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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _______________ to
______________
Commission File Number 0-28672
OPTIKA INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4154552
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7450 Campus Drive, 2nd Floor 80920
Colorado Springs, CO (Zip Code)
(Address of principal executive offices)
(719) 548-9800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No ____.
7,202,188 shares of the Registrant's Common Stock, $.001 par value
per share, were outstanding as of November 8, 1999
<PAGE>
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1998
and September 30, 1999 1
Condensed Consolidated Statements of Operations for the three-
month and nine-month periods ended September 30, 1998 and 1999
(Unaudited) 2
Condensed Consolidated Statements of Cash Flows for the nine-
month periods ended September 30, 1998 and 1999 (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
<PAGE>
<TABLE>
<CAPTION>
OPTIKA INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 31, September 30,
1998 1999
---------------- ----------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 6,811 $ 3,931
Short-term investments 1,000 3,895
Accounts receivable, net 4,571 3,201
Other current assets 511 537
---------------- ----------------
Total current assets 12,893 11,564
---------------- ----------------
Fixed assets, net 3,136 2,809
Deferred tax asset, net 2,438 3,020
Other assets, net 70 10
---------------- ----------------
$ 18,537 $ 17,403
================ ================
Liabilities and Stockholders' Equity Current liabilities:
Accounts payable $ 710 $ 841
Accrued expenses 1,446 1,355
Accrued compensation expense 1,206 603
Deferred revenue 3,355 3,454
---------------- ----------------
Total current liabilities 6,717 6,253
---------------- ----------------
Commitments and contingencies
Common stockholders' equity:
Common stock; $.001 par value; 25,000,000 shares authorized;
7,114,573 and 7,237,014 shares issued and outstanding
at December 31, 1998 and September 30, 1999, respectively 7 7
Additional paid-in capital 17,617 17,896
Accumulated deficit (5,804) (6,753)
---------------- ----------------
Total common stockholders' equity 11,820 11,150
---------------- ----------------
$ 18,537 $ 17,403
================ ================
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OPTIKA INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ------------------------
1998 1999 1998 1999
<S> <C> <C> <C> <C>
Revenues:
Licenses $ 3,072 $ 2,863 $ 7,163 $ 8,050
Maintenance and other 2,105 2,721 5,210 7,669
--------- -------- --------- ---------
Total revenues 5,177 5,584 12,373 15,719
Cost of revenues:
Licenses 97 345 307 635
Maintenance and other 854 1,048 2,335 2,973
--------- -------- --------- ---------
Total cost of revenues 951 1,393 2,642 3,608
--------- -------- --------- ---------
Gross profit 4,226 4,191 9,731 12,111
Operating expenses:
Sales and marketing 3,381 2,815 9,618 8,252
Research and development 1,385 1,333 3,798 3,992
General and administrative 754 493 1,929 1,473
Restructuring charge 425 - 425 -
--------- -------- --------- ---------
Total operating expenses 5,945 4,641 15,770 13,717
--------- -------- --------- ---------
Loss from operations (1,719) (450) (6,039) (1,606)
Other income, net 50 79 63 146
--------- -------- --------- ---------
Loss before benefit from income taxes (1,669) (371) (5,976) (1,460)
Benefit from income taxes (333) (130) (1,194) (511)
--------- -------- --------- ---------
Net loss $ (1,336) $ (241) $ (4,782) $ (949)
========= ======== ========= =========
Basic net loss per common share $ (0.19) $ (0.03) $ (0.69) $ (0.13)
========= ======== ========= =========
Basic weighted average number of common shares outstanding 6,985 7,205 6,956 7,177
========= ======== ========= =========
Diluted net loss per common share $ (0.19) $ (0.03) $ (0.69) $ (0.13)
========= ======== ========= =========
Diluted weighted average number of common shares
outstanding 6,985 7,205 6,956 7,177
========= ======== ========= =========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OPTIKA INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended September 30,
---------------------------------
1998 1999
<S> <C> <C>
Cash Flows From Operating Activities:
Net Loss $ (4,782) $ (949)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Depreciation and amortization 770 742
Deferred tax benefit (1,299) (582)
Loss on disposal of assets 35 -
Change in assets and liabilities:
Accounts receivable, net 3,223 1,370
Other assets (78) 34
Accounts payable 436 131
Accrued expenses 354 (694)
Deferred revenue 789 99
---------------- ---------------
Net cash provided (used) by operations (552) 151
---------------- ---------------
Cash Flows From Investing Activities:
Capital expenditures (1,082) (415)
