<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
Commission File Number 0-28672
OPTIKA IMAGING SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4154552
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5755 MARK DABLING BOULEVARD 80919
SUITE 100 (Zip Code)
COLORADO SPRINGS, CO
(Address of principal executive offices)
(719) 548-9800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X . NO .
---- ----
Shares of Registrant's Common Stock, $.001 par value per share,
as of November 7, 1996, 6,670,319 shares of the
Registrant's common stock were outstanding.
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INDEX
PAGE
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PART 1 - FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
December 31, 1995 and September 30, 1996 3
Condensed Consolidated Statements of Operations for
the three-month and nine-month periods ended
September 30, 1995 and 1996 4
Condensed Consolidated Statements of Cash Flows for
the nine-month period ended September 30, 1995 and 1996 5
Condensed Consolidated Statement of Changes in
Stockholders' Equity for the nine-month period
ended September 30, 1996 6
Notes to Condensed Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 22
Item 2 - Changes in Securities 22
Item 3 - Defaults on Senior Securities 22
Item 4 - Submission of Matters to a Vote of Security Holders 22
Item 5 - Other Information 22
Item 6 - Exhibits and Reports on Form 8-K 22
Signatures 23
<PAGE>
OPTIKA IMAGING SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except share amounts)
DECEMBER 31, SEPTEMBER 30,
1995 1996
-------------- --------------
(unaudited)
ASSETS
Current Assets:
Cash................................. $ 1,415 $ 1,396
Short-term investments............... -- 10,072
Accounts receivable, net............. 3,199 4,511
Other current assets................. 306 856
------------- ------------
Total current assets........... 4,920 16,835
------------- ------------
Fixed assets, net....................... 762 980
Other assets, net....................... 500 368
------------- ------------
$ 6,182 $ 18,183
============= ============
LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt.... $ 177 $ 263
Accounts payable and accrued expenses 1,357 1,741
Deferred revenues.................... 1,545 1,713
------------- ------------
Total current liabilities...... 3,079 3,717
------------- ------------
Long-term debt.......................... 266 245
Commitments and contingencies
Preferred stock (1,493,024 shares
authorized):
Series A mandatorily redeemable
convertible preferred stock;
no par value; 298,864 and no
shares issued and outstanding
at December 31, 1995 and
September 30, 1996, respectively... 411 --
Series B mandatorily redeemable
convertible preferred stock;
no par value; 752,160 and no
shares issued and outstanding
at December 31, 1995 and
September 30, 1996, respectively... 2,932 --
Series C mandatorily redeemable
convertible preferred stock;
no par value; 441,177 and no
shares issued and outstanding
at December 31, 1995 and
September 30, 1996, respectively... 1,461 --
Common stockholders' equity (deficit):
Common stock; $.001 par value;
25,000,000 shares authorized;
2,843,930 and 6,670,319 shares
issued and outstanding
at December 31, 1995 and
September 30, 1996, respectively... 799 7
Additional paid-in capital......... -- 16,701
Retained deficit................... (2,766) (2,487)
------------- ------------
Total common stockholders'
equity (deficit)............. (1,967) 14,221
------------- ------------
$ 6,182 $ 18,183
============= ============
The accompanying notes are an integral part of these financial statements.
Page 3
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OPTIKA IMAGING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
THREE MONTHS NINE MONTHS
ENDED, ENDED,
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1995 1996 1995 1996
---- ---- ---- ----
Revenues:
Licenses.............................. $ 2,132 $ 3,309 $ 5,576 $ 8,957
Maintenance and other................. 549 1,002 1,538 2,315
------- ------- ------- -------
Total revenues...................... 2,681 4,311 7,114 11,272
Cost of revenues:
Licenses.............................. 63 150 167 427
Maintenance and other................. 480 439 1,322 1,306
------- ------- ------- -------
Total cost of revenues.............. 543 589 1,489 1,733
------- ------- ------- -------
Gross profit............................ 2,138 3,722 5,625 9,539
Operating expenses:
Sales and marketing................... 893 1,998 2,488 4,924
Research and development.............. 841 1,233 2,622 3,463
General and administrative............ 297 302 1,128 915
------- ------- ------- -------
Total operating expenses............ 2,031 3,533 6,238 9,302
------- ------- ------- -------
Income (loss) from operations........... 107 189 (613) 237
Other (expenses) income, net............ (6) 72 (29) 69
------- ------- ------- -------
Income (loss) before provision for 101 261 (642) 306
income taxes...........................
