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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM _______________ TO ______________
Commission File Number 0-28672
OPTIKA IMAGING SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4154552
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7450 CAMPUS DRIVE, 2/ND/ FLOOR 80920
COLORADO SPRINGS, COLORADO (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (719) 548-9800
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share.
----------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Registration S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ____
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of the Common Stock on March
10, 1998 as reported on the Nasdaq National Market, was approximately
$12,724,635. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes. As of March 10, 1998, Registrant had outstanding 6,945,204 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Annual Report to Stockholders for the fiscal
year ended December 31, 1997 are incorporated into Part II of this Report on
Form 10-K.
2. Portions of the Registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 19, 1998 is incorporated by
reference in Part III of this Form 10-K to the extent stated herein.
3. Portions of the Registrants registration on Form S-1 are incorporated by
reference into certain exhibits of this Form 10-K.
OPTIKA IMAGING SYSTEMS, INC.
1997 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business............................................................................. 1
Item 2. Properties........................................................................... 17
Item 3. Legal Proceedings.................................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders.................................. 17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................ 18
Item 6. Selected Financial Data.............................................................. 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 20
Item 8. Financial Statements and Supplementary Data.......................................... 25
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure. 25
PART III
Item 10. Directors and Executive Officers of Registrant....................................... 26
Item 11. Executive Compensation............................................................... 26
Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 26
Item 13. Certain Relationships and Related Transactions....................................... 26
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................... 27
Signatures........................................................................... 42
PART I
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS
THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED UNDER THE CAPTION "BUSINESS RISKS" CONTAINED HEREIN.
ITEM 1. BUSINESS
INTRODUCTION
Optika(R) Imaging Systems, Inc. ("Optika" or the "Company") is a leading
provider of high-performance, client/server, integrated imaging software, as
well as software for managing business-to-business commerce transactions. In the
high-performance imaging market, Optika offers the integrated FilePower(R)
suite. Optika's FilePower suite is comprised of server software, which provides
core imaging functions, application software for document image management,
computer output to laser disc ("COLD"), automated workflow transaction
processing and associated development tools. The FilePower Suite is easy to
install, use and integrate with end-users' existing information systems and is
designed to be deployed at the departmental or workgroup level and then scaled
throughout the enterprise.
In March 1998, the Company introduced Optika eMedia, its next-generation
software solution for managing and automating paper-intensive business-to-
business transactions. Optika eMedia is currently undergoing beta testing and is
currently scheduled to be commercially available by approximately mid-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 all of the imaging/COLD/workflow functionality of
Optika's FilePower solution, in addition to powerful Internet negotiation and
resolution tools, availability of multiple client interfaces and a scalable, 3-
tier architecture. (See Business Risks-Risks Associated with the Introduction
of Optika eMedia).
INDUSTRY BACKGROUND
Document image processing systems allow documents to be electronically
stored, retrieved and routed, and generally include the following five basic
functions: (i) document capture, (ii) optical storage, (iii) retrieval and
display, (iv) document management and (v) automated transaction processing
(workflow). Document capture is the conversion of paper documents into digitized
images and generally includes batch preparation, scanning, image enhancement,
quality assurance and indexing of images to long-term storage, including optical
disks, CD-ROM and magnetic media. Optical storage is the storage of images on
optical drives and jukeboxes and includes platter management, volume management
and hierarchical storage management. Retrieval and display is the retrieval of
document images via either standard searches (using the indices stored during
capture) or full-text indexing for display, annotation and routing. Document
management is the centralized management and administration of large volumes of
documents and typically provides a file cabinet and file folder metaphor for
retrieving documents. Workflow is the automation of routine work processes,
usually performed by the automatic routing of images as a replacement for the
manual routing of paper.
For paper-intensive industries such as healthcare, financial services,
insurance and retail, electronic document image processing offers several
advantages over paper or microfilm, including: (i) faster and easier file
access, because document images are located and retrieved by entering a few key-
words into a computer database rather than by searching through file cabinets
for paper folders or microfilm; (ii) fewer misfiled documents, because database
software is used to track the location of document images; (iii) concurrent file
access, since multiple users have the ability to access a document
simultaneously; (iv) remote distribution and access, because document images are
easily transmitted to standard facsimile equipment or remote computer terminals
over commercial telephone lines; and (v) less expensive storage, because
electronic storage generally requires less floor space and clerical overhead
than paper-based storage, thereby reducing overall document storage costs. Once
documents have been converted to an electronic format, they can be automatically
routed from one workgroup or
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task to another. By implementing the automated workflow approach, companies can
improve operating efficiencies, compared to traditional paper-based document
processing tasks.
Over the past few years, there has been an increasing convergence of
document management, imaging, COLD and workflow technologies, according to
industry market research firms such as International Data Corporation. As a
result of this technology convergence, new market categories such as knowledge
management and management of business-to-business transactions have emerged.
OPTIKA FILEPOWER SUITE
Optika has developed the FilePower Suite of integrated client/server
imaging software, which is comprised of: server software providing core imaging
functions; application software for document image management; COLD; automated
workflow transaction processing; and associated development tools. The Company
believes that the FilePower Suite enables end-users to reduce costs, improve
operational productivity and enhance customer service. The Company's integrated
software combines image management, COLD and advanced workflow processing into a
single, component-based application. The FilePower Suite is designed to provide
the following key benefits:
Rapid Installation and Ease of Use. The FilePower Suite is contained on a
single compact disc ("CD") which includes on-line documentation and on-line
help, and is designed for push-button installation and rapid integration into
the end-user's existing information system. The Company's products offer a
convenient user interface so that users can move easily between imaging, COLD
and workflow applications as well as other graphical applications. The FilePower
Suite uses common viewing technology for the integrated products that allows
end-users to work with a common environment to manage all of the folder-based
data in the imaging and COLD systems. Standard programming languages can be used
to integrate existing information systems and other management information
technologies with the FilePower Suite.
Enterprise-Wide Scalability. The Company's products can be deployed via
LANs and WANs, and are designed for enterprise-wide scalability throughout large
organizations. Thus, organizations can deploy solutions that meet the needs of
workgroups and departments, and can later scale across an entire enterprise.
Small workgroups can take advantage of enterprise functionality such as volume
input and storage, disaster recovery, and security, while large enterprises can
implement systems based on departmental return on investment calculations.
Compatibility with Heterogeneous Computing Environments. Since inception,
the Company's products have been designed to operate on Windows-based platforms.
The Company's software products currently operate on a variety of open computing
platforms, including Windows 3.x, Windows 95 and Windows NT on the client
desktop, Windows NT and Novell Netware as servers, and UNIX for SQL database
support. The Company's products also operate on many common hardware, software
and database platforms, including SQL databases from Oracle, Sybase, Informix
and Microsoft. Because different types of data can be accessed from a variety of
platforms without the need for reformatting, the Company's products can be
deployed in an enterprise with heterogeneous platforms, without the need to
restructure the organization's existing computing environment.
Ease of Customization and Extension. The open client/server architecture of
the Company's products enables end-users to customize the software for industry-
specific, vertical applications, which can then be integrated into existing
computing environments through a custom user interface. The Company's network of
Business Solutions Partners ("BSPs") and Original Equipment Manufacturers
("OEMs") are able to build industry-specific, customized applications, which
interoperate with the Company's open, component-based software using Application
Programming Interfaces, Dynamic Data Exchange and ActiveX controls.
The FilePower Suite consists of a client domain, development tools, and a
server domain. The client domain includes document image management, COLD and
workflow software applications, while the server domain provides an extensive
set of core imaging services. API development tools included with the suite
enable third-party developers to build a variety of applications tailored to
specific industries. Electronic business documents and COLD pages can be stored
in folders along with document images, which are managed by the FilePower server
software. The FilePower Suite allows users to view and manipulate many disparate
document types without launching separate applications.
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Client Domain
FPmulti. FPmulti, the Company's image management product, provides a
comprehensive solution for managing scanned images of paper documents,
facsimiles and computer-generated reports, as well as data files created by
common Windows-based application software. FPmulti accesses the tools necessary
to capture, view, file, store, retrieve, share, print and fax documents. FPmulti
utilizes industry-standard SQL databases to manage the index information for
scanned documents, computer reports, and electronic files created by other
office applications.
