OPTIKA IMAGING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Page
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _______________ to
______________
Commission File Number 0-28672
OPTIKA 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.)
7450 Campus Drive 80920
Suite 200 (Zip Code)
Colorado Springs, CO
(Address of principal executive offices)
(719) 548-9800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No ____.
7,078,469 shares of the Registrant's Common Stock, $.001 par value
per share, were outstanding as of November 13, 1998
================================================================================
<PAGE>
<TABLE>
<CAPTION>
INDEX
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1997 and
September 30, 1998 1
Condensed Consolidated Statements of Operations for the three-month and
nine-month periods ended September 30, 1997 and 1998 (Unaudited) 2
Condensed Consolidated Statements of Cash Flows for the nine-month
periods ended September 30, 1997 and 1998 (Unaudited) 3
Notes to Condensed Consolidated Financial Statements (Unaudited) 4
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 5
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 17
Item 2 - Changes in Securities and Use of Proceeds 17
Item 3 - Defaults on Senior Securities 17
Item 4 - Submission of Matters to a Vote of Security Holders 17
Item 5 - Other Information 17
Item 6 - Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OPTIKA IMAGING SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 31, September 30,
1997 1998
---------------- ----------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................................... $ 3,202 $ 5,858
Short-term investments.............................................. 5,398 1,294
Accounts receivable, net............................................ 8,555 5,332
Other current assets................................................ 986 815
---------------- ----------------
Total current assets.......................................... 18,141 13,299
---------------- ----------------
Fixed assets, net...................................................... 2,721 3,188
Other assets, net...................................................... 1,024 2,382
--------------- ----------------
$ 21,886 $ 18,869
================ ================
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt................................... $ 15 $ -
Accounts payable ................................................... 742 1,178
Accrued expenses.................................................... 2,192 2,546
Deferred revenue.................................................... 2,445 3,234
---------------- ----------------
Total current liabilities.................................... 5,394 6,958
---------------- ----------------
Commitments and contingencies
Common stockholders' equity:
Common stock; $.001 par value; 25,000,000 shares authorized;
6,890,724 and 7,078,469 shares issued and outstanding
at December 31, 1997 and September 30, 1998, respectively........ 7 7
Additional paid-in capital....................................... 17,179 17,380
Accumulated deficit.............................................. (694) (5,476)
---------------- ----------------
Total common stockholders' equity............................ 16,492 11,911
---------------- ----------------
$ 21,886 $ 18,869
================ ================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OPTIKA IMAGING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ------------------------
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Revenues:
Licenses................................ $ 4,273 $ 3,072 $ 11,213 $ 7,163
Maintenance and other................... 1,533 2,105 4,285 5,210
--------- -------- --------- ---------
Total revenues....................... 5,806 5,177 15,498 12,373
Cost of revenues:
Licenses................................ 172 97 470 307
Maintenance and other................... 764 854 2,066 2,335
--------- -------- --------- ---------
Total cost of revenues............... 936 951 2,536 2,642
--------- -------- --------- ---------
Gross profit............................... 4,870 4,226 12,962 9,731
Operating expenses:
Sales and marketing..................... 2,649 3,381 7,364 9,618
Research and development................ 1,360 1,385 3,902 3,798
General and administrative.............. 474 754 1,315 1,929
Restructuring charge.................... -- 425 -- 425
--------- -------- --------- ---------
Total operating expenses............. 4,483 5,945 12,581 15,770
--------- -------- --------- ---------
Income (loss) from operations.............. 387 (1,719) 381 (6,039)
Other income, net.......................... 113 50 349 63
--------- -------- --------- ---------
Income (loss) before provision (benefit) for
income taxes............................... 500 (1,669) 730 (5,976)
Provision (benefit) for income taxes....... 190 (333) 276 (1,194)
--------- -------- --------- ---------
Net income (loss).......................... $ 310 $ (1,336) $ 454 $ (4,782)
========= ======== ========= =========
Net income (loss) per common share......... $ 0.05 $ (0.19) $ 0.07 $ (0.69)
========= ======== ========= =========
Weighted average number of common shares
outstanding................................ 6,803 6,985 6,760 6,956
========= ======== ========= =========
Diluted net income (loss) per common share. $ 0.04 $ (0.19) $ 0.06 $ (0.69)
========= ======== ========= =========
Diluted weighted average number of common
shares outstanding......................... 7,624 6,985 7,725 6,956
========= ======== ========= =========
<FN>
The accompanying notes are an integral part of these financial statementS.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OPTIKA IMAGING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended September 30,
----------------------------------
1997 1998
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss)...................................................... $ 454 $ (4,782)
Adjustments to reconcile net income (loss) to net cash used by
operating activities:
Depreciation and amortization....................................... 439 770
Deferred tax asset (benefit)........................................ 276 (1,299)
Loss on disposal of assets.......................................... 18 35
Change in assets and liabilities:
Accounts receivable, net......................................... (1,631) 3,223
Other assets..................................................... (454) (78)
Accounts payable................................................. (325) 436
Accrued expenses................................................. 517 354
Deferred revenue................................................. 451 789
---------------- ----------------
Net cash used by operations.................................. (255) (552)
---------------- ----------------
Cash Flows From Investing Activities:
Capital expenditures................................................... (2,107) (1,082)
Sale of short-term investments......................................... 127 4,104
---------------- ----------------
Net cash provided (used) by investing activities............. (1,980) 3,022
---------------- ----------------
Cash Flows From Financing Activities:
Principal payments on long-term debt................................... (324) (15)
Proceeds from issuance of common stock................................. 460 201
---------------- ----------------
Net cash provided by financing activities.................... 136 186
---------------- ----------------
Net increase (decrease) in cash and cash equivalents................... (2,099) 2,656
Cash and cash equivalents at beginning of period....................... 3,474 3,202
---------------- ----------------
Cash and cash equivalents at end of period............................. $ 1,375 $ 5,858
================ ================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
OPTIKA IMAGING SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
Basis of Presentation
The unaudited condensed consolidated financial statements included herein
reflect all adjustments, consisting only of normal recurring adjustments, which
in the opinion of management are necessary to fairly present the Company's
consolidated financial position, results of operations, and cash flows for the
periods presented. Certain information and footnote disclosures normally
included in audited financial information prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
Securities and Exchange Commission's (SEC's) rules and regulations. The
consolidated results of operations for the period ended September 30, 1998 are
not necessarily indicative of the results to be expected for any subsequent
quarter or for the entire fiscal year ending December 31, 1998. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto for the year ended December 31, 1997,
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1997.
Net Income (Loss) Per Common Share
In 1997, the Company adopted the guidelines of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share". Prior period EPS have been
restated to conform with the new statement. Basic EPS is computed by dividing
net income by the weighted average number of shares outstanding during the
period. Diluted EPS is computed using the weighted average number of shares
outstanding plus all dilutive potential common shares outstanding. During the
first nine months of 1998, 382,000 options to purchase common stock of the
Company were granted. Additionally, during the first quarter of 1998, 264,500
options to purchase common stock of the Company were re-priced at $3.18 per
option share.
The following is the reconciliation of the numerators and denominators of the
basic and diluted EPS computations (in thousands except per share data):
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Earning Per Share:
Net income (loss)..................... $ 310 $ (1,336) $ 454 $ (4,782)
Weighted average common shares outstanding 6,803 6,985 6,760 6,956
Net income (loss) per common share.... $ 0.05 $ (0.19) $ 0.07 $ (0.69)
Effect of Dilutive Securities:
Options and warrants.................. 821 -- 965 --
Diluted weighted average common shares
outstanding.......................... 7,624 6,985 7,725 6,956
Diluted net income (loss) per common share $ 0.04 $ (0.19) $ 0.06 $ (0.69)
</TABLE>
Restructuring of Asian Operations
Due to the current economic status and instability in the Asian markets,
the Company made the decision to consolidate its Asian Operations from four
offices to two in the third quarter of 1998, thus reducing future operational
risks and cash outflows into the region. This restructuring resulted in a
$425,000 one-time write-off including $125,000 of goodwill, $200,000 of
severance costs and $100,000 of lease termination and other costs. As of
September 30, 1998 there is approximately $112,000 of severance and lease costs
remaining to be paid. All severance costs and the majority of the lease costs
are expected to be paid before the end of 1998.
2. Contingencies
The Company is, from time to time, subject to certain claims, assertions or
litigation by outside parties as part of its ongoing business operations. The
outcome of any such contingencies are not expected to have a material adverse
effect on the financial condition, operations or cash flows of the Company. The
Company is not currently a party to any material legal proceedings.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS
THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED UNDER THE CAPTION "BUSINESS RISKS" CONTAINED HEREIN.
Results of Operations
The Company's revenues consist primarily of license revenues that are
comprised of one-time fees for the license of the Company's products, and
maintenance revenues, which are comprised of fees for updates and technical
support. The Company's Advantage Partners ("APs"), formerly called Business
Solution Partners, and Original Equipment Manufacturers ("OEMs"), which are
responsible for the installation and integration of the software, enter into
sales agreements with the end-user and purchase software directly from the
Company. The software is licensed directly to the end-user by the Company
through a standard shrink-wrapped license agreement. Annual maintenance
agreements are also entered into between the APs and OEMs and the end-user, and
the APs and OEMs then purchase maintenance services directly from the Company.
For the nine months ended September 30, 1998, approximately 57.9% of the
Company's total revenues were derived from software licenses and approximately
29.8% 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 12.3% of
the Company's total revenues.
The Company adopted the provisions of Statement of Position 97-2, Software
Revenue Recognition (SOP 97-2), for transactions entered into after January 1,
1998. Under SOP 97-2, the Company generally recognizes license revenue upon
shipment when a non-cancelable license agreement has been signed or a purchase
order has been received, delivery has occurred, the fee is fixed and
determinable and collectibility is probable. Where applicable, fees from
multiple element arrangements are unbundled and recorded as revenue as the
elements are delivered to the extent that vendor specific objective evidence of
fair value exists. Maintenance revenues are deferred and recognized ratably over
the maintenance period, which is generally one year. Other revenues are
recognized as services are performed. The Company generally does not grant
rights to return products, except for defects in the performance of the products
relative to specifications and pursuant to standard industry shrink-wrapped
license agreements which provide for 30-day rights of return if an end-user does
not accept the terms of the software license, nor does it provide provisions for
price adjustments or rotation rights. Based on the Company's research and
development process, costs incurred between the establishment of technological
feasibility and general release of the software products have not been material
and therefore have not been capitalized in accordance with Statement of
Financial Accounting Standards No. 86. All research and development costs have
been expensed as incurred.
In March 1998, the Company introduced Optika eMedia(TM), its
next-generation software solution for managing and automating paper-intensive
business-to-business transactions. In July 1998, Optika announced the controlled
shipment of Optika eMedia to initial user sites that included Fortune 1000
companies and other large organizations. Optika eMedia became commercially
available in late September 1998. Optika eMedia manages business transactions
both within an enterprise and across the Internet with multiple business
partners. Commerce-brokering software and solutions enable large organizations
to manage the high-volume flow of documents and electronic information
associated with business-to-business transactions. Optika eMedia incorporates a
vast majority of the imaging/COLD/workflow functionality of Optika's FilePower
solution, in addition to availability of multiple client interfaces and a
scalable, 3-tier architecture. (See "Business Risks-Risks Associated with the
Introduction of Optika eMedia").
Revenues
Total revenues decreased 20.2%, from $15.5 million for the nine months
ended September 30, 1997, to $12.4 million for the nine months ended September
30, 1998. Total revenues decreased 10.8%, from $5.8 million for the quarter
ended September 30, 1997, to $5.2 million for the quarter ended September 30,
1998.
