds
of square feet of storage space has been reduced to 40 square feet, and the
end-user has been able to reduce the number of customer service employees at
the operations center by approximately 30%.
Retail: A leading membership warehouse with over 240 membership warehouses
in the United States, Canada, Mexico and the United Kingdom needed to reduce
the paperwork associated with its accounts payable processing system. The end-
user expected that, by 1996, in the absence of an imaging solution, accounting
documents would exceed 9 million pages per year. In conjunction with one of
its BSPs, the Company installed FPmulti and FPreport to provide the end-user
with the ability to assemble and access proof of shipment, purchase orders and
invoices on-line, resulting in cost savings in excess of $7 million over a
five-year period as well as improved customer service through faster and more
reliable access to documents.
STRATEGY
Optika's objective is to be the leading worldwide supplier of high-
performance client/server, integrated imaging software designed to meet the
needs of paper-intensive industries. The Company's strategy includes the
following key elements:
Extend Technology Leadership. The Company intends to extend its position as
a technology leader in developing and marketing open architecture,
client/server, integrated imaging, COLD and workflow software products. The
Company believes that Windows NT will challenge UNIX as a leading imaging and
workflow server operating system over the next several years and intends to
maintain and extend its leadership position in developing imaging software to
support Windows NT operating environments. The Company plans to introduce
enhancements to its FilePower Suite and vertical market applications which are
complementary to the FilePower Suite, such as the MediPower Suite. The Company
also may seek to acquire complementary technologies and products both to
enhance the features and functionality of its existing products and to add new
products. The Company is developing intranet and Internet applications for its
imaging, COLD and workflow technologies.
Continue to Develop Leveraged Distribution Model. The Company intends to
continue to strengthen its network of BSPs and OEMs in targeted domestic and
international markets. BSPs are an integral part of the Company's distribution
strategy because they are responsible for identifying potential end-users,
selling the Company's products to end-users as part of a complete hardware and
software solution, customizing and integrating the Company's products at the
end-user's site and supporting the end-user following the sale. The Company's
strategy is to target its marketing activities toward its most productive BSPs
and recruit additional BSPs in key geographical and vertical markets. OEMs
also are an integral part of the Company's distribution strategy because they
generally have a higher sales volume and require considerably less post-sales
support than the Company's BSPs. The Company currently has OEM relationships
with Lanier Worldwide, Inc. ("Lanier"), Alltel Healthcare Information
Services, Inc. ("Alltel") and Anacomp, Inc. ("Anacomp") and is actively
seeking to develop additional OEM relationships.
Focus on Scalable Solutions. The Company has designed its products to scale
from workgroups and departments to large enterprises. The Company believes
that initial end-user success with its software is an essential factor in the
end-user's decision to deploy the software throughout the enterprise. The
Company believes that migrating end-users from initial departmental usage to
enterprise-wide deployment provides additional sales opportunities within its
existing end-user installed base. Optika also intends to integrate its
software with Lotus Notes and its workflow application software with Microsoft
Exchange client software.
32
<PAGE>
Lower Cost of Ownership. The Company's intends to continue to enable end-
users to leverage their investment in their existing infrastructure of
heterogeneous hardware, software and database systems through the open
architecture of it software products. The Company believes that end-users,
BSPs and OEMs can reduce programming costs by using Optika's application
programming interface ("API") or by employing the integration methods in OLE.
Because the Company's products can be initially deployed at the workgroup
level, end-users can deploy a limited number of copies of Optika's software as
required to meet their immediate needs, and then receive preferential pricing
as they scale to a larger number of users.
Capitalize on Healthcare Opportunity. Due to the size of the FilePower
Suite's installed base in the healthcare industry, the Company formed a
dedicated Healthcare Division in August 1994 to develop and market the
MediPower Suite as a comprehensive software solution tailored to this
industry. Key elements of the Company's healthcare strategy include completing
the development of the MediPower Suite, recruiting additional BSPs, OEMs and
sales and marketing personnel focused on healthcare, and expanding sales of
its imaging products to other healthcare organizations, including health
maintenance organizations and home healthcare providers. The Company intends
to develop additional applications for other vertical markets, such as
financial services, in the future.
PRODUCTS
The Company's core products are the FilePower Suite, a suite of high-
performance, client/server, integrated imaging software products which perform
all five basic imaging functions, and the MediPower Suite, a suite of
integrated document imaging and computer report processing applications for
managing medical records and business office applications. The Company's
products run on a variety of open computing platforms, support standard
graphical operating systems and can be deployed across enterprises through
LANs and WANs.
FILEPOWER SUITE
In August 1995, the Company released the FilePower Suite on a single, easy-
to-use CD which simplifies system installation and configuration. The
FilePower Suite consists of a client domain, development tools and a server
domain. The client domain includes document image management, COLD and
workflow software applications while the server domain provides an extensive
set of core imaging services. API development tools included on the CD enable
third-party developers to build a variety of applications tailored to specific
industries. Electronic business documents and COLD pages can be stored in
folders along with document images, which are managed by the FilePower server
software. The FilePower Suite allows users to view and manipulate many
disparate document types without launching separate applications.
33
<PAGE>
[GRAPHICAL REPRESENTATION OF COMPONENTS OF
FILEPOWER ARCHITECTURE APPEARS HERE]
Client Domain
FPmulti. FPmulti, the Company's image management product, provides a
comprehensive solution for managing scanned images of paper documents,
facsimiles and computer-generated reports, as well as data files created by
common Windows-based application software. FPmulti accesses the tools
necessary to capture, view, file, store, retrieve, share, print and fax
documents. FPmulti utilizes industry-standard SQL databases to manage the
index information for scanned documents, computer reports and electronic files
created by other office applications.
FPreport. FPreport, the Company's COLD product, is an information solution
for the capture, optical storage, management and retrieval of mainframe and
minicomputer generated reports as an alternative to paper or COM (computer
output to microfilm/fiche). FPreport captures computer data from mainframes,
minicomputers and personal workstations to be formatted, indexed, compressed
and stored on optical disk. It also provides users with an interface for
designing and selecting the fields that will be indexed for future retrieval
needs. FPreport is able to store hundreds of thousands or millions of computer
report pages on an optical disk using compression techniques.
PowerFlow. PowerFlow is the automated transaction processing system that
provides independent workflow services, process-based and ad hoc routing, and
a platform for integrating third-party applications and data into the workflow
process. All management and administration for the system (for example,
designing workflow process maps and, producing management reports) is
accomplished graphically and without programming or scripting. The resulting
process definitions are used as an electronic "road map" for automatically
routing documents, initiating task assignments and triggering automated
processes such as printing, faxing or updating. In addition, an administration
tool allows supervisory personnel to monitor and manage work processes and
resources on a continuous basis.
34
<PAGE>
WorkBooks and WebBooks. Optika WorkBooks enables copies of documents stored
in a FilePower application to be placed in a "container" that can be e-mailed
via Lotus Notes, Microsoft Exchange, corporate e-mail systems and similar
systems throughout the enterprise. WebBooks, the Company's first product being
developed for intranets and the Internet, will use WorkBook technology to
allow users to collect information from an Optika system, encrypt it, and
transmit it over intranets and the Internet with a high level of security.
Development Tools and Connectivity
FilePower integration and development tools include a set of APIs and an OLE
automation and control layer (collectively, "FPengine"). FPengine consists of
a powerful collection of advanced functions designed to simplify the
complexity of image-enabling, including optical disk management, OCR, full
text indexing, high-speed image printing and faxing and image display and
manipulation. FPengine provides a comprehensive solution for integrating
imaging, COLD and workflow functionality with most existing applications.
FPengine can be used by third-party developers with standard development tools
including Visual Basic, C/C++ and PowerBuilder and other programming
environments to image-enable legacy applications and to invent custom document
imaging solutions or create value added enhancements to the core FilePower
family of products by integrating other information management technologies.
Server Software Domain
The server software included in the FilePower Suite provides a number of
core image management functions. FPdisc facilitates the retrieval and storage
of documents and images. The FPdisc Server acts as the system's storage for
data files, documents, computer reports and images. FPdisc Server is the
foundation of the Optika image and work management systems and support
numerous high-capacity storage subsystems such as optical media and CD-ROM.
FPprint and FPfax provide hard-copy replication, electronic transmission and
reception of documents and images. FPenhance improves the quality of scanned
images by applying complex mathematical algorithms to the image. These
enhancement functions serve to improve the shape and readability of the
characters on the scanned image, resulting in higher accuracy for the optical
character recognition process performed by the FilePower Optical Character
Recognition Server ("FPocr"). The FilePower Transaction Processing Systems
("FPtransact") are companion servers that perform batch processing of work
generated by external systems. The FPtransact product line includes batch
processing capabilities for FPmulti and PowerFlow, and the SQL database
structures for FPmulti and PowerFlow.
MEDIPOWER SUITE
The Company is currently developing the MediPower Suite, an integrated
patient accounting and medical records software suite designed to enable
hospitals and other healthcare organizations to manage large amounts of
patient related documents. The MediPower Suite, which utilizes the FilePower
server software and associated development tools, is designed to provide fast
and efficient access to patient information from workstations located
throughout the enterprise, including the point of patient care. The MediPower
Suite integrates and improves on the traditional paper-handling associated
with patient care and is designed to address initial patient scheduling, in-
patient, out-patient or emergency department treatment, medical chart
completion, billing, follow-up and remittance posting. The MediPower Suite
will integrate with HCIS systems to automatically establish computer-based
patient records. Additionally, the MediPower Suite will provide a customized
medical viewer and configurable workflow processes. To date, five of the seven
software modules currently comprising the MediPower Suite have been developed
and the remaining two modules are under development and are currently expected
to be completed by the end of 1996. In addition, an eighth module will be
added to the MediPower Suite, and is expected to be delivered by mid-1997. The
Company may add additional software modules to extend the functionality of the
MediPower Suite. The Company has formed an advisory council of current and
potential end-users of the MediPower Suite to enable it to meet industry-wide
requirements. See "Risk Factors--Risks Associated with the MediPower Suite."
35
<PAGE>
[GRAPHICAL REPRESENTATION OF COMPONENTS OF
MEDIPOWER SUITE APPEARS HERE]
The following are key aspects of the MediPower Suite:
MPregister. MPregister uses pen-pads and low-cost desktop scanners at the
registration desks to reduce or eliminate the creation of paper at the time of
patient registration. Patients review, complete and electronically sign
various forms which are then automatically placed in the patient's electronic
folder.
MPviewer. MPviewer is the fundamental interactive viewing tool for medical
charts and folders as well as records in the business office. It is used
throughout the MediPower Suite and displays scanned documents, medical images,
formatted pages from downloaded computer reports, as well as most word
processing, spreadsheet and other personal computer-type files. MPviewer
features folder-style tabs to access documents within sections of a chart or
billing folder, and can be personalized for individual users.
MPchart. MPchart combines sophisticated rule-based workflow with a simple
graphical interface for chart completion and enables doctors or other
authorized personnel to electronically sign individual documents. MPchart
supports assignment and re-analysis of deficiencies and interfaces with the
hospital's existing third-party deficiency tracking software to form a secure,
comprehensive and versatile completion system.
MPbridge. MPbridge uses the healthcare industry's "HL-7" communication
standard to interface with the hospital's admission, discharge and transfer
system for automatic folder creation/maintenance, as well as automatic
retrieval of documents from prior visits into high speed magnetic disk cache.
MPindex. MPindex is a configurable, extensible workflow system for scanning,
auto-indexing and filing all types of medical records, financial documents,
and correspondence. It combines technologies such as image enhancement, bar-
code recognition, OCR and mark sense with a streamlined user interface for
document quality control, exception handling, and re-scanning.
MPacquire. MPacquire, which is currently under development, is a family of
servers which capture, process and import documents created by other data
processing systems within the hospital. Transcriptions, lab reports, bills and
other documents can be filed electronically without the need for scanning
paper.
MPremit. MPremit, which is currently under development, is an automated
system for the scanning and processing of bulk remittances. MPremit applies
business rules based on the hospital and the specific payor to calculate
payment and adjustment amounts, and posts these transactions to the hospital's
financial system.
36
<PAGE>
SALES AND MARKETING
Sales
Optika employs a two-tiered leveraged sales model consisting of a worldwide
network of approximately 170 BSPs and three OEMs. Optika also has a Major
Accounts team which supports its BSPs. Sales from BSPs and OEMs accounted for
89% and 11%, respectively, of the Company's revenues for the year ended
December 31, 1995, and 87% and 13%, respectively, for the six months ended
June 30, 1996. See "Risk Factors--Reliance on Indirect Distribution Channels;
Potential for Channel Conflict."
Business Solutions Partners. Business Solutions Partners or BSPs are VARs
which are 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 end-
users sites and providing support and maintenance to the end-users following
the sale. The Company's BSPs 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 BSPs through written agreements
which establish a price at which the BSP 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 the BSPs, do not prevent the
BSPs from carrying competing product lines and do not require the BSPs to sell
any particular dollar amount of the Company's software, although the 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 BSPs 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 BSPs remit the proceeds of software sales and
maintenance fees directly to the Company following the sale to the end-user.
The Company supports its BSPs through dedicated personnel at its headquarters
in Colorado Springs and a network of seven field offices. Services range from
joint marketing efforts and assistance with pricing and proposals to technical
product support.
The Company's strategy is to target its marketing activities toward its most
productive BSPs and recruit additional BSPs in key geographic and vertical
markets. The Company's "Eye on Partnership" and "Affiliate Company" programs
are crucial elements of this strategy. The Eye on Partnership program is
designed to promote long-term relationships between the Company and its BSPs
by awarding silver, gold and platinum status to BSPs 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. The Affiliate Company program is designed
to create a partnership between the Company and its most productive BSPs and
provide additional incentives to encourage them to promote the Company's
products. Affiliate Companies agree not to carry competing products and
receive territorial rights (although not exclusivity), concentrated marketing
efforts from the Company and additional support from the Company's Major
Accounts team.
OEMs. The Company has also established relationships with three 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 BSP
relationships, the OEMs actively compete with the Company and its BSPs. The
Company's current OEM relationships consist of Lanier (imaging and COLD),
Alltel (healthcare) and Anacomp (COLD). 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 BSPs. The Company's
strategy is to continue to recruit OEMs in key vertical markets such as
healthcare and financial services.
Major Accounts. The Company's Major Accounts team focuses on developing
relationships with large corporate end-users with multiple geographic
locations. The Major Accounts team initiates contact directly with the end-
user, but relies heavily on the Company's BSPs to provide installation and
integration services at the
37
<PAGE>
end-user's site and provide end-user support and maintenance following sales.
For sales originated by the Major Accounts team, the end-user enters into a
contract directly with the Company, and the Company sub-contracts and
coordinates installation and support activities with the BSPs.