FPreport. FPreport, the Company's COLD product, is an information solution
for the capture, optical storage, management and retrieval of mainframe and
minicomputer generated reports as an alternative to a paper or COM (computer
output to microfilm/fiche). FPreport captures computer data from mainframes,
minicomputers and personal workstations, to be formatted, indexed, compressed
and stored on optical disk. It also provides users with an interface for
designing and selecting the fields that will be indexed for future retrieval
needs. FPreport is able to store hundreds of thousands or millions of computer
report pages on an optical disk, using compression techniques.
PowerFlow. PowerFlow is the automated transaction processing system that
provides independent workflow services, process-based and ad hoc routing, and a
platform for integrating third-party applications and data into the workflow
process. All management and administration for the system (for example,
designing workflow process maps and producing management reports) is
accomplished graphically and without programming or scripting. The resulting
process definitions are used as an electronic "road map" for automatically
routing documents, initiating task assignments and triggering automated
processes such as printing, faxing or updating. In addition, an administration
tool allows supervisory personnel to monitor and manage work processes and
resources on a continuous basis.
FPworkBooks and FPwebBooks. Optika FPworkBooks enables copies of documents
stored in a FilePower application to be placed in a "container" that can be e-
mailed via Lotus Notes, Microsoft Exchange, corporate e-mail systems and similar
systems throughout the enterprise. FPwebBooks, the Company's first product
developed for intranets and the Internet, utilizes FPworkBooks technology to
allow users to collect information from an Optika system, encrypt it, and
transmit it over intranets and the Internet with a high level of security.
Development Tools and Connectivity
FilePower integration and development tools include a set of APIs and an
OLE automation and control layer (collectively, "FPengine"). FPengine consists
of a powerful collection of advanced functions designed to simplify the
complexity of image-enabling, including optical disk management, OCR, full text
indexing, high-speed image printing and faxing, and image display and
manipulation. FPengine provides a comprehensive solution for integrating
imaging, COLD and workflow functionality with most existing applications.
FPengine can be used by third-party developers with standard development tools
including Visual Basic, C/C++ and PowerBuilder and other programming
environments to image-enable legacy applications and to invent custom document
imaging solutions, or create value added enhancements to the core FilePower
family of products by integrating other information management technologies.
Server Software Domain
The server software included in the FilePower Suite provides a number of
core image management functions. FPdisc facilitates the retrieval and storage of
documents and images. The FPdisc Server acts as the system's storage for data
files, documents, computer reports and images. FPdisc Server is the foundation
of the Optika image and work management systems, and supports numerous high-
capacity storage subsystems such as optical media and CD-ROM. FPprint and FPfax
provide hard-copy replication, electronic transmission and reception of
documents and images. FPenhance improves the quality of scanned images by
applying complex mathematical algorithms to the image. These enhancement
functions serve to improve the shape and readability of the characters on the
scanned image, resulting in higher accuracy for the optical character
recognition process performed by the FilePower Optical Character Recognition
Server ("FPocr"). The FilePower Transaction Processing Systems ("FPtransact")
are companion servers that perform batch processing of work generated by
external systems. The
3
FPtransact product line includes batch processing capabilities for FPmulti and
PowerFlow, and the SQL database structures for FPmulti and PowerFlow.
OPTIKA EMEDIA
Optika eMedia will be Optika's entry into the market of managing business-
to-business transactions. Optika eMedia is currently undergoing beta testing and
is currently scheduled to be commercially available by approximately mid-1998.
Optika eMedia is software and a methodology designed to manage the full range of
documents, interactions and communications supporting business transactions
within an organization, across the Internet and throughout the supply chain.
Optika eMedia provides businesses with a new, Web-based electronic
infrastructure for conducting business with its suppliers and customers. Optika
eMedia supplies on-demand access to the entire context of business-to-business
relationships, including the ability to find and view all electronic data (such
as electronic data interchange--EDI), documents, images and electronic
communications and negotiations associated with a business transaction. With
Optika eMedia, a company can manage all of its interactions within its supply
chain in an efficient and context-rich manner.
Optika eMedia consists of the following:
A scalable, extensible 3-tier architecture built on industry standards
that combines image management, document management, workflow and COLD,
deployed and maintained over the Internet;
Multiple, user-configurable clients for retrieving and viewing documents
of virtually any type as well as processing work in a workflow. Clients
include an Optika production interface, a Windows Explorer interface, a
standard browser interface and Optika eMedia tools integrated with a line-
of-business application;
A new concept called "Galleries" which allows business analysts, not
programmers, to customize user interfaces specific to business functions;
Internet negotiation and resolution tools that enable organizations to
collaborate on business transactions and settle differences in out-of-
tolerance transactions;
Inter-company visual workflow software to manage value chain processes;
and
Technology adoption methodology to successfully implement the paper
automation, paper elimination and eMediation processes.
Optika eMedia is a 32-bit, Internet-based solution. Optika eMedia employs a
standards-based, 3-tier architecture designed to manage all data associated with
business-to-business transactions from a single interface. End-user solutions
are constructed from a set of components that have been built for the Optika
eMedia framework. Because Optika eMedia is designed to work with today's
popular technologies and platforms, such as Windows NT and Web browsers, the
Company believes that Optika eMedia lowers the cost for businesses to implement
information management solutions and enables businesses to achieve the highest
possible return on investment by extending the benefits of technology to their
partners. Optika eMedia is designed as a full-featured Internet application,
using standard TCP/IP protocols to deliver a fully functional product accessible
by anyone with Web access. (See Business Risks-Risks Associated with the
Introduction of Optika eMedia)
SALES AND MARKETING
Sales
Optika employs a two-tiered leveraged sales model consisting of a worldwide
network of approximately 259 BSPs and 11 OEMs in addition to a direct sales
model. Optika has a Solution Services team which supports its BSPs. License
revenues from BSPs and OEMs accounted for 80% and 8%, respectively, of the
Company's license
4
revenues for the year ended December 31, 1997. (See "Business Risks--Reliance on
Indirect Distribution Channels; Potential for Channel Conflict.")
Business Solutions Partners. Business Solutions Partners, or BSPs, are
Value Added Resellers (VARs) responsible for identifying potential end-users,
selling the Company's products to the end-users as part of a complete hardware
and software solution, customizing and integrating the Company's products at the
end-users sites, and providing support and maintenance to the end-users
following the sale. The Company's BSPs currently include large organizations
selling a wide variety of products, smaller organizations focused on imaging,
application-oriented organizations and geographically-focused organizations. The
Company establishes relationships with BSPs through written agreements which
establish a price at which the BSP is eligible to purchase the Company's
software for resale to end-users, the maintenance fee revenues which must be
remitted back to the Company, and other material terms and conditions. Such
agreements generally do not grant exclusivity to the BSPs, do not prevent the
BSPs from carrying competing product lines and do not require the BSPs to sell
any particular dollar amount of the Company's software, although the contracts
may be terminated at the election of the Company if specified sales targets and
end-user satisfaction goals are not attained. Actual sales contracts are between
the BSPs and the end-users, although the end-user directly licenses the software
from the Company through acceptance of a standard shrink-wrapped license
agreement. The Company supports its BSPs through dedicated personnel at its
headquarters in Colorado Springs and a network of fifteen field offices.
Services range from joint marketing efforts to assistance with pricing and
proposals to technical product support.
The Company's strategy is to target its marketing activities toward its
most productive BSPs, and to recruit additional BSPs in key geographical and
vertical markets. The Company's "Eye on Partnership" program is a crucial
element of this strategy. The Eye on Partnership program is designed to promote
long-term relationships between the Company and its BSPs by awarding silver,
gold and platinum status to BSPs, based on their sales, training and customer
service achievements. This program includes extended support and free training,
as well as marketing assistance with seminars, programs and co-op marketing
funds.