Licenses. License revenues decreased 36.1%, from $11.2 million during the
nine months ended September 30, 1997, to $7.2 million for the nine months ended
September 30, 1998, and decreased 28.1%, from $4.3 million during the quarter
ended September 30, 1997, to $3.1 million during the same period in 1998.
License revenues represented 72.4% and 57.9% of the total revenues for the nine
months ended September 30, 1997 and 1998, respectively, and 73.6% and 59.3% of
the total revenues for the quarters ended September 30, 1997 and 1998,
respectively. Management believes that the decrease in license revenues during
the first nine months of 1998 is primarily a result of customers choosing to
delay purchase decisions of the Company's product until the general release of
Optika eMedia, which became commercially available in late September 1998. Total
revenues generated outside of the United States accounted for approximately
24.1% of the Company's revenues for the nine months ended September 30, 1997,
compared to 22.5% for the same period in 1998, and 18.7% and 25.4% for the
quarters ended September 30, 1997 and 1998, respectively. The quarterly
difference in international revenues as a percentage of total revenues increased
due to stronger Europe and Latin American sales during the third quarter of 1998
as compared to the third quarter of 1997.
Maintenance and Other. Maintenance revenues, exclusive of other revenue,
increased 40.0%, from $2.6 million during the nine months ended September 30,
1997, to $3.7 million for the nine months ended September 30, 1998.
Additionally, maintenance revenues increased 41.5%, from $952,000 during the
quarter ended September 30, 1997 to $1.3 million during the same period in 1998.
Maintenance revenue represented 17.0% and 29.8% of the total revenues for the
nine months ended September 30, 1997 and 1998, respectively, and 16.4% and 26.0%
of the total revenues for the quarters ended September 30, 1997 and 1998,
respectively. Through the Company's continued improvements in the tracking,
monitoring and notifying of expiring maintenance contracts and the general
increase in the number of installed systems, the Company was able to increase
the number of maintenance contract renewals. Other revenue, consisting primarily
of consulting services, training and consulting fees represented 10.6% and 12.3%
of total revenues for the nine months ended September 30, 1997 and 1998,
respectively, and 10.0% and 14.7% of total revenues for the quarters ended
September 30, 1997 and 1998, respectively.
Cost of Revenues
Licenses. Cost of licenses consists primarily of royalty payments to
third-party vendors, translation fees, 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 decreased in absolute dollars from $470,000,
or 4.2% of license revenues, to $307,000, or 4.3% of license revenues, for the
nine months ended September 30, 1997 and 1998, respectively, and decreased from
$172,000, or 4.0% of license revenues, to $97,000, or 3.2% of license revenues,
for the quarters ended September 30, 1997 and 1998, respectively. The decrease
in absolute dollar cost of licenses was attributable to the decreased license
revenue.
Maintenance and Other. Costs of maintenance and other consist of the direct
and indirect costs of providing software maintenance and support, training and
consulting services to the Company's APs, OEMs and end-users. Cost of
maintenance and other increased in absolute dollars from $2.1 million, or 48.2%
of maintenance and other revenues, to $2.3 million, or 44.8% of maintenance and
other revenues, for the nine months ended September 30, 1997 and 1998,
respectively. Cost of maintenance and other increased from $764,000, or 49.8% of
maintenance and other revenues, to $854,000, or 40.6% of maintenance and other
revenues, for the quarters ended September 30, 1997 and 1998, respectively. The
increase in absolute dollars with a decrease in the percentage of revenues
represents the continued revenue growth of maintenance and other revenue, while
the costs to provide these services does not increase at a corresponding rate.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and other related expenses for sales and marketing
personnel, marketing, advertising and promotional expenses. Sales and marketing
expenses increased from $7.4 million, or 47.5% of total revenues, for the nine
months ended September 30, 1997 to $9.6 million, or 77.7% of total revenues, for
the nine months ended September 30, 1998. Sales and marketing expenses increased
from $2.6 million, or 45.6% of total revenues, for the quarter ended September
30, 1997, to $3.4 million, or 65.3% of total revenues, for the quarter ended
September 30, 1998. The increase in sales and marketing expenses is primarily
attributable to costs associated with the continued expansion of the Company's
product launch activities associated with Optika eMedia, expansion of the
Company's direct sales force as well as an increase in finders fees on the
Company's direct sales. The Company anticipates that sales and marketing
expenses will continue to increase in absolute dollars in future quarters as the
Company continues the launch of the Optika eMedia product and enters into more
direct sales opportunities.
Research and Development. Research and development expenses consist
primarily of salaries and other related expenses for research and development
personnel, as well as the cost of facilities and equipment. Research and
development expenses decreased from $3.9 million, or 25.2% of total revenues,
for the nine months ended September 30, 1997 to $3.8 million, or 30.7% of total
revenues, for the nine months ended September 30, 1998. Research and development
expenses remained constant in absolute dollars at $1.4 million, or 23.4% and
26.8% of total revenues, for the quarters ended September 30, 1997 and 1998,
respectively. Research and development costs decreased in absolute dollars
between the nine month periods as a result of the Company's exit from the
healthcare market in late 1997. Research and development on the Company's core
products, Optika eMedia and FilePower increased significantly in absolute
dollars. The Company expects research and development expenses to increase in
absolute dollars in future quarters to fund the development of new products and
product enhancements.
General and Administrative. General and administrative expenses consist
primarily of salaries and other related expenses of administrative, executive
and financial personnel and outside professional fees. General and
administrative expenses increased from $1.3 million, or 8.5% of total revenues
for the nine months ended September 30, 1997 to $1.9 million, or 15.6% of total
revenues for the nine months ended September 30, 1998. General and
administrative expenses increased from $474,000, or 8.2% of total revenues for
the quarter ended September 30, 1997, to $754,000, or 14.6% of total revenues
for the quarter ended September 30, 1998. The increase in general and
administrative costs in absolute dollars was primarily due to the write-off of
certain accounts receivable in Asia during the first nine months of 1998.
Other income, net. Other income, net consists primarily of interest earned
on the Company's financing activities offset by interest expense on the
Company's capitalized lease obligations and other debt. The Company recognized
net other income of $349,000 during the nine months ended September 30, 1997
compared to net other income of $63,000 during the nine months ended September
30, 1998. The Company recognized net other income of $113,000 during the quarter
ended September 30, 1997 compared to net other income of $50,000 for the same
period in 1998. The decrease in net other income is primarily the result of
decreased investment income due to lower cash balances to invest, and increased
foreign currency translation loss.
Provision (Benefit) for Income Taxes. The Company's effective tax rates
decreased from 38% for the quarter ended September 30, 1997 to 20% for the
quarter ended September 30, 1998 primarily due the Company revising its
effective tax rate to provide a valuation allowance against certain of its
research and development tax credits during third quarter of 1998.
Liquidity and Capital Resources
Cash and short-term investments at September 30, 1998 were $7.2 million,
decreasing by approximately $1.4 million from December 31, 1997. The decrease in
cash and short-term investments is primarily due to the 1998 losses and capital
expenditures for computer equipment and software offset by the collection of
accounts receivable.
For the nine months ended September 30, 1997, net cash used by operating
activities was $255,000 compared to net cash used by operating activities of
$552,000 for the nine months ended September 30, 1998. The increase in cash used
by operating activities for the nine months ended September 30, 1998 is
primarily due to the 1998 losses offset by improved accounts receivable
collections.
Cash used by investing activities was $2.0 million for the nine months
ended September 30, 1997 compared to cash provided by investing activities of
$3.0 million for the nine months ended September 30, 1998. Uses of cash
consisted primarily of purchases of marketable securities and property and
equipment in the first nine months of 1997, while marketable securities were
sold during the first nine months of 1998.
Cash provided by financing activities was $136,000 for the nine months
ended September 30, 1997. Cash provided by financing activities was $186,000 for
the nine months ended September 30, 1998. Cash provided by financing activities
resulted primarily from proceeds from stock option exercises and the sales of
securities under the Company's employee stock purchase plan, offset in part by
repayments of bank borrowings, capital leases and other debt.
At September 30, 1998, the Company's principal sources of liquidity
included cash and short-term investments of $7.2 million. In addition, the
Company has a secured credit facility for up to $3.0 million, bearing interest
at the bank's prime rate. As of September 30, 1998, the Company had $2.8 million
available for borrowing and no other debt outstanding.
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 financing or from other sources. There can be no assurance that
additional financing will be available at all or that, if available, such
financing will be obtainable on terms favorable to the Company and would not be
dilutive.
Year 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the Year 2000 approaches. Many currently installed
computer and software products are coded to accept only two digit entries in the
date code field. These date code fields will need to accept four digit entries
to distinguish 21st century dates from 20th century dates. As a result, in less
than one and a half years, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
Significant uncertainty exists in the software industry concerning the potential
effects associated with such compliance. The Company believes that the
purchasing patterns of customers and potential customers may be significantly
affected by Year 2000 issues. Many companies are expending significant resources
to correct or patch their current software systems for Year 2000 compliance.
These expenditures may result in reduced funds available to purchase products or
services such as those offered by the Company. Additionally, Year 2000 issues
could cause a significant number of companies, including current customers of
the Company; to reevaluate their current system needs, and as a result, consider
switching to other systems or suppliers. This could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company is currently taking steps to address its Year 2000 readiness
issues in the following areas:
1. The Company's products (including embedded software technology)
2. Internal systems (includes information technologies and non-information
technologies)
3. Readiness of third parties with whom the Company has business
relationships
The Company has assigned two dedicated Year 2000 cross functional teams
(CFT's), one CFT to address the Company's products and one CFT to address
internal systems and third parties. Each CFT has an executive sponsor and meets
regularly to carry out the process of identifying potential Year 2000 issues,
assessing their impact on the Company, putting in place an action plan to
address the problem (which will include contingency planning) and following
through to ensure the plan was carried out and tested.
The Company's Products
The Company designs its products and services to be Year 2000 compatible.
Nevertheless the Company has performed initial Year 2000 compliance testing on
both Optika eMedia and FilePower product suites. During the testing of the
FilePower product suite, a few minor deficiencies were found in the Company's
FPreport product. The Company is currently addressing these deficiencies and a
product patch is expected to be introduced by the first quarter of 1999. This
patch will be available electronically to customers who have maintenance
agreements with the Company. Costs to address these deficiencies are expected to
include only internal development staff time, which has not been separately
tracked, and is expected to have no effect on the Company's operating results.
No current projects have been delayed or are expected to be delayed due to using
internal staff on this issue. To help ensure Year 2000 compliance, the Company
plans to perform additional tests on its FilePower and Optika eMedia product
suites. The additional testing is expected to be completed during the first
quarter of 1999. Any issues found through the additional tests will be addressed
in the first half of 1999.
Although the Company has designed its products and services to be Year 2000
capable and tests its products and services, including third-party software that
is incorporated into its products and services, specifically for Year 2000
compliance, there can be no assurance that the Company's products and services,
particularly when such products and services incorporate third-party software,
contain all necessary date code changes. To the extent that the Company's
software does not comply with Year 2000 requirements, there can be no assurance
that potential system interruptions or the cost necessary to update the software
will not have a material adverse effect on the Company's business, financial
condition and results of operations.
