SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 0-9747
EXCALIBUR TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 85-0278207
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1921 Gallows Road, Suite 200, Vienna, Virginia 22182
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 761-3700
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 the filing
requirements for the past 90 days. Yes |X| No __
As of December 8, 2000, 15,115,224 shares of the registrant's Common Stock, par
value $.01 per share, were outstanding.
EXCALIBUR TECHNOLOGIES CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 2000
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements: Page
Consolidated Balance Sheets
October 31, 2000 (unaudited) and January 31, 2000.............................3
Consolidated Statements of Operations and Comprehensive Loss (unaudited)
Three and nine months ended October 31, 2000 and 1999.........................4
Consolidated Statements of Cash Flows (unaudited)
Nine months ended October 31, 2000 and 1999...................................5
Notes to Consolidated Financial Statements....................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................10
PART II. OTHER INFORMATION
Items 1. - 6. .............................................................................17
Signatures .............................................................................18
EXCALIBUR TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
ASSETS October 31, 2000 January 31, 2000
(Unaudited)
Current Assets:
Cash and cash equivalents........................................$ 10,129 $ 10,884
Short term investments........................................... 142 178
Accounts receivable, net of allowance for doubtful
accounts of $1,100 and $830, respectively................... 17,434 14,254
Prepaid expenses and other ...................................... 4,309 2,354
-------------- --------------
Total current assets....................................... 32,014 27,670
Equipment and leasehold improvements, net of accumulated
depreciation of $8,487 and $7,594, respectively.................... 2,103 1,766
Other assets.......................................................... 984 1,251
-------------- --------------
Total assets.................................................$ 35,101 $ 30,687
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................. 2,922 1,982
Accrued expenses................................................. 1,684 2,474
Deferred revenues................................................ 5,076 3,926
-------------- --------------
Total current liabilities.................................. 9,682 8,382
Shareholders' Equity:
5% Cumulative convertible preferred stock, $0.01 par value, preference
in liquidation $10 per share plus dividends, 1,000 shares
authorized; 27 shares issued and outstanding................. 271 271
Common stock, $0.01 par value, 40,000 shares authorized; 15,228
and 14,646 shares issued and outstanding..................... 152 146
Additional paid-in capital....................................... 83,261 78,024
Accumulated deficit ............................................. (58,183) (56,138)
Accumulated other comprehensive income (loss).................... (82) 2
-------------- --------------
Total shareholders' equity................................... 25,419 22,305
-------------- --------------
Total liabilities and shareholders' equity $ 35,101 $ 30,687
============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
EXCALIBUR TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(unaudited)
(in thousands, except per share data)
Three Months Ended Nine Months Ended
October 31, October 31,
2000 1999 2000 1999
-------------- -------------- -------------- --------------
Revenues:
Software....................................... $ 10,601 $ 7,003 $ 28,106 $ 21,413
Maintenance.................................... 1,703 1,363 4,956 3,783
-------------- -------------- -------------- --------------
12,304 8,366 33,062 25,196
-------------- -------------- -------------- --------------
Expenses:
Cost of software revenues...................... 2,404 1,229 5,238 3,510
Cost of maintenance revenues................... 345 542 1,079 1,618
Sales and marketing............................ 5,547 4,064 16,554 11,708
Research and product development............... 2,934 2,173 8,466 7,035
General and administrative..................... 1,558 1,369 4,105 4,081
-------------- -------------- -------------- --------------
12,788 9,377 35,442 27,952
-------------- -------------- -------------- --------------
Operating loss..................................... (484) (1,011) (2,380) (2,756)
Other income (expenses):
Interest income, net.......................... 109 55 336 179
Write-off of investment in affiliate.......... -- -- -- (471)
-------------- -------------- -------------- --------------
Net loss........................................... (375) (956) (2,044) (3,048)
Dividends on preferred stock....................... 3 3 10 10
-------------- -------------- -------------- --------------
Net loss applicable to common shareholders......... $ (378) $ (959) $ (2,054) $ (3,058)
============== ============== ============== ==============
Basic and diluted net loss per common share........ $ (0.02) $ (0.07) $ (0.14) $ (0.21)
Weighted-average number of common shares
outstanding........................................ 15,144 14,363 14,926 14,215
Other comprehensive income (loss):
Net loss........................................... (375) (956) (2,044) (3,048)
Foreign currency translation adjustment....... (29) 18 (84) 89
-------------- -------------- -------------- --------------
Comprehensive loss................................. $ (404) $ (938) $ (2,128) $ (2,959)
============== ============== ============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
EXCALIBUR TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
For the Nine Months Ended October 31,
2000 1999
---------------- ----------------
Cash Flows from Operating Activities:
Net loss................................................................ $ (2,044) $ (3,048)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization..................................... 1,066 1,126
Bad debt expense.................................................. 270 340
Write-off of investment in affiliate.............................. - 471
Changes in operating assets and liabilities:
Accounts receivable............................................... (4,233) (3,612)
Prepaid expenses and other assets................................. (1,851) 348
Accounts payable and accrued expenses............................. 299 (160)
Deferred revenues................................................. 1,322 (36)
---------------- ----------------
Net cash used in operating activities................................... (5,171) (4,571)
---------------- ----------------
Cash Flows from Investing Activities:
Purchases of equipment and leasehold improvements....................... (1,329) (706)
Purchase of investments, net of sales and maturities.................... 36 (178)
---------------- ----------------
Net cash used in investing activities................................... (1,293) (884)
---------------- ----------------
Cash Flows from Financing Activities:
Gross proceeds from the issuance of common stock........................ 258 5,145
Proceeds from the exercise of stock options............................. 4,978 1,207
Issuance costs in connection with issuance of common stock.............. - (342)
---------------- ----------------
Net cash provided by financing activities............................... 5,236 6,010
---------------- ----------------
Effect of Exchange Rate Changes on Cash...................................... 473 62
---------------- ----------------
Net Increase (Decrease) in Cash and Cash Equivalents......................... (755) 617
Cash and Cash Equivalents, beginning of period............................... 10,884 5,851
---------------- ----------------
Cash and Cash Equivalents, end of period..................................... $ 10,129 $ 6,468
================ ================
The accompanying notes are an integral part of these
consolidated financial statements.