Sale (purchase) of short-term investments 4,104 (2,895)
---------------- ---------------
Net cash provided (used) by investing activities 3,022 (3,310)
---------------- ---------------
Cash Flows From Financing Activities:
Principal payments on long-term debt (15) -
Proceeds from issuance of common stock 201 279
---------------- ---------------
Net cash provided by financing activities 186 279
---------------- ---------------
Net increase (decrease) in cash and cash equivalents 2,656 (2,880)
Cash and cash equivalents at beginning of period 3,202 6,811
---------------- ---------------
Cash and cash equivalents at end of period $ 5,858 $ 3,931
================ ===============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
OPTIKA 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, 1999 are
not necessarily indicative of the results to be expected for any subsequent
quarter or for the entire fiscal year ending December 31, 1999. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto for the year ended December 31, 1998,
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1998.
Net Loss Per Common Share
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. During the first nine
months of 1999, 744,200 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 share.
The following is the reconciliation of the numerators and denominators of the
basic and diluted EPS computations (unaudited, in thousands, except per share
data):
Quarter Ended Nine Months Ended
September 30, September 30,
------------- -----------------
1998 1999 1998 1999
------------------- -------------------
Loss Per Share:
Net loss $(1,336) $ (241) $(4,782) $ (949)
Weighted average common
shares outstanding 6,985 7,205 6,956 7,177
Net loss per common share $ (0.19) $ (0.03) $ (0.69) $ (0.13)
Effect of Dilutive Securities:
Options and warrants -- -- -- --
Diluted weighted average
common shares outstanding 6,985 7,205 6,956 7,177
Diluted net loss per common
share $ (0.19) $ (0.03) $ (0.69) $ (0.13)
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
outcomes of any such contingencies are not expected to have a material adverse
effect on the financial condition, operations or cash flows of the Company. The
Company is not currently a party to any material legal proceedings.
<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.
Overview
Optika(R) Inc. is a leading provider of business-to-business electronic
commerce ("e-commerce") solutions. By leveraging the technology of the World
Wide Web, the Company's software bridges the gap between paper and electronic
commerce across the enterprise and throughout supply chains.
The license of the Company's software products is typically an
executive-level decision by prospective end-users and generally requires the
Company and its Advantage Partners ("APs") or Original Equipment Manufacturers
("OEMs") to engage in a lengthy and complex sales cycle (typically between six
and twelve months from the initial contact date). The Company distributes its
products through a direct sales force and worldwide network of approximately 170
APs and 5 OEMs. For fiscal year 1998, approximately 69% of the Company's license
revenues were derived from its APs, approximately 10% of its license revenues
were derived from sales by OEMs and the remaining license fees were derived from
direct sales. However, no individual AP accounted for more than 10% of the
Company's total revenues. For the years ended December 31, 1996, 1997 and 1998,
the Company generated approximately 29%, 23% and 24%, respectively, of its total
revenues from international sales.
The Company's revenues consist primarily of license revenues, which are
comprised of one-time fees for the license of the Company's products; and
maintenance revenues, which are comprised of fees for upgrades and technical
support. The APs and OEMs, which are responsible for the installation and
integration of the software, enter into sales agreements with the end-user, and
purchase software directly from the Company. The software is licensed directly
to the end-user by the Company through a standard shrink-wrapped license
agreement. Annual maintenance agreements are also entered into between the APs
and OEMs and the end-user, and the APs and OEMs then purchase maintenance
services directly from the Company. For 1997 and 1998, approximately 73% and
60%, respectively of the Company's total revenues were derived from software
licenses and approximately 18% and 28%, respectively, of the Company's total
revenues were derived from maintenance agreements. Other revenues, which are
comprised of training, consulting and implementation services, and third-party
hardware and software products, accounted for 9% and 12%, respectively, 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 right 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.