OEMs. The Company has also established relationships with eleven OEMs who
resell the Company's software under their names to their end-user customers as
part of their own imaging software solution. Unlike the Company's BSP
relationships, the OEMs actively compete with the Company and its BSPs. The
Company's current OEM relationships include Anacomp, IHS/Softmed, Lanvision,
Printrak and Lanier. Optika's OEM agreements establish a price at which the OEM
is eligible to purchase the Company's software for resale to its customers, and
the maintenance fees received by the OEM to be remitted back to Optika. OEMs
generally have a higher sales volume and require considerably less post-sale
support than the Company's BSPs. The Company's strategy is to continue to
recruit OEMs in key vertical markets such as healthcare, transportation and
financial services.
Solution Services. The Company's Solution Services team focuses on
developing relationships with large corporate end-users with multiple geographic
locations. The Solution Services team initiates contact directly with the end-
user, but relies heavily on the Company's BSPs to provide installation and
integration services at the end-user's site and provide end-user support and
maintenance following sales. For sales originated by the Solution Services team,
the end-user enters into a contract directly with the Company, and the Company
sub-contracts and coordinates installation and support activities with the BSPs.
International Sales
For the years ended December 31, 1996 and 1997, Optika generated
approximately 29% and 23%, respectively, of its total revenues from
international sales. The Company currently maintains offices in London,
Frankfurt and Munich to support its 38 European BSPs, an office in Brazil to
support its 19 Latin American BSPs and offices in Singapore, Hong Kong, Malaysia
and Australia to support its 34 Asian BSPs. The Company is actively seeking to
expand and strengthen its network of foreign BSPs. See "Business Risks--
International Operations."
5
Marketing
The Company has an integrated marketing program that supports its sales
strategy. The Company's marketing efforts are organized into marketing
communications, marketing programs, channel marketing and web service programs.
The Company supports these efforts by issuing frequent announcements to the
press, advertising in periodicals and magazines, communicating with key industry
analysts, participating in trade shows, telemarketing and direct mailing to
prospective customers, uniting with channel partners in joint marketing efforts
and developing and maintaining a web service. The targeted audience is Fortune
1000 and Global 2000 companies in the retail, financial services (mortgage
lending and banking) and insurance sectors.
CUSTOMERS
The Company's direct customers are its BSPs and OEMs, which purchase and
resell its products to its indirect customers, the end-users. As of December 31,
1997, the Company had licensed approximately 65,000 seats to its end-users
worldwide. No BSP, OEM or end-user accounted for more than 10% of the Company's
total revenues for the year ended December 31, 1997. Set forth below is a
partial list of end-users who have generated revenues for the Company and have
acquired licenses for a minimum of five users. The Company believes that these
end-users are currently using the Company's products and are representative of
the Company's overall end-user base.
FINANCIAL SERVICES & BANKING RETAIL
- ---------------------------- ------
Associates Bancorp Eddie Bauer
Banco Nacional de Costa Rica The Home Depot
Chase Manhattan Bank Phillips-Van Heusen
Citibank Russell Corporation
Deutsche Bank
Diners Club International MANUFACTURING
Discover Card -------------
Ernst & Young Casio
Far East Bank Coca-Cola Company
Federal Reserve Bank Cummins Engine Company
Fidelity Brokerage Georgia-Pacific Corporation
First Commerce Technologies Packard-Bell
Merrill Lynch Sony
Smith Barney Subaru
Standard & Poor's Volvo Car UK Limited
Union Bank of Switzerland
United Companies Financial Corporation GOVERNMENT
----------
INSURANCE City of Greensboro
- --------- County of Fresno
Blue Cross/Blue Shield Indiana Department of Motor Vehicles
Guardian Life Insurance Company State of New Mexico
Western National Life Insurance Company State of Washington
HOSPITAL EDUCATION
- -------- ---------
Baptist Medical Center Iowa State University
Children's Hospital University of Notre Dame
Texas Women's University
COMMUNICATIONS
- -------------- TRANSPORTATION
MCI --------------
Turner Broadcasting Hawaiian Airlines
The Walt Disney Company Navistar
WorldCom British Railways
6
SERVICE AND SUPPORT
The Company believes that a high level of service and support is critical
to the Company's performance. The Company provides technical support,
maintenance, training and consulting to its BSPs, which are in turn primarily
responsible for providing technical support services directly to the end-users.
The Company also provides such support directly to its end-users on an as-needed
basis. These services are designed to increase end-user satisfaction, provide
feedback to the Company as to end-users' demands and requirements, and generate
recurring revenue. The Company plans to continue to expand its services and
support programs as the depth and breadth of the products offered by the Company
increases.
BSP Support
The Company maintains pre-sales technical support personnel that work
directly with the BSPs to provide technical responses to sales inquiries. The
Company offers educational and training programs, as well as customized
consulting services, to its BSPs. Fees for training and consulting services are
generally charged on a per diem basis. The Company also provides product
information bulletins on an ongoing basis, including bulletins posted through
its Internet web site, its customer database, and through periodic informational
updates about the products installed. These bulletins generally answer
frequently asked questions and provide information about new product features.
Technical Support and Software Maintenance
The Company, in conjunction with its BSPs, offers end-users a software
maintenance program. The maintenance program includes software updates provided
by the Company to the end-user, and technical support provided by the BSP.
Telephone consultation is provided by the Company to the BSP to respond to end-
user technical questions that the BSP is unable to answer. A BSP typically
charges the end-user a fee for maintenance and support of the entire imaging
systems, including software and hardware. In turn, the Company, on an annual
basis, charges the BSP a fee of between 8% and 12% of the then-current list
prices of the licensed software.
Warranty
The Company generally includes a 90-day limited warranty with the software
license. During the warranty period, the end-user is entitled to free product
upgrades and corrections for documented program errors, and the BSP is entitled
to free telephone consultation. The services and upgrades provided during the
warranty period may be extended by the end-user if they enter into the software
maintenance program.
RESEARCH AND DEVELOPMENT
The Company has committed, and expects to continue to commit, substantial
resources to research and development. Optika's research and development
organization is organized along the product team concept. Each product team has
an engineering team leader, a product manager, development engineers and quality
assurance engineers. The team is entirely responsible for the design,
implementation and quality of its products. Product development efforts are
directed at increasing product functionality, improving product performance, and
expanding the capabilities of the products to interoperate with third-party
software and hardware. In particular, the Company is devoting substantial
development resources to develop additional functionality for its products, and
the capability to support additional platforms, databases, graphical user
interfaces, toolsets and emerging technologies. The Company believes that the
modular architecture of its software products will provide the foundation for
future enhancements to the Company's integrated imaging solution.
As of December 31, 1997, the Company's research and development
organization consisted of 42 full-time employees in Colorado Springs, Colorado.
During 1997, research and development expenses were $5.0 million. As of December
31, 1997, the Company had expensed all of its software development costs as
incurred. (See "Business Risks--Rapid Technological Change; Dependence on New
Product Development; Risks Associated with the Introduction of Optika eMedia.")
COMPETITION
7
The market for the Company's products is intensely competitive and can be
significantly affected by new product introductions and other market activities
of industry participants. The Company believes that the principal competitive
factors affecting its market include product features such as adaptability,
scalability, ability to integrate with third-party products, functionality, ease
of use, product reputation, quality, performance, price, customer service and
support, effectiveness of sales and marketing efforts, and company reputation.
Although the Company believes that it currently competes favorably with respect
to such factors, there can be no assurance that the Company can maintain its
competitive position against current and potential competitors. The Company's
principal direct competitors for its various product lines include FileNet
Corporation, International Business Machines Corporation, Unisys Corporation,
Mosaix, Inc. 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, without limitation, providers
of document management software products, providers of document archiving
products, and RDBMS ("Relational Database Management System") vendors. In
addition, the Company may face competition from other established and emerging
companies in new market segments following the introduction of Optika eMedia.
Many of the Company's current and potential competitors have longer operating
histories, significantly greater resources and name recognition, and a larger
installed base of customers than the Company. As a result, these competitors may
be able to respond more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the development,
promotion and sale of their products, than can the Company. The Company also
faces indirect competition from VARs, OEMs, distributors and system integrators.
The Company relies on a number of these resellers for implementation and other
customer support services, as well as recommendations of its products during the
evaluation stage of the purchase process. Although the Company seeks to maintain
close relationships with these resellers, many of these third parties have
similar, and often more established, relationships with the Company's principal
competitors. (See "Business Risks--Intense Competition.")