EXCALIBUR TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2000
(1) THE COMPANY
The consolidated financial statements include the accounts of Excalibur
Technologies Corporation ("Excalibur") and its wholly owned subsidiaries. These
entities are collectively referred to hereinafter as the "Company." All
significant inter-company transactions and accounts have been eliminated.
The Company designs, develops, markets and supports high performance, accurate,
scalable and secure search- powered software solutions. Excalibur offers a suite
of intelligent search solutions for corporate intranets, Internet e-commerce,
online publishing, application service providers ("ASP") and the original
equipment manufacturer ("OEM") market that enables individuals to quickly
capture, analyze, index, catalog, access, navigate, retrieve, publish and share
relevant information residing on an enterprise's networks, intranets, extranets
and the Internet. The Company offers consulting, training, product maintenance
and systems implementation services in support of its software products. The
Company licenses its software products directly to commercial businesses and
government agencies throughout North America, Europe and other parts of the
world and also distributes its software products to end users through license
agreements with value-added resellers, systems integrators, original equipment
manufacturers, application service providers and other strategic partners.
The Company incurred a net loss of $2.0 million in the nine month period ended
October 31, 2000 and has incurred cumulative losses of approximately $12.5
million over the last three fiscal years. The accumulated deficit at October 31,
2000 was $58.2 million. The Company's operations are subject to certain risks
and uncertainties including, among others: the dependence upon the timing of the
closing on sales of large software licenses; actual and potential competition by
entities with greater financial resources, experience and market presence than
the Company; rapid technological changes; the success of the Company's product
marketing and product distribution strategies; the risks associated with
acquisitions and international expansion; the need to manage growth; the need to
retain key personnel and protect intellectual property; and the availability of
additional capital financing on terms acceptable to the Company.
On May 1, 2000, the Company and Intel Corporation jointly announced an agreement
to form a new company, to be named Convera Corporation, that will enable owners
of branded high-value content to produce and securely sell their audio and video
content over the Internet. The Company will combine its entire business
operations with Intel's Interactive Media Services division, which is composed
of three operating units, intellectual property assets and other assets used by
that division. In addition, Intel will contribute approximately $155 million in
cash to the new company, $150 million of which will be paid at closing and the
balance of which will be payable in 2001 to fund retention bonuses to former
Intel employees. The assets to be contributed by Intel's Interactive Media
Services Division include a broad set of technical capabilities, 14 patents and
patent applications in the area of content security, source code components,
non-exclusive licenses to additional source code components and other Intel
patents and patent applications, Intel's rights under certain customer contracts
and technical employee resources in key areas, primarily in software and
engineering. In exchange for these contributions, Intel will receive 49% of the
new company's voting stock and 60% of the new company's equity on a
fully-diluted basis. Excalibur shareholders and present option holders will
receive 51% of the new company's voting stock and 40% of the new company's
equity on a fully-diluted basis in exchange for their Excalibur stock. Excalibur
shareholders will receive one share of stock in the new company for each share
they hold of Excalibur. The transaction is subject to the approval of the
stockholders of the Company and other customary closing conditions. Details of
this agreement and additional information are contained in the Company's Form
8-K filed with the Securities and Exchange Commission ("SEC") on May 3, 2000,
the Company's definitive proxy statement filed with the SEC on November 21, 2000
and other related filings with the SEC made by the Company subsequent to the May
1 announcement. A shareholders' meeting is scheduled for December 21, 2000 to,
among other things, approve this combination.
(2) SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Presentation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
These consolidated financial statements are unaudited and have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission regarding interim financial reporting. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements, and it is suggested
that these consolidated financial statements be read in conjunction with the
consolidated financial statements, and the notes thereto, included in the
Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2000.
In the opinion of management, the consolidated financial statements for the
fiscal periods presented herein include all adjustments that are normal and
recurring which are necessary for a fair presentation of the results for the
interim periods. The results of operations for the nine-month period ended
October 31, 2000 are not necessarily indicative of the results for the entire
fiscal year ending January 31, 2001.