Revenues
Total revenues increased 27.0%, from $12.4 million for the nine months
ended September 30, 1998, to $15.7 million for the nine months ended September
30, 1999. Total revenues increased 7.9%, from $5.2 million for the quarter ended
September 30, 1998, to $5.6 million for the quarter ended September 30, 1999.
Licenses. License revenues increased 12.4%, from $7.2 million during the
nine months ended September 30, 1998, to $8.1 million for the nine months ended
September 30, 1999, and decreased 6.8%, from $3.1 million during the quarter
ended September 30, 1998, to $2.9 million during the same period in 1999.
License revenues represented 57.9% and 51.2% of the total revenues for the nine
months ended September 30, 1998 and 1999, respectively, and 59.3% and 51.3% of
the total revenues for the quarters ended September 30, 1998 and 1999,
respectively. The increase in license revenues during the first nine months of
1999 is a result of the release of the Optika eMedia product into marketplace.
Total revenues generated outside of the United States accounted for
approximately 22.5% of the Company's revenues for the nine months ended
September 30, 1998, compared to 9.1% for the same period in 1999, and 25.4% and
17.1% for the quarters ended September 30, 1998 and 1999, respectively. The
difference in international revenues as a percentage of total revenues decreased
due to weaker Asian and Latin American sales for the three and nine months ended
September 30,1999, as compared to the same periods in 1998.
Maintenance and Other. Maintenance revenues, exclusive of other revenue,
increased 41.2%, from $3.7 million during the nine months ended September 30,
1998, to $5.2 million for the nine months ended September 30, 1999.
Additionally, maintenance revenues increased 41.3%, from $1.3 million during the
quarter ended September 30, 1998 to $1.9 million during the same period in 1999.
Maintenance revenue represented 29.8% and 33.1% of the total revenues for the
nine months ended September 30, 1998 and 1999, respectively, and 26.0% and 34.1%
of the total revenues for the quarters ended September 30, 1998 and 1999,
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 12.3% and 15.7%
of total revenues for the nine months ended September 30, 1998 and 1999,
respectively, and 14.7% and 14.6% of total revenues for the quarters ended
September 30, 1998 and 1999, respectively.
Cost of Revenues
Licenses. Cost of licenses consists primarily of royalty payments to
third-party vendors and costs of product media, duplication, packaging and
fulfillment. Cost of licenses increased in absolute dollars from $307,000, or
4.3% of license revenues, to $635,000, or 7.9% of license revenues, for the nine
months ended September 30, 1998 and 1999, respectively, and increased from
$97,000, or 3.2% of license revenues, to $345,000, or 12.1% of license revenues,
for the quarters ended September 30, 1998 and 1999, respectively. The increase
in the 1999 absolute dollar cost of licenses over 1998 was attributable to an
unusually high third party component that is expected to be lower in future
quarters.
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 $2.3 million, or
44.8% of maintenance and other revenues, to $3.0 million, or 38.8% of
maintenance and other revenues, for the nine months ended September 30, 1998 and
1999, respectively. Cost of maintenance and other decreased from $854,000, or
40.6% of maintenance and other revenues, to $1,048,000, or 38.5% of maintenance
and other revenues, for the quarters ended September 30, 1998 and 1999,
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 is not increasing 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 decreased from $9.6 million, or 77.7% of total revenues, for the nine
months ended September 30, 1998 to $8.3 million, or 52.5% of total revenues, for
the nine months ended September 30, 1999. Sales and marketing expenses decreased
from $3.4 million, or 65.3% of total revenues, for the quarter ended September
30, 1998, to $2.8 million, or 50.4% of total revenues, for the quarter ended
September 30, 1999. The decrease in sales and marketing expenses is primarily
attributable to the closure of several Asian sales offices in late 1998. The
Company anticipates that sales and marketing expenses will increase in absolute
dollars in future quarters as it continues to expand the distribution of its
Optika eMedia product.