Provision for income taxes.............. 6 27 19 27
------- ------- ------- -------
Net income (loss)....................... $ 95 $ 234 $ (661) $ 279
======= ======= ======= =======
Net income (loss) per common share...... $ 0.02 $ 0.03 $ (0.14) $ 0.05
======= ======= ======= =======
Weighted average number of common 5,062 7,114 4,787 6,191
shares outstanding.....................
The accompanying notes are an integral part of these financial statements.
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OPTIKA IMAGING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
NINE MONTHS ENDED SEPTEMBER 30,
1995 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................... $ (661) $ 279
Adjustments to reconcile net income
(loss) to net cash provided (used)
by operating activities:
Depreciation and amortization........ 224 357
Loss on disposal of assets........... 15 --
Provision for loss on accounts
receivable.......................... -- (22)
Change in assets and liabilities:
Accounts receivable............... 172 (1,290)
Other assets...................... (183) (491)
Accounts payable.................. (28) 58
Accrued expenses.................. 52 327
Deferred revenue.................. 259 168
----------- ----------
Net cash used by operations (150) (614)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................... (144) (503)
Purchase of short-term investments...... -- (10,072)
----------- ----------
Net cash used by investing (144) (10,575)
activities...................
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred
stock, net............................. 98 --
Principal payments on long-term debt.... (291) (364)
Proceeds from issuance of long-term debt -- 429
Proceeds from issuance of common stock.. 18 11,105
----------- ----------
Net cash provided (used) by
financing activities......... (175) 11,170
----------- ----------
Net decrease in cash.................... (469) (19)
Cash at beginning of period............. 771 1,415
----------- ----------
Cash at end of period................... $ 302 $ 1,396
=========== ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
TRANSACTIONS:
Interest paid........................... (40) (39)
Income tax refund....................... 130 --
The accompanying notes are an integral part of these financial statements.
Page 5
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OPTIKA IMAGING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
(Unaudited)
(In thousands, except share amounts)
<TABLE>
<CAPTION>
TOTAL
COMMON
ADDITIONAL STOCKHOLDERS'
COMMON STOCK PAID-IN ACCUMULATED EQUITY
-------------------
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
--------- -------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995.......... 2,843,930 $ 3 796 $ (2,766) $ (1,967)
Common stock issued upon exercise of
stock options................... 125,925 -- 102 102
Common stock issued upon initial
public offering................... 2,200,000 2 11,001 11,003
Mandatorily redeemable preferred
stock converted to common stock... 1,500,464 2 4,802 4,804
Net income......................... 279 279
--------- -------- --------- ----------- ----------
Balance at September 30, 1996......... 6,670,319 $ 7 $16,701 $ (2,487) $ 14,221
========= ======== ========= =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 6
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OPTIKA IMAGING SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
Basis of Presentation
The unaudited condensed consolidated financial statements included
herein reflect all adjustments, consisting only of normal recurring accruals,
which in the opinion of management are necessary to fairly present the Company's
consolidated financial position, results of operations, and cash flows for the
periods presented. Certain information and footnote disclosures normally
included in audited financial information and footnote disclosures normally
included in audited financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
Securities and Exchange Commission's rules and regulations. The consolidated
results of operations for the period ended September 30, 1996 are not
necessarily indicative of the results to be expected for any subsequent quarter
or for the entire fiscal year ending December 31, 1996. These consolidated
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's Registration Statement on Form S-1
(File No. 0-28672), which was declared effective by the Securities and Exchange
Commission ("SEC") on July 25, 1996.
