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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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, Suite 100 80919
Colorado Springs, Colorado (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (719) 548-9800
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share.
----------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Registration S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
-----
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of the common stock on March
17, 1997 as reported on the Nasdaq National Market, was approximately
$17,033,751. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes. As of March 17, 1997, Registrant had outstanding 6,710,708 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Annual Report to Stockholders for the fiscal
year ended December 31, 1996 are incorporated into Part II of this Report on
Form 10-K.
2. Portions of the Registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 23, 1997 is incorporated by reference
in Part III of this Form 10-K to the extent stated herein.
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OPTIKA IMAGING SYSTEMS, INC.
1996 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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PART I
Item 1. Business.....................................................................................3
Item 2. Properties..................................................................................24
Item 3. Legal Proceedings...........................................................................24
Item 4. Submission of Matters to a Vote of Security Holders.........................................24
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters.......................25
Item 6 Selected Financial Data.....................................................................26
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.......27
Item 8 Financial Statements and Supplementary Data.................................................32
Item 9 Changes In and Disagreements with Accountants on Accounting and Financial Disclosure........32
PART III
Item 10 Directors and Executive Officers of Registrant..............................................33
Item 11 Executive Compensation......................................................................33
Item 12 Security Ownership of Certain Beneficial Owners and Management..............................33
Item 13 Certain Relationships and Related Transactions
Signatures..................................................................................34
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................36
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PART I
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS
THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED UNDER THE CAPTION "BUSINESS RISKS" CONTAINED HEREIN.
ITEM 1. BUSINESS
Introduction
Optika 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"),
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 scaled 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 125 installations of the FilePower Suite. Approximately 13% of the
Company's total revenue in 1996 was derived from sales in the healthcare
industry. The Company is seeking to capitalize on the success of the FilePower
Suite in the healthcare industry throughout the development of the FPhealthcare
Suite, formerly known as the MediPower Suite, which is designed to enable
hospitals and other healthcare organizations to manage large amounts of patient
related documents. The FPhealthcare 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 throughoutout 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 performed by the automatic routing of images as a replacement for the
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)
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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 ("HCIS") 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 repository for a patient's complete medical
record, including paper-based documents such as doctors' 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 Claims Processing. Insurance companies use document imaging
systems to speed claims 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, and this
process 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) the 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) the 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 claims 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
The first generation of document image processing systems was introduced in
the mid-1980s. 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.
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Since 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 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 are limited
because (i) they do not capture paper-based records which are stored in various
sites throughout the enterprise, and (ii) 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 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, which is comprised of: server software, providing core imaging
functions; application software for document image management; COLD; automated
workflow transaction processing;, and associated development tools. The Company
believes that the FilePower Suite enables end-users to reduce costs, improve
operational productivity and enhance customer service. The Company's integrated
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
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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 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, Informix
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 with heterogeneous platforms, without the need to
restructure 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
Business Solutions Partners ("BSPs") and Original Equipment Manufacturers
("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 FPhealthcare 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. Revenues from the healthcare industry comprised
approximately 13% of the Company's total revenues during 1996. The Company is
seeking to capitalize on the installed base of over 125 installations of the
FilePower Suite in the healthcare industry through the development of the
FPhealthcare Suite. The FPhealthcare 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 customer applications using the Company's
products. The benefits achieved by the following end-users may 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 accounting and medical records functions and ultimately
allow for the creation of a complete CPR. In conjunction with one of its BSPs,
the Company installed the FilePower Suite and is currently in the process of
installing the FPhealthcare 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. Four of the seven software modules included in the
FPhealthcare Suite have been installed and are currently operational at the end-
user's facilities.
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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 for 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 has also installed the FilePower Suite at the end-
user's second U.S. service center and at an international service center.
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, power-
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 have 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 retailer 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 in 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 continue to 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 technologies and products both to enhance the features
and functionality of its existing products, and to add new products. The Company
has developed 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, among others, Lanier Worldwide, Inc. ("Lanier"), Eclypsis
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(formerly Alltel Healthcare Information Services, Inc.) and Anacomp, Inc.
("Anacomp"), and is actively seeking to develop additional OEM relationships.
Focus on Scaleable 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.
Lower Cost of Ownership. The Company 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 its
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
FPhealthcare Suite as a comprehensive software solution tailored to this
industry. Key elements of the Company's healthcare strategy include: completing
the development of the FPhealthcare 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 retail, in the
future.
Products
The Company's core products are (i) the FilePower Suite, a suite of high-
performance, client/server, integrated imaging software products that perform
all five basic imaging functions, and (ii) the FPhealthcare 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.
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 a paper or COM
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(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.
FPworkBooks and FPwebBooks. Optika FPworkBooks 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. FPwebBooks, the Company's first product
developed for intranets and the Internet, utilizes FPworkBooks 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 supports 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.
FPhealthcare Suite
The Company is currently developing the FPhealthcare 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 FPhealthcare 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 FPhealthcare Suite
integrates and improves on the traditional paper-handling associated with
patient care, and is designed to address initial patient scheduling, in-
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patient, out-patient or emergency department treatment, medical chart
completion, billing, follow-up and remittance posting. The FPhealthcare Suite
will integrate with HCIS systems to automatically establish computer-based
patient records. Additionally, the FPhealthcare Suite will provide a customized
medical viewer and configurable workflow processes. To date, five of the seven
software modules currently comprising the FPhealthcare Suite have been
developed, and the remaining two modules are under development and are currently
expected to be completed by mid-1997. In addition, an eighth module will be
added to the FPhealthcare Suite, and is also expected to be delivered by late
1997. The Company may add additional software modules to extend the
functionality of the FPhealthcare Suite. The Company has formed an advisory
council of current and potential end-users of the FPhealthcare Suite to enable
it to meet industry-wide requirements. See "Business Risks--Risks Associated
with the FPhealthcare Suite."
The following are key aspects of the FPhealthcare 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, folders and records in the business office. It is used throughout the
FPhealthcare Suite and displays scanned documents, medical images, formatted
pages from downloaded computer reports, and 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 that 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.
Sales and Marketing
Sales
Optika employs a two-tiered leveraged sales model consisting of a worldwide
network of approximately 212 BSPs and eight 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 years ended
December 31, 1996 and December 31, 1995. (See "Business Risks--Reliance on
Indirect Distribution Channels; Potential for Channel Conflict.")
10
<PAGE>
Business Solutions Partners. Business Solutions Partners or BSPs are VARs
responsible for identifying potential end-users, selling the Company's products
to the end-users as part of a complete hardware and software solution,
customizing and integrating the Company's products at the end-users sites, and
providing support and maintenance to the end-users following the sale. The
Company's 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
eleven field offices. Services range from joint marketing efforts to assistance
with pricing and proposals to technical product support.
The Company's strategy is to target its marketing activities toward its most
productive BSPs and to recruit additional BSPs in key geographical 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 to 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 eight 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 include Lanier (imaging and COLD), Eclypsis
(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 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 years
ended December 31, 1995 and 1996, Optika generated approximately 15% and 29%,
respectively, of its total revenues from international sales. The Company
currently maintains an office in London to support its 29 European BSPs, and
offices in Singapore, Hong Kong, Malaysia and Australia to support its 26 Asian
BSPs. The Company is actively seeking to expand and strengthen its network of
foreign BSPs,
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<PAGE>
particularly in Japan and Latin America. The Company is also recruiting BSPs in
Canada, continental Europe and Latin America. See "Business Risks--International
Operations."
Marketing
In support of its sales efforts, the Company conducts sales training courses,
and targeted marketing programs that include 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 through programs targeted at educating consultants
on the Company's capabilities. As part of its public relations program, Optika
has deployed a multimedia CD-ROM. This CD contains product demonstrations,
Company highlights, marketing materials 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 December 31,
1996, the Company had licensed approximately 37,000 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, 1996. Set forth below is a
partial list of end-users who have generated revenues for the Company since
January 1, 1996 and have acquired licenses for a minimum of five users. The
Company believes that these end-users are currently using the Company's products
and are representative of the Company's overall end-user base.
<TABLE>
<CAPTION>
Healthcare Government
- ---------- ----------
<S> <C>
Geisinger Clinic Washington State Patrol
Emanuel Medical Center Mississippi Public Employees Retirement System
Alexian Brothers Hospital State of Washington-Office of Financial Management
Colorado Department of Human Services
Financial & Banking
- ------------------- Manufacturing
The CIT Group -------------
Bank of Nova Scotia - NY Navistar
First Chicago National Bank Boart Longyear
Nations Bank H.K. Michelin
Siemens Credit Corporation Starcraft
Equifax
Retail
Insurance ------
- --------- J. Crew
Colorado Farm Bureau Speigel
Colonial Penn Life Insurance Payless Cashways
Vela Insurance Services Western Auto
Communications Transportation
- -------------- --------------
Ackerley Communications Fritz Companies
Telephone Express DHL
Telecomunicacaoes de SP -
Brazil Utilities
Unique Air Ltd. ---------
Intermountain Rural Electric Association
Education Hong Kong Gas
- --------- Orlando Utilities Commission
University of Colorado Louisville Gas & Electric Company
University of Nebraska
</TABLE>
12
<PAGE>
Florida Community College
at Jacksonville
Washington University
John Marshall Law School
13
<PAGE>
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, its Lotus Notes database, and through 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 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
systems, 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 upgrades 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 its 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 percentage of the revenues generated by
the product. 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 FPhealthcare Suite,
and further enhancing the FilePower Suite. The Company continues
14
<PAGE>
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 December 31, 1996, the Company's research and development organization
consisted of 43 full-time employees in Colorado Springs, Colorado, and nine
employees in Marlboro, Massachusetts. During 1996, research and development
expenses were $4.6 million. As of December 31, 1996, the Company had expensed
all of its software development costs as incurred. (See "Business Risks--Rapid
Technological Change; Dependence on New Product Development.")
Competition
The market for the Company's products is intensely competitive and can be
significantly affected by new product introductions and other market activities
of industry participants. The Company believes that the principal competitive
factors affecting its market include product features such as adaptability,
scalability, ability to integrate with third-party products, functionality, ease
of use, product reputation, quality, performance, price, customer service and
support, effectiveness of sales and marketing efforts, and company reputation.
Although the Company believes that it currently competes favorably with respect
to such factors, there can be no assurance that the Company can maintain its
competitive position against current and potential competitors. The Company's
principal direct competitors for its various product lines include BancTec,
Inc., FileNet Corporation, International Business Machines Corporation, Unisys
Corporation, Mosaix, Inc. (formerly Viewstar Corporation) and Eastman Kodak
Company. 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,
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 system integrators. The Company
relies on a number of these resellers for implementation and other customer
support services, as well as recommendations of its products during the
evaluation stage of the purchase process. Although the Company seeks to maintain
close relationships with these resellers, many of these third parties have
similar, and often more established, relationships with the Company's principal
competitors. 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 "Business Risks--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 "Business
Risks--Dependence on Proprietary Technologies; Risk of Infringement.")
Employees
At December 31, 1996, the Company had 142 full-time employees in 12 cities.
Of these employees, 52 were involved in research and development, 48 in sales
and marketing, 27 in technical support and training, and 15 in
15
<PAGE>
administration and finance. No employees are covered by any collective
bargaining agreements. The Company believes that its relationship with its
employees is good.
Executive Officers
The Company's executive officers and key employees, and their ages as of
March 10, 1997, are:
<TABLE>
<CAPTION>
Name Age Position
---- --- ----------------------------------------------
<S> <C> <C>
Mark K. Ruport............ 44 President, Chief Executive Officer and
Chairman of the Board of Directors
Steven M. Johnson......... 35 Vice President-Finance and Administration,
Chief Financial Officer and Secretary
Marc R. Fey............... 41 Senior Vice President-Engineering and
Customer Support Services
David J. Mansen........... 42 Vice President-Marketing
Mark A. Schenecker........ 36 Vice President-Research and Development
Michael J. Cataldo........ 35 Vice President-Sales & Marketing Healthcare
Division
Paul Carter............... 42 Co-Founder and Director
Malcolm D. Thomson........ 35 Co-Founder and Director
</TABLE>
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 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, he
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.
Michael J. Cataldo has served as Vice President--Sales and Marketing for the
Company's Health Care Division since October 1996. From July 1996 through
September 1996, Mr. Cataldo was a consultant for Software Technologies
Corporation and TradeWave Corporation. From July 1994 to June 1996, Mr. Cataldo
was employed by Software Technologies Corporation and held positions as Vice
President of World Wide Marketing and Vice President of Sales and Marketing for
North America. From 1988 to 1994, Mr. Cataldo was employed by HBO & Company
where he held positions as Business Unit Manager, Business Planner and Area
Manager. From 1986 to
16
<PAGE>
1988, he was a Marketing Representative with Shared Medical Systems; and from
1984 to 1986, he progressed to District Sales Manager with Cable & Wireless Co.
in Vienna, Virginia.
David J. Mansen has served as Vice President--Marketing for the Company 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.
BUSINESS RISKS
IN EVALUATING THE COMPANY'S BUSINESS, READERS SHOULD CAREFULLY CONSIDER THE
BUSINESS RISKS DISCUSSED IN THIS SECTION, IN ADDITION TO THE OTHER INFORMATION
PRESENTED IN THIS ANNUAL REPORT ON FORM 10-K.
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; to establish sales, marketing and distribution
channels; and to recruit and train its employees. As a consequence, the Company
has incurred net losses in three of its past six fiscal years. In addition, the
Company experienced virtually no revenue growth between 1993 and 1995. As of
December 31, 1996, the Company had an accumulated deficit of approximately
$859,000. 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 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,
17
<PAGE>
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 has been, and the Company believes will continue to be,
derived from a limited number of orders, and the timing of such orders and their
fulfillment have caused, and are expected to continue to cause, material
fluctuations in the Company's operating results. Revenues are also difficult to
forecast because the markets for the Company's products are rapidly evolving,
and the sales cycle of the Company and of its 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; consequently, order backlog
at the beginning of any quarter has in the past represented only a small portion
of that quarter's revenues. Furthermore, the Company has often recognized most
of its revenues in the last month, or even in the last weeks or days, of a
quarter. Accordingly, a delay in shipment near the end of a particular quarter
may cause revenues in a particular quarter to fall significantly below the
Company's expectations and may materially adversely affect the Company's
operating results for such quarter. Conversely, to the extent that significant
revenues occur earlier than expected, operating results for subsequent quarters
may fail to keep pace with results of previous quarters or even decline. The
Company also has recorded generally lower sales in the first quarter than in the
immediately preceding quarter, as a result of, among other factors, end-users'
purchasing and budgeting practices and the Company's sales commission practices,
and the Company expects this pattern to continue in future years. To the extent
that future international operations constitute a higher percentage of total
revenues, the Company anticipates that it may also experience relatively weaker
demand in the third quarter as a result of reduced sales in Europe during the
summer months. A significant portion of the Company's expenses are relatively
fixed in the short term. Accordingly, if revenue levels fall below
expectations, operating results are likely to be disproportionately and
adversely affected. As a result of these and other factors, the Company
believes that its quarterly operating results will vary in the future, and that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
Furthermore, due to all of the foregoing factors, it is likely that in some
future quarter the Company's operating results will be below the expectations of
public market analysts and investors. In such event, the price of the Company's
Common Stock would likely be materially adversely affected.
Risks Associated with the FPhealthcare 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 FPhealthcare Suite,
the Company's first software product tailored for an industry-specific
application. The FPhealthcare 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 FPhealthcare Suite
have been developed, and the remaining two modules are under development and are
currently expected to be completed in mid-1997 by the end of 1996. In
addition, an eighth module will be added to the FPhealthcare Suite and is
expected to be delivered to SEMC by late 1997. However, there can be no
assurances that any such modules can be completed in such time frame. 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 FPhealthcare Suite. Three of the developed modules have
been installed at SEMC's site. If the Company fails to complete the
FPhealthcare Suite to SEMC's satisfaction in a timely manner, the Company's
ability to market its
18
<PAGE>
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 and adversely affected. The FPhealthcare
Suite has not achieved widespread customer acceptance; this acceptance will
depend, in part, on the Company's ability to complete and market this software
successfully. The failure of the Company to develop its distribution channel to
include healthcare sales expertise in a timely manner will negatively impact its
ability to gain broad acceptance in the healthcare market.
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 1996, the Company's top 53 BSPs/OEMs 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
the distributor 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 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 that 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 and adversely affect its relationship 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
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.
19
<PAGE>
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 FPhealthcare Suite. The Company
currently expects the FilePower and the FPhealthcare 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 FPhealthcare 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 and adversely affected.
Lengthy and Complex Sales and Implementation Cycles; Dependence on Capital
Spending. The license of the Company's software products is typically an
executive-level decision by prospective end-users, and generally requires for
the Company and its 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 can be significantly affected by new product introductions and
other market activities of industry participants. The Company's competitors
offer a variety of products and services to address the emerging market for
imaging software solutions. The Company's principal direct competitors include
BancTec, Inc., FileNet Corporation, International Business Machines Corporation,
Unisys Corporation, Mosaix, Inc. (formerly Viewstar Corporation) and Eastman
Kodak Company. 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, 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
20
<PAGE>
Company will be required to continue to invest significant resources in research
and development, and in sales and marketing. There can be no assurance that the
Company will have sufficient resources to make such investments or that the
Company will be able to make the technological advances necessary to be
competitive. In addition, current and potential competitors have established or
may establish cooperative relationships among themselves or with third parties,
to increase the ability of their products to address the needs of the Company's
prospective customers. In addition, several competitors have recently made, or
attempted to make, acquisitions to enter the market or increase their market
presence. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. Increased
competition is likely to result in price reductions, reduced gross margins and
loss of market share, any of which would have a material adverse effect on the
Company's business, results of operations and financial condition. There can be
no assurance that the Company will be able to compete successfully against
current or future competitors, or that competitive pressures will not have a
material adverse effect on the Company's business, results of operations, and
financial condition.
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.
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, debt
assumptions, 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.
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 that the Company continue to assimilate new
personnel and to expand, train and manage its work force. The Company intends
to continue to increase the scale of its operations significantly to support
anticipated increases in revenues, and to address critical infrastructure and
other requirements. These increases have included and will include the leasing
of new space, the opening of additional foreign offices, 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 and 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
21
<PAGE>
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.
22
<PAGE>
Dependence on Key Personnel. The Company's future performance depends to a
significant degree upon the continuing contributions of its key management,
sales, marketing, customer support, and product development personnel. The
Company has at times experienced, and continues to experience, difficulty in
recruiting qualified personnel, particularly in software development and
customer support. The Company believes that there may be only a limited number
of persons with the requisite skills to serve in those positions, and that it
may become increasingly difficult to hire such persons. Competitors and others
have in the past, and may in the future, attempt to recruit the Company's
employees. The loss of key management or technical personnel, or the failure to
attract and retain key personnel, could have a material adverse effect on the
Company's business, results of operations, and financial condition.
Dependence on Proprietary Technologies; Risk of Infringement. The Company's
performance depends in part on its ability to protect its proprietary rights to
the technologies used in its principal products. The Company relies on a
combination of copyright and trademark laws, trade secrets, confidentiality
provisions and other contractual provisions to protect its proprietary rights,
which are measures that afford only limited protection. Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy aspects of the Company's products, or to obtain and use information that
the Company regards as proprietary. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights as fully as do the
laws of the United States. There can be no assurance that the Company's means
of protecting its proprietary rights in the United States or abroad will be
adequate, or that competitors will not independently develop similar
technologies. 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 and 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 and adversely affected.
The Company also licenses software from third parties, software which is
incorporated into its products, including software incorporated into its viewer,
image decompression software and optical character recognition, and full-text
engines. These licenses expire from time to time. There can be no assurance
that these third-party software licenses will continue to be available to the
Company on commercially reasonable terms. While the Company believes that all
of such third-party software is available from alternate vendors, and the
Company maintains standard software escrow agreements with each of such parties,
agreements which provide the Company with access to the source code in the event
of their bankruptcy or insolvency, the loss of, or inability to maintain, any
such software licenses could result in shipment delays or reductions until
equivalent software could be developed, identified, licensed and integrated,
which in turn could materially and adversely affect the Company's business,
results of operations, and financial condition. In addition, the Company
generally does not have access to source code for the software supplied by these
third parties. Certain of these third parties are small companies that do not
have extensive financial and technical resources. If any of these relationships
were terminated or if any of these third parties were to cease doing business,
the Company may be forced to expend significant time and development resources
to replace the licensed software. Such an event would have a material adverse
effect upon the Company's business, results of
23
<PAGE>
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 15% and 29% of the Company's revenues in 1995 and 1996,
respectively. 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 and 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, could make the Company's software less price-
competitive, and could have a material adverse effect upon the Company's
business, results of operations, and financial condition. In addition, the
Company's international business is, and will continue to be, subject to a
variety of risks, including: delays in establishing international distribution
channels; difficulties in collecting international accounts receivable;
increased costs associated with maintaining international marketing and sales
efforts; unexpected changes in regulatory requirements, tariffs and other trade
barriers; political and economic instability; limited protection for
intellectual property rights in certain countries; lack of acceptance of
localized products in foreign countries; difficulties in managing international
operations, potentially adverse tax consequences including, restrictions on the
repatriation of earnings; and the burdens of complying with a wide variety of
foreign laws. There can be no assurance that such factors will not have a
material adverse effect on the Company's future international revenues and,
consequently, the Company's results of operations. Although the Company's
products are subject to export controls under United States laws, the Company
believes it has obtained all necessary export approvals. However, the inability
of the Company to obtain required approvals under any applicable regulations
could adversely affect the ability of the Company to make international sales.
Product Liability; Risk of Product Defects. The Company's license agreements
with its customers typically contain provisions designed to limit the Company's
exposure to potential product liability claims. However, it is possible that
the limitation of liability provisions contained in the Company's license
agreements may not be effective under the laws of certain jurisdictions.
Although the Company has not experienced any product liability claims to date,
the sale and support of products by the Company may entail the risk of such
claims, and there can be no assurance that the Company will not be subject to
such claims in the future. A successful product liability claim brought against
the Company could have a material adverse effect upon the Company's business,
results of operations, and financial condition. Software products such as those
offered by the Company frequently contain errors or failures, especially when
first introduced or when new versions are released. Although the Company
conducts extensive product testing, the Company has in the past released
products that contained defects, and has discovered software errors in certain
of its new products and enhancements after introduction. The Company could in
the future lose or delay recognition of revenues as a result of software errors
or defects, the failure of its products to meet customer specifications or
otherwise. The Company's products are typically intended for use in
applications that may be critical to a customer's business. As a result, the
Company expects that its customers and potential customers have a greater
sensitivity to product defects than the market for general software products.
Although the Company's business has not been materially and adversely affected
by any such errors, or by defects or failure to meet specifications, to date,
there can be no assurance that, despite testing by the Company and by current
and potential customers, errors or defects will not be found in new products or
releases after commencement of commercial shipments, or that such products will
meet customer specifications, resulting in loss or deferral of revenues,
diversion of resources, damage to the Company's reputation, or increased service
and warranty and other
24
<PAGE>
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 in order 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 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
25
<PAGE>
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.
ITEM 2. PROPERTIES
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. In support of its field sales and
support organization, the Company also leases facilities and offices in seven
other locations in the United States, one location in the United Kingdom, one
location in Singapore, one location in Hong Kong, one in Malaysia and one in
Australia. The Company believes that it will require additional space upon the
expiration of its lease in July 1997, and has entered into an agreement to lease
approximately 39,000 square feet of office space in Colorado Springs commencing
April 1997. The Company expects to incur additional capital expenditures in
connection with the preparation of the new facility for occupancy, some of which
may be material.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently not a party to any material litigation, and is
currently not aware of any pending or threatened litigation that could have a
material adverse effect upon the Company's business, operating results, or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
26
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded over-the-counter on the Nasdaq National
Market under the symbol "OPTK." The Company commenced its initial public
offering of Common Stock on July 25, 1996 at a price of $6 per share. Prior to
such date, there was no public market for the Common Stock. The following table
sets forth the high and low closing sale prices for the Common Stock for the
periods indicated, as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
Quarter ended December 31, 1996................................... $ 8.25 $5.02
Quarter ended September 30, 1996 (from July 25,1996).............. $ 9.00 $5.25
</TABLE>
The Company has not paid any cash dividends on its capital stock since its
inception, and does not expect to pay cash dividends on its Common Stock in the
foreseeable future. The Company's bank line of credit currently prohibits the
payment of cash dividends without the consent of the bank. Certain other
information required by this Item is incorporated by reference from the
Company's 1996 Annual Report to Stockholders.
27
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's consolidated financial statements and related
notes thereto, and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in Item 7. The consolidated statement of
operations data for each of the three years in the period ended December 31,
1996 and the consolidated balance sheet data at December 31, 1995 and 1996, are
derived from the audited consolidated financial statements included in Item 8.
The consolidated statement of operations data for each of the two years in the
period ended December 31, 1994, and the consolidated balance sheet data at
December 31, 1992, 1993 and 1994, are derived from audited consolidated
financial statements not included in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- -------- --------
Consolidated Statement of Operations Data: (in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues:
Licenses............................................... $ 13,406 $ 8,333 $ 7,562 $ 6,924 $ 3,531
Maintenance and other.................................. 3,297 2,135 1,690 2,119 1,240
--------- --------- --------- -------- --------
Total revenues....................................... 16,703 10,468 9,252 9,043 4,771
Cost of revenues:
Licenses............................................... 585 316 413 471 275
Maintenance and other.................................. 1,930 1,823 1,889 2,073 613
--------- --------- --------- -------- --------
Total cost of revenues............................... 2,515 2,139 2,302 2,544 888
--------- --------- --------- -------- --------
Gross profit............................................. 14,188 8,329 6,950 6,499 3,883
Operating expenses:
Sales and marketing.................................... 7,332 3,732 4,200 2,585 1,466
Research and development............................... 4,624 3,658 3,112 2,332 1,454
General and administrative............................. 1,367 1,461 1,513 1,037 845
--------- --------- --------- -------- --------
Total operating expenses............................. 13,323 8,851 8,825 5,954 3,765
--------- --------- --------- -------- --------
Income (loss) from operations............................ 865 (522) (1,875) 545 118
Other (income) expenses.................................. (229) 411 25 476 53
--------- --------- --------- -------- --------
Income (loss) before provision........................... 1,094 (933) (1,900) 69 65
(benefit) for income taxes
Provision (benefit) for income taxes..................... (813) 29 (168) 42 104
--------- --------- --------- -------- --------
Net income (loss)........................................ $ 1,907 $ (962) $ (1,732) $ 27 $ (39)
========= ========= ========= ======== ========
Unaudited pro-forma net income (loss) per common
share (1)............................................... $ 0.29 $ (0.20)
Unaudited pro-forma weighted average number of common
shares outstanding (1).................................. 6,615 4,811
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data: (in thousands)
Cash, cash equivalents and short-term investments........ $ 11,499 $ 1,415 $ 771 $ 1,741 $ 110
Working capital.......................................... 13,817 1,841 1,338 2,151 632
Total assets............................................. 20,258 6,182 4,450 5,102 2,223
Long-term debt, excluding current portion................ 136 266 353 353 546
Convertible preferred stock.............................. - 4,804 3,343 2,346 411
Total stockholders' equity (deficit)..................... 15,849 (1,967) (1,497) 213 159
</TABLE>
(1) See Note 1 to Notes to Consolidated Financial Statements.
28
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS INCLUDES A NUMBER OF FORWARD-LOOKING STATEMENTS WHICH REFLECT THE
COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE.
THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES,
INCLUDING THOSE DISCUSSED BELOW AND THOSE UNDER THE CAPTION "BUSINESS RISKS" IN
ITEM 1, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL
RESULTS OR THOSE ANTICIPATED.
Overview
Optika 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 and entered 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
because 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 FPhealthcare 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
60% growth in total revenues during the twelve months ended December 31, 1996,
compared to the corresponding prior period. Healthcare revenues increased from
approximately 5% of total revenues in 1995, to approximately 13% of total
revenues during 1996. After experiencing
29
<PAGE>
operating losses in 1994 and in 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 six subsequent quarters. There can
be no assurance, however, that such profitability will be maintained in the
future. (See "Business Risks--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.")
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 212 BSPs
and eight OEMs. For both 1995 and 1996, approximately 89% of the Company's total
revenues were derived from its BSPs and approximately 11% of its total revenues
were derived from sales by OEMs. In 1996, the Company's top 53 BSPs accounted
for approximately 80% of its total revenues. However, no individual BSP
accounted for more than 10% of the Company's total revenues. For the years ended
December 31, 1995 and 1996, the Company generated approximately 15% and 29%,
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 both 1995 and 1996, approximately 80% 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 6%, 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.
30
<PAGE>
Results of Operations
Comparison of Years Ended December 31, 1996 to December 31, 1995
Revenues
Total revenues increased 60% from $10.5 million for the year ended December
31, 1995 to $16.7 million for the year ended December 31, 1996.
Licenses. License revenues increased 61% from $8.3 million for the year
ended December 31, 1995 to $13.4 million for the year ended December 31, 1996,
representing approximately 80% of total revenues in both periods. This
increase was primarily the result of increased unit sales of components 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.
License revenues generated outside of the United States increased from
approximately 16% of license revenues for the year ended December 31, 1995 to
approximately 31% of license revenues for the year ended December 31, 1996.
License revenues from the healthcare industry increased from 5% of license
revenues for the year ended December 31, 1995, to 15% of license revenues for
the year ended December 31, 1996.
Maintenance and Other. Maintenance revenues, exclusive of other revenues,
increased 112%, from approximately $1.1 million during the year ended December
31, 1995, to $2.4 million for the year ended December 31, 1996, representing
approximately 11% of total revenues for the year ended December 31, 1995 and 14%
of total revenues for the year ended December 31, 1996. 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
9% and 6% of total revenue for the years ended December 31, 1995 and 1996,
respectively.
Cost of Revenues
Licenses. Cost of licenses consists primarily of royalty payments to third-
party software vendors; product author commissions, whereby certain of the
Company's software developers are entitled to receive a specified percentage of
product sales; and costs of product media, duplication, packaging and
fulfillment. Cost of licenses increased from $316,000, or 4% of license
revenues, for the year ended December 31, 1995, to $585,000, or 4% of license
revenues, for the year ended December 31, 1996, primarily as a result of the
increased number of licenses sold during the period.
Maintenance and Other. Cost of maintenance and other consists of the direct
and indirect costs of providing software maintenance and support, training and
consulting services, to the Company's BSPs, OEMs and end-users, and the cost of
third-party software products. Cost of maintenance and other increased from
$1.8 million, or 85% of maintenance and other revenues, for the year ended
December 31, 1995, to $1.9 million, or 59% of maintenance and other revenues,
for the year ended December 31, 1996. This increase was primarily due to
increased staffing for customer support, and was partially offset by a decreased
third-party software component, which has a lower gross profit margin, in the
year ended December 31, 1996.
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 $3.7 million, or 36% of total revenues, for
the year ended December 31, 1995, to $7.3 million, or 44% of total revenues, for
the year ended December 31, 1996. This increase was primarily attributable in
increased staffing for sales and marketing activities. In mid-1995, the Company
opened six regional sales offices in the United States, and during 1996 the
Company expanded its operations in Asia with the opening of sales offices in
Hong Kong, Singapore and Malaysia. The Company anticipates that sales and
marketing expenses will continue to increase in absolute dollars in 1997 as the
Company continues to build and expand its network of BSPs and OEMs.
31
<PAGE>
Research and Development. Research and development expenses consist
primarily of salaries and other related expenses for research and development
personnel, and of the cost of facilities and equipment. Research and
development expenses increased from $3.7 million, or 35% of total revenues, for
the year ended December 31, 1995, to $4.6 million, or 28% of total revenues, for
the year ended December 31, 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 FPhealthcare Suite. The Company expects research and
development expenses to continue to increase in absolute dollars in 1997 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 $1.5 million, or 14% of total revenues,
for the year ended December 31, 1995, to $1.4 million, or 8% of total revenues,
for the year ended December 31, 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 decrease was partially offset by increased staffing and related
expenditures. General and administrative expenses are expected to increase in
absolute dollars in 1997 as the Company expands its staffing to support expanded
operations and to comply with the responsibilities of a public company.
Other Expenses. Other expenses consist primarily of interest expense on the
Company's capitalized lease obligations, and other debt, offset by interest
earned on the Company's financing activities. The Company incurred a net
expense of $411,000 during the year ended December 31, 1995, compared to a net
income of $229,000 during the year ended December 31, 1996. During 1995 the
Company settled certain litigation as discussed in Note 5 of Notes to
Consolidated Financial Statements. Approximately $373,000 of settlement costs
and legal expenses are included in other expenses for 1995. Other income for
1996 was primarily a result of interest income derived from the investment of
the Company's initial public offering proceeds.