PROPRIETARY RIGHTS
The Company relies on a combination of trade secret, copyright and
trademark laws, software licenses and nondisclosure agreements, to establish and
protect its proprietary rights in its products. The Company enters into
confidentiality and/or license agreements with all of its employees and
distributors, as well as with its customers and potential customers seeking
proprietary information, and limits access to and distribution of, its software,
documentation and other proprietary information. Despite these precautions, it
may be possible for unauthorized third parties to copy aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. The Company has certain registered and other trademarks. The
Company believes that its products, trademarks and other proprietary rights do
not infringe the proprietary rights of third parties. There can be no assurance,
however, that third parties will not assert infringement claims in the future.
(See "Business Risks--Dependence on Proprietary Technologies; Risk of
Infringement.")
EMPLOYEES
At December 31, 1997, the Company had 168 full-time employees in 16 cities.
Of these employees, 42 were involved in research and development, 79 in sales
and marketing, 31 in technical support and training, and 16 in administration
and finance. No employees are covered by any collective bargaining agreements.
The Company believes that its relationship with its employees is good.
EXECUTIVE OFFICERS
The Company's executive officers and key employees, and their ages as of
March 10, 1998, are:
NAME AGE POSITION
- --------------------------- --- ----------------------------------------------
Mark K. Ruport 45 President, Chief Executive Officer and
Chairman of the Board of Directors
Steven M. Johnson 36 Vice President--Finance and Administration,
Chief Financial Officer and Secretary
Marc R. Fey 42 Senior Vice President--Engineering and
Customer Support Services
Jeanne Logozzo 34 Vice President--Marketing
William C. Boersing 49 Senior Vice President--North American
Operations
8
NAME AGE POSITION
- --------------------------- --- ----------------------------------------------
Mark A. Schenecker 37 Vice President--Research and Development
Paul Carter 43 Chief Product Architect, Co-Founder and
Director
Mark K. Ruport has been President and Chief Executive Officer and a
Director of the Company since February 1995. He has served as Chairman of the
Board of Directors since May 1996. From June 1990 to July 1994, Mr. Ruport was
President and Chief Operating Officer, and most recently Chief Executive
Officer, of Interleaf, Inc., a publicly-held software and services company that
develops and markets document management, distribution and related software.
From July 1994 to February 1995, Mr. Ruport pursued personal interests. From
1989 to 1990, Mr. Ruport was Senior Vice President of Worldwide Sales of
Informix Software, where he had responsibility for direct and indirect sales and
OEMs.
Steven M. Johnson has served as Vice President--Finance and Administration
and Chief Financial Officer of the Company since September 1992, and as its
Secretary since May 1996. He also served as interim Chief Executive Officer of
the Company from October 1994 to February 1995. Prior to joining the Company,
from February 1988 to September 1992, Mr. Johnson was Vice President-Finance,
and Chief Financial Officer, of Insurance Auto Auctions, Inc., a publicly held
company.
Marc R. Fey has served as the Company's Senior Vice President--Engineering
and Customer Support Services since February 1996. Mr. Fey previously held the
position of Vice President--Development from July 1994 to February 1996. Prior
to joining the Company, from September 1991 to June 1994, Mr. Fey was President
of The Fey Company, which provided consulting services for software companies
and venture investors on technology, acquisitions, strategic planning and
general operations. Mr. Fey co-founded XA Systems Corporation, where from 1982
to 1991 he served in various capacities, including President, and most recently,
Chairman and Chief Technology Officer. Prior to 1982, Mr. Fey was a manager with
Andersen Consulting.
Jeanne Logozzo has served as Vice President--Marketing since October 1997.
Prior to joining Optika, Ms. Logozzo served as an independent consultant from
May 1997 to October 1997. Ms. Logozzo was Senior Director of Marketing at Open
Text Corporation from May 1996 to May 1997, where she was responsible for
marketing that company's intranet collaborative product suite. From June 1994 to
May 1996, Ms. Logozzo was Manager of Strategic Marketing for Ciros, a new
subsidiary of R.R. Donnelley & Sons. Ms. Logozzo held various marketing
positions at Interleaf Corporation from 1986 to 1994.
William C. Boersing has served as Senior Vice President--North American
Operations since April 1997. Before joining the Company, Mr. Boersing served as
the President and CEO of Alliance Integration & Services in San Diego,
California from September 1993 to March 1997. Alliance focused on imaging and
workflow solutions for the financial and legal market segments. Mr. Boersing's
experience providing fully integrated imaging solutions to key marketplaces also
includes directing the sales for the Imageline Systems, a western area agency of
GTE Vantage Solutions, where he was a Managing Partner for that group from May
1991 until it was sold to MicroAge in August 1993. Mr. Boersing was the Vice
President of Sales and Marketing for Hitachi's Adaptive Information Systems
organization from September 1988 through April 1991.
Mark A. Schenecker has served as the Company's Vice President--Research and
Development since February 1996. Mr. Schenecker held the position of Director of
Product Management from August 1995 to January 1996, and Product Manager from
March 1994 to July 1995. Prior to joining the Company, Mr. Schenecker was
employed by Lanier Worldwide, Inc., where he held positions in systems analysis
and was responsible for advanced digital imaging and copier technology.
Paul Carter is a co-founder of the Company and has served as a Director
since its inception. Since July 1994, he has served as Chief Product Architect,
and he served as the Company's Secretary from 1988 to May 1996. From July 1990
to June 1994, Mr. Carter was Director of Research and Development of the
Company, and from January 1988 to June 1990 he was its Vice President--Research
and Development.
9
BUSINESS RISKS
IN EVALUATING THE COMPANY'S BUSINESS, READERS SHOULD CAREFULLY CONSIDER THE
BUSINESS RISKS DISCUSSED IN THIS SECTION, IN ADDITION TO THE OTHER INFORMATION
PRESENTED IN THIS ANNUAL REPORT ON FORM 10-K.
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 BSPs and OEMs, from initial evaluation to purchase, is lengthy and varies
substantially from end-user to end-user. To achieve its quarterly revenue
objectives, the Company depends upon obtaining orders in any given quarter for
shipment in that quarter. Product orders are typically shipped shortly after
receipt; consequently, order backlog at the beginning of any quarter has in the
past represented only a small portion of that quarter's revenues. Furthermore,
the Company has often recognized most of its revenues in the last month, or even
in the last weeks or days, of a quarter. Accordingly, a delay in shipment near
the end of a particular quarter may cause revenues in a particular quarter to
fall significantly below the Company's expectations and may materially adversely
affect the Company's operating results for such quarter. Conversely, to the
extent that significant revenues occur earlier than expected, operating results
for subsequent quarters may fail to keep pace with results of previous quarters
or even decline. The Company also has recorded generally lower sales in the
first quarter than in the immediately preceding quarter, as a result of, among
other factors, end-users' purchasing and budgeting practices and the Company's
sales commission practices, and the Company expects this pattern to continue in
future years. To the extent that future international operations constitute a
higher percentage of total revenues, the Company anticipates that it may also
experience relatively weaker demand in the third quarter as a result of reduced
sales in Europe during the summer months. A significant portion of the Company's
expenses are relatively fixed in the short term. Accordingly, if revenue levels
fall below expectations, operating results are likely to be disproportionately
and adversely affected. As a result of these and other factors, the Company
believes that its quarterly operating results will vary in the future, and that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
Furthermore, due to all of the foregoing factors, it is likely that in some
future quarter the Company's operating results will be below the expectations of
public market analysts and investors. In such event, the price of the Company's
Common Stock would likely be materially adversely affected.
Risks Associated with the 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. Optika eMedia is
currently undergoing beta testing and is currently scheduled to be commercially
available by approximately mid-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
10
saturated with competitors, or if it does not achieve market acceptance,
the Company's business, results of operations and financial condition may be
materially adversely affected. Software companies who 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's buying patterns whereby they have a tendency to wait until
the new version is generally available to actually make a purchase. The Company
expects that it will experience this adverse effect until Optika eMedia, which
was recently announced, is available. 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". The effect of these two potential adverse factors coupled
with anticipated significant research and development spending will likely
result in operating losses being incurred in several of the quarters of 1998.