Revenue Recognition
Revenue from the sale of software licenses is recognized upon shipment of
product, provided that the fee is fixed and determinable, persuasive evidence of
an arrangement exists and collection of the resulting receivable is considered
probable. Software revenues include revenues from licenses, training and system
implementation services. Training and systems implementation services are sold
as part of a bundled software license agreement as well as separately to
customers who have previously purchased software licenses. When training or
systems implementation services that are not essential to the functionality of
the software are sold as part of a bundled license agreement, the fair value of
these services, based on the price charged for the services when sold
separately, is deferred and recognized when the services are performed.
Customization work is sometimes required to ensure that the Company's software
functionality meets the requirements of its customers. Under these
circumstances, the Company's revenues are derived from fixed price contracts and
revenue is recognized using the percentage of completion method based on the
relationship of actual costs incurred to total costs estimated to be incurred
over the duration of the contract. Estimated losses on such contracts would be
charged against earnings in the period such losses are identified. No such
losses have been incurred on such contracts to date.
Historically, the Company has not experienced significant returns or exchanges
of its products from direct sales to customers. Revenue related to customer
support agreements is deferred and recognized ratably over the term of
respective agreements. Customer support agreements generally include bug fixes,
telephone support and product upgrades on a when and if available basis. When
the Company provides a software license and the related customer support
arrangement for one bundled price, the fair value of the customer support, based
on the price charged for that element separately, is deferred and recognized
ratably over the term of the respective agreement.
Cash, Cash Equivalents and Short Term Investments
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Cash equivalents
consist of funds deposited in money market accounts. Consequently, the carrying
amount of cash and cash equivalents approximates fair value. The balance of
short term investments at October 31, 2000 consisted of a certificate of deposit
pledged to collateralize a letter of credit required for a leased facility.
Net Loss Per Common Share
Basic loss per common share is computed by dividing net loss available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted loss per common share includes the potential dilution that would
occur if securities or other contracts to issue common stock were exercised or
converted into common stock. Under the treasury stock method, options to
purchase 1,900,466 and 1,696,108 shares of common stock for three and nine
months ended October 31, 2000, respectively, and 271,800 shares of cumulative
convertible preferred stock that were outstanding at October 31, 2000 were not
included in the computation of diluted loss per share as their effect would be
anti-dilutive. As a result, the basic and diluted loss per common share amounts
are identical.
Income Taxes
Deferred taxes are provided utilizing the liability method, whereby deferred tax
assets are recognized for deductible temporary differences and operating loss
and tax credit carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The Company
has provided a full valuation allowance against its net deferred tax asset as of
October 31, 2000 and January 31, 2000, respectively.
(3) CAPITALIZATION
During the nine months ended October 31, 2000, the Company issued 572,000 shares
of common stock upon the exercise of options resulting in total cash proceeds of
$4,978,000. Additionally the Company issued 9,000 shares of common stock to
participants of the employee stock purchase plan resulting in cash proceeds of
$258,000.
(4) SEGMENT REPORTING
The Company aligns its business into two operating segments. The Excalibur
Applications Group develops, markets and services the Excalibur RetrievalWare
suite of products and focuses on large corporations and government organizations
building knowledge management intranets and portals, as well as Internet based
e-commerce and online service businesses. The Excalibur Media Services Group
develops, markets and services the video product line and provides software
products and services primarily to original equipment manufacturers ("OEM") and
application service providers ("ASP") focusing on internet and intranet video
content management. Media Services Group revenues are generated primarily from
OEM and ASP transactions, which may involve development and customization by the
Company. While OEM deals are a significant component of the Applications Group
revenues, the majority of revenue is generated from licensing the RetrievalWare
suite of products directly to corporations and government organizations building
intranets and Internet based e-commerce and online service businesses.
The Company does not identify or allocate assets by operating segment.
The following chart represents revenues and expenses (in thousands of dollars)
attributable to the Applications Group and Media Services Group for the three
and nine-month periods ended October 31, 2000 and 1999. Expenses for each
segment consist of direct and allocated expenses.
- -----------------------------------------------------------------------------------------------------------
Applications Group Media Services Group Total
- ----------------------------------------------------------------------------------------------------------
Three months ended Three months ended Three months ended
October 31, October 31, October 31,
2000 1999 2000 1999 2000 1999
------------------------- ------------------------- -------------------------
Total Revenues $ 9,178 $ 7,549 $ 2,586 $ 817 $ 11,373 $ 9,070
Operating Expenses 9,670 7,310 3,118 2,067 11,508 9,346
------------------------- ------------------------- -------------------------
Operating Income (Loss) $ 48 $ 239 $ (532) $ (1,250) $ (135) $ (276)
------------------------- ------------------------- -------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Applications Group Media Services Group Total
- ----------------------------------------------------------------------------------------------------------
Six months ended Six months ended Six months ended
July 31, July 31, July 31,
2000 1999 2000 1999 2000 1999
------------------------- ------------------------- -------------------------
Total Revenues $ 18,391 $ 13,715 $ 2,367 $ 3,115 $ 20,758 $ 16,830
Operating Expenses 16,552 13,860 6,103 4,715 22,655 18,575
------------------------- ------------------------- -------------------------
Operating Income (Loss) $ 1,839 $ (145) $ (3,736) $ (1,600) $ (1,897) $ (1,745)
------------------------- ------------------------- -------------------------
- -----------------------------------------------------------------------------------------------------------
Major Customers
In the current quarter, revenues derived from sales to agencies of the U.S.