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 to the uncertainty surrounding the
timing of realizing benefits of its favorable tax attributes, the Company had
recorded a valuation allowance against all of its favorable tax assets as of
December 31, 1995. 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
such to evidence. As required by Statement of Financial Accounting Standards
No. 109, management concluded that a valuation allowance against deferred tax
assets was no longer appropriate as of December 31, 1996. Specifically, during
1996, the Company generated four straight quarters of profitability and pre-tax
income of $1.1 million.
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 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
Latin 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.
32
<PAGE>
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 FPhealthcare 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, and which in turn were 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.
Liquidity and Capital Resources
Cash and short-term investments at December 31, 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 year ended December 31, 1995, net cash used in operating activities
was $127,000, compared to $409,000 for the year ended December 31, 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. {Add Discussion - get from Tod
Cash used in investing activities was $208,000 for the year ended December
31, 1995 compared to $8.6 million for the year ended December 31, 1996. Uses of
cash consisted primarily of purchases of short-term securities, and property and
equipment.
Cash provided from financing activities was $9796,000 for the year ended
December 31, 1995. Cash provided from financing activities was $11.1 million
for the year ended December 31, 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.
33
<PAGE>
The Company has entered into an agreement to lease approximately 38,000
square feet of office space in Colorado Springs commencing during the second
quarter of 1997. The Company expects to incur additional capital expenditures in
connection with the preparation of the new facility for occupancy, some of which
may be material.
At December 31, 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 December 31, 1996, the Company had $2.8 million
available for borrowing. The Company also has a term note with a principal
balance of $195,000 at December 31, 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 $173,000 at
December 31, 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14(a) for an index to the financial statements and supplementary
financial information which are attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
34
<PAGE>
PART III
Certain information required by Part III is omitted from this Annual Report
on Form 10-K in that the Registrant will file a definitive proxy statement
pursuant to Regulation 14A no later than 120 days after the end of the fiscal
year covered by this Report, and certain information included therein is
incorporated herein by reference. Only those sections of the Proxy Statement
which specifically address the items set forth herein are incorporated by
reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
The information required by this item relating to the Company's directors and
nominees and disclosure relating to compliance with Section 16(a) of the
Securities Exchange Act of 1934 is included under the captions "Election of
Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of
1934" in the Company's Proxy Statement for the 1997 Annual Meeting of
Stockholders and is incorporated herein by reference. The information required
by this item relating to the Company's executive officers and key employees is
included under the caption "Executive Officers" in Part I of the Report on Form
10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included under the caption
"Executive Compensation and Related Information" in the Company's Proxy
Statement for the 1997 Annual Meeting of the Stockholders and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is included under the caption "Stock
Ownership of Certain Beneficial Owners and Management" in the Company's Proxy
Statement for the 1997 Annual Meeting of Stockholders and is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is included under the caption "Certain
Transactions" in the Company's Proxy Statement for the 1997 Annual Meeting of
Stockholders and is incorporated herein by reference.
35
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Annual Report on Form
10-K:
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Financial Statements:
Report of Independent Accountants...................................39
Consolidated Balance Sheet as of December 31,
1996 and 1995......................................................40
Consolidated Statement of Operations for each
of the three years in the period
ended December 31, 1996..........................................41
Consolidated Statement of Stockholders' Equity
(deficit)for each of the three years
in the period ended December 31, 1996............................42
Consolidated Statement of Cash Flows for each
of the three years in the period
ended December 31, 1996..........................................43
Notes to Consolidated Financial Statements..........................44
</TABLE>
2. Financial Statement Schedule:
The following financial statement schedule of Optika Imaging Systems, Inc.,
for the years ended December 31, 1996, 1995 and 1994, is filed as part of this
Annual Report on Form 10-K and should be read in conjunction with the
Consolidated Financial Statements of Optika Imaging Systems, Inc.
All schedules have been omitted because they are not required, not
applicable, or the required information is shown in the financial statements
and related notes thereto.
3. Exhibits - See Item 14 (c) below.
(a) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter ended December
31, 1996.
(a) Exhibits
See Exhibit Index on page 53
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act, as amended, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized on March 28,
1997.
OPTIKA IMAGING SYSTEMS, INC.
By: /s/ MARK K. RUPORT
-------------------------
Mark K. Ruport
President, Chief Executive Officer
and Chairman of the Board
By: /s/ STEVEN M. JOHNSON
--------------------------
Steven M. Johnson
Chief Financial Officer, Vice President,
Finance and Administration, Secretary and
Chief Accounting Officer
37
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Mark K. Ruport and Steven M. Johnson, and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and his name, place and deed,
in any and all capacities, to sign any and all amendments (including post-
effective amendments) to this Report on Form 10-K, and to file the same, with
all exhibits thereto, and other documents in conncetion therewith, with all
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 28, 1997;
Signature Title
--------- -----
By: /s/ MARK K. RUPORT Chief Executive Officer and
---------------------- Chairman of the Board
Mark K. Ruport
By: /s/ STEVEN M. JOHNSON Chief Financial Officer, Vice
---------------------- President, Finance &
Steven M. Johnson Administration, Secretary and
Chief Accounting Officer
By: /s/ MALCOLM THOMSON Co-Founder and Director
----------------------
Malcolm Thomson
By: /s/ PAUL CARTER Co-Founder and Director
----------------------
Paul Carter
By: /s/ RICHARD A. BASS Director
----------------------
Richard A. Bass
By: /s/ JAMES E. CRAWFORD Director
----------------------
James E. Crawford
By: /s/ ROBERT L. GETT Director
----------------------
Robert L. Gett
By: /s/ HARRY S. GRUNER Director
----------------------
Harry S. Gruner
By: /s/ GRAHAM O. KING Director
----------------------
Graham O. King
38
<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 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, 1996 and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996, 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
January 31, 1997
Boulder, Colorado
39
<PAGE>
Optika Imaging Systems, Inc.
Consolidated Balance Sheet
(In thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------------ ------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.............. $ 3,474 $ 1,415
Short-term investments................. 8,025 --
Accounts receivable, net of allowance
for doubtful accounts of $112
and $90 at December 31, 1996 and
1995, respectively................... 5,766 3,199
Other current assets................... 825 306
------- -------
Total current assets................ 18,090 4,920
------- -------
Fixed assets, net of accumulated
depreciation of $1,128 and $820 at
December 31, 1996 and 1995,
respectively.......................... 1,038 762
Notes receivable from related parties... -- 103
Other assets, net of accumulated
amortization of $228 and $120
at December 31, 1996 and 1995,
respectively.......................... 1,130 397
------- -------
$20,258 $ 6,182
======= =======
Liabilities, Redeemable Convertible
Preferred Stock
and Stockholders' Equity (Deficit)
Current liabilities:
Current portion of long-term debt...... $ 280 $ 177
Accounts payable....................... 808 627
Accrued vacation...................... 219 167
Accrued expenses....................... 1,107 563
Deferred revenue....................... 1,859 1,545
------- -------
Total current liabilities........... 4,273 3,079
------- -------
Long-term debt.......................... 136 266
Commitments and contingencies (Notes 5
and 9)
Preferred stock (-0- and 1,493,024
shares authorized at
December 31, 1996 and 1995,
respectively):
Series A mandatorily redeemable
convertible preferred stock; no par
value, 298,864 shares issued and
outstanding at December 31, 1995
and no shares issued and outstanding
at December 31, 1996................. -- 411
Series B mandatorily redeemable
convertible preferred stock; no par
value; 752,160 shares issued and
outstanding at December 31, 1995
and no shares issued and outstanding
at December 31, 1996................. -- 2,932
Series C mandatorily redeemable
convertible preferred stock; no par
value; 441,177 shares issued and
outstanding at December 31, 1995
and no shares issued and outstanding
at December 31, 1996................. -- 1,461
Common stockholders' equity (deficit):
Common stock; $.001 and no par value
at December 31, 1996 and
1995, respectively; 25,000,000
shares authorized; 6,670,319 and
2,843,930 shares issued and
outstanding at December 31, 1996
and 1995, respectively............... 7 799
Additional paid-in capital............. 16,701 --
Accumulated deficit.................... (859) (2,766)
------- -------
Total stockholders' equity
(deficit).......................... 15,849 (1,967)
------- -------
$20,258 $ 6,182
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
Optika Imaging Systems, Inc.
Consolidated Statement of Operations
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Licenses..................................... $13,406 $ 8,333 $ 7,562
Maintenance and other........................ 3,297 2,135 1,690
------- ------- -------
Total revenues.............................. 16,703 10,468 9,252
Cost of revenues:
Licenses..................................... 585 316 413
Maintenance and other........................ 1,930 1,823 1,889
------- ------- -------
Total cost of revenues...................... 2,515 2,139 2,302
------- ------- -------
Gross profit.................................. 14,188 8,329 6,950
Operating expenses:
Sales and marketing.......................... 7,332 3,732 4,200
Research and development..................... 4,624 3,658 3,112
General and administrative................... 1,367 1,461 1,513
------- ------- -------
Total operating expenses.................... 13,323 8,851 8,825
------- ------- -------
Income (loss) from operations................. 865 (522) (1,875)
Other (income) expense:
Litigation settlements....................... -- 373 --
Interest and other (income) expenses, net.... (229) 38 25
------- ------- -------
Total other (income) expense, net........... (229) 411 25
------- ------- -------
Income (loss) before provision (benefit) for
income taxes................................. 1,094 (933) (1,900)
Provision (benefit) for income taxes.......... (813) 29 (168)
------- ------- -------
Net income (loss)............................. $ 1,907 $ (962) $(1,732)
======= ======= =======
Unaudited pro-forma net income (loss) per
share........................................ $ .29 $ (.20) $ --
Unaudited pro-forma weighted average number
of common shares outstanding................. 6,615 4,811 4,795
</TABLE>
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
Optika Imaging Systems, Inc.
Consolidated Statement of Changes in Stockholders' Equity (Deficit)
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Total
Common
Common Stock Additional Stockholders'
Paid-in Accumulated Equity
Shares Amount Capital Deficit (Deficit)
----------- ------ ----------- ------------ -------------
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 acquisition.................. 216,431 405 405
Net loss............................................. (962) (962)
----------- ------ ----------- ------------ -------------
Balance at December 31, 1995.............................. 2,843,930 799 (2,766) (1,967)
Company reincorporation.............................. (796) $ 796
Common stock issued upon exercise
of stock options.................................. 125,925 102 102
Common stock issued upon initial
public offering................................... 2,200,000 2 11,001 11,003
Manditorily redeemable preferred stock
converted to common stock ........................ 1,500,464 2 4,802 4,804
Net income........................................... 1,907 1,907
----------- ------ ----------- ------------ -------------
Balance at December 31, 1996.............................. 6,670,319 $ 7 $ 16,701 $ (859) $ 15,849
=========== ====== =========== ============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
Optika Imaging Systems, Inc.
Consolidated Statement of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
-------- ------- --------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss).................................. $ 1,907 $ (962) $(1,732)
Adjustments to reconcile net income (loss) to
net cash used by operating activities:
Depreciation and amortization.................... 492 338 219
Loss on disposal of assets....................... 4 15 --
Provision for loss on accounts receivable........ 22 (14) (76)
Litigation settlement............................ -- 282 --
Change in assets and liabilities:
Accounts receivable............................. (2,588) (677) 133
Deferred tax asset.............................. (885) -- --
Other assets.................................... (453) 64 (132)
Accounts payable................................ 182 (66) 230
Accrued expenses................................ 597 234 (394)
Deferred revenue................................ 313 659 455
------- ------ -------
Net cash used by operations................... (409) (127) (1,297)
------- ------ -------
Cash Flows From Investing Activities
Capital expenditures............................... (585) (316) (158)
Purchase of short-term investments................. (8,025) -- --
Cash acquired in acquisition....................... -- 108 --
------- ------ -------
Net cash used in investing activities......... (8,610) (208) (158)
------- ------ -------
Cash Flows From Financing Activities
Proceeds from issuance of preferred stock, net..... -- 1,461 997
Principal payments on long-term debt............... (456) (696) (534)
Proceeds from issuance of long-term debt........... 429 184 --
Proceeds from issuances of common stock............ 11,105 30 22
------- ------ -------
Net cash provided by financing
activities................................... 11,078 979 485
------- ------ -------
Net increase (decrease) in cash and cash
equivalents....................................... 2,059 644 (970)
Cash and cash equivalents at beginning of period... 1,415 771 1,741
------- ------ -------
Cash and cash equivalents at end of period......... $ 3,474 $1,415 $ 771
======= ====== =======
Supplemental Disclosure of Non-cash
Transactions
Capital lease obligations for purchase
of equipment...................................... $ -- $ -- $ 381
Interest paid...................................... 50 54 54
Income taxes paid (refund)......................... -- 130 (8)
Assets obtained in acquisition..................... -- 498 --
Liabilities assumed in acquisition................. -- 200 --
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.
43
<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 Delaware 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.
Cash Equivalents and Short-term Investments
The Company classifies short-term investments with an original maturity
of three months or less as cash equivalents. Short-term investments consist of
Corporate and U.S. Government obligations maturing within one year. Such
short-term investments are classified as held-to-maturity as defined by
Statement of Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" and accordingly carried at
amortized cost.
Depreciation and Amortization
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
44
<PAGE>
Optika Imaging Systems, Inc.
Notes to Consolidated Financial Statements
receivable and the ability to realize deferred tax assets. Actual results
could differ from these estimates, making it reasonably possible that a change
in these estimates could occur in the near term.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments including
cash, short-term investments, trade receivables and payables and long-term
debt, approximate their fair values.
Stock Compensation Plans
The Company applies APB Option No. 25, Accounting for Stock Issued to
Employees, in accounting for its stock option and employee stock purchase
plans. The Company has adopted the disclosure provision of SFAS No. 123,
Accounting for Stock-Based Compensation.
Export Sales
The Company had export sales totaling approximately $4,811,450,
$1,542,500 and $1,205,000 for the years ended December 31, 1996, 1995 and
1994, respectively, in Europe, Asia and Latin America.
Pro-forma Net Income (Loss) Per Common Share (unaudited)
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. Preferred stock which converted to common
stock upon the Company's initial public offering is assumed to be converted to
common stock for all periods presented. Common equivalent shares are not
included in the per share calculations where the effect of their inclusion
would be antidilutive, except that, in conformity with SEC requirements, 1996,
1995 and 1994 net income (loss) per common share include common and common
equivalent shares issued during the twelve-month period prior to the filing of
the Company's July 1996 initial public offering have been included in the
calculation as if they were outstanding for all periods, using the treasury
stock method and the initial public offering price.
Concentration
The Company has historically relied on a limited number of products and
has concentrated risk related to the continued and future market acceptance of
such products. The Company currently has no major customers accounting for
more than 10% of its consolidated revenues; however, the Company's accounts
receivable are heavily concentrated with resellers of the Company's products.
Receivables from end users are not concentrated in any particular industry.
2. Business Combinations
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 acquisitions were
accounted for using the purchase method. 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.
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. In June 1995, the Company terminated the operations of TEAMWorks
and recorded approximately $69,000 of expenses related to this termination.
45
<PAGE>
Optika Imaging Systems, Inc.
Notes to Consolidated Financial Statements
3. Notes Receivable - Related Parties.
Notes receivable aggregating $103,000 at December 31, 1995 were due from
certain stockholders, officers and employees. The notes bear interest ranging
from 5% to 7.5% and were settled during 1996.
4. Line of Credit
During 1995, the Company entered into a $1,500,000 bank credit facility
with a bank. The terms of this credit facility were modified in September
1996. Pursuant to these changes, the Company is now able to draw up to $3.0
million for one year bearing interest at the bank's prime rate plus .75%. At
December 31, 1996, $2.8 million was available for borrowing thereunder.
Pursuant to the terms of the credit facility, any loans under said facility
would be secured by all of the Company's assets, with the exception of
intellectual property and would be subject to certain covenants. 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% (10.25% at December
31, 1996). Pursuant to the term facility, $195,000 was outstanding at December
31, 1996, which is secured by the equipment purchased thereunder. The term
facility is repayable in 30 equal installments of principal and accrued
interest commencing July, 1996. In addition, the Company has a two-year
secured note with a principal balance of $173,000 outstanding at December 31,
1996, bearing interest at 10.75%. This note matures in 1998.
5. Long-Term Debt and Lease Obligations
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1996 1995
------ ------
<S> <C> <C>
Term loan payable to a bank............................ $ 369 $ 185
Notes payable to stockholders; non-interest bearing;
balance due July 1997; unsecured...................... 43 43
Notes payable for litigation settlement, non-interest
bearing; unsecured.................................... -- 206
Other.................................................. 4 9
----- -----
416 443
Less current portion................................. (280) (177)
----- -----
$ 136 $ 266
===== =====
</TABLE>
Notes Payable for Litigation Settlements
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 alleged contribution 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 was settled during 1996. The
Company also incurred $91,000 of legal expenses related to this litigation.
46
<PAGE>
Optika Imaging Systems, Inc.
Notes to Consolidated Financial Statements
Debt Maturities
Scheduled maturities of long-term debt at December 31, 1996, are as follows
(in thousands):
<TABLE>
<CAPTION>
Debt
Maturities
----------
<S> <C>
1997................................. $ 309
1998................................. 132
1999................................. 12
----------
453
Less: amount representing interest.. (37)
----------
416
Less: current portion............... (280)
----------
$ 136
==========
</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>
1997..................................... $ 776
1998..................................... 664
1999..................................... 558
2000..................................... 550
2001..................................... 565
Thereafter............................... 3,296
---------
$ 6,409
=========
</TABLE>
Rent expense related to these and other operating leases approximated
$727,000, $488,000, and $467,000 for the years ended December 31, 1996, 1995 and
1994.
6. Income Taxes
The Company's provision (benefit) for income taxes is comprised of the
following (in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current:
Federal............................ $ -- $ -- $ (184)
State.............................. -- -- 1
Foreign............................ 72 29 15
Deferred:
Federal............................ (813) -- --
State.............................. (72) -- --
------- ------- ------
Total income tax expense (benefit). $ (813) $ 29 $ (168)
======= ======= ======
</TABLE>
47
<PAGE>
Optika Imaging Systems, Inc.
Notes to Consolidated Financial Statements
The Company's net deferred income tax assets are comprised of the tax
effects of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------ -------------
<S> <C> <C>
Gross Deferred Tax Assets
Net operating loss carryforwards...... $ 449 $ 895
Tax credit carryforwards.............. 278 341
Deferred revenue...................... -- 20
Accrued expenses...................... 158 113
--------- ----------
885 1,369
Less: deferred tax asset valuation
allowance........................... -- (1,359)
--------- ----------
885 10
--------- ----------
Gross Deferred Tax Liabilities
Accelerated tax depreciation.......... -- (10)
--------- ----------
Net deferred tax asset............... $ 885 $ --
========= ==========
</TABLE>
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,
----------------------------
1996 1995 1994
--------- ------- -------
<S> <C> <C> <C>
U.S. federal income tax expense (benefit)
at statutory rate....................... $ 372 $ (317) $ (646)
Increases (decreases) resulting from:
Unrecognized benefit of net operating
loss carryforwards and future net
deductions.............................. -- 310 411
State taxes, net of federal benefit..... 38 -- --
Non-deductible items.................... 93 35 17
Decrease in valuation allowance......... (1,359) -- --
Foreign tax rate differentials.......... 20 (1) (13)
Effect of graduated tax rates in the
carryback period........................ -- -- 63
Other................................... 23 2 --
------- ------ -------
Provision (benefit) for income taxes...... $ (813) $ 29 $ (168)
======= ====== =======
</TABLE>
At December 31, 1996, the Company has net operating loss carryforwards of
approximately $1,367,000 which expire beginning in 2009 through 2010.
Additionally, the Company has various tax credit carryforwards aggregating
approximately $278,000 which expire beginning in 2005 through 2010.
48
<PAGE>
Optika Imaging Systems, Inc.
Notes to Consolidated Financial Statements
7. Capital Stock and Stock Options
In July 1996 the Company effected a reincorporation from the State of
California into the State of Delaware, which changed the par value of the
Company's stock.
Mandatorily Redeemable Convertible Preferred Stock
The following table reflects activity of Series A, B and C preferred stock
for each of the three years ended December 31, 1996 (in thousands, except for
share data):
<TABLE>
<CAPTION>
Mandatorily Redeemable
Convertible Preferred Stock
-----------------------------
Shares Amount
---------------- -----------
<S> <C> <C>
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............. 1,492,201 4,804
---------- -------
Conversion of preferred stock............ (1,492,201) (4,804)
---------- -------
Balance at December 31, 1996............. 0 $ 0
========== =======
</TABLE>
Upon the closing of the Company's initial public offering, all Series A, B
and C preferred stock automatically converted to shares of common stock at their
respective conversion rates. Series A and Series C preferred stock converted
into one share of common stock for each share of preferred stock. Series B
converted into approximately 1.011 shares of common stock for each share of
preferred stock.
Each share of outstanding Series A, Series B and Series C preferred stock
was entitled to as many votes as the number of shares of common stock into which
it was convertible.
49
<PAGE>
Optika Imaging Systems, Inc.
Notes to Consolidated Financial Statements
Stock Compensation Plans
At December 31, 1996 the Company has two stock-based compensation plans.
The Company applies APB Opinion 25 and related Interpretations in accounting for
its plans. Accordingly, no compensation cost has been recognized for its fixed
stock option plan and its employee stock purchase plan. Had compensation cost
for the Company's stock-based compensation plans been determined based on the
fair value at the grant dates for awards under those plans consistent with the
method of FASB Statement 123, the Company's pro-forma results of operations and
pro-forma net income (loss) per share would have been as follows:
<TABLE>
<CAPTION>
(In thousands, except per share data)
1996 1995
----------------- -------------------
<S> <C> <C>
Net income (loss):
As reported.................. $1,907 $ (962)
Pro-forma.................... $1,403 $(1,089)
Net income (loss) per share:
As reported.................. $ 0.29 $ (0.20)
Pro-forma.................... $ 0.21 $ (0.23)
</TABLE>
Fixed Stock Option Plan
Under the Company's stock option plan, the Company may grant incentive and
non-qualified stock options to its employees and directors for up to 2,790,000
shares of common stock. Under the plan, options are granted at an exercise price
not less than the fair market value of the stock on the date of grant. The
options generally vest ratably over four years and expire 10 years after the
date of grant. Certain options are subject to accelerated vesting provisions.
The fair value of each option and warrant grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted-
average assumptions used for grants in 1996 and 1995, respectively; no estimated
dividends for either year; expected volatility of 77% for both years; risk-free
interest rates between 5.36% and 6.69% in 1996 and 5.51% and 7.05% in 1995; and
expected option terms of 5 years for both years.
50
<PAGE>
Optika Imaging Systems, Inc.
Notes to Consolidated Financial Statements
A summary of the status of the Company's fixed option plan as of December
31, 1996, 1995 and 1994 and changes during the years then ending is presented
below. Included in the summary below are 95,000 warrants issued in 1995 in
settlement of a lawsuit, all of which are exercisable at December 31, 1996.
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------- ------------------------- -------------------------
Shares Weighted-Average Shares Weighted-Average Shares Weighted-Average
(000's) Exercise Price (000's) Exercise Price (000's) Exercise Price
--------------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 1,644 $ 1.56 941 $ 1.29 681 $ 0.95
Granted 492 $ 4.72 887 $ 1.88 372 $ 1.88
Exercised (126) $ 0.80 (32) $ 0.93 (28) $ 0.75
Forfeited (77) $ 2.50 (152) $ 1.82 (84) $ 1.35
-------- ------------ ------ ------------ ----- ------------
Outstanding at end of year 1,933 $ 2.38 1,644 $ 1.56 941 $ 1.29
======== ============ ====== ============ ===== ============
Options and warrants
exercisable at year end 729 $ 1.39 530 $ 0.95 454 $ 0.81
Weighted average fair value
of options granted during
the year $ 3.16 $ 1.26
Weighted average fair value
of warrants granted during
the year $ -- $ 1.25
</TABLE>
The following table summarizes information about fixed stock options and
warrants outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options and Warrants
Options and Warrants Outstanding Exercisable
-------------------------------------------------- -------------------------
Number Weighted Weighted Number Weighted
Range of Outstanding Average Average Exercisable Average
Exercise Price at 12/31/96 Remaining Exercise at 12/31/96 Exercise
(000's) Contractual Life Price (000's) Price
-------------- ------------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
$ 0.44 - 1.87 1,463 6.9 $ 1.62 778 $1.39
$ 3.40 211 9.0 3.40 -- --
$ 5.00 - 6.50 259 9.5 5.85 1 6.50
------------ ------------- -------- --------- -----------
1,933 7.5 $ 2.38 779 $1.39
============ ============= ======== ========= ===========
</TABLE>
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in May 1996 and approved by the Company's
stockholders in June 1996. Under the Purchase Plan, the Company is authorized to
issue up to 250,000 shares of common stock to eligible employees. Under the
terms of the Purchase Plan, employees may elect to have up to 10% of their total
cash earnings withheld by payroll deduction to purchase the Company's common
stock. The purchase price of the stock is 85% of the lower of the market price
on the participant's entry date into the Purchase Plan or the semi-annual
purchase date. During 1996, no shares of common stock were purchased under the
Purchase Plan.
51
<PAGE>
Optika Imaging Systems, Inc.
Notes to Consolidated Financial Statements
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 1996, 1995
or 1994.
9. Contingencies
The Company is, from time to time, subjected to certain claims, assertions
or litigation by outside parties as part of its ongoing business operations. The
outcomes of any such contingencies are not expected to have a material adverse
effect on the financial condition or operations of the Company. In addition, in
the ordinary course of business, the Company has issued letters of credit as
security for performance on certain contracts and, as a result, is contingently
liable in the amount of approximately $220,000 at December 31, 1996.
52
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit
No. Description
<S> <C>
2.1(1) Form of Agreement and Plan of Merger of Optika Imaging Systems, Inc., a California
corporation, and the Registrant.
2.2(1) Agreement and Plan of Reorganization, dated January 31, 1994, by and between the
Registrant, TEAMWorks and certain other parties named herein.
2.3(1) Asset Purchase Agreement, dated November 13, 1995, by and among the Registrant,
Optika Asia, Inc., IPRS Asia (S) Pte Ltd., and other entities named therein.
3.1(1) Certificate of Incorporation of the Registrant.
3.2(1) Form of First Amended and Restated Certificate of Incorporation of the Registrant.
3.3(1) Form of Second Amended and Restated Certificate of Incorporation of the Registrant.
3.4(1) Bylaws of the Registrant.
4.1(1) Specimen Common Stock certificate.
4.2(1) Amended and Restated Shareholders' Agreement, dated November 25, 1995, by and among
the Registrant and the entities named therein.
4.3(1) Amended and Restated Registration Agreement, dated November 22, 1995, by and among
the Registrant and the entities named therein, including the First Amendment thereto.
4.4(1) Form of Warrant to purchase Common Stock dated November 1, 1995.
10.1(1) Form of Indemnification Agreement between the Registrant and each of its directors
and officers.
10.2(1) The Registrant's 1994 Stock Option/Stock Issuance Plan, as restated and amended.
10.3(1) The Registrant's 1996 Management Incentive Compensation Plan.
10.4(1) The Registrant's Employee Stock Purchase Plan.
10.5(1) Loan and Security Agreement, dated June 16, 1995, by and between the Registrant
and Silicon Valley Bank, including Amendments No. 1 and 2 thereto.
10.6(1) Office Lease Agreement, dated December 1, 1992, by and between the Registrant
and Lincoln National, regarding the space located at 5755 Mark Dabling
Boulevard, Colorado Springs, Colorado, and the First Amendment thereto, dated
February 8, 1994.
10.7(1) Employment Agreement by and between the Registrant and Mr. Mark K. Ruport effective
February 18, 1995.
10.8(1) Employment Agreement by and between the Registrant and Mr. Steven M. Johnson,
effective May 15, 1996.
10.9(1) Employment Agreement by and between the Registrant and Mr. Marc Fey, effective
May 4, 1994.
10.10(1) Form of Business Solutions Partner (Reseller) Agreement.
</TABLE>
53
<PAGE>
<TABLE>
<S> <C>
10.11(1) Form of FilePower Suite Software License Agreement.
10.12(1) Technology Transfer Agreement, dated February 20, 1992, by and between the
Registrant, Mr. Paul Carter and Mr. Malcolm Thomson.
10.13(1) Commitment Letter for Line of Credit with Silicon Valley Bank.
10.14(2) Third Amendment to Loan and Security Agreement dated as of September 3, 1996,
by and between the Registrant and Silicon Valley Bank.
10.15 Fourth Amendment to Loan and Security Agreement dated as of December 9, 1996,
by and between the Registrant and Silicon Valley Bank.
10.16 Lease Agreement dated October 11, 1996, by and between the Registrant and
Woodman Office Campus II J.V. LLC for office space at 7450 Campus Drive,
Suite 200, Colorado Springs, Colorado.
21.1(1) Subsidiaries of the Registrant.
23.1 Consent of Price Waterhouse LLP, Independent Accountants.
24.1 Power of Attorney. (Included on Signature Page.)
24.7 Financial Data Schedule.
</TABLE>
- ---------------------------
(1) Incorporated by reference to identically numbered exhibits included in
the Registrant's Registration Statement on Form S-1 (File No. 333-03637), as
amended.
(2) Incorporated by reference to an exhibit to the Company's Quarterly Report
on Form 10-Q (File No. 0-28672) for the quarter ended September 30, 1996.
54
<PAGE>
Exhibit 10.15
_____________
AMENDMENT NO. 4 TO LOAN AND SECURITY AGREEMENT
This Amendment No. 4 to Loan and Security Agreement (this "Amendment")
is made as of December 9, 1996, by and between Optika Imaging Systems, Inc. (the
"Borrower") and Silicon Valley Bank ("Bank").
RECITALS
A. Borrower and Bank are parties to, among other documents, a Loan
and Security Agreement dated on or about June 16, 1995 (the "Agreement"), as
such agreement may be amended from time to time. The Agreement provided for,
among other things, a Committed Line in the original principal amount of One
Million Five Hundred Thousand and 00/100 Dollars ($1,500,000.00) (the "Revolving
Facility"). The Agreement has been amended pursuant to among other documents an
Amendment No. 3 to Loan and Security Agreement dated September 3, 1996, pursuant
to which, among other things, the Committed Line was increased to Three Million
and 00/100 Dollars ($3,000,000.00).
B. Borrower and Bank desire to modify the Agreement, in accordance
with the terms of this Amendment.
NOW THEREFORE, Borrower and Bank agree as follows:
1. The following terms are amended or added as defined terms in
Section 1.1, as follows:
"Revolving Maturity Date" shall mean September 2, 1997.
"Letters of Credit" means a letter of credit or similar
undertaking issued by Bank pursuant to Section 2.1.3.
"Letter of Credit Reserve" has the meaning as set forth in
Section 2.1.3.
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 the "Revolving Advances") to Borrower in an aggregate amount not to
exceed the Committed Line minus the face amount of all outstanding Letters of
Credit (including drawn but unreimbursed Letters of Credit (including drawn but
unreimbursed Letters of Credit). 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. A new Section 2.1.3 entitled "Letters of Credit" is added
as follows:
2.1.3 Letters of Credit. Subject to the terms and
-----------------
conditions of this Agreement, Bank agrees to issue or cause to be issued letters
of credit for the account of Borrower in an aggregate face amount not to exceed
(i) The Committed Line with respect to the
<PAGE>
Revolving Facility minus (ii) the then outstanding principal balance of the
Revolving Advances; provided that the face amount of the outstanding Letters of
Credit (including drawn but unreimbursed Letters of Credit) shall not in any
case exceed Five Hundred Thousand and 00/100 Dollars ($500,000.00). Each such
Letter of Credit shall have an expiry date no later than one hundred eighty
(180) days after the Revolving Maturity Date, provided that Borrower's Letter of
Credit reimbursement obligation shall be secured by cash on terms acceptable to
Bank at any time after the Revolving Maturity Date if the term of the Agreement
is not extended by Bank. All such Letters of Credit shall be in form and
substance, acceptable to Bank in its sole discretion and shall be subject to the
terms and conditions of Bank's form of application and Letter of Credit
agreement.
Borrower shall indemnify, defend and hold Bank harmless from any loss,
cost, expense or liability, including, without limitation, reasonable attorney's
fees, arising out of or in connection with any Letters of Credit.
Borrower may request that Bank issue a Letter of Credit payable in a
currency other than United States Dollars. If a demand for payment is made
under such Letter of Credit, Bank shall treat such demand as an advance to
Borrower of the equivalent amount thereof (plus cable charges) in United States
currency at the then prevailing rate of exchange in San Francisco, California,
for sales of that other currency for cable transfer to the country of which it
is the currency.