International Sales
The Company believes that a significant opportunity exists to increase
international sales of its integrated imaging software products. For the year
ended December 31, 1995 and the six months ended June 30, 1996, Optika
generated approximately 15% and 24%, respectively, of its total revenues from
international sales. The Company currently maintains an office in London to
support its 22 European BSPs and an office in Singapore to support its 17
Asian BSPs. The Company is actively seeking to expand and strengthen its
network of foreign BSPs, particularly in Japan and throughout the Pacific Rim,
which was a significant factor behind the IPRS/Intuit Acquisition. The Company
is also recruiting BSPs in Canada, continental Europe and Latin America. See
"Risk Factors--International Operations."
Marketing
In support of its sales efforts, the Company conducts sales training
courses, targeted marketing programs, including direct mail, channel
marketing, promotions, seminars, trade shows, telemarketing and ongoing
customer and third-party communication programs. The Company also seeks to
stimulate interest in its products through its public relations program,
speaking engagements, white papers, technical notes and programs targeted at
educating consultants on the Company's capabilities. As part of its public
relations program, Optika is deploying a multimedia CD-ROM. This CD contains
product demonstrations, Company highlights, marketing material and video clips
of customer testimonials. Optika's marketing CD is used as a fulfillment piece
for direct mail and seminars, as well as an educational tool for industry
analysts. Optika is also entering into, or expanding corporate relationships
with major technology, database, application and hardware companies such as
Microsoft, Cornerstone Imaging, Inc., Kofax Image Products, Inc. and PC DOCS
Group International, Inc. to improve the Company's position in the market.
CUSTOMERS
The Company's direct customers are its BSPs and OEMs, which purchase and
resell its products to its indirect customers, the end-users. As of June 30,
1996, the Company had licensed over 27,000 seats to its end-users worldwide.
No BSP, OEM or end-user accounted for more than 10% of the Company's total
revenues for the year ended December 31, 1995 or the six months ended June 30,
1996. Set forth below is a partial list of end-users who have generated
revenues for the Company since January 1, 1995 and have acquired licenses for
a minimum of five users. The Company believes that all of these end-users are
currently using the Company's products and are representative of the Company's
overall end-user base.
38
<PAGE>
HEALTHCARE EDUCATION
---------- ---------
Parkview Hospital Mercer County Community College
Pascack Valley Hospital Pace University
Rush Presbyterian St. Luke's
Medical Center GOVERNMENT
St. Elizabeth Medical Center ----------
Washington Dental Services El Paso County, Colorado
Jefferson County, Alabama
FINANCIAL & BANKING Massachusetts Court of Appeals
------------------- Minnesota Department of Health
Bank One Denver N.A. San Francisco Department of Building
Equifax, Inc. Inspection
Federal Home Loan Bank
General American Credits, Inc. MANUFACTURING
Merrill Lynch, Pierce, -------------
Fenner & Smith, Inc. Better Bilt Aluminum Products
Mitsubishi Finance International Plc Company
Norwest Bank Chaparral Steel Company, Inc.
UNIPAC Service Corporation Dow Corning Corporation
Travelers Express Company, Inc. Mazda Motor Corporation
Michelin Tire Corporation
INSURANCE
--------- RETAIL
Blue Cross and Blue Shield of ------
Florida, Inc. Best Buy Co., Inc.
Colorado Farm Bureau Carr Gottstein Foods Co.
Fireman's Insurance Payless Cashways, Inc.
John Hancock Mutual Life Price Costco, Inc.
Insurance Company Royal Cup Coffee, Inc.
COMMUNICATIONS TRANSPORTATION
-------------- --------------
AT&T Wireless Services European Transport Company
Bell Atlantic Mobile Myers Industries, Inc.
Continental Cablevision Inc.
Kansas Cellular UTILITIES
---------
Homer Electric Association Inc.
Louisville Gas & Electric Company
SERVICE AND SUPPORT
The Company believes that a high level of service and support is critical to
the Company's performance. The Company provides technical support,
maintenance, training and consulting to its BSPs, which are in turn primarily
responsible for providing technical support services directly to the 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.
BSP Support
The Company maintains pre-sales technical support personnel that work
directly with the BSPs to provide technical responses to sales inquiries. The
Company offers educational and training programs, as well as customized
consulting services to its BSPs. 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 through
its Internet web site, Lotus Notes database and periodic informational updates
about the products installed. These bulletins generally answer commonly asked
questions and provide information about new product features.
Technical Support and Software Maintenance
The Company, in conjunction with its BSPs, offers end-users a software
maintenance program. The maintenance program includes software updates
provided by the Company to the end-user and technical support
39
<PAGE>
provided by the BSP. Telephone consultation is provided by the Company to the
BSP to respond to end-user technical questions that the BSP is unable to
answer. A BSP typically charges the end-user a fee for maintenance and support
of the entire imaging system, including software and hardware. In turn, the
Company, on an annual basis, charges the BSP 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 free product
upgrades and corrections for documented program errors and the BSP is entitled
to free telephone consultation. The services and updates provided during the
warranty period may be extended by the end-user if they enter into the
software maintenance program.
RESEARCH AND 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 their products. Additionally, Optika has
employed a "product author" concept under which individual contributors, or
small teams, develop products from conception to market introduction with
limited corporate interference. Product authors are responsible for end-user
satisfaction with the products and are compensated based on a declining
percentage of the revenues generated by the product over a three year period.
Product authorship encourages innovation, faster time to market, higher
quality and long-term employment relationships between the Company and its
most valued engineers. 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 its software products will provide the foundation for
future enhancements to the Company's integrated imaging solution.
Areas of future development currently being pursued by the Company include
completing the development of two software modules of the MediPower Suite,
further enhancing the FilePower Suite and completing the development of
WebBooks, the Company's first product for intranets and the Internet. The
Company continues to identify and prioritize various technologies for
potential future product offerings. The Company may develop these products
internally or enter into arrangements to license or acquire products or
technologies from third parties. As of June 30, 1996, the Company's research
and development organization consisted of 36 full-time employees in Colorado
Springs, Colorado, and six employees in Marlboro, Massachusetts. During 1995,
research and development expenses were $3.7 million. As of June 30, 1996, the
Company had expensed all of its software development costs as incurred. See
"Risk Factors--Rapid Technological Change; Dependence on New Product
Development," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 1 of Notes to Consolidated Financial
Statements.
COMPETITION
The market for the Company's products is intensely competitive and
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 various
product lines include BancTec, FileNet, IBM, Unisys
40
<PAGE>
Corporation, ViewStar and Wang. The Company also competes with industry-
specific application vendors such as IMNET and LanVision. 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 vendors. Many of
the Company's current and potential competitors have longer operating
histories, significantly 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
systems 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. If the Company is unable to develop
and retain effective, long-term relationships with these resellers, the
Company's competitive position would be materially adversely affected.
Further, there can be no assurance that these third parties, many of which
have significantly greater resources than the Company, will not market
software products in competition with the Company in the future or will not
otherwise reduce or discontinue their relationships with or support of the
Company and its products. See "Risk Factors--Intense Competition."
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. See "Risk Factors--Dependence on
Proprietary Technology; Risk of Infringement."
EMPLOYEES
At June 30, 1996, the Company had 122 full-time employees in eleven cities.
Of these employees, 42 were involved in research and development, 43 in sales
and marketing, 25 in technical support and training and 12 in administration
and finance. No employees are covered by any collective bargaining agreements.
The Company believes that its relationships with its employees are good.
FACILITIES
The Company's principal administrative, sales and marketing, research and
development and support facilities consist of approximately 21,500 square feet
of office space in Colorado Springs, Colorado. The Company occupies these
premises under a lease expiring July 1997. As of June 30, 1996, the monthly
base rent for this facility was approximately $26,000. In support of its field
sales and support organization, the Company also leases facilities and offices
in eight other locations in the United States, one location in the United
Kingdom and one location in Singapore. The Company believes that it will
require additional space upon the expiration of its lease in July 1997, and
has entered into a non-binding letter of intent to lease approximately 38,000
square feet of office space in Colorado Springs commencing March 1997 at a
monthly base rent of approximately $41,000. No assurance can be given that a
lease will be consummated based on such terms or that such space can be
obtained on terms acceptable to the Company or that business interruptions
will not result due to any such relocation.
LEGAL PROCEEDINGS
The Company is not currently a party to any material legal proceedings.
41
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors and executive officers and their ages as of the date
of this Prospectus, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Mark K. Ruport.............. 43 President, Chief Executive Officer and
Chairman of the Board of Directors
Steven M. Johnson........... 34 Vice President--Finance and Administration,
Chief Financial Officer and Secretary
Marc R. Fey................. 40 Senior Vice President--Engineering and
Customer Support Services
Donald R. Graham............ 48 Vice President--United States Operations
David J. Mansen............. 41 Vice President--Marketing
Mark A. Schenecker.......... 36 Vice President--Research and Development
Paul Carter................. 41 Co-Founder and Director
Malcolm D. Thomson.......... 34 Co-Founder and Director
Richard A. Bass(1).......... 54 Director
James E. Crawford III(2).... 50 Director
Robert L. Gett.............. 45 Director
Harry S. Gruner(1)(2)....... 36 Director
Graham O. King(1)(2)........ 56 Director
</TABLE>
- --------
(1) Member of Audit Committee
(2) Member of Compensation Committee
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 document management, distribution and related
software. 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 direct responsibility for
direct and indirect sales and OEMs. From 1985 to 1989, Mr. Ruport was Vice
President of North American Operations for Cullinet Software, where he oversaw
North American sales, customer support and systems integration.
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. 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. From June 1987 to February 1988, Mr. Johnson served as Controller and
Director of Finance for HOH Water Technology Corporation and prior to 1987,
was a senior accountant with KPMG Peat Marwick.
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.
42
<PAGE>
Donald R. Graham has served as the Company's Vice President--United States
Operations since January 1, 1996. From June 1995 to December 1995, Mr. Graham
served as the Company's Vice President--Eastern Region, and from January 1994
to June 1995, he was self-employed as a private fund raiser. From April 1992
through December 1993, Mr. Graham served as Director of Sales for Relay
Technology, and from September 1991 through March 1992, he was Director of the
Eastern Region at Uniface Corporation.
David J. Mansen has served as Vice President--Marketing since October 1995.
From July 1991 to October 1995, Mr. Mansen was employed by Recognition
International, Inc., a provider of image processing systems, most recently as
Vice President of Marketing. From 1986 to 1991, Mr. Mansen was a principal in
a technology investment management firm, and from 1978 to 1985, he held
marketing positions at Datapoint Corporation.
Mark A. Schenecker has served as the Company's Vice President--Research and
Development since February 1996. Mr. Schenecker held the position of Director
of Product Management from August 1995 to January 1996 and Product Manager
from March 1994 to July 1995. Prior to joining the Company, Mr. Schenecker was
employed by Lanier Worldwide, Inc., where he held positions in systems
analysis and was responsible for advanced digital imaging and copier
technology.
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. Prior to co-founding the Company, Mr.
Carter was a design specialist for Ashton-Tate in California.
Malcolm D. Thomson is a co-founder of the Company and has served as a
Director since its inception. Since January 1996, he has served as Vice
President--Internet and Interconnectivity of the Company. From July 1994
through December 1995, he served as Vice President--New Business Development;
from February 1993 through June 1994, he served as Vice President--
Development; from August 1992 through January 1993, he served as Vice
President--Sales; from July 1990 through July 1992, he served as Director of
Systems Integration; and from the inception of the Company through June 1990,
he served as President. Prior to co-founding the Company, Mr. Thomson was an
engineer with Ashton-Tate in the United Kingdom and in California.
Richard A. Bass has served as a Director of the Company since May 1993, and
he served as Chairman of the Board from September 1994 to May 1996. Since
February 1991, Mr. Bass has been President and Chief Executive Officer of
Point of View, Inc., a multimedia publishing company.
James E. Crawford III has served as a Director of the Company since December
1993. He is a general partner of Frontenac Company, a venture capital firm
that he joined in August 1992. From February 1984 to August 1992, Mr. Crawford
was a general partner of William Blair Venture Management Co., the general
partner of William Blair Venture Partners III, a venture capital fund. He was
also a general partner of William Blair & Company, an investment bank and
brokerage affiliated with William Blair Venture Management Co., from January
1987 to August 1992. Mr. Crawford is also a Director of Cornerstone Imaging,
Inc., a provider of document imaging subsystems, and he is a director of
several private companies.
Robert L. Gett has served as a Director of the Company since June 1996. He
has been Executive Vice President--Operations of Cambridge Technology Partners
(Massachusetts), Inc., an international professional services information
technology firm, since March 1991, and he has served as a Director of that
firm since October 1992. From August 1990 until March 1991, Mr. Gett served as
Executive Vice President--Operations, of Cambridge Technology Group, Inc. From
July 1988 until August 1990, Mr. Gett served as President of Fidelity Software
Development Company, the systems and technology services unit of Fidelity
Investments. From February 1982 until July 1988, Mr. Gett served as Chief
Information Officer of Smith Barney, Harris Upham & Company, Inc.
43
<PAGE>
Harry S. Gruner has served as a Director of the Company since May 1996. He
has been a general partner of JMI Equity Fund, a private equity investment
partnership, since November 1992. From August 1986 to October 1992, Mr. Gruner
was a principal with Alex. Brown & Sons Incorporated. Mr. Gruner is also a
director of Brock International, Inc., a developer, marketer and supporter of
software systems, Jackson Hewitt, Inc., an income tax processing company, The
META Group, Inc., a syndicated information technology research company,
Hyperion Software, Inc., a financial software company and numerous privately
held companies.
Graham O. King has served as a Director since April 1996. Mr. King is
currently the Chairman, Chief Executive Officer and a Director of US Servis,
Inc., a healthcare management services company. From April 1987 to October
1993, Mr. King was with Shared Medical Services, a company specializing in
hospital information systems, most recently serving as its president from 1988
to 1993. From February 1983 to December 1986, Mr. King was President of Daseke
and Company and from December 1979 to November 1982, was President and Chief
Executive Officer of Auto-Trol Technology, a computer-aided design software
company. Mr. King is also a Director of ADAC Laboratories, a provider of
nuclear medicine diagnostic imaging equipment and a supplier of radiology and
laboratory information systems.
The Company's executive officers are appointed by, and serve at the
discretion of, the Board of Directors. Each executive officer is a full-time
employee of the Company. All Directors hold office until the next annual
meeting of stockholders or until their successors are duly elected and
qualified. The Board of Directors is divided into three classes, each of whose
members serve for a staggered three-year term. The Board is composed of two
Class I Directors (Messrs. Carter and Bass), three Class II Directors (Messrs.