Government were approximately $1.3 million, or 11.2% of total revenues. No
single customer accounted for 10% or more of the Company's revenues for the
quarter ended July 31, 2000.
(5) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement, as amended by SFAS No. 137 and SFAS No. 138, establishes accounting
and reporting standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement also requires that changes in the derivative's fair value be
recognized in earnings unless specific hedge accounting criteria are met. The
Company believes the adoption of SFAS Nos. 133, 137 and 138, which will be
effective for the quarter ending April 30, 2001, will not have a material effect
on the financial statements.
In December 1999, the SEC released Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements." This bulletin, as amended by Staff
Accounting Bulletin No. 101B, establishes more clearly defined revenue
recognition criteria than previously existing accounting pronouncements and is
effective for the Company for the quarter ending January 31, 2001. The Company
is evaluating the full impact of this bulletin to determine the impact on its
financial position, results of operations and cash flows but does not anticipate
that it will have a material effect.
In March 2000, FASB issued Interpretation (FIN) No. 44, "Accounting for Certain
Transactions Involving Stock Compensation -- An Interpretation of APB Opinion
No. 25." This Interpretation clarifies (a) the definition of employee for
purposes of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a non-compensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. This Interpretation was effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998, or January 12, 2000. The Company does not expect the
application of FIN 44 to have a material impact on financial position or results
of operations.
(6) LINE OF CREDIT
The Company has available a $3,000,000 line of credit under an agreement with a
bank which expires on September 20, 2000. Up to $250,000 of borrowings may be in
the form of letters of credit. The line of credit is collateralized by
substantially all corporate assets. Borrowings under the line of credit bear
interest at the lender's prime rate (9.5% at July 31, 2000) plus up to 1%. The
agreement requires the Company to comply with certain financial covenants that
are computed on a monthly basis and prohibits additional borrowings without the
bank's approval. The Company was in compliance with all covenants at July 31,
2000. As of July 31, 2000, no borrowings were outstanding under the line of
credit.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The statements contained in this report that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
without limitation statements about the Company's expectations, beliefs,
intentions or strategies regarding the future. All forward-looking statements
included in this report are based on information available to the Company on the
date hereof and the Company assumes no obligation to update any such
forward-looking statements. The forward-looking statements contained herein
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in this report.
The Company principally earns revenues from the licensing of its software
products to commercial businesses and government agencies throughout North
America, Europe and other parts of the world. The Company licenses its software
to end users directly and also distributes its software products through license
agreements with value-added resellers, system integrators, original equipment
manufacturers, application service providers and other strategic partners.
Revenues are provided under software licenses with new customers and from the
related sale of product maintenance, training and implementation support
services. Additions to the number of authorized users, upgrades to newer product
versions and the renewal of product maintenance arrangements by customers
pursuant to existing licenses also provide revenues to the Company. Under
software maintenance contracts, customers are typically entitled to receive
telephone support, software bug fixes and new releases of particular software
products when and if they are released.
The Company aligns its business into two operating segments. The Excalibur
Applications Group develops, markets and services the Excalibur RetrievalWare
suite of products and focuses on large corporations and government organizations
building knowledge management intranets and portals, as well as Internet based
e-commerce and online service businesses. The Excalibur Media Services Group
develops, markets and services the video product line and provides software
products and services primarily to original equipment manufacturers ("OEM") and
third party application service providers ("ASP") focusing on Internet and
intranet video content management. Media Services Group revenues are generated
primarily from OEM and ASP transactions, which may involve development and
customization by the Company. While OEM deals are a significant component of the
Applications Group revenues, the majority of revenue is generated from licensing
the RetrievalWare suite of products directly to corporations and government
organizations building intranets and Internet based e-commerce and online
service businesses.
The following chart represents revenues and expenses (in thousands of dollars)
attributable to the Applications Group and Media Services Group for the three
and six month periods ended July 31, 2000 and 1999. Expenses for each segment
consist of direct and allocated expenses.