Research and Development. Research and development expenses consist
primarily of salaries and other related expenses for research and development
personnel, as well as the cost of facilities and equipment. Research and
development expenses increased from $3.8 million, or 30.7% of total revenues,
for the nine months ended September 30, 1998 to $4.0 million, or 25.4% of total
revenues, for the nine months ended September 30, 1999. Research and development
expenses decreased from $1.4 million, or 26.8% of total revenues, for the
quarter ended September 30, 1998, to $1.3 million, or 23.9% of total revenues,
for the quarter ended September 30, 1999. The nine month absolute dollar
increase in research and development is primarily a result of the continued cost
to further enhance the Optika eMedia product. The Company anticipates that
research and development expenses will increase in absolute dollars in future
quarters because of the expected continued enhancements of the Optika eMedia
product.
General and Administrative. General and administrative expenses consist
primarily of salaries and other related expenses of administrative, executive
and financial personnel and outside professional fees. General and
administrative expenses decreased from $1.9 million, or 15.6% of total revenues
for the nine months ended September 30, 1998 to $1.5 million, or 9.4% of total
revenues for the nine months ended September 30, 1999. General and
administrative expenses decreased from $754,000, or 14.6% of total revenues for
the quarter ended September 30, 1998, to $493,000, or 8.8% of total revenues for
the quarter ended September 30, 1999. The decrease 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 $63,000 during the nine months ended September 30, 1998
compared to net other income of $146,000 during the nine months ended September
30, 1999. The Company recognized net other income of $50,000 during the quarter
ended September 30, 1998 compared to net other income of $79,000 for the same
period in 1999. The increase in net other income is primarily the result of
investment income and increased foreign currency translation gain.
Benefit for Income Taxes. The Company's effective tax rate for the
periods ending September 30, 1999 was 35% which reflects the Company's estimated
annual effective tax rate.
Liquidity and Capital Resources
Cash and short-term investments at September 30, 1999 were $7.8 million,
increasing by approximately $15,000 from December 31, 1998. The increase in cash
and short-term investments is primarily due to the collection of accounts
receivable offset by 1999 losses and capital expenditures for equipment.
For the nine months ended September 30, 1998, net cash used by operating
activities was $552,000 compared to net cash provided by operating activities of
$151,000 for the nine months ended September 30, 1999. The increase in cash used
by operating activities for the nine months ended September 30, 1999 is
primarily due to improved accounts receivable collections offset by the 1999 net
operating losses.
Cash provided by investing activities was $3.0 million for the nine
months ended September 30, 1998 compared to cash used by investing activities of
$3.3 million for the nine months ended September 30, 1999. Investing activities
consisted primarily of sales of marketable securities offset by purchases of
property and equipment in the first nine months of 1998, while marketable
securities and capital equipment were purchased during the first nine months of
1999.
Cash provided by financing activities was $186,000 for the nine months
ended September 30, 1998. Cash provided by financing activities was $279,000 for
the nine months ended September 30, 1999. 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, 1999, the Company's principal sources of liquidity
included cash and short-term investments of $7.8 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, 1999, 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 year, 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. Moreover, the Company believes some companies may
delay software purchasing decisions until after January 1, 2000, in hopes that
Year 2000 issues will have been identified and corrected prior to their
purchase. 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 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 product. The
Company addressed these known deficiencies with a product release which was made
available during the first quarter of 1999. 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.
The Company has developed the eMedia product with Year 2000 compliance
in mind. Testing of the product has been performed throughout the development
cycle for Year 2000 compliance. The Company worked with a third-party to
extensively test the Year 2000 compliance of the product. The testing did not
discover any material Year 2000 compliancy deficiencies in the product. While
the Company is not aware of any current deficiencies that would result in the
product not being compliant, it is possible that deficiencies may be discovered
subsequent to the testing process. Costs to address these deficiencies are
expected to include only internal development staff time, which will not be
separately tracked, and is expected to have no material effect on the Company's
operating results.