Upon the issuance of any Letter of Credit payable in a currency other
than United States Dollars, Bank shall create a reserve (the "Letter of Credit
Reserve") under the Committed Line, with respect to the Revolving Facility for
Letters of Credit against fluctuations in currency exchange rates, in an amount
equal to ten percent (10%) of the face amount of such Letter of Credit. The
amount of such reserve may be amended by Bank from time to time to account for
fluctuations in the exchange rate. The availability of funds under the
Committed Line, with respect to the Revolving Facility shall be reduced by the
amount of such reserve for so long as such Letter of Credit remains outstanding.
4. Unless otherwise defined, all capitalized terms in this Amendment
shall have the meanings assigned in the Agreement. Except as amended, the
Agreement remains in full force and effect.
5. Borrower represents and warrants that the Representations and
Warranties contained in the Agreement are true and correct as of the date of
this Amendment, and that no Event of Default has occurred and is continuing.
6. 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.
7. This Amendment amends certain terms of the Agreement. Except as
amended hereby, the Agreement remains in full force and effect. This Amendment,
together with the Agreement and any documents executed in connection with the
Agreement, constitute the entire agreement of the parties with respect to the
subject matter hereof, and supersede all prior agreements and negotiations.
2.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the first date above written.
BORROWER: BANK:
OPTIKA IMAGING SYSTEMS, INC. SILICON VALLEY BANK
By: /s/ Steven M. Johnson By: /s/ Framk Amaroso
---------------------- -------------------------
Name: Steven M. Johnson Name: Framk Amaroso
-------------------- -----------------------
Title: Chief Financial Officer Title:
------------------------- ----------------------
3.
<PAGE>
Exhibit 10.16
WOODMEN OFFICE CAMPUS II
7450 CAMPUS DRIVE
COLORADO SPRINGS, COLORADO 80920
OFFICE LEASE
BETWEEN
WOODMEN OFFICE CAMPUS II JV LLC,
A COLORADO LIMITED LIABILITY COMPANY
(LANDLORD AND/OR LESSOR)
AND
OPTIKA IMAGING SYSTEMS, INC.,
A DELAWARE CORPORATION
(TENANT AND/OR LESSEE)
DATE: SEPTEMBER 30, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
SUMMARY OF BASIC LEASE TERMS................................................ 1
BASIC LEASE TERMS........................................................... 4
1. PREMISES
1.1 Grant of Premises....................................... 4
1.2 Office Building......................................... 4
1.3 Construction by Landlord................................ 4
2. TERM......................................................... 4
2.1 Basic Term.............................................. 4
2.2 Early Possession........................................ 5
3. RENT......................................................... 5
3.1 Rent.................................................... 5
3.2 Base Rent............................................... 5
3.3 Operating Expenses...................................... 5
3.4 Place of Payments....................................... 5
3.5 Base Rent Adjustments................................... 5
3.5.1 Adjustments for C.P.I............................... 5
3.6 Interest on Unpaid Sums................................. 5
4. SECURITY DEPOSIT AND CONDITION OF LEASED
PREMISES...................................................... 5
4.1 Condition of Leased Premises............................ 5
5. USE........................................................... 6
5.1 Permitted Use........................................... 6
5.2 Tenant's Compliance with Laws........................... 6
5.3 Landlord's Compliance with Laws......................... 6
5.4 Insurance Cancellation.................................. 7
5.5 Landlord's Rules and Regulations........................ 7
6. OPERATING EXPENSES............................................ 7
6.1 Tenant's Obligations.................................... 7
6.2 Definition of Operating Expenses........................ 7
6.2.1 Taxes and Other Government Obligations.............. 8
6.2.2 Insurance Costs..................................... 8
6.2.3 Heating, Ventilating & Air
Conditioning Costs.................................. 8
6.2.4 Utility & Janitorial Costs.......................... 8
6.2.5 Cost of Professionals............................... 8
6.2.6 Operations, Maintenance & Repair.................... 8
6.2.7 Requirements of Government Entities................. 9
6.3 Operating Expenses Exclusion............................. 9
6.4 Time of Payment......................................... 10
6.5 Re-estimations.......................................... 10
6.6 Annual Adjustments...................................... 10
6.7 Audit Right............................................. 11
7. UTILITIES AND SERVICES........................................ 11
7.1 Utilities Provided...................................... 11
7.2 Electric Service........................................ 11
7.3 Heating, Ventilation and Air Conditioning
of Service.............................................. 12
7.4 Normal Operating Hours and Extended Hours............... 12
7.5 Interruption of Services................................ 12
8. MAINTENANCE, REPAIRS AND ALTERATIONS.......................... 12
8.1 Landlord's Obligations.................................. 12
8.2 Tenant's Obligations.................................... 12
8.3 Notification to Landlord................................ 13
8.4 Surrender of Leased Premises............................ 13
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
9. ALTERATIONS AND ADDITIONS.................................... 13
9.1 Landlord's Consent Required............................. 13
9.2 Payment for Work........................................ 14
9.3 Signage................................................. 14
10. INSURANCE..................................................... 14
10.1 Tenant's Insurance...................................... 14
10.2 Landlord's Insurance.................................... 15
10.3 Waiver of Subrogation................................... 15
11. INDEMNITY..................................................... 15
11.1 Indemnification of Landlord............................. 15
11.2 Indemnification of Other Tenants........................ 16
11.3 Indemnification of Landlord............................. 16
11.4 Landlord's Liability.................................... 16
11.5 Americans with Disabilities Act ("ADA")................. 16
12. CASUALTY AND RECONSTRUCTION................................... 17
12.1 Short-Term Repairs...................................... 17
12.1 Long-Term Repairs....................................... 17
12.2 Casualty in Last Year of Lease.......................... 17
13. TENANT TAXES.................................................. 17
13.1 Personal Property....................................... 17
13.2 Increase in Taxes....................................... 17
14. COMMON AREAS.................................................. 17
14.1 Definition.............................................. 17
14.2 Maintenance............................................. 18
14.3 Tenant's Rights and Obligations......................... 18
14.4 Changes to Common Areas................................. 18
15. SUBLETTING AND ASSIGNMENT..................................... 18
16. TENANT'S DEFAULT.............................................. 20
16.1 Default................................................. 20
16.2 Remedies................................................ 20
16.2.1 Termination of Lease................................ 20
16.2.2 Repossession without Termination.................... 21
16.3 Late Charges............................................ 21
16.4 Cumulative Remedies..................................... 21
16.5 No Waiver............................................... 21
16.6 Bankruptcy.............................................. 22
17. LANDLORD'S DEFAULT............................................ 22
17.1 Notice of Landlord...................................... 22
17.2 Notice to Mortgagee..................................... 22
17.3 Limitation of Landlord's Liability...................... 22
18. CONDEMNATION.................................................. 22
18.1 Effect of Taking........................................ 22
18.2 Rents Reduction......................................... 23
18.3 Awards.................................................. 23
19. SUBORDINATION AND ATTORNMENT.................................. 23
19.1 Subordination........................................... 23
19.2 Attornment-Non-Disturbance.............................. 23
20. QUIET ENJOYMENT............................................... 23
20.1 Covenant of Quiet Enjoyment............................. 23
21. EXTENDED TIME DUE TO DELAY.................................... 23
22. GENERAL PROVISIONS............................................ 24
22.1 Estoppel Certificates................................... 24
22.2 Transfer of Landlord's Interest......................... 24
22.3 Captions................................................ 24
22.4 Time of Essence......................................... 24
22.5 Severability............................................ 24
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
22.6 Modifications for Mortgage............................. 24
22.7 Entire Agreement....................................... 24
22.8 Recording.............................................. 24
22.9 Area Determination..................................... 24
22.10 Binding Effect: Choice of Law......................... 25
22.11 Holding Over: Payments After Termination............... 25
22.12 Entry by Landlord...................................... 25
22.13 Authority.............................................. 25
22.14 Notices................................................ 25
22.15 Brokerage Clause....................................... 26
22.16 Bankruptcy............................................. 26
22.16.1 Net Worth Capability.............................. 26
22.16.2 Agreement to be Bound............................. 26
22.16.3 Adequate Assurances & Cure........................ 26
22.17 Parking................................................ 26
22.18 Lease Subject to Approval of Mortgagee................. 26
22.19 Financial Statements................................... 27
22.20 Relationship of the Parties............................ 27
22.21 Counterparts........................................... 27
23. HAZARDOUS WASTE............................................... 27
23.1 Hazardous Waste........................................ 27
</TABLE>
Exhibit "A" - Legal Description of the Property
Exhibit "B" - The Leased Premises
Exhibit "C" - Work Letter
Exhibit "D" - Rules and Regulations
Exhibit "E" - Commencement of Lease Term and Estoppel Certificate
Exhibit "F" - Agreement for Parking
Exhibit "G" - Agreement for Signage
Exhibit "H" - Right of First Refusal
Exhibit "I" - Assignment and Assumption of Lease Form
Exhibit "J" - Letter of Credit Form
<PAGE>
WOODMEN OFFICE CAMPUS II LEASE
THIS LEASE is dated for reference purposes only SEPTEMBER 30, 1996, and is made
by and between WOODMEN OFFICE CAMPUS II JV LLC, A COLORADO LIMITED LIABILITY
COMPANY (hereinafter referred to as "Landlord") and OPTIKA IMAGING SYSTEMS,
INC., A DELAWARE CORPORATION (hereinafter referred to as "Tenant").
W I T N E S S E T H:
- - - - - - - - - -
For and in consideration of the rental and of the covenants and agreements
hereinafter set forth to be kept and performed by the Tenant, Landlord hereby
leases to Tenant and Tenant hereby leases from Landlord the Premises herein
described for the Lease Term as defined below, at the rental and subject to and
upon all of the terms, covenants and agreements hereinafter set forth.
SUMMARY OF BASIC LEASE TERMS
- ----------------------------
A. LANDLORD: WOODMEN OFFICE CAMPUS II JV LLC
B. TENANT: OPTIKA IMAGING SYSTEMS, INC., a Delaware
corporation.
C. BUILDING: WOODMEN OFFICE CAMPUS II, located at 7450 Campus
Drive, Colorado Springs, Colorado, more particularly
described on Exhibit "A" attached hereto and
incorporated herein by this reference (sometimes
referred to as the "Building")
D. LEASED PREMISES: Crosshatched on Exhibit "B", containing approximately
38,869 square feet of Rentable Area, as determined by
Landlord's architect pursuant to current BOMA
standards on the second (2nd) floor of the Building.
E. LEASE TERM: Ten (10) years and seventeen (17) days, commencing on
March 15, 1997 and ending on March 31, 2007.
F. SECURITY DEPOSIT: Two Hundred Twenty Thousand and 00/100 U.S.
Dollars ($220,000.00).
G. BASE RENT (NNN): Five Million, Seven Hundred Ninety-Three
Thousand,\Twenty-Five, and 39/100 U.S. Dollars
($5,793,025.39) payable in monthly installments with
each such payment due on the first day of the month
for which such payment or partial payment is due
pursuant to the following schedule (Monthly base rent
and annualized base rent have been calculated
pursuant to Base Rent (NNN) multiplied by 38,869 rsf.
1
<PAGE>
<TABLE>
<CAPTION>
BASE RENT PAYMENT SCHEDULE:
=================================================================================================
BASE RENTAL
ANTICIPATED RATE/RSF/YR *MONTHLY *TOTAL BASE RENT
TIME PERIOD DATES FOR PERIOD BASE RENT FOR TIME PERIOD
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
17 Days 3/15/97 - 3/31/97 $13.00 $42,108.08 $ 23,091.53
- -------------------------------------------------------------------------------------------------
Year 1 4/1/97 - 3/31/98 $13.00 $42,108.08 $505,296.96
- -------------------------------------------------------------------------------------------------
Year 2 4/1/98 - 3/31/99 $13.39 $43,371.33 $520,455.96
- -------------------------------------------------------------------------------------------------
Year 3 4/1/99 - 3/31/00 $13.79 $44,666.96 $536,003.52
- -------------------------------------------------------------------------------------------------
Year 4 4/1/00 - 3/31/01 $14.21 $46,027.37 $552,328.44
- -------------------------------------------------------------------------------------------------
Year 5 4/1/01 - 3/31/02 $14.63 $47,387.79 $568,653.48
Dec 31, 20012
- -------------------------------------------------------------------------------------------------
Year 6 4/1/02 - 3/31/03 $15.07 $48,812.99 $585,755.88
Dec 31, 2002
- -------------------------------------------------------------------------------------------------
Year 7 4/1/03 - 3/31/04 $15.52 $50,270.57 $603,246.84
- -------------------------------------------------------------------------------------------------
Year 8 4/1/04 - 3/31/05 $15.99 $51,792.94 $621,515.28
- -------------------------------------------------------------------------------------------------
Year 9 4/1/05 - 3/31/06 $16.47 $53,347.70 $640,172.40
- -------------------------------------------------------------------------------------------------
Year 10 4/1/06 - 3/31/07 $16.96 $54,934.85 $659,218.20
=================================================================================================
</TABLE>
H. TENANT'S PERCENTAGE
SHARE OF TOTAL RENT-
ABLE AREA IN THE BLDG: 50.02% which has been calculated by dividing the
total rentable area leased to tenant under this
lease (38,869 square feet) divided by the total
rentable area of the Building (77,409 square
feet). Absent further written agreement between
the parties, the Tenant's Percentage Share (for
the entire Leased Premises) of Fifty and 02/100
Percent (50.02%) shall be considered an agreed
percentage, and shall not be subject to unilateral
challenge by one of the parties for any reason,
including, without limitation, remeasuring of the
Leased Premises or Building, or a restructuring of
any portion of the interior of the Building
(within the exterior Building envelope as it is
drawn at the execution hereof). Tenant's
Percentage Share may change if the total Building
envelope is enlarged or reduced through eminent
domain or casualty.
I. TENANTS SHARE OF
OPERATING EXPENSES: An amount equal to the Tenant's Percentage Share
of the total rentable area in the Building, as
defined in H above, multiplied by the total
operating expenses of the Building during the
applicable calendar year.
J. AMOUNT OF REQUIRED
LIABILITY INSURANCE: Two million dollars ($2,000,000.00).
K. ADDRESSES FOR NOTICES
AND PAYMENT OF RENT
AND CHARGES:
TO LANDLORD: Woodmen Office Campus II JV LLC
455 Sherman Street, Suite 140
Denver, Colorado 80203
2
<PAGE>
TO TENANT: Post Commencement Date
----------------------
Optika Imaging Systems, Inc.
7450 Campus Drive, Suite 200
Colorado Springs, Colorado 80920
Pre-Commencement Date
---------------------
Optika Imaging Systems, Inc.
5755 Mark Dabling Boulevard, Suite 100
Colorado Springs, Colorado 80919
L. USE OF LEASED
PREMISES: Tenant shall be permitted to use and occupy the
property for general office administration,
product development, customer sales and support
training and for no other purpose ("Tenant's Use")
without the prior written consent of Landlord,
which consent shall not be unreasonably withheld.
M. BROKER: OLIVE REAL ESTATE GROUP, INC.
As "Transaction Broker"
102 North Cascade Avenue, Suite 250
Colorado Springs, Colorado 80903
3
<PAGE>
BASIC LEASE TERMS
1. PREMISES.
1.1 GRANT OF PREMISES. Landlord hereby leases to Tenant and Tenant hereby
-----------------
leases from Landlord the Leased Premises situated in the City of Colorado
Springs, Colorado, described in paragraph D of the Summary of Basic Lease
Terms and more particularly described as the crosshatched portion of
Exhibit "B".
1.2 OFFICE BUILDING. The Leased Premises, together with and including
---------------
other property owned by Landlord, comprise a multi-story office building
(hereinafter referred to as the "Building"). A general floor plan, showing
the size and location of the Leased Premises within the Building, is
attached hereto as Exhibit "B". Landlord shall not, of its own volition,
materially increase or decrease the rentable area of the Building without
Tenant's consent, which consent shall not be unreasonably withheld,
conditioned or delayed. Tenant's use and occupancy of the Leased Premises
shall include the use, in common with others, of the Common Areas described
in Article 14, but excepting therefrom and reserving unto Landlord the
exterior faces of all exterior walls, the roof and the right to install,
use and maintain where necessary in the Leased Premises all pipes,
ductwork, conduits and utility lines through hung ceiling space,
partitions, beneath the floor or through other parts of Leased Premises.
Landlord reserves the right to effect such other tenancies in the Building
as Landlord may elect.
1.3 CONSTRUCTION BY LANDLORD. The obligations of Landlord to perform
------------------------
the work and supply materials and labor to prepare the Leased Premises for
occupancy are set forth in Exhibit "C". Landlord shall expend all funds and
do all acts required of it to perform the work set forth in Exhibit "C" and
shall have the work performed promptly and diligently in a first-class
workmanlike manner. Landlord shall use its best reasonable efforts to
deliver Substantial Completion of the Premises as set forth in Exhibit "C"
by March 15, 1997. If Substantial Completion of the Premises is not
delivered within three (3) months of the aforementioned date, as extended
by any Tenant Caused Delay as defined in Exhibit "C", then Tenant may
terminate this lease and upon such termination, each party hereto shall be
released from all liability to the other party, and Landlord shall promptly
return to Tenant any Security Deposit which Tenant has paid to Landlord.
2. TERM.
2.1 BASIC TERM. The term of this Lease shall be for the period of ten
----------
(10) years and seventeen (17) days, commencing and ending on the dates set
forth in paragraph E of the Summary of Basic Lease Terms; provided,
however, if the Leased Premises are not "Ready for Occupancy" as
hereinafter defined, on the date the term hereof is to commence (March 15,
1997), the commencement date of the Lease shall be delayed until the Leased
Premises are Ready for Occupancy. If the Premises are not Ready for
Occupancy within three (3) months after March 15, 1997, and Tenant does not
elect to terminate this lease as provided in Section 1.3, then the
expiration date of this Lease shall be extended by the period of delay. The
deferral of Tenants rental obligation shall be in full satisfaction of any
and all rights which Tenant might otherwise have as a result of the delay
of the commencement date of the Lease Term subject to the provisions
of Article 24.4. "Ready for Occupancy" as used herein shall mean the
---------------
date that Landlord shall have (a) performed the work required to complete
the Base Building as defined in Exhibit "C", (b) delivered Substantial
Completion of the Leased Premises, in compliance with all applicable laws,
statutes, codes, rules and regulations (collectively, "Laws"); (c) provided
heating, ventilating, air conditioning ("HVAC"), plumbing, life safety,
mechanical and/or electrical systems (collectively, "Building Systems"),
operational to the extent necessary to service the Leased Premises; and (d)
provided Tenant with the number of parking spaces to which it is entitled
under this Lease. If the commencement of the Lease Term is delayed and
occurs on other than the first day of the month, Tenant shall pay
proportionate rent at the same monthly rate set forth here for the first
month of the Lease Term and the Lease Term shall be extended by the number
of days in such partial month so that the Lease Term will end on the last
day of the One Hundred and Twentieth (120th) calendar month after the date
on which the Leased Premises are Ready for Occupancy unless sooner
terminated as herein provided. As soon as the Lease Term
4
<PAGE>
commences, Landlord and Tenant shall execute an addendum to this Lease
setting forth the exact date on which the Lease Term commenced and the
expiration date of the Lease Term.
2.2 EARLY POSSESSION. If, prior to commencement of the term of the Lease,
----------------
Tenant uses or occupies the Leased Premises or any part thereof with
Landlord's prior written consent, for the purpose of completing alterations
or installation of cabling and/or office furniture systems in the Leased
Premises, Tenant agrees to observe and perform all the provisions of this
Lease except those which require payment of rent; provided, however, if
Tenant commences business in any part of the Leased Premises prior to
commencement of the term, Tenant shall pay Landlord on Rent for each day of
such use or occupancy prior to commencement of the term, calculated on the
basis of the per diem rental and all other sums which would be due to
Landlord from Tenant if the term had commenced, including Tenant's Share of
annual Operating Expense. Landlord and Tenant hereby agree that if the
construction of the space is complete and the Leased Premises are ready for
Tenant's conduct of business, then Tenant may occupy the Leased Premises as
early as March 15, 1997, for its own preparation of the Leased Premises and
for the conduct of business. Tenant agrees to perform all the provisions of
this Lease including those which require payment of rent.
3. RENT.
3.1 RENT. Rent shall mean Base Rent (as defined below), Operating
----
Expenses (as defined below), and all other sums due under this Lease. One
month's Rent ($56,683.96 = The sum of $13.50/r.s.f./yr. Base Rent plus
$4.50/r.s.f./yr. estimated Operating Expense multiplied times 38,869 r.s.f.
and divided by 12 months) shall be payable upon the execution of this Lease
and shall be applied to the Rent due for the period from the Commencement
Date until the first day of the next calendar month, with the excess, if
any, being credited toward such next month's Rent, and the balance of such
next month's Rent shall be due on the first day of such month. Thereafter,
Rent shall be payable in lawful money of the United States in advance on
the first day of each calendar month during the lease term, without any
deduction, prior notice, demand or offset whatsoever subject to any
specific provisions to the contrary herein.
3.2 BASE RENT. Tenant agrees to pay to Landlord, promptly when due,
---------
without notice or demand and without deduction or set off for any reason
whatsoever, except as otherwise provided herein, as rent for the Leased
Premises, the Base Rent set forth in paragraph G of the Summary of Basic
Lease Terms for each and every month during the term hereof. The Base Rent
and Tenant's Percentage Share of estimated Operating Expenses, as hereafter
described, shall be payable in advance on the first day of each calendar
month during the term.
3.3 OPERATING EXPENSES. In addition to Base Rent, Tenant agrees to pay
------------------
additional rent equal to its Percentage Share of Operating Expenses as
provided in Article 6 hereof.
3.4 PLACE OF PAYMENT. All rent payable hereunder, as well as all other
----------------
amounts payable by Tenant to Landlord under the terms of this Lease, shall
be paid at the office of Landlord set forth in paragraph K of the Summary
of Basic Lease Terms, or at such other place as Landlord may from time to
time designate, by written notice to Tenant, in lawful money of the United
States.
3.5 BASE RENT ADJUSTMENTS.
---------------------
3.5.1 ADJUSTMENTS FOR C.P.I. There shall be no adjustment to the
---------------------
rent except as set forth in paragraph G of the Summary of Basic Lease
Terms.
3.6 INTEREST ON UNPAID SUM. If rent, or any other monetary sum required
----------------------
to be paid hereunder by Tenant to Landlord, is not paid when due, such sum
shall accrue interest at the rate of three percent (3%) per annum above the
prime rate charged by First Interstate Bank of Denver to its largest
business customers on an unsecured basis ("Prime Rate") as of the date such
default occurred. Said interest shall be charged from the date the amount
in question was due until received by Landlord.
4. SECURITY DEPOSIT AND CONDITION OF LEASED PREMISES.
4.1 SECURITY DEPOSIT. Concurrently with Tenant's execution of this Lease,
----------------
Tenant shall deposit
5
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with Landlord the sum set forth in paragraph F, of the Summary of Basic
Lease Terms, to be held by Landlord as security for the faithful
performance of every provision of this Lease, including but not limited to
the provisions relating to the payment of Base Rent, and other amounts due
hereunder. Landlord may (but shall not be required to) use, apply or retain
all or any part of this Security Deposit for the payment of rent or any
other sum in default, or for the payment of any amount which Landlord may
spend or become obligated to spend by reason of Tenant's default or to
compensate Landlord for any other loss or damage which Landlord may suffer
by reason of Tenant's default. If any portion of said deposit is to be used
or applied, Tenant shall, within ten (10) days after written demand
therefor, deposit cash with Landlord in an amount sufficient to restore the
Security Deposit to the amount set forth in paragraph F of the Summary of
Basic Lease Terms, and Tenant's failure to do so shall be deemed a default
by Tenant under this Lease. If Tenant shall fully and faithfully perform
every provision of this Lease to be performed by Tenant, the security
deposit, or any balance thereof, shall be returned to Tenant (or Tenant's
assignee) at the expiration of the term and after Tenant has vacated the
Leased Premises; however, in no event shall Landlord be under any
obligation to return said deposit earlier than thirty (30) days after the
expiration of the term but Landlord shall be under an obligation to return
the deposit within sixty (60) days after the expiration of the Term. Tenant
hereby agrees that in the event any mortgagee of the Building succeeds to
Landlord's interest in the Building by reason of foreclosure or deed in
lieu thereof, unless funds representing the security deposit are delivered
by Landlord to such mortgagee, Tenant shall have no claim against such
mortgagee for any deposit.
4.2 LETTER OF CREDIT. In place of cash, Tenant may, at its option,
----------------
obtain and deliver to Landlord before the Commencement Date and keep open
for the entire term of this Lease, including any renewal, extension and
holdover periods, an irrevocable and divisible Letter of Credit in the
amount set forth under paragraph F of the Summary of Basic Lease Terms,
naming Landlord as beneficiary and drawn on a bank reasonably approved by
Landlord and confirmed by Landlord's bank. Except for the name and address
of the banks involved, the Letter of Credit to be opened by Tenant shall be
in the form and wording as the Letter of Credit attached as Exhibit "J" and
incorporated herein by this reference (the "Security Deposit Letter of
Credit"). The Security Deposit Letter of Credit may be drawn upon in whole
or in part by Landlord upon demand by written draft and a notarized
statement signed by Landlord or its authorized agent, that it is entitled
to draw upon the security deposit under the terms of this Lease. There
shall be no other conditions to drawing upon the Security Deposit Letter of
Credit. By delivering such demand draft to the bank issuing or confirming
the Security Deposit Letter of Credit, Landlord warrants that it has a
right to draw against the security deposit under the terms of this Lease.
Landlord shall have a right to draw upon the Security Deposit Letter of
Credit and convert the Security Deposit Letter of Credit to a cash security
deposit upon any default under this Lease, or upon the occurrence of any
event under this Lease which would give rise to Landlord's right to draw
against the cash security deposit described above, or if the Security
Deposit Letter of Credit is not renewed before, and evidence thereof
provide to Landlord no later than thirty (30) days prior to the maturity
date (and each successive maturity date) of the Security Deposit Letter of
Credit. This Security Deposit Letter of Credit shall remain in place and be
renewed or replaced if necessary for the entire term of this Lease.
Landlord agrees that if it has not drawn on the Security Deposit Letter of
Credit to satisfy obligations under this Lease, Landlord will release the
Security Deposit Letter of Credit upon the Expiration of one (1) month
after the end of the original term demised under this Lease.
4.3 CONDITION OF LEASED PREMISES. Tenant hereby agrees that by taking
----------------------------
possession of the Leased
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Premises it is acknowledging that the Leased Premises are accepted and in a
clean and good operating condition on the date of possession, subject to
punch-list items and latent defects, if any. Landlord represents and
warrants to Tenant, as of the Commencement Date, that (i) the Leased
Premises shall be in compliance with all applicable municipal, county,
state and federal statutes, laws and ordinances relating to the
construction, condition and occupancy of the Leased Premises, but
specifically excluding zoning ordinances, and regulations governing and
relating to the Tenant's use of the Leased Premises; and (ii) the Leased
Premises are in good condition and repair.
5. USE.
5.1 PERMITTED USE. Tenant shall use the Leased Premises solely for
-------------
Tenant's Use as set forth in paragraph L of the Basic Lease Terms and shall
not permit the Leased Premises to be used for any other purpose.
5.2 TENANT'S COMPLIANCE WITH LAW. Tenant shall not use the Leased
----------------------------
Premises or permit anything to be done in or about the Leased Premises
which will in any way conflict with any law, statute, ordinance or
governmental rule or regulation now in force or which may hereafter be
enacted or promulgated. Tenant shall at its sole cost and expense promptly
comply with all laws, statutes, ordinances and governmental rules,
regulations and requirements now in force or which may hereafter be in
force and with the reasonable requirements of any insurer, underwriter or
other similar entity now or hereafter relating to or affecting the use of
occupancy of the Leased Premises by Tenant unless such law, statute,
ordinance or governmental rule, regulation or requirement is generally
applicable to all like kind properties within the jurisdiction thereof and
requires a physical improvement to the Building, in which event Landlord
shall perform any such physical improvement and the cost thereof shall be
amortized at a market rate over the useful life of such improvement, as
reasonably calculated and determined by Landlord, and included within
Operating Expenses. Tenant shall at its sole cost and expense promptly
comply with all applicable laws, statutes, ordinances, rules, regulations,
orders and requirements in effect during the term regulating the use or
occupancy of the Leased Premises, including the requirements of any board
of fire underwriters or other similar body now or hereafter constituted;
provided, however, Tenant shall not be required to pay for (through
Operating Expenses or otherwise) or make any structural changes or capital
expenditures in or on the Leased Premises in order to comply with any
applicable law, statute, ordinance or governmental rule, regulation or
requirement which was in effect on the Commencement Date hereof unless the
charges or expenditures are required by Tenant's particular use of the
Leased Premises. Tenant will not use or permit the use of the Leased
Premises in any manner which may tend to create waste or a nuisance, or
which may materially interfere with the rights of other tenants of the
Building or injure or annoy them. Tenant shall neither install nor permit
the installation or use of any vending machines dispensing food items,
including but not limited to candy, soft drinks, sandwiches, fruit or bag
foods, upon the Leased Premises, except for the exclusive use of its
employees and clients, without the prior written consent of Landlord.
Tenant will have the right to contest any law, statute, ordinance or
governmental rule or regulation with which it is obligated to comply by
appropriate proceedings diligently pursued in good faith, and, so long as
neither Landlord nor the Leased Premises, Tenant's interest in the
Leasehold, the Building or the real property are subject to or threatened
with any criminal liability, or civil liability against which Tenant does
not agree to indemnify it and so long as Tenant's financial net worth is
equal to at least three (3) times the total amount of any threatened
liability, lien or lis pendens, Tenant may defer compliance until the
resolution of its contest. Landlord will cooperate reasonably with Tenant's
contest at no cost to Landlord. Tenant shall be solely responsible for
compliance with the provisions of the Americans with Disabilities Act as it
applies to Tenant's particular use of the Leased Premises. Landlord makes
no warranty express or implied that Tenant's intended use of the Leased
Premises is suitable or allowable under any applicable governmental code,
statute or regulation.
5.3 LANDLORD'S COMPLIANCE WITH LAW. Landlord represents and warrants to
------------------------------
Tenant, with regard to the Leased Premises, on the date that the Leased
Premises are Ready for Occupancy and
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delivered to Tenant (but without regard to the use for which Tenant will
use the Leased Premises), to the best of Landlord's knowledge and belief,
such portion of the Leased Premises does not violate any covenants,
conditions or restrictions which affect or encumber the Leased Premises
whether or not of record, or any applicable building code, regulation or
ordinance then in effect. Landlord further represents and warrants that, to
the best of Landlord's knowledge and belief, the Building, foundation,
walls, floors and roof are structurally sound and the plumbing, lighting
and mechanical systems and equipment (including heating, ventilation and
air conditioning) servicing the Leased Premises shall be in good operating
condition on the date the Leased Premises are Ready for Occupancy. Without
limiting the foregoing, Landlord further represents and warrants to Tenant
that the Leased Premises (but without regard to the specific use to be made
of the Leased Premises by Tenant), and the common areas in the Building, in
their respective conditions existing on the Commencement Date of this
Lease, comply with the requirements of Title III of the Americans With
Disabilities Act (42 U.S.C.A. (S)12101 et seq.) (the "ADA"); provided
Landlord has no obligation to have any common areas in the Building on
floors other than those on which the Leased Premises are located comply
until such floors are to be fully occupied by other lessees. If it is
determined that these representations and warranties are untrue, then it
shall be the obligation of Landlord, after written notice from Tenant, to
rectify any such violation promptly at no cost to Tenant. Landlord will
have the right to contest any law, statute, ordinance or governmental rule
or regulation with which it is obligated to comply by appropriate
proceedings diligently pursued in good faith, and, so long as neither
Tenant nor the Leased Premises, or Tenant's interest in the Leasehold are
subject to or threatened with any criminal liability, or civil liability
against which Landlord does not agree to indemnify it and so long as
Landlord's financial net worth is equal to at least three (3) times the
total amount of threatened liability, Landlord may defer compliance until
the resolution of its contest. Tenant will cooperate reasonably with
Landlord's contest at no cost to Tenant.
5.4 INSURANCE CANCELLATION. Tenant shall not do or permit anything to
----------------------
be done on or about the Leased Premises which may in any way cause
cancellation or increase the existing rate of any insurance policy covering
the Building or any of its contents or cause cancellation of any such
insurance policy. If any such action shall increase the rate of any such
policy, Tenant shall pay the amount of such increase, as additional rent.
5.5 LANDLORD'S RULES AND REGULATIONS. Tenant shall observe and comply
--------------------------------
with the Building rules and regulations which may be promulgated from time
to time and such reasonable amendments and additions thereto as Landlord
may from time to time promulgate on a non-discriminatory basis. Landlord
shall not be responsible to Tenant for the non-performance of said rules
and regulations by any other tenants of the Building. Landlord shall be
under a duty to enforce Landlord's rules and regulations in a uniform
manner.