- ------------------------------------------------------------------------------------------------------------------------
Applications Group Media Services Group Applications Group Media Services Group
------------------ -------------------- ------------------ --------------------
Three months ended Three months ended Six months ended Six months ended
July 31, July 31, July 31, July 31,
2000 1999 2000 1999 2000 1999 2000 1999
--------------------- --------------------- --------------------- ---------------------
Total Revenues $ 9,729 $ 6,865 $ 1,644 $ 2,205 $ 18,391 $ 13,715 $ 2,367 $ 3,115
Operating Expenses 8,392 6,832 3,116 2,514 16,552 13,860 6,103 4,715
--------------------- --------------------- --------------------- ---------------------
Operating Income (Loss) $ 1,337 $ 33 $ (1,472) $ (309) $ 1,839 $ (145) $ (3,736) $ (1,600)
--------------------- --------------------- --------------------- ---------------------
- ------------------------------------------------------------------------------------------------------------------------
On May 1, 2000, the Company and Intel Corporation jointly announced an agreement
to form a new company, to be named Convera Corporation, that will enable owners
of branded high-value content to produce and securely sell their audio and video
content over the Internet. The Company will combine its entire business
operations with Intel's Interactive Media Services division, which is composed
of three operating units, intellectual property assets and other assets used by
that division. In addition, Intel will contribute approximately $155 million in
cash to the new company, $150 million of which will be paid at closing and the
balance of which will be payable in 2001 to fund retention bonuses to former
Intel employees. The assets to be contributed by Intel's Interactive Media
Services Division include a broad set of technical capabilities, 14 patents and
patent applications in the area of content security, source code components,
non-exclusive licenses to additional source code components and other Intel
patents and patent applications, Intel's rights under certain customer contracts
and technical employee resources in key areas, primarily in software and
engineering. In exchange for these contributions, Intel will receive 49% of the
new company's voting stock and 60% of the new company's equity on a
fully-diluted basis. Excalibur shareholders and present option holders will
receive 51% of the new company's voting stock and 40% of the new company's
equity on a fully-diluted basis in exchange for their Excalibur stock. Excalibur
shareholders will receive one share of stock in the new company for each share
they hold of Excalibur. The transaction is subject to regulatory review,
approval of the stockholders of the Company and other customary closing
conditions. Details of this agreement and additional information are contained
in the Company's Form 8-K filed with the Securities and Exchange Commission
("SEC") on May 3, 2000, the Company's preliminary proxy statement filed with the
SEC on August 14, 2000 and other related filings with the SEC made by the
Company subsequent to the May 1 announcement. The transaction is expected to
close in the fall of 2000.
As disclosed in Item 5 of this form 10-Q, on September 13, 2000, the Company
announced that Intel and the National Basketball Association ("NBA") entered
into an agreement to be assigned to Convera Corporation whereby Intel and the
NBA will develop and distribute interactive NBA content, ultimately including
enhanced broadband programming and interactive game broadcasts. As part of the
NBA agreement, the NBA will receive a 10% equity stake in Convera Corporation
after giving effect to the Company's combination with Intel's Interactive Media
Services division. The transaction with the NBA is subject to certain
conditions, including approval by the NBA Board of Governors.
Results of Operations
Revenues
Total revenues increased 25% in the second quarter of the current year over the
second quarter last year. Software revenues (licenses and services revenues)
from Excalibur RetrievalWare increased 47% in the second quarter of the current
year to $8.4 million from $5.7 million in the second quarter of the prior year.
RetrievalWare revenues represented 84% of software revenues in the second
quarter of the current year compared to 72% in the second quarter last year.
Software revenues from the Screening Room product decreased 26% to $1.6 million
in the current quarter from $2.2 million in the second quarter of last year.
Revenues from Screening Room represented 16% of software revenues compared to
28% in the second quarter last year. Due to the Company's transition from the
EFS product line to RetrievalWare, no EFS revenue was recognized in the current
year compared to $21 thousand in the second quarter last year.
Total software revenues increased 27% in the second quarter this year to $10.0
million from $7.9 million in the second quarter last year. North America
software revenues decreased 7% in the second quarter to $5.9 million from $6.4
million in the second quarter last year. International software revenues
increased 171% to $4.0 million in the current quarter from $1.5 million in the
second quarter of the prior year.
For the six months ended July 31, 2000, total revenues were $20.8 million, an
increase of 23% over total revenues of $16.8 million reported for the
corresponding period last year. Software revenues from RetrievalWare for the
first half of the current fiscal year increased 36% to $15.4 million from $11.3
million for the first half of last fiscal year. Software revenues from Screening
Room for the six month period ended July 31, 2000 decreased 31% to $2.1 million
from $3.1 million in the same period last year.
Total software revenues for the six months ended July 31, 2000 were $17.5
million, an increase of 21% over total software revenues of $14.4 million
reported for the corresponding period last year. Software revenues from North
America for the first six months of the current year increased 7% to $11.7
million from $11.0 million in the comparable period last year. International
software revenues increased 68% to $5.8 million in the six month period ended
July 31, 2000 from $3.4 million for the first half of last year.
The charts below summarize the components of revenues and expenses, including
the amounts expressed as a percentage of total revenues, for the three and six
month periods ended July 31, 2000 and 1999, and the percentage change in the
amounts between fiscal periods (dollars in thousands).