King, Gett and Gruner) and three Class III Directors (Messrs. Ruport, Thomson
and Crawford). At each annual meeting of stockholders after the 1997 annual
meeting of stockholders, the appropriate number of directors will be elected
for a three-year term to succeed the directors of the same class whose terms
are then expiring. The terms of the Class I Directors, Class II Directors and
Class III Directors will expire upon the election and qualification of
successor directors at the annual meetings of stockholders held in calendar
years 1998, 1999 and 2000, respectively. There are no family relationships
between any Director or executive officer of the Company. Messrs. Crawford,
Gruner, Ruport, Carter, Thomson and Bass were appointed to the Board of
Directors of the Company pursuant to an Amended and Restated Shareholders'
Agreement between the Company and certain stockholders named therein dated as
of November 22, 1995, which Agreement will expire on consummation of this
offering.
BOARD COMMITTEES
In May 1994, the Board of Directors established the Audit Committee, which
reviews the Company's annual audit and meets with the Company's independent
accountants to review the Company's internal controls and financial management
practices. The Audit Committee consists of Messrs. Bass, Gruner and King. In
January 1994, the Board of Directors also established the Compensation
Committee, which will recommend to the Board of Directors compensation for
certain of the Company's personnel and administers the 1994 Stock Plan. The
Compensation Committee consists of Messrs. Crawford, Gruner and King.
DIRECTOR COMPENSATION
Except for grants of stock options and reimbursement of expenses, directors
of the Company do not receive compensation for services rendered as a
director. However, both Mr. King and Mr. Gett will receive a fee of $10,000
for each year of service as a director. The Company does not pay compensation
for committee participation or special assignments of the Board of Directors.
Messrs. Carter and Thomson each received options in 1990 to purchase 120,000
shares of Common Stock at an exercise price of $0.75 per share, which options
are currently exercisable for fully vested shares of Common Stock. Mr. Ruport
has been granted options under the 1994 Stock Plan to purchase an aggregate of
510,000 shares of Common Stock.
On April 1, 1996, in connection with his appointment to the Board of
Directors, Mr. King received from the Company an option under the 1994 Stock
Plan to purchase 25,000 shares of Common Stock at an exercise price of $5.00
per share. The option has a maximum term of ten years measured from the grant
date, subject to
44
<PAGE>
earlier termination upon Mr. King's cessation of service with the Company. The
option is immediately exercisable in full. Twenty-five percent of the option
shares were fully vested as of the grant date. The remaining option shares are
subject to repurchase by the Company at the exercise price paid per share
should Mr. King cease to be a non-employee board member prior to vesting in
the shares. Mr. King will vest in an additional 25% of the option shares upon
his completion of each of the three years of service with the Company measured
from the option grant date. Mr. King also received an option from Frontenac VI
Limited Partnership ("Frontenac") to purchase 25,000 shares of Common Stock
currently owned by Frontenac at an exercise price of $5.00 per share. On June
3, 1996, in connection with his appointment to the Board of Directors, Mr.
Gett received an option under the 1994 Stock Plan to purchase 25,000 shares of
Common Stock at an exercise price of $7.50 per share. The option has a maximum
term of ten years measured from the grant date subject to earlier termination
upon Mr. Gett's cessation of service with the Company. The option is
immediately exercisable in full. The option shares are subject to repurchase
by the Company at the exercise price paid per share should Mr. Gett cease to
be a non-employee Board member prior to vesting in the shares. Twenty-five
percent of the option shares will vest on Mr. Gett's completion of each of the
next four years of service with the Company measured from the option grant
date. The option shares held by both Mr. King and Mr. Gett will fully vest in
the event the Company is acquired by merger or asset sale, unless the option
is assumed by the acquiring company. Non-employee Board members will receive
option grants at periodic intervals under the Automatic Option Grant Program
of the 1994 Stock Plan. See "--1994 Stock Option/Stock Issuance Plan" and
"Certain Transactions."
LIMITATION OF LIABILITY AND INDEMNIFICATION
Pursuant to the provisions of the Delaware General Corporation Law, the
Company has adopted provisions in its Amended and Restated Certificate of
Incorporation which provide that directors of the Company shall not be
personally liable for monetary damages to the Company or its stockholders for
a breach of fiduciary duty as a director, except for liability as a result of:
(i) a breach of the director's duty of loyalty to the Company or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) an act related to
the unlawful stock repurchase or payment of a dividend under Section 174 of
Delaware General Corporation Law and (iv) transactions from which the director
derived an improper personal benefit. Such limitation of liability does not
affect the availability of equitable remedies such as injunctive relief or
rescission.
The Company's Amended and Restated Certificate of Incorporation also
authorizes the Company to indemnify its officers, directors and other agents
by bylaws, agreements or otherwise, to the full extent permitted under
Delaware law. The Company has entered into separate indemnification agreements
with its executive officers and directors which may, in some cases, be broader
than the specific indemnification provisions contained in the Delaware General
Corporation Law. The indemnification agreements will require the Company,
among other things, to indemnify such officers and directors against certain
liabilities that may arise by reason of their status or service as officers or
directors (other than liabilities arising from willful misconduct of a
culpable nature), and to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened
litigation or proceeding which may result in a claim for such indemnification.
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned during 1995 for
services rendered in all capacities to the Company and its subsidiaries during
such year by Mr. Ruport, who was appointed Chief Executive Officer of the
Company effective February 28, 1995, and Messrs. Johnson and Fey, whose total
compensation for 1995 was each in excess of $100,000 (collectively, the "Named
Officers").
45
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------- ------------
AWARDS
------------
SECURITIES
NAME AND PRESENT PRINCIPAL OTHER ANNUAL UNDERLYING
POSITION SALARY($) BONUS($)(1) COMPENSATION ($) OPTIONS(#)
- -------------------------- --------- ----------- ---------------- ------------
<S> <C> <C> <C> <C>
Mark K. Ruport............. 152,208 41,000 100,000(2) 400,000(3)
President and Chief
Executive Officer
Steven M. Johnson.......... 105,578 9,000 -- --
Vice President--Finance
and Administration, Chief
Financial Officer and
Secretary
Marc R. Fey................ 118,300 5,000 -- --
Senior Vice President--
Engineering and Customer
Support Services
</TABLE>
- --------
(1) The bonuses listed in the table were earned during 1995 and paid in 1996.
(2) Represents an allowance for moving expenses incurred by Mr. Ruport in
connection with his appointment as President and Chief Executive Officer
of the Company.
(3) The option was granted under the 1994 Stock Plan. See "--Option Grants
During 1995."
OPTION GRANTS DURING 1995
The following table sets forth information concerning the stock option
grants made to each of the Named Officers during 1995. No stock appreciation
rights or restricted stock awards were granted to those individuals during
such year.
OPTION GRANTS DURING 1995
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(1)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION -----------------------
NAME GRANTED FISCAL YEAR SHARE DATE 5% 10%
---- ---------- ------------- --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Mark K. Ruport.......... 400,000(2) 51% $1.875(3) 03/27/05 $ 471,671 $ 1,195,307
Steven M. Johnson....... -- -- -- -- -- --
Marc R. Fey............. -- -- -- -- -- --
</TABLE>
- --------
(1) The five percent and ten percent assumed annual rates of compounded stock
price appreciation are mandated by the rules of the Securities and
Exchange Commission and are based on appreciation of the fair market value
at the grant date. Assuming a fair market value of $6.00 per share, the
potential realizable value at assumed rates of appreciation of five
percent and ten percent would be $1,509,347 and $3,824,982, respectively.
No assurance can be provided to the option holder or any other holder of
the Company's securities that the actual stock price appreciation over the
ten-year option term will be at the assumed five percent and ten percent
levels or at any other defined level.
(2) The option was granted to Mr. Ruport on March 28, 1995 pursuant to the
1994 Stock Plan. The option has a maximum term of ten years measured from
the grant date, subject to earlier termination upon Mr. Ruport's cessation
of service with the Company. The option is immediately exercisable for all
of the option shares. However, any shares purchased under the option are
subject to repurchase by the Company at the option exercise price paid per
share, should the optionee leave the Company prior to vesting in the
shares. Mr. Ruport will vest in the option shares in a series of four
equal successive annual installments over his period
46
<PAGE>
of service with the Company measured from February 28, 1995. The option
shares will fully vest in the event the Company is acquired by merger or
asset sale, unless the option is assumed by the acquiring company. In
addition, in the event the option is assumed by the acquiring company, the
option shares will fully vest upon the termination of Mr. Ruport's service,
whether involuntarily or through a resignation for good reason, within
eighteen months following the acquisition.
(3) The exercise price may be paid in cash, in shares of the Company's Common
Stock valued at fair market value on the exercise date or through a
cashless exercise procedure involving a same-day sale of the purchased
shares. The Company may also finance the option exercise by loaning the
optionee sufficient funds to pay the exercise price for the purchased
shares, together with any federal and state income tax liability incurred
by the optionee in connection with such exercise. The Compensation
Committee of the Board of Directors, as the Plan Administrator of the 1994
Stock Plan, has the discretionary authority to reprice the option through
the cancellation of such option and the grant of a replacement option with
an exercise price based on the fair market value of the option shares on
the grant date.
In addition to the options listed in the foregoing table, on January 9,
1996, Messrs. Ruport and Johnson received options to purchase 110,000 and
35,000 shares of Common Stock, respectively, under the Company's 1994 Stock
Plan at an exercise price of $3.40 per share. The options have a maximum term
of ten years measured from the grant date, subject to earlier termination upon
the optionee's cessation of service with the Company. Mr. Ruport's option is
exercisable as to 25% of the option shares as of the grant date and becomes
exercisable for an additional 25% of the option shares on January 1 of each of
1997, 1998 and 1999. Mr. Johnson's option is exercisable for 29,000 of the
option shares as of the grant date and becomes exercisable for the remaining
6,000 option shares on January 1, 1997. Any shares purchased upon exercise of
the option are subject to repurchase by the Company at the option exercise
price paid per share should the optionee leave the Company prior to vesting in
the shares. Each optionee will vest in 25% of his option shares upon his
completion of one year of service with the Company after the grant date and
the balance in a series of equal monthly installments over the 36 months of
service completed thereafter. The options will fully vest in the event the
Company is acquired by merger or asset sale, unless the option is assumed by
the acquiring company. In addition, if the option is assumed by the acquiring
company, such option will vest in full upon the termination of the optionee's
service, whether involuntarily or through a resignation for good reason,
within eighteen months following the acquisition.
AGGREGATE OPTION EXERCISES IN 1995 AND 1995 YEAR-END OPTION VALUES
The following table sets forth information concerning option holdings as of
December 31, 1995 with respect to each of the Named Officers. No stock options
were exercised by the Named Officers during 1995. No stock appreciation rights
were granted during such year or outstanding at the end of such year.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT 1995 YEAR-END 1995 YEAR-END($)(1)
---------------------------- -------------------------
NAME EXERCISABLE(2) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Mark K. Ruport........... 400,000 -- $ 0 --
Steven M. Johnson........ 120,000 -- 32,500 --
Marc R. Fey.............. 60,000 -- 0 --
</TABLE>
- --------
(1) Based on the deemed fair value of the Company's Common Stock at fiscal
year-end, $1.875 per share (as determined by the Board of Directors), less
the exercise price payable per share. Based on a fair market value of
$6.00 per share, the value of unexercised options would be $1,650,000,
$527,500 and $247,500 for Messrs. Ruport, Johnson and Fey, respectively.
(2) The options are immediately exercisable for all the option shares, but any
shares purchased under the options will be subject to repurchase by the
Company at the original exercise price per share upon the optionee's
cessation of service prior to vesting in such shares. As of December 31,
1995, the Company's repurchase right had lapsed as to none of Mr. Ruport's
option shares, 52,000 of Mr. Johnson's option shares and 15,000 of Mr.
Fey's option shares.
47
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company's Board was formed in January
1994. Messrs. Crawford, Gruner and Lawrence W. Lepard, a General Partner of
LMC Purchase Limited Partnership, served on the Compensation Committee during
the year ended December 31, 1995. The current members of the Compensation
Committee are Messrs. Crawford, Gruner and King. None of the individuals who
served on the Compensation Committee during the year ended December 31, 1995
was at any time during such year, or at any other time, an officer or employee
of the Company, and no executive officer of the Company served as a member of
the Board of Directors or Compensation Committee of any entity which has one
or more executive officers serving as a member of the Company's Board of
Directors or Compensation Committee.
1994 STOCK OPTION/STOCK ISSUANCE PLAN
The Company's 1994 Stock Plan became effective upon its adoption by the
Board of Directors on August 12, 1994 and was approved by the Company's
stockholders on October 10, 1994. The 1994 Stock Plan was implemented to serve
as the successor equity incentive program to the Company's 1992 Stock Plan
(the "1992 Plan"). Outstanding options under the 1992 Plan were incorporated
into the 1994 Stock Plan upon its adoption by the Board of Directors on August
12, 1994, and no further option grants were made under the 1992 Plan after
such date. The incorporated options continue to be governed by their original
terms, unless the Plan Administrator elects to extend one or more features of
the 1994 Stock Plan to those options. However, the outstanding options under
the 1992 Plan contain substantially the same terms and conditions summarized
below for the Discretionary Option Grant Program in effect under the 1994
Stock Plan.
In February 1996, the Board of Directors amended the 1994 Stock Plan to (i)
increase the total number of shares of Common Stock authorized for issuance
thereunder from 2,040,000 to 2,790,000 shares and (ii) increase the maximum
aggregate number of shares of Common Stock for which any one participant in
such plan may receive option grants, separately exercisable stock appreciation
rights and direct stock issuances from 500,000 shares over the term of the
1994 Stock Plan to 500,000 shares per calendar year, beginning with the 1996
calendar year. In May 1996, the Board of Directors restated the 1994 Stock
Plan to implement the Salary Investment and Automatic Option Grant Programs
and provide that the share reserve for such plan will automatically be
increased on the first trading day of January 1998 and January 1999 by a
number of shares equal to three percent of the number of shares of Common
Stock outstanding on the last trading day of the immediately preceding
calendar year. In June 1996, the Company's stockholders approved the amendment
and restatement of the 1994 Stock Plan. As of June 30, 1996, 1,886,370 shares
of Common Stock were issuable upon exercise of options outstanding under the
1994 Stock Plan and 545,431 shares remained available for grant of future
options.
The 1994 Stock Plan is divided into four separate components: (i) the
Discretionary Option Grant Program under which eligible individuals in the
Company's employ or service (including officers, non-employee Board members
and consultants) may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Common Stock at an exercise price not less than
85% of their fair market value on the grant date, (ii) the Stock Issuance
Program under which such individuals may, in the Plan Administrator's
discretion, be issued shares of Common Stock directly, through the purchase of
such shares at a price not less than 85% of their fair market value at the
time of issuance or as a bonus tied to the performance of services, (iii) the
Salary Investment Option Grant Program under which executive officers and
other highly compensated employees may elect to apply a portion of their base
salary to the acquisition of special below-market stock option grants, and
(iv) the Automatic Option Grant Program under which option grants will
automatically be made at periodic intervals to eligible non-employee Board
members to purchase shares of Common Stock at an exercise price equal to 100%
of their fair market value on the grant date.