Internal Systems
The Company's internal systems include both its information technology
("IT") and non-IT systems. The Company has initiated an assessment of its
internal IT systems including third-party software and hardware technology and
its non-IT systems (such as its security system, building equipment, and phone
systems). The Company has identified its Mission Critical Systems and during
1998 it will assign each Mission Critical System to a responsible party to carry
out Year 2000 testing and vendor polling to ensure compliance during the first
half of 1999. Initial review indicates that bringing the Mission Critical
Systems to Year 2000 readiness will be covered under software/hardware
maintenance agreements and/or normal product upgrades. However, any failure of
one or more of the Company's mission critical IT systems to become Year 2000
compliant due to unanticipated problems could limit access of employees to
critical information, require the Company to process information manually or
result in other inconveniences or inefficiencies for the Company and its
customers that may divert management's time and attention, as well as financial
and personnel resources from normal business activities. The majority of the
Company's IT software applications are produced by Microsoft. Any failure by
Microsoft to address the Year 2000 issue could have a material impact on the
Company's operations. All non-Mission Critical Systems are deemed to be
non-essential to the business and will be upgraded or replaced if a Year 2000
issue exists. Year 2000 compliance issues relating to non-Mission Critical
Systems are not expected to have a material financial impact on operations or
the Company's ability to carry out its operations.
Third Parties
The Company does not currently have any information concerning the Year
2000-compliance status of its vendors. The key third parties to which the
Company is concerned are its investing and banking relationships. The Company
will attempt to obtain Year 2000-compliance status from the key third parties by
the first half of 1999. If the Company's current or future vendors, including
investing and banking relationships, fail to achieve Year 2000 compliance or if
they divert substantial technology expenditures to address the Year 2000 issue,
thus impacting their ability to serve the Company, the Company will move its
relationships to another vendor that is Year 2000 compliant. Management believes
there will be no material adverse affect on the Company of this action.
Disclaimer
The discussion of the Company's efforts, and management's expectations,
relating to year 2000 compliance are forward-looking statements. The Company's
ability to achieve Year 2000 compliance and the level of incremental costs
associated therewith could be adversely impacted by, among other things, the
availability and cost of programming and testing resources, vendors' abilities
to modify proprietary software, unanticipated problems in the ongoing compliance
review and failure by the Company to identify a critical year 2000 compliance
problem.
<PAGE>
BUSINESS RISKS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISK 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 BELOW.
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. In addition, the commercial
introduction of Optika eMedia, the timing of revenue therefrom and any adverse
impact on the Company's sales of the Filepower Suite associated therewith could
cause the Company's sales and operating results to vary significantly over the
next several quarters. A significant portion of the Company's revenues has been,
and the Company believes will continue to be, derived from a limited number of
orders, and the timing of such orders and their fulfillment have caused, and are
expected to continue to cause, material fluctuations in the Company's operating
results. Revenues are also difficult to forecast because the markets for the
Company's products are rapidly evolving, and the sales cycle of the Company and
of its APs and OEMs, from initial evaluation to purchase, is lengthy and varies
substantially from end-user to end-user. To achieve its quarterly revenue
objectives, the Company depends upon obtaining orders in any given quarter for
shipment in that quarter. Product orders are typically shipped shortly after
receipt; consequently, order backlog at the beginning of any quarter has in the
past represented only a small portion of that quarter's revenues. Furthermore,
the Company has often recognized most of its revenues in the last month, or even
in the last weeks or days, of a quarter. Accordingly, a delay in shipment near
the end of a particular quarter may cause revenues in a particular quarter to
fall significantly below the Company's expectations and may materially adversely
affect the Company's operating results for such quarter. Conversely, to the
extent that significant revenues occur earlier than expected, operating results
for subsequent quarters may fail to keep pace with results of previous quarters
or even decline. The Company also has recorded generally lower sales in the
first quarter than in the immediately preceding quarter, as a result of, among
other factors, end-users' purchasing and budgeting practices and the Company's
sales commission practices, and the Company expects this pattern to continue in
future years. To the extent that future international operations constitute a
higher percentage of total revenues, the Company anticipates that it may also
experience relatively weaker demand in the third quarter as a result of reduced
sales in Europe during the summer months. A significant portion of the Company's
expenses are relatively fixed in the short term. Accordingly, if revenue levels
fall below expectations, operating results are likely to be disproportionately
and adversely affected. As a result of these and other factors, the Company
believes that its quarterly operating results will vary in the future, and that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
Furthermore, due to all of the foregoing factors, it is likely that in some
future quarter the Company's operating results will be below the expectations of
public market analysts and investors. In such event, the price of the Company's
Common Stock would likely be materially adversely affected.
Risks Associated with the Introduction of Optika eMedia. In March 1998, the
Company announced plans to introduce Optika eMedia, a software solution designed
to manage and automate paper-intensive business processes within an enterprise
through the Internet and across the value chain. In July 1998, Optika announced
the controlled shipment of Optika eMedia to initial user sites that included
Fortune 1000 companies and other large organizations. Optika eMedia became
commercially available in late September 1998. Because the market for Optika
eMedia is new and evolving, it is difficult to assess or predict with any
assurance the growth rate, if any, and size of this market. There also can be no
assurance that the market for Optika eMedia will develop, or that the solution
will be adopted or utilized. If the market fails to develop, develops more
slowly than expected or becomes saturated with competitors, or if the product
does not achieve market acceptance, the Company's business, results of
operations and financial condition may be materially adversely affected.
Software companies that are in the process of announcing and releasing new
versions or products frequently experience an adverse effect on revenue during
the period between the date the new release is announced and when it becomes
generally available. This negative effect is a result of customer buying
patterns whereby they have a tendency to wait until the new version is generally
available to actually make a purchase. The Company has experienced and expects
that it will continue to experience this adverse effect until Optika eMedia
gains full market acceptance. Further, if customers purchasing current products
are granted discounts or upgrade rights to future releases, significant amounts
of revenue may be deferred from sales of currently shipped products because of
the Company's adoption of the recently released SOP 97-2 "Software Revenue
Recognition".
Although sales of Optika eMedia are not expected to be significant until
the fourth quarter of 1998, the Company is directing a significant amount of its
product development expenditures to the ongoing development of Optika eMedia and
a significant amount of its sales and marketing resources to the full commercial
introduction of Optika eMedia and believes that its acceptance by customers is
critical to the future success of the Company. There can be no assurance that
Optika eMedia will gain significant market acceptance, if at all. Optika eMedia
has not been fully implemented in customers' environments and as a result, there
can be no assurance that Optika eMedia will not require substantial software
enhancements or modifications to satisfy performance requirements of customers
or to fix design defects or previously undetected errors. Further, it is common
for complex software programs such as Optika eMedia to contain undetected errors
when first released, which are discovered only after the product has been used
over time with different computer systems and in varying applications and
environments. While the Company is not aware of any significant technical
problems with Optika eMedia, there can be no assurance that errors will not be
discovered, or if discovered, that they will be successfully corrected on a
timely basis, if at all. The Company's future business growth is substantially
dependent on the continued development, introduction and market acceptance of
Optika eMedia. If customers experience significant problems with implementation
of Optika eMedia or are otherwise dissatisfied with the functionality or
performance of Optika eMedia, or if it fails to achieve market acceptance for
any other reason, the Company's business, results of operations and financial
condition may be materially adversely affected.
Reliance on Indirect Distribution Channels; Potential for Channel Conflict.
The Company's future results of operations will depend on the success of its
marketing and distribution strategy, which has relied, to a significant degree,
upon APs and OEMs to sell and install the Company's software, and provide
post-sales support. In 1997, the Company's top 70 APs/OEMs accounted for
approximately 75% of its license revenues, and substantially all of the
Company's license revenues were derived from sales by APs 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 APs will
continue to represent the Company or sell its products. Furthermore, there can
be no assurance that other APs, some of which have significantly greater
financial marketing and other resources than the Company, will not develop or
market software products which compete with the Company's products or will not
otherwise discontinue their relationship with, or support of, the Company. Some
of the Company's APs are small companies that have limited financial and other
resources which could impair their ability to pay the Company. To date, the
Company's inability to receive payments from such APs has not had a material
adverse effect on the Company's business, results of operations or financial
condition. The Company's OEMs occasionally compete with the Company and its APs.
Selling through indirect channels may also hinder the Company's ability to
forecast sales accurately, evaluate customer satisfaction, provide quality
service and support or recognize emerging customer requirements.
The Company recently altered its sales strategy with the introduction of a
direct sales team. The Company's strategy of marketing its products directly and
indirectly (through APs and OEMs) may result in distribution channel conflicts.
To the extent that the Company, APs and OEMs target the same customers, they may
come into conflict with each other. Although the Company has attempted to
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
APs and OEMs, or adversely affect its ability to attract new APs and OEMs. The
loss by the Company of a number of its more significant APs or OEMs, the
inability of the Company to obtain qualified new APs or OEMs, or to obtain
access to the channels of distribution offering software products to the
Company's targeted markets, or the failure of APs or OEMs to pay the Company for
its software, could have a material adverse effect on the Company's business,
results of operations, or financial condition.
Rapid Technological Change: Dependence on New Product Development. The
market for imaging, workflow and COLD 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 operating
systems being introduced by Microsoft this year, such as Microsoft Windows NT
5.0 and Windows 98, could alter generally accepted conventions for document
creation, distribution and management. The Company is unable to predict the
future impact of such technology changes on the Company's products. Moreover,
the life cycles of the Company's products are difficult to estimate. The
Company's future performance will depend in significant part upon its ability to
enhance current products, and to develop and introduce new products and
enhancements that respond to evolving customer requirements. The Company has in
the recent past experienced delays in the development and commencement of
commercial shipments of new products and enhancements, resulting in customer
frustration and delay or loss of revenues. The inability of the Company, for
technological or other reasons, to develop and introduce new products or
enhancements in a timely manner in response to changing customer requirements,
technological change or emerging industry standards, or maintain compatibility
with heterogeneous computing environments, would have a material adverse effect
on the Company's business, results of operations and financial condition.
Product Concentration; 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. As of late September 1998, Optika eMedia was
generally available. The Company expects Optika eMedia, in the event it is
successfully introduced in the marketplace and produces future revenues, and the
FilePower Suite to account for substantially all of its future revenues. 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 Optika
eMedia. 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 APs and OEMs to engage in a lengthy and complex sales cycle
(typically between six and twelve months from the initial contact date). In
addition, the implementation by customers of the 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
FileNet Corporation, International Business Machines Corporation, Unisys
Corporation, Mosaix, Inc. and Eastman Kodak Company. 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 APs or OEMs for the Company. In addition, the Company may face
competition from other established and emerging companies in new market segments
created by the release of Optika eMedia.
Many of the Company's current and potential competitors are substantially
larger than the Company, have significantly greater financial, technical and
marketing resources and have established more extensive channels of
distribution. As a result, such competitors may be able to respond more rapidly
to new or emerging technologies and changes in customer requirements, or to
devote greater resources to the development, promotion and sale of their
products than the Company. Because the Company's products are designed to
operate in non-proprietary computing environments and because of low barriers to
entry in the imaging software market, the Company expects additional competition
from established and emerging companies, as the market for integrated imaging
products continues to evolve. The Company expects its competitors to continue to
improve the performance of their current products and to introduce new products
or new technologies that provide added functionality and other features.
Successful new product introductions or enhancements by the Company's
competitors could cause a significant decline in sales or loss of market
acceptance of the Company's products and services, result in continued intense
price competition, or make the Company's products and services or technologies
obsolete or noncompetitive. To be competitive, the Company will be required to
continue to invest significant resources in research and development, and in
sales and marketing. There can be no assurance that the Company will have
sufficient resources to make such investments or that the Company will be able
to make the technological advances necessary to be competitive. In addition,
current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties, to increase the ability of
their products to address the needs of the Company's prospective customers. In
addition, several competitors have recently made, or attempted to make,
acquisitions to enter the market or increase their market presence. Accordingly,
it is possible that new competitors or alliances among competitors may emerge
and rapidly acquire significant market share. Increased competition is likely to
result in price reductions, reduced gross margins and loss of market share, any
of which would have a material adverse effect on the Company's business, results
of operations and financial condition. There can be no assurance that the
Company will be able to compete successfully against current or future
competitors, or that competitive pressures will not have a material adverse
effect on the Company's business, results of operations, and financial
condition.