Although sales of Optika eMedia are not expected to be significant in 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. Should the Company fail to release a fully commercial version of
Optika eMedia, if the Company is unable to ship Optika eMedia on a timely basis,
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.
Restructuring Charges and Sale of FPhealthcare Suite. During the fourth
quarter of 1997, the Company made the decision to exit the vertical healthcare
market and sold the rights to the majority of the software products that
previously comprised the FPhealthcare suite of products. The FPhealthcare suite
was being developed to offer a product tailored to the healthcare industry;
however, there have been a limited number of customers who have licensed the
software. The restructuring plan involved the FPhealthcare suite product sale,
closure of the Company's Boston facility, and the termination of approximately
14 employees. There can be no assurance that the Company will not incur
additional expenses as a result of the decision to exit the vertical healthcare
market and the sale of the healthcare division. The decision to exit a business
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, disputes with customers who have purchased
the FPhealthcare suite or disputes with the buyer of the division. There can be
no assurance that the Company will not experience unforeseen costs associated
with the decision to exit the healthcare division, and such unforeseen costs
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Dependence on Windows NT. The Company is largely dependent on the
development and growth in the market for Windows NT operating systems and the
migration of imaging and workflow server software to such operating systems.
There can be no assurance that this market will grow or that the Company will be
able to respond effectively to the evolving requirements of this market. UNIX-
based operating systems currently account for most client/server-based
production imaging operating systems, and the Company's software interoperates
with UNIX-based operating systems to only a very limited extent. There can be no
assurance that UNIX will not continue to be the dominant operating platform in
the future or that the introduction of other operating systems will not
adversely affect the deployment of Windows NT. The failure of Windows NT
operating systems to achieve
11
market acceptance over the next several years would have a material adverse
effect on the Company's business, results of operations, and financial
condition. In addition, certain performance characteristics of the Company's
products are currently limited by the Windows NT architecture, including the
ability to be deployed throughout the largest enterprises.
Reliance on Indirect Distribution Channels; Potential for Channel Conflict.
The Company's future results of operations will depend on the success of its
marketing and distribution strategy, which relies, to a significant degree, upon
BSPs and OEMs to sell and install the Company's software, and provide post-sales
support. In 1997, the Company's top 65 BSPs/OEMs accounted for approximately 80%
of its license revenues, and substantially all of the Company's license revenues
were derived from sales by BSPs and OEMs. These relationships are usually
established through formal agreements that generally do not grant exclusivity,
do not prevent the distributor from carrying competing product lines and do not
require the distributor to purchase any minimum dollar amount of the Company's
software. There can be no assurance that any BSPs will continue to represent the
Company or sell its products. Furthermore, there can be no assurance that other
BSPs, some of which have significantly greater financial marketing and other
resources than the Company, will not develop or market software products which
compete with the Company's products or will not otherwise discontinue their
relationship with, or support of, the Company. Some of the Company's BSPs are
small companies that have limited financial and other resources which could
impair their ability to pay the Company. To date, the Company's inability to
receive payments from such BSPs has not had a material adverse effect on the
Company's business, results of operations or financial condition. The Company's
OEMs currently compete with the Company and its BSPs. Selling through indirect
channels may also hinder the Company's ability to forecast sales accurately,
evaluate customer satisfaction, provide quality service and support or recognize
emerging customer requirements. The Company's strategy of marketing its products
indirectly through BSPs and OEMs may result in distribution channel conflicts.
To the extent that different BSPs and OEMs target the same customers, they may
come into conflict with each other. Although the Company has attempted to
allocate certain territories for its products among its distribution channels in
a manner to avoid potential conflicts, there can be no assurance that channel
conflict will not materially and adversely affect its relationship with existing
BSPs and OEMs, or adversely affect its ability to attract new BSPs and OEMs. The
loss by the Company of a number of its more significant BSPs or OEMs; the
inability of the Company to obtain qualified new BSPs or OEMs, or to obtain
access to the channels of distribution offering software products to the
Company's targeted markets; or the failure of BSPs or OEMs to pay the Company
for its software; could have a material adverse effect on the Company's
business, results of operations, or financial condition.
Rapid Technological Change: Dependence on New Product Development. The
market for imaging software is characterized by rapid technological change,
changes in customer requirements, frequent new product introductions and
enhancements, and emerging industry standards. The Company's future performance
will depend in significant part upon its ability to respond effectively to these
developments. The introduction of product 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. However, a new product architecture that leverages
these operating systems and the structure of the World Wide Web are presently in
the developmental stage, and 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. Although Optika eMedia is not currently in
commercial production, the Company expects Optika eMedia, in the event it is
successfully introduced in the marketplace and
12
produces future revenues, and the FilePower Suite to account for substantially
all of its future revenues. Optika eMedia is not currently available to the
public. As a result, factors adversely affecting the pricing of, or demand for,
such products, such as competition or technological change, could have a
material adverse effect on the Company's business, results of operations, and
financial condition. The Company's future financial performance will depend in
general on growth in the relatively small and emerging market for imaging
software products, and in particular on the successful development, introduction
and customer acceptance of new and enhanced versions of its existing software
products such as 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 BSPs and OEMs to engage in a lengthy and complex sales cycle
(typically between six and twelve months from the initial contact date). In
addition, the implementation by customers of the imaging products offered by the
Company may involve a significant commitment of resources by such customers over
an extended period of time. For these and other reasons, the sales and customer
implementation cycles are subject to a number of significant delays over which
the Company has little or no control. The Company's future performance also
depends upon the capital expenditure budgets of its customers and the demand by
such customers for the Company's products. Certain industries to which the
Company sells its products, such as the financial services industry, are highly
cyclical. The Company's operations may in the future be subject to substantial
period-to-period fluctuations as a consequence of such industry patterns,
domestic and foreign economic and other conditions, and other factors affecting
capital spending. There can be no assurance that such factors will not have a
material adverse effect on the Company's business, results of operations, and
financial condition.
Intense Competition. The market for the Company's products is intensely
competitive and can be significantly affected by new product introductions and
other market activities of industry participants. The Company's competitors
offer a variety of products and services to address the emerging market for
imaging software solutions. The Company's principal direct competitors include
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 BSPs or OEMs for the Company. In addition, the Company may face
competition from other established and emerging companies in new market segments
following the introduction 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
13
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 three 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 BSP
support capabilities. This expansion will continue to require significant
expenditures to build the necessary infrastructure. There can be no assurance
that the Company's efforts to expand its marketing, sales and customer support
efforts will be successful or will result in additional revenues or
profitability in any future period.
Dependence on Key Personnel. The Company's future performance depends to a
significant degree upon the continuing contributions of its key management,
sales, marketing, customer support, and product development personnel. The
Company has at times experienced, and continues to experience, difficulty in
recruiting qualified personnel, particularly in software development and
customer support. The Company believes that there may be only a limited number
of persons with the requisite skills to serve in those positions, and that it
may become increasingly difficult to hire such persons. Competitors and others
have in the past, and may in the future, attempt to recruit the Company's
employees. The loss of key management or technical personnel, or the failure to
attract and retain key personnel, could have a material adverse effect on the
Company's business, results of operations, and financial condition.