Net Income (Loss) Per Common Share
Net income (loss) per common share is computed using the weighted
average number of common and common equivalent shares outstanding during the
period. Common equivalent shares consist of Convertible Preferred Stock (using
the if-converted method) and stock options (using the treasury stock method).
Common equivalent shares from stock options are excluded from the computation if
their effect is antidilutive, except that, pursuant to the Securities and
Exchange Commission Staff Accounting Bulletin, common and common equivalent
shares issued from May 23, 1995 through the closing of the Company's initial
public offering on July 25, 1996 have been included in the computation using the
treasury stock method as if they were outstanding for all periods prior to the
initial public offering. Furthermore, in accordance with SEC Staff policy,
common equivalent shares from Convertible Preferred Stock that converted into
Common Stock upon the closing of the initial public offering are included using
the if-converted method.
Recently Issued Accounting Pronouncements
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.
2. STOCKHOLDERS' EQUITY
Reincorporation
In July 1996, the Company effected a reincorporation from the State of
California into the State of Delaware, which changed the par value of the
Company's stock. The statement of
Page 7
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OPTIKA IMAGING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
changes in stockholders' equity is presented as if the reincorporation had
occurred as of December 31, 1995.
Initial Public Offering
In July 1996, the Company effected an initial public offering on Form
S-1. In connection with the offering, the Company issued 2,200,000 shares of
common stock and received net proceeds of approximately $11 million. In
addition, all of the Convertible Preferred Stock was exchanged for common stock
upon the effectiveness of the initial public offering.
3. BANK CREDIT FACILITY
The Company's line-of-credit agreement with a bank as amended on
September 3, 1996, provides for borrowings up to $3.0 million. Borrowings under
the line are secured by certain assets of the Company and bear interest at the
bank's prime rate plus .75%. The agreement requires the Company to comply with
certain financial covenants, including the maintenance of specified minimum
ratios. In addition, the Company's line of credit agreement prohibits the
payment of dividends without the prior approval of the bank. The Company was in
compliance with respect to these covenants through September 30, 1996. The line
expires on September 2, 1997.
4. CONTINGENCIES
The Company is, from time to time, subject to certain claims,
assertions or litigation by outside parties as part of its ongoing business
operations. The outcome 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.
Page 8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements
that involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed under the caption "Business Risks" contained herein.
RESULTS OF OPERATIONS
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 Business Solutions Partners ("BSPs") and Original Equipment
Manufacturers ("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 the nine months ended September 30,
1996, approximately 79.5% of the Company's total revenues were derived from
software licenses and approximately 14.5% 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 6.0% 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. 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. 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.
Page 9
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The following table sets forth items from the consolidated statements
of operations as a percentage of revenues for the periods indicated. The
operating results presented in this table are not necessarily indicative of the
results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED, ENDED,
SEPTEMBER 30, SEPTEMBER 30,
---------------- ----------------
1995 1996 1995 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Licenses................. 79.5% 76.8% 78.4% 79.5%
Maintenance and other.... 20.5 23.2 21.6 20.5
----- ----- ----- -----
Total revenues......... 100.0 100.0 100.0 100.0
Cost of revenues:
Licenses................. 2.3 3.5 2.3 3.8
Maintenance and other.... 18.0 10.2 18.6 11.6
----- ----- ----- -----
Total cost of revenues 20.3 13.7 20.9 15.4
----- ----- ----- -----
Gross profit............... 79.7 86.3 79.1 84.6
Operating expenses:
Sales and marketing...... 33.3 46.3 35.0 43.7
Research and development. 31.4 28.6 36.9 30.7
General and
administrative.......... 11.0 7.0 15.8 8.1
----- ----- ----- -----
Total operating
expenses.............. 75.7 81.9 87.7 82.5
----- ----- ----- -----
Income (loss) from
operations................ 4.0 4.4 (8.6) 2.1
Other (expenses) income,
net....................... (0.2) 1.6 (0.4) 0.6
----- ----- ----- -----
Income (loss) before
provision for income
taxes..................... 3.8 6.0 (9.0) 2.7
Provision for income taxes. 0.2 0.6 0.3 0.2
----- ----- ----- -----
Net income (loss).......... 3.6% 5.4% (9.3)% 2.5%
===== ===== ===== =====
</TABLE>
REVENUES
Total revenues increased 58.4% from $7.1 million for the nine months
ended September 30, 1995 to $11.3 million for the nine months ended September
30, 1996. Total revenues increased 60.8% from $2.7 million for the quarter
ended September 30, 1995 to $4.3 million for the quarter ended September 30,
1996.