Management Changes; No Assurance of Successful Expansion of Operations.
Most of the Company's senior management team have joined the Company within the
last five years. There can be no assurance that these individuals will be able
to achieve and manage growth, if any, or build an infrastructure necessary to
operate the Company. The Company's ability to compete effectively and to manage
any future growth will require that the Company continue to assimilate new
personnel and to expand, train and manage its work force. The Company intends to
continue to increase the scale of its operations significantly to support
anticipated increases in revenues, and to address critical infrastructure and
other requirements. These increases have included and will include the leasing
of new space, the opening of additional foreign offices, and potential
acquisitions, significant increases in research and development to support
product development, and the hiring of additional personnel in sales and
marketing. The increased scale of operations has resulted in significantly
higher operating expenses, which are expected to continue to increase
significantly in the future. If the Company's revenues do not correspondingly
increase, the Company's results of operations would be materially 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 AP
support capabilities. This expansion will continue to require significant
expenditures to build the necessary infrastructure. There can be no assurance
that the Company's efforts to expand its marketing, sales and customer support
efforts will be successful or will result in additional revenues or
profitability in any future period.
Dependence on Key Personnel. The Company's future performance depends to a
significant degree upon the continuing contributions of its key management,
sales, marketing, customer support, and product development personnel. The
Company has at times experienced, and continues to experience, difficulty in
recruiting qualified personnel, particularly in software development and
customer support. The Company believes that there may be only a limited number
of persons with the requisite skills to serve in those positions, and that it
may become increasingly difficult to hire such persons. Competitors and others
have in the past, and may in the future, attempt to recruit the Company's
employees. The 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. However, there can be no assurance that third parties
will not claim infringement by the Company's products of their intellectual
property rights. The Company expects that software product developers will
increasingly be subject to infringement claims if the number of products and
competitors in the Company's industry segment grows and the functionality of
products in different industry segments overlaps. Any such claims, with or
without merit, and regardless of the outcome of any litigation, will be time
consuming to defend, result in costly litigation, divert management's attention
and resources, cause product shipment delays, or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, if at all. In
the event of a successful claim of infringement against the Company's products
and the failure or inability of the Company to license the infringed or similar
technology, the Company's business, results of operations, and financial
condition would be materially and adversely affected.
The Company also licenses software from third parties, which is
incorporated into its products, including software incorporated into its viewer,
image decompression software and optical character recognition, and full-text
engines. These licenses expire from time to time. There can be no assurance that
these third-party software licenses will continue to be available to the Company
on commercially reasonable terms. While the Company believes that all of such
third-party software is available from alternate vendors, and the Company
maintains standard software escrow agreements with each of such parties,
agreements which provide the Company with access to the source code in the event
of their bankruptcy or insolvency, the loss of, or inability to maintain, any
such software licenses could result in shipment delays or reductions until
equivalent software could be developed, identified, licensed and integrated,
which in turn could materially and adversely affect the Company's business,
results of operations, and financial condition. In addition, the Company
generally does not have access to source code for the software supplied by these
third parties. Certain of these third parties are small companies that do not
have extensive financial and technical resources. If any of these relationships
were terminated or if any of these third parties were to cease doing business,
the Company may be forced to expend significant time and development resources
to replace the licensed software. Such an event would have a material adverse
effect upon the Company's business, results of operations, and financial
condition. The Company has entered into source code escrow agreements with a
limited number of its customers and resellers, requiring release of source code
in certain circumstances. Such agreements generally provide that such parties
will have a limited, non-exclusive right to use such code in the event that
there is a bankruptcy proceeding by or against the Company, if the Company
ceases to do business, or if the Company fails to provide timely responses to
identified product defects.
International Operations. Sales outside the United States accounted for
approximately 15%, 29% and 23% of the Company's revenues in 1995, 1996 and 1997,
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 the U.S.
dollar currency. The Company does not currently engage in foreign currency
hedging transactions; as a result, a decrease in the value of foreign currencies
relative to the U.S. dollar could result in losses from transactions denominated
in foreign currencies, could make the Company's software less price-competitive,
and could have a material adverse effect upon the Company's business, results of
operations, and financial condition. In addition, the Company's international
business is, and will continue to be, subject to a variety of risks, including:
delays in establishing international distribution channels; difficulties in
collecting international accounts receivable; increased costs associated with
maintaining international marketing and sales efforts; unexpected changes in
regulatory requirements, tariffs and other trade barriers; political and
economic instability; limited protection for intellectual property rights in
certain countries; lack of acceptance of localized products in foreign
countries; difficulties in managing international operations, potentially
adverse tax consequences including, restrictions on the repatriation of
earnings; and the burdens of complying with a wide variety of foreign laws.
There can be no assurance that such factors will not have a material adverse
effect on the Company's future international revenues and, consequently, the
Company's results of operations. Although the Company's products are subject to
export controls under United States laws, the Company believes it has obtained
all necessary export approvals. However, the inability of the Company to obtain
required approvals under any applicable regulations could adversely affect the
ability of the Company to make international sales.
Product Liability; Risk of Product Defects. The Company's license
agreements with its customers typically contain provisions designed to limit the
Company's exposure to potential product liability claims. However, it is
possible that the limitation of liability provisions contained in the Company's
license agreements may not be effective under the laws of certain jurisdictions.
Although the Company has not experienced any product liability claims to date,
the sale and support of products by the Company may entail the risk of such
claims, and there can be no assurance that the Company will not be subject to
such claims in the future. A successful product liability claim brought against
the Company could have a material adverse effect upon the Company's business,
results of operations, and financial condition. Software products such as those
offered by the Company frequently contain errors or failures, especially when
first introduced or when new versions are released. Although the Company
conducts extensive product testing, the Company has in the past released
products that contained defects, and has discovered software errors in certain
of its new products and enhancements after introduction. The Company could in
the future lose or delay recognition of revenues as a result of software errors
or defects, the failure of its products to meet customer specifications or
otherwise. The Company's products are typically intended for use in applications
that may be critical to a customer's business. As a result, the Company expects
that its customers and potential customers have a greater sensitivity to product
defects than the market for general software products. Although the Company's
business has not been materially and adversely affected by any such errors, or
by defects or failure to meet specifications, to date, there can be no assurance
that, despite testing by the Company and by current and potential customers,
errors or defects will not be found in new products or releases after
commencement of commercial shipments, or that such products will meet customer
specifications, resulting in loss or deferral of revenues, diversion of
resources, damage to the Company's reputation, or increased service and warranty
and other costs, any of which could have a material adverse effect upon the
Company's business, operating results, and financial condition.
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 39% of the outstanding shares of Common Stock of the Company.
Accordingly, these stockholders could, if acting in concert, be able to elect
all members of the Company's Board of Directors and determine the outcome of
corporate actions requiring stockholder approval, such as mergers and
acquisitions. Certain provisions of the Company's Certificate of Incorporation,
equity incentive plans, Bylaws, and Delaware law may also discourage certain
transactions involving a change in control of the Company. This level of
ownership by such persons and entities, when combined with the Company's
classified Board of Directors and the ability of the Board of Directors to issue
"blank check" preferred stock without further stockholder approval, may have the
effect of delaying, deferring or preventing a change in control of the Company
and may adversely affect the voting and other rights of other holders of Common
Stock.
Restructuring Charges. In order to reduce future risk in Asian markets, the
Company made the decision to consolidate its Asian Operations from four offices
to two in the third quarter of 1998, resulting in one-time write-offs of
goodwill, severance costs and lease termination costs. There can be no assurance
that the Company will not incur additional expenses as a result of the decision
to consolidate its Asian operations. The decision to consolidate operations also
involves special risks and uncertainties, some of which may not be foreseeable
or within the Company's control, such as unforeseen severance costs, disputes
with terminated employees, customer loss or customer dissatisfaction with the
decision. There can be no assurance that the Company will not experience
unforeseen costs associated with the decision to consolidate its Asian
operations, and such unforeseen costs could have a material adverse effect on
the Company's business, financial condition and results of operations.
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.
None.
Item 2 - Changes in Securities and Use of Proceeds.
None.
Item 3 - Defaults upon Senior Securities.
None.
Item 4 - Submission of Matters to a Vote of Security Holders.
None.
Item 5 - Other Information.
None.
Item 6 - Exhibits and Reports on Form 8-K .
(a) Exhibits
10.18 Loan and Security Agreement dated as of October 15, 1998, by and
between the registrant and Silicon Valley Bank.
27.1 Financial Data Schedule for the nine months ended September 30,
1998.
27.2 Restated Financial Data Schedule for the nine months ended
September 30, 1997.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter ended September
30, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
OPTIKA IMAGING SYSTEMS, INC.
(Registrant)
11/13/98 /s/ Mark K. Ruport
-------- -----------------------
(Date) Mark K. Ruport
President, Chief Executive Officer
and Chairman of the Board
11/13/98 /s/ Steven M. Johnson
-------- -----------------------
(Date) Steven M. Johnson
Chief Financial Officer, Vice President Finance
and Administration, Secretary and
Chief Accounting Officer
LOAN AND SECURITY AGREEMENT
OPTIKA IMAGING SYSTEMS, INC.
<PAGE>
TABLE OF CONTENTS
Page
1 ACCOUNTING AND OTHER TERMS...................................................4
2 LOAN AND TERMS OF PAYMENT....................................................4
2.1 Credit Extensions.................................................4
2.2 Interest Rate, Payments...........................................5
2.3 Fees..............................................................5
3 CONDITIONS OF LOANS..........................................................5
3.1 Conditions Precedent to Initial Credit Extension..................5
3.2 Conditions Precedent to all Credit Extensions.....................5
4 CREATION OF SECURITY INTEREST................................................5
4.1 Grant of Security Interest........................................5
5 REPRESENTATIONS AND WARRANTIES...............................................6
5.1 Due Organization and Authorization................................6
5.2 Collateral........................................................6
5.3 Litigation........................................................6
5.4 No Material Adverse Change in Financial Statements................6
5.5 Solvency..........................................................6
5.6 Regulatory Compliance.............................................6
5.7 Subsidiaries......................................................7
5.8 Full Disclosure...................................................7
6 AFFIRMATIVE COVENANTS........................................................7
6.1 Government Compliance.............................................7
6.2 Financial Statements, Reports, Certificates.......................7
6.3 Inventory; Returns................................................7
6.4 Taxes.............................................................8
6.5 Insurance.........................................................8
6.6 Primary Accounts..................................................8
6.7 Financial Covenants...............................................8
6.8 Further Assurances................................................8
7 NEGATIVE COVENANTS...........................................................8
7.1 Dispositions......................................................8
7.2 Changes in Business, Ownership, Management or Business Locations..9
7.3 Mergers or Acquisitions...........................................9
7.4 Indebtedness......................................................9
7.5 Encumbrance.......................................................9
7.6 Distributions; Investments........................................9
7.7 Transactions with Affiliates......................................9
7.8 Subordinated Debt.................................................9
7.9 Compliance........................................................9
8 EVENTS OF DEFAULT...........................................................10
8.1 Payment Default..................................................10
8.2 Covenant Default.................................................10
8.3 Material Adverse Change..........................................10
8.4 Attachment.......................................................10
8.5 Insolvency.......................................................10
8.6 Other Agreements.................................................10
8.7 Judgments........................................................11
8.8 Misrepresentations...............................................11
9 BANK'S RIGHTS AND REMEDIES..................................................11
9.1 Rights and Remedies..............................................11
9.2 Power of Attorney................................................11
9.3 Accounts Collection..............................................12
9.4 Bank Expenses....................................................12
9.5 Bank's Liability for Collateral..................................12
9.6 Remedies Cumulative..............................................12
9.7 Demand Waiver....................................................12
10 NOTICES....................................................................12
11 CHOICE OF LAW , VENUE AND JURY TRIAL WAIVER................................13
12 GENERAL PROVISIONS.........................................................13
12.1 Successors and Assigns..........................................13
12.2 Indemnification.................................................13
12.3 Time of Essence.................................................13
12.4 Severability of Provision.......................................13
12.5 Amendments in Writing, Integration..............................13
12.6 Counterparts....................................................13
12.7 Survival........................................................14
12.8 Confidentiality.................................................14
12.9 Attorneys' Fees, Costs and Expenses.............................14
13 DEFINITIONS................................................................14
13.1 Definitions.....................................................14
<PAGE>
This LOAN AND SECURITY AGREEMENT dated October 15, 1998, between
SILICON VALLEY BANK ("Bank"), whose address is 3003 Tasman Drive, Santa Clara,
California 95054 with a loan production office located at 4430 Arapahoe Ave.,
Ste. 225, Boulder, Colorado 80303 and OPTIKA IMAGING SYSTEMS, INC., a Delaware
corporation ("Borrower"), whose address is 7450 Campus Drive, 2nd Floor,
Colorado Springs, Colorado 80920 provides the terms on which Bank will lend to
Borrower and Borrower will repay Bank. The parties agree as follows:
This Loan and Security Agreement replaces that certain Loan and
Security Agreement, dated June 16, 1995, by and between Optika Imaging Systems,
Inc., a California corporation and Bank. Borrower agrees to assume any and all
obligations between Optika Imaging Systems, Inc. a California corporation, and
Bank existing prior to the date of this Agreement.