Dependence on Proprietary Technologies; Risk of Infringement. The Company's
performance depends in part on its ability to protect its proprietary rights to
the technologies used in its principal products. The Company relies on a
combination of copyright and trademark laws, trade secrets, confidentiality
provisions and other contractual provisions to protect its proprietary rights,
which are measures that afford only limited protection. Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy aspects of the Company's products, or to obtain and use information that
the Company regards as proprietary. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights as fully as do the
laws of the United States. There can be no assurance that the Company's means of
protecting its proprietary rights in the United States or abroad will be
adequate, or that competitors will not independently develop similar
technologies. The Company is not aware that it is infringing any proprietary
rights of third parties. In August 1994, a third party notified the Company that
it believes that one of the Company's products is infringing a patent held by
such third party. The Company subsequently notified such third party that it
does not believe that such product infringed such patent. Neither party has
communicated with the other since January 1995. If the third party should file
suit against the Company, and should it be determined that its patent is valid
and infringed by the Company's product, the Company may redesign the allegedly
infringing product or seek to obtain a license from
14
such third party. Any redesign may be costly and time consuming, may not avoid
litigation, and would materially and adversely affect the Company's business,
results of operations, and financial condition. If it becomes necessary to seek
a license from such third party, there can be no assurance that the Company will
be able to obtain such a license on acceptable terms. Moreover, there can be no
assurance that additional third parties will not claim infringement by the
Company's products of their intellectual property rights. The Company expects
that software product developers will increasingly be subject to infringement
claims if the number of products and competitors in the Company's industry
segment grows and the functionality of products in different industry segments
overlaps. Any such claims, with or without merit, and regardless of the outcome
of any litigation, will be time consuming to defend, result in costly
litigation, divert management's attention and resources, cause product shipment
delays, or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on terms
acceptable to the Company, if at all. In the event of a successful claim of
infringement against the Company's products and the failure or inability of the
Company to license the infringed or similar technology, the Company's business,
results of operations, and financial condition would be materially and adversely
affected.
The Company also licenses software from third parties, software which is
incorporated into its products, including software incorporated into its viewer,
image decompression software and optical character recognition, and full-text
engines. These licenses expire from time to time. There can be no assurance
that these third-party software licenses will continue to be available to the
Company on commercially reasonable terms. While the Company believes that all
of such third-party software is available from alternate vendors, and the
Company maintains standard software escrow agreements with each of such parties,
agreements which provide the Company with access to the source code in the event
of their bankruptcy or insolvency, the loss of, or inability to maintain, any
such software licenses could result in shipment delays or reductions until
equivalent software could be developed, identified, licensed and integrated,
which in turn could materially and adversely affect the Company's business,
results of operations, and financial condition. In addition, the Company
generally does not have access to source code for the software supplied by these
third parties. Certain of these third parties are small companies that do not
have extensive financial and technical resources. If any of these relationships
were terminated or if any of these third parties were to cease doing business,
the Company may be forced to expend significant time and development resources
to replace the licensed software. Such an event would have a material adverse
effect upon the Company's business, results of 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
15
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 would, if acting in concert, be able to elect
all members of the Company's Board of Directors and determine the outcome of
corporate actions requiring stockholder approval, such as mergers and
acquisitions. Certain provisions of the Company's Certificate of Incorporation,
equity incentive plans, Bylaws, and Delaware law may also discourage certain
transactions involving a change in control of the Company. This level of
ownership by such persons and entities, when combined with the Company's
classified Board of Directors and the ability of the Board of Directors to issue
"blank check" preferred stock without further stockholder approval, may have the
effect of delaying, deferring or
16
preventing a change in control of the Company and may adversely affect the
voting and other rights of other holders of Common Stock .
Year 2000 . 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 21/st/ century
dates from 20/th/ century dates. As a result, in less than two 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 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 currently offers
products and services that are designed to be Year 2000 compatible. Although the
Company has designed its products and services to be Year 2000 capable and tests
third-party software that is incorporated with the Company's products and
services, 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. The Company utilizes off-the-shelf and
custom software developed internally and by third parties. To the extent that
such software and systems do not comply with Year 2000 requirements, there can
be no assurance that potential system interruptions or the cost necessary to
update such software will not have a material adverse effect on the Company's
business, financial condition and results of operations.
ITEM 2. PROPERTIES
The Company's principal administrative, sales and marketing, research and
development and support facilities consist of approximately 39,000 square feet
of office space in Colorado Springs, Colorado. The Company occupies these
premises under a lease expiring March 2007. In support of its field sales and
support organization, the Company also leases facilities and offices in seven
other locations in the United States, two locations in Germany, and one office
in each of the following locations: the United Kingdom, Brazil, Singapore, Hong
Kong, Malaysia and Australia.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently not a party to any material litigation, and is
currently not aware of any pending or threatened litigation that could have a
material adverse effect upon the Company's business, operating results, or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded over-the-counter on the Nasdaq
National Market under the symbol "OPTK." The Company commenced its initial
public offering of Common Stock on July 25, 1996 at a price of $6 per share.
Prior to such date, there was no public market for the Common Stock. The
following table sets forth the high and low closing sale prices for the Common
Stock for the periods indicated, as reported on the Nasdaq National Market.
HIGH LOW
Quarter ended December 31,
1997.................................... $5.75 $3.00
Quarter ended September 30,
1997.................................... $5.94 $3.63
Quarter ended June 30,
1997.................................... $5.75 $4.50
Quarter ended March 31,
1997.................................... $7.13 $4.75
Quarter ended December 31,
1996.................................... $8.25 $5.02
Quarter ended September 30, 1996 (from
July 25,1996)........................... $9.00 $4.88
The Company has not paid any cash dividends on its capital stock since its
inception, and does not expect to pay cash dividends on its Common Stock in the
foreseeable future. The Company's bank line of credit currently prohibits the
payment of cash dividends without the consent of the bank. Certain other
information required by this Item is incorporated by reference from the
Company's 1997 Annual Report to Stockholders.
18
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's consolidated financial statements and related
notes thereto, and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in Item 7. The consolidated statement of
operations data for each of the three years in the period ended December 31,
1997 and the consolidated balance sheet data at December 31, 1996 and 1997, are
derived from the audited consolidated financial statements included in Item 8.
The consolidated statement of operations data for each of the two years in the
period ended December 31, 1994, and the consolidated balance sheet data at
December 31, 1993, 1994 and 1995, are derived from audited consolidated
financial statements not included in this Annual Report on Form 10-K.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
-------- --------- --------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses.............................. $ 15,912 $ 13,406 $ 8,333 $7,562 $ 6,924
Maintenance and other................. 5,751 3,297 2,135 1,690 2,119
-------- --------- --------- ---------- ---------
Total revenues...................... 21,663 16,703 10,468 9,252 9,043
Cost of revenues:
Licenses.............................. 737 585 316 413 471
Maintenance and other................. 2,845 1,930 1,823 1,889 2,073
-------- --------- --------- ---------- ---------
Total cost of revenues.............. 3,582 2,515 2,139 2,302 2,544
-------- --------- --------- ---------- ---------
Gross profit............................ 18,081 14,188 8,329 6,950 6,499
Operating expenses:
Sales and marketing................... 10,666 7,332 3,732 4,200 2,585
Research and development.............. 4,978 4,624 3,658 3,112 2,332
General and administrative............ 1,829 1,367 1,461 1,513 1,037
Restructuring charge (1).............. 885 -- -- -- --
-------- --------- --------- ---------- ---------
Total operating expenses............ 18,358 13,323 8,851 8,825 5,954
-------- --------- --------- ---------- ---------
Income (loss) from operations........... (277) 865 (522) (1,875) 545
Other (income) expenses................. (442) (229) 411 25 476
-------- --------- --------- ---------- ---------
Income (loss) before provision
(benefit) for income taxes............. 165 1,094 (933) (1,900) 69
Provision (benefit) for income taxes.... -- (813) 29 (168) 42
-------- --------- --------- ---------- ---------
Net income (loss)....................... $ 165 $ 1,907 $ (962) $(1,732) $ 27
======== ========= ========= ========== =========
Net income (loss) per common share (2). $ 0.02 $ 0.45 $ (0.37) $ (0.67) $ 0.01
Weighted average number of common
shares outstanding (2)................. 6,782 4,246 2,620 2,581 2,554
Diluted net income (loss) per common
share (2).............................. $ 0.02 $ 0.30 $ (0.37) $ (0.67) $ 0.01
Diluted weighted average number of
common shares outstanding (2)......... 7,661 6,349 2,620 2,581 3,128
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
-------- --------- --------- ---------- ---------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term $ 8,600 $ 11,499 $ 1,415 $ 771 $ 1,741
investments
Working capital 12,747 13,817 1,841 1,338 2,151
Total assets 21,886 20,258 6,182 4,450 5,102
Long-term debt, excluding current -- 136 266 353 353
portion
Convertible preferred stock -- -- 4,804 3,343 2,346
Total stockholders' equity (deficit) 16,492 15,849 (1,967) (1,497) 213
(1) See Note 8 of Notes to Consolidated Financial Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS INCLUDES A NUMBER OF FORWARD-LOOKING STATEMENTS WHICH
REFLECT THE COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL
PERFORMANCE. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES, INCLUDING THOSE DISCUSSED BELOW AND THOSE UNDER THE CAPTION
"BUSINESS RISKS" IN ITEM 1, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM HISTORICAL RESULTS OR THOSE ANTICIPATED.