Licenses. License revenues increased 60.6% from $5.6 million during
the nine month period ended September 30, 1995 compared to $9.0 million in the
same period in 1996, and increased 55.2% from $2.1 million during the quarter
ended September 30, 1995 compared to $3.3 million in the same period in 1996.
License revenues represented 78.4% and 79.5% of the total revenues for the nine
month periods ended September 30, 1995 and 1996, respectively and 79.5% and
76.8% of the total revenues for the quarter ended September 30, 1995 and 1996,
respectively. The increase in license revenue was primarily the result of
increased unit sales of the FilePower Suite. The increased unit sales were
driven, in part, by a significant increase in sales to international customers,
primarily in Asia and the United Kingdom, and continued growth of sales in the
healthcare market. Sales outside of the United States accounted for
approximately 30% of the Company's revenues for the nine months ended September
30, 1996, compared to 17% in the corresponding prior period.
Page 10
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Maintenance and Other. Maintenance revenues, exclusive of other
revenue, increased 97.6% from $827,000 during the nine month period ended
September 30, 1995, compared to $1.6 million in the same period in 1996, and
increased 89.9% from $338,000 during the quarter ended September 30, 1995
compared to $642,000 during the same period in 1996. Maintenance revenue
represented 11.6% and 14.5% of the total revenues for the nine month periods
ended September 30, 1995 and 1996, respectively and 12.6% and 14.9% of the total
revenues for the quarter ended September 30, 1995 and 1996, respectively. This
increase was primarily a result of an increase in the number of installed
systems and the Company's improved tracking and monitoring of expiring
maintenance contracts. Other revenue, consisting primarily of training and
consulting fees represented 10.0% and 6.1% of total revenues for the nine month
periods ended September 30, 1995 and 1996, respectively and 7.9% and 8.4% for
the quarters ended September 30, 1995 and 1996, respectively.
COST OF REVENUES
Licenses. Cost of licenses consists primarily of royalty payments
to third-party vendors, product author commissions, whereby certain of the
Company's software developers are entitled to receive a specified percentage of
product sales, and costs of product media, duplication, packaging and
fulfillment. Cost of licenses increased from $167,000 or 3.0% of license
revenues to $427,000 or 4.8% of license revenues for the nine month periods
ended September 30, 1995 and 1996, respectively. Cost of licenses increased
from $63,000 or 3.0% of license revenues to $150,000 or 4.5% of license revenues
for the quarters ended September 30, 1995 and 1996, respectively. The increase
in cost of licenses as a percentage of revenue is primarily as a result of
increased commissions paid under the Company's product author plan.
Maintenance and Other. Costs 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. Although the absolute dollars
expended for maintenance and other remained constant at $1.3 million for the
nine-month periods ended September 30, 1995 and 1996, it decreased as a
percentage of maintenance and other revenues for the same periods from 86.0% to
56.4%, respectively. Cost of maintenance and other decreased from $480,000 or
87.4% of maintenance and other revenues to $439,000 or 43.8% of maintenance and
other revenues for the quarters ended September 30, 1995 and 1996, respectively.