The Discretionary Option Grant Program and the Stock Issuance Program are
administered by the Compensation Committee. The Compensation Committee as Plan
Administrator has complete discretion to
48
<PAGE>
determine which eligible individuals are to receive option grants or stock
issuances, the time or times when such option grants or stock issuances are to
be made, the number of shares subject to each such grant or issuance, the
status of any granted option as either an incentive stock option or a non-
statutory stock option under the Federal tax laws, the vesting schedule to be
in effect for the option grant or stock issuance and the maximum term for
which any granted option is to remain outstanding. The administration of the
Salary Investment Option Grant and Automatic Option Grant Programs will be
self-executing in accordance with the express provisions of each such program.
The exercise price for the shares of Common Stock subject to option grants
made under the 1994 Stock Plan may be paid in cash or in shares of Common
Stock valued at fair market value on the exercise date. The option may also be
exercised through a same-day sale program without any cash outlay by the
optionee. In addition, the Plan Administrator may permit one or more optionees
to pay the exercise price in installments or provide financial assistance to
one or more optionees in the exercise of their outstanding options by allowing
such individuals to deliver a full-recourse, interest-bearing promissory note
in payment of the exercise price and any associated withholding taxes incurred
in connection with such exercise.
In the event that the Company is acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program which is not
to be assumed by the successor corporation will automatically accelerate in
full, and all unvested shares under the Stock Issuance Program will
immediately vest, except to the extent the Company's repurchase rights with
respect to those shares are to be assigned to the successor corporation. Any
options that are assumed in an acquisition will automatically accelerate, and
any repurchase rights which are assigned will terminate, in the event the
individual's service is terminated, whether involuntarily or through a
resignation for good reason, within eighteen months following the acquisition.
In addition, the Plan Administrator has the discretion to provide for the
automatic acceleration of options and the lapse of any repurchase rights upon
(i) a hostile change in control of the Company effected by a successful tender
offer for more than 50% of the Company's outstanding voting stock or by proxy
contest for the election of Board members or (ii) the termination of the
individual's service, whether involuntarily or through a resignation for good
reason, within a specified period following such a hostile change in control.
Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program and provide the holders with the election
to surrender their outstanding options for an appreciation distribution from
the Company equal to the excess of (i) the fair market value of the vested
shares of Common Stock subject to the surrendered option over (ii) the
aggregate exercise price payable for such shares. Such appreciation
distribution may be made in cash or in shares of Common Stock.
The Plan Administrator has the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program (including
options incorporated from the 1992 Plan) in return for the grant of new
options for the same or different number of option shares with an exercise
price per share based upon the fair market value of the Common Stock on the
new grant date.
In the event the Plan Administrator elects to activate the Salary Investment
Option Grant Program for one or more calendar years, each executive officer
and other highly compensated employee of the Company selected for
participation may elect, prior to the start of the calendar year, to reduce
his or her base salary for that calendar year by a specified dollar amount not
less than $10,000 nor more than $50,000. In return, the officer will
automatically be granted, on the first trading day in the calendar year for
which the salary reduction is to be in effect, a non-statutory option to
purchase that number of shares of Common Stock determined by dividing the
salary reduction amount by two-thirds of the fair market value per share of
Common Stock on the grant date. The option will be exercisable at a price per
share equal to one-third of the fair market value of the option shares on the
grant date. As a result, the total spread on the option shares at the time of
grant will be equal to the salary reduction amount. The option will vest in a
series of twelve equal monthly installments over the calendar year for which
the salary reduction is in effect and will be subject to full and immediate
vesting upon certain changes in the ownership or control of the Company.
49
<PAGE>
Under the Automatic Option Grant Program, each individual who is serving as
a non-employee Board member on the date the underwriting agreement is executed
in connection with the offering (other than Mr. King and Mr. Gett, who
received option grants in connection with their appointment to the Board of
Directors on April 1, 1996 and June 3, 1996, respectively) will receive an
option grant for 10,000 shares of Common Stock on such date at an exercise
price equal to the offering price. Each individual who first joins the Board
after the effective date of this offering as a non-employee Board member will
receive an option grant for 10,000 shares of Common Stock at the time of his
or her commencement of Board service, provided such individual has not
otherwise been in the prior employ of the Company. In addition, at each Annual
Stockholders Meeting, beginning with the 1997 Annual Meeting, each individual
who is to continue to serve as a non-employee Board member, including Mr. King
and Mr. Gett, will receive an option grant to purchase 2,500 shares of Common
Stock, whether or not such individual has been in the prior employ of the
Company.
Each automatic grant will have an exercise price equal to the fair market
value per share of Common Stock on the grant date and will have a maximum term
of ten years, subject to earlier termination following the optionee's
cessation of Board service. Each automatic option will be immediately
exercisable; however, any shares purchased upon exercise of the option will be
subject to repurchase, at the option exercise price paid per share, should the
optionee's service as a non-employee Board member cease prior to vesting in
the shares. The 10,000-share grant will vest in four equal and successive
annual installments over the optionee's period of Board service measured from
the grant date. Each additional 2,500-share grant will vest upon the
optionee's completion of one year of Board service measured from the grant
date. However, each outstanding option will immediately vest upon (i) an
acquisition of the Company by merger, asset sale or a hostile takeover of the
Company or (ii) the death or disability of the optionee while serving as a
Board member.
The Board may amend or modify the 1994 Stock Plan at any time. However,
certain material changes will require the approval of the Company's
stockholders. The 1994 Stock Plan will terminate on August 11, 2004, unless
sooner terminated by the Board of Directors.
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. The Purchase Plan is designed to allow eligible
employees of the Company and participating subsidiaries to purchase shares of
Common Stock, at semi-annual intervals, through their periodic payroll
deductions under the Purchase Plan, and a reserve of 250,000 shares of Common
Stock has been established for this purpose.
The Purchase Plan will be implemented in a series of successive offering
periods, each with a maximum duration of 24 months. However, the initial
offering period will begin on the day the underwriting agreement is executed
in connection with this offering and will end on the last business day in July
1998.
Individuals who are eligible employees on the start date of any offering
period may enter the Purchase Plan on that start date or on any subsequent
quarterly entry date (February 1, May 1, August 1 or November 1 each year).
Individuals who become eligible employees after the start date of the offering
period may join the Purchase Plan on any subsequent quarterly entry date
within that period.
Payroll deductions may not exceed ten percent of the participant's total
cash earnings for each semi-annual period of participation, and the
accumulated payroll deductions will be applied to the purchase of shares on
the participant's behalf on each semi-annual purchase date (January 31 and
July 31 each year, with the first such purchase date to occur on January 31,
1997) at a purchase price per share equal to 85% of the lower of (i) the fair
market value of the Common Stock on the participant's entry date into the
offering period (but in no event less than the fair market value of the Common
Stock on the first day of the offering period) or (ii) the fair market value
on the semi-annual purchase date. In no event, however, may any participant
purchase more than 750 shares of Common Stock on any one semi-annual purchase
date. Should the fair market value of the Common Stock on any semi-annual
purchase date be less than the fair market value of the Common Stock on the
first day of the offering period, then the current offering period will
automatically end and a new twenty-four month offering period will begin,
based on the lower fair market value.
50
<PAGE>
EMPLOYMENT AGREEMENTS, COMPENSATION AND CHANGE OF CONTROL ARRANGEMENTS
Employment Agreements
The Company has an agreement with Mark K. Ruport that provides for his
employment as President and Chief Executive Officer of the Company at the
discretion of the Board of Directors. Mr. Ruport's base salary is $180,000,
subject to annual review by the Compensation Committee, and he is eligible to
receive performance bonuses which may be awarded by the Compensation
Committee. In 1995, Mr. Ruport was also granted an option to acquire 400,000
shares of Common Stock under the 1994 Stock Plan pursuant to the terms of his
employment agreement. Mr. Ruport is eligible to receive severance equal to one
year's base salary in the event he is terminated by the Company without cause.
The Company has an agreement with Marc R. Fey that provides for his
employment as Senior Vice President--Engineering and Customer Support
Services, at the discretion of the Board of Directors. Mr. Fey's base salary
is $120,000, subject to annual review by the Compensation Committee, and he is
eligible to receive performance bonuses which may be awarded by the
Compensation Committee. Mr. Fey is eligible to receive severance equal to six
months' salary in the event he is terminated by the Company without cause.
The Company has an agreement with Steven M. Johnson that provides for his
employment as Chief Financial Officer of the Company, at the discretion of the
Board of Directors. Mr. Johnson's base salary is $131,156, and he is eligible
to receive performance bonuses which may be awarded by the Compensation
Committee. Mr. Johnson is eligible to receive severance equal to six months'
salary in the event he is terminated by the Company without cause.
In connection with an acquisition of the Company by merger or asset sale,
each outstanding option held by the Chief Executive Officer and the other
executive officers under the 1994 Stock Plan will automatically accelerate in
full and all unvested shares of Common Stock issued to such individuals
pursuant to the exercise of options granted or direct stock issuances made
under such plan will immediately vest in full, except to the extent such
options are to be assumed by, and the Company's repurchase rights with respect
to those shares are to be assigned to, the successor corporation. Any options
that are assumed in an acquisition will automatically accelerate, and any
repurchase rights which are assigned will terminate, in the event the
executive's service is terminated, whether involuntarily or through a
resignation for good reason, within eighteen months following the acquisition.
In addition, the Compensation Committee as Plan Administrator of the 1994
Stock Plan has the authority to provide for the accelerated vesting of the
shares of Common Stock subject to outstanding options held by the Chief
Executive Officer or any other executive officer or the shares of Common Stock
purchased pursuant to the exercise of options or subject to direct issuances
held by such individual, in connection with the termination of the officer's
employment following certain hostile changes in control of the Company.
1996 Management Incentive Compensation Plan
The Company's 1996 Management Incentive Compensation Plan (the "Management
Plan") was adopted by the Board of Directors in May 1996. The Management Plan
is intended to promote the interests of the Company by providing for bonus
payments to a select group of executive officers and key employees on the
attainment of certain performance goals established for the Company and for
each individual.
Mr. Ruport and the Compensation Committee have established certain
performance objectives based on the Company's operating profit for fiscal
1996. The maximum aggregate bonus payable to each participant in the
Management Plan will be limited to a pre-determined percentage of the
participant's base salary. A minimum performance level must be achieved by the
Company before payment of bonuses may be made under the Management Plan. A
designated percentage of the participant's maximum aggregate bonus will become
payable automatically upon achievement of such minimum performance level. The
remainder of such bonus will be payable at the discretion of Mr. Ruport and
the Compensation Committee, after consideration of individual performance
factors.
51
<PAGE>
CERTAIN TRANSACTIONS
Since January 1, 1993, the Company has issued, in private placement
transactions, shares of Convertible Preferred Stock, as follows: an aggregate
of 752,160 shares of Series B Participating Convertible Preferred Stock at
$3.99 per share in December 1993 and March 1994 and 441,177 shares of Series C
Participating Convertible Preferred Stock at $3.40 per share in November 1995.
All of such Convertible Preferred Stock will convert into an aggregate of
1,201,600 shares of Common Stock upon the closing of the sale of the shares
offered hereby. The following table summarizes the shares of Convertible
Preferred Stock purchased by entities that may be deemed affiliated with
directors and five percent or greater stockholders of the Company and persons
associated with them as of June 30, 1996.
<TABLE>
<CAPTION>
SERIES B SERIES C TOTAL SHARES
PREFERRED PREFERRED AS IF
INVESTOR STOCK STOCK CONVERTED
-------- --------- --------- ------------
<S> <C> <C> <C>
Frontenac VI Limited Partnership(1)............ 501,440 294,118 801,067
JMI Equity Fund, L.P(2)........................ 250,720 147,059 400,533
</TABLE>
- --------
(1) James E. Crawford III, a director of the Company, is a general partner of
Frontenac Company, the general partner of Frontenac, the holder of
approximately 21% of the Company's Common Stock. See "Principal and
Selling Stockholders."
(2) Harry S. Gruner, a director of the Company, is a general partner of JMI
Equity Partners, L.P, the general partner of JMI Equity Fund, L.P., the
holder of approximately 9% of the Company's Common Stock. See "Principal
and Selling Stockholders."
Holders of shares of Convertible Preferred Stock are entitled to certain
registration rights in respect of the Common Stock issuable upon conversion
thereof. See "Description of Capital Stock--Registration Rights."
On May 1, 1996, the Company entered into a Resignation and Release Agreement
with Harvey L. Jeane, its former President, Chief Executive Officer and
Director. Under the Resignation and Release Agreement, Mr. Jeane immediately
resigned as a director of the Company. In the event that any shares held by
Mr. Jeane are sold pursuant to the exercise of the Underwriters' overallotment
option, Mr. Jeane has also agreed to remit to the Company an aggregate of
$80,000 plus accrued and unpaid interest in satisfaction of certain promissory
notes from Mr. Jeane to the Company. Concurrently therewith, the Company has
agreed to release its security interest in any shares of Common Stock Mr.
Jeane pledged to secure repayment of such indebtedness, and Mr. Jeane will be
permitted to exercise any options for the purchase of Common Stock held by
him. In such event, Mr. Jeane has also agreed to terminate his employment
agreement with the Company and forfeit future compensation thereunder, and
will release the Company from any and all claims. If, however, Mr. Jeane does
not sell any shares pursuant to the exercise of the Underwriters' over-
allotment option, the Company has agreed to continue to allow the promissory
notes to remain outstanding and Mr. Jeane's employment agreement will remain
in full force and effect.
In April 1996, Frontenac, which beneficially owns approximately 20% of the
Company's Common Stock prior to the offering, granted Mr. King an option to
purchase 25,000 shares of Common Stock currently owned by Frontenac at an
exercise price of $5.00 per share concurrently with his appointment to the
Board of Directors of the Company. The option is immediately exercisable for
all of the option shares. However, any shares purchased under the option are
subject to repurchase by Frontenac at the option exercise price per share,
should Mr. King leave the Board of Directors prior to vesting in the shares.
Mr. King vested as to 25% of such option shares on the grant date, and will
vest as to the balance of such option shares in equal annual installments over
the next three years of service.