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, it will be necessary for
the Company to commit the necessary resources to correct the software. Although
the costs cannot be reasonably estimated, 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 conducted 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 has reviewed them
for Year 2000 compliance by contacting each vendor and requesting documentation
on Year 2000 readiness. Those contacted include, but are not limited to,
Microsoft, financial software, customer database and phone system vendors. Based
on the results of these queries, the Company has performed upgrades on numerous
systems to bring them into compliance according to their Year 2000 compliance
statements. The Company did perform testing of its Mission Critical Systems in
the third quarter of 1999 with no major discrepancies noted. It is estimated
that the testing of the Mission Critical Systems will cost approximately
$121,000 during 1999. The bringing of 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
will 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 has obtained documentation on the Year 2000-compliance
status of its key vendors. Key vendors to which the Company is concerned include
its investing, banking, and payroll relationships. 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 effect on the
Company of this potential 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.
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; rate of customer adoption of Optika
eMedia and rate of conversion of current customers to Optika eMedia; 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 including
the extent to which the Company is able to establish a direct sales force;
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; changes in accounting pronouncements;
potential acquisitions; changes in customer buying patterns as a result of Year
2000 concerns; the level of international expansion; and seasonal trends. A
significant portion of the Company's revenues has been, and the Company believes
will continue to be, derived from a limited number of orders, and the timing of
such orders and their fulfillment have caused, and are expected to continue to
cause, material fluctuations in the Company's operating results. Revenues are
also difficult to forecast because the markets for the Company's products are
rapidly evolving, and the sales cycle of the Company and of its 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.
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. 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.
During 1998, the Company altered its sales strategy with the introduction
of a direct sales team. Although the Company has recruited a direct sales staff,
the Company has limited experience in marketing and selling its products on a
direct sales basis. Consequently, there can be no assurance the Company will be
successful in achieving a significant level of direct sales on a timely basis,
or at all. 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 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 the Company's products 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. 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. Optika eMedia accounts for substantially all of its
current and future software revenues with a proportionate decline in revenues
from the Optika Filepower product. The Company's future financial performance
will depend in general on the continued transition from imaging software to
e-commerce, 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
continue to 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 e-commerce software market 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 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 Optika eMedia and Filepower
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 e-commerce solutions. The Company's principal direct
competitors for its products include FileNet Corporation, International Business
Machines Corporation and Eastman Kodak Company. The Company also competes with
industry-specific application vendors. Numerous other software vendors also
compete in each product area. Potential competitors include providers of
document management software, providers of document archiving products, and
RDBMS ("Relational Database Management Systems") vendors. 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 e-commerce market, the Company expects additional competition from
established and emerging companies, as the market for e-commerce 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 has 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, potential acquisitions,
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 may impose a significant strain on the Company's management,
financial and other resources. 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 Company has from time to time experienced turnover of key
management and technical personnel. 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. 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 29%, 23% and 24% of the Company's revenues in 1996, 1997 and 1998,
respectively. An 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. 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.
Year 2000. The Company is also subject to the risks associated with the
Year 2000 compatibility of it's products. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Year 2000".
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, as of
November 8, 1999, approximately 29.3% of the outstanding shares of Common Stock
of the Company. Accordingly, these stockholders could, if acting in concert, be
able to substantially influence the election of all members of the Company's
Board of Directors and determine the outcome of corporate actions requiring
stockholder approval, such as mergers and acquisitions. Certain provisions of
the Company's Certificate of Incorporation, equity incentive plans, Bylaws, and
Delaware law may also discourage certain transactions involving a change in
control of the Company. This level of ownership by such persons and entities,
when combined with the Company's classified Board of Directors and the ability
of the Board of Directors to issue "blank check" preferred stock without further
stockholder approval, may have the effect of delaying, deferring or preventing a
change in control of the Company and may adversely affect the voting and other
rights of other holders of Common Stock.
<PAGE>
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
10.19 Loan Modification Agreement dated as of October 15, 1999, by and
between the registrant and Silicon Valley Bank.
27 Financial Data Schedule for the nine months ended September 30,
1999.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter ended
September 30, 1999.
<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 INC.