- --------------------------------------------------------------------------------------------------------------
Components of Revenue and Expenses Increase/
(Decrease)
Three Months Ended July 31,
2000 1999
$ % of total $ % of total %
revenues revenues
------------------------ ------------------------ -----------
Revenues:
RetrievalWare $ 8,375 74 % $ 5,685 63 % 47 %
Screening Room 1,618 14 2,177 24 (26)
EFS - - 21 0 (100)
------------------------ ------------------------ -----------
Total Software 9,993 88 7,883 87 27
Maintenance 1,380 12 1,187 13 16
------------------------ ------------------------ -----------
Total revenues $11,373 100 % $ 9,070 100 % 25 %
------------------------ ------------------------ -----------
Expenses:
Costs of sales $ 2,009 18 % $ 1,791 20 % 12 %
Sales and marketing 5,439 48 3,749 41 45
Research and product development 2,843 25 2,372 26 20
General and administrative 1,217 11 1,434 16 (15)
------------------------ ------------------------ -----------
Total expenses $11,508 101 % $ 9,346 103 % 23 %
------------------------ ------------------------ -----------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Components of Revenue and Expenses Increase/
(Decrease)
Six Months Ended July 31,
2000 1999
$ % of total $ % of total %
revenues revenues
------------------------ ------------------------ -----------
Revenues:
RetrievalWare $15,387 74 % $11,329 68 % 36 %
Screening Room 2,118 10 3,061 18 (31)
EFS - - 21 0 (100)
------------------------ ------------------------ -----------
Total Software 17,505 84 14,411 86 21
Maintenance 3,253 16 2,419 14 34
------------------------ ------------------------ -----------
Total revenues $20,758 100 % $16,830 100 % 23 %
------------------------ ------------------------ -----------
Expenses:
Costs of sales $ 3,568 17 % $ 3,358 20 % 6 %
Sales and marketing 11,008 53 7,643 45 44
Research and product development 5,532 27 4,862 29 14
General and administrative 2,547 12 2,712 16 (6)
------------------------ ------------------------ -----------
Total expenses $22,655 109 % $18,575 110 % 22 %
------------------------ ------------------------ -----------
- --------------------------------------------------------------------------------------------------------------
The Company primarily sells to three markets: corporations and large
organizations with intranets, on-line content providers and Internet
e-businesses, and the OEM market. The revenue increase over the second quarter
of last year was driven by an increase in sales to the intranet or knowledge
management market. Noteworthy licensing arrangements that were signed during the
second quarter of the current year include Deutsche Post, Bell Atlantic, USDA,
and Nikoyo (HK) Limited. Sales to the intranet or knowledge management market
were 50% of license revenues in the second quarter compared to 31% in the second
quarter last year. For the six months ended July 31, 2000, intranet sales were
40%, consistent with the same period last year.
For three months ended July 31, 2000, 23% of license revenues were generated
from sales to the on-line content providers compared to 22% in the second
quarter last year. For the six months ended July 31, 2000, sales to the online
services market were 32% compared to 21% in the comparable period last year.
Noteworthy licensing arrangements that were signed during the second quarter of
the current year in the online services market included webADTV, Chicago
Tribune, Wiznet and InterGraph. There are now approximately 90 customers using
Excalibur products to power online information services and e-commerce
applications.
OEM revenues comprised 27% of second quarter license revenues compared to 46% in
the comparable quarter last year. For the six months ended July 31, 2000, OEM
sales were 27% of license revenues compared to 39% for the six months ended July
31, 1999. The decrease is mainly due to the completion of the StorageTek joint
development agreement in the second quarter last year.
Software maintenance and customer support revenues increased 16% in the second
quarter of the current year to $1.4 million from $1.2 million in the second
quarter last year. For the six months ended July 31, 2000, software maintenance
and customer support revenues increased 34% to $3.3 million from $2.4 million in
the same period last year. The increase was attributable primarily to an
increase in the number of RetrievalWare customers.
Operating Expenses
Costs of sales increased 12% to $2.0 million in the second quarter of the
current year from $1.8 million in the second quarter last year. Costs of sales
expressed as a percentage of total revenues were 18% in the current quarter
compared to 20% in the second quarter last year For the six months of the
current year, costs of sales increased 6% to $3.6 million from $3.4 million in
the first six months of last year, representing 17% and 20% of total revenues,
respectively. The increase in costs of sales is attributable to growth in the
costs of software revenues, primarily royalty expense, in line with increased
sales volume this year. Costs of maintenance decreased for the quarter and six
months ended July 31, 2000 due to changes implemented in the fourth quarter of
fiscal 2000 that streamlined the customer support organization, thus reducing
overall costs of maintenance.
Sales and marketing expenses increased 45% in the quarter ended July 31, 2000 to
$5.4 million from $3.7 million in the second quarter last year, representing 48%
and 41% of total revenues, respectively. For the first half of the current year,
sales and marketing expenses increased 44% to $11.0 million from $7.6 million
for the corresponding period last year, representing 53% and 45% of total
revenues, respectively. The increase in expenses was due to the opening of the
Company's sales office in Germany, overall growth in sales and marketing
personnel, and higher sales commissions, in line with higher revenues this year.
The Company also experienced a growth in marketing program expenses this year
due to a corporate advertising and branding campaign.
Total research and product development costs increased 20% to $2.8 million in
the second quarter of the current year compared to $2.4 million in the second
quarter last year. Research and product development costs expressed as a
percentage of total revenues were 25% in the current quarter compared to 26% in
the second quarter last year. For the six months ended July 31, 2000, total
research and development costs increased 14% to $5.5 million from $4.9 million
for the first half of last year, representing 27% and 29% of total revenues,
respectively. The increase in absolute dollars is largely due to increased
investment in both the text and video product lines as the Company continued to
make enhancements to its RetrievalWare and Screening Room products. In the first
quarter of this year, the Company announced support for the Arabic, Chinese,
Dutch, Italian, Japanese and Korean languages, making RetrievalWare one of the
most comprehensive international search products available. The Company also
announced the release of Screening Room Version 2.2. The Screening Room upgrade
release provides enhancements for video ingestion and capture, added scalability
capabilities, new user interfaces and published APIs for user customization.