6. OPERATING EXPENSES.
6.1 TENANT'S OBLIGATIONS. In addition to the Base Rent provided for
--------------------
hereinabove, Tenant shall pay to Landlord an amount for Operating Expenses
equal to the Tenant's Percentage Share (as set forth in paragraph H of the
Basic Lease Terms) multiplied by the Building Operating Expenses during any
calendar year during the term hereof calculated on an accrual basis. If the
commencement date of this Lease is other than the first day of a calendar
year, during the first and last calendar years of the Lease, Tenant will
pay a proportion of Operating Expenses based upon the number of days in
which the Lease was in effect, during such first and last calendar years of
the Lease.
6.2 DEFINITION OF OPERATING EXPENSES. Operating Expenses are intended
--------------------------------
to be inclusive of all reasonable, actual and necessary costs of operating
and maintaining the Building and the real property on which it is situated
in a first class manner. Landlord agrees to make reasonable efforts to
minimize costs insofar as such efforts are not inconsistent with Landlord's
intent to operate and maintain the Building in a first class manner.
Landlord reserves the right to meter separately any tenant that causes the
Landlord to incur above average or abnormal Operating Expenses and
Landlord, in good faith but in its sole discretion, shall determine what is
"above average" or "abnormal". Operating Expenses shall be directly
attributable to the operation, maintenance,
8
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management and repair of the Building and the real property on which it is
situated as determined under generally accepted accounting principles
("GAAP"), consistently applied, for the applicable period, except for any
specific deviations from GAAP set forth herein, for which the terms of this
Lease shall control. Operating Expenses shall include, but shall not be
limited, subject to the Operating Expense Exclusions under Article 6.3
herein, to the following:
6.2.1 TAXES AND OTHER GOVERNMENT OBLIGATIONS. All taxes,
--------------------------------------
assessments, water and sewer rents, and other governmental impositions
and charges whatsoever which may create a statutory lien upon the
Leased Premises or the Building, which are assessed, levied or imposed
during the term of this Lease, surcharges levied upon or assessed
against parking spaces or areas, and any tax, levy or license fee
measured by the rent payable by Tenant under this Lease which may be
in lieu of or in addition to current taxes (except Landlord's net
income taxes) or any obligation to any governmental entity assessed
upon Landlord as a result of its ownership operation or use of the
Building and all costs and expenses incurred by Landlord in contesting
or negotiating the same with governmental authority if Landlord, in
its reasonable discretion, elects to contest or negotiate the same.
Landlord shall cause any real estate taxes which may be evidenced by
improvement or other bonds or which may be paid in annual or other
periodic installments to be paid in installments over the maximum
period provided by law.
6.2.2 INSURANCE COSTS. All costs and expenses to Landlord in
---------------
maintaining the insurance, including the part of any claim required to
be paid under the deductible portion of any insurance policies carried
by Landlord in connection with the Building, as described under
Article 10.2 herein.
6.2.3 HEATING, VENTILATING & AIR CONDITIONING COSTS. All costs and
---------------------------------------------
expenses of repairing, including major replacements, the cost for
which shall be amortized over their projected useful life as
reasonably determined and calculated by Landlord; operating and
maintaining the heating, ventilating and air conditioning system for
the Building, including maintenance contracts therefor and the cost of
all utilities required in the operation of such systems, except those
required to be paid directly by tenants of the Building.
6.2.4 UTILITY & JANITORIAL COSTS. All costs and expenses to
--------------------------
Landlord in providing standard services and utilities to tenants of
the Building, including office janitorial services, window washing and
utilities not separately metered; together with the cost of
replacement of electric light bulbs and fluorescent tubes and
ballasts, which Landlord shall have the exclusive right to provide and
install. Tenant shall have the right but not the obligation to provide
its own janitorial service for the Leased Premises and in the event
Tenant elects to provide its own janitorial service, Tenant shall
provide Landlord written notice of its intent to provide its own
janitorial service, and Landlord shall notify Tenant in writing of the
date of expiration of Landlord's current janitorial contract, and
Tenant may commence providing its own janitorial service on the day
following such expiration, and Landlord shall not include janitorial
service costs in Tenant's Percentage Share of Operating Expenses for
the period Tenant provides it own janitorial service pursuant to the
terms hereunder.
6.2.5 COST OF PROFESSIONALS. Cost incurred for accountants,
---------------------
attorneys and other experts or other consultants to assist such
professionals in making the computations required hereunder and
rendering professional services.
6.2.6 OPERATIONS, MAINTENANCE & REPAIR. All costs and expenses
--------------------------------
incurred by Landlord in operating, managing, maintaining and repairing
the Building, including all sums expended in connection with the
Common Areas for general maintenance and repairs, resurfacing,
painting, restriping, cleaning, sweeping,
9
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janitorial and trash services, window washing, maintenance and repair
of elevators, stairways, curbs and Building signs, sprinkler systems,
planting and landscaping, lighting and other utilities, maintenance
and repair of any fire protection systems, automatic sprinkler
systems, lighting systems, storm drainage systems and any other
utility systems, costs of supplies, personnel to implement such
services and to police the Common Areas, rental and/or depreciation of
machinery and equipment used in such maintenance and services in
accordance with GAAP, security and fire protection services, trash
removal services, all costs and expenses pertaining to snow and ice
removal, security systems, utilities, roof repairs and replacements
with the cost of replacements being amortized over their useful life
as reasonably determined and calculated by Landlord, personal property
taxes, all labor costs for all full time management personnel,
including all payroll taxes and administrative overhead, and all labor
costs on an allocated, pro-rata basis for all management personnel to
the extent they are directly related on a part time basis with the
operation or the maintenance of the Property; reasonable and customary
fees for management of the Building but no more than five percent (5%)
of all Base Rent and Operating Expenses paid by all lessees of the
Building including Tenant, fees for required licenses and permits,
supplies and charges for professional management of the Building and
Common Areas. If Landlord performs such management, then overhead
costs equal to five percent (5%) of the total operating costs will be
included in Operating Expenses but in such event no fees payable to an
independent professional will so be included. Landlord, however, may
cause any or all of said services to be provided by an independent
contractor or contractors. Costs and expenses incurred by Landlord in
operating, managing and maintaining the Building which are incurred
exclusively for the benefit of specific tenants of the building will
be billed accordingly and will not be included within the Operating
Expenses.
6.2.7 REQUIREMENTS OF GOVERNMENT ENTITIES. Cost of capital
-----------------------------------
improvements, structural repairs or replacements made to the Building
in order to conform to changes subsequent to the Commencement Date of
this Lease in any applicable laws, ordinances, rules, regulations or
orders of any governmental or quasi-governmental authority having
jurisdiction over the Building or any such capital improvements,
structural repairs or replacements designed primarily to reduce
Operating Expenses. Expenditures for the foregoing shall be amortized
at a market rate of return over the useful life of such capital
improvement or structural repair or replacement as determined by
Landlord's accountants, in accordance with GAAP; provided that the
amortized amount of any cost-saving improvement shall be limited in
any year to the estimated reduction in Operating Expenses as a result
thereof.
6.3 OPERATING EXPENSE EXCLUSIONS. Operating Expenses shall specifically
-----------------------------
exclude the following:
i) Costs of any voluntary capital additions to the Building, except to the
extent they reduce operating costs; ii) Loan payments or interest, except
where specifically included in Article 6.2 above; iii) Refinancing costs;
iv) Ground rent under any ground lease or master lease; v) Depreciation or
amortization, except where specifically included in Article 6.2 above; vi)
Costs of remedying any building code violations; vii) Interest or penalties
resulting from delinquent payment by Landlord of any taxes, fees or
contract amounts; viii) Penalties or costs, including legal fees, arising
from Landlord's violation of laws or proven breach of contracts with third
parties; ix) Advertising costs, promotional fees, and leasing commissions;
x) Alterations or improvements to other tenants' space; xi) Costs for
services reimbursed by other tenants, unless such reimbursement constitutes
such other tenants' regular contribution to operating expenses of the
Building; xii) Costs of initial landscaping or construction of the
Building; xiii) Payment of salaries to any employees of the Landlord above
the level of manager of the Building; xiv) To the extent services are
performed or materials provided by entities related to the Landlord, all
amounts paid in excess of amounts which would otherwise be paid to
unrelated third parties for similar services performed to the same standard
of quantity and of quality; xv) Any bad debt loss, rent loss or reserves
for bad debt or rent loss; xvi) Costs, including legal fees, directly and
solely related to
10
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the creation, maintenance and operation of the entity or partnership which
constitutes the Landlord; xvii) The cost of any work for which Landlord is
reimbursed by insurance proceeds or for which Landlord is reimbursed by
reason of any warranty or guaranty; xviii) Initial hookup or connection
charges for water, sewer, and electrical utilities; xix) Initial
installation of any fire/life safety systems or equipment (including any
sales taxes or other taxes thereon); xx) Professional fees including
accounting and legal fees, and other costs incurred in the leasing of
space, or in connection with a dispute with or default of Tenant or another
tenant, or defense of Landlord's title or interest in the Building; xxi)
Consulting fees specifically related to ownership of the Building as
opposed to operation of the building; xxii) Initial paving and painting of
parking areas; xxiii) Cost of any space occupied by the property manager
and leasing agent; xxiv) Dues, fees, and contributions paid to civic or
political organizations and associations; xxv) Franchise fees or charges;
xxvi) Improvements made for other tenants or rent concessions made for
other tenants instead of improvements xxvii) Expenses incurred in removing
or storing an ex-tenant's property; xxviii) Rentals for items which, if
purchased rather than rented, would constitute a capital improvement or
equipment; xxix) Costs of services, utilities, or other benefits which are
not offered to Tenant or for which Tenant is charged for directly, but
which are provided to another tenant or occupant of the Property,
including, but not limited to, above Building standard heating, ventilation
and air-conditioning, janitorial services and exclusive use Common Areas;
xxx) Costs arising from the negligence, or intentional misconduct of
Landlord, its employees or its agents, or of any other tenant, or any
vendors, contractors, or providers of materials or services selected, hired
or engaged by Landlord or by Landlord's authorized agents; xxxi) Costs
arising from the presence or removal of Hazardous Materials as defined
herein, located in or about the Building; xxxii) Initial costs for
sculpture, paintings or other objects of art; xxxiii) The cost of
correcting latent defects in the design, construction or operating systems
of the Building; xxxiv) Reserves for capital items, including, but not
limited to, replacement reserves, and reserves for bad debts or lost rent
or any similar charge not involving the payment of money to third parties;
xxxv) Any costs associated with the purchase or rental of furniture,
fixtures, or equipment for any management, security, engineering, or other
offices associated with the building or for Landlord's office or the
offices of other landlords of the building; xxxvi) Any compensation paid to
clerks, attendants or other persons in commercial concessions operated by
Landlord in the Building or Property; xxxvii) The entertainment expenses
and travel expenses of Landlord, its employees, agents, partners and
affiliates; (xxxviii) any state, local, federal, personal or corporate
income tax measured by the income of Landlord; (xxxix) real estate taxes
resulting from overstandard improvements made by other tenants; (xxxx)
damage and repairs covered under any insurance policy, except for the cost
of any deductible, carried by, or required to be carried by, Landlord in
connection with the Building or Common Areas; (xxxxi) Landlord's general
overhead expenses not related to the Building; (xxxxii) costs incurred due
to violation by Landlord or any other tenant in the Building of the terms
and conditions of any lease; (xxxxiii) costs incurred in connection with
any portion of the Building which is used for parking and for which parking
fees are charged; and (xxxxiv) property management fees in excess of five
percent (5%) of Tenant's Base Rent and Operating Expenses. Landlord shall
not collect in excess of one hundred percent (100%) of Operating Expenses
or any item of cost more than once.
6.4 TIME OF PAYMENT. Tenant shall pay to Landlord in advance on the
---------------
first day of each calendar month during the term and any extensions hereof
one-twelfth (1/12) of Tenant's Percentage Share of the estimated annual
Operating Expenses. If the term of this Lease commences on a day other than
the first day of a calendar month, Tenant shall pay to Landlord on the
first day of the term a sum determined by multiplying one three hundred
sixty-fifth (1/365) of the Tenant's Percentage Share of the estimated
annual Operating Expenses by the number of days remaining in the first
calendar month of the term. Any change in the Tenant's Percentage Share
resulting from changes in any particular floor area during the term shall
be effective as of the first day of the month following the change.
6.5 RE-ESTIMATIONS. At anytime and from time to time during the term
--------------
hereof but no more than one (1) time in any six (6) month period, Landlord
may furnish Tenant with written notice of a re-estimation of the annual
Operating Expenses to reflect more accurately, in Landlord's reasonable
opinion, the current Operating Expenses. Commencing on the first day of the
calendar month next succeeding delivery of such notice to Tenant, and
continuing on the first day of each subsequent calendar month during the
term (until subsequently re-estimated), Tenant shall pay to Landlord one-
twelfth (1/12) of the Tenant's Percentage Share of the estimated annual
Operating Expenses, as re-estimated.
6.6 ANNUAL ADJUSTMENTS. After the commencement of each year during the
------------------
hereof
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Landlord shall furnish to Tenant an itemized statement, certified as
correct by Landlord, setting forth the total Operating Expenses for the
preceding calendar year, the amount of Tenant's Percentage Share of
Operating Expenses and the payments made by Tenant with respect to such
calendar year. If Tenant's Percentage Share of the actual Operating
Expenses for such year exceeds the payment so made by Tenant, Tenant shall
pay Landlord the deficiency within thirty (30) days after receipt of such
statement. If the payments so made by Tenant exceed Tenant's Percentage
Share of the actual Operating Expenses, Tenant shall be entitled to offset
the excess against the next payment(s) due to Landlord on account of
Operating Expenses (or, at the end of the term hereof, if Tenant is not in
default hereunder, Landlord shall refund the overage to Tenant). Until
Tenant receives a statement pursuant to Section 6.4 setting forth a new
amount of Tenant's estimated Percentage Share of Operating Expenses for the
new calendar year, Tenant shall continue to pay such Tenant's Percentage
Share at the rate being paid for the year just completed. Moreover, Tenant
shall pay to Landlord, or deduct from the rent, as the case may be, on the
date required for the payment of its Percentage Share of Operating Expenses
as adjusted, the difference, if any, between the monthly installments of
estimated Operating Expenses so adjusted for the new calendar year and the
monthly installments actually paid during each year since January 1st.
6.7 Audit Right: Notwithstanding any provision of this Lease to the
-----------
contrary, Tenant shall have the right during the applicable Review Period
(as defined below), after reasonable notice and at reasonable times, to
inspect and photocopy Landlord's accounting records at Landlord's office
where such accounting records are customarily maintained in the Denver
metropolitan area, or, at Landlord's option, at the Building. If, after
such inspection and photocopying, Tenant disputes Tenant's Share of
Operating Expenses for the preceding calendar year, Tenant shall be
entitled to retain an independent auditor who has substantial knowledge of
real estate matters to audit and review Landlord's records to determine the
proper amount of Tenant's Share of Operating Expenses. If such audit
alleges that Landlord has overcharged Tenant, then within five (5) days
after the results of such audit are made available to Landlord, Landlord
shall either reimburse Tenant the amount of such overcharge previously paid
by Tenant or provide Tenant with a detailed explanation of why Landlord
contests the results of such audit. Tenant agrees to pay all costs of such
audit, provided that, if Landlord's determination of Tenant's Share of
Operating Expenses was in error in Landlord's favor by more than three
percent (3%), Landlord shall pay the cost of such audit. Landlord shall be
required to maintain records of all Operating Expenses and other rent
adjustments for not less than one (1) year following Landlord's delivery to
Tenant of each statement setting forth Tenant's Share of Operating Expenses
(the "Review Period") for the preceding calendar year. The payment by
Tenant of any amounts pursuant to this Lease shall not preclude Tenant from
questioning at any time during the applicable Review Period the correctness
of any statement of a reconciliation of any Operating Expenses for any
preceding calendar year provided by Landlord, but the failure of Tenant to
object thereto and complete the audit thereof prior to the expiration of
the Review Period for such statement shall be conclusively deemed Tenant's
approval of such Statement. Tenant shall not be deemed to have objected to
any statement by Landlord unless Tenant gives such statement in writing,
signed by Tenant and the auditor, with a detailed analysis of every
objection, and an explanation of what Tenant proposes is a corrected
statement of Tenant's liability. Nothing herein shall preclude Tenant 's
liability from increasing if such audit reveals that Tenant has been
undercharged.
7. UTILITIES AND SERVICES.
7.1 UTILITIES PROVIDED. Landlord will cause to be made available to
------------------
Tenant upon the Leased Premises, facilities for the supply of domestic hot
(or tempered) and cold running water at general points of usage,
electricity and telephones on a twenty-four (24) hour seven (7) day per
week basis. Tenant agrees, at its own expense, to pay for all utilities
which are separately metered for the Leased Premises or which are billed
directly to Tenant from and after the delivery of possession thereof by
Landlord. If any such charges are not paid when due, Landlord may pay the
same, and any amount so paid by Landlord shall thereupon become due to
Landlord from Tenant as additional rent.
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7.2 ELECTRIC SERVICE. Landlord will cause to be made available to the
----------------
Leased Premises electric power for normal lighting and small office
equipment on a twenty-four (24) hour seven (7) day per week basis. Tenant
shall use the electricity supplied to the Leased Premises only for standard
lighting and standard office equipment. Tenant shall not make any
alteration to the Building electric system or connect high wattage
electrical equipment (including, without limitation, computer equipment)
without Landlord's prior written consent, which Landlord shall not
unreasonably withhold. Tenant shall pay, as additional rent, the cost of
modifications to the Building's electrical system necessitated by such
usage, the cost of separate metering, if required by Landlord, and the cost
of the additional electrical service provided to Tenant, unless billed
directly to Tenant by the utility company.
7.3 HEATING, VENTILATION AND AIR CONDITIONING OF SERVICE. Landlord shall
----------------------------------------------------
furnish to the Leased Premises and to the Building, heating and air
conditioning maintained at such temperatures as are established by custom
and practice for first-class office buildings in Colorado Springs, Colorado
during Normal Business Hours, provided however, Landlord's obligation
hereunder shall at all times be subject to compliance with applicable laws,
ordinances, rules and regulations established by governmental authority.
Tenant shall not make alterations or additions to the Leased Premises, or
install any equipment or machinery which would affect the heating and air
conditioning system of the Building, without Landlord's prior written
consent. Tenant shall pay the cost of all modifications, supplements or
additions required to such mechanical systems as a result of any
alteration, additions or installation requested by the Tenant.
7.4 NORMAL OPERATING HOURS AND EXTENDED HOURS. Normal Business Hours
-----------------------------------------
shall mean the hours of 7:30 a.m. to 6:00 p.m. Monday through Friday,
except during any Building Holidays which include New Year's Day, Easter,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas
Day. Landlord, upon Tenant's request, shall provide for services at times
other than Normal Business Hours, which additional hours shall be at
Tenant's expense provided at Landlord's actual cost without surcharge.
Landlord shall provide an access system to Tenant which will allow access
to the building 24 hours per day seven (7) days per week.
7.5 INTERRUPTION OF SERVICES. Landlord shall not be liable for any
------------------------
damage, loss or expense incurred by Tenant by reason of any interruption,
reduction (permanent or temporary) or failure of the utilities and
services, except when caused by the negligent acts or intentional
misconduct of Landlord. Landlord may, with notice to Tenant, or without
notice in case of emergency, cut off and discontinue services when such
discontinuance is necessary in order to make repairs or alterations and
Landlord shall diligently perform such repair or alterations. If the Leased
Premises are rendered unusable for their intended purpose as a result of
such failure, interruption or reduction for a continuous period of 72 hours
and Tenant does not occupy the Leased Premises as a result thereof, the
Base Rent shall thereafter abate until Tenant resumes occupancy of the
Leased Premises or services are restored, whichever first occurs. No
failure, interruption or reduction of services shall be construed as an
eviction or disturbance of possession by Landlord unless the interruption
or reduction continues for thirty (30) days in which case Tenant may
terminate this lease.
8. MAINTENANCE, REPAIRS AND ALTERATIONS.
8.1 LANDLORD'S OBLIGATIONS. Landlord, at Landlord's expense, shall
----------------------
maintain the structural integrity of the foundations, exterior roof and
exterior walls (excluding the interior surface of exterior wall and all
windows, doors and plate glass) of the Building, except that Tenant shall
bear the cost of all repairs to the Building (including the Leased Premises
and the apparatus contained therein) which become necessary by reason of
negligence or misuse by Tenant, its customers, invitees or employees, and
cost thereof shall be paid to Landlord on demand as additional rental.
Except for Tenant's obligations as provided in the following section,
Landlord shall make all other repairs, provide general maintenance and
furnish such janitorial services as Landlord deems reasonably necessary for
the operation of a first class office building, and the cost thereof shall
be included in the Operating Expenses. Landlord shall have no obligation to
commence any repair
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until a reasonable time after the receipt by Landlord of written notice of
the need for repairs or Landlord's actual knowledge that such repair is
required. Landlord shall be under a duty to act as quickly as it is
reasonably able, following written notice in the event of an emergency
repair.
8.2 TENANT'S OBLIGATIONS. Throughout the term of this Lease, Tenant shall
--------------------
exercise due care in the use and occupancy of the Leased Premises and the
Building and shall, at Tenant's expense, repair all damage thereto caused
by Tenant's use thereof. Tenant, at Tenant's expense, shall provide for all
special or additional maintenance services required by Tenant's special
uses of the Leased Premises. If Tenant fails to perform Tenant's
obligations under this section, Landlord may, without terminating this
Lease, enter upon the Leased Premises after three (3) days' prior written
notice to Tenant, and put the same in good order, condition and repair, and
the cost thereof shall be immediately due and payable as additional rent to
Landlord. Landlord shall have no liability to Tenant for any damage,
inconvenience or interference with the use of the Leased Premises by Tenant
as a result of performing any such repair and maintenance, except for
damage caused by the negligence of Landlord or it's employees. Tenant will
not bring into the Leased Premises or permit the placing within the Leased
Premises of equipment or property exceeding the floor loads of the
Building.
8.3 NOTIFICATION TO LANDLORD. Tenant agrees to notify promptly the
------------------------
Landlord or its representative of any accidents or defects in the Building
of which Tenant becomes aware, including defects in pipes, electric wring
and heating, ventilation and air conditioning equipment or condition which
may cause injury or damage to the Building or any person therein.
8.4 SURRENDER OF LEASED PREMISES. Upon the expiration or sooner
----------------------------
termination of the Lease Term, Tenant agrees to quit and surrender the
Leased Premises, broom-clean, in good condition and repair, ordinary wear
and tear excepted, together with all keys and combinations to locks, safes
and vaults and all improvements, alterations, additions, lighting fixtures
and equipment at any time made or installed in, upon or to the interior or
exterior of the leased Premises (except personal property, signs and trade
fixtures and equipment put in at Tenant's expense) all of which shall
thereupon become the property of Landlord without any claim by Tenant
therefor, but the surrender of such Property to Landlord shall not be
deemed to be a payment of rent or in lieu of any rent reserved hereunder.
Before surrendering the Leased Premises, Tenant shall remove all of
Tenant's personal property, signs and trade fixtures and equipment and, at
Landlord's option (subject to Article 9.1 below), Tenant shall also remove
any alterations, additions, fixtures, equipment and decorations at any time
made or installed by Tenant in, upon or to the interior or exterior of the
Leased Premises, and Tenant further agrees to repair any damage caused
thereby. If Tenant shall fail to remove any of Tenant's personal property
and trade fixtures, then at the option of Landlord, either the same shall
be deemed abandoned and become the exclusive property of Landlord, or
Landlord shall have the right to remove and store said property, at the
expense of Tenant, upon written notice to Tenant and hold Tenant
responsible for any and all charges and expense incurred by Tenant
therefor. If the Leased Premises are not surrendered upon termination of
this Lease, Tenant shall indemnify Landlord against all loss or liability
resulting from the delay by Tenant in so surrendering the same, including,
without limitation, any claims made by any succeeding occupant founded on
such delay. Tenant's obligations under this section shall survive the
expiration or sooner termination of the Lease Term.
9. ALTERATIONS AND ADDITIONS.
9.1 LANDLORD'S CONSENT REQUIRED. Tenant shall not make any alterations or
---------------------------
additions to the Leased Premises in excess (i) of $10,000.00, in any twelve
(12) month period, or (ii) which require the issuance of a building permit
of any type, or (iii) which affect the structure of the Building or any of
the electrical, mechanical, plumbing or other components located within the
Leased Premises, but which service other parts of the Building which are
not part of the Leased Premises, without first obtaining Landlord's written
consent. For those alterations and additions submitted by Tenant for
Landlord's approval, Landlord hereby agrees to notify Tenant, in writing,
at the same time that Landlord consents to the installation of such
alterations and additions to the Leased Premises by Tenant, whether or not
such alterations and additions must be removed from
14
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the Leased Premises by Tenant upon the expiration or earlier termination of
this Lease. Tenant shall cause all repairs or alterations, whether or not
approved by Landlord, to be done promptly and in a good and workmanlike
manner in accordance with the plans and specifications, which plans and
specifications must be submitted to Landlord at least fifteen (15) days
prior to the commencement of any alterations or additions, submitted to
Landlord and such rules and regulations as may be established by Landlord.
All work shall be performed in accordance with applicable building codes
and governmental regulations. Except as provided above, all work done and
material supplied shall be done or supplied only by contractors reasonably
approved by Landlord, and Landlord shall have the right to grant such
approval conditionally.
9.2 PAYMENT FOR WORK. All costs of any work performed by or at the
----------------
instance of Tenant shall be paid promptly by Tenant so as to avoid the
assertion of any mechanic's and/or materialmen's liens. Within thirty (30)
days after receipt of notice thereof, Tenant shall discharge, by bonding,
payment or other means reasonably acceptable to Landlord, any mechanic's
lien filed against the Leased Premises or the Building resulting from
material or labor furnished or performed at the instance or request of
Tenant. If the lien is not discharged within said thirty (30) days period,
Landlord shall have the right, but not the obligation, to discharge said
lien by payment, bonding or otherwise, and the costs and expenses to
Landlord of obtaining such discharge shall be paid to Landlord by Tenant on
demand as additional rent. Landlord shall have the right at any time and
from time to time to post and maintain on the Leased Premises and Building
such notices as Landlord deems necessary to protect the Leased Premises
against mechanic's liens.
9.3 SIGNAGE. See Exhibit "G".
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10. INSURANCE.
10.1 TENANT'S INSURANCE. Tenant shall, at its own cost, at all times
------------------
during the term of this Lease and any extensions hereof, procure and
maintain all risk insurance for hazard, fire and extended coverage on
Tenant's personal property and the contents of the Leased Premises in an
amount equal to full replacement cost thereof with a deductible of no more
than $1,000, workers' compensation and employers' liability insurance in
the minimum statutory amount and including a waiver of subrogation in favor
of the Landlord and Landlord's insuror (to the extent available), and
comprehensive general liability insurance on an occurrence basis, including
coverage for bodily injury, broad form property damage, personal injury
(employee and contractual liability exclusions deleted), products and
completed operations, contractual liability, owner's protective liability,
host liquor legal liability and cross liability with the following limits
of liability: One Million Dollars ($1,000,000.00) combined single limit for
each occurrence of bodily injury, property damage and personal injury; Two
Million Dollars ($2,000,000.00) aggregate for bodily injury and property
damage for products and completed operations. Tenant shall further, at its
own cost, at all times during the term of this Lease and any extensions
hereof, procure and maintain insurance for automobile liability including
coverage for bodily injury, property damage and personal injury for owned,
hired and non-owned autos with the following limits of liability: One
Million Dollars ($1,000,000.00) combined single limit for each occurrence
of bodily injury, property damage and personal injury. Tenant shall also
maintain business interruption insurance in an amount sufficient to
reimburse Tenant for direct and indirect loss of earnings attributable to
prevention of access to the Building or Leased Premises as a result of such
perils, and such other forms and amounts of insurance as Landlord or its
mortgagee may reasonably require from time to time provided that such
insurance is in general conformance with commercially reasonable forms and
amounts of insurance carried by prudent and reasonable landlords of
comparable properties in the Colorado Springs area. All such insurance
shall be procured from a responsible insurance company or companies
authorized to do business in the State where the Leased Premises are
located, with general policyholder's ratings of not less than "A-" and a
financial rating of not less than "XI" in the most current available Best's
Insurance Reports, and shall be otherwise reasonably satisfactory to
Landlord. All such policies shall name Landlord and Landlord's property
management agent as additional insureds, and shall provide that the same
(to the extent applicable to the Leased Premises and the Building) may not
be canceled or altered except upon thirty (30) days prior written notice to
Landlord. All insurance maintained by Tenant shall be primary to any
insurance provided by Landlord. Tenant shall provide certificate(s) of such
insurance to Landlord prior to occupancy of the Leased Premises and
commencement of the Lease
15
<PAGE>
term and at least thirty (30) days prior to the annual renewal date thereof
and upon request from time to time, if required for a legitimate business
purpose related to Landlord's operation of the Building, and such
certificate(s) shall disclose that such insurance names Landlord and
Landlord's designated property management agent as an additional insured,
in addition to the other requirements set forth herein. The limits of such
insurance shall not, under any circumstances, limit the liability of Tenant
hereunder.
Should Tenant fail to procure such insurance within the time period
hereinbefore specified, Landlord may, at its option, but Landlord shall
have no obligation to do so, procure such insurance and pay the premiums
therefor and Tenant agrees to reimburse Landlord for the cost thereof plus
interest thereon at the rate of eighteen percent (18%) per annum (but in no
event in excess of the maximum rate permitted under law), as Additional
Rent on the first day of the calendar month following the rendition of the
bill or bills therefor and Landlord shall have the same rights and remedies
in enforcing the payment of such additional rent as in the case of Tenant's
failure to pay the rent herein reserved.
10.2 LANDLORD'S INSURANCE. Landlord agrees to carry and maintain the
--------------------
following insurance during the term of this Lease and any extension hereof:
all risk property insurance for fire, hazard and extended coverage with
respect to the Building and the Common Areas; and general public liability
insurance against claims for personal injury, including death and property
damage in or about the Leased Premises and the Building (excluding Tenant's
Property), such insurance to be in an amount not less than One Million
Dollars ($1,000,000.00) combined single limit; Two Million Dollars
($2,000,000.00) aggregate for bodily injury and property damage. Such
insurance may expressly exclude property paid for by tenants or paid for by
Landlord for which tenants have reimbursed Landlord located in, or
constituting a part of the Building. Such insurance shall afford coverage
for damages to the Building and leasehold improvements (to the extent of
the cost thereof was paid by Landlord) in amounts of not less than one
hundred percent (100%) of the replacement value (exclusive of foundations
and improvements which Tenant is required to insure) resulting from (a)
fire, (b) perils covered by extended coverage insurance, and (c) explosion
of steam and pressure boilers and similar apparatus located in the
Building. Landlord may carry such other additional insurance coverage as
Landlord or Landlord's mortgagee deems appropriate, including coverage for
loss of rents. All such insurance shall be procured from a responsible
insurance company, or companies, authorized to do business in the State
where the Leased Premises are located, with general policyholder's ratings
of not less than "A-" and a financial rating of not less than "XI" in the
most current available Best's Insurance Reports. Tenant shall pay its
Percentage Share of the cost of such insurance as part of the Operating
Expenses. Tenant shall have no right to any portion of the proceeds of any
insurance carried by Landlord.
10.3 WAIVER OF SUBROGATION. Each party agrees to include in each of its
---------------------
policies insuring against loss, damage or destruction by fire or other
casualty, a waiver of the insurer's right of subrogation against the other
party, or if such waiver is unobtainable or unenforceable (i) an express
agreement that such policy shall not be invalidated if the insured, prior
to the casualty, waives the right of recovery against any party responsible
for a casualty covered by the policy; or (ii) any other form of permission
for the release of the other party. Each party hereby releases the other
party with respect to any claim (including a claim of negligence) which it
might otherwise have against the other party for loss, damage or
destruction with respect to its property (including the Premises, Building
and rental value or business interruption) occurring during the term of the
Lease to the extent to which it is insurable under any policy or policies
required to be carried under this Lease (which are required to contain a
waiver of subrogation or permission to release liability) and for which the
applicable party actually receives the proceeds from the applicable
insurer.