The decrease in cost of maintenance and other as a percentage of maintenance and
other revenues is primarily a result of a lower third-party product component,
which has a lower gross profit margin, partially offset by slightly increased
costs of providing maintenance support due to increased staffing requirements.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses consist primarily
of salaries, commissions and other related expenses for sales and marketing
personnel, marketing, advertising and promotional expenses. Sales and marketing
expenses increased from $2.5 million, or 35.0% of total revenues, for the nine
months ended September 30, 1995 to $4.9 million, or 43.7% of total revenues,
for the nine months ended September 30, 1996. Sales and marketing expenses
increased from $893,000, or 33.3% of total revenues, for the quarter ended
September 30, 1995 to $2.0 million, or 46.3% of total revenues, for the quarter
ended September 30, 1996. The increase in sales and marketing expenditures is
primarily attributable to additional costs incurred for establishing sales
offices in Hong Kong and Malaysia during
Page 11
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the quarter and costs associated with the continued expansions of the Company's
network of BSPs and OEMs. The Company anticipates that sales and marketing
expenses will continue to increase in absolute dollars in future quarters 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 $2.6 million, or 36.9% of total revenues,
for the nine months ended September 30, 1995 to $3.5 million, or 30.7% of total
revenues, for the nine months ended September 30, 1996. Research and development
expenses increased from $841,000, or 31.4% of total revenues, for the quarter
ended September 30, 1995 to $1.2 million, or 28.6% of total revenues, for the
quarter ended September 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 future
quarters 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 $1.1 million, or 15.8% of total revenues,
for the nine months ended September 30, 1995 to $915,000, or 8.1% of total
revenues, for the nine months ended September 30, 1996. General and
administrative expenses increased from $297,000, or 11.0% of total revenues, for
the quarter ended September 30, 1995 to $302,000, or 7.0% of total revenues, for
the quarter ended September 30, 1996. The decrease in general and
administrative expenses for the nine month period 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. General and administrative expenses are expected to increase in
absolute dollars in future quarters as the Company expands its staffing to
support expanded operations and to comply with the responsibilities of a public
company.
Other expenses. Other expenses consists primarily of interest expense
on the Company's capitalized lease obligations offset by interest earned on the
Company's financing activities. The Company incurred a net expense of $29,000
during the nine months ended September 30, 1995 compared to net income of
$69,000 during the nine months ended September 30, 1996, primarily as a result
of interest income derived from the investment of the Company's initial public
offering proceeds in July, 1996.
Provision 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 September
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 only generated
$306,000 of pre-tax income for the first nine months of 1996.
LIQUIDITY AND CAPITAL RESOURCES
Page 12
<PAGE>
Cash and short-term investments at September 30, 1996 were $11.5
million, increasing $10.1 million from December 31, 1995. The increase in cash
and short-term investments is primarily due to the proceeds of the Company's
initial public offering in July 1996.
For the nine months ended September 30, 1995, net cash used in
operating activities was $150,000 compared to $614,000 for the nine months ended
September 30, 1996. This was primarily attributable to the growth in Company
revenue over the same period, which resulted in an increase in the Company's
accounts receivable balance.
Cash used in investing activities was $144,000 for the nine months
ended September 30, 1995 compared to $10.6 million for the nine months ended
September 30, 1996. Uses of cash consisted primarily of purchases of marketable
securities and property and equipment.
Cash used in financing activities was $175,000 for the nine months
ended September 30, 1995. Cash provided from financing activities was $11.2
million for the nine months ended September 30, 1996. Cash provided from
financing activities resulted primarily from private sales of preferred stock in
1995, the proceeds of the Company's initial public offering in 1996, and
proceeds from and repayments of bank borrowings, capital leases and other debt.
At September 30, 1996, the Company's principal sources of liquidity
included cash and short-term investments of $11.5 million. In addition, the
Company has a secured credit facility for up to $3.0 million, bearing interest
at the bank's prime rate plus .75%. As of September 30, 1996, the Company had
$3.0 million available for borrowing. The Company also has a term note with a
principal balance of $216,000 at September 30, 1996, bearing interest at the
bank's prime rate plus 2.0%. The term note 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 principal
balance of $213,000 at September 30, 1996, bearing interest at 10.75%.
The Company believes that its current cash and short-term investments,
together with anticipated cash flow from operations and its bank credit
facility, will be sufficient to meet its working capital and capital expenditure
requirements for at least the next 12 months. Thereafter, the Company may
require additional funds to support such activity through public or private
equity financings or from other sources. There can be no assurance that
additional financing will be available at all or that, if available, such
financing will be obtainable on terms favorable to the Company and would not be
dilutive.