General and administrative expenses decreased 15% in the second quarter to $1.2
million, representing 11% of total revenues in the second quarter compared to
$1.4 million, or 16% of total revenues, in the second quarter of last year. For
the first half of the current year, general and administrative expenses
decreased 6% to $2.5 million from $2.7 million for the corresponding period last
year, representing 12% and 16% of total revenues, respectively. The decrease is
attributable to reduced travel and management information system expenses.
Net interest income increased to $133,000 and $228,000, respectively, in the
three and six month periods ended July 31, 2000 from $66,000 and $124,000,
respectively, in the comparable periods last year due to a higher level of
invested funds.
Liquidity and Capital Resources
In the six months ended July 31, 2000, the Company's combined balance of cash,
cash equivalents and short-term investments increased to $11.8 million from
$11.1 million at January 31, 2000 as summarized below (in thousands). At July
31, 2000, investments consisted of a certificate of deposit pledged to
collateralize a letter of credit.
July 31, January 31,
2000 2000 Change
--------------- --------------- ---------------
Cash and cash
Equivalents $ 11,695 $ 10,884 $ 811
Short-term
investments 142 178 (36)
--------------- --------------- ---------------
Total $ 11,837 $ 11,062 $ 775
=============== =============== ===============
During the six months ended July 31, 2000, cash of $2.4 million used to fund
operating activities was more than the net loss of $1.7 million primarily due to
an increase in accounts receivable, prepaid expenses, and other assets of $1.5
million. Non-cash charges totaling $0.9 million included depreciation and
amortization of $0.7 million.
The Company's investing activities used $0.9 million in the first six months of
the current year due to the purchase of equipment and leasehold improvements.
Cash provided by financing activities was $3.9 million for the six months ended
July 31, 2000. Cash of approximately $3.7 million was provided from the exercise
of employee stock options and $0.2 million was provided from the issuance of
stock under the employee stock purchase plan
The Company has available a $3,000,000 line of credit under an agreement with a
bank which expires on September 20, 2000. Up to $250,000 of borrowings may be in
the form of letters of credit. The line of credit is collateralized by
substantially all corporate assets. Borrowings under the line of credit bear
interest at the lender's prime rate (9.5% at July 31, 2000) plus up to 1%. The
agreement requires the Company to comply with certain financial covenants that
are computed on a monthly basis and prohibits additional borrowings without the
bank's approval. As of July 31, 2000, no borrowings were outstanding under the
line of credit.
The Company's balances of cash and cash equivalents at July 31, 2000 and its
funds generated from operations, if any, are expected to provide sufficient cash
to meet the Company's current projected needs for the foreseeable future.
Historically, the Company has used cash provided primarily from sales of its
common stock to fund its operations. If the Company fails to achieve its
operating plan for fiscal year 2001, the Company's balance of cash and cash
equivalents may be reduced substantially. The Company may be required to pursue
additional external sources of financing to support its operations and capital
requirements. There can be no assurance that external sources of financing will
be available to fund the Company's ongoing operations or other capital
requirements on terms acceptable to the Company.
Factors That May Affect Future Results
The Company's business environment is characterized by intense competition,
rapid technological changes, changes in customer requirements and emerging new
market segments. Consequently, to compete effectively, the Company must make
frequent new product introductions and enhancements while protecting its
intellectual property, retain its key personnel and deploy sales and marketing
resources to take advantage of new business opportunities. Future operating
results will be affected by the ability of the Company to expand its product
distribution channels and to manage the expected growth of the Company. Future
results may also be impacted by the effectiveness of the Company in executing
future acquisitions and integrating the operations of acquired companies with
those of the Company. Failure to meet any of these challenges could adversely
affect future operating results.
The Company's quarterly operating results have varied substantially in the past
and are likely to vary substantially from quarter to quarter in the future due
to a variety of factors. In particular, the Company's period-to-period operating
results are significantly dependent upon the timing of the closing of large
license agreements. In this regard, the purchase of the Company's products can
require a significant capital investment from a potential customer which the
customer generally views as a discretionary cost that can be deferred or
canceled due to budgetary or other business reasons and can involve long sales
cycles of six months or more. Estimating future revenues is also difficult
because the Company ships its products soon after an order is received and, as
such does not have a significant backlog. Thus, quarterly license fee revenues
are heavily dependent upon a limited number of orders for large licenses
received and shipped within the same quarter. Moreover, the Company has
generally recorded a significant portion of its total quarterly license fee
revenues in the third month of a quarter, with a concentration of these revenues
occurring in the last half of that third month. This concentration of revenues
is influenced by customer tendencies to make significant capital expenditures at
the end of a fiscal quarter. The Company expects these revenue patterns to
continue for the foreseeable future. Despite the uncertainties in its revenue
patterns, the Company's operating expenses are based upon anticipated revenue
levels and such expenses are incurred on an approximately ratable basis
throughout a quarter. As a result, if expected revenues are deferred or
otherwise not realized in a quarter for any reason, the Company's business,
operating results and financial condition would be materially adversely
affected.