In November 1995, Messrs. Thomson and Carter and the Company entered into a
Settlement Agreement and Mutual Release (the "Settlement Agreement") dated
November 1, 1995 with two claimants (the "Claimants"), to resolve litigation
initiated by the Claimants against each of Messrs. Thomson and Carter and the
Company. The claims in this matter included both contract and tort claims
arising from a partnership that was alleged to exist among Messrs. Thomson and
Carter and the Claimants, prior to formation of the Company. The Claimants
alleged breach of an alleged partnership agreement, breach of fiduciary duty
among partners and other claims related to the disposition of certain assets
alleged to be assets of the partnership. Under the Settlement Agreement, the
Claimants received: (i) options to purchase an aggregate of 95,000 shares of
Common Stock held by Messrs. Thomson and Carter at an exercise price of $1.875
per share, (ii) warrants for the purchase of 95,000 shares of Common Stock
from the Company at a price of $1.875 per share (the "Warrants"), expiring
five years from the date of issuance, and (iii) a non-interest bearing
promissory note then in the amount of $225,000, which the Company expects to
retire with a portion of the net proceeds from the offering.
52
<PAGE>
The Company is currently indebted to Messrs. Thomson and Carter in the
aggregate amount of $21,500 each, under subordinated promissory notes
(collectively, the "Founders' Notes") each in the original aggregate principal
amount $297,500, which notes are due and payable in February 2002. The Company
executed the Founders' Notes in satisfaction of certain indebtedness
previously incurred by the Company in consideration for the conveyance by
Messrs. Thomson and Carter of all of their right, title and interest in and to
the FilePower technology to the Company. Aggregate payments to Messrs. Thomson
and Carter under the Founders' Notes were $60,000 and $60,000, $156,000 and
$114,327 and $30,000 and $71,673 in 1993, 1994 and 1995, respectively.
The Company has entered into an Indemnification Agreement with each of its
executive officers and directors.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been otherwise
obtained from unaffiliated third parties. All future transactions between the
Company and its officers, directors and principal stockholders and their
affiliates will be approved by a majority of the Board of Directors, including
a majority of the independent and disinterested outside directors of the Board
of Directors and will be on terms no less favorable to the Company than could
be obtained from unaffiliated third parties.
53
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of June 30, 1996, and as adjusted
to reflect the sale of the shares of Common Stock offered hereby with respect
to: (i) each person who is known by the Company to beneficially own more than
five percent of the Company's Common Stock, (ii) each of the Company's
directors, (iii) each of the Named Officers and (iv) all current executive
officers and directors as a group.
<TABLE>
<CAPTION>
SHARES NUMBER OF SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO OFFERING (1)(2) AFTER OFFERING (1)(2)(3)
DIRECTORS, OFFICERS AND --------------------------- ---------------------------
5% STOCKHOLDERS NUMBER PERCENT NUMBER PERCENT
----------------------- -------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Mark K. Ruport(4)....... 442,500 9.3% 442,500 6.3%
Steven M. Johnson(5).... 150,000 3.3 150,000 2.2
Marc R. Fey(6).......... 161,500 3.7 161,500 2.4
Paul Carter(7).......... 992,500 22.2 992,500 14.9
Malcolm D. Thomson(8)... 974,500 21.8 974,500 14.6
Richard A. Bass(9)...... 10,000 * 10,000 *
James E. Crawford
III(10)................ 903,067 20.7 903,067 13.8
Robert L. Gett(11)...... 25,000 * 25,000 *
Harry S. Gruner(12)..... 410,533 9.4 410,533 6.3
Graham O. King(13)...... 50,000 1.1 50,000 *
Harvey L. Jeane(14)..... 406,976 9.1 406,976 6.1
Frontenac VI Limited
Partnership(15)........ 893,067 20.5 893,067 13.6
135 S. LaSalle Street,
Suite 3800
Chicago, IL 60603
JMI Equity Fund,
L.P.(16) .............. 410,533 9.4 410,533 6.3
1119 St. Paul St.
Baltimore, MD 21202
LMC Purchase Limited
Partnership............ 298,864 6.9 298,864 4.6
339 Carlton Terrace
Ridgewood, NJ 07450
All directors and
executive officers as a
group (13 persons)(17). 4,316,267 78.3 4,316,267 55.9
</TABLE>
- --------
* Represents beneficial ownership of less than 1%.
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock. Amounts shown for each stockholder include all shares issuable
upon conversion of the Company's Convertible Preferred Stock. The address
for Messrs. Ruport, Carter and Thomson is c/o Optika Imaging Systems,
Inc., 5755 Mark Dabling Blvd., Colorado Springs, Colorado 80919.
(2) Based on 4,347,494 shares of Common Stock outstanding as of June 30,
1996. The number of shares of Common Stock deemed outstanding prior to
this offering includes shares of Common Stock issuable pursuant to stock
options that may be exercised within 60 days after June 30, 1996, which
is the assumed effective date of the offering. Shares issuable pursuant
to such options are deemed outstanding for computing the percentage of
the person holding such options, but are not deemed outstanding for
computing the percentage of any other person.
(3) Assumes no exercise of the Underwriters' over-allotment option to
purchase up to an aggregate of 330,000 shares of Common Stock from the
following Selling Stockholders: Paul Carter (61,996 shares), Malcolm D.
Thomson (61,996 shares), Harvey L. Jeane (61,996 shares) and certain
other stockholders (the "Other Selling Stockholders") consisting of Kevin
Ilsen (8,172 shares), Richard Holzman (54,480 shares), James T. Schuster
(34,480 shares), David L. Holzman (27,240 shares), Russell A. Johnson
(13,960 shares), Eric G. Brown (5,000 shares) and Linda E. Boguslav (680
shares). If the Underwriters' over-allotment option is exercised in full,
upon completion of this offering Mr. Carter, Mr. Thomson, Mr. Jeane and
the Other Selling Stockholders would beneficially own 930,504 shares,
912,504 shares, 344,980 shares and 83,296 shares of Common Stock,
respectively, representing 14.0%, 13.7%, 5.2% and 1.3% of the outstanding
Common Stock, respectively.
54
<PAGE>
(4) Includes 427,500 shares of Common Stock issuable upon exercise of options
that are currently exercisable or will become exercisable within 60 days
of June 30, 1996, 327,500 of which shares are subject to a repurchase
right of the Company.
(5) Includes 149,000 shares of Common Stock issuable upon exercise of options
that are currently exercisable or will become exercisable within 60 days
of June 30, 1996, 77,000 of which shares are subject to a repurchase
right of the Company.
(6) Includes 60,000 shares of Common Stock issuable upon exercise of options
that are currently exercisable or will become exercisable within 60 days
of June 30, 1996, 30,000 of which shares are subject to a repurchase
right of the Company.
(7) Includes (i) 128,418 shares of Common Stock held of record by the Paul
Carter Irrevocable Trust, of which Mr. Carter may be deemed to be
beneficial owner and (ii) 120,000 vested shares of Common Stock issuable
upon exercise of options that are currently exercisable or will become
exercisable within 60 days of June 30, 1996. Also includes an aggregate
of 67,500 shares of Common Stock which are subject to currently
exercisable options held by third parties. See "Certain Transactions."
(8) Includes an aggregate of 67,500 shares of Common Stock which are subject
to currently exercisable options held by third parties. See "Certain
Transactions." Also includes 120,000 vested shares of Common Stock
issuable upon exercise of options that are currently exercisable or will
become exercisable within 60 days of June 30, 1996.
(9) Consists of 10,000 shares of Common Stock issuable upon exercise of
options that are currently exercisable or will become exercisable within
60 days of June 30, 1996, all of which shares are subject to a repurchase
right of the Company.
(10) Includes 893,067 shares of Common Stock owned beneficially by Frontenac.
The general partner of Frontenac is the Frontenac Company, of which Mr.
Crawford is a general partner. In such capacity, Mr. Crawford may be
deemed to be a beneficial owner of such shares, although he disclaims
such beneficial ownership except to the extent of his pecuniary interest
therein, if any. Also includes (i) 10,000 shares of Common Stock issuable
upon exercise of options that are currently exercisable or will become
exercisable within 60 days of June 30, 1996, all of which shares are
subject to a repurchase right of the Company, and (ii) 25,000 shares of
Common Stock which are subject to currently exercisable options granted
by Frontenac to Mr. King. See "Certain Transactions." The address of Mr.
Crawford is c/o Frontenac Company, 208 South LaSalle Street, Chicago
Illinois 60604.
(11) Includes 25,000 shares of Common Stock issuable upon exercise of options
granted by the Company that are currently exercisable or will become
exercisable within 60 days of June 30, 1996, all of which shares are
subject to a repurchase right of the Company.
(12) Includes 400,533 shares of Common Stock owned beneficially by JMI Equity
Fund, L.P. The general partner of JMI Equity Fund, L.P. is JMI Partners,
L.P., of which Mr. Gruner is a general partner. In such capacity, Mr.
Gruner may be deemed to be a beneficial owner of such shares, although he
disclaims such beneficial ownership except to the extent of his pecuniary
interest therein, if any. Also includes 10,000 shares of Common Stock
issuable upon exercise of options that are currently exercisable or will
become exercisable within 60 days of June 30, 1996, all of which shares
are subject to a repurchase right of the Company. The address of Mr.
Gruner is c/o JMI Partners, L.P., 1119 St. Paul Street, Baltimore,
Maryland 21202.
(13) Includes (i) 25,000 shares of Common Stock issuable upon exercise of
options granted by the Company that are currently exercisable or will
become exercisable within 60 days of June 30, 1996, 18,750 of which
shares are subject to a repurchase right of the Company and (ii) 25,000
shares of Common Stock issuable upon exercise of options granted by
Frontenac to Mr. King, which options are currently exercisable or will
become exercisable within 60 days of June 30, 1996, 18,750 of which
shares are subject to a repurchase right of Frontenac. See "Certain
Transactions."
(14) Includes (i) 120,000 vested shares of Common Stock issuable upon exercise
of options that are currently exercisable or will become exercisable
within 60 days of June 30, 1996 and (ii) 18,000 shares of Common Stock
held of record by trusts for the benefit of Michelle Thomson, Sylvia
Thomson and Julie White, of which Mr. Jeane is trustee and may be deemed
to be beneficial owner. The address of Mr. Jeane is 8832 Elk Grove Way,
#201, Las Vegas, Nevada 89117. Mr. Jeane previously served as President,
Chief Executive Officer and a Director of the Company.
(15) Includes 25,000 shares of Common Stock which are subject to a currently
exercisable option granted to Mr. King by Frontenac. See "Certain
Transactions." Excludes options to purchase Common Stock held by Mr.
Crawford.
(16) Includes 10,000 shares of Common Stock issuable upon exercise of options
granted to Mr. Gruner in connection with his service on the Board of
Directors that are currently exercisable or will become exercisable
within 60 days of June 30, 1996, all of which shares are subject to a
repurchase right of the Company.
(17) Includes (i) 10,667 shares of Common Stock beneficially held by an
executive officer not named in the foregoing table and (ii) a total of
186,000 shares of Common Stock issuable upon exercise of options held by
executive officers not named in such table which are currently
exercisable or will become exercisable within 60 days of June 30, 1996,
166,250 of which shares are subject to a repurchase right of the Company.
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK
At the closing of this offering, the authorized capital stock of the Company
will consist of 25,000,000 shares of Common Stock, par value $.001 per share,
and 2,000,000 shares of Preferred Stock, par value $.001 per share (the
"Preferred Stock"), after giving effect to the amendment of the Company's
First Restated Certificate of Incorporation to delete references to the
Convertible Preferred Stock following conversion of such stock. The following
description of capital stock reflects the Second Amended and Restated
Certificate of Incorporation which will be effective upon closing of this
offering. Immediately following the completion of this offering, an aggregate
of 6,547,494 shares of Common Stock will be issued and outstanding, and no
shares of Convertible Preferred Stock will be issued and outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters to
be voted upon by the stockholders. Holders of Common Stock do not have
cumulative voting rights, and therefore holders of a majority of the shares
voting for the election of directors can elect all of the directors. In such
event, the holders of the remaining shares will not be able to elect any
directors.
Holders of the Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. The Company does not anticipate paying cash dividends in
the foreseeable future. In the event of the liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities. See "Dividend
Policy."
Holders of Common Stock have no preemptive, conversion or redemption rights
and are not subject to further calls or assessments by the Company. All of the
outstanding shares of Common Stock are, and the shares offered by the Company
hereby will be, if issued, validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Company's Board of Directors is authorized to issue from time to time,
without stockholder authorization, in one or more designated series, any or
all of the authorized but unissued shares of Preferred Stock of the Company
with such dividend, redemption, conversion and exchange provisions as may be
provided in the particular series. Any series of Preferred Stock may possess
voting, dividend, liquidation and redemption rights superior to that of the
Common Stock. The rights of the holders of Common Stock will be subject to,
and may be materially adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. Issuance of a new series of
Preferred Stock, while providing desirable flexibility in connection with
possible acquisition and other corporate purposes, could have the effect of
entrenching the Company's Board of Directors and making it more difficult for
a third-party to acquire, or discourage a third-party from acquiring, a
majority of the outstanding voting stock of the Company. The Company has no
present plans to issue any series of Preferred Stock.
WARRANTS
In November 1995, the Company issued the Warrants to purchase an aggregate
of 95,000 shares of Common Stock pursuant to the Settlement Agreement. Each
Warrant currently entitles the holder to purchase one share of Common Stock at
an exercise price of $1.875 during the period commencing on the date of
issuance and ending November 1, 2000. The Warrants are not transferable. The
exercise price and the number of shares purchasable pursuant to the Warrants
are subject to adjustment for any reclassification, split, subdivision or
combination of the Company's shares. The Warrants do not confer upon the
Claimants any voting or other rights of a stockholder of the Company.
REGISTRATION RIGHTS
Pursuant to the Amended and Restated Registration Agreement dated as of
November 22, 1995, as amended, among the Company and most holders of its
securities (the "Rights Agreement"), the holders of
56
<PAGE>
approximately 4,295,000 shares of Common Stock (the "Registrable Securities")
will be entitled to certain rights with respect to the registration of the
Registrable Securities under the Securities Act. Under the Rights Agreement,
if the Company proposes to register any of its securities under the Securities
Act, either for its own account or the account of other stockholders, the
holders of Registrable Securities are entitled to notice of such registration
and are entitled to include their Registrable Securities therein. In addition,
if at any time beginning six months following the date of this Prospectus, the
Company receives a request from certain initiating holders of Registrable
Securities, the Company is obligated to cause such shares to be registered
under the Securities Act (provided that the offering is reasonably expected to
exceed $750,000). Holders of Registrable Securities have the right to cause
two such demand registrations. In addition to the first two demand
registrations, holders of Registrable Securities may also require the Company
to register all or a portion of their Registrable Securities on Form S-2 or
Form S-3 under the Securities Act (provided that the offering size is
reasonably expected to exceed $250,000), when such forms become available for
use by the Company, and subject to certain other conditions and limitations.