Page 13
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BUSINESS RISKS
This Quarterly Report on Form 10-Q contains forward-looking statements
that involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed under the caption "Business Risks" contained herein.
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 September
30, 1996, the Company had an accumulated deficit of approximately $2.5 million.
There can be no assurance that the Company will achieve revenue growth or will
be profitable on a quarterly or annual basis.
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 significant
revenues occur earlier than expected,
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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.
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 during the first half of 1997. 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 relationship 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 the 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. 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 and 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
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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.
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.
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.
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 and OEMs to engage in a lengthy and complex sales cycle
(typically between six and twelve months from the initial contact date). In
addition, the implementation by customers of the 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 customers for the Company's products. Certain industries to which the
Company sells its products, such as the financial services industry, are highly
cyclical. The Company's operations may in the future be subject to substantial
period-to-period fluctuations as a consequence of such industry patterns,
domestic and foreign economic and other conditions and other factors affecting
capital spending. There can be no assurance that such factors will not have a
material adverse effect on the Company's business, results of operations and
financial condition.
Intense Competition. The market for the Company's products is
intensely competitive and significantly affected by new product introductions
and other market activities of industry participants. The Company's
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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., FileNet Corporation, International Business
Machines Corporation, Unisys Corporation, ViewStar Corporation and Wang
Laboratories, Inc. The Company also competes with industry-specific application
vendors such as IMNET Systems, Inc. and LanVision Systems, Inc. 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 vendors. The
Company also faces competition from VARs, OEMs, distributors and systems
integrators, some of which are BSPs or OEMs for the Company.
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 reduction, 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.
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 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 Acquisition 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
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expenses, unexpected expenses and accounting charges which may be associated
with the integration of such acquisitions.
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 foreign
offices, the Acquisitions and other 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.
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.
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
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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 optical character recognition and full-text
engines. These licenses expire from time to time. There can be no assurance
that these third-party software licenses will continue to be available to the
Company on commercially reasonable terms. While the Company believes that all
of such third-party software is available from alternate vendors and the Company
maintains standard software escrow agreements with each of such parties 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.
International Operations. Sales outside the United States accounted
for approximately 7%, 13%, 15% and 30% of the Company's revenues in 1993, 1994,
1995 and for the nine months ended September 30, 1996. 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
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a material adverse effect on the Company's future international revenues and,
consequently, the Company's results of operations. Although the Company's
products are subject to export controls under United States laws, the Company
believes it has obtained all necessary export approvals. However, the inability
of the Company to obtain required approvals under any applicable regulations
could adversely affect the ability of the Company to make international sales.
Product Liability; Risk of Product Defects. The Company's license
agreements with its customers typically contain provisions designed to limit the
Company's exposure to potential product liability claims. However, it is
possible that the limitation of liability provisions contained in the Company's
license agreements may not be effective under the laws of certain jurisdictions.
Although the Company has not experienced any product liability claims to date,
the sale and support of products by the Company may entail the risk of such
claims, and there can be no assurance that the Company will not be subject to
such claims in the future. A successful product liability claim brought against
the Company could have a material adverse effect upon the Company's business,
results of operations and financial condition. Software products such as those
offered by the Company frequently contain errors or failures, especially when
first introduced or when new versions are released. Although the Company
conducts extensive product testing, the Company has in the past released
products that contained defects, and has discovered software errors in certain
of its new products and enhancements after introduction. The Company could in
the future lose or delay recognition of revenues as a result of software errors
or defects, the failure of its products to meet customer specifications or
otherwise. The Company's products are typically intended for use in
applications that may be critical to a customer's business. As a result, the
Company expects that its customers and potential customers have a greater
sensitivity to product defects than the market for 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.
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
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
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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.