1 ACCOUNTING AND OTHER TERMS
--------------------------
Accounting terms not defined in this Agreement will be construed
following GAAP Calculations and determinations must be made following GAAP. The
term "financial statements" includes the notes and schedules. The terms
"including" and "includes" always mean "including (or includes) without
limitation," in this or any Loan Document. This Agreement shall be construed to
impart upon Bank a duty to act reasonably at all times.
2 LOAN AND TERMS OF PAYMENT
-------------------------
2.1 Credit Extensions.
Borrower will pay Bank the unpaid principal amount of all Credit
Extensions and interest on the unpaid principal amount of the Credit Extensions.
2.1.1 Revolving Advances.
(a) Bank will make Advances not exceeding (i) the Committed Revolving
Line, minus (ii) the amount of all outstanding Letters of Credit (including
drawn but unreimbursed Letters of Credit). Amounts borrowed under this Section
may be repaid and reborrowed during the term of this Agreement.
(b) To obtain an Advance, Borrower must notify Bank by facsimile or
telephone by 3:00 p.m. Pacific time on the Business Day the Advance is to be
made. Borrower must promptly confirm the notification by delivering to Bank the
Payment/Advance Form attached as Exhibit B. Bank will credit Advances to
Borrower's deposit account. Bank may make Advances under this Agreement based on
instructions from a Responsible Officer or his or her designee or without
instructions if the Advances are necessary to meet Obligations which have become
due. Bank may rely on any telephone notice given by a person whom Bank believes
is a Responsible Officer or designee. Borrower will indemnify Bank for any loss
Bank suffers due to reliance.
(c) The Committed Revolving Line terminates on the Revolving Maturity
Date, when all Advances and other amounts due under this Agreement are
immediately payable.
2.1.2 Letters of Credit.
Bank will issue or have issued Letters of Credit for Borrower's account
not exceeding (i) the Committed Revolving Line minus (ii) the outstanding
principal balance of the Advances; however, the face amount of outstanding
Letters of Credit (including drawn but unreimbursed Letters of Credit and any
Letter of Credit Reserve) may not exceed $500,000. Each Letter of Credit will
have an expiry date of no later than 180 days after the Revolving Maturity Date,
but Borrower's reimbursement obligation will be secured by cash on terms
acceptable to Bank at any time after the Revolving Maturity Date if the term of
this Agreement is not extended by Bank.
2.2 Interest Rate, Payments.
(a) Interest Rate. Advances accrue interest on the outstanding
principal balance at a per annum rate equal to the Prime Rate. After an Event of
Default, Obligations accrue interest at 5 percent above the rate effective
immediately before the Event of Default. The interest rate increases or
decreases when the Prime Rate changes. Interest is computed on a 360 day year
for the actual number of days elapsed.
(b) Payments. Interest due on the Committed Revolving Line is payable
on the 15th of each month. Bank may debit any of Borrower's deposit accounts
including Account Number ________________ for principal and interest payments or
any amounts Borrower owes Bank. Bank will notify Borrower when it debits
Borrower's accounts. These debits are not a set-off. Payments received after
12:00 noon Pacific time are considered received at the opening of business on
the next Business Day. When a payment is due on a day that is not a Business
Day, the payment is due the next Business Day and additional fees or interest
accrue.
2.3 Fees.
Borrower will pay:
(a) Facility Fee. A fully earned, non-refundable Facility Fee of
$15,000 due on the Closing Date; and
(b) Bank Expenses. All Bank Expenses (including reasonable attorneys'
fees and expenses) incurred through and after the date of this Agreement, are
payable when due.
3 CONDITIONS OF LOANS
3.1 Conditions Precedent to Initial Credit Extension.
Bank's obligation to make the initial Credit Extension is subject to
the condition precedent that it receive the agreements, documents and fees it
requires.
3.2 Conditions Precedent to all Credit Extensions.
Bank's obligations to make each Credit Extension, including the initial
Credit Extension, is subject to the following:
(a) timely receipt of any Payment/Advance Form; and
(b) the representations and warranties in Section 5 must be materially
true on the date of the Payment/Advance Form and on the effective date of each
Credit Extension and no Event of Default may have occurred and be continuing, or
result from the Credit Extension. Each Credit Extension is Borrower's
representation and warranty on that date that the representations and warranties
of Section 5 remain true.
4 CREATION OF SECURITY INTEREST
4.1 Grant of Security Interest.
Borrower grants Bank a continuing security interest in all presently
existing and later acquired Collateral to secure all Obligations and performance
of each of Borrower's duties under the Loan Documents. Except for Permitted
Liens, any security interest will be a first priority security interest in the
Collateral. Bank may place a "hold" on any deposit account pledged as
Collateral, up to the amount of any outstanding Obligations.
5 REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1 Due Organization and Authorization.
Borrower and each Subsidiary is duly existing and in good standing in
its state of formation and qualified and licensed to do business in, and in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be qualified.
The execution, delivery and performance of the Loan Documents have been
duly authorized, and do not conflict with Borrower's formation documents, nor
constitute an event of default under any material agreement by which Borrower is
bound. Borrower is not in default under any agreement to which or by which it is
bound in which the default could cause a Material Adverse Change.
5.2 Collateral.
Borrower has good title to the Collateral, free of Liens except
Permitted Liens. All Inventory is in all material respects of good and
marketable quality, free from material defects.
5.3 Litigation.
Except as shown in the Schedule, there are no actions or proceedings
pending or, to Borrower's knowledge, threatened by or against Borrower or any
Subsidiary in which an adverse decision could cause a Material Adverse Change.
5.4 No Material Adverse Change in Financial Statements.
All consolidated financial statements for Borrower, and any Subsidiary,
delivered to Bank fairly present in all material respects Borrower's
consolidated financial condition and Borrower's consolidated results of
operations. There has not been any material deterioration in Borrower's
consolidated financial condition since the date of the most recent financial
statements submitted to Bank.
5.5 Solvency.
The fair salable value of Borrower's assets (including goodwill minus
disposition costs) exceeds the fair value of its liabilities; the Borrower is
not left with unreasonably small capital after the transactions in this
Agreement; and Borrower is able to pay its debts (including trade debts) as they
mature.
5.6 Regulatory Compliance.
Borrower is not an "investment company" or a company "controlled" by an
"investment company" under the Investment Company Act. Borrower is not engaged
as one of its important activities in extending credit for margin stock (under
Regulations G, T and U of the Federal Reserve Board of Governors). Borrower has
complied with the Federal Fair Labor Standards Act. Borrower has not violated
any laws, ordinances or rules, the violation of which could cause a Material
Adverse Change. None of Borrower's or any Subsidiary's properties or assets has
been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge,
by previous Persons, in disposing, producing, storing, treating, or transporting
any hazardous substance other than legally. Borrower and each Subsidiary has
timely filed all required tax returns and paid, or made adequate provision to
pay, all taxes, except those being contested in good faith with adequate
reserves under GAAP. Borrower and each Subsidiary has obtained all consents,
approvals and authorizations of, made all declarations or filings with, and
given all notices to, all government authorities that are necessary to continue
its business as currently conducted.
5.7 Subsidiaries.
Borrower does not own any stock, partnership interest or other equity
securities except for Permitted Investments.
5.8 Full Disclosure.
No representation, warranty or other statement of Borrower in any
certificate or written statement given to Bank contains any untrue statement of
a material fact or omits to state a material fact necessary to make the
statements contained in the certificates or statements not misleading.
6 AFFIRMATIVE COVENANTS
Borrower will do all of the following:
6.1 Government Compliance.
Borrower will maintain its and all Subsidiaries' legal existence and
good standing in its jurisdiction of formation and maintain qualification in
each jurisdiction in which the failure to so qualify could have a material
adverse effect on Borrower's business or operations. Borrower will comply, and
have each Subsidiary comply, with all laws, ordinances and regulations to which
it is subject, noncompliance with which could have a material adverse effect on
Borrower's business or operations or cause a Material Adverse Change.
6.2 Financial Statements, Reports, Certificates.
(a) Borrower will deliver to Bank: (i) within 5 days of filing, copies
of all statements, reports and notices made available to Borrower's security
holders or to any holders of Subordinated Debt and all reports on Form 10-K,
10-Q and 8-K filed with the Securities and Exchange Commission; (ii) a prompt
report of any legal actions pending or threatened against Borrower or any
Subsidiary that could result in damages or costs to Borrower or any Subsidiary
of $100,000 or more; and (iii) budgets, sales projections, operating plans or
other financial information Bank requests.
(b) Within 30 days after the last day of each quarter, Borrower will
deliver to Bank aged listings of accounts receivable.
(c) Within 50 days after the last day of each quarter, Borrower will
deliver to Bank with the quarterly financial statements a Compliance Certificate
signed by a Responsible Officer in the form of Exhibit C.
(d) Bank has the right to audit Borrower's Collateral at Borrower's
expense prior to the initial Credit Extension, and at such time as an Event of
Default has occurred and is continuing.
6.3 Inventory; Returns.
Borrower will keep all Inventory in good and marketable condition, free
from material defects. Returns and allowances between Borrower and its account
debtors will follow Borrower's customary practices as they exist at execution of
this Agreement. Borrower must promptly notify Bank of all returns, recoveries,
disputes and claims, that involve more than $50,000.
6.4 Taxes.
Borrower will make, and cause each Subsidiary to make, timely payment
of all material federal, state, and local taxes or assessments and will deliver
to Bank, on demand, appropriate certificates attesting to the payment.