(Registrant)
November 12, 1999 /s/ Mark K. Ruport
----------------- --------------------------------------
(Date) Mark K. Ruport
President, Chief Executive Officer
and Chairman of the Board
November 12, 1999 /s/ Steven M. Johnson
----------------- --------------------------------------
(Date) Steven M. Johnson
Chief Financial Officer, Vice President
Finance and Administration, Secretary
and Chief Accounting Officer
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of October 15,
1999, by and between Optika, Inc. (formerly known as Optika Imaging Systems,
Inc). ("Borrower") and Silicon Valley Bank ("Bank").
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may be
owing by Borrower to Bank, Borrower is indebted to Bank pursuant to, among other
documents, a Loan and Security Agreement, dated October 15, 1998, as may be
amended from time to time, (the "Loan Agreement"). The Loan Agreement provided
for, among other things, a Committed Revolving Line in the original principal
amount of Three Million Dollars ($3,000,000). Defined terms used but not
otherwise defined herein shall have the same meanings as in the Loan Agreement.
Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to
as the "Indebtedness."
2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Indebtedness is
secured by the Collateral as described in the Loan Agreement. Additionally,
Borrower has agreed with Bank not to mortgage, pledge, hypothecate or otherwise
encumber its Intellectual Property, pursuant to a Negative Pledge Agreement
dated October 15, 1998.
Hereinafter, the above-described security documents and guaranties, together
with all other documents securing repayment of the Indebtedness shall be
referred to as the "Security Documents". Hereinafter, the Security Documents,
together with all other documents evidencing or securing the Indebtedness shall
be referred to as the "Existing Loan Documents".
3. DESCRIPTION OF CHANGE IN TERMS.
A. Modification(s) to Loan Agreement.
1. Sub-section (ii) entitled "Tangible Net Worth" and
sub-section (iv) entitled "Profitability" of Section 6.7
entitled "Financial Covenants" are hereby amended to read
as follows:
(ii) Tangible Net Worth. A Tangible Net Worth of at
least $7,500,000.
(iv) Profitability. Borrower shall achieve profitability
of $1 each quarter, except that Borrower may suffer 2
quarterly losses not to exceed $500,000 in the aggregate.
2. The defined term "Revolving Maturity Date" as described
in Section 13.1 entitled "Definitions" is hereby amended
to read as follows:
"Revolving Maturity Date" is October 15, 2000.
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever
necessary to reflect the changes described above.
5. PAYMENT OF LOAN FEE. Borrower shall pay Lender a fee in the amount of Fifteen
Thousand Dollars ($15,000) plus all out-of-pocket expenses.
6. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing
below) agrees that, as of the date hereof, it has no defenses against the
obligations to pay any amounts under the Indebtedness.
7. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing below)
understands and agrees that in modifying the existing Indebtedness, Bank is
relying upon Borrower's representations, warranties, and agreements, as set
forth in the Existing Loan Documents. Except as expressly modified pursuant to
this Loan Modification Agreement, the terms of the Existing Loan Documents
remain unchanged and in full force and effect. Bank's agreement to modifications
to the existing Indebtedness pursuant to this Loan Modification Agreement in no
way shall obligate Bank to make any future modifications to the Indebtedness.
Nothing in this Loan Modification Agreement shall constitute a satisfaction of
the Indebtedness. It is the intention of Bank and Borrower to retain as liable
parties all makers and endorsers of Existing Loan Documents, unless the party is
expressly released by Bank in writing. No maker, endorser, or guarantor will be
released by virtue of this Loan Modification Agreement. The terms of this
paragraph apply not only to this Loan Modification Agreement, but also to all
subsequent loan modification agreements.
8. CONDITIONS. The effectiveness of this Loan Modification Agreement is
conditioned upon payment of the Loan Fee.
This Loan Modification Agreement is executed as of the date first
written above.
BORROWER: BANK:
OPTIKA, INC. SILICON VALLEY BANK
By: By:
Name: Name:
Title: Title:
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1999 YEAR-TO-DATE FINANCIAL STATEMENTS AS REPORTED ON FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT
</LEGEND>
<CIK> 0001014920
<NAME> OPTIKA INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,931
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0
0
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<EPS-BASIC> (0.13)
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</TABLE>