11. INDEMNITY.
11.1 INDEMNIFICATION OF LANDLORD. Tenant shall, and hereby does,
---------------------------
indemnify and hold Landlord harmless from and against any and all losses,
claims and damages arising from Tenant's use of the Leased Premises
exclusive of Common Area or the conduct of its business or from any act or
omission by Tenant to act, activity, work or thing done, permitted or
suffered by Tenant in or about the Leased Premises, and shall further
indemnify and hold Landlord harmless from and against any and all claims
arising from any breach or default in the performance by Tenant of any
obligation of Tenant to be performed under the terms of this Lease, or
arising from any
16
<PAGE>
act or negligence of Tenant or any of its agents, licensees or contractors
or employees, and from and against all costs, attorney's fees, expenses and
liabilities incurred in connection therewith (except to the extent that an
agent, licensee or contractor or their insurance carrier covers such loss,
claim or damage). In case any action or proceeding is brought against
Landlord by reason of any such claim, Tenant, upon notice from Landlord,
shall defend the same at Tenant's expense by counsel reasonably
satisfactory to Landlord. Tenant, as a material part of the consideration
to Landlord, hereby assumes all risks of damage to property or injury to
person in, upon or about the Leased Premises except to the extent such
damage to property or injury to person is caused by the act or omission of
Landlord, its agents, employees or contractors. The indemnity shall also
apply during Tenant's occupancy of the Leased Premises prior to the
commencement of the Leased Term.
11.2 INDEMNIFICATION OF TENANT. Landlord shall indemnify and hold harmless
--------------------------
Tenant against and from any and all claims arising from Landlord's use of
the Building from any activity, work or other thing done, permitted or
suffered by the Landlord in or about the Building, except for any loss or
claim caused by the acts or omissions of any other tenants in the Building,
and Landlord shall further indemnify and hold harmless Tenant against and
from any and all claims arising from any breach or default in the
performance of any obligation on Landlord's part to be performed under the
terms of this Lease, or arising from any act or negligence of the Landlord,
or any officer, employee, agent or licensee or contractor of the Landlord
(except for any acts, loss or damage caused by other tenants in the
Building and except to the extent that an agent, licensee or contractor or
their insurance carrier covers such loss, claim or damage), and from all
and against all cost, attorneys' fees, expenses and liabilities incurred in
or about any such claim or any action or proceeding brought thereon, and,
in any case, action or proceeding brought against Tenant by reason of any
such claim. Landlord upon notice from Tenant shall defend the same at
Landlord's expense by counsel reasonably satisfactory to Tenant. Landlord,
as a material part of the consideration to the Tenant, hereby assumes all
risk of damages to property or injury to person, in, upon or about the
Building, from any cause other than Tenant's act, omission, negligence or
willful misconduct, and Landlord hereby waives all claims in respect
thereof against Tenant.
11.3 LANDLORD'S LIABILITY. Landlord shall not be liable for injury or
--------------------
damage which may be sustained by the person, goods, wares, merchandise or
property of Tenant, its employees, invitees or customers, or any other
person in or about the Leased Premises caused by or resulting from theft,
or fire, or from steam, electricity, gas or water, which may leak, or flow
from or into any part of the leased Premises, or from the breakage,
leakage, obstruction or other defects of the pipes, sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures of the same,
except to the extent caused by the negligence or wilful misconduct of
Landlord or its employees. All of Tenant's property shall be kept, stored
and maintained at the sole risk of Tenant. Landlord shall not be liable for
any damages arising from any act or neglect of any tenant of the Building,
except to the extent such damages are the result of Landlord's failure to
enforce Landlord's rules and regulations in a uniform manner. Except as to
the limitations of liabilities set forth above, Landlord indemnifies Tenant
for all other liability, loss or damage solely and proximately caused by
Landlord's acts.
11.4 AMERICANS WITH DISABILITIES ACT ("ADA"). Except for any claims which
---------------------------------------
result from Landlord's acts or omissions in the construction of the Base
Building described in Exhibit B attached hereto, Landlord, its agents and
employees shall not be liable, and Tenant hereby waives its rights, if any,
to claim for any damage or loss as a result of any failure of the Building
to comply strictly with the ADA as it applies to the Building. Except for
any claims which result from Landlord's acts or omissions in the
preparation of the Tenant Finish Work described in Exhibit B attached
hereto, Tenant hereby agrees to save, hold harmless and defend Landlord
against any claims, suits or liabilities made against the Landlord by any
of Tenant's existing or prospective clients, employees, agents, servants or
invitees as a result of or in connection with any non-compliance of the
Premises with the ADA. In the event any failure of the Building to comply
with the ADA, and if such failure substantially interferes with the
operation of Tenant's business in the Premises, Tenant's sole remedy shall
be for termination of this Lease, provided that Tenant shall have no claim
for termination of this Lease based on the non-compliance with
17
<PAGE>
the ADA by the Building unless Tenant promptly gives notice of any such
non-compliance and allows Landlord a reasonable time to correct any such
non-compliance. If Tenant properly terminates this lease under this
paragraph and vacates the property within sixty (60) days thereafter,
Tenant shall not be penalized and shall have no further obligations for
payment of rent and other charges after Tenant has vacated the Premises. No
notice or termination under this paragraph shall be effective unless (i) it
is given by Tenant within sixty (60) days after Tenant determines that
Landlord is not willing or refuses to remedy any alleged failure of the
Building to comply with the ADA and (ii) it specifies the date on which
Tenant shall vacate the Premises.
12. CASUALTY AND RECONSTRUCTION. If the Leased Premises or the Building are
damaged by fire or other insured casualty, Landlord will give Tenant notice of
the time which will be needed to repair such damage, as reasonably determined by
Landlord's licensed architect or engineer ("Landlord's Architect"), and the
election (if any) which Landlord has made according to this Paragraph. Such
notice will be given no later than the thirtieth (30th) day (the "Notice Date")
after the fire or other insured casualty.
12.1 SHORT-TERM REPAIRS. If the Leased Premises or the Building are
------------------
damaged by fire or other insured casualty to an extent which may be
repaired within one hundred and eighty (180) days after the date of the
casualty (the "Casualty Date"), as determined by Landlord's Architect,
Landlord will proceed with due diligence to promptly repair the damage. In
that event this Lease will continue in full force and effect except that
Base Rent and Operating Expenses will be abated from the Casualty Date
until the date of the substantial completion of such repairs (the "Repair
Period") in proportion to the rentable square footage of the Premises which
Tenant is unable to use for the conduct of its normal business operations
during the Repair Period.
12.2 LONG-TERM REPAIRS. If the Leased Premises or the Building are
-----------------
damaged by fire or other insured casualty to an extent which may not be
repaired within one hundred eighty (180) days after the date of such fire
or other insured casualty (the "Casualty Date"), as determined by
Landlord's Architect, then (i) Landlord may cancel this Lease as of the
Casualty Date by written notice given to Tenant on or before the Notice
Date, or (ii) Tenant may cancel this Lease as of the date of such damage by
written notice given to Landlord within ten (10) days after Landlord's
delivery of a notice that the repairs cannot be made within one hundred
eighty (180) days following the Casualty Date. If neither Landlord nor
Tenant so elects to cancel this Lease, Landlord will proceed with due
diligence to promptly repair the Building and Leased Premises, and Base
Rent will be abated during the Repair Period in proportion to the rentable
square footage of the Premises which Tenant is unable to use for the
conduct of its normal business operations during the Repair Period.
12.3 CASUALTY IN LAST YEAR OF LEASE. Any other provisions of this Lease
------------------------------
to the contrary notwithstanding, Landlord shall have no obligation to
rebuild the Leased Premises or the Building, and Tenant shall have the
right to terminate this Lease as of the Casualty Date, if the casualty
occurs within the final twelve (12) months of the term of this Lease,
unless Tenant agrees to exercise any option it then has to extend this
Lease, or the parties otherwise agree to an extension or renewal hereof.
13. TENANT TAXES.
13.1 PERSONAL PROPERTY. Tenant shall pay prior to delinquency all taxes,
-----------------
assessments, license fees and public charges levied, assessed or imposed
upon or measured by the value of its business operation, including but not
limited to the furniture, fixtures, leasehold improvements, equipment and
other property of Tenant at any time situated upon or installed in the
Leased Premises by Tenant. Tenant shall cause all such personal property to
be assessed and billed separately from the real property of Landlord.
13.2 INCREASE IN TAXES. If at any time during the term of this Lease any
-----------------
of Tenant's property is assessed as a part of the Leased Premises, or if
the assessed value of the Landlord's property is increased by the inclusion
therein of a value place on Tenant's property, Tenant shall pay to Landlord
upon demand, as additional rent, the amount of any such additional taxes as
may be levied against the Building by reason thereof.
14. COMMON AREAS.
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14.1 DEFINITION. The term "Common Areas" means all areas and facilities
----------
outside the Leased Premises that are provided and designated for the common
use and convenience of Tenant and other tenants of the Building, their
respective officers, agents, employees, customers and invitees. Common
Areas include, but are not limited to, corridors, lobbies, pedestrian
sidewalks, stairways, landscaped areas, drinking fountains and rest rooms
on multi-tenant floors, elevators and shipping and receiving areas of the
Building, parking areas, private streets and lighting or utilities.
14.2 MAINTENANCE. Landlord will maintain, operate and repair (or cause
-----------
others to do so) all of the Common Areas and keep the same in clean and
sightly condition, including snow removal, in accordance with customary
practices for first class commercial office buildings in the Colorado
Springs area, during the term of this Lease; the cost for which is included
within Operating Expenses. Landlord shall have the right to adopt and
promulgate reasonable rules and regulations from time to time concerning
the Common Area generally applicable to tenants and occupants of parking
areas, if any, designated exclusively for customers of the Building. For
the purpose of maintenance and repair, or to avoid involuntary taking or to
prevent the public from obtaining prescriptive rights, Landlord may
temporarily close portions of the Common Areas, and such actions shall not
be deemed an eviction of Tenant or a disturbance of Tenant's use of the
Leased Premises.
14.3 TENANT'S RIGHTS AND OBLIGATIONS. Landlord grants to Tenant, during
-------------------------------
the term of this Lease, the nonexclusive right and license to use, for the
benefit of Tenant and its officers, agents, employees, customers and
invitees, in common with others entitled to such use, the Common Areas as
they from time to time exist, subject to the rights and privileges of
Landlord reserved herein. Tenant shall not at any time interfere with the
rights of Landlord and others entitled to use any part of the Common Areas,
and shall not store, permanently or temporarily, any materials, supplies or
equipment in the Common Areas.
14.4 CHANGES TO COMMON AREAS. Landlord shall have the right at any time
-----------------------
during the term to change the location of entrances to the Building and
change, alter, remodel, reduce or improve the Common Areas, elevators,
drains, pipes, heating and air conditioning apparatus or any other part of
the Building except the Leased Premises without compensation to Tenant,
provided Landlord does not change or alter the Common Areas in a manner
which materially or unreasonably interferes with Tenant's Use of the Leased
Premises. For such purposes, Landlord may, if necessary, enter, pass
through and work upon the Leased Premises, provided that Landlord shall
carry out such work diligently and reasonably, and provided Landlord
notifies Tenant of such entry or work, in writing, at least twenty-four
hours in advance, except in the case of emergency for which no advance
notice shall be required.
15. ASSIGNMENT AND SUBLETTING.
Tenant shall neither voluntarily nor by operation of law, assign, transfer,
mortgage, pledge, hypothecate or encumber this Lease or any interest
therein, and shall not sublet the Leased Premises or any part thereof, or
any right or privilege appurtenant thereto, or suffer any other person (the
employees, agents, servants and invitees of Tenant excepted) to occupy or
use the Leased Premises, or any portion thereof, without the written
consent of Landlord first had and obtained, which consent shall not be
unreasonably withheld or delayed and shall be deemed given if Landlord does
not respond to Tenant's request for consent within fifteen (15) days after
the written request is received. Any request by Tenant shall be in writing
with complete and accurate details of the proposed assignment or sublease,
including, without limitation, the proposed use by such assignee or
sublessee, current financial statements (balance and income sheets),
certified by one or more owners of the proposed assignee or sublessee and
prepared or approved by a certified public accountant as being true and
complete, and prepared in accordance with generally accepted accounting
principles. Any objection to any proposed assignment or subletting may
include or be based on an allegation that the Tenant has provided
insufficient or incomplete information regarding the proposed transaction
or parties. A consent to one assignment, subletting, occupation or use by
any other person shall not be deemed to be a consent to any subsequent
assignment, subletting, occupation or use by another person. Any such
assignment or subletting without such consent, at the option of the
Landlord, shall be void, and constitute a default under this Lease.
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If any amounts payable by an assignee (including, without limitation, any
consideration for the assignment of the Lease) or subtenant with respect to
its occupancy of the Leased Premises are in excess of the amounts payable
by Tenant to Landlord hereunder, said excess amounts (after first deducting
from such excess amounts all Tenant's actual out of pocket costs to third
parties for such subleasing or assignment, such as Tenant Improvements,
lease commissions, attorneys fees, free rent and advertising), shall be
equally divided between the original Tenant and the Landlord. In the event
of an assignment, if the excess is paid as a lump sum, then all such costs
shall be deducted before it is divided; and if the excess is paid over a
term, such costs shall be amortized over that term and deducted from the
payments received. In the event of a sublease, all such amounts due to the
Landlord shall constitute Additional Rent due on the same day such excess
rent or other charges are due by such Sublessee or Assignee. Tenant shall
not permit any subtenant to make any Alterations without the advance
written consent of Landlord. If Tenant requests an approval by Landlord for
any assignment or subletting, Tenant agrees to pay all reasonable costs and
fees incurred by Landlord in connection with any such proposed assignment
or subletting, regardless of whether such assignment or subletting is
eventually consummated; provided that no such costs or fees shall exceed
One Thousand and 00/100 Dollars ($1,000.00) for each proposed assignment or
subletting.
Except as set forth in this sentence, Tenant shall have no claim, and
hereby waives the right to any claim, against Landlord for money damages by
reason of any refusal, withholding or delay by Landlord of any consent or
approval to any proposed assignment or subletting, and, in such event,
Tenant's sole remedy for any such refusal, withholding or delay shall be an
action for specific performance or injunction; provided that Tenant shall
also have a claim for damages if, after Tenant has filed a lawsuit for
specific performance or injunctive relief, but prior to the court's
determination of Tenant's request for specific performance and/or
injunctive relief, the proposed assignee or sublessee refuses to complete
the assignment or subletting, unless the primary reason for such refusal to
complete the transaction is not the delay caused by waiting for the court's
determination; and provided further that until there has been a
determination by a court of competent jurisdiction regarding Tenant's
request for specific performance, injunction or damages, Tenant shall have
no right to withhold the payment of any Base Rent, Additional Rent or other
charges payable by Tenant hereunder, or to claim any setoff against same on
account of this paragraph 15, and Tenant hereby consents that Landlord is
entitled to have Tenant's obligation (to continue to pay Base Rent and
other charges until a determination on Tenant's claim for specific
performance, injunction or damages) enforced by injunctive relief. The
Tenant agrees that Landlord's withholding of consent to any proposed
assignment or subletting shall be deemed to be reasonable if, in addition
to any other reasonable factors used by Landlord in its evaluation, (i) any
existing guarantor, surety or assignor fails to agree in writing to
continue to remain liable for the entire term of the Lease after such
assignment and/or subletting, (ii) the proposed assignee or sublessee is
not, in Landlord's reasonable determination, financially capable of
complying with this Lease, or the portion thereof subject to such
assignment and/or subletting, according to its terms, (iii) the proposed
assignee or sublessee will use the Leased Premises for a purpose other than
as allowed under Article 5 above or (iv) the proposed assignee or sublessee
will use the Leased Premises for a purpose which violates the exclusive
rights granted by Landlord to any other lessee in the Building prior to
such assignment or subletting.
So long as the proposed assignee or sublessee and such assignment or
subletting do not violate the terms of (i), (iii) or (iv) of the preceding
sentence, Landlord hereby consents to any assignment or subletting of this
Lease or any interest therein to any Affiliate of Tenant (as defined
below), so long as Tenant gives detailed written notice of such assignment
or subletting to Landlord at least thirty (30) days prior to the effective
date of any such assignment or subletting, and so long as such Affiliate
executes any and all documents reasonably required to bind such Affiliate
to the terms of this Lease, to the extent applicable to the portion of the
Lease which is being assigned to or sublet by such Affiliate. A person
shall be deemed to be an Affiliate of Tenant if (i) Tenant owns at least
eighty percent (80%) of all issued and outstanding stock or other ownership
interest in such person, such person owns at least eighty percent (80%) of
the issued and outstanding stock or other ownership interest in Tenant or a
third person owns at least eighty percent (80%) of the stock or other
ownership interest in both the Tenant and the other person who is the
proposed assignee or sublessee, or the person is an entity into which
Tenant is merged or entity with which
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Tenant is consolidated, or entity that purchases all or substantially all
of Tenant's assets; and (ii) there exists no plan or intent by Tenant or
the Affiliate or Affiliate's parent company, at the time of the assignment
or subletting, to reduce the percentage of ownership below the amount
required under this paragraph.
No such assignment or subletting shall release Tenant from any of the
obligations to accrue under this Lease, whether before or after the date of
any such assignment or subletting. If this Lease grants to Tenant any
option to renew or extend this Lease, no assignee or sublessee, regardless
of whether approved by Landlord, shall be entitled to exercise such option
unless the document evidencing Landlord's approval expressly so provides.
All assignments of this Lease shall be on the Assignment form attached
hereto as Exhibit I; provided that any assignment documents for an
assignment shall further provide that, in the absence of an agreement
between the parties to the contrary, the assignor shall not be liable for
any increase in any Base Rental or other charges hereunder caused by any
modification, extension or renewal of this Lease entered into by such
assignee after the date of such assignment without the assignor's prior
written consent; provided that (i) no such post-assignment modification,
extension or renewal shall operate as a release of such assignor, and such
assignor shall continue to remain liable for all rent and other charges
under this Lease but such liability shall be limited to the amount which
would have been due absent such post-assignment modification, extension or
renewal, and (ii) nothing in this sentence shall operate to prevent
Landlord from requiring, as part of Landlord's reasonable consent, that
such assignor remain liable for any such post-assignment modifications,
extensions and renewals for which assignor has provided its prior written
consent if the proposed assignee is not, in Landlord's reasonable
determination, financially capable of complying with this Lease, or the
portion thereof subject to such assignment, according to its terms.
No assignee or sublessee of less than all of the Leased Premises shall be
entitled to Tenant's signage rights under EXHIBIT G attached hereto. So
long as all assignees and sublessees are Affiliates of Tenant, no
assignment or subletting shall change or reduce Tenant's signage rights.
16. TENANT'S DEFAULT.
16.1 DEFAULT. If a default shall be made in the payment of any sum to be
-------
paid by Tenant under this Lease, and such default shall continue for three
(3) business days following Tenant's receipt of a statement or written
notice of non-payment then such default in payment shall be a Tenant
default under this Lease. If a default shall be made in the performance of
any of the other covenants or conditions which Tenant is required to
observe and to perform and such default shall continue for thirty (30) days
after Landlord's written notice of such default due to nonperformance, or
if the interest of Tenant under this Lease shall be levied upon under
execution or other legal process, or if any petition shall be filed by or
against Tenant to declare Tenant a debtor under the Federal Bankruptcy
Code, for the reorganization or rehabilitation of Tenant or to delay,
reduce or modify Tenant's debts or obligations, or if any petition shall be
filed or other action taken to reorganize or modify Tenant's capital
structure if Tenant is a corporation or other entity, or if Tenant be
declared insolvent according to law, or if any assignment of Tenant's
property shall be made for the benefit of creditors, or if a receiver or
trustee is appointed for Tenant or Tenant's property, or if Tenant fails to
take possession of the Leased Premises on the commencement date of the term
of this Lease or thereafter fails to occupy and conduct its business on the
Leased Premises on a substantially continuous basis, then Landlord may
treat the occurrence of any one or more of the foregoing events as a
default under this Lease (provided that no such levy, execution, legal
process or petition filed against Tenant shall constitute a default under
this Lease if Tenant shall diligently contest the same by appropriate
proceedings and shall remove or vacate the same within twenty (20) days
from the date of its creation, service or filing.)
16.2 REMEDIES. In the event of a default under this Lease by Tenant,
--------
Landlord shall have all of the following remedies, in addition to all
rights and remedies provided at law or in equity:
16.2.1 TERMINATION OF LEASE. Landlord may terminate this Lease and
--------------------
forthwith repossess the Leased Premises and be entitled to recover as
damages a sum of money equal to the total of (i) the cost of
recovering the Leased Premises, including Landlord's
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attorneys' fees; (ii) the unpaid Base Rent and additional rent earned
at the time of termination, plus interest thereon at the rate of
twelve percent (12%) per annum from the due date; (iii) the balance of
the Base Rent for the remainder of the Lease Term less the reasonable
rental value if relet under the terms of this Lease; (iv) damages for
the wrongful withholding of the Leased Premises by Tenant; and (v) any
other sum of money and damages owed by Tenant to Landlord.
16.2.2 REPOSSESSION WITHOUT TERMINATION. Landlord may retake
--------------------------------
possession of the Leased Premises and shall have the right but not the
obligation, without being deemed to have accepted a surrender thereof,
and without terminating this Lease, to relet the same for the
remainder of the term provided for herein upon terms and conditions
satisfactory to Landlord; and if the rent received through such
reletting does not at least equal the Base Tent and additional rent
provided for herein, then Tenant shall pay and satisfy any deficiency
between the amount of the rent so provided for and that received
through reletting (and, to the extent any such rent or other charges
would have accrued after the date of the award, all such future sums
shall be discounted to present value by using a discount factor equal
to the rate on Treasury Bills offered at the time of the computation
with a maturity date as close to the Termination Date as possible),
and, in addition, Tenant shall pay all reasonable expenses incurred in
connection with any such reletting, including, but not limited to, the
cost of renovating, altering and decorating for an occupant and
leasing commissions paid to any real estate broker or agent and
attorneys' fees incurred. The foregoing notwithstanding, Landlord
shall be under a duty to act reasonably in the mitigation of its
damages herein; however, Landlord shall be under no duty to refrain
from the showing or letting of other space in the Building.
16.3 LATE CHARGES. Tenant hereby acknowledges that the timely payment of
------------
rent is of the essence and that late payment by Tenant to Landlord of rent
and other sums due hereunder will cause Landlord to incur costs not
contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges and late charges which may be imposed on
Landlord by the terms of any mortgage or trust deed covering the Leased
Premises. Accordingly, if any rent or other sum due from Tenant shall not
be received by Landlord or Landlord's designee within five (5) days after
the said amount is due, Tenant shall pay to Landlord a late charge, equal
to five percent (5%) of such overdue amount. The parties hereby agree that
such late charge represents a fair and reasonable estimate of the cost
Landlord will incur by reason of late payment by Tenant. No more than one
(1) time in a given twelve (12) month period under this Lease, Landlord
will waive collection of a late charge and interest on one (1) late payment
so long as (i) such late payment is no more than ten (10) days past due;
(ii) at no time since the Commencement Date has there been more than one
event of default in any twelve (12) month period under this Lease; and
every event of default based upon a monetary obligation of Tenant has been
cured within five (5) days after the event of default occurred. Acceptance
of such late charge by Landlord shall in no event constitute a waiver of
Tenant's default with respect to such overdue amount nor prevent Landlord
from exercising any of the other rights and remedies granted hereunder.
16.4 CUMULATIVE REMEDIES. Suit or suits for the recovery of the rents
-------------------
and other amounts and damages set forth hereinabove may be brought by
Landlord, from time to time, at Landlord's election and nothing herein
shall be deemed to require Landlord to await the date on which this lease
or the term hereof would have expired by limitation had there been no such
default by Tenant, or no such termination, as the case may be. Each right
and remedy provided for in this Lease shall be cumulative and shall be in
addition to every other right or remedy provided for in this Lease or
hereafter existing at law or in equity or by stature or otherwise including
but not limited to suits for injunctive relief and specific performance.
The exercise or beginning of the exercise by Landlord of any one or more of
the rights or remedies provided for in this Lease or now or hereafter
existing at law or in equity or by statute or otherwise shall not preclude
the simultaneous or later exercise by Landlord of any or all other rights
or remedies provided for in this Lease or now or hereafter existing at
law or in equity or by statute or otherwise. All such
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rights and remedies shall be considered cumulative and nonexclusive. All
costs incurred by Landlord in connection with collecting any rent or other
amounts and damages owing by Tenant pursuant to the provisions of this
Lease, or to enforce any provision of this Lease, including reasonable
attorney's fees from the date such matter is turned over to any attorney,
whether or not one or more actions are commenced by Landlord, shall also be
recoverable as damages by Landlord from Tenant.
16.5 NO WAIVER. No failure by Landlord is insist upon the strict
---------
performance of any agreement, term, covenant or condition hereof or to
exercise any right or remedy consequent upon a breach thereof, and no
acceptance of full or partial rent during the continuance of any such
breach, shall constitute a waiver of any such breach or of such agreement,
term, covenant or condition. No agreement, term, covenant or condition
hereof to be performed or complied with by Tenant, and no breach thereof,
shall be waived, altered or modified except by written instrument executed
by Landlord. No waiver of any branch shall affect or alter this Lease, but
each and every agreement, term, covenant and condition hereof shall
continue in full force and effect with respect to any other then existing
or subsequent breach thereof. Notwithstanding any termination of this
Lease, the same shall continue in force and effect as to any provisions
which require observance or performance by Landlord or Tenant subsequent to
such termination.
16.6 BANKRUPTCY. Nothing contained in this Article 16 shall limit or
----------
prejudice the right of Landlord to prove and obtain as liquidated damages
in any bankruptcy, insolvency, receivership, reorganization or dissolution
proceeding, an amount equal to the maximum allowed by any statute or rule
of law governing such a proceeding and in effect at the time when such
damages are to be proved, whether or not such amount be greater, equal to
or less than the amounts recoverable, either as damages or rent, referred
to in any of the preceding provisions of this paragraph.
17. LANDLORD'S DEFAULT.
17.1 NOTICE OF LANDLORD. Landlord shall in no event be charged with
------------------
default in the performance of any of its obligations hereunder unless and
until Landlord shall have failed to perform such obligation within fifteen
(15) days (or within such additional time as is reasonably required to
correct any such default if, within such 15-day period Landlord begins to
perform and diligently prosecutors its performance continuously thereafter)
after receipt of written notice to Landlord by Tenant properly specifying
wherein Landlord has failed to perform any such obligations.
17.2 NOTICE TO MORTGAGEE. If the holder of record of any mortgage
-------------------
covering the Leased Premises shall have given prior notice to Tenant that
it is the holder of a mortgage and such notice includes the address at
which notices to such mortgagee are to be sent, then Tenant shall give
notice to the holder of record of such mortgages simultaneously with any
notice given to Landlord to correct any default of Landlord as hereinabove
provided. The holder of record of any such mortgage shall have the right,
within thirty (30) days after receipt or said notice, to correct or remedy
such default before Tenant may take any action under this Lease by reason
of such default. Any notice of default given Landlord shall be null and
void unless simultaneous notice has been given to all mortgagees whose
addresses have theretofore been given to Tenant.
17.3 LIMITATION OF LANDLORD'S LIABILITY. Anything in this Lease to the
----------------------------------
contrary notwithstanding, Tenant agrees that it will look solely to the
estate and property of Landlord in the Building and underlying land for the
collection of any judgment requiring the payment of money by Landlord in
the event of any default or breach by Landlord with respect to the terms of
this Lease; and no other assets of Landlord or any partner of Landlord
shall be subject to levy, execution or other procedures for the
satisfaction of Tenant's remedies. This Lease is executed by an officer
and/or trustee of Integrated Property Management, Inc. in his/her capacity
as such officer and/or trustee. By execution of this Lease, the Tenant
agrees that any legal recourse or resort that Tenant has shall be limited
solely to the Building and underlying land and no shareholder, trustee,
officer, employee or agent of Landlord shall be personally liable therefor.
18. CONDEMNATION.
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18.1 EFFECT OF TAKING. If the Leased Premises or any portion thereof are
----------------
taken under the power of eminent domain, or sold by Landlord under the
threat of the exercise of said power (all of which is herein referred to as
"condemnation"), this Lease shall terminate as to the part so taken as of
the date the condemning authority takes title or possession, whichever
occurs first. If more than twenty-five percent (25%) of the floor area of
the Leased Premises or twenty-five percent (25%) of the parking allocated
to Tenant pursuant to Exhibit "F" is taken by condemnation, Tenant may, at
its option, terminate this Lease as of the date the condemning authority
takes possession, by providing Landlord notice in writing of its intent to
terminate not later than twenty (20) days after Landlord shall have
notified Tenant of the taking. If all of the Leased Premises or so much of
the Building is taken by condemnation (even though no part or only a small
part of the Leased Premises be taken) that Landlord elects not to repair or
reconstruct the remaining portion, the provisions of Section 12.2 shall
apply. Failure of Landlord or Tenant to so notify the other party shall
constitute agreement of said party to continue the Lease in full force and
effect as to the balance of the Leased Premises.
18.2 RENT REDUCTION. If the Lease is not fully terminated after any
--------------
taking, then it shall remain in full force and effect as to the portion of
the Leased Premises remaining; provided the rent payable hereunder shall be
reduced in proportion to the area taken.
18.3 AWARDS. Upon any such taking or purchase, Landlord shall be
------
entitled to receive and retain the entire award or consideration for
Landlord's fee interest in the affected lands and improvements, and Tenant
shall not have nor advance any claim against Landlord for the value of its
property or its leasehold estate or the unexpired Term of the Lease, or for
costs of removal or relocation, or business interruption expense or any
other damages arising out of such taking or purchase, provided, that Tenant
shall have the right to assert a claim against the condemning authority in
the condemnation action to compensate Tenant for the loss of Tenant's
leasehold estate in the Leased Premises.
19. SUBORDINATION AND ATTORNMENT.
19.1 SUBORDINATION. Landlord and Tenant agree that this Lease be and the
-------------
same hereby is made subject and subordinate at all times to any mortgage
constituting a first lien against the Building or any other method of
financing or refinancing in any amounts, and all advances thereon, which
may now or hereafter be place against or affect any or all of the land
and/or the Leased Premises and/or any or all of the buildings and
improvements now or at any time hereafter constituting a part of or
adjoining the Building, and to all renewals, modifications, consolidations,
participations, replacements and extensions thereof. The term "mortgages"
as used herein shall mean and refer to any mortgage or deed of trust
constituting a first lien on the Property. The aforesaid provisions shall
be self-operative and no further instrument or subordination shall be
necessary unless required by any such mortgagee. Should Landlord or any
mortgagee desire confirmation of such subordination, the Tenant, within ten
(10) days following Landlord's written request therefor, agrees to execute
and deliver, without any charge, any and all documents (in form reasonably
acceptable to such mortgagee) effectuating such priority.
19.2 ATTORNMENT-NON-DISTURBANCE. Tenant agrees that in the event of a
--------------------------
sale, transfer, or assignment of the Landlord's interest in the Building or
any part thereof, including the Leased Premises, to attorn to and to
recognize such sale, transfer or assignment or underlying lessor or
mortgagee as Landlord under the Lease. In the event of any attornment by
Tenant, this Lease and Tenant's rights hereunder shall continue undisturbed
so long as Tenant is not in default hereunder. Notwithstanding anything to
the contrary contained in this Lease, the subordination of this Lease to
any mortgage or deed of trust shall be subject to the fulfillment of the
conditions precedent that (i) the holder of the security interest shall
have entered into a recognition or attornment agreement with Tenant,
reasonably acceptable to Tenant, which provides that this Lease shall not
be adversely affected or terminated by foreclosure or sale pursuant to the
terms of the mortgage or deed of trust; and (ii) the subordination shall
not otherwise restrict or limit the rights, or increase the obligations, of
Tenant under this Lease.
20. QUIET ENJOYMENT.
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20.1 COVENANT OF QUIET ENJOYMENT. Landlord agrees that Tenant, upon
---------------------------
paying rent and other monetary sums due under this Lease and performing the
covenants and conditions of this Lease, may quietly have, hold and enjoy
the Leased Premises during the term hereof, subject, however, to the
provision herein referring to subordination and condemnation.
21. EXTENDED TIME DUE TO DELAY. Except for Tenant's obligation for the timely
payment of all rent and other sums due under this Lease, whenever either
Landlord or Tenant shall be delayed or restricted in the performance of any of
its obligation herein with respect to the performance of work or repairs by
reason of an inability to obtain materials, services or labor required for such
performance or by reason of any statue, law or regulation of a government
entity, or by reason of any other cause beyond the delayed or restricted party's
control, said party shall be entitled to extend the time for such performance by
a time equal to the extent of the delay or restriction.