6.5 Insurance.
Borrower will keep its business and the Collateral insured for risks
and in amounts, as Bank requests. Insurance policies will be in a form, with
companies, and in amounts that are satisfactory to Bank. All property policies
will have a lender's loss payable endorsement showing Bank as an additional loss
payee and all liability policies will show the Bank as an additional insured and
provide that the insurer must give Bank at least 20 days notice before canceling
its policy. At Bank's request, Borrower will deliver certified copies of
policies and evidence of all premium payments. Proceeds payable under any policy
will, at Bank's option, be payable to Bank on account of the Obligations.
6.6 Primary Accounts.
Borrower will maintain its primary depository and operating accounts
with Bank.
6.7 Financial Covenants.
Borrower will maintain as of the last day of each quarter:
(i) Quick Ratio [Adjusted]. A ratio of Quick Assets to
Current Liabilities minus Deferred Maintenance Revenue of at least 2.00 to 1.00.
(ii) Tangible Net Worth. A Tangible Net Worth of at
least $8,000,000 plus 75% of new equity received by Borrower.
(iii) Minimum Cash. A ratio of unrestricted cash (and
equivalents), less all current outstanding Credit Extensions, of not less than
$3,000,000.
(iv) Profitability. Borrower will be profitable each quarter,
except that Borrower may suffer losses not to exceed $500,000 for the fiscal
quarter ending December 31, 1998; $400,000 for the fiscal quarter ending March
31, 1999; and $250,000 for the fiscal quarter ending June 30, 1999.
6.8 Further Assurances.
Borrower will execute any further instruments and take further action
as Bank requests to perfect or continue Bank's security interest in the
Collateral or to effect the purposes of this Agreement.
7 NEGATIVE COVENANTS
Borrower will not do any of the following:
7.1 Dispositions.
Convey, sell, lease, transfer or otherwise dispose of (collectively
"Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of
its business or property, other than Transfers (i) of Inventory in the ordinary
course of business; (ii) of non-exclusive licenses and similar arrangements for
the use of the property of Borrower or its Subsidiaries in the ordinary course
of business; or (iii) of worn-out or obsolete Equipment.
7.2 Changes in Business, Ownership, Management or Business Locations.
Engage in or permit any of its Subsidiaries to engage in any business
other than the businesses currently engaged in by Borrower or have a material
change in its ownership of greater than 25%. Borrower will not, without at least
30 days prior written notice, relocate its chief executive office or add any new
offices or business locations in which 10 or more employees occupy.
7.3 Mergers or Acquisitions.
Merge or consolidate, or permit any of its Subsidiaries to merge or
consolidate, with any other Person, or acquire, or permit any of its
Subsidiaries to acquire, all or substantially all of the capital stock or
property of another Person, except (i) where no Event of Default has occurred
and is continuing or would result from such action during the term of this
Agreement and Tangible Net Worth will not decrease by more than 25%; or (ii)
merge or consolidate a Subsidiary into another Subsidiary or into Borrower.
7.4 Indebtedness.
Create, incur, assume, or be liable for any Indebtedness, or permit any
Subsidiary to do so, other than Permitted Indebtedness.
7.5 Encumbrance.
Create, incur, or allow any Lien on any of its property, or assign or
convey any right to receive income, including the sale of any Accounts, or
permit any of its Subsidiaries to do so, except for Permitted Liens, or permit
any Collateral not to be subject to the first priority security interest granted
here.
7.6 Distributions; Investments.
Directly or indirectly acquire or own any Person, or make any
Investment in any Person, other than Permitted Investments, or permit any of its
Subsidiaries to do so. Pay any dividends or make any distribution or payment or
redeem, retire or purchase any capital stock, other than majority owned
Subsidiaries.
7.7 Transactions with Affiliates.
Directly or indirectly enter or permit any material transaction with
any Affiliate except transactions that are in the ordinary course of Borrower's
business, on terms less favorable to Borrower than would be obtained in an arm's
length transaction with a non-affiliated Person.
7.8 Subordinated Debt.
Make or permit any payment on any Subordinated Debt, except under the
terms of the Subordinated Debt, or amend any provision in any document relating
to the Subordinated Debt without Bank's prior written consent.
7.9 Compliance.
Become an "investment company" or a company controlled by an
"investment company," under the Investment Company Act of 1940 or undertake as
one of its important activities extending credit to purchase or carry margin
stock, or use the proceeds of any Credit Extension for that purpose; fail to
meet the minimum funding requirements of ERISA, permit a Reportable Event or
Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the
Federal Fair Labor Standards Act or violate any other law or regulation, if the
violation could have a material adverse effect on Borrower's business or
operations or cause a Material Adverse Change, or permit any of its Subsidiaries
to do so.
8 EVENTS OF DEFAULT
Any one of the following is an Event of Default:
8.1 Payment Default.
If Borrower fails to pay any of the Obligations;
8.2 Covenant Default.
If Borrower does not perform any obligation in Section 6 or violates
any covenant in Section 7 or does not perform or observe any other material
term, condition or covenant in this Agreement, any Loan Documents, or in any
agreement between Borrower and Bank and as to any default under a term,
condition or covenant that can be cured, has not cured the default within 10
days after it occurs, or if the default cannot be cured within 10 days or cannot
be cured after Borrower's attempts within 10 day period, and the default may be
cured within a reasonable time, then Borrower has an additional period (of not
more than 30 days) to attempt to cure the default. During the additional time,
the failure to cure the default is not an Event of Default (but no Credit
Extensions will be made during the cure period);
8.3 Material Adverse Change.
(i) If there occurs a material impairment in the perfection or priority
of the Bank's security interest in the Collateral or in the value of such
Collateral which is not covered by adequate insurance or (ii) if the Bank
determines, based upon information available to it and in its reasonable
judgment, that there is a reasonable likelihood that Borrower will fail to
comply with one or more of the financial covenants in Section 6 during the next
succeeding financial reporting period.
8.4 Attachment.
If any material portion of Borrower's assets is attached, seized,
levied on, or comes into possession of a trustee or receiver and the attachment,
seizure or levy is not removed in 10 days, or if Borrower is enjoined,
restrained, or prevented by court order from conducting a material part of its
business or if a judgment or other claim becomes a Lien on a material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed against
any of Borrower's assets by any government agency and not paid within 10 days
after Borrower receives notice. These are not Events of Default if stayed or if
a bond is posted pending contest by Borrower (but no Credit Extensions will be
made during the cure period);
8.5 Insolvency.
If Borrower becomes insolvent or if Borrower begins an Insolvency
Proceeding or an Insolvency Proceeding is begun against Borrower and not
dismissed or stayed within 30 days (but no Credit Extensions will be made before
any Insolvency Proceeding is dismissed);
8.6 Other Agreements.
If there is a default in any agreement between Borrower and a third
party that gives the third party the right to accelerate any Indebtedness
exceeding $100,000 or that could cause a Material Adverse Change;
8.7 Judgments.
If a money judgment(s) in the aggregate of at least $50,000 is rendered
against Borrower and is unsatisfied and unstayed for 10 days (but no Credit
Extensions will be made before the judgment is stayed or satisfied); or
8.8 Misrepresentations.
If Borrower or any Person acting for Borrower makes any material
misrepresentation or material misstatement now or later in any warranty or
representation in this Agreement or in any writing delivered to Bank or to
induce Bank to enter this Agreement or any Loan Document.
9 BANK'S RIGHTS AND REMEDIES
9.1 Rights and Remedies.
When an Event of Default occurs and continues Bank may, without notice
or demand, do any or all of the following:
(a) Declare all Obligations immediately due and payable (but if an
Event of Default described in Section 8.5 occurs all Obligations are immediately
due and payable without any action by Bank);
(b) Stop advancing money or extending credit for Borrower's benefit
under this Agreement or under any other agreement between Borrower and Bank;
(c) Settle or adjust disputes and claims directly with account debtors
for amounts, on terms and in any order that Bank considers advisable;
(d) Make any payments and do any acts it considers necessary or
reasonable to protect its security interest in the Collateral. Borrower will
assemble the Collateral if Bank requires and make it available as Bank
designates. Bank may enter premises where the Collateral is located, take and
maintain possession of any part of the Collateral, and pay, purchase, contest,
or compromise any Lien which appears to be prior or superior to its security
interest and pay all expenses incurred. Borrower grants Bank a license to enter
and occupy any of its premises, without charge, to exercise any of Bank's rights
or remedies;
(e) Apply to the Obligations any (i) balances and deposits of Borrower
it holds, or (ii) any amount held by Bank owing to or for the credit or the
account of Borrower;
(f) Ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sale, and sell the Collateral;
(g) Dispose of the Collateral according to the Code; and
(h) Modify this Agreement and the Loan Documents to require, among
other things, an advance rate under the Committed Revolving Line subject to the
value of Borrower's Accounts.
9.2 Power of Attorney.
Effective only when an Event of Default occurs and continues, Borrower
irrevocably appoints Bank as its lawful attorney to: (i) endorse Borrower's name
on any checks or other forms of payment or security; (ii) sign Borrower's name
on any invoice or bill of lading for any Account or drafts against account
debtors, (iii) make, settle, and adjust all claims under Borrower's insurance
policies; (iv) settle and adjust disputes and claims about the Accounts directly
with account debtors, for amounts and on terms Bank determines reasonable; and
(v) transfer the Collateral into the name of Bank or a third party as the Code
permits. Bank may exercise the power of attorney to sign Borrower's name on any
documents necessary to perfect or continue the perfection of any security
interest regardless of whether an Event of Default has occurred. Bank's
appointment as Borrower's attorney in fact, and all of Bank's rights and powers,
coupled with an interest, are irrevocable until all Obligations have been fully
repaid and performed and Bank's obligation to provide Credit Extensions
terminates.
9.3 Accounts Collection.
When an Event of Default occurs and continues, Bank may notify any
Person owing Borrower money of Bank's security interest in the funds and verify
the amount of the Account. Borrower must collect all payments in trust for Bank
and, if requested by Bank, immediately deliver the payments to Bank in the form
received from the account debtor, with proper endorsements for deposit.
9.4 Bank Expenses.
If Borrower fails to pay any amount or furnish any required proof of
payment to third persons Bank may make all or part of the payment or obtain
insurance policies required in Section 6.5, and take any action under the
policies Bank deems prudent. Any amounts paid by Bank are Bank Expenses and
immediately due and payable, bearing interest at the then applicable rate and
secured by the Collateral. No payments by Bank are deemed an agreement to make
similar payments in the future or Bank's waiver of any Event of Default.
9.5 Bank's Liability for Collateral.
If Bank complies with reasonable banking practices it is not liable
for: (a) the safekeeping of the Collateral; (b) any loss or damage to the
Collateral; (c) any diminution in the value of the Collateral; or (d) any act or
default of any carrier, warehouseman, bailee, or other person. Borrower bears
all risk of loss, damage or destruction of the Collateral.
9.6 Remedies Cumulative.
Bank's rights and remedies under this Agreement, the Loan Documents,
and all other agreements are cumulative. Bank has all rights and remedies
provided under the Code, by law, or in equity. Bank's exercise of one right or
remedy is not an election, and Bank's waiver of any Event of Default is not a
continuing waiver. Bank's delay is not a waiver, election, or acquiescence. No
waiver is effective unless signed by Bank and then is only effective for the
specific instance and purpose for which it was given.
9.7 Demand Waiver.
Borrower waives demand, notice of default or dishonor, notice of
payment and nonpayment, notice of any default, nonpayment at maturity, release,
compromise, settlement, extension, or renewal of accounts, documents,
instruments, chattel paper, and guarantees held by Bank on which Borrower is
liable.