The holders' rights with respect to all such registrations are subject to
certain conditions, including the right of the underwriters to limit the
number of shares included in any such registration. The Company has agreed to
pay all expenses related thereto, except for underwriting discounts and
commissions to effect the sale of the Registrable Securities.
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
Certificate of Incorporation and Bylaws
The Second Amended and Restated Certificate of Incorporation provides that,
effective upon the closing of this offering, all stockholder actions must be
effected at a duly called meeting and not by a consent in writing. The Bylaws
provide that the Company's stockholders may call a special meeting of
stockholders only upon a request of stockholders owning at least 50% of the
Company's capital stock. The Bylaws further provide that stockholders seeking
to make stockholder proposals or nominations for the Board of Directors must
notify the Company in writing not less than 20 nor more than 60 days prior to
the stockholders' meeting at which the proposal or nomination is to be
considered. In addition, the Company's Second Amended and Restated Certificate
of Incorporation provides that the directors of the Company shall be
classified into three classes as nearly equal in size as practicable, with
staggered three-year terms. The Second Amended and Restated Certificate of
Incorporation further provides that the vacancies on the Board of Directors
may be filled by a majority of the Board of Directors then in office.
Furthermore, any director elected by the stockholders, or by the Board of
Directors to fill a vacancy, may be removed only by a vote of 50% of the
combined voting power of the shares of Common Stock entitled to vote for the
election of directors. These provisions of the Second Amended and Restated
Certificate of Incorporation and Bylaws could have the effect of making it
more difficult for a third-party to acquire, or of discouraging a third-party
from acquiring or making a bid to acquire, control of the Company. These
provisions are intended (i) to enhance the likelihood of continuity and
stability in the composition of the Board of Directors and in the policies
formulated by the Board of Directors, (ii) to discourage certain types of
transactions that may involve an actual or threatened change of control of the
Company, (iii) to reduce the vulnerability of the Company to an unsolicited
acquisition proposal and (iv) to discourage certain tactics that may be used
in proxy fights. However, such provisions could have the effect of
discouraging others from making tender offers for the Company's shares and, as
a consequence, they also may inhibit fluctuations in the market price of the
Company's shares that could result from actual or rumored takeover attempts.
Such provisions also may have the effect of preventing changes in the
management of the Company. See "Risk Factors--Control by Existing
Stockholders; Effects of Certain Anti-Takeover Provisions."
Delaware Takeover Statute
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which, subject to certain exceptions, prohibits a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three (3) years following the date that
such stockholder became an interested stockholder, unless: (i) prior to such
date, the board of directors of the corporation approved either the business
combination or the transaction that resulted in the stockholder becoming an
interested stockholder, (ii) upon consummation of the transaction that
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the
57
<PAGE>
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned (x) by persons who are directors and
also officers and (y) by employee stock plans in which employee participants
do not have the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange offer or (iii) on or
subsequent to such date, the business combination is approved by the board of
directors and authorized at an annual or special meeting of stockholders, and
not by written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder, (ii)
any sale, transfer, pledge or other disposition of ten percent or more of the
assets of the corporation involving the interested stockholder, (iii) subject
to certain exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the interested
stockholder, (iv) any transaction involving the corporation that has the
effect of increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested stockholder or
(v) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation. In general, Section 203 defines an interested
stockholder as any entity or person beneficially owning fifteen percent or
more of the outstanding voting stock of the corporation and any entity or
person affiliated with or controlling or controlled by such entity or person.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Boston EquiServe
Limited Partnership.
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market could materially adversely affect prevailing market prices.
Upon completion of this offering, the Company will have 6,547,494 shares of
Common Stock outstanding (assuming no exercise of the Underwriters'
overallotment option or outstanding warrants or outstanding options under the
1994 Stock Plan). Of these shares, the 2,200,000 shares sold in this offering
will be freely transferable without restriction or registration under the
Securities Act, except for any shares purchased by an existing "affiliate" of
the Company, as that term is defined by the Securities Act (an "Affiliate"),
which shares will be subject to the resale limitations of Rule 144 adopted
under the Securities Act. The remaining 4,347,494 outstanding shares are
"restricted shares" (as defined in Rule 144). Of such shares, and without
consideration of the contractual restrictions described below, 100,000 shares
would be available for immediate sale in the public market without
restriction. Beginning 90 days after the date of this Prospectus, and without
consideration of the contractual restrictions described below, approximately
3,266,000 shares would be eligible for sale in reliance upon Rule 144
promulgated under the Securities Act and approximately 138,000 shares would be
eligible for sale in reliance upon Rule 701 promulgated under the Securities
Act. Without consideration of the contractual restrictions described below,
the remaining approximately 816,000 restricted shares will not be transferable
pursuant to Rule 144 until the expiration of their two-year holding periods.
After the offering pursuant to this Prospectus, the holders of approximately
4,295,000 shares of Common Stock, or their transferees, will be entitled to
certain rights with respect to the registration of such shares under the
Securities Act. See "Description of Capital Stock--Registration Rights."
Registration of such shares under the Securities Act would result in such
shares becoming freely tradeable without restriction under the Securities Act
(except for shares purchased by Affiliates) immediately upon the effectiveness
of such registration.
All officers and directors and certain security holders of the Company have
agreed not to offer, sell, contract to sell or grant any option to purchase or
otherwise dispose of Common Stock of the Company for certain periods of time
after the effective date of the registration statement filed in connection
with this offering without the prior written consent of Volpe, Welty and
Company. Additionally, as a result of these contractual restrictions,
approximately 3,432,000 shares will become available for sale 180 days after
the effective date of this offering.
In general, under Rule 144 as currently in effect, beginning 90 days after
the offering, a person (or persons whose shares are aggregated), who owns
shares that were purchased from the Company (or any Affiliate) at least two
years previously, including persons who may be deemed Affiliates of the
Company, is entitled to sell within any three-month period a number of shares
that does not exceed the greater of one percent of the then outstanding shares
of the Company's Common Stock (approximately 65,000 shares immediately after
the offering) or the average weekly trading volume of the Company's Common
Stock in The Nasdaq National Market during the four calendar weeks preceding
the date on which notice of the sale is filed with the Securities and Exchange
Commission. Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. Any person (or persons whose shares are
aggregated) who is not deemed to have been an Affiliate of the Company at any
time during the 90 days preceding a sale, and who owns shares within the
definition of "restricted securities" under Rule 144 under the Securities Act
that were purchased from the Company (or any Affiliate) at least three years
previously, would be entitled to sell such shares under Rule 144(k) without
regard to the volume limitations, manner of sale provisions, public
information requirements or notice requirements.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its
employees, directors, officers, consultants or advisers up to the date the
Company becomes subject to the
59
<PAGE>
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), pursuant to written compensatory benefit plans or written
contracts relating to the compensation of such persons. In addition, the
Securities and Exchange Commission has indicated that Rule 701 will apply to
typical stock options granted by an issuer before it becomes subject to the
reporting requirements of the Exchange Act, along with the shares acquired
upon exercise of such options (including exercises after the date of this
Prospectus). Securities issued in reliance on Rule 701 are restricted
securities and, subject to the contractual restrictions described above,
beginning 90 days after the date of this Prospectus, such securities may be
sold (i) by persons other than Affiliates, subject only to the manner of sale
provisions of Rule 144 and (ii) by Affiliates under Rule 144 without
compliance with its two-year minimum holding period requirements.
The Company intends to file a registration statement under the Securities
Act covering approximately 2,682,000 shares of Common Stock issued or reserved
for issuance under the 1994 Stock Plan and the Employee Stock Purchase Plan.
See "Management--1994 Stock Option/Stock Issuance Plan" and "--Employee Stock
Purchase Plan." Such registration statement will be filed within 30 days
following the effective date of this offering and will automatically become
effective upon filing. Accordingly, shares registered under such registration
statement pursuant to the 1994 Stock Plan will, subject to Rule 144 volume
limitations applicable to Affiliates, be available for sale in the open
market, except to the extent that such shares are subject to vesting
restrictions with the Company or the contractual restrictions described above.
At June 30, 1996, options to purchase 1,886,370 shares were issued and
outstanding under the 1994 Stock Plan.
60
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below (the
"Underwriters"), and each of such Underwriters for whom Volpe, Welty &
Company, Piper Jaffray Inc. and Needham & Company, Inc. (together, the
"Representatives") are acting as representatives, has agreed severally to
purchase from the Company, the respective number of shares of Common Stock set
forth opposite its name below. The Underwriters are committed to purchase and
pay for all shares if any shares are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Volpe, Welty & Company.......................................... 443,334
Piper Jaffray Inc. ............................................. 443,333
Needham & Company, Inc. ........................................ 443,333
Bear, Stearns & Co. Inc......................................... 90,000
BT Securities Corporation....................................... 90,000
Donaldson, Lufkin & Jenrette Securities Corporation............. 90,000
Hambrecht & Quist LLC........................................... 90,000
Lehman Brothers Inc............................................. 90,000
Robertson, Stephens & Company LLC............................... 90,000
UBS Securities LLC.............................................. 90,000
Brean Murray, Foster Securities Inc............................. 30,000
Dain Bosworth Incorporated...................................... 30,000
First Albany Corporation........................................ 30,000
Hanifen, Imhoff Inc............................................. 30,000
Parker/Hunter Incorporated...................................... 30,000
Punk, Ziegel & Knoell........................................... 30,000
The Robinson-Humphrey Company, Inc.............................. 30,000
Wedbush Morgan Securities Inc................................... 30,000
---------
Total......................................................... 2,200,000
=========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public at the offering
price set forth on the cover page of this Prospectus. The Underwriters may
offer a portion of the shares of Common Stock directly to the public at the
public offering price set forth on the cover page hereof and a portion to
certain dealers at a price which represents a concession not in excess of
$0.21 per share under the public offering price. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $0.10 per share to
certain brokers or dealers. After the public offering, the public offering
price and such concessions may be changed by the Underwriters.
The Selling Stockholders have granted the Underwriters an option for 30 days
after the date of this Prospectus to purchase, at the public offering price,
less the underwriting discounts and commissions as set forth on the cover page
of this Prospectus, up to an aggregate of 330,000 additional shares of Common
Stock, solely to cover over-allotments, if any. If the Underwriters exercise
their over-allotment option, the Underwriters have severally agreed, subject
to certain conditions, to purchase approximately the same percentage thereof
that the number of shares of Common Stock to be purchased by each of them, as
shown in the foregoing table, bears to the 2,200,000 shares of Common Stock
offered hereby. The Underwriters may exercise such option only to cover the
over-allotment in connection with the sale of the 2,200,000 shares of Common
Stock offered hereby.
The Company, each of its directors and executive officers and certain
holders of the Company's currently outstanding securities have agreed that,
for a period of 180 days following the date of this Prospectus, they will not,
without the prior written consent Volpe, Welty & Company, offer, sell or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for any shares of Common Stock. The
Company has also agreed not to offer, sell, contract to sell or otherwise
dispose of any shares of
61
<PAGE>
Common Stock or any securities convertible into or exchangeable for, or any
rights to purchase or acquire, Common Stock for a period of 180 days following
the date of this Prospectus without the prior written consent of Volpe, Welty &
Company, except for the granting of options or the sale of stock pursuant to
the Company's existing stock plans. Volpe, Welty & Company, in its discretion,
may waive the foregoing restrictions in whole or in part, with or without a
public announcement of such action.
The Underwriters will not make sales to accounts over which they exercise
discretionary authority (i) in excess of five percent of the number of shares
of Common Stock offered hereby and (ii) unless they obtain specific written
consent from the customer.
Prior to the offering, there has been no public market for the Common Stock.
The initial public offering price of the Common Stock was negotiated between
the Company and the Representatives. The factors considered in determining the
initial public offering price of the Common Stock, in addition to prevailing
market conditions, include the Company's historical performance, estimates of
the business potential and earnings prospects of the Company, an assessment of
the Company's management and the consideration of the above factors in relation
to market valuations of companies in related businesses.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities that may be incurred in connection
with the offering, including liabilities under the Securities Act, or to
contribute payments that the Underwriters may be required to make in respect
thereof.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company and the Selling Stockholders by Brobeck, Phleger & Harrison LLP, in
Denver, Colorado and Palo Alto, California. A member of the firm of Brobeck,
Phleger & Harrison LLP owns 3,452 shares of Common Stock of the Company.
Certain legal matters in connection with the offering will be passed upon for
the Underwriters by Sachnoff & Weaver, Ltd., Chicago, Illinois.
EXPERTS
The consolidated financial statements as of December 31, 1994 and 1995 and
for each of the three years in the period ended December 31, 1995 included in
this Prospectus have been so included in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement on Form S-1 under the
Securities Act with respect to the Common Stock offered hereby. This Prospectus
does not contain all of the information set forth in the Registration Statement
and the exhibits and schedules to the Registration Statement. For further
information with respect to the Company and such Common Stock offered hereby,
reference is made to the Registration Statement and the exhibits and schedules
filed as a part of the Registration Statement. Statements contained in this
Prospectus concerning the contents of any contract or any other document
referred to are not necessarily complete; reference is made in each instance to
the copy of such contract or document filed as an exhibit to the Registration
Statement. Each such statement is qualified in all respects by such reference
to such exhibit. The Registration Statement, including exhibits and schedules
thereto, may be inspected without charge at the Securities and Exchange
Commission's principal office in Washington, D.C., and copies of all or any
part thereof may be obtained from such office after payment of fees prescribed
by the Securities and Exchange Commission. The Securities and Exchange
Commission also maintains a site on the World Wide Web that contains reports,
proxy and information statements and other information regarding the Company.
The address for such site is http://www.sec.gov.
62
<PAGE>
OPTIKA IMAGING SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheet............................................... F-3
Consolidated Statement of Operations..................................... F-4
Consolidated Statement of Changes in Common Stockholders' Equity
(Deficit)............................................................... F-5
Consolidated Statement of Cash Flows..................................... F-6
Notes to Consolidated Financial Statements............................... F-7
Pro Forma Combined Condensed Financial Information (Unaudited)........... F-15
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Optika Imaging Systems, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in common stockholders'
equity (deficit) and of cash flows present fairly, in all material respects,
the financial position of Optika Imaging Systems, Inc. and its subsidiaries at
December 31, 1995 and 1994, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1995, 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.