22. GENERAL PROVISIONS.
22.1 ESTOPPEL CERTIFICATES. Tenant shall at any time, upon notice from
---------------------
Landlord, execute, but only in connection with a bona fide purchase and
sale contract or financing application, acknowledge and deliver to Landlord
a statement in writing: (i) certifying that this Lease is unmodified and in
full force and effect (or if modified, stating the nature of the
modifications) and the dates to which the rent and other charges are paid
in advance; (ii) acknowledging that there are not, to Tenant's knowledge,
any uncured defaults on the part of Landlord hereunder or specifying such
defaults if any exist; (iii) acknowledging to any mortgagee that Tenant
will not modify or amend this Lease without the consent of such mortgagee;
and (iv) certifying to any other matter about which Landlord may reasonably
request information. Tenant's failure to execute such written statement
within ten (10) business days of receipt of Landlord's written notice shall
constitute a default by Tenant under this Lease.
22.2 TRANSFER OF LANDLORD'S INTEREST. In the event of a sale or
-------------------------------
conveyance by Landlord of Landlord's interest in the Leased Premises,
Landlord shall be relieved from and after the date of such transfer of all
liability accruing thereafter on the part of Landlord; provided that any
funds in the hands of Landlord at the time of transfer in which Tenant has
an interest shall be delivered to the successor of Landlord; and provided
such successor of Landlord fully assumes the liability and obligations of
Landlord under the Lease after the date of such transfer. This lease shall
not be affected by any such sale.
22.3 CAPTIONS. Article and paragraph captions are for convenience only
--------
and are not a part of this Lease and shall not be used for interpretation
or construction of this Lease.
22.4 TIME OF ESSENCE. Time is of the essence.
---------------
22.5 SEVERABILITY. The invalidity of any provision of this Lease, as
------------
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
22.6 MODIFICATIONS FOR MORTGAGE. In the event any lending institution
--------------------------
with whom Landlord has negotiated or shall hereafter negotiate for the
initial interim/construction the initial mini-perm and the initial
permanent (for a period of five (5) years or more) financing for the
Building shall require a modification of this Lease as a condition to
providing such financing, Landlord shall provide written notice of the
requirement to Tenant and Tenant agrees with fifteen (15) days to make any
such modification so long as it does not alter any of Tenant's monetary
obligations hereunder, or otherwise materially increase Tenant's non-
monetary obligations. If Tenant fails or refuses to make such modification
within said fifteen (15) days period, this Lease may, at Landlord's sole
option, be terminated by Landlord as of the date set forth in a written
notice from Landlord to Tenant, which date shall in no event be less than
thirty (30) days following such notice.
22.7 ENTIRE AGREEMENT. This Lease, along with any exhibits or attachments
----------------
hereto, constitutes the entire agreement between the parties relative to
the Leased Premises and there are no oral agreements or representation
between the parties with respect to the subject matter hereof. This Lease
supersedes and cancels all prior agreements and understandings with respect
to the subject matter hereof. This Lease may be modified only in writing,
signed by the parties in interest at the time of modification.
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22.8 RECORDING. This Lease shall not be recorded and any recordation
---------
shall be a breach under this Lease.
22.9 AREA DETERMINATION. Absent further written agreement between the
------------------
parties, the Rentable Area of the Leased Premises of 38,869 square feet
shall be considered an agreed area, and shall not be subject to unilateral
challenge by one of the parties for any reason, including, without
limitation, remeasuring of the Leased Premises or Building, or a
restructuring of any portion of the interior of the Building (within the
exterior Building envelope as it is drawn at the execution hereof). The
Rentable Area may change if the total Building envelope is enlarged or
reduced through eminent domain or casualty.
22.10 BINDING EFFECT: CHOICE OF LAW. Subject to any provisions hereof
-----------------------------
restricting assigning or subletting by Tenant and subject to the provisions
for the transfer of Landlord's interest, this Lease shall bind the parties,
their successors and assigns. This Lease shall be governed by the laws of
the State of Colorado.
22.11 HOLDING OVER: PAYMENTS AFTER TERMINATION. If Tenant remains in
----------------------------------------
possession of all or any part of the Leased Premises after the expiration
of the term hereof, without the execution of a new Lease, such tenancy
shall be deemed to have created and be construed to be tenancy from the
month to month only terminable on thirty (30) days written notice by either
party to the other on the same terms and conditions as provided herein,
except not only as to the term of this Lease, but also except the Base Rent
to be paid by Tenant shall be equal to the sum of: (i) one hundred fifty
percent (150%) of the Base Rent paid by Tenant immediately prior to the
beginning of the holdover period; (ii) 1/12 of the Net Operating Expenses,
and (iii) any additional sums as may be due under this Lease. No payments
of money by Tenant to Landlord after the termination of this Lease, in any
manner, or after giving of any notice (other than a demand for payment of
money) by Landlord to Tenant, shall reinstate, continue or extend the term
of this Lease or affect any notice given to Tenant prior to the payment of
such money. It is agreed that after the service of notice or the
commencement of a suit or after final judgment granting Landlord possession
of the Leased Premises, or after any other exercise Landlord's rights and
remedies hereunder, then the payment of such sums of money, whether as rent
or otherwise, shall not waive said notice, or in any manner affect any
pending suit or judgment.
22.12 ENTRY BY LANDLORD. Landlord and its agents shall have the right
-----------------
to enter the Leased Premises at all reasonable times upon reasonable notice
under the circumstances for the purpose of examining or inspecting the
same, to supply janitorial services and any other services to be provided
by Landlord or Tenant hereafter, and make such alterations, repairs,
improvements or additions to the Leased Premises or to the Building of
which they are a part as Landlord may deem necessary or desirable. Tenant
shall permit Landlord to show the Leased Premises to prospective tenants
and place "For Lease" signs in, on or about the Leased Premises or the
Property as will not reasonably interfere with Tenant's use of the Leased
Premises, but only within the six (6) months prior to the anticipated
termination date of this Lease. Tenant shall permit Landlord to show the
Leased Premises to prospective purchasers and place "For Sale" signs on the
Leased Premises or in such locations as will not reasonably interfere with
Tenant's use of the Leased Premises. If Tenant shall not be personally
present to open and permit any entry into the Leased Premises at any time
when such entry by Landlord is necessary, Landlord may enter by means of a
master key without liability to Tenant, except for Landlord's negligence or
willful misconduct, and without affecting this Lease. If, during the last
month of the term or extension thereof, Tenant shall have removed
substantially all of its property therefrom, Landlord may immediately, with
Tenant's written approval, which shall not be unreasonably withheld,
conditioned or delayed, enter and alter, renovate and redecorate the Leased
Premises without elimination or abatement of rent or incurring liability to
Tenant for any compensation. Landlord's access shall be subject to any
security restrictions imposed on the Tenant by any contracts with the
United States of America to which Tenant is party and under which Tenant is
working on the Property. Tenant shall give notice to Landlord of such
restrictions simultaneously with the execution of this Lease.
26
<PAGE>
22.13 AUTHORITY. If Tenant is a corporation, each individual executing
---------
this Lease on behalf of said corporation represents and warrants that he is
duly authorized to execute and deliver this Lease on behalf of said
corporation in accordance with a duly adopted resolution of the Board of
Directors of said corporation or in accordance with the By-Laws of said
corporation, and that this Lease is binding upon said corporation in
accordance with its terms. If Landlord or Tenant is a partnership, each
individual executing this Lease on behalf of said partnership represents
that he (alone or together with the other parties executing this Lease) is
duly authorized to execute this Lease on behalf of said partnership in
accordance with the partnership agreement for said partnership and that
this Lease is binding on said partnership in accordance with its terms.
22.14 NOTICES. All notices or demands of every kind required or desired
-------
to be given by Landlord or Tenant hereunder (except for notices under
Exhibit "C", the Work Letter) shall be in writing and shall be deemed
delivered on the date which is the first to occur of (i) the date the same
is hand delivered, (ii) the date and time of confirmed delivery by telefax,
(iii) the date which is one (1) business day after such notice is delivered
to a nationally recognized overnight delivery service or (iv) forty-eight
(48) hours after depositing the notice or demand in the United States mail,
certified or registered, postage prepaid, addressed to the Landlord or
Tenant at the addresses set forth in paragraph K of the Summary of Basic
Lease Terms. All parties shall have the right from time to time to
designate by written notice to all other parties any other address or place
where such notice, demand, or request be addressed. Copies of notices to
legal counsel are for informational purposes only, and a failure to give a
copy of any notice to legal counsel shall not be deemed a failure to give
notice.
22.15 BROKERAGE CLAUSE. Landlord and Tenant each hereby warrant and
----------------
represent for the benefit of the other that it has not dealt with any real
estate broker or finder in connection with the transaction evidenced hereby
except for the broker named in paragraph M of the Summary of Basic Lease
Terms, for whose commission Landlord shall be responsible, and each party
hereby agrees to indemnify, defend, and hold the other party harmless from
and against any and all claims which may be made by any other broker or
finder in connection with the transaction evidenced hereby resulting from
the actions of the indemnifying party in connection with this Lease.
22.16 BANKRUPTCY. Landlord and Tenant understand that notwithstanding
----------
certain provisions to the contrary contained herein, a trustee or debtor in
possession under the Bankruptcy Code of the United States may have certain
rights to assume or assign this Lease; Landlord and Tenant further
understand that in any event Landlord is entitled under the Bankruptcy Code
to adequate assurances of future performance of the terms and provisions of
this Lease. For purposes of any such assumption or assignment, the parties
hereto agree that the term "adequate assurance" shall include at least the
following:
22.16.1 NET WORTH CAPABILITY. In order to assure Landlord that
--------------------
the proposed assignee will have the resources with which to pay the rent
called for herein, any proposed assignee must have demonstrated to
Landlord's satisfaction a net worth (as defined in accordance with
generally accepted accounting principles consistently applied) at least as
great as the new worth of Tenant on the date this Lease became effective
increased by seven percent (7%) for each year from the commencement of this
lease term through the date of the proposed assignment. The financial
condition and resources of Tenant were a material inducement to Landlord in
entering into this Lease.
22.16.2 AGREEMENT TO BE BOUND. Any proposed assignee of this
---------------------
Lease must assume and agree to be personally bound by the terms,
provisions and covenants of this Lease.
22.16.3 ADEQUATE ASSURANCES AND CURE. Notwithstanding anything
----------------------------
to the contrary
27
<PAGE>
contained in this Lease, if a Trustee in Bankruptcy assumes control
over Tenant's rights under this Lease, the Trustee shall provide the
Landlord with adequate assurance of future performance under this
Lease, cure or give adequate assurance that he will cure the default
and shall compensate Landlord for actual loss resulting from the
Tenant's bankruptcy. If the Trustee elects to assign such rights to
any third party, "adequate assurance of future performance" shall be
deemed to be the Base Rent paid hereunder increased to the then
current Base Rate which Landlord would charge for comparable space
in the Building as of the date of the Tenant filing its petition for
Bankruptcy.
22.17 PARKING. So long as Tenant is not in default under this Lease,
-------
Tenant shall be entitled to lease the number of parking spaces set forth in
Exhibit "F" of the Lease and will pay Landlord the per month rent for each
such space as set forth in Exhibit "F" of the Lease on the first day of
each month during the term hereof.
22.18 LEASE SUBJECT TO APPROVAL OF MORTGAGEE. This Lease is subject to
--------------------------------------
the approval of Bank One, Colorado, NA, who is the proposed beneficiary of
a first deed of trust encumbering the property. If such approval is not
obtained from Bank One, Colorado, NA on or before thirty (30) days
following the mutual execution date hereof, Landlord may within ten (10)
days following expiration of such thirty (30) day period, terminate this
Lease by written notice to Tenant whereupon the parties shall be released
of all obligations to each other. If Landlord fails so to terminate the
Lease as set forth above, then this Lease shall continue in full force and
effect.
22.19 FINANCIAL STATEMENTS. If financial information is requested in good
--------------------
faith by any existing or prospective lender or mortgagee, appraiser,
accountant, auditor or purchaser of the Building and/or Premises, Tenant
(and all guarantors and assignors) shall at any time and from time to time,
upon not less than ten (10) business days' prior written notice from
Landlord, deliver to such requesting person, in a form reasonably
satisfactory to such requesting person, as designated by Landlord, a full
and complete current balance sheet for Tenant and all guarantors and
assignors (if any) of Tenant's obligations under this Lease, certified to
be an accurate statement of Tenant's (and, if applicable, the guarantors')
current financial condition (i.e. within the ninety (90) days prior to the
date of delivery to Landlord), and an accurate, full and complete income
statement for Tenant and all guarantors and assignors, if any, for the
current and one preceding calendar years. Any such financial statements
must be kept confidential and may be relied upon by any such existing or
prospective purchaser, lender, appraiser, accountant, auditor or mortgagee.
22.20 RELATIONSHIP OF THE PARTIES. Nothing herein contained shall be
---------------------------
deemed or construed by the parties hereto, nor by any third party, as
creating the relationship of principal and agent; partners; or joint
venturers between the parties hereto, and it is hereby understood and
agreed that neither the method of computation of rent, nor any other
provisions contained herein, nor any acts of the parties hereto, shall be
deemed to create any relationship between the parties hereto other than the
relationship of Landlord and Tenant.
22.21 COUNTERPARTS. This Lease may be executed in several counterparts,
------------
each of which shall be deemed an original, and all such counterparts shall
together constitute one and the same instrument.
23. HAZARDOUS WASTE.
23.1 HAZARDOUS WASTE. Tenant shall not bring or allow any of its agents,
---------------
employees, contractors or invitees to bring, onto or about the Leased
Premises or the Building, any Hazardous Materials. For purposes of this
Lease, the term "Hazardous Materials" shall mean any one or more of the
following: (a) any "hazardous waste" as defined by the Resource
Conservation and Recovery Act of 1976 (42 U.S.C. Section 6901 et seq.), as
amended from time to time, and regulations promulgated thereunder; (b) any
"hazardous substance" as defined by the
28
<PAGE>
Comprehensive Environmental Response, Compensation and Liability Act of
1980 (42 U.S.C. Section 9601 et seq.) ("CERCLA"), as amended from time to
time and regulations promulgated thereunder; (c) asbestos; (d)
polychlorinated biphenyls; and (e) any other substance, in a quantity
which, by any governmental rules, statutes or regulations, requires special
handling or notification of any federal, state or local governmental entity
in its collection, storage, treatment or disposal.
23.2 The parties acknowledge that Landlord has, prior to the execution of
this Lease, provided a current update dated August 19, 1996 prepared by Due
Diligence Advisors, Inc. to the original Phase I Environmental Audit done
in 1990, prepared by Due Diligence Advisors, Inc. (the "1996 Phase I
Report") to Tenant. If, during the performance of the work described in
EXHIBIT B attached hereto, any Hazardous Materials are discovered in or
about the Leased Premises or the Building, Landlord shall, at its sole cost
and expense, remove all such Hazardous Materials, to the extent remediation
is required under current federal, state or local government statutes,
regulations or ordinances, prior to commencement of or during the Building
Construction or the Tenant Finish Work.
23.3 Landlord represents and warrants to Tenant that, to the best of
Landlord's actual knowledge, no Hazardous Materials are or have been
present, released, stored, generated, transported to or from, or disposed
of on, under or about the Leased Premises or the Building, other than as
reported in the 1996 Phase I Report, and no Hazardous Materials are
contained in the Building or any other improvements or facilities located
on the property on which the Building is situated. Unless caused by the
negligence, conduct or misconduct of Tenant, Landlord shall indemnify,
defend and hold harmless Tenant, its officers, directors, shareholders,
employees, attorneys, agents, partners, affiliates, successors and assigns
from and against any and all claims, liabilities, losses, response,
remedial or removal costs, damages, costs or expenses (including, without
limitation, attorneys' fees) arising out of or incurred in connection with
the presence, release storage, generation, transportation, remediation,
removal or disposal of any Hazardous Materials on, under or about the
Leased Premises or contained in the Building or any other improvements or
facilities located on the property on which the Building is situated.
Landlord's obligations under this paragraph shall survive the expiration or
termination of this Lease. Any provisions of this paragraph to the contrary
notwithstanding, Tenant shall have no claim against Landlord for any
violation of this paragraph of which Tenant had knowledge prior to the
execution of this Lease.
23.4 Tenant shall indemnify, defend and hold harmless Landlord enant, its
officers, directors, shareholders, employees, attorneys, agents, partners,
affiliates, successors and assigns from and against any and all claims,
liabilities, losses, response, remedial or removal costs, damages, costs or
expenses (including, without limitation, attorneys' fees) arising out of or
incurred in connection with the presence, release storage, generation,
transportation, remediation, removal or disposal of any Hazardous Materials
brought by Tenant, its agents, employees, contractors or invitees on, under
or about the Leased Premises or contained in the Building or any other
improvements or facilities located on the property on which the Building is
situated. Tenant shall not bring or allow any of its agents, employees,
contractors or invitees to bring, onto or about the Leased Premises or the
Building, any Hazardous Materials.
23.5 Each party herein shall immediately advise the other, in writing, in
the event such party becomes aware that there is located on or about the
Leased Premises or the Building, or that such party or other tenant or any
other person intends or may bring onto or about the Leased Premises or the
Building any Hazardous Materials. Each party herein shall save, hold
harmless and indemnify the other from all claims, suits and liabilities
which may be brought as a result of the use, storage or transportation of
any Hazardous Materials in or about the Leased Premises or the Building by
such party, its agents, contractors or invitees.
29
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the dates
below written.
Address: LANDLORD:
c/o Integrated Property Management, Inc. WOODMEN OFFICE CAMPUS II JV L.L.C.,
455 Sherman Street, Suite 140 A COLORADO LIMITED LIABILITY COMPANY
Denver, Colorado 80203
/s/ LOREN E. SNYDER
By:_________________________________
Name: LOREN E. SNYDER
_______________________________
Title: MANAGER
______________________________
October 11, 1996
Date:_______________________________
Address: TENANT:
7450 Campus Drive, Suite 200 OPTIKA IMAGING SYSTEMS, INC.,
Colorado Springs, Colorado 80920 A DELAWARE CORPORATION
/s/ STEVEN M. JOHNSON
By:_________________________________
Name: STEVEN M. JOHNSON
_______________________________
Title: VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
______________________________
OCTPBER 11, 1996
Date:_______________________________
30
<PAGE>
LEGAL DESCRIPTION OF THE PROPERTY
APPROXIMATELY 5.5 ACRES TO BE PLATTED AS LOT 2 FROM THE FOLLOWING:
THAT PORTION OF THE NORTHWEST QUARTER OF SECTION 8, TOWNSHIP 13 SOUTH, RANGE 66
WEST OF THE 6TH P.M., IN THE CITY OF COLORADO SPRINGS, EL PASO COUNTY, COLORADO,
DESCRIBED AS FOLLOWS:
BEGINNING AT THE NORTHWEST CORNER OF SAID SECTION 8; THENCE SOUTH 01 DEGREES 10
MINUTES 05 SECONDS WEST ON THE WESTERLY LINE OF SAID SECTION 8, A DISTANCE OF
848.38 FEET TO A POINT ON THE EASTERLY RIGHT OF WAY LINE OF INTERSTATE HIGHWAY
25; THENCE SOUTH 08 DEGREES 32 MINUTES 52 SECONDS EAST ON SAID EASTERLY RIGHT OF
WAY LINE, 295.30 FEET; THENCE SOUTH O5 DEGREES 02 MINUTES 52 SECONDS EAST, ON
SAID RIGHT OF WAY LINE, 373.73 FEET; THENCE NORTH 90 DEGREES 00 MINUTES 00
SECONDS EAST, 441.71 FEET TO THE EASTERLY LINE OF THE VACATED WESTERLY 20 FEET
OF VINCENT DRIVE PER VACATION PLAT RECORDED IN BOOK H-3 AT PAGE 14; THENCE NORTH
02 DEGREES 56 MINUTES 42 SECONDS WEST ALONG THE EASTERLY LINE OF SAID VACATED 20
FEET, A DISTANCE OF 79.28 FEET TO A POINT ON THE EASTERLY EXTENSION OF THE LINE
COMMON TO LOTS 1 AND 2, BLOCK 15, FALCON ESTATES NO. 1; THENCE NORTH 02 DEGREES
29 MINUTES 51 SECONDS WEST, ALONG THE EASTERLY LINE OF SAID VACATED 20 FEET,
670.05 FEET TO A POINT ON THE EASTERLY EXTENSION OF THE NORTHERLY LINE OF
AFORESAID LOT 2; THENCE SOUTH 87 DEGRESS 30 MINUTES 09 SECONDS WEST, ALONG SAID
NORTHERLY LINE AND ITS EASTERLY EXTENSION 47.77 FEET TO THE NORTHWEST CORNER OF
SAID LOT 2 AND THE SOUTHWEST CORNER OF LOT 3 AND A POINT ON THE EASTERLY RIGHT
OF WAY LINE OF THE ATCHISON, TOPEKA AND SANTA FE RAILWAY COMPANY AS SAID RIGHT
OF WAY EXISTED PRIOR TO RELOCATION IN ABOUT 1903; THENCE NORTH 02 DEGREES 36
MINUTES 51 SECONDS EAST, ALONG THE WESTERLY LINE OF AFORESAID LOT 3 AND THE
EASTERLY LINE OF SAID RAILROAD RIGHT OF WAY, 124.54 FEET TO A POINT OF CURVE;
THENCE NORTHERLY AND NORTHWESTERLY ALONG THE EASTERLY LINE OF SAID RAILROAD
RIGHT OF WAY AND THE WESTERLY LINE OF LOTS 3 AND 4, BLOCK 15, IN AFORESAID
FALCON ESTATES NO. 1 AND ON A CURVE TO THE LEFT, WITH A RADIUS OF 985.45 FEET
AND A CENTRAL ANGLE OF 39 DEGREES 40 MINUTES 25 SECONDS, AN ARC DISTANCE OF
682.36 FEET TO THE NORTHWEST CORNER OF FALCON ESTATES NO. 1, SAID CORNER BEING A
POINT ON THE NORTHERLY LINE OF AFORESAID NORTHWEST QUARTER OF SECTION 8; THENCE
NORTH 89 DEGREES 18 MINUTES 16 SECONDS WEST, ALONG SAID NORTHERLY LINE, 227.88
FEET TO THE POINT OF BEGINNING. NOTE: BENEFICIAL EASEMENT FOR INGRESS AND
EGRESS, INCLUDING REASONABLE VEHICULAR ACCESS TO THE SUBJECT PROPERTY AS
CONTAINED IN INSTRUMENT RECORDED JANUARY 31, 1985 IN BOOK 3967 AT PAGE 310.
(TO BE REPLACED FOLLOWING REPLATTING)
<PAGE>
Exhibit B
THE LEASED PREMISES
Suite 200 - comprising approximately 38,869 rentable square feet
7450 Campus Drive
Colorado Springs, Colorado 80920
<PAGE>
Exhibit C - Work Letter
WORK LETTER
This Work Letter is dated SEPTEMBER 30, 1996 between WOODMEN OFFICE CAMPUS
II JV L.L.C., A COLORADO LIMITED LIABILITY COMPANY ("Landlord") and OPTIKA
IMAGING SYSTEMS, INC., A DELAWARE CORPORATION ("Tenant").
A. This Work Letter is attached to and forms a part of that certain Lease
dated SEPTEMBER 30, 1996 (the "Lease"), pursuant to which Landlord has leased to
Tenant office space in a to be constructed office building known as WOODMEN
OFFICE CAMPUS II, located at 7450 CAMPUS DRIVE, COLORADO SPRINGS, COLORADO (the
"Building").
B. Landlord desires to make improvements to the Leased Premises, and Tenant
desires that Landlord make them, prior to occupancy, upon the terms and
conditions contained herein.
Therefore, the parties agree as follows:
I. DEFINITIONS. In this Work Letter, some of the defined terms are as
-----------
follows:
A. Architect: Gray Design Group of Colorado, Inc.
---------
B. Base Building: Those elements of the core and shell construction of the
-------------
Building that are completed in preparation for the improvements to the Leased
Premises defined as follows:
1) Structural shell including foundations, exterior load-bearing site
cast concrete walls, structural steel framing and decks for floors
and roof, concrete slab on grade for first floor and concrete topping
slab for second floor. Floors are designed to support a live load of
fifty (50) pounds per square foot and an additional partition load of
twenty (20) pounds per square foot. Floors are to be level and
smooth within normal industry standards and ready to receive floor
coverings.
2) Supply complete EPDM roof membrane system including rock ballast and
roof deck insulation board, and parapet wall flashing.
3) Insulated-glass window system with painted aluminum frames, installed
in window openings and insulated glass panels glazed into painted
storefront framing system at building entry/lobby areas.
4) Plumbing system installed complete including fixtures in public
restrooms, and one (1) vertical rough stack adjacent to an interior
column in each wing of the building for future connection of
kitchen/coffee bar sinks in the Leased Premises. Drinking fountains
with chilled water installed in compliance with applicable laws
(including the current ADA) and building codes.
5) Makeup-air system installed complete including gas-fired makeup-air
fan unit installed on building roof, and vertical duct system to
distribute make-up air into ceiling plenum(s) of the Leased Premises
in accordance with current ASHRAE standards. (If hard ducting of
make-up air to individual heat pump units is required by code related
requirements related to tenant occupancy, the cost of furnishing and
installing this ductwork shall be considered a part of the Tenant
Finish Work.)
6) Water-source heat pump system including cooling tower and boilers to
produce the tempered water for the heat pump circulating loop, and
heat
C-1
<PAGE>
pumps (one (1) heat pump per 1,200 square feet of rentable area)
mounted in ceiling plenum and connected to tempered water circulating
loop, with condensate pans connected to building sanitary sewer
system. (Additional heat pumps and distribution ductwork from heat
pumps to diffusers installed in the ceiling grid of individual spaces
in the Leased Premises shall be considered part of the Tenant Finish
Work.)
7) Complete electrical service entry for a 480/277 volt 3-phase
electrical system, including subfeeders to 480/277 volt lighting
panels and heat pump power panels in electrical closets located
adjacent to public restroom core on each floor of the building.
Connection of heat pump units to power panels, and step-down
transformers and panelboards for 208/120 volt convenience electrical
uses is also included.
Emergency light fixtures in stairwells and code required minimum
emergency light fixtures installed in future Leased Premises.
(Installation of 2' X 4' "lay-in" fluorescent light fixtures with
prismatic plastic lenses in the ceiling grid, and wiring connection
of these light fixtures to lighting panels in the electrical closets
shall be considered a part of the Tenant Finish Work.)
All wiring of convenience electrical circuits from the 208/120 volt
convenience electrical panels to convenience electrical outlets
(including all dedicated electrical outlets and wiring connections to
furniture systems) shall be considered part of the Tenant Finish
Work.
8) Steel stud framing to deck, drywall both sides to deck, and interior
finishes (including finished walls, ceilings, ceramic tile floors and
wet wall wainscot, and adequate lighting) of public restrooms.
Toilet partitions and all normally installed toilet accessories for
public restrooms (including necessary plumbing, fixtures, vanities,
and mechanical system distribution).
9) Steel stud framing to deck, drywall both sides of walls to deck,
paint finish to interior walls of electrical closets, janitors
closets, mechanical rooms, etc.
10) Steel stud framing and 3" thermal insulation batts at exterior
walls and aluminum window sills supported by steel stud framing are
included. Drywall installed above the window heads is included in
the Base Building and all drywall installed on exterior walls, below
the window heads shall be considered part of the Tenant Finish Work.
11) Steel stud framing and drywall both sides of walls of deck to
create stairwell enclosures, and paint finish to interior
concrete/drywall walls of stairwells. Stairwells to be in compliance
with applicable building codes.
12) All exterior sitework, including site grading, landscaping, site
utilities, asphalt parking lots, concrete sidewalks, curbs, gutter
and site lighting.
13) Core Doors.
a. Building Standard solid core birch veneer doors for stairwells,
electrical, mechanical, janitorial and telephone rooms and public
restrooms all installed, primed, sanded, stained and sealed.
C-2
<PAGE>
b. Doors finished and completed with frame, trim, necessary hardware,
electric door releases and/or magnetic hold-open devices and
closers, where required by code.
14) Life Safety.
a. Life safety improvements including life safety panel(s) (the cost
of which will be paid by Landlord and not deducted from the Tenant
Improvement Allowance) to the extent required by shell and core
construction for a temporary certificate of occupancy for the
Building.
b. A sprinkler system installed in compliance with code for floors,
including main loop connected to core and drops in place with
heads installed per code for an unimproved (non-occupied) floor.
c. Firehose and extinguisher cabinets finished and installed as
required by code for shell and core construction.
d. Smoke detectors in all areas as required by code.
e. Fire extinguishers as required by code for shell and core
construction.
f. Fire horns and exit signs as required by code for shell and core
construction.
g. Electric door releases and magnetic hold-open devices, as
applicable, installed for all fire doors.
h. Two (2) hour fire rated separation wall delineating each floor
into two (2) distinct areas for fire separation. The position of
this wall has been predetermined to aline with the tenant finish
work approved for the first floor. (Deviations in the positioning
of the wall on the second floor to accommodate the Tenant Finish
Work herein shall be considered part of the Tenant Finish Work.)
C. Building Standard: component elements utilizing the design and
-----------------
construction of the improvements that have been agreed by Tenant and Landlord in
the Working Drawing Documents to ensure uniformity of quality, function and
appearance throughout the Building. These elements include, but are not limited
to, ceiling systems, doors, hardware, walls, floor coverings, finishes, window
coverings, light fixtures and HVAC components.
D. Change Order: any change, modification or addition to the Final Space
------------
Plan or the Working Drawing Documents or the Tenant Finish Work after Tenant and
Landlord have approved the Final Space Plan.
E. Construction Schedule: a schedule depicting the relative time frames and
---------------------
the various activities, including projected timing for communications cabling
and punch list work, related to the construction of the improvements in the
Leased Premises to be initially provided by Landlord to Tenant on or before
OCTOBER 1, 1996 and to be updated from time to time as required.
F. Preliminary Space Plan: One (1) scaled drawing in sketch format which
----------------------
(i) has been approved by Landlord and Tenant; (ii) clearly shows the Building
shell and core with the location of the Leased Premises, layout of an office and
other rooms depicting partitions, door locations and room specs, delineate
furniture systems and locations of upgrades including built-in cabinetwork,
counters, operable walls, etc. as allowed by Landlord.
C-3
<PAGE>
G. Final Space Plan: one or more drawings of the Leased Premises, which
----------------
(i) have been approved by Landlord and Tenant; and (ii) clearly show the layout
of all offices and other rooms, depicting partitions, door locations, types and
locations of all electrical, data and telephone outlets, and types and locations
of all furniture systems and equipment, with equipment specifications and
locations for glazing and built-in casework.
H. Landlord's Representative: Landlord hereby appoints LOREN E. SNYDER to
------------------------- ---------------
act as its sole representative in all matters associated with this Work Letter.
Landlord may change its designated Landlord's Representative only by further
written notice to Tenant, and may only have one Landlord's Representative at any
time. All matters involving Landlord's involvement with the administration of
the construction under this Work Letter shall be conducted only through
Landlord's Representative.
I. Project Design Schedule: The schedule of design activities and target
-----------------------
dates for these activities to be completed or started attached to this Work
Letter.
J. Substantial Completion: Substantial Completion shall be the earlier of
----------------------
(i) the issuance of a Temporary Certificate of Occupancy or its equivalent, from
the appropriate governmental authority enabling Tenant to install its
furnishings and equipment for the entire Leased Premises subject only to an
written agreed punch list signed by Landlord and Tenant, or (ii) upon the
issuance of a Certificate by the Architect that the cost to complete the Tenant
Finish Work will not exceed three percent (3%) of the total cost therefor
subject to Tenant being able to install its furnishings and equipment for the
entire Leased Premises and a written agreed punch list signed by Landlord and
Tenant. Upon completion of the Tenant Finish Work in the Leased Premises, the
Landlord, Tenant and Architect shall conduct a final walk-through in such Leased
Premises to develop a punch list. Landlord shall give Tenant three (3) business
days prior notice of such intended walk-through, and, so long as the intended
walk-through is during normal business hours, failure of the Tenant to attend
shall not prevent the compilation of the punch list for such Leased Premises by
the Architect and Landlord. During or promptly after each such walk-through,
the Architect will assign a cost to each item on the punch list, and certify his
figures. If the aggregate cost of the outstanding matters on such punch list
exceeds three percent (3%) of the total cost for the Tenant Finish Work, the
Leased Premises shall not be deemed to be Substantially Complete, and another
walk-through shall be done after another prior notice thereof by Landlord. If
the aggregate cost of the outstanding matters on such punch list is equal to or
less than three percent (3%) of the total cost for the Tenant Finish Work for
the Leased Premises, Tenant Finish Work shall be deemed to be Substantially
Complete.
K. Tenant Finish Work: Except as noted herein, all labor and materials
------------------
necessary to complete the Leased Premises in accordance with the Final Space
Plan and the Working Drawing Documents.