10 NOTICES
All notices or demands by any party about this Agreement or any other
related agreement must be in writing and be personally delivered or sent by an
overnight delivery service, by certified mail, postage prepaid, return receipt
requested, or by telefacsimile to the addresses set forth at the beginning of
this Agreement. A Party may change its notice address by giving the other Party
written notice.
11 CHOICE OF LAW , VENUE AND JURY TRIAL WAIVER
California law governs the Loan Documents without regard to principles
of conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction
of the State and Federal courts in Santa Clara County, California.
BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE
OF ACTION ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY CONTEMPLATED
TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS
WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT.
EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.
12 GENERAL PROVISIONS
12.1 Successors and Assigns.
This Agreement binds and is for the benefit of the successors and
permitted assigns of each party. Borrower may not assign this Agreement or any
rights under it without Bank's prior written consent which may be granted or
withheld in Bank's discretion. Bank has the right, without the consent of or
notice to Borrower, to sell, transfer, negotiate, or grant participation in all
or any part of, or any interest in, Bank's obligations, rights and benefits
under this Agreement.
12.2 Indemnification.
Borrower will indemnify, defend and hold harmless Bank and its
officers, employees, and agents against: (a) all obligations, demands, claims,
and liabilities asserted by any other party in connection with the transactions
contemplated by the Loan Documents; and (b) all losses or Bank Expenses
incurred, or paid by Bank from, following, or consequential to transactions
between Bank and Borrower (including reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 Time of Essence.
Time is of the essence for the performance of all obligations in this
Agreement.
12.4 Severability of Provision.
Each provision of this Agreement is severable from every other
provision in determining the enforceability of any provision.
12.5 Amendments in Writing, Integration.
All amendments to this Agreement must be in writing and signed by
Borrower and Bank. This Agreement represents the entire agreement about this
subject matter, and supersedes prior negotiations or agreements. All prior
agreements, understandings, representations, warranties, and negotiations
between the parties about the subject matter of this Agreement merge into this
Agreement and the Loan Documents.
12.6 Counterparts.
This Agreement may be executed in any number of counterparts and by
different parties on separate counterparts, each of which, when executed and
delivered, are an original, and all taken together, constitute one agreement.
12.7 Survival.
All covenants, representations and warranties made in this Agreement
continue in full force while any Obligations remain outstanding. The obligations
of Borrower in Section 12.2 to indemnify Bank will survive until all statutes of
limitations for actions that may be brought against Bank have run.
12.8 Confidentiality.
In handling any confidential information, Bank will exercise the same
degree of care that it exercises for its own proprietary information, but
disclosure of information may be made (i) to Bank's subsidiaries or affiliates
in connection with their business with Borrower, (ii) to prospective transferees
or purchasers of any interest in the Loans, (iii) as required by law,
regulation, subpoena, or other order, (iv) as required in connection with Bank's
examination or audit and (v) as Bank considers appropriate exercising remedies
under this Agreement. Confidential information does not include information that
either: (a) is in the public domain or in Bank's possession when disclosed to
Bank, or becomes part of the public domain after disclosure to Bank; or (b) is
disclosed to Bank by a third party, if Bank does not know that the third party
is prohibited from disclosing the information.
12.9 Attorneys' Fees, Costs and Expenses.
In any action or proceeding between Borrower and Bank arising out of
the Loan Documents, the prevailing party will be entitled to recover its
reasonable attorneys' fees and other costs and expenses incurred, in addition to
any other relief to which it may be entitled.
13 DEFINITIONS
13.1 Definitions.
In this Agreement:
"Accounts" are all existing and later arising accounts, contract
rights, and other obligations owed Borrower in connection with its sale or lease
of goods (including licensing software and other technology) or provision of
services, all credit insurance, guaranties, other security and all merchandise
returned or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"Affiliate" of a Person is a Person that owns or controls directly or
indirectly the Person, any Person that controls or is controlled by or is under
common control with the Person, and each of that Person's senior executive
officers, directors, partners and, for any Person that is a limited liability
company, that Person's managers and members.
"Bank Expenses" are all audit fees and expenses and reasonable costs or
expenses (including reasonable attorneys' fees and expenses) for preparing,
negotiating, administering, defending and enforcing the Loan Documents
(including appeals or Insolvency Proceedings).
"Borrower's Books" are all Borrower's books and records including
ledgers, records regarding Borrower's assets or liabilities, the Collateral,
business operations or financial condition and all computer programs or discs or
any equipment containing the information.
"Business Day" is any day that is not a Saturday, Sunday or a day on
which the Bank is closed.
"Closing Date" is the date of this Agreement.
"Code" is the California Uniform Commercial Code.
"Collateral" is the property described on Exhibit A.
"Committed Revolving Line" is an Advance of up to $3,000,000.
"Contingent Obligation" is, for any Person, any direct or indirect
liability, contingent or not, of that Person for (i) any indebtedness, lease,
dividend, letter of credit or other obligation of another such as an obligation
directly or indirectly guaranteed, endorsed, co-made, discounted or sold with
recourse by that Person, or for which that Person is directly or indirectly
liable; (ii) any obligations for undrawn letters of credit for the account of
that Person; and (iii) all obligations from any interest rate, currency or
commodity swap agreement, interest rate cap or collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; but "Contingent
Obligation" does not include endorsements in the ordinary course of business.
The amount of a Contingent Obligation is the stated or determined amount of the
primary obligation for which the Contingent Obligation is made or, if not
determinable, the maximum reasonably anticipated liability for it determined by
the Person in good faith; but the amount may not exceed the maximum of the
obligations under the guarantee or other support arrangement.
"Credit Extension" is each Advance, Letter of Credit, or any other
extension of credit by Bank for Borrower's benefit.
"Current Liabilities" are the aggregate amount of Borrower's Total
Liabilities which mature within one (1) year.
"Deferred Maintenance Revenue" is all amounts received in advance of
performance under maintenance contracts and not yet recognized as revenue.
"Equipment" is all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.
"ERISA" is the Employment Retirement Income Security Act of 1974, and
its regulations.
"GAAP" is generally accepted accounting principles.
"Indebtedness" is (a) indebtedness for borrowed money or the deferred
price of property or services, such as reimbursement and other obligations for
surety bonds and letters of credit, (b) obligations evidenced by notes, bonds,
debentures or similar instruments, (c) capital lease obligations and (d)
Contingent Obligations.
"Insolvency Proceeding" are proceedings by or against any Person under
the United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
"Inventory" is present and future inventory in which Borrower has any
interest, including merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products intended for sale or
lease or to be furnished under a contract of service, of every kind and
description now or later owned by or in the custody or possession, actual or
constructive, of Borrower, including inventory temporarily out of its custody or
possession or in transit and including returns on any accounts or other proceeds
(including insurance proceeds) from the sale or disposition of any of the
foregoing and any documents of title.
"Investment" is any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
"Letter of Credit" is defined in Section 2.
"Lien" is a mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.
"Loan Documents" are, collectively, this Agreement, any note, or notes
or guaranties executed by Borrower or Guarantor, and any other present or future
agreement between Borrower and/or for the benefit of Bank in connection with
this Agreement, all as amended, extended or restated.
"Material Adverse Change" is defined in Section 8.3.
"Obligations" are debts, principal, interest, Bank Expenses and other
amounts Borrower owes Bank now or later, including letters of credit and
Exchange Contracts and including interest accruing after Insolvency Proceedings
begin and debts, liabilities, or obligations of Borrower assigned to Bank.
"Permitted Indebtedness" is:
(a) Borrower's indebtedness to Bank under this Agreement or any other
Loan Document;
(b) Indebtedness existing on the Closing Date and shown on the
Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the ordinary course of
business; and
(e) Indebtedness secured by Permitted Liens.
"Permitted Investments" are:
(a) Investments existing on the Closing Date; and
(b) (i) marketable direct obligations issued or unconditionally
guaranteed by the United States or its agency or any State maturing within 1
year from its acquisition, (ii) commercial paper maturing no more than 1 year
after its creation and having the highest rating from either Standard & Poor's
Corporation or Moody's Investors Service, Inc., and (iii) Bank's certificates of
deposit issued maturing no more than 1 year after issue.
"Permitted Liens" are:
(a) Liens existing on the Closing Date and shown on the Schedule or
arising under this Agreement or other Loan Documents;
(b) Liens for taxes, fees, assessments or other government charges or
levies, either not delinquent or being contested in good faith and for which
Borrower maintains adequate reserves on its Books, if they have no priority over
any of Bank's security interests;
(c) Purchase money Liens (i) on Equipment acquired or held by Borrower
or its Subsidiaries incurred for financing the acquisition of the Equipment, or
(ii) existing on equipment when acquired, if the Lien is confined to the
property and improvements and the proceeds of the equipment;
(d) Leases or subleases and licenses or sublicenses granted in the
ordinary course of Borrower's business and any interest or title of a lessor,
licensor or under any lease or license, if the leases, subleases, licenses and
sublicenses permit granting Bank a security interest;
(e) Liens incurred in the extension, renewal or refinancing of the
indebtedness secured by Liens described in (a) through (c), but any extension,
renewal or replacement Lien must be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness may not increase.
"Person" is any individual, sole proprietorship, partnership, limited
liability company, joint venture, company association, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or government agency.
"Prime Rate" is Bank's most recently announced "prime rate," even if it
is not Bank's lowest rate.
"Quick Assets" is, on any date, the Borrower's consolidated,
unrestricted cash, cash equivalents, net billed accounts receivable and
investments with maturities of fewer than 12 months determined according to
GAAP.
"Responsible Officer" is each of the Chief Executive Officer, the
President, the Chief Financial Officer and the Controller of Borrower.
"Revolving Maturity Date" is October 15, 1999.
"Schedule" is any attached schedule of exceptions.
"Subordinated Debt" is debt incurred by Borrower subordinated to
Borrower's debt to Bank (and identified as subordinated by Borrower and Bank).
"Subsidiary" is for any Person, or any other business entity of which
more than 50% of the voting stock or other equity interests is owned or
controlled, directly or indirectly, by the Person or one or more Affiliates of
the Person.
"Tangible Net Worth" is, on any date, the consolidated total assets of
Borrower and its Subsidiaries minus, (i) any amounts attributable to (a)
goodwill, (b) intangible items such as unamortized debt discount and expense,
Patents, trade and service marks and names, Copyrights and research and
development expenses except prepaid expenses, and (c) reserves not already
deducted from assets, and (ii) Total Liabilities plus Subordinated Debt.
"Total Liabilities" is on any day, obligations that should, under GAAP,
be classified as liabilities on Borrower's consolidated balance sheet, including
all Indebtedness, and current portion Subordinated Debt allowed to be paid, but
excluding all other Subordinated Debt.
BORROWER:
Optika Imaging Systems, Inc.
By:
Title:
BANK:
SILICON VALLEY BANK
By:
Title:
<PAGE>
EXHIBIT A
The Collateral consists of all of Borrower's right, title and interest
in and to the following:
All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor vehicles
and trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;
All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above;
All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, license agreements, franchise
agreements, purchase orders, customer lists, route lists, claims, computer
programs, computer discs, computer tapes, literature, reports, catalogs, design
rights, income tax refunds, payments of insurance and rights to payment of any
kind, specifically excluding patents, trademarks, copyrights and other
intellectual property rights;
All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Borrower, whether or not earned by performance, and any
and all credit insurance, guaranties, and other security therefor, as well as
all merchandise returned to or reclaimed by Borrower;
All documents, cash, deposit accounts, securities, securities
entitlements, securities accounts, investment property, letters of credit,
certificates of deposit, instruments and chattel paper now owned or hereafter
acquired and Borrower's Books relating to the foregoing;
All Borrower's Books relating to the foregoing and any and all claims,
rights and interests in any of the above and all substitutions for, additions
and accessions to and proceeds thereof.