Price Waterhouse LLP
March 1, 1996
Boulder, Colorado
F-2
<PAGE>
OPTIKA IMAGING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, DECEMBER 31, JUNE 30, EQUITY
1994 1995 1996 JUNE 30, 1996
------------ ------------ ----------- -------------
(NOTE 1)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash...................... $ 771 $ 1,415 $ 603
Accounts receivable, net
of allowance for doubtful
accounts of $76, $90 and
$90 at December 31, 1994,
1995 and June 30, 1996,
respectively............. 2,400 3,199 4,273
Other current assets...... 418 306 756
------- ------- -------
Total current assets... 3,589 4,920 5,632
------- ------- -------
Fixed assets, net of
accumulated depreciation of
$517, $820 and $1,009 at
December 31, 1994, 1995
and June 30, 1996,
respectively.................... 764 762 900
Notes receivable from related
parties................... 95 103 106
Other assets, net.......... 2 397 384
------- ------- -------
$ 4,450 $ 6,182 $ 7,022
======= ======= =======
LIABILITIES, REDEEMABLE
CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current portion of long-
term debt................. $ 367 $ 177 $ 383
Accounts payable.......... 625 627 722
Accrued vacation.......... 131 167 207
Accrued expenses.......... 295 563 559
Deferred revenues......... 833 1,545 1,922
------- ------- -------
Total current
liabilities........... 2,251 3,079 3,793
------- ------- -------
Long-term debt............. 353 266 341
Commitments and
contingencies (Note 9)
Preferred stock (1,493,024
shares authorized):
Series A mandatorily
redeemable convertible
preferred stock; no par
value; 298,864 shares issued
and outstanding at
December 31, 1994, 1995 and
June 30, 1996............ 411 411 411
Series B mandatorily
redeemable convertible
preferred stock; no par
value; 752,160 shares issued
and outstanding at
December 31, 1994, 1995 and
June 30, 1996............ 2,932 2,932 2,932
Series C mandatorily
redeemable convertible
preferred stock; no par
value; 441,177 shares issued
and outstanding at
December 31, 1995 and June 30,
1996..................... 1,461 1,461
Common stockholders' equity
(deficit):
Common stock; no par
value; 6,320,000 shares
authorized; 2,595,376,
2,843,930 and 2,847,030
shares issued and outstanding
at December 31, 1994, 1995
and June 30, 1996,
respectively, and 4,347,494
at June 30, 1996 pro
forma.................... 307 799 805 $ 5,609
Accumulated deficit....... (1,804) (2,766) (2,721) (2,721)
------- ------- ------- -------
Total stockholders'
equity (deficit)...... (1,497) (1,967) (1,916) 2,888
------- ------- ------- -------
$ 4,450 $ 6,182 $ 7,022 $ 7,022
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
OPTIKA IMAGING SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- -----------------------
1993 1994 1995 1995 1996
------- -------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Licenses................. $ 6,924 $ 7,562 $ 8,333 $3,444 $5,648
Maintenance and other.... 2,119 1,690 2,135 989 1,312
------- -------- ------- ------ ------
Total revenues......... 9,043 9,252 10,468 4,433 6,960
Cost of revenues:
Licenses................. 471 413 316 104 278
Maintenance and other.... 2,073 1,889 1,823 842 866
------- -------- ------- ------ ------
Total cost of
revenues.............. 2,544 2,302 2,139 946 1,144
------- -------- ------- ------ ------
Gross profit............... 6,499 6,950 8,329 3,487 5,816
Operating expenses:
Sales and marketing...... 2,585 4,200 3,732 1,595 2,927
Research and
development............. 2,332 3,112 3,658 1,781 2,229
General and
administrative.......... 1,037 1,513 1,461 831 612
------- -------- ------- ------ ------
Total operating
expenses.............. 5,954 8,825 8,851 4,207 5,768
------- -------- ------- ------ ------
Income (loss) from opera-
tions..................... 545 (1,875) (522) (720) 48
Litigation settlements... 458 -- 373 -- --
Other expenses, net........ 18 25 38 23 3
------- -------- ------- ------ ------
Total other expenses... 476 25 411 23 3
------- -------- ------- ------ ------
Income (loss) before
provision (benefit) for
income taxes.............. 69 (1,900) (933) (743) 45
Provision (benefit) for in-
come taxes................ 42 (168) 29 13 --
------- -------- ------- ------ ------
Net income (loss).......... $ 27 $ (1,732) $ (962) $ (756) $ 45
======= ======== ======= ====== ======
Pro forma net income (loss)
per common share
(unaudited)............... $ (.20) $ (.16) $ .01
======= ====== ======
Pro forma weighted average
number of common shares
outstanding............... 4,811 4,787 5,730
======= ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
OPTIKA IMAGING SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
COMMON
COMMON STOCK STOCKHOLDERS'
---------------- ACCUMULATED EQUITY
SHARES AMOUNT DEFICIT (DEFICIT)
--------- ------ ----------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1992........ 2,541,376 $ 258 $ (99) $ 159
Common stock issued upon exercise
of stock options.................. 26,000 27 -- 27
Net income......................... -- -- 27 27
--------- ----- ------- -------
Balance at December 31, 1993........ 2,567,376 285 (72) 213
Common stock issued upon exercise
of stock options.................. 28,000 22 -- 22
Net loss........................... -- -- (1,732) (1,732)
--------- ----- ------- -------
Balance at December 31, 1994........ 2,595,376 307 (1,804) (1,497)
Common stock issued upon exercise
of stock options.................. 32,123 30 -- 30
Warrants issued in settlement of
litigation........................ -- 57 -- 57
Common stock issued for
acquisitions...................... 216,431 405 -- 405
Net loss........................... -- -- (962) (962)
--------- ----- ------- -------
Balance at December 31, 1995........ 2,843,930 799 (2,766) (1,967)
Common stock issued upon exercise
of stock options.................. 3,100 6 -- 6
Net income......................... -- -- 45 45
--------- ----- ------- -------
Balance at June 30, 1996 (unau-
dited)............................. 2,847,030 $ 805 $(2,721) $(1,916)
========= ===== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
OPTIKA IMAGING SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- ---------------
1993 1994 1995 1995 1996
-------- -------- ------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss)............... $ 27 $ (1,732) $ (962) $ (756) $ 45
Adjustments to reconcile net
income (loss) to net cash
provided (used) by operating
activities:
Depreciation and amortization.. 216 219 338 141 229
Loss on disposal of assets..... 15 15 --
Provision for loss on accounts
receivable.................... (76) (14) -- --
Litigation settlement.......... 300 282 -- --
Change in assets and
liabilities:
Accounts receivable........... (1,118) 133 (677) 587 (1,074)
Other assets.................. (43) (132) 64 (112) (480)
Accounts payable.............. 92 230 (66) (1) 95
Accrued expenses.............. 346 (394) 234 245 36
Deferred revenue.............. 189 455 659 18 377
-------- -------- ------- ------ -------
Net cash provided (used) by
operations.................. 9 (1,297) (127) 137 (772)
-------- -------- ------- ------ -------
CASH FLOWS FROM INVESTING
ACTIVITIES
Capital expenditures............ (72) (158) (316) (42) (321)
Cash acquired in acquisition.... 108 -- --
-------- -------- ------- ------ -------
Net cash used in investing
activities.................. (72) (158) (208) (42) (321)
-------- -------- ------- ------ -------
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from issuance of
preferred stock, net........... 1,935 997 1,461 -- --
Principal payments on long-term
debt........................... (265) (534) (696) (218) (40)
Proceeds from issuance of long-
term debt...................... 184 -- 321
Proceeds from issuances of
common stock................... 27 22 30 -- --
-------- -------- ------- ------ -------
Net cash provided (used) by
financing activities........ 1,697 485 979 (218) 281
-------- -------- ------- ------ -------
Net increase (decrease) in
cash........................... 1,634 (970) 644 (123) (812)
Cash at beginning of period..... 107 1,741 771 771 1,415
-------- -------- ------- ------ -------
Cash at end of period........... $ 1,741 $ 771 $ 1,415 $648 $603
======== ======== ======= ====== =======
SUPPLEMENTAL DISCLOSURE OF NON-
CASH TRANSACTIONS
Capital lease obligations for
purchase of equipment.......... $ 278 $ 381
Interest paid................... 26 54 $ 54 $ 29 $ 25
Income taxes paid (refund)...... 132 (8) 130
Assets obtained in acquisition.. 498
Liabilities assumed in
acquisition.................... 200
Common stock issued in
acquisition.................... 405
Note issued in litigation
settlement..................... 225
Warrants issued in litigation
settlement..................... 57
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
OPTIKA IMAGING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Optika Imaging Systems, Inc., a California corporation, and its subsidiaries
("Optika" or the "Company") was formed in 1988 and currently develops and
markets high-performance, client/server integrated imaging software. 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 Imaging Systems, Inc. and its wholly owned subsidiaries TEAMWorks
Technologies, Inc., Optika Imaging Systems Europe, Ltd. and Optika Asia, Inc.
All significant intercompany accounts and transactions have been eliminated.
Revenue Recognition
License revenues are generally recognized upon shipment when no significant
vendor obligations remain and collectibility is probable. License revenues
related to contracts with significant post-delivery performance obligations
are recognized when the Company's obligations are no longer significant or
when the customer accepts the product, as applicable. Maintenance revenues for
maintaining, supporting and providing upgrades are deferred and recognized
ratably over the maintenance period which is generally one year. Other
revenues consist of training, consulting and implementation services and are
recognized as such services are performed.
Depreciation and Amortization
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. Goodwill represents the excess of the purchase price over the fair
market value of assets acquired and is being amortized over a four- year
period.
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. The capitalized cost is then amortized on a
straight-line basis over the estimated product life, or on the ratio of
current revenue to total projected product revenue, whichever is greater. 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.
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 valuation
allowance recorded against net 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.
F-7
<PAGE>
OPTIKA IMAGING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interim Financial Data
The interim financial data as of June 30, 1996 and for the six months ended
June 30, 1995 and June 30, 1996 is unaudited; however, in the opinion of
management of the Company, the interim data includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results for the interim periods presented. All data
presented in these notes at such dates and for such periods are unaudited.
Unaudited Pro Forma Stockholders' Equity
The Board of Directors authorized management of the Company to file a
registration statement with the Securities and Exchange Commission ("SEC")
permitting the Company to sell shares of its common stock to the public. If
the Company's initial public offering is consummated under the terms presently
anticipated, all of the mandatorily redeemable convertible preferred stock
outstanding will automatically convert into 1,500,464 shares of common stock.
Unaudited pro forma stockholders' equity as of June 30, 1996, as set forth on
the accompanying balance sheet, is adjusted for the anticipated conversion of
preferred stock.
Pro Forma Net Income (Loss) Per Common Share
The Company's historical capital structure is not indicative of its
prospective structure due to the automatic conversion of all shares of
mandatorily redeemable convertible preferred stock into common stock
concurrent with the closing of the Company's anticipated initial public
offering. Accordingly, historical net income (loss) per common share is not
considered meaningful and has not been presented herein.
Pro forma net income (loss) per common share is computed based on the
weighted average number of common shares outstanding and gives effect to
certain adjustments described below. Common equivalent shares are not included
in the per share calculation where the effect of their inclusion would be
antidilutive, except that, in conformity with SEC requirements, common and
common equivalent shares issued during the twelve-month period prior to the
filing of the Company's proposed initial public offering have been included in
the calculation as if they were outstanding for all periods, using the
treasury stock method and the assumed initial public offering price.
Additionally, all outstanding shares of mandatorily redeemable convertible
preferred stock are assumed to have been converted to common stock at the time
of their issuance.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including cash,
short-term trade receivables and payables and long-term debt, approximate
their fair values.
Export Sales
The Company had export sales totaling approximately $600,000, $1,205,000 and
$1,542,500 for the years ended December 31, 1993, 1994 and 1995, respectively,
in Europe, Asia and Latin America.
Adoption of New Accounting Standards
The Company has reviewed Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" and No. 123 "Accounting for Stock-Based Compensation" for
applicability. Based on management's estimates and its intention to continue
to apply its existing accounting for stock options, the adoption of these
standards is not expected to have a material effect on the Company's
consolidated financial statements.
F-8
<PAGE>
OPTIKA IMAGING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 its BSPs who act as resellers of the
Company's products. Receivables from end-users are not concentrated in any
particular industry.
2. BUSINESS COMBINATIONS
On January 28, 1994, the Company issued approximately 272,400 shares of its
common stock for all of the outstanding common stock of TEAMWorks
Technologies, Inc. ("TEAMWorks"). The Company also reserved an additional
15,320 shares for issuance under Optika's stock option plan in connection with
the Company's assumption of TEAMWork's outstanding options. The combination
was accounted for as a pooling of interests and, accordingly, the consolidated
financial statements for all periods presented include the operations of
TEAMWorks. Separate pre-combination revenues and net income (loss) of
TEAMWorks was not significant for the period from January 1, 1994 through
January 28, 1994. Separate pre-combination revenues and net income (loss) of
Optika and TEAMWorks for 1993 were as follows:
<TABLE>
<S> <C>
Revenues:
Optika......................................................... $8,181,000
TEAMWorks...................................................... 861,850
----------
Total revenues............................................... $9,042,850
==========
Net income (loss):
Optika......................................................... $ 156,000
TEAMWorks...................................................... (129,000)
----------
Net income................................................... $ 27,000
==========
</TABLE>
On December 1, 1995, the Company acquired certain assets and assumed certain
liabilities of two of its resellers, IPRS Asia (S) Pte Ltd. and Intuit
Development Limited (the "acquired companies"). The acquisitions were
accounted for using the purchase method. The results of operations for the
acquired companies for the one-month period ended December 31, 1995 are
included in the Optika Consolidated Statement of Operations for the year ended
December 31, 1995. The purchase price of the acquired companies was 216,431
shares of common stock and resulted in $350,350 of goodwill. Goodwill is being
amortized on a straight-line basis over a four-year period beginning January,
1996.
The following table presents unaudited pro forma results of operations as if
the acquisitions had occurred as of the beginning of the respective periods
after giving effect to certain adjustments, including amortization of
goodwill. The unaudited pro forma information is provided for comparative
purposes only and does not purport to be indicative of the results which
actually would have been obtained if the acquisition had been effected for the
periods indicated, or of results which may be obtained in the future:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
DECEMBER 31, DECEMBER 31,
1995 1994
-------------------- --------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Revenues.................... $ 11,070 $ 9,824
Net loss.................... $ (1,355) $ (1,890)
Pro forma net loss per
common share (see Note 1).. $ (.28)
</TABLE>
F-9
<PAGE>
OPTIKA IMAGING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In June 1995, the Company terminated the operations of TEAMWorks and
recorded approximately $69,000 of expenses related to this termination.
3. NOTES RECEIVABLE--RELATED PARTIES
Notes receivable and accrued interest aggregating approximately $95,000 and
$103,000 at December 31, 1994 and 1995, respectively, are due from certain
stockholders, officers and employees. The notes bear interest ranging from 5%
to 7.5% and are due through January 1998.