Potential Volatility of Stock Price. The market price of shares of
Common Stock is likely to be highly volatile and may be significantly affected
by factors such as actual or anticipated fluctuations in the Company's operating
results, announcements of technological innovations, new products or new
contracts by the Company or its competitors, sales of Common Stock by
management, sales of significant amounts of Common Stock into the market,
developments with respect to proprietary rights, conditions and trends in the
software and other technology industries, adoption of new accounting standards
affecting the software industry, changes in financial estimates by securities
analysts and others, general market conditions and other factors that may be
unrelated to the Company or its performance. In addition, the stock market has
from time to time experienced significant price and volume fluctuations that
have particularly affected the market prices for the common stock of technology
companies. These broad market fluctuations may adversely affect the market
price of the Company's Common Stock. In the past, following periods of
volatility in the market price of a particular company's securities, securities
class action litigation has often been brought against such company. There can
be no assurance that such litigation will not occur in the future with respect
to the Company. Such litigation, regardless of its outcome, would result in
substantial costs and a diversion of management's attention and resources which
could have a material adverse effect upon the Company's business, results of
operations and financial condition.
Control by Existing Stockholders; Effects of Certain Anti-Takeover
Provisions. Members of the Board of Directors and the executive officers of the
Company, together with members of their families and entities that may be deemed
affiliates of or related to such persons or entities, beneficially own
approximately 53% 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.
Page 21
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.
None.
Item 2 - Changes in Securities.
None.
Item 3 - Defaults upon Senior Securities.
None.
Item 4 - Submission of Matters to a Vote of Security Holders.
None.
Item 5 - Other Information.
None.
Item 6 - Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 Third Amendment to Loan and Security Agreement dated
September 3, 1996 by and between the Registrant and Silicon
Valley Bank.
27 Financial data schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter ended
September 30, 1996.
Page 22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OPTIKA IMAGING SYSTEMS, INC.
(Registrant)
11/12/96 /S/ MARK K. RUPORT
- --------------------------------- --------------------------------
(Date) Mark K. Ruport
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
11/12/96 /S/ STEVEN M. JOHNSON
-------------------------------- --------------------------------
(Date) Steven M. Johnson
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
Page 23
<PAGE>
Exhibit Index
-------------
10.1 Amendment No. 3 to Loan and Security Agreement
27 Financial Data Schedule
<PAGE>
EXHIBIT 10.1
AMENDMENT NO. 3
TO
LOAN AND SECURITY AGREEMENT
---------------------------
This Amendment No. 3 to Loan and Security Agreement is entered into as of
September 3, 1996, by and between Silicon Valley Bank ("Bank") and Optika
Imaging Systems, Inc. ("Borrower").
RECITALS
--------
Borrower and Bank are parties to that certain Loan and Security Agreement
dated as of June 16, 1995, as amended from time to time (the "Agreement"). The
parties desire to amend the Agreement in accordance with the terms of this
Amendment.
NOW, THEREFORE, the parties agree as follows:
1. The following terms are revised or added as defined terms in Section
1.1, as follows:
"Committed Line" means Three Million Dollars ($3,000,000).
"Initial Public Offering" means the sale by Borrower of its equity
securities in a sale pursuant to a registration statement filed under the
Securities Act of 1933, as amended.
2. The first paragraph of Section 2.1 is amended to read as follows:
2.1 Advances. Subject to and upon the terms and conditions of this
--------
Agreement, Bank agrees to make Advances (each a "Revolving Advance" and
collectively "Revolving Advances") to Borrower in an aggregate amount not to
exceed the Committed Line. Subject to the terms and conditions of this
Agreement, amounts borrowed pursuant to this Section 2.1 may be repaid and
reborrowed at any time prior to September 2, 1997.
3. Section 2.3(a) is amended to read as follows:
(a) Interest Rate. Except as set forth in Section 2.3(b), any Advances
--------------
shall bear interest, on the average Daily Balance, at a floating rate equal to
Three Quarters of One Percentage Point (0.75%) above the Prime Rate, and any
Equipment Advances shall bear interest on the outstanding balance at a floating
rate equal to two (2) percentage points above the Prime Rate.