OVERVIEW
Optika is a leading provider of high-performance, client/server, integrated
imaging software designed to meet the needs of paper intensive industries such
as healthcare, financial services, insurance, and large retail organizations.
The license of the Company's software products is typically an executive-
level decision by prospective end-users and generally requires the Company and
its BSPs or OEMs to engage in a lengthy and complex sales cycle (typically
between six and twelve months from the initial contact date). The Company
distributes its products through a worldwide network of approximately 259 BSPs
and 11 OEMs. For 1997, approximately 80% of the Company's license revenues were
derived from its BSPs and approximately 8% of its license revenues were derived
from sales by OEMs. In 1997, the Company's top 70 BSPs accounted for
approximately 75% of its license revenues. However, no individual BSP accounted
for more than 10% of the Company's total revenues. For the years ended December
31, 1995, 1996 and 1997, the Company generated approximately 15%, 29% and 23%,
respectively, of its total revenues from international sales.
The Company's revenues consist primarily of license revenues, which are
comprised of one-time fees for the license of the Company's products; and
maintenance revenues, which are comprised of fees for upgrades and technical
support. The BSPs and OEMs, which are responsible for the installation and
integration of the software, enter into sales agreements with the end-user, and
purchase software directly from the Company. The software is licensed directly
to the end-user by the Company through a standard shrink-wrapped license
agreement. Annual maintenance agreements are also entered into between the BSPs
and OEMs and the end-user, and the BSPs and OEMs then purchase maintenance
services directly from the Company. For 1996 and 1997, approximately 80% and
73%, respectively of the Company's total revenues were derived from software
licenses and approximately 14% and 18%, 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 6% and 9%, respectively, of the
Company's total revenues.
License revenues are generally recognized upon shipment when no significant
vendor obligations remain and collectibility is probable. License revenues
related to contracts with significant post-delivery performance obligations are
recognized when the Company's obligations are no longer significant or when the
customer accepts the product, as applicable. Maintenance revenues are deferred
and recognized ratably over the maintenance period, which is generally one year.
Other revenues are recognized as services are performed. Based on the Company's
research and development process, costs incurred between the establishment of
technological feasibility and general release of the software products have not
been material and therefore have not been capitalized in accordance with
Statement of Financial Accounting Standards No. 86. All research and development
costs have been expensed as incurred. See Note 1 of Notes to Consolidated
Financial Statements.
The Company generally does not grant rights to return products, except for
defects in the performance of the products relative to specifications; and
pursuant to standard industry shrink-wrapped license agreements, which provide
for 30-day rights of return if an end-user does not accept the terms of the
software license; nor does it provide provisions for price adjustments or
rotation rights. However, if other rights of return are granted, revenue
20
recognition is deferred until such rights lapse. The Company's terms of sales
generally range from 30 to 60 days from date of shipment for BSPs and OEMs.
During the fourth quarter of 1997, the Company made the decision to exit the
vertical healthcare market and sold the rights to the majority of the software
products that previously comprised the FPhealthcare suite of products. The
FPhealthcare suite was being developed to offer a product tailored to the
healthcare industry however, there have been a limited number of customers who
have licensed the software. The restructuring plan involved the FPhealthcare
suite product sale, closure of the Company's Boston facility, and the
termination of approximately 14 employees. The Company anticipates a reduction
in operating expenses of approximately $2.0 million per year due to the exiting
of this business and an insignificant reduction in revenues from the healthcare
products.
Software companies who 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's buying
patterns whereby they have a tendency to wait until the new version is generally
available to actually make a purchase. The Company expects that it will
experience this adverse effect until Optika eMedia, which was recently
announced, is available. 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". The effect of these two potential adverse factors coupled with
anticipated significant research and development spending will likely result in
operating losses being incurred in several of the quarters of 1998.
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 TO DECEMBER 31, 1996
Revenues
Total revenues increased 30% from $16.7 million for the year ended December
31, 1996 to $21.7 million for the year ended December 31, 1997.
Licenses. License revenues increased 19% from $13.4 million for the year
ended December 31, 1996 to $15.9 million for the year ended December 31, 1997,
representing approximately 80% and 73%, respectively of total revenues in both
periods. This increase was primarily the result of increased sales of components
of the FilePower Suite. The increase in license revenues was primarily the
result of increased sales in the United States compared to a year ago. License
revenues generated outside of the United States decreased from approximately 31%
of license revenues for the year ended December 31, 1996 to approximately 23% of
license revenues for the year ended December 31, 1997.
Maintenance and Other. Maintenance revenues, exclusive of other revenues,
increased 55%, from approximately $2.4 million during the year ended December
31, 1996, to $3.7 million for the year ended December 31, 1997, representing
approximately 14% of total revenues for the year ended December 31, 1996 and 18%
of total revenues for the year ended December 31, 1997. This increase was
primarily a result of an increase in the number of installed systems and the
Company's improved tracking and monitoring of expiring maintenance contracts.
Other revenue, consisting primarily of consulting services and training,
represented 6% and 9% of total revenue for the years ended December 31, 1996 and
1997, respectively. The increase in other revenues was primarily due to
increased revenues from the Company's Solution Services group.
Cost of Revenues
Licenses. Cost of licenses consist primarily of royalty payments to third-
party software vendors; product author commissions, whereby certain of the
Company's software developers are entitled to receive a specified percentage of
product sales; and costs of product media, duplication, packaging and
fulfillment. Cost of licenses increased from $585,000, or 4% of license
revenues, for the year ended December 31, 1996, to $737,000, or 5% of license
revenues, for the year ended December 31, 1997, primarily as a result of the
increased license revenue sold during the period.
21
Maintenance and Other. Cost of maintenance and other consists of the direct
and indirect costs of providing software maintenance and support, training and
consulting services, to the Company's BSPs, OEMs and end-users, and the cost of
third-party software products. Cost of maintenance and other increased from $1.9
million, or 59% of maintenance and other revenues, for the year ended December
31, 1996, to $2.8 million, or 49% of maintenance and other revenues, for the
year ended December 31, 1997. The decrease as a percentage of maintenance and
other revenues is primarily a result of the leverage received from utilizing
existing resources to service the Company's increased maintenance base.
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 $7.3 million, or 44% of total revenues, for
the year ended December 31, 1996, to $10.7 million, or 49% of total revenues,
for the year ended December 31, 1997. This increase was primarily attributable
to additional costs resulting from the establishment of sales offices in
Australia, Brazil, Germany and the expansion of the North American sales staff.
The Company anticipates that sales and marketing expenses will continue to
increase in absolute dollars in future quarters as the Company brings the Optika
eMedia solution to market, continues to build and expand its network of BSP's
and OEMs and expands its direct sales efforts.
Research and Development. Research and development expenses consist
primarily of salaries and other related expenses for research and development
personnel, and of the cost of facilities and equipment. Research and development
expenses increased from $4.6 million, or 28% of total revenues, for the year
ended December 31, 1996, to $5.0 million, or 23% of total revenues, for the year
ended December 31, 1997. The Company expects research and development expenses
to continue to increase in absolute dollars in 1998 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 $1.4 million, or 8% of total revenues,
for the year ended December 31, 1996, to $1.8 million, or 8% of total revenues,
for the year ended December 31, 1997. The increase was primarily due to the
Company incurring additional expenses as a public company and costs to support
expanding worldwide operations. General and administrative expenses are
expected to increase in absolute dollars in 1998 as the Company expands its
staffing to support expanded operations.
Other income, net. Other expenses consist primarily of interest expense on
the Company's capitalized lease obligations, and other debt, offset by interest
earned on the Company's financing activities. The Company incurred a net other
income of $229,000 during the year ended December 31, 1996, compared to a net
other income of $442,000 during the year ended December 31, 1997. Other income
for 1996 and 1997 was primarily a result of interest income derived from the
investment of the Company's initial public offering proceeds.