4. BANK CREDIT FACILITY
During 1995, the Company entered into a $1,500,000 bank credit facility with
a bank. This bank credit facility consists of (i) a working capital line of
credit pursuant to which the Company can draw up to the lesser of $1,200,000
or a borrowing base determined by eligible accounts receivable which bears
interest at the bank's prime rate plus 1.5% (actual rate of 10% at December
31, 1995) and (ii) a term facility of $300,000 to finance capital expenditures
which bears interest at the bank's prime rate plus 2.0% (actual rate of 10.5%
at December 31, 1995). At December 31, 1995 there were no amounts outstanding
under the working capital line and $1,200,000 was available for borrowing
thereunder. The borrowings under the term facility at December 31, 1995 are
due December 1998 and are secured by certain equipment (see Note 5).
Approximately $115,000 was available for borrowing under the term facility at
December 31, 1995. The working capital line of credit expires June 30, 1996.
The bank credit facility contains certain financial covenants which must be
maintained by the Company.
5. LONG-TERM DEBT AND LEASE OBLIGATIONS
Long-term debt, including capitalized lease obligations consists of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1994 1995
------ ------
<S> <C> <C>
Term loan payable to bank.................................. -- $ 185
Notes payable to stockholders; non-interest bearing;
balance due July 1997; unsecured.......................... $ 145 43
Notes payable for litigation settlement, non-interest bear-
ing; unsecured............................................ -- 206
Other...................................................... -- 9
Note payable; interest at prime rate plus 2% (10.50% at De-
cember 31, 1994); paid during 1995; unsecured............. 75 --
Capitalized lease obligations.............................. 500 --
------ ------
720 443
Less current portion....................................... (367) (177)
------ ------
$ 353 $ 266
====== ======
</TABLE>
Notes Payable for Litigation Settlements
During 1993, the Company settled a lawsuit with a former employee and
stockholder alleging various breach of contract and tort claims related to his
equity interest in the Company for $300,000. The Company paid $100,000 in cash
and issued a note payable for $200,000, payable in quarterly installments of
$25,000 beginning November 1993 through August 1995. The Company also incurred
$158,000 of legal expenses related to this litigation.
F-10
<PAGE>
OPTIKA IMAGING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1995, the Company settled a lawsuit by two former associates of the
founders of the Company which included various breach of contract and tort
claims related to the alleged contributions of the claimants to the formation
of the Company for $282,000 by issuing a non-interest bearing note and
warrants to purchase 95,000 shares of common stock. The warrants have an
exercise price of $1.875 per share and expire in 2000. The note is payable in
monthly installments beginning November 1995 through October 1997, or earlier
in the event of an initial public offering. The Company also incurred $91,000
of legal expenses related to this litigation.
Debt Maturities
Scheduled maturities of long-term debt at December 31, 1995 are as follows
(in thousands):
<TABLE>
<CAPTION>
DEBT
MATURITIES
----------
<S> <C>
1996......................................................... $ 193
1997......................................................... 209
1998......................................................... 72
-----
474
Less: amount representing interest........................... (31)
-----
443
Less: current portion........................................ (177)
-----
$ 266
=====
</TABLE>
Lease Commitments
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):
<TABLE>
<CAPTION>
OPERATING
LEASE
OBLIGATIONS
-----------
<S> <C>
1996........................................................ $469
1997........................................................ 233
1998........................................................ 60
1999........................................................ 4
----
$766
====
</TABLE>
Rent expense related to these and other operating leases approximated
$284,000, $467,000 and $488,000 for the years ended December 31, 1993, 1994
and 1995.
6. INCOME TAXES
The Company's provision (benefit) for income taxes is comprised of the
following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1993 1994 1995
---- ----- ----
<S> <C> <C> <C>
Current:
Federal.................................................... $12 $(184) --
State...................................................... 5 1 --
Foreign.................................................... 25 15 $29
--- ----- ---
$42 $(168) $29
=== ===== ===
</TABLE>
F-11
<PAGE>
OPTIKA IMAGING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's net deferred income tax assets are comprised of the following
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
GROSS DEFERRED TAX ASSETS
Net operating loss carryforwards.................. $ 543 $ 895
Tax credit carryforwards.......................... 248 341
Deferred revenue.................................. 30 20
Accrued expenses.................................. 130 113
----- -------
951 1,369
Less: deferred tax asset valuation allowance...... (938) (1,359)
----- -------
13 10
----- -------
GROSS DEFERRED TAX LIABILITIES
Accelerated tax depreciation...................... (13) (10)
----- -------
Net deferred tax asset............................ $ -- $ --
===== =======
</TABLE>
Due to the Company's history of pre-tax losses and uncertainty surrounding
the timing of realizing the benefits of its net operating loss carryforwards,
tax credit carryforwards, and future net tax deductibles, the Company has
recorded a valuation allowance against its otherwise recognizable net deferred
tax assets.
The provision (benefit) for 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):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1993 1994 1995
---- ----- -----
<S> <C> <C> <C>
U.S. federal income tax expense (benefit) at statutory
rate................................................... $23 $(646) $(317)
Increases (decreases) resulting from:
Unrecognized benefit of net operating loss
carryforwards and future net deductions.............. -- 411 310
Non-deductible items.................................. 3 17 35
Foreign tax rate differentials........................ -- (13) (1)
Effect of graduated tax rates in the carryback
period............................................... -- 63 --
Other................................................. 16 -- 2
--- ----- -----
Provision (benefit) for income taxes.................... $42 $(168) $ 29
=== ===== =====
</TABLE>
At December 31, 1995, the Company has net operating loss carryforwards of
approximately $2,342,000 which expire beginning in 2009 through 2010.
Additionally, the Company has various tax credit carryforwards aggregating
approximately $341,000 which expire beginning in 2005 through 2009;
utilization of these credit carryforwards is limited on an annual basis due to
regulations limiting utilization after a "change in ownership," which occurred
in 1994 and is subject to possible further limitations for future ownership
changes, including the proposed initial public offering described in Note 1.
7. CAPITAL STOCK AND STOCK OPTIONS
Stock Split
In August 1994, the Company effected a four-for-one stock split. All stock
and stock option amounts presented in these consolidated financial statements
reflect this stock split.
F-12
<PAGE>
OPTIKA IMAGING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Mandatorily Redeemable Convertible Preferred Stock
The Board of Directors has authorized 1,493,024 shares of preferred stock
(298,864, 752,160 and 442,000 designated as Series A, Series B and Series C
mandatorily redeemable convertible preferred stock, respectively). The
following table reflects issuances of Series A, B and C preferred stock for
each of the three years ended December 31, 1995 and for the six months ended
June 30, 1996 (in thousands, except for share amounts):
<TABLE>
<CAPTION>
MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED STOCK
-----------------------------
SHARES AMOUNT
--------------- -------------
<S> <C> <C>
Balances at December 31, 1992................. 298,864 $ 411
Series B preferred stock issued for cash,
net.......................................... 501,440 1,935
--------------- ------------
Balance at December 31, 1993.................. 800,304 2,346
Series B preferred stock issued for cash,
net.......................................... 250,720 997
--------------- ------------
Balance at December 31, 1994.................. 1,051,024 3,343
Series C preferred stock issued for cash,
net.......................................... 441,177 1,461
--------------- ------------
Balance at December 31, 1995 and June 30,
1996......................................... 1,492,201 $ 4,804
=============== ============
</TABLE>
Each share of outstanding Series A, Series B and Series C preferred stock is
entitled to as many votes as the number of shares of common stock into which
it is convertible.
The conversion ratio for Series A and Series C preferred stock is one share
of common stock for each share of preferred stock, subject to certain
antidilution provisions. The conversion ratio for Series B preferred stock is
approximately 1.011 shares of common stock for each share of preferred stock
subject to certain additional antidilution provisions. At December 31, 1995,
1,500,464 authorized and unissued shares of common stock are reserved for
issuance upon conversion of the Series A, Series B and Series C preferred
stock.
Series A, Series B and Series C preferred stock have dividend rights equal
to dividends payable to common stockholders. Additionally, the holders of
Series A, B and C preferred stock have the option to require redemption
beginning November 1, 1998 or upon the occurrence of certain other events. The
redemption price and liquidation price of the Series A, Series B and Series C
preferred stock is $1.51, $3.99 and $3.40 per share, respectively, plus
dividends in arrears, if any. Additionally, all Series A, B and C preferred
stock automatically convert to shares of common stock at their respective
conversion rates upon closing of a qualified public offering.
Stock Options
The Company has a stock option plan (the "1994 Stock Plan") whereby
2,040,000 aggregate shares of common stock are reserved for issuance pursuant
to incentive and non-qualified stock options. Incentive stock options are
granted at exercise prices not less than the fair market value of the stock on
the date of grant as determined by the Board of Directors. Options generally
vest over four years. Certain options are subject to accelerated vesting
provisions.
F-13
<PAGE>
OPTIKA IMAGING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a summary of the stock option activity for the years ended
December 31, 1995, 1994 and for the six months ended June 30, 1996 (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
NUMBER OF
OPTIONS PRICE PER SHARE
--------- ---------------
<S> <C> <C>
Options outstanding December 31, 1992............ 574 $ .4425--1.0625
Options granted................................. 133 1.0625--1.875
Options exercised............................... (26) 1.0625
----- ---------------
Options outstanding December 31, 1993............ 681 .4425--1.875
Options granted................................. 372 1.875
Options exercised............................... (28) .75
Options forfeited............................... (84) 1.0625--1.875
-----
Options outstanding at December 31, 1994......... 941 .4425--1.875
Options granted................................. 792 1.875
Options exercised............................... (32) .4425--1.875
Options forfeited............................... (152) 1.0625--1.875
-----
Options outstanding at December 31, 1995......... 1,549 .4425--1.875
Options granted................................. 369 3.40--7.50
Options exercised............................... (3) 1.875
Options forfeited............................... (29) 1.875
-----
Options outstanding at June 30, 1996
(unaudited)..................................... 1,886 $ .4425--7.50
</TABLE>
At December 31, 1995, 529,982 options are exercisable and 135,405 options
are available for grant. The weighted average exercise price per share of
outstanding options and warrants at June 30, 1996 is $2.08 per share.
8. 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 5 years. The Company did not contribute to this plan in 1994 or
1995.
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, operations or cash flows of the
Company. The Company is not currently a party to any material legal
proceedings.
10. EVENTS SUBSEQUENT TO DECEMBER 31, 1996 (UNAUDITED)
On May 21, 1996, the Board of Directors adopted an Employee Stock Purchase
Plan authorizing 250,000 shares of common stock pursuant to such plan. This
plan will allow employees of the Company to purchase shares of common stock
through periodic payroll deductions at semi-annual intervals.
Subsequent to December 31, 1995, the Board of Directors increased the number
of authorized shares pursuant to the Company's 1994 Stock Plan from 2,040,000
to 2,790,000.
Subsequent to December 31, 1995, 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.
F-14
<PAGE>
OPTIKA IMAGING SYSTEMS, INC., IPRS ASIA (S) PTE LTD. AND INTUIT DEVELOPMENT
LIMITED
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
On December 1, 1995, the Company acquired certain assets and assumed certain
liabilities of two of its resellers, IPRS Asia (S) Pte Ltd. and Intuit
Development Ltd. (the "acquired companies").
The following unaudited pro forma combined condensed financial information
reflects the business combination between the Company and the acquired
companies accounted for using the purchase method of accounting. The pro forma
combined condensed statement of operations combines the Company's historical
statements of operations with the acquired companies' historical statements of
operations for the year ended December 31, 1995. The pro forma combined
condensed statement of operations reflects the combination as if it had
occurred at the beginning of the year presented.
The unaudited pro forma combined condensed statement of operations are not
necessarily indicative of the operating results that would have been achieved
had the transaction been effected as of the beginning of such period and
should not be construed as representative of future operations.
The historical consolidated financial statements of the Company are included
elsewhere in this Prospectus and should be read in conjunction with those
consolidated financial statements and related notes.
F-15
<PAGE>
OPTIKA IMAGING SYSTEMS, INC., IPRS ASIA (S) PTE LTD. AND INTUIT DEVELOPMENT
LIMITED
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
---------------------
COMBINED
ACQUIRED PRO FORMA PRO FORMA
OPTIKA COMPANIES(1) ADJUSTMENTS COMBINED
------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Revenues......................... $10,468 $ 776 $(174)(2) $11,070
Cost of revenues................. 2,139 174 (174)(2) 2,139
------- ------ ----- -------
Gross profit................... 8,329 602 8,931
------- ------ -------
Total operating expenses......... 8,851 903 88 (3) 9,842
------- ------ ----- -------
Loss from operations............. (522) (301) (88) (911)
Litigation settlement............ 373 373
Other expenses (income), net..... 38 (25) 13
------- ------ ----- -------
Loss before provision for income
taxes........................... (933) (276) (88) (1,297)
Provision for income taxes....... 29 29 58
------- ------ -------
Net loss......................... $ (962) $ (305) $ (88) $(1,355)
======= ====== ===== =======
Pro forma net loss per common
share........................... $ (.20) $ (.28)
======= =======
Pro forma weighted average number
of common shares outstanding.... 4,811 4,811
======= =======
</TABLE>
- --------
(1) The amounts included in the combined acquired companies column are the
results of the acquired companies for the eleven months ended November 30,
1995. Their combined results for December 1995 are included in the
Company's historical results.
(2) The pro forma adjustment includes the elimination of sales made by the
Company to the combined acquired companies. Additionally, the shares
issued in the acquisition are not presented as a pro forma adjustment
because the pro forma weighted average number of common shares outstanding
includes such shares as outstanding for the entire year ended December 31,
1995.
(3) The pro forma adjustment includes the amortization of $350,325 goodwill
over a four-year period.
See accompanying notes to pro forma combined condensed financial information.
F-16
<PAGE>
[GRAPHICAL REPRESENTATION OF THREE COMPUTER SCREENS
DISPLAYING MEDIPOWER SUITE APPEARS HERE]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER, ANY UNDER-
WRITER OR BY ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE SHARES OF COMMON STOCK OFFERED
HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION
IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT
AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
The Company.............................................................. 15
Use of Proceeds.......................................................... 15
Dividend Policy.......................................................... 15
Capitalization........................................................... 16
Dilution................................................................. 17
Selected Consolidated Financial Data..................................... 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
Business................................................................. 28
Management............................................................... 42
Certain Transactions..................................................... 52
Principal and Selling Stockholders....................................... 54
Description of Capital Stock............................................. 56
Shares Eligible for Future Sale.......................................... 59
Underwriting............................................................. 61
Legal Matters............................................................ 62
Experts.................................................................. 62
Additional Information................................................... 62
Index to Consolidated Financial Statements............................... F-1
</TABLE>
---------------
UNTIL AUGUST 19, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRIT-
ERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,200,000 SHARES
[ LOGO OF OPTIKA IMAGING APPEARS HERE ]
COMMON STOCK
--------------
PROSPECTUS
July 25, 1996
--------------
VOLPE, WELTY & COMPANY
PIPER JAFFRAY INC.
NEEDHAM & COMPANY, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