<PAGE>
EXHIBIT B
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE:
FAX#: (408) 496-2426 TIME:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FROM: Optika Imaging Systems, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CLIENT NAME (BORROWER)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REQUESTED BY:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AUTHORIZED SIGNER'S NAME
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AUTHORIZED SIGNATURE:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PHONE NUMBER:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FROM ACCOUNT # TO ACCOUNT #
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REQUESTED TRANSACTION TYPE REQUESTED DOLLAR AMOUNT
- --------------------------------------------------------------------------------
PRINCIPAL INCREASE (ADVANCE) $
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PRINCIPAL PAYMENT (ONLY) $
- --------------------------------------------------------------------------------
INTEREST PAYMENT (ONLY) $
- --------------------------------------------------------------------------------
PRINCIPAL AND INTEREST (PAYMENT) $
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OTHER INSTRUCTIONS:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
All Borrower's representations and warranties in the Loan and Security Agreement
are true, correct and complete in all material respects on the date of the
telephone request for and Advance confirmed by this Borrowing Certificate; but
those representations and warranties expressly referring to another date shall
be true, correct and complete in all material respects as of that date.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BANK USE ONLY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TELEPHONE REQUEST:
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Authorized Requester Phone #
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Received By (Bank) Phone #
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Authorized Signature (Bank)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
<PAGE>
EXHIBIT C
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
3003 Tasman Drive
Santa Clara, CA 95054
FROM: OPTIKA IMAGING SYSTEMS, INC.
The undersigned authorized officer of Optika Imaging Systems, Inc.
("Borrower") certifies that under the terms and conditions of the Loan and
Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is
in complete compliance for the period ending _______________ with all required
covenants except as noted below and (ii) all representations and warranties in
the Agreement are true and correct in all material respects on this date.
Attached are the required documents supporting the certification. The Officer
certifies that these are prepared in accordance with Generally Accepted
Accounting Principles (GAAP) consistently applied from one period to the next
except as explained in an accompanying letter or footnotes. The Officer
acknowledges that no borrowings may be requested at any time or date of
determination that Borrower is not in compliance with any of the terms of the
Agreement, and that compliance is determined not just at the date this
certificate is delivered.
<TABLE>
<CAPTION>
Please indicate compliance status by circling Yes/No under "Complies" column.
Reporting Covenant Required Complies
<S> <C> <C> <C>
10-Q, 10-K and 8-K + Compliance Cert. Within 5 days after filing with SEC Yes No
Accounts Receivable agings Quarterly within 30 days Yes No
Financial Covenant Required Actual Complies
Maintain on a Quarterly Basis:
Minimum Adjusted Quick Ratio 2.00:1.00 _____:1.00 Yes No
Minimum Tangible Net Worth $8,000,000 +
75% of new equity $________ Yes No
Minimum Cash $3,000,000 $________ Yes No
Profitability: Quarterly $_________ Yes No
Losses not to exceed: $500,000 for the fiscal quarter ending December Yes No
31, 1998; $400,000 for the fiscal quarter ending
March 31, 1999; and $250,000 for the fiscal
quarter ending June 30, 1999.
</TABLE>
- --------------------------------------------------------------------------------
BANK USE ONLY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Received by:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AUTHORIZED SIGNER
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Date:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Verified:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AUTHORIZED SIGNER
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Date:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Compliance Status: Yes No
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3
- --------------------------------------------------------------------------------
Comments Regarding Exceptions: See Attached.
Sincerely,
Optika Imaging Systems, Inc.
SIGNATURE
TITLE
DATE
<PAGE>
[GRAPHIC OMITTED]
SILICON VALLEY BANK
PRO FORMA INVOICE FOR LOAN CHARGES
BORROWER: Optika Imaging Systems, Inc.
LOAN OFFICER: Frank Amoroso
DATE: October 15, 1998
Revolving Loan Fee $15,000.00
Credit Report 35.00
Documentation Fee 1,650.00
TOTAL FEE DUE $16,685.00
Please indicate the method of payment:
{ } A check for the total amount is attached.
{ } Debit DDA # __________________ for the total amount.
{ } Loan proceeds
Borrower:
By:
(Authorized Signer)
Silicon Valley Bank (Date)
Account Officer's Signature
<PAGE>
NEGATIVE PLEDGE AGREEMENT
This Negative Pledge Agreement is made as of October 15, 1998 by and
between Optika Imaging Systems, Inc. ("Borrower") and Silicon Valley Bank
("Bank").
In connection with, among other documents, the Loan and Security Agreement (the
"Loan Documents") being concurrently executed herewith between Borrower and
Bank, Borrower agrees as follows:
1. Borrower, other than in its ordinary course of business, shall
not sell, transfer, assign, mortgage, pledge, lease, grant a
security interest in, or encumber any of Borrower's
intellectual property, including, without limitation, the
following:
a. Any and all copyright rights, copyright applications,
copyright registrations and like protections in each
work or authorship and derivative work thereof,
whether published or unpublished and whether or not
the same also constitutes a trade secret, now or
hereafter existing, created, acquired or held;
b. All mask works or similar rights available for the
protection of semiconductor chips, now owned or
hereafter acquired;
c. Any and all trade secrets, and any and all
intellectual property rights in computer software and
computer software products now or hereafter existing,
created, acquired or held;
d. Any and all design rights which may be available to
Borrower now or hereafter existing, created, acquired
or held;
e. All patents, patent applications and like protections
including, without limitation, improvements,
divisions, continuations, renewals, reissues,
extensions and continuations-in-part of the same,
including without limitation the patents and patent
applications;
f. Any trademark and servicemark rights, whether
registered or not, applications to register and
registrations of the same and like protections, and
the entire goodwill of the business of Borrower
connected with and symbolized by such trademarks,
including without limitation;
g. Any and all claims for damages by way of past,
present and future infringements of any of the rights
included above, with the right, but not the
obligation, to sue for and collect such damages for
said use or infringement of the intellectual property
rights identified above;
h. All licenses or other rights to use any of the
Copyrights, Patents, Trademarks or Mask Works, and
all license fees and royalties arising from such use
to the extent permitted by such license or rights;
and
i. All amendments, extensions, renewals and extensions
of any of the Copyrights, Trademarks, Patents, or
Mask Works; and
j. All proceeds and products of the foregoing, including
without limitation all payments under insurance or
any indemnity or warranty payable in respect of any
of the foregoing;
2. It shall be an event of default under the Loan Documents
between Borrower and Bank if there is a breach of any term of
this Negative Pledge Agreement.
3. Capitalized terms used but not otherwise defined herein shall have
the same meaning as in the Loan Documents.
BORROWER:
Optika Imaging Systems, Inc.
By:
Name:
Title:
BANK:
SILICON VALLEY BANK
By:
Name:
Title:
<PAGE>
CORPORATE BORROWING RESOLUTION
Borrower: Optika Imaging Systems, Inc. Bank: Silicon Valley Bank
7450 Campus Drive, 2nd Floor 4430 Arapahoe Ave., Ste. 225
Colorado Springs, CO 80920 Boulder, CO 80303
I, the undersigned Secretary or Assistant Secretary of Optika Imaging Systems,
Inc. ("Borrower"), HEREBY CERTIFY that Borrower is a corporation duly organized
and existing under and by virtue of the laws of the State of Delaware.
I FURTHER CERTIFY that at a meeting of the Directors of Borrower (or by other
duly authorized corporate action in lieu of a meeting), duly called and held, at
which a quorum was present and voting, the following resolutions were adopted.
BE IT RESOLVED, that any one (1) of the following named officers,
employees, or agents of Borrower, whose actual signatures are shown below
NAMES POSITIONS ACTUAL SIGNATURES
- -------------------- ------------------------- ------------------------------
- -------------------- ------------------------- ------------------------------
- -------------------- ------------------------- ------------------------------
- -------------------- ------------------------- ------------------------------
acting for and on behalf of Borrower and as its act and deed be, and they
hereby are, authorized and empowered:
Borrow Money. To borrow from time to time from Silicon Valley Bank
("Bank"), on such terms as may be agreed upon between the officers of
Borrower and Bank, such sum or sums of money as in their judgment
should be borrowed.
Execute Loan Documents. To execute and deliver to Bank the loan
documents of Borrower, on Bank's forms, at such rates of interest and
on such terms as may be agreed upon, evidencing the sums of money so
borrowed or any indebtedness of Borrower to Bank, and also to execute
and deliver to Bank one or more renewals, extensions, modifications,
refinancings, consolidations, or substitutions for one or more of the
loan documents, or any portion of the loan documents.
Grant Security. To grant a security interest to Bank in any of
Borrower's assets, which security interest shall secure all of
Borrower's obligations to Bank
Negotiate Items. To draw, endorse, and discount with Bank all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness
payable to or belonging to Borrower or in which Borrower may have an
interest, and either to receive cash for the same or to cause such
proceeds to be credited to the account of Borrower with Bank, or to
cause such other disposition of the proceeds derived therefrom as they
may deem advisable.
Letters of Credit. To execute letter of credit applications and other
related documents pertaining to Bank's issuance of letters of credit.
Further Acts. In the case of lines of credit, to designate additional
or alternate individuals as being authorized to request advances
thereunder, and in all cases, to do and perform such other acts and
things, to pay any and all fees and costs, and to execute and deliver
such other documents and agreements, including agreements waiving the
right to a trial by jury, as they may in their discretion deem
reasonably necessary or proper in order to carry into effect the
provisions of these Resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
Resolutions and performed prior to the passage of these resolutions are hereby
ratified and approved, that these Resolutions shall remain in full force and
effect and Bank may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Bank. Any such notice
shall not affect any of Borrower's agreements or commitments in effect at the
time notice is given.
I FURTHER CERTIFY that the persons named above are principal officers of the
Borrower and occupy the positions set opposite their respective names; that the
foregoing Resolutions now stand of record on the books of the Borrower; and that
they are in full force and effect and have not been modified or revoked in any
manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on October 15, 1998 and
attest that the signatures set opposite the names listed above are their genuine
signatures.
CERTIFIED TO AND ATTESTED BY:
X ______________________________________________
*Secretary or Assistant Secretary
X ______________________________________________
*NOTE: In case the Secretary or other certifying officer is designated by the
foregoing resolutions as one of the signing officers, this resolution should
also be signed by a second Officer or Director of Borrower.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1998 YEAR-TO-DATE FINANCIAL STATEMENTS AS REPORTED ON FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001014920
<NAME> Optika Imaging Systems, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,858
<SECURITIES> 1,294
<RECEIVABLES> 5,332
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,299
<PP&E> 5,139
<DEPRECIATION> (1,951)
<TOTAL-ASSETS> 18,869
<CURRENT-LIABILITIES> 6,958
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 17,380
<TOTAL-LIABILITY-AND-EQUITY> 18,869
<SALES> 7,163
<TOTAL-REVENUES> 12,373
<CGS> 307
<TOTAL-COSTS> 2,642
<OTHER-EXPENSES> 15,770
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (63)
<INCOME-PRETAX> (5,976)
<INCOME-TAX> (1,194)
<INCOME-CONTINUING> (4,782)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,782)
<EPS-PRIMARY> (.69)
<EPS-DILUTED> (.69)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1997 YEAR-TO-DATE FINANCIAL STATEMENTS AS REPORTED ON FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001014920
<NAME> Optika Imaging Systems, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,375
<SECURITIES> 7,898
<RECEIVABLES> 7,397
<ALLOWANCES> 0
<INVENTORY> 0
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0
0
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</TABLE>