4. Section 6.3 is amended by adding the following paragraph:
Notwithstanding the foregoing, Borrower need not deliver to Bank a
Borrowing Base Certificate or listings of accounts receivable and accounts
payable, Bank shall not audit Borrower's Accounts, and clause (a) of the first
paragraph of Section 6.3 shall not be effective.
5. Section 6.13 is deleted from the Agreement, and Sections 6.10, 6.11, 6.12
and 6.14 of the Agreement are amended and restated to read as follows:
6.10 Quick Ratio. Borrower shall maintain, as of the last day of
-----------
each calendar quarter, a ratio of Quick Assets to Current
Liabilities, excluding deferred maintenance revenue, of at least
1.75 to 1.0.
6.11 Debt-Tangible Net Worth Ratio. Borrower shall maintain as
-----------------------------
of the last day of each calendar quarter a ratio of Total
Liabilities less Subordinated Debt, excluding all
1
<PAGE>
deferred maintenance revenue, to Tangible Net Worth plus
Subordinated Debt of not more than 1.0 to 1.0.
6.12 Tangible Net Worth. Borrower shall maintain as of the last day
------------------
of each calendar quarter a Tangible Net Worth plus Subordinated
Debt of not less than Two Million Dollars ($2,000,000) plus
seventy five percent (75%) of the net proceeds of the sale of
Borrower's equity securities.
6.14 Profitability. Borrower shall have net income for each
-------------
fiscal quarter greater than zero; provided that Borrower may
suffer a loss of up to Two Hundred Fifty Thousand Dollars
($250,000) in any one fiscal quarter.
6. Bank waives compliance by Borrower of the profitability covenant for
the fiscal quarter ending June 30, 1995 and December 31, 1995.
7. The Compliance Certificate shall be in the form of attached Exhibit D.
8. In conjunction with this Amendment, Bank shall release from its
security interest the property described on Exhibit A attached hereto (the
---------
"Intellectual Property").
9. In connection with this Amendment, Borrower shall pay Bank a fee of
Eleven Thousand, Two Hundred Fifty Dollars ($11,250), plus all Bank Expenses
incurred in connection with the preparation of this Amendment.
10. Unless otherwise defined, all capitalized terms in this Amendment shall
be as defined in the Agreement. Except as amended, the Agreement remains in full
force and effect.
11. Borrower represents and warrants that the Representations and
Warranties contained in the Agreement are true and correct as of the date of
this Amendment (except such representations and warranties to be expressly true
as of a specific date), and that no unwaived or uncured Event of Default has
occurred and is continuing.
12. This Amendment may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one instrument.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
first date above written.
OPTIKA IMAGING SYSTEMS, INC.
By:________________________________
Title:_____________________________
SILICON VALLEY BANK
By:_______________________________
Title:____________________________
2
<PAGE>
EXHIBIT A
(a) Any and all copyright rights, copyright applications, copyright
registrations and like protections in each work or authorship and derivative
work thereof, whether published or unpublished and whether or not the same also
constitutes a trade secret, now or hereafter existing, created, acquired or held
(collectively, the "Copyrights");
(b) Any and all trade secrets, and any and all intellectual property
rights in computer software and computer software products now or hereafter
existing, created, acquired or held;
(c) Any and all design rights now or hereafter existing, created, acquired
or held;
(d) All patents, patent applications and like protections including
without limitation improvements, divisions, continuations, renewals, reissues,
extensions and continuations-in-part of the same (collectively, the "Patents");
(e) Any trademark and servicemark rights, whether registered or not,
applications to register and registrations of the same and like protections, and
the entire goodwill of the business of Grantor connected with and symbolized by
such trademarks (collectively, the "Trademarks");
(f) Any and all claims for damages by way of past, present and future
infringement of any of the rights included above, with the right, but not the
obligation, to sue for and collect such damages for said use or infringement of
the intellectual property rights identified above;
(g) All amendments, renewals and extensions of any of the Copyrights,
Trademarks or Patents;
3
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<PAGE>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
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