L. Tenant's Representative: Tenant hereby appoints STEVEN M. JOHNSON to
----------------------- -----------------
act as its representative in all matters associated with this Work Letter who
shall be fully authorized to make all decisions and give all approvals requested
or required for the project. Tenant may change its designated Tenant's
Representative only by written notice to Landlord, and may only have no more
than one Tenant's Representative at any time. All matters involving Tenant's
involvement with the administration of the construction under this Work Letter
shall be conducted only through Tenant's Representative.
M. Working Drawing Documents: Construction documents (including plans,
-------------------------
specifications, details and required schematics) detailing the improvements and
conformation to building codes, complete in form and content and containing all
information from the Final Space Plan in the detail required to allow for
competitive bidding for and construction of the Tenant Finish Work, except for
detailed electrical and mechanical engineering design documents, which are to be
provided on a design-build basis by selected electrical and mechanical
contractors.
II. IMPROVEMENTS.
------------
C-4
<PAGE>
A. General Procedure: Landlord has hired Gray Design Group of Colorado,
-----------------
Inc. to act as Architect for the project and to help Tenant complete the Final
Space Plan, and all costs therefor shall be part of the planning costs for the
Tenant Finish Work. Immediately after mutual execution hereof, and from time to
time as needed thereafter, Tenant shall meet with its own space planner and/or
the Architect to prepare the Final Space Plan for the Leased Premises. Tenant
shall cause the Final Space Plan to be completed by its in-house space planner
and/or the Architect as soon as possible after the mutual execution hereof, and
the parties understand that the Commencement Date under the Lease is affected by
the delivery date of the Final Space Plan from Tenant to Landlord. A copy of
any proposed Final Space Plan shall be delivered to Landlord, and Landlord shall
be deemed to have approved same unless Landlord specifies its written objections
thereto within three (3) business days after receipt. Immediately after the
Final Space Plan has been approved by Tenant and Landlord, and from time to time
as needed or as requested by the Architect, the Tenant Representative shall
furnish necessary information and make decisions required for Architect to
complete the Working Drawing Documents. The date of any approval by Landlord of
any major material change to the Final Space Plan requested or required by
Tenant after the Final Space Plan has been previously approved by Landlord and
Tenant shall be deemed to be the date on which the Final Space Plan was issued
by Tenant. If any changes are made by Tenant to the Final Space Plan after
approval thereof by Landlord and Tenant the time elapsed between the date the
Final Space Plan was approved by both parties and the time the change(s) is
approved by both parties may be deemed a Tenant-Caused Delay if the change(s)
result in a net delay in the preparation of the Working Drawing Documents or in
the construction of the Tenant Finish Work. A copy of all or any part of the
proposed Working Drawing Documents shall be delivered to Tenant, and Tenant
shall be deemed to have approved the same unless Tenant specifies its written
objections thereto within three (3) business days after receipt.
B. The Work: The project contemplated by this Work Letter is made up of the
--------
following:
1. Planning. The Planning shall include the development of a Final Space
--------
Plan and Working Drawing Documents, including supporting engineering
studies, if necessary. Landlord shall designate the engineers, space
planners and contractors to perform the planning work subject to
Tenant's reasonable approval. Landlord shall have primary
responsibility to work with such engineers, space planners, and
contractors during the planning stage to ensure that the Working
Drawing Documents are completed, approved by Landlord and accepted by
Tenant, no later than NOVEMBER 15, 1996. Tenant shall perform all of
its obligations by the target dates specified in the Project Design
Schedule attached hereto and any delay of Tenant in providing
documents and information and/or responding to submittals for approval
by the target dates specified in the Project Design Schedule shall be
deemed to be part of the Tenant-Caused Delay pursuant to paragraph 6.3
hereof.
2. Construction. Landlord shall arrange for all labor and materials
------------
necessary to complete the Tenant Finish Work. The Tenant Finish Work,
which will create finished ceilings, walls and floor surfaces, HVAC,
lighting, electrical and fire protection, and which shall be at
Tenant's cost, subject to the TIA (as defined below), shall include:
a. All Planning, as defined in Article B.1., and Construction, as
defined in Article B.2., costs associated with the Tenant Finish
Work for the Leased Premises;
b. All costs incurred by Landlord associated with the preparation of
and engineering for the Final Space Plan as completed by the
Architect, the Working Drawing Documents, all other Construction
drawings and details, and all permitting fees;
c. Any improvements to the Leased Premises:
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d. A construction management fee equal to five percent (5%) of all of
Planning Costs and Construction Costs shall be paid to Integrated
Property Management, Inc. (IPM), which will act as Construction
Manager. A construction management fee equal to seven and one-half
percent (7 1/2%) of all costs of Planning Costs and Construction
Costs required under all Change Orders requested by Tenant or
necessitated by Tenant's acts or omissions, shall also be paid to
IPM.
3. Personal Property. The improvements will not include personal
-----------------
property items, such as decorator items or services, artwork, plants, furniture,
equipment or the fixtures not permanently affixed to the Leased Premises.
3. PROJECT CONSTRUCTION. All of the Base Building and Tenant Finish Work
--------------------
will be performed by a general contractor selected and engaged by Landlord.
4. COST RESPONSIBILITY.
-------------------
4.1 Tenant Improvement Allowance. Landlord will pay all third-party costs
----------------------------
of the Planning required to finalize the Final Space Plan and to prepare the
Working Drawing Documents (the "Planning Costs"), and to perform the Tenant
Finish Work in accordance with the Final Space Plan and the Working Drawing
Documents (the "Construction Costs") over and above the Base Building items
defined herein, provided that Landlord shall not be obligated to pay more than
the TIA for all Planning and Construction Costs. For purposes of this Lease,
the "TIA" shall mean TWENTY-FOUR AND 00/100 DOLLARS ($24.00) for each rentable
square foot of floor area in the Leased Premises. Provided that Tenant is not in
default under this Lease, Tenant shall be entitled to credit any unused portion
of the TIA toward its rent obligations under this Lease. The amount of the TIA
allowance to be provided by Landlord shall not be changed due to any
fluctuations in the costs of materials or labor.
4.2 Excess Tenant Improvements. If the construction costs exceed the TIA
--------------------------
of TWENTY-FOUR AND 00/100 DOLLARS ($24.00) per rentable square foot, Landlord
agrees to pay for same, up to an additional FIVE AND 00/100 DOLLARS ($5.00) per
rentable square foot (the "Excess TIA") but only if the costs are physical
improvements to the Building, or are part of the installation, wiring or cabling
of (but not the purchase of) the Tenant's trade fixtures, furnishings or
equipment. The Excess TIA shall be repaid by Tenant to Landlord, plus interest
thereon at the rate of thirteen percent (13%). As soon as the Excess TIA is
calculated, Landlord shall send a notice thereof to Tenant. Interest shall
accrue on such Excess TIA from the date the Excess TIA is actually paid by the
Landlord for the construction costs, regardless of when the notice thereof is
provided to Tenant; provided, however, Tenant may, at Tenant's option pay the
Excess TIA to Landlord, in full, within ten (10) days after receipt of
Landlord's notice, in which event no interest shall accrue or be payable with
respect to the Excess TIA. In the event Tenant does not so pay the Excess TIA
as a lump sum payment, Tenant agrees to pay, on the first (1st) day of each and
every month, starting with the first (1st) day of the calendar month after the
calendar month in which the Commencement Date falls, an amount equal to the
Amortized Excess TIA. The "Amortized Excess TIA" shall mean the total Excess
TIA spent by the Landlord, plus the current applicable interest thereon, based
on an amortization which will pay all interest and principal thereof on a level
payment amortization by the end of the initial term of this Lease. After the
initial establishment of the amount of the monthly payment necessary to amortize
the Excess TIA, Landlord shall have no further obligation to bill Tenant
therefor, and Tenant shall make such monthly installments, on the same day as
base rent is due, without further notice. Failure to pay same shall constitute
a default of the Lease.
4.3 Tenant's Costs. Tenant will pay to Landlord all Planning Costs and
--------------
Construction Costs in excess of the TIA and Excess TIA, except for such costs
which are expressly made the obligation of the Landlord under this Work Letter.
All such costs will be paid by Tenant within fifteen (15) days of Tenant's
receipt of an invoice from Landlord tendered with a copy of the receipts
verifying Landlord's payment of such costs, provided that Landlord may not
render any such billing to Tenant prior to the earlier of Substantial Completion
of the Leased Premises or
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such time as the total Construction Costs in excess of the TIA exceed ONE DOLLAR
($1.00) per square foot.
4.4 Landlord's Costs. Landlord shall be responsible for all costs
----------------
associated with creating the Base Building except for those modifications to
the Base Building required by Tenant's additional or unique requirements.
5. LANDLORD'S APPROVAL. Landlord, in its sole discretion, may withhold its
-------------------
approval of any Final Space Plan or Working Drawing Documents which, and Tenant
shall have no right to make any Change Order which:
5.1 Exceeds or adversely affects the integrity of the Building or any part
of the HVAC or the systems of the Building.
5.2 Is not approved by the holder of any mortgage or deed of trust
encumbering the Building at the time the work is proposed.
5.3 Would not be approved by a prudent owner of property similar to the
Building.
5.4 Violates any agreement that affects the Building or binds the Landlord.
5.5 Landlord reasonably believes will increase the cost of operation or
maintenance of any of the systems in the Building.
5.6 Landlord reasonably believes will reduce the market value of the Leased
Premises or the Building at the end of the term.
5.7 Does not conform to applicable building codes or is not approved by any
government, quasi-governmental, or other authority with jurisdiction over the
Leased Premises or Building.
5.8 Does not comply with any of the requirements of the Lease or its
Exhibits, including this Work Letter.
6. SCHEDULE OF IMPROVEMENT ACTIVITIES.
----------------------------------
6.1 Landlord will cause the Architect to prepare and deliver to Tenant the
Working Drawing Documents based upon the approved Final Space Plan. Tenant
shall give its immediate attention to approval of the Working Drawing Documents
and Tenant shall respond to the Landlord within three (3) business days after
each and every submission is made to a Tenant Representative by hand delivery,
facsimile transmission, or overnight courier service. Tenant's failure to
object in writing to any such submission within such three (3) business days
shall constitute approval thereof.
6.2 Following approval of the Final Space Plan, Landlord will cause
application to be made to the appropriate governmental authorities for necessary
approvals and building permits. Upon receipt of the necessary approvals and
permits, and, upon receipt of the fully approved Working Drawing Documents,
Landlord will commence the Tenant Finish Work.
6.3 The total number of days that the preparation of the Working Drawing
Documents or the Substantial Completion of the Tenant Finish Work for the Leased
Premises as defined by paragraph 1.9 hereof is delayed as a result of (i) the
acts or omissions of Tenant, its agents, employees or contractors, (ii) Change
Order requests made by Tenant after completion and approval of the Final Space
Plan, including the time necessary for Landlord's reasonable approval thereof
(not to exceed three (3) business days), but not including any delays caused by
any unreasonable objection thereto by Landlord, (iii) delays in obtaining
building or Construction materials requested by Tenant which are not readily
available in the Colorado Springs metropolitan area, (iv) the failure of the
Tenant to provide any required information, documents, or approvals or
disapprovals in a timely fashion (not to exceed three (3) business days), (v)
any
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failure by Tenant to approve any submissions to Tenant without reasonable
cause, or (vi) any delays caused by Tenant's requiring additional scope of work
by Tenant's Designated Contractors within the Leased Premises (as more fully
described in paragraph 6.4 below), after considering any time saved by Tenant as
a result of its Change Orders, shall be referred to as "Tenant-Caused Delay".
6.4 The total number of days that the preparation of the Working Drawing
Documents or the Substantial Completion of the Tenant Finish Work for the Leased
Premises as defined by paragraph 1.9 hereof is delayed as a result of (i) the
acts or omissions of Landlord, its agents, employees or contractors, (ii) the
failure of Landlord to hire a contractor and proceed diligently to Substantial
Completion of the Tenant Finish Work, (iii) the failure of the Landlord to
provide any required information, documents, or approvals or disapprovals in a
timely fashion (not to exceed three (3) business days), (iv) any failure by
Landlord to approve any submissions to Landlord without reasonable cause, after
considering any time saved by Landlord as a result of its early completion of
any of the Tenant Finish Work, shall be referred to as "Landlord-Caused Delay".
6.5 Without Landlord's prior written consent, Tenant shall not have any
right to have access to any portion of the Leased Premises for any of its
contractors, vendors or suppliers prior to Substantial Completion of Leased
Premises; provided that this restriction shall not apply to reasonable access
for inspection by the Tenant Representative. Tenant shall have the right prior
to Substantial Completion to designate contractors, vendors or suppliers
("Tenant's Designated Contractors") for Construction and/or cabling work in the
Leased Premises for a scope of work which is not required by the Working Drawing
Documents, and if Tenant's Designated Contractors meet with Landlord's
reasonable approval, Landlord shall engage Tenant's Designated Contractors to
perform such additional work, but only if (i) such persons become subject to the
scheduling and control of Landlord's Construction Manager, (ii) all Tenant's
Designated Contractors meet the requirements of the Lease regarding contractors
hired by Tenant to do Alterations, and (iii) any delay or costs caused by the
additional work imposed on Landlord shall be the responsibility of Tenant.
7. CHANGE ORDERS. After final approval of the Working Drawing Documents,
-------------
Tenant shall have the right to require changes to the Tenant Finish Work or the
Working Drawing Documents for the Leased Premises only by a written Change
Order, signed by Tenant's Representative, on a form to be provided by Landlord
along with the approval of the Working Drawing Documents. All Change Orders
requested by Tenant will be subject to Landlord's prior written approval (to be
evidenced by a signature thereon by Landlord's Representative) which will not be
unreasonably withheld, and shall be deemed given unless Landlord objects to the
written Change Order request within three (3) business days after such request
is made. If, at the time Tenant requests any Change Order, there is
insufficient TIA remaining to complete the Tenant Finish Work as required by the
Working Drawing Documents, or if the total costs of Construction have exceeded
the TIA, Tenant shall pay Landlord, within ten (10) days after billing, for any
net increased costs incurred as a result of Change Orders requested by Tenant,
including, without limitation, all overtime premiums and other acceleration
costs incurred by contractors to meet the target Construction schedule, and
including a five percent (5%) Construction management fee to IPM for any net
increase in the costs of the Tenant Finish Work as amended by such Change Order.
After final approval of the Working Drawing Documents, if any changes are
needed in the Tenant Finish Work as a result of any physical or Base Building
system limitations, Landlord shall have the right to implement changes to the
physical, mechanical, electrical, structural or other Building system components
(but not any aesthetics within the Leased Premises) of the Tenant Finish Work or
the Working Drawing Documents for the Leased Premises only by a written Change
Order Request, signed by Landlord's Representative, on the approved form. All
such Change Orders requested by Landlord will be subject to Tenant's prior
written approval (to be evidenced by a signature thereon by Tenant's
Representative) which will not be unreasonably withheld, and shall be deemed
given unless Tenant objects to the written Change Order request within three (3)
business days after such request is made. All costs for such Tenant-approved
Change Orders shall be part of the Construction Costs for the Tenant Finish
Work, and any delay caused thereby shall not be considered a Landlord delay
under paragraph 6.4 herein.
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<PAGE>
If the need for any Change Order is the result of any inaccuracy,
inadequacy, illegality or error in the Working Drawing Documents caused by the
Architect, or in the mechanical or electrical design documents caused by the
mechanical or electrical contractors/designers, the party hereto who is damaged
thereby shall own any claim therefor.
8. CONDITION OF THE LEASED PREMISES. Other than the items specified in the
--------------------------------
written punch list issued by the Architect under paragraph 1.9 of this Work
Letter, by taking possession of any portion of the Leased Premises (Tenant's
access pursuant to Article 6.5 hereunder excluded), except for the punch list
prepared prior to occupancy, and for latent defects, Tenant will be deemed to
have confirmed that the Leased Premises is Substantially Complete and to have
accepted same in its condition on the date of such possession and to have
acknowledged that Landlord had installed the improvements as required by this
Work Letter and that there are no items needing additional work or repair. The
punch list will not include any damage caused by Tenant's move-in, or early
access if allowed by Landlord. Damage caused to the Leased Premises, the
Building or Common Areas by Tenant's move-in or early access will be repaired or
corrected by Landlord at Tenant's expense.
Tenant acknowledges that neither Landlord nor its agents or employees has
made any representations or warranties as to the suitability or fitness of the
Leased Premises or Building for the conduct of Tenant's business or for any
other purpose, nor has Landlord or its agents or employees agreed to undertake
any alterations or construct any tenant improvements to the Building except as
expressly provided in this Lease, and the Work Letter. Landlord shall have no
responsibility for any failure, inability or delay of or by the local provider
of telephone service or fiber optics to meet Tenant's requirements, and Tenant's
inability to obtain its required telephone service or fiber optics (unless
directly caused by Landlord's willful acts) shall not delay the rental starting
date for the Leased Premises.
9. NOTICE. Due to the "fast-track" schedule required to complete the
------
Planning and Construction work, by the target dates required herein, and the
need for prompt approvals and response, the following provisions regarding
notice shall apply for purposes of notice and response for all Tenant Finish
Work, and the Planning therefor, under this Work Letter. Notice for submitting
requests, plans, or other information for approval, and for giving approval,
disapproval or other objections may be given by either of the following two
methods:
(i) sending same in writing by a national courier service which provides
receipts and guaranteed next day delivery (excluding Sundays and national
holidays), for next day delivery, properly addressed and prepaid, to, the
Tenant's Representatives at the address set forth below in this paragraph,
or to the Landlord's Representative at the address for him set forth in this
paragraph. If given by overnight courier service, the notice shall be
deemed given, and any time period, including any three (3) business day time
period, shall begin to run at the time of delivery, as shown by the receipt
from the national courier service, for such package. Signature may be
waived for all such overnight deliveries; or
(ii) by facsimile transmission to the facsimile number for the Landlord's
Representative and for the Tenant's Representative set forth below in this
paragraph, by a facsimile machine which prints a simultaneous record which
shows that the particular facsimile transmission was sent without error to
the facsimile telephone number set forth below. Each party shall equip its
facsimile machine to designate its own correct telephone number to any
transmitting facsimile machine from which it receives a facsimile
transmission, and, if such party fails to do so, such party shall bear the
risk of incorrect delivery.
Landlord's Representative:
Loren E. Snyder
Woodmen Office Campus II JV L.L.C.
c/o Integrated Property Management, Inc.
455 Sherman Street, Suite 140
Denver Colorado 80203
Telephone Number: (303) 691-8665
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Facsimile Number: (303) 733-6272
Mobile/Voice Mail Number: (303) 880-2755
Tenant's Representative:
Steven M. Johnson
Optika Imaging Systems, Inc.
5755 Mark Dabling Boulevard, Suite 100
Colorado Springs, Colorado 80919
Telephone Number: (719) 548-9800
Facsimilie Number: (719)
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<PAGE>
This work letter is executed by Landlord and Tenant below.
LANDLORD: TENANT:
WOODMEN OFFICE CAMPUS II JV OPTIKA IMAGING SYSTEMS, INC.,
L.L.C., A COLORADO LIMITED A DELAWARE CORPORATION
LIABILITY COMPANY
By: By:
--------------------------- ---------------------------------
Name:LOREN E. SNYDER Name: STEVEN M. JOHNSON
------------------------- -------------------------------
Title: MANAGER Title:VICE PRESIDENT AND CHIEF
------------------------ ------------------------------
FINANCIAL OFFICER
Date: ------------------------------
-------------------------
Date:
-------------------------------
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<PAGE>
EXHIBIT C - 2
TENANT FINISH DESIGN SCHEDULE
-----------------------------
WOODMEN OFFICE CAMPUS II BUILDING
NOTE: ALL SUBMITTALS BY GRAY DESIGN GROUP OF COLORADO, INC. (THE "ARCHITECT")
- ----
FOR APPROVAL SHALL REQUIRE WRITTEN RESPONSE INDICATING ANY CORRECTIONS OR
REVISIONS WITHIN THREE (3) BUSINESS DAYS, OR SHALL BE DEEMED APPROVED. ANY
MODIFICATIONS TO AN APPROVED SUBMITTAL SHALL BE A CHANGE ORDER. NONE OF THE
TIME LIMITS IN THIS ATTACHMENT TO THE WORK LETTER SHALL ALTER OR CONTROL OVER
ANY CONFLICTING TIME LIMITS SET FORTH IN THE LEASE OR THE WORK LETTER.
On or before January 27, 1997:
- -----------------------------
1. Tenant shall issue to Landlord for approval all ceiling grid product
material and color selections approved by Tenant and authorize release
of factory order for these materials.
2. Tenant shall issue to Landlord for approval all color/finish selections
approved by Tenant, and authorize release of factory order for all wood
doors and metal door frames.
On or before January 28, 1997:
- -----------------------------
1. Tenant shall issue to Landlord for approval carpet sample "strike-offs"
approved by Tenant, and written authorization to release the carpet order with
the suppler/mill..
On or before January 30, 1997:
- -----------------------------
1. Tenant to issue to Landlord for approval door hardware schedule and
finish hardware cut-sheets approved by Tenant and authorize release of
factory order of all door hardware.
2. Tenant to issue to Landlord for approval all light fixture product
selections approved by Tenant, and written authorization for release of
factory order for all light fixtures.
3. Tenant to issue casework drawings approved by Tenant to Landlord for
review of design intent.
On or before February 5, 1997:
- -----------------------------
1. Tenant to issue to Landlord all Tenant approved Working Drawing
Documents and electrical, mechanical and plumbing specifications for
Construction (except for color selections.)
On or before February 10, 1997:
- ------------------------------
1. Tenant to issue to Landlord for approval all Tenant approved paint
material specifications and color selections for all paint to be applied to
exposed structure, mechanical and electrical elements in ceiling plenum.
2. Tenant to issue to Landlord for approval all Tenant approved
color selections and materials specifications for all paint materials and
millwork/laminate selections.
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EXHIBIT C - 3
CONSTRUCTION SCHEDULE
----------------------
WOODMEN OFFICE CAMPUS II BUILDING
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<PAGE>
EXHIBIT C - 3
CONSTRUCTION SCHEDULE
----------------------
WOODMEN OFFICE CAMPUS II BUILDING
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<PAGE>
EXHIBIT C - 3
CONSTRUCTION SCHEDULE
----------------------
WOODMEN OFFICE CAMPUS II BUILDING
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<PAGE>
Exhibit D - Rules and Regulations
RULES AND REGULATIONS
1. The sidewalks, hallways, passages, exits, entrances, elevators (if any), and
stairways of the Building shall not be obstructed by any of the tenants or used
by them for any purpose other than for ingress to and egress from their
respective premises. The halls, passages, exits, entrances, elevators (if any)
and stairways are not for the general public and Landlord shall in all cases
retain the right to control and prevent access hereto of all persons whose
presence in the judgement of Landlord would be prejudicial to the safety,
character, reputation and interest of the Building and its tenants, provided
that nothing herein contained shall be construed to prevent such access to
persons with whom any tenant normally deals in the ordinary course of its
business, unless such persons are engaged in illegal activities. No tenant and
no employee or invitee of any tenant shall go upon the roof of the Building.
Landlord shall have the right at any time without the same constituting an
actual or constructive eviction and without incurring any liability to Tenant
therefore to change the arrangement and/or location of entrances or passageways,
doors or door ways, corridors, elevators, stairs, toilets or other common areas
of the Building; provided, however, Landlord shall not change the Common Areas
in a manner which materially or unreasonably interferes with Tenant's Use of
Leased Premises.
2. No sign, placard, picture, name, advertisement or notice visible from the
exterior of any tenant's premises shall be inscribed, painted, affixed or
otherwise displayed by any tenant on any part of the Building without the prior
written consent of Landlord. Landlord has adopted interior signage format and
guidelines relating to signs inside the Building. Tenant agrees to conform to
such guidelines. All approved signs or lettering on doors or walls shall be
printed, painted, affixed or inscribed at the expense of Tenant by a person
approved by Landlord. Material affixed to the window glass or interior lighted
signs visible from outside the Building will not be permitted.
3. In order for a new or existing building tenant to have signage on the
Building monument sign, the following criteria must be met:
a. Tenant must occupy all of one floor on one wing of the Building or not less
than 15,000 square feet.
b. Monument signage may be available pursuant to Exhibit "G" primarily to
announce to the public driving by on the Interstate that the tenant
mentioned occupy the building. Monument signage is not intended nor will it
be allowed to advertise anything other than tenant name and logo.
c. Tenant must be on a valid executed lease with at least a three year term.
d. Tenant shall pay any cost for any modifications to the signage after the
Commencement Date of the Lease.
e. Should tenant, at any point in time, reduce its square footage to something
less than 15,000 square foot or one wing of one floor, then, at Landlords
option, Landlord may remove tenant sign from the monument sign.
D-1
<PAGE>
f. Any modifications to this policy must be approved in advance and in writing
by the Landlord.
g. Landlord reserves the right to approve or disapprove any sign request beyond
what is set forth in Exhibit "G".
h. Landlord reserves the right to modify monument sign criteria at any time but
only for future application and subject to the terms of Exhibit "G".
4. The Premises shall not be used for the storage of merchandise held for sale
to the general public or for lodging. No cooking shall be done or permitted on
the Premises, except the private use by Tenant of Underwriters' Laboratory
approved equipment for brewing coffee, tea, hot chocolate and similar beverages,
and use of microwave ovens for heating precooked foods or beverages shall be
permitted, provided that such use is in accordance with all applicable Federal,
state and municipal laws, codes, ordinances, rules and regulations.
5. No tenant shall employ any person or persons other than the janitor of
Landlord for the purpose of cleaning its premises unless otherwise agreed to by
Landlord in writing. Except with the written consent of Landlord, no person or
persons other than those approved by Landlord shall be permitted to enter the
Building for the purpose of cleaning the same. No tenant shall cause any
unnecessary labor by reason of such Tenant's carelessness of indifference in the
preservation of good order and cleanliness. Landlord shall not be responsible
to any tenant for any loss of property on the Premises, however occurring, or
for any damage done to the effects of any tenant by the janitor or any other
employee or any other person. Janitor service will not be furnished on nights
when rooms are occupied after 10:30 P.M. unless, by agreement in writing,
service is extended to a later hour for specifically designated rooms.
6. Landlord will furnish each tenant free of charge with two (2) keys to each
door lock provided in the Premises by Landlord. Landlord may make a reasonable
charge for any additional keys. No tenant shall have any such keys copied or
any keys made. No tenant shall alter any lock or install a new or additional
lock or any bolt on any door of its premises. Each tenant, upon the termination
of its lease, shall deliver to Landlord all keys to doors in the building.
7. Landlord shall designate appropriate entrances for deliveries or other
movement to or from the Premises of equipment, materials, supplies, furniture or
other property, and Tenant shall not use any other entrance or elevators (if
any) for such purposes. All persons employed and means or methods used to move
equipment, materials, supplies, furniture or other property in or out of the
Building must be approved by Landlord prior to any such movement. Landlord
shall have the right to prescribe the maximum weight, size and position of all
equipment, materials, furniture or other property brought into the building.
Heavy objects shall, if considered necessary by Landlord, stand on a platform of
such thickness as is necessary to properly distribute the weight. Landlord will
not be responsible for loss of or damage to any such property from any cause,
and all damage done to the Building by moving or maintaining such property shall
be repaired at the expense of Tenant.
8. No tenant shall use or keep in the Premises or the Building any kerosene,
gasoline or inflammable or combustible fluid or material other than limited
quantities thereof reasonably necessary for the operation or maintenance of
office equipment. No tenant shall use any method
D-2
<PAGE>
of heating or air conditioning other than that supplied by Landlord. No tenant
shall use or keep or permit to be used or kept any foul or noxious gas or
substance in the Premises, or permit or suffer the Premises to be occupied or
used in a manner offensive or objectionable to Landlord or other occupants of
the Building by reason of noise, orders or vibrations, or interfere in any way
with other tenants or those having business in the Building, nor shall any
animals or birds be brought or kept in the Premises or the Building.
9. Landlord shall have the right, exercisable upon prior written notice with
reasonable cause and without liability to any tenant, to change the name of the
Building or the street address of the Building.
10. Landlord establishes the hours of 7:30 A.M. to 6:00 P.M. Monday through
Friday, except Building Holidays which include New Year's Day, Easter, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day as
reasonable and usual business hours for the purposes of subparagraph 7.4 of the
Lease.
11. Landlord reserves the right to exclude from the Building between the hours
of 6:00 P.M. and 7:30 A.M. Monday through Friday, at all hours on Saturdays and
Sundays, and on Building Holidays, all persons who do not present identification
acceptable to Landlord. Each tenant shall provide Landlord with a list of all
persons authorized by Tenant to enter its premises and shall be liable to
Landlord for all acts of such persons. Landlord shall in no case be liable for
damages for any error with regard to the admission to or exclusion from the
Building of any person. In the case of invasion, mob riot, public excitement or
other circumstances rendering such action advisable in Landlord's opinion,
Landlord reserves the right to prevent access to the Building during the
continuance of the same by such action as Landlord may deem appropriate,
including closing doors.
12. The directory to the Building will be provided for the display of the name
and location of Tenants and a reasonable number of the principal officers and
employees of tenants at the expense of such tenants. Landlord reserves the
right to restrict the amount of directory space utilized by any tenant.
13. No curtains, draperies, blinds, shutters, shades, screens or other
coverings, hangings or decorations shall be attached to, hung or place in, or
used in connection with any window of the Building without the prior written
consent of Landlord. In any event, with the prior written consent of Landlord,
such items shall be installed on the office side of Landlord's standard window
covering and shall in no way be visible from the exterior of the Building.
Tenant shall keep window coverings closed when the effect of sunlight (or the
lack thereof) would impose unnecessary loads on the Building's heating or air
conditioning system.
14. No tenant shall obtain for use in the Premises ice, drinking water, food,
beverage, towel or other similar services, except at such reasonable hours and
under such reasonable regulations as may be fixed by Landlord.
15. Each tenant shall ensure that the doors of its premises are closed and
locked and that all water faucets, water apparatus lights and other utilities
are shut off before Tenant or Tenant's employees leave the Premises so as to
prevent waste or damage, and for any default or carelessness in this regard,
Tenant shall make good all injuries sustained by other tenants or occupants of
the Building or Landlord. On multiple-tenancy floors, all tenants shall keep
the doors to the Building corridors closed at all times except for ingress and
egress.
16. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall
not be used for any purpose other than that for which they were constructed, no
foreign substance of any kind
D-3
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whatsoever shall be thrown therein and the expense of any breakage, stoppage or
damage resulting from the violation of this rule shall be borne by the tenant
who, or whose employees or invitees, shall have caused it.
17. Except with the prior written consent of Landlord, no tenant shall sell at
retail newspapers, magazines, periodicals, theater or travel tickets or any
other goods or merchandise to the general public in or on the Premises, nor
shall any tenant carry on or permit or allow any employee or other person to
carry on the business of stenography, typewriting, printing or photocopying or
any similar business in or from the Premises for the service or accommodation of
occupants of any other portion of the Building, nor shall the Premises of any
tenant be used for manufacturing of any kind, or any business or activity other
than that specifically provided for in such tenant lease.
18. No tenant shall install any radio or television antenna, loudspeaker or
other devise on the roof or exterior walls of the Building. No TV or radio or
recorder shall be played in such a manner as to cause a nuisance to any other
tenant.
19. There shall not be used in any space, or in the public halls of the
Building, either by any tenant or others, any hand trucks except those equipped
with rubber tires and side guards or such other material handling equipment as
Landlord may approve. No other vehicles of any kind shall be brought by any
tenant into the Building or kept in or about its premises.
20. Each tenant shall store all its trash and garbage within its premises. No
material shall be placed in the trash boxes or receptacles if such material is
of such nature that it may not be disposed of in the ordinary and customary
manner of removing and disposing of office building trash and garbage in the
City of Colorado Springs without being in violation of any law or ordinance
governing such disposal. All garbage and refuse disposal shall be made only
through
entryways and elevators provided for such purposes and at such time as Landlord
shall designate.
21. Canvassing, soliciting, distribution of handbills or any other written
material and peddling in the Building are prohibited, and each tenant shall
cooperate to prevent the same.
22. The requirements of tenants will be attended to upon application in writing
at the office of the Building. Employees of Landlord shall not perform any work
or do anything outside of their regular duties unless under special instructions
from Landlord.
23. Landlord may waive any one or more of these Rules and Regulations for the
benefit of any particular tenant or tenants, but no such waiver by Landlord
shall be construed as a waiver of such Rules and Regulations in favor of any
other tenant or tenants, nor prevent Landlord from thereafter enforcing any such
Rules and Regulations against any or all of the tenants of the Building.
24. These Rules and Regulations are in addition to, and shall not be construed
to in any way modify or amend, in whole or in part, the agreements, covenants,
conditions and provisions of any lease of Premises in the Building.