Provision (benefit) for Income Taxes. Income taxes are accounted for
in accordance with Statement of Financial Accounting Standards No. 109. Due to
the Company's history of pre-tax losses, and to the uncertainty surrounding the
timing of realizing benefits of its favorable tax attributes, the Company had
recorded a valuation allowance against all of its favorable tax assets as of
December 31, 1995. In reaching the Company's determination of the need to
provide a deferred tax valuation allowance, the Company considered all available
evidence, both positive and negative, as well as the weight and importance given
such to evidence. As required by Statement of Financial Accounting Standards
No. 109, management concluded that a valuation allowance against deferred tax
assets was no longer appropriate as of December 31, 1996. Specifically, during
1996, the Company generated four straight quarters of profitability and pre-tax
income of $1.1 million. As of December 31, 1997, the Company still believes
that it is more likely than not that such assets will be realized based on
expected future earnings.
22
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 TO DECEMBER 31, 1995
Revenues
Total revenues increased 60% from $10.5 million for the year ended December
31, 1995 to $16.7 million for the year ended December 31, 1996.
Licenses. License revenues increased 61% from $8.3 million for the year
ended December 31, 1995 to $13.4 million for the year ended December 31, 1996,
representing approximately 80% of total revenues in both periods. This increase
was primarily the result of increased unit sales of components of the FilePower
Suite. The increased unit sales were driven, in part, by a significant increase
in sales to international customers, primarily in Asia and the United Kingdom,
and continued growth of sales in the healthcare market. License revenues
generated outside of the United States increased from approximately 15% of
license revenues for the year ended December 31, 1995 to approximately 31% of
license revenues for the year ended December 31, 1996.
Maintenance and Other. Maintenance revenues, exclusive of other revenues,
increased 112%, from approximately $1.1 million during the year ended December
31, 1995, to $2.4 million for the year ended December 31, 1996, representing
approximately 11% of total revenues for the year ended December 31, 1995 and 14%
of total revenues for the year ended December 31, 1996. This increase was
primarily a result of an increase in the number of installed systems and the
Company's improved tracking and monitoring of expiring maintenance contracts.
Other revenue, consisting primarily of training and consulting fees, represented
9% and 6% of total revenue for the years ended December 31, 1995 and 1996,
respectively.
Cost of Revenues
Licenses. Cost of licenses consists primarily of royalty payments to third-
party software vendors; product author commissions, whereby certain of the
Company's software developers are entitled to receive a specified percentage of
product sales; and costs of product media, duplication, packaging and
fulfillment. Cost of licenses increased from $316,000, or 4% of license
revenues, for the year ended December 31, 1995, to $585,000, or 4% of license
revenues, for the year ended December 31, 1996, primarily as a result of the
increased number of licenses sold during the period.
Maintenance and Other. Cost of maintenance and other consists of the direct
and indirect costs of providing software maintenance and support, training and
consulting services, to the Company's BSPs, OEMs and end-users, and the cost of
third-party software products. Cost of maintenance and other increased from $1.8
million, or 85% of maintenance and other revenues, for the year ended December
31, 1995, to $1.9 million, or 59% of maintenance and other revenues, for the
year ended December 31, 1996. This increase was primarily due to increased
staffing for customer support, and was partially offset by a decreased third-
party software component, which has a lower gross profit margin, in the year
ended December 31, 1996.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and other related expenses for sales and marketing
personnel; marketing; advertising; and promotional expenses. Sales and
marketing expenses increased from $3.7 million, or 36% of total revenues, for
the year ended December 31, 1995, to $7.3 million, or 44% of total revenues, for
the year ended December 31, 1996. This increase was primarily attributable in
increased staffing for sales and marketing activities. In mid-1995, the Company
opened six regional sales offices in the United States, and during 1996 the
Company expanded its operations in Asia with the opening of sales offices in
Hong Kong, Singapore and Malaysia.
Research and Development. Research and development expenses consist
primarily of salaries and other related expenses for research and development
personnel, and of the cost of facilities and equipment. Research and development
expenses increased from $3.7 million, or 35% of total revenues, for the year
ended December 31, 1995, to $4.6 million, or 28% of total revenues, for the year
ended December 31, 1996. The increase was primarily
23
due to increased staffing in order to develop enhancements to the FilePower
Suite and to continue the development of the FPhealthcare Suite.
General and Administrative. General and administrative expenses consist
primarily of salaries and other related expenses of administrative, executive
and financial personnel, and outside professional fees. General and
administrative expenses decreased from $1.5 million, or 14% of total revenues,
for the year ended December 31, 1995, to $1.4 million, or 8% of total revenues,
for the year ended December 31, 1996. The decrease was primarily due to the
Company incurring severance payments, and recruiting and relocation expenses in
connection with the senior management reorganization during the first six months
of 1995. This decrease was partially offset by increased staffing and related
expenditures.
Other Expenses. Other expenses consist primarily of interest expense on the
Company's capitalized lease obligations, and other debt, offset by interest
earned on the Company's financing activities. The Company incurred a net expense
of $411,000 during the year ended December 31, 1995, compared to a net income of
$229,000 during the year ended December 31, 1996. During 1995 the Company
settled certain litigation as discussed in Note 5 of Notes to Consolidated
Financial Statements. Approximately $373,000 of settlement costs and legal
expenses are included in other expenses for 1995. Other income for 1996 was
primarily a result of interest income derived from the investment of the
Company's initial public offering proceeds.
Provision (benefit) for Income Taxes. Income taxes are accounted for in
accordance with Statement of Financial Accounting Standards No. 109. Due to the
Company's history of pre-tax losses, and to the uncertainty surrounding the
timing of realizing benefits of its favorable tax attributes, the Company had
recorded a valuation allowance against all of its favorable tax assets as of
December 31, 1995. In reaching the Company's determination of the need to
provide a deferred tax valuation allowance, the Company considered all available
evidence, both positive and negative, as well as the weight and importance given
such to evidence. As required by Statement of Financial Accounting Standards
No. 109, management concluded that a valuation allowance against deferred tax
assets was no longer appropriate as of December 31, 1996. Specifically, during
1996, the Company generated four straight quarters of profitability and pre-tax
income of $1.1 million.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments at December 31, 1997 were $8.6 million,
decreasing $2.9 million from December 31, 1996. The decrease in cash and short-
term investments is primarily due to the capital expenditures associated with
equipment and furnishings for the Company's new leased corporate headquarters,
the Company's investment in a centralized lead tracking and customer service
database, and an investment in a new financial accounting system.
For the year ended December 31, 1996, net cash used in operating activities
was $409,000, compared to $733,000 for the year ended December 31, 1997. The
increase in cash used from operating activities was due to an increase in
receivables attributable to increased revenues.
Cash used in investing activities was $8.6 million for the year ended
December 31, 1996 compared to cash provided of $384,000 for the year ended
December 31, 1997. Uses of cash consisted primarily of purchases of short-term
securities, and property and equipment offset by any sales of investments.
Cash provided from financing activities was $11.1 million for the year
ended December 31, 1996. Cash provided from financing activities was $77,000 for
the year ended December 31, 1997. Cash provided from financing activities
resulted primarily from private sales of preferred stock in 1995, the proceeds
of the Company's initial public offering in 1996, and the proceeds from the
issuance from common stock under the Company's employee stock purchase plan and
stock option exercises offset by repayments of bank borrowings, capital leases
and other debt.
At December 31, 1997, the Company's principal sources of liquidity included
cash and short-term investments of $8.6 million. In addition, the Company has a
secured credit facility for up to $3.0 million, bearing
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interest at the bank's prime rate plus .75%. As of December 31, 1997, the
Company had $2.8 million available for borrowing.
The Company believes that its current cash and short-term investments,
together with anticipated cash flow from operations and its bank credit
facility, will be sufficient to meet its working capital and capital expenditure
requirements for at least the next 12 months. Thereafter, the Company may
require additional funds to support such activity through public or private
equity financings or from other sources. There can be no assurance that
additional financing will be available at all or that, if available, such
financing will be obtainable on terms favorable to the Company and would not be