As of January 31, 2000, the Company had net operating loss carryforwards
("NOLs") of approximately $64.7 million. The deferred tax assets representing
the tax benefits of the NOLs have been offset completely by a valuation
allowance due to the Company's lack of an earnings history. The Company incurred
a net loss of $1.7 million for the six months ended July 31, 2000. The
accumulated deficit of the Company at July 31, 2000 was $57.8 million. The
realization of the benefits of the NOLs is dependent on sufficient taxable
income in future fiscal years. Lack of future earnings, or a change in the
ownership of the Company, could adversely affect the Company's ability to
utilize the NOLs. Despite the NOL carryforwards, the Company may have income tax
liability in future years due to the application of the alternative minimum tax
rules of the Internal Revenue Code.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company believes that inflation has not had a material effect on the results
of its operations to date.
Other Factors
EURO Conversion
On January 1, 1999, the exchange rates of eleven countries (Germany, France, the
Netherlands, Austria, Italy, Spain, Finland, Ireland, Belgium, Portugal and
Luxembourg) were fixed amongst one another and became the currencies of the
EURO. The currencies of the eleven countries will remain in circulation until
mid-2002. The EURO currency will be introduced on January 1, 2002. The Company
does not expect future balance sheets and statements of earnings and cash flows
to be materially impacted by the EURO Conversion.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement, as amended by SFAS No. 137 and SFAS No. 138, establishes accounting
and reporting standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement also requires that changes in the derivative's fair value be
recognized in earnings unless specific hedge accounting criteria are met. The
Company believes the adoption of SFAS Nos. 133, 137 and 138, which will be
effective for the quarter ending April 30, 2001, will not have a material effect
on the financial statements.
In December 1999, the SEC released Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements." This bulletin, as amended by Staff
Accounting Bulletin No. 101B, establishes more clearly defined revenue
recognition criteria than previously existing accounting pronouncements and is
effective for the Company for the quarter ending January 31, 2001. The Company
is evaluating the full impact of this bulletin to determine the impact on its
financial position, results of operations and cash flows but does not anticipate
that it will have a material effect.
In March 2000, FASB issued Interpretation (FIN) No. 44, "Accounting for Certain
Transactions Involving Stock Compensation -- An Interpretation of APB Opinion
No. 25." This Interpretation clarifies (a) the definition of employee for
purposes of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a non-compensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. This Interpretation was effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998, or January 12, 2000. The Company does not expect the
application of FIN 44 to have a material impact on financial position or results
of operations.
Market Risk
The Company's market risk is principally confined to changes in foreign currency
exchange rates and potentially adverse effects of differing tax structures.
International revenues from ETIL, the Company's foreign sales subsidiary located
in the United Kingdom, were approximately 38% of total revenues in the second
quarter of the current year. International sales are made mostly from the
Company's foreign subsidiary and are typically denominated in British pounds.
The Company's exposure to foreign exchange rate fluctuations arises in part from
intercompany accounts in which royalties on ETIL sales are charged to ETIL and
recorded as intercompany receivables on the books of the U.S. parent company.
The Company is also exposed to foreign exchange rate fluctuations as the
financial results of ETIL are translated into U.S. dollars in consolidation. As
exchange rates vary, those results when translated may vary from expectations
and adversely impact overall expected profitability.
PART II-- OTHER INFORMATION
Item 1. Legal Proceedings None.
- ------
Item 2. Changes in Securities None.
- ------
Item 3. Defaults upon Senior Securities None.
- ------
Item 4. Submission of Matters to Vote of Security Holders None.
- ------
Item 5. Other Information None.
- ------
On September 11, 2000, the Company and Intel Corporation announced that the name
of the new company they will form to deliver interactive media services will be
Convera Corporation.
On September 13, 2000, the Company announced that its video content management
technologies, including Excalibur Screening Room(R), will become part of a
solution delivered by Convera Corporation, the newly named company to be created
by the Company and the Intel Interactive Media Services Division, to the
National Basketball Association ("NBA") as part of an agreement announced by
Intel Corporation and the NBA. Intel and the NBA announced that they have
entered into an agreement whereby Intel and the NBA will develop and distribute
interactive NBA content, ultimately including enhanced broadband programming and
interactive game broadcasts. Intel intends to assign the agreement to Convera
Corporation. As part of the NBA agreement, the NBA will receive a 10% equity
stake in Convera. The transaction with the NBA is subject to certain conditions,
including approval by the NBA Board of Governors.
Item 6. Exhibits and Reports on Form 8-K
- ------
Two reports on Form 8-K were filed during the second quarter of fiscal year
2001.
On May 3, 2000, the Company filed a Form 8-K for Item 5, announcing the
Agreement and Plan of Contribution and Merger with Intel Corporation , Exca
Holdings, Inc., a wholly owned subsidiary of the Company ("Newco"), and
Excalibur Transitory, Inc., a wholly owned subsidiary of Newco. The Form 8-K
contained a brief description of the terms of the proposed merger and included
as an exhibit the Agreement and Plan of Contribution and Merger.
On July 19, 2000, the Company filed a Form 8-K for Item 4, reporting a change in
the Company's independent accounting firm.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EXCALIBUR TECHNOLOGIES CORPORATION
November 15, 2000 By: /s/ Patrick C. Condo
--------------------------
Patrick C. Condo
President and Chief Executive Officer
(Principal Executive Officer)
November 15, 2000 By: /s/ James H. Buchanan
--------------------------
James H. Buchanan
Chief Financial Officer
(Principal Financial and Accounting Officer)