25. Landlord reserves the right to make such other rules and regulations as in
its judgment may from time to time be needed for the safety, care and
cleanliness of the Building and for the preservation of good order therein.
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<PAGE>
Exhibit E
COMMENCEMENT OF LEASE TERM AND ESTOPPEL CERTIFICATE
THIS COMMENCEMENT OF LEASE TERM AND ESTOPPEL CERTIFICATE, dated for
reference purposes only this 30TH day of SEPTEMBER, 1996, by and between WOODMEN
OFFICE CAMPUS II JV LLC, A COLORADO LIMITED LIABILITY COMPANY, hereinafter
called the "Landlord", whose address is 455 Sherman Street, Suite 140, Denver,
Colorado 80203 and OPTIKA IMAGING SYSTEMS, INC., A DELAWARE CORPORATION,
hereinafter called "Tenant", whose address is 7450 CAMPUS DRIVE, SUITE 200,
COLORADO SPRINGS, COLORADO 80920.
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, the Lessor and Lessee, entered into an Office Lease dated SEPTEMBER
30, 1996, ("the Lease") which Lease demised the Leased Premises located at
WOODMEN OFFICE CAMPUS II, 7450 CAMPUS DRIVE, COLORADO SPRINGS, COLORADO 80920,
described in Exhibit "B" to the Lease.
-----------
WHEREAS, the parties desire to reaffirm and/or amend and certify to certain
provisions of the Lease; and
WHEREAS, the parties desire that the matters set forth herein be conclusive
and binding on the parties.
NOW, THEREFORE, for a good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. The Lease Commencement Date is deemed and agreed to be ______________,
199___, and the Lease Termination Date is agreed and deemed to be
______________, 199___, unless sooner terminated, as provided therein.
2. Tenant's first installment of Base Rent in the amount of
_________________________ __________________________________ Dollars
($__________) for the period of ___________ _________________________________
(is due on) (was paid on) _____________________, 199___.
3. Tenant's first installment of Tenant's PERCENTAGE Share of ESTIMATED
ANNUAL Operating Expenses in THE amount OF
______________________________________________ DOLLARS ($_________) FOR THE
PERIOD OF ________________________ is due on ______________________, 199___.
4. By execution hereof, Tenant acknowledges and agrees that all improvements
or other work required of Landlord has been satisfactorily performed and Tenant
hereby accepts the Leased Premises in full compliance with the terms and
conditions of the Lease.
5. Except as may be amended herein, all terms and conditions of the Lease
shall continue in full force and effect and are hereby republished and
reaffirmed in their entirety.
6. This Certificate shall be binding upon and may be relied upon by the
parties hereto and their respective legal representatives, successors and
assigns.
IN WITNESS WHEREOF, the Landlord and Tenant have executed this statement
on the dates below written.
LANDLORD: TENANT:
WOODMEN OFFICE CAMPUS II JV LLC, OPTIKA IMAGING SYSTEMS, INC.,
A COLORADO LIMITED LIABILITY COMPANY A DELAWARE CORPORATION
BY: /s/ LOREN E. SNYDER BY: /S/ STEVEN M. JOHNSON
--------------------------------- --------------------------------
NAME: LOREN E. SNYDER NAME: STEVEN M. JOHNSON
------------------------------- ------------------------------
TITLE: MANAGER TITLE: VICE PRESIDENT AND CHIEF
------------------------------ -----------------------------
FINANCIAL OFFICER
-----------------------------
DATE: OCTOBER 11, 1996 DATE: OCTOBER 11, 1996
------------------------------- ------------------------------
E-1
<PAGE>
Exhibit F
AGREEMENT FOR PARKING
This AGREEMENT FOR PARKING is dated, for reference purposes only, this
30TH day of SEPTEMBER, 1996 between WOODMEN OFFICE CAMPUS II JV LLC, A COLORADO
LIMITED LIABILITY COMPANY ("Landlord") and OPTIKA IMAGING SYSTEMS, INC., A
DELAWARE CORPORATION ("Tenant").
W I T N E S S E T H
- - - - - - - - - -
A. By Office Lease dated SEPTEMBER 30, 1996 (THE "LEASE"), Landlord
leased to Tenant certain office building space at WOODMEN OFFICE CAMPUS II,
located at 7450 CAMPUS DRIVE, COLORADO SPRINGS, COLORADO, 80907 (the
"Building").
B. Appurtenant to the Building are uncovered parking spaces. Tenant
desires to lease from Landlord parking spaces in said area.
C. Landlord is willing to let certain parking spaces to Tenant pursuant
to the terms and conditions contained herein.
NOW, THEREFORE, the parties agree as follows:
1. Lease of Parking Spaces.
-----------------------
a. WEEKDAY DAYTIME PARKING LICENSE. Between the hours of 7:00 a.m.
-------------------------------
and 6:00 p.m. Monday through Friday, Landlord hereby leases to Tenant uncovered
and unassigned parking spaces in the ratio of four and one-half (4 1/2) stalls
per 1,000 square feet of rentable area in the Leased Premises, located in the
improvements adjacent to the Building. Said Lease shall be for a period
concurrent with the term of the Office Lease, as the same may be extended or
renewed.
b. AFTER HOURS PARKING LICENSE. Between the hours of 6:00 p.m. and
---------------------------
7:00 a.m. Monday through Friday, Landlord hereby leases to Tenant forty (40)
uncovered and unassigned parking spaces located in the improvements adjacent to
the Building. Said Lease shall be for a period concurrent with the term of the
Office Lease, as the same may be extended or renewed.
2. Nonexclusive. So long as Tenant is not in default under this Lease,
------------
Tenant shall be entitled to use the parking spaces referenced above in common
with the other tenants of the Building. This Parking Agreement shall not be
deemed to be a lease of specific parking spaces and no specific parking spaces
shall be reserved for the use of the Tenant, but shall be deemed to be a right
granted to Tenant to use the designated number of parking spaces within the
specific parking areas designated above. Landlord shall not lease to all of the
tenants in the Building more than the total number of actual parking spaces
located adjacent to the Building. The provisions on casualty loss and eminent
domain shall apply to the parking spaces. Tenant shall not have the
F-1
<PAGE>
right to use the parking spaces unless it has fully paid any amounts then due
for the parking spaces in addition to the Base Rent and all other charges due
under the Lease. In the event that any amounts are received from the Tenant
which are less than the total amounts due under the Lease, including parking
charges, Landlord may credit such amounts, in its sole discretion, as it deems
appropriate.
3. Operation of Parking Spaces. Tenant agrees to comply with all
---------------------------
reasonable rules and regulations imposed by Landlord for the operation,
utilization and maintenance of the parking spaces. Tenant shall not undertake
any activity which will increase Landlord's insurance or create a disturbance or
waste to the parking spaces. Tenant shall have access to the above described
allotments of parking spaces between the hours designated above, three hundred
sixty-five (365) days per year so long as Tenant is not in default, and subject
to the provisions on casualty loss, eminent domain and other applicable
provisions of the Lease. Tenant recognizes that during non-business hours,
Landlord may maintain reduced artificial lighting within the parking area.
Landlord shall maintain the parking facility well lighted from 7:00 A.M. to
10:30 P.M. Monday through Friday, and from 8:00 A.M. until 5:00 P.M. on Saturday
and Sunday (with reduced artificial lighting at other times), and generally in
good condition and repair which shall mean that, within a reasonable time after
such conditions appear, Landlord shall maintain those portions of the parking
area which are actually necessary for access and/or parking, substantially free
of ice, snow and potholes to the extent it is reasonably possible. Landlord
shall have the right, at any time and from time to time by written notice to
Tenant, to designate specific parking spaces for use by Tenant, its agents,
employees and invitees, in which case Tenant shall use, and shall require its
agents, employees and invitees to use only such spaces.
4. Default. Lessee shall be in default under this Agreement upon the
-------
occurrence of any of the following events:
4.1 Tenant is in default for any reason pursuant to the terms and
conditions of the Office Lease.
5. Remedies. Upon the occurrence of an event of default, Lessor shall
--------
be entitled to declare this Agreement terminated, to terminate the rights of
Lessee to utilize the parking spaces, and seek whatever damages Lessor may deem
reasonable and proper including, without limitation, its fees and expenses
(including attorneys' fees) incurred in pursuing such action.
IN WITNESS WHEREOF, the Landlord and Tenant have executed this Agreement
for Parking on the dates below written.
LANDLORD: TENANT:
WOODMEN OFFICE CAMPUS II JV LLC, OPTIKA IMAGING SYSTEMS, INC.,
A COLORADO LIMITED LIABILITY COMPANY A DELAWARE CORPORATION
BY: /S/ LOREN E. SNYDER BY: /S/ STEVEN M. JOHNSON
--------------------------------- ---------------------------------
NAME: LOREN E. SNYDER NAME: STEVEN M. JOHNSON
------------------------------- -------------------------------
TITLE: MANAGER TITLE: VICE PRESIDENT AND CHIEF
------------------------------ ------------------------------
FINANCIAL OFFICER
------------------------------
DATE: OCTOBER 11, 1996 DATE: OCTOBER 11, 1996
______________________________ ______________________________
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<PAGE>
Exhibit G
AGREEMENT FOR SIGNAGE
THIS AGREEMENT FOR SIGNAGE is dated, for reference purposes only, this
30TH day of SEPTEMBER, 1996 between WOODMEN OFFICE CAMPUS II JV LLC, A COLORADO
LIMITED LIABILITY COMPANY, (the "Landlord") and OPTIKA IMAGING SYSTEMS, INC., A
DELAWARE CORPORATION, (the "Tenant").
W I T N E S S E T H :
- - - - - - - - - -
A. By Office Lease dated SEPTEMBER 30, 1996 (the "Lease"), Landlord leased
to Tenant certain space at WOODMEN OFFICE CAMPUS II, located at 7450 CAMPUS
DRIVE, COLORADO SPRINGS, COLORADO 80920.
B. Landlord is willing to ALLOW signage to Tenant pursuant to the terms
and conditions contained herein.
C. Tenant at Tenant's sole cost, which cost may be paid for from the Lease
Incentive Allowance or the TIA, may purchase and install signage as described
below.
NOW, THEREFORE, the parties agree as follows:
1. Building Identification Signs. One (1) Building identification sign
-----------------------------
may be purchased, at Tenant's sole cost, and displayed (i) on each floor which
is sixty percent (60%) or more occupied by Tenant or an Affiliate, and (ii) on
the door or on the wall located next to the entry door of each suite occupied by
Tenant or an Affiliate on any floor which is not fully occupied by Tenant or an
Affiliate. All such signage must comply with any applicable governmental laws,
statutes, ordinances and regulations and be approved in writing by Landlord in
Landlord's reasonable discretion.
2. Exterior Building Signs. Tenant or an Affiliate, at Tenant's sole
-----------------------
cost, may purchase and install no more than two (2) exterior signs on the
exterior of the Building with no more than one (1) sign on each side of the
Building (the "Tenant's Exterior Building Signs"). The Tenant shall not be
allowed to install any of the Tenant's Exterior Building Signs until Tenant has
obtained Landlord's prior written approval, which shall not be unreasonably
withheld, and the Tenant has supplied to Landlord evidence that Tenant has
complied with all applicable governmental restrictions and has obtained permits
from all applicable governmental authorities. Any installation to be done by
Tenant for Tenant's Exterior Building Signs shall be done pursuant to the
provisions of the Office Lease on Alterations and Additions. Exterior Building
signage will be limited to only two tenants of the building. Such signage
rights will allow approximate equal prominence for each tenant. Tenant shall
choose, subject to the reasonable approval of Landlord and the approval of any
applicable governmental entity having jurisdiction, where to locate Tenant's
sign on the South and West facing exterior wall and Landlord shall choose,
subject to Tenant's reasonable approval and the approval of any applicable
governmental entity having jurisdiction, where to locate Tenant's sign on the
North and West facing exterior wall of the Building.
Each of the Tenant's Exterior Building Signs shall be equal or less than
fifty percent (50%) of the allowed signage area by the City of Colorado Springs
which Landlord has been
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<PAGE>
informed equates to one and one-half (1 1/2) square feet in total area for each
linear foot of length for the wall on which the sign is located.
3. Monument Signage. Tenant shall have the right to purchase, at Tenant's
----------------
sole cost, and install a sign which prominently displays Tenant's or an
Affiliate's name on any monument sign placed by Landlord along the property line
bordering Interstate 25. Tenant shall have the second right, subject to a prior
existing first right, to choose and receive its desired signage strip location
from amongst the signage strip locations available on such monument sign, but
Tenant shall not have any exclusive rights to utilize such monument sign.
Landlord and Tenant will agree upon the design of the monument sign no later
than the date the Working Drawing Documents are due for the Initial Premises.
Landlord shall be responsible for the design of the monument sign (and such
design cost shall not be included as part of the TIA under EXHIBIT B), and
Tenant shall be deemed to have approved any such design unless Tenant objects,
in writing, within three (3) business days after submission of the plans for the
proposed monument sign by Landlord to Tenant. Tenant shall not be entitled to
the proportion of the monument sign that the Premises bears to the Building, but
the space allocable to Tenant on the monument sign shall be equivalent to the
space allocated to any other tenant permitted to utilize space on the monument
sign.
4. Effect of Assignment on Signage Rights. The Tenant's signage rights
--------------------------------------
shall not be effected by an assignment or subletting to an Affiliate, as such
term is defined in the Lease. If Tenant assigns or sublets all of the Premises
to a non-Affiliate, the non-Affiliate assignee shall be entitled to exercise all
signage rights of Tenant hereunder. Without Landlord's further prior written
consent, which shall not be unreasonably withheld, conditioned or delayed, no
non-Affiliate assignee or sublessee of less than all the Premises shall be
entitled to exercise any of the signage rights granted to Tenant hereunder. In
the event Tenant assigns or subleases less than all of the Premises to any non-
Affiliate, Tenant shall lose the rights for one of Tenant's Building Signs for
every twenty-five percent (25%) of the Lease which is assigned or sublet to such
non-Affiliate.
5. Default. Tenant shall be in default under this Agreement upon the
-------
occurrence of any of the following events:
5.1 Tenant is in default for any reason pursuant to the terms and
conditions of the Lease.
6. Remedies. Upon the occurrence of an event of default, Landlord shall
--------
be entitled to declare this Agreement terminated, to terminate the rights of
Tenant to utilize the signage, and seek whatever damages Landlord may deem
reasonable and proper including, without limitation, its fees and expenses
(including attorneys' fees) incurred in pursuing such action.
7. Miscellaneous.
-------------
7.1 Any amount of the TIA, as such term is defined in Exhibit B
attached to this Lease (the "Work Letter") which is not used for the Tenant's
Finish Work, may be utilized, in whole or in part, by Tenant to pay for any of
the signage described in this Agreement for which Tenant is liable.
G-2
<PAGE>
7.2 No sign for Tenant on the exterior of the Building or on the
monument may display any information other than the Tenant's logo, name and the
financial group of companies with which Tenant is affiliated.
7.3 Upon the termination of this Lease, Tenant shall remove all
interior Building signs, exterior Building signs and monument signs, and shall
repair all damage caused by such removal (or the original installation of such
signs), and shall return the walls or other structures from which such signs are
removed to their original condition prior to the installation of any such signs,
all at Tenant's sole cost and expense.
G-3
<PAGE>
IN WITNESS WHEREOF, the Landlord and Tenant have executed this Agreement for
Signage on the dates below written.
LANDLORD: TENANT:
WOODMEN OFFICE CAMPUS II JV LLC, OPTIKA IMAGING SYSTEMS, INC.,
A COLORADO LIMITED LIABILITY COMPANY A DELAWARE CORPORATION
BY: /S/ LOREN E. SNYDER BY: /S/ STEVEN M. JOHNSON
--------------------------------- ---------------------------------
NAME: LOREN E. SNYDER NAME: STEVEN M. JOHNSON
------------------------------- -------------------------------
TITLE: MANAGER TITLE: VICE PRESIDENT AND CHIEF
------------------------------ ------------------------------
FINANCIAL OFFICER
------------------------------
DATE: OCTOBER 11, 1996 DATE: OCTOBER 11, 1996
------------------------------- -------------------------------
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<PAGE>
EXHIBIT H
RIGHT OF FIRST REFUSAL
This RIGHT OF FIRST REFUSAL is dated, for reference purposes only, this
30TH day of SEPTEMBER, 1996 between WOODMEN OFFICE CAMPUS II JV LLC, A COLORADO
LIMITED LIABILITY COMPANY, ("Landlord") and OPTIKA IMAGING SYSTEMS, INC., A
DELAWARE CORPORATION ("Tenant").
W I T N E S S E T H
- - - - - - - - - -
A. By Office Lease dated SEPTEMBER 30, 1996 (the "Lease"), Landlord
leased to Tenant certain office building space at WOODMEN OFFICE CAMPUS II,
located at 7450 CAMPUS DRIVE, COLORADO SPRINGS, COLORADO 80920 (the
"Building").
B. Tenant wants to have a right of first refusal with regard to certain
space within the Building.
C. Landlord is willing to let Tenant have such a right pursuant to the
terms and conditions contained herein.
NOW, THEREFORE, the parties agree as follows:
1. Subject to the terms and conditions set forth below, Tenant shall
have a right of first refusal ("Refusal Right") regarding: any remaining space
on the first (1st)floor of the Building (the "Refusal Space"). Such right of
first refusal may be exercised only upon strict compliance with the following
terms and conditions: In the event Landlord receives a letter of intent (from a
new proposed lessee) to lease the Refusal Space, Landlord shall promptly give
written notice ("Landlord's Notice") to Tenant of all the material business
terms and conditions proposed by such letter of intent, along with any changes
to the letter of intent which would make same acceptable to Landlord. Tenant
may exercise its right of first refusal by agreeing to meet the terms and
conditions set forth in Landlord's Notice, provided that: (i) the dates for any
purposes set forth in such letter of intent, such as for starting the Lease
term, completing construction, etc., shall be delayed by the same amount of time
that it took from the date of the letter of intent until the time that Tenant
exercises its rights. If Tenant does not exercise its right of first refusal
within ten (10) days after receipt of Landlord's Notice, Tenant shall be deemed
to have waived its right of first refusal for all or that portion of the Refusal
Space described in the letter of intent, and Landlord is thereafter free to
lease same to the new proposed lessee (or its successor, affiliate or assignee);
provided that Landlord shall have no right to enter into a lease which is more
than five percent (5%) more favorable with respect to the monetary business
terms to such new proposed lessee than was proposed in the Landlord's Notice .
If the Tenant elects to exercise this Right of First Refusal, Landlord and
Tenant shall execute an amendment to this Lease agreement within ten (10) days
after Tenant's exercise, and the amendment to this Lease shall set forth the
specific terms and conditions which are specified in the Landlord's Notice . If
Tenant does not exercise its Right of First Refusal but Landlord thereafter does
not enter into a Lease agreement with such new proposed lessee, this Right of
First Refusal shall attach for any subsequent letters of intent received by
Landlord for all or any portion of the Refusal Space. Tenant shall have no
right to exercise a Right of First Refusal unless all current Guarantors and
Assignors, if any, of the Lease agree to guarantee the new Lease for the Refusal
Space on a form equal or equivalent to the Guarantee or Assignment, as
applicable, for the Lease and the Guarantors and/or Assignors provide
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<PAGE>
Landlord with current financial statements (in a form and content which complies
with the terms and conditions as required of the Tenant under the Lease) which
are reasonably acceptable to the Landlord.
2. BY WHOM EXERCISABLE. This Right of First Refusal is not
assignable, and may not be exercised by any sublessee or assignee of the
original Tenant other than an approved Affiliate, regardless of whether the
sublease or assignment has been approved by the Landlord. No Guarantor or any
person other than the original Tenant shall have any right to exercise any of
the Tenant's rights under this Right of First Refusal.
3. TENANT'S OPTION RIGHTS. Tenant shall be deemed to have its Right of
First Refusal hereunder if, and only if: (i) Tenant is not in default under the
Lease at the time of the exercise of its rights hereunder beyond the expiration
of all applicable cure periods; and (ii) at no time since the Commencement Date
has there been more than one event of default in any twelve (12) month period
under the Lease. If any of the foregoing conditions are not met, Tenant shall
be deemed to have forfeited its Right of First Refusal.
IN WITNESS WHEREOF, the Landlord and Tenant have executed this Right of
First Refusal on the dates below written.
LANDLORD: TENANT:
WOODMEN OFFICE CAMPUS II JV LLC, OPTIKA IMAGING SYSTEMS, INC.,
A COLORADO LIMITED LIABILITY COMPANY A DELAWARE CORPORATION
BY: /S/ LOREN E. SNYDER BY: /S/ STEVEN M. JOHNSON
--------------------------------- ---------------------------------
NAME: LOREN E. SNYDER NAME: STEVEN M. JOHNSON
------------------------------- -------------------------------
TITLE: MANAGER TITLE: VICE PRESIDENT AND CHIEF
------------------------------ ------------------------------
FINANCIAL OFFICER
------------------------------
DATE: OCTOBER 11, 1996 DATE: OCTOBER 11, 1996
------------------------------- -------------------------------
H-2
<PAGE>
EXHIBIT I
ASSIGNMENT AND ASSUMPTION OF LEASE
----------------------------------
THIS ASSIGNMENT is made this __________ day of ____________________,
199__, between _______________________________ (the "Assignor"),
__________________________ (the "Assignee"), and WOODMEN OFFICE CAMPUS II JV
LLC, A COLORADO LIMITED LIABILITY COMPANY (the "Landlord") who agree as follows:
RECITALS
WHEREAS:
A. Assignor leased from Landlord certain real property located in the
County of EL PASO, State of COLORADO, and known as WOODMEN OFFICE CAMPUS II,
located at 7450 CAMPUS DRIVE, COLORADO SPRINGS, COLORADO 80920 (the
"Property") by an Office Lease dated the ________ day of ________________,
199___ (the "Lease"); and
B. Assignor desires to assign all of its rights and obligations under the
Lease to Assignee, and Assignee desires to assume all such rights and
obligations; and
C. Landlord desires to consent to said assignment without thereby
releasing any rights Landlord may have against Assignor.
NOW, THEREFORE, in consideration of the covenants, agreements, and
warranties herein, and for other valuable consideration, the parties agree as
follows:
1. Assignor hereby grants, conveys and assigns to Assignee all of its
right, title, interest and obligation under the Lease, such assignment to be
effective at 12:01 A.M. on the _____ day of __________, 19__.
2. Assignee hereby unconditionally assumes all rights and obligations
under the Lease as though Assignee had been the original tenant under the Lease.
Assignee shall be liable for any and all obligations, defaults or deficiencies
under the Lease regardless of when such obligations, defaults or deficiencies
may have occurred (including prior to the effective date of this Assignment), or
may become due or payable.
3. Landlord hereby consents and agrees to the assignment of all rights
and obligations under the Lease to Assignee without releasing any rights or
remedies which Landlord may have under the Lease, now or in the future, against
the Assignor.
I-1
<PAGE>
4. Assignor and Assignee understand that, regardless of what rights may
exist between them, they shall both remain absolutely and unconditionally liable
to Landlord for all of the obligations, terms and conditions of the Lease for
the balance of the term thereof, and for any extensions, renewals, alterations
and/or modifications of the Lease. Regardless of any rights and obligations
which may exist between Assignor and Assignee, Landlord shall have no obligation
to obtain Assignor's approval prior to executing or making any renewals,
extensions, modifications or other amendments to the Lease, and the failure by
Landlord to obtain such approval shall not in any way affect or diminish the
obligations of Assignor.
5. Any security deposit under the Lease shall continue to be held by
Landlord for the purposes stated in the Lease. After the effective date of this
Assignment, Landlord shall have no obligation (unless ordered otherwise by a
court of competent jurisdiction) to return all or any portion of the security
deposit, or make an accounting therefor, to Assignor. Any portion of the
security deposit or accounting therefor which is required to be sent by Landlord
under the Lease shall be sent to Assignee.
6. In the event of a notice of default, suit or other claim made by
Landlord upon Assignee for default of the Lease, Assignee shall immediately send
a copy thereof to Assignor. Any notice or notices given by Landlord to Assignor
shall be deemed to be for convenience only, and shall not release Assignee of
its obligation to give notice of any defaults or declared defaults to Assignor.
7. This Assignment shall be binding upon the parties hereto, their heirs,
successors, representatives and assigns, and by signature below, a party
acknowledges receipt of a copy hereof.
8. No delay by Landlord in the enforcement of any of Landlord's rights
and/or remedies under the Lease against Assignee shall affect or diminish the
obligations of Assignor hereunder. The obligation of all Assignors and
Assignees hereunder is joint and several. Landlord may proceed to enforce the
obligations of the Lease against any Assignor or Assignee without proceeding
against the other(s). The right of Landlord to enforce the obligations of
Assignor shall not be postponed, delayed or otherwise prejudiced by the
commencement of proceedings (whether voluntary or involuntary) to have any
Assignee named as a debtor under the federal Bankruptcy Code, or under any
similar state or federal law.
9. This Assignment shall be construed according to the laws of the State
in which the Property is located.
10. If Landlord has or obtains any interest in any collateral to secure
all or any portion of any Assignee's obligation under the Lease, or to secure
any other obligation of Assignee upon which Assignor may be liable, such
interest shall be deemed to be held for the benefit of Landlord only, and shall
not inure at any time to or for the benefit of Assignor. Landlord shall have no
obligation to record, maintain, or otherwise enforce any such security interest,
and Landlord's failure to do so shall neither diminish the obligations of
Assignor under the Lease nor create any claim or right of Assignor against
Landlord.
11. All sections of this Assignment shall be deemed to be severable. If
any portion of this Assignment is deemed to be unenforceable by a court of
competent jurisdiction, this Assignment shall be deemed to be modified only to
the minimum extent necessary to comply with applicable law.
I-2
<PAGE>
12. If there is more than one Assignor or Assignee, the singular shall
also be deemed to mean the plural.
13. Assignor and Assignee represent as follows:
13.1 A true, correct and complete copy of the Lease and any currently
effective amendments make up a total of _________ pages, and a copy of all these
pages is attached hereto. The Lease, as amended (if applicable), is in full
force and effect. There are no other written agreements, promises,
representations or covenants, with regard to the Lease and the occupation of the
Property which Assignor or Assignee considers to be effective at this time or
which will become effective at a later time without further approval by the
Landlord under the Lease. There are no oral representations, agreements,
promises or covenants, with regard to the Lease and the occupation of the
Property, which Assignor or Assignee considers to be effective at this time or
which will become effective at a future time without further approval by the
Landlord under the Lease.
13.2 The amount of the security deposit which the Assignor and Assignee
claim is currently being held by the Landlord under the Lease is AND
/100 DOLLARS ($ ). To the best of Assignor's knowledge and belief,
all of the security deposit is still being held under the Lease.
13.3 The current monthly Base Rent under the Lease is AND /100
DOLLARS ($ ) per month payable on or before the first day of each calendar
month. The Assignor has paid Base Rent only through ____________, 19__.
13.4 The Assignor and Assignee are not aware of any defaults by the
Landlord under the Lease or of any facts which could constitute a default by the
Landlord under the Lease. The Landlord does not owe Assignor or Assignee any
money for tenant finish or otherwise except as set forth on Exhibit A attached
hereto ( pages), and except for any monies which may become due as a result of
the next annual reconciliation of Excess Operating Expenses.
14. This Assignment shall not be effective until executed by all
Guarantors of the Lease. Each Guarantor which executes this Assignment
acknowledges that the Guaranty such Guarantor signed for the Lease is in full
force and effect, that it is fully, absolutely and unconditionally binding on
such Guarantor, and that Guarantor is not currently aware of any facts which
would constitute a defense to the Guarantor's liability under its Guaranty of
the Lease. Each such Guarantor also agrees that it shall remain completely,
absolutely and unconditionally liable for the balance of the Lease term, as the
same may be extended, modified or renewed. Each Guarantor acknowledges that the
Assignee and the Landlord may enter into any modification, extension or renewal
of the Lease and that, regardless of any rights between the Assignee and the
Guarantor, the Landlord shall have no obligation to obtain any consent or
approval by the Guarantor of any such modification, extension or renewal; and
the failure of the Landlord to obtain any such approval or consent by the
Guarantor shall not in any way eliminate or reduce the Guarantor's obligations
under its Guaranty of the Lease.
I-3
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Assignment the day and
year written above.
LANDLORD: TENANT/ASSIGNOR:
WOODMEN OFFICE CAMPUS II JV ---------------------------,
LLC,A COLORADO LIMITED LIABILITY COMPANY ---------------------------
By: By:
------------------------------------- -------------------------------
Name: Name:
----------------------------------- -----------------------------
Title: MANAGER Title:
---------------------------------- ----------------------------
Date: Date:
----------------------------------- -----------------------------
ATTESTED:
------------------------
Secretary
ASSIGNEE
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
Date:
-----------------------------------
ATTESTED:
- ---------------------------
Secretary
APPROVAL BY GUARANTOR(S)
------------------------
I/We the undersigned (i) hereby consent(s) to the foregoing Assignment,
and understand that I/we am/are and will be bound thereby for as long as the
Assignor is liable under the Lease, and (ii) hereby confirm that the
_________________________ Guaranty dated ____________________________, 19___,
is still in full force and effect.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
Date:
-----------------------------------
ATTESTED:
- ---------------------------
Secretary
I-4
<PAGE>
EXHIBIT J - LETTER OF CREDIT FORM
SPECIMEN TEXT OF A LETTER OF CREDIT
(ON BANK LETTERHEAD)
(....... amount in figures and words .......)
ISSUED BY :
LETTER OF CREDIT NO. :
DATE OF ISSUE :
DATE OF MATURITY :
DATE OF EXPIRATION :
BENEFICIARY :
WE, THE UNDERSIGNED, HEREBY OPEN OUR UNCONDITIONAL, IRREVOCABLE, DIVISIBLE AND
TRANSFERABLE LETTER OF CREDIT IN FAVOR OF
__________________________________________________________ FOR THE AMOUNT OF
______________________________________________ UNITED STATES DOLLARS (U.S.D.)
($__________________ USD) MATURING ON ONE YEAR AND ONE DAY FROM THE DATE OF
ISSUE.
PAYMENT IS AVAILABLE AT ANY TIME PRIOR TO THE EXPIRATION DATE OF THIS LETTER OF
CREDIT UPON BENEFICIARY'S DRAFT DEMAND HEREUNDER. THE DRAFT DRAWN UNDER THIS
LETTER OF CREDIT MUST BE MARKED "DRAWN UNDER LETTER OF CREDIT NO.
__________________ DATED ______________________________." THE DRAFT MUST BE
ACCOMPANIED BY A NOTARIZED STATEMENT EXECUTED BY THE BENEFICIARY OR ITS
AUTHORIZED AGENT STATING THAT "___________________________________________IS
ENTITLED TO DRAW UPON THIS LETTER OF CREDIT UNDER THE TERMS OF THAT CERTAIN
LEASE BETWEEN _______________________________________________________ AND
____________________________________________________."
WE ENGAGE WITH YOU THAT THE DEMAND DRAWN UNDER AND IN COMPLIANCE WITH THE TERMS
OF THIS LETTER OF CREDIT SHALL BE DULY HONORED ON DUE PRESENTATION TO US.
THIS LETTER OF CREDIT IS SUBJECT TO THE UNIFORM CUSTOMS AND PRACTICES FOR
DOCUMENTARY CREDITS (1983 revision), I.C.C. PUBLICATION NO. 400 AND SUBJECT TO
THE UNIFORM COMMERCIAL CODE.
ALL CHARGES ARE FOR THE ACCOUNT OF THE APPLICANT.
BANK OFFICER BANK OFFICER
NAME AND TITLE NAME AND TITLE
SEAL SEAL
J-1
<PAGE>
Exhibit 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-10769) of Optika Imaging Sysytems, Inc. of our
report dated January 31, 1997, appearing on page 37 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Boulder, Colorado
March 27, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 3,474 1,415
<SECURITIES> 8,025 0
<RECEIVABLES> 5,766 3,199
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 18,090 4,920
<PP&E> 2,166 1,582
<DEPRECIATION> 1,128 820
<TOTAL-ASSETS> 20,258 6,182
<CURRENT-LIABILITIES> 4,273 3,079
<BONDS> 0 0
0 4,804
0 0
<COMMON> 7 799
<OTHER-SE> 15,842 (2,766)
<TOTAL-LIABILITY-AND-EQUITY> 20,258 6,182
<SALES> 13,406 8,333
<TOTAL-REVENUES> 16,703 10,468
<CGS> 585 316
<TOTAL-COSTS> 2,515 2,139
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 1,094 (933)
<INCOME-TAX> (813) 29
<INCOME-CONTINUING> 1,907 (962)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,907 (962)
<EPS-PRIMARY> .29 (.20)
<EPS-DILUTED> 0 0
</TABLE>
