SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1996
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 4, 1996, 12,437,025 shares of the registrant's Common Stock, par
value $0.01 per share, were outstanding.
EXCALIBUR TECHNOLOGIES CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 1996
TABLE OF CONTENTS
PART I . FINANCIAL INFORMATION
Item 1. Financial Statements: Page
Consolidated Balance Sheets
October 31, 1996 and January 31, 1996....................3
Consolidated Statements of Operations
Three-month and nine-month periods ended
October 31, 1996 and 1995 ...............................4
Consolidated Statements of Cash Flows
Nine-month periods ended October 31, 1996 and 1995.......5
Notes to Consolidated Financial Statements...............6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................11
PART II. OTHER INFORMATION
Items 1. - 6.......................................................19
Signatures ........................................................20
2
EXCALIBUR TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
ASSETS
October 31, January 31,
1996 1996
(unaudited)
-------- --------
Current Assets:
Cash and cash equivalents ......................... $ 3,047 $ 2,903
U.S. government securities, at cost ............ 10,856 10,341
Accounts receivable, net of allowance for
doubtful accounts of $386 and $375, respectively 7,823 6,942
Prepaid expenses and other ........................ 943 582
-------- --------
Total current assets ......................... 22,669 20,768
Equipment and leasehold improvements, net of
accumulated depreciation of $3,842 and
$2,838,respectively .................................. 2,956 1,943
Investment in affiliate (Note 3) ..................... 1,132 --
Other assets ......................................... 67 335
-------- --------
$ 26,824 $ 23,046
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable .................................. $ 1,428 $ 1,005
Accrued expenses .................................. 2,126 2,999
Deferred revenues ................................. 2,490 2,759
Deferred compensation ............................. 1,001 1,032
-------- --------
Total current liabilities .................... 7,045 7,795
-------- --------
Shareholders' Equity:
5% Cumulative convertible preferred stock,
$0.01 par value, preference in liquidation
$10 per share, 1,000 shares authorized,
27 shares issued and outstanding ............. 271 271
Common stock, par value $0.01, 40,000
shares authorized; 12,418 and 11,953
shares issued and outstanding, respectively .. 124 119
Additional paid-in capital ........................ 61,661 51,272
Accumulated deficit ............................... (42,208) (36,446)
Cumulative translation adjustment ................. (69) 35
-------- --------
Total shareholders' equity ................... 19,779 15,251
-------- --------
$ 26,824 $ 23,046
======== ========
The accompanying notes to the consolidated financial statements are an
integral part of these consolidated balance sheets.
3
EXCALIBUR TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
Three months ended Nine months ended
October 31 October 31
1996 1995 1996 1995
-------- -------- -------- --------
REVENUES:
Software ......................... $ 4,727 $ 3,940 $ 10,968 $ 10,243
Maintenance ...................... 1,084 1,066 3,163 2,662
-------- -------- -------- --------
5,811 5,006 14,131 12,905
-------- -------- -------- --------
EXPENSES:
Sales and marketing .............. 3,832 2,381 10,456 6,244
Research and product development . 2,136 1,226 5,557 3,522
General and administrative ....... 1,000 861 2,940 2,610
Cost of software revenues ........ 396 456 746 1,033
Cost of maintenance revenues ..... 225 143 603 415
Merger costs (Note 1) ............ -- -- -- 490
-------- -------- -------- --------
7,589 5,067 20,302 14,314
-------- -------- -------- --------
Operating loss ...................... (1,778) (61) (6,171) (1,409)
OTHER INCOME/ (EXPENSES):
Interest income, net ........... 177 169 591 414
Equity in net loss of affiliate (123) -- (182) --
-------- -------- -------- --------
Net (loss) income ................... (1,724) 108 (5,762) (995)
Dividends on preferred stock ........ 3 3 10 10
-------- -------- -------- --------
Net (loss) income applicable to
common stock ........................ $ (1,727) $ 105 $ (5,772) $ (1,005)
======== ======== ======== ========
Net (loss) income per common share .. $ (0.14) $ 0.01 $ (0.47) $ (0.09)
======== ======== ======== ========
Weighted-average number of common
shares outstanding .................. 12,413 11,540 12,321 11,403
======== ======== ======== ========
The accompanying notes to the consolidated financial statements are an
integral part of these consolidated statements.
4
EXCALIBUR TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
For the nine months ended
October 31
1996 1995
--------- ----------
Cash Flows from Operating Activities:
Net loss ........................................... $ (5,762) $ (995)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ................. 998 781
Equity in net loss of affiliate ............... 182 --
Loss on disposal of assets .................... 7 14
Compensation paid in common stock ............. -- 65
Changes in operating assets and liabilities:
Accounts receivable, net ...................... (730) (917)
Prepaid expenses and other .................... (59) (298)
Accounts payable and accrued expenses ......... (487) (770)
Deferred revenues ............................. (311) (122)
Adjustment for change in fiscal year of ConQuest ... -- (181)
-------- --------
Net cash used in operating activities .............. (6,162) (2,423)
-------- --------
Cash Flows from Investing Activities:
Purchase of investments ............................ (14,505) (8,600)
Proceeds from maturities of investments ............ 13,990 7,911
Investment in affiliate ............................ (557) --
Purchases of equipment and leasehold improvements .. (2,012) (462)
-------- --------
Net cash used in investing activities (3,084) (1,151)
-------- --------
Cash Flows from Financing Activities:
Proceeds from the issuance of common stock ......... 9,603 3,346
Proceeds from notes payable ........................ -- 238
Repayment of notes payable and capital leases ...... (14) (540)
Dividends paid ..................................... -- (14)
-------- --------
Net cash provided by financing activities .......... 9,589 3,030
-------- --------
The Effect of Exchange Rate Changes on Cash ........ (199) 9
-------- --------
Net increase (Decrease) in Cash and Cash Equivalents .. 144 (535)
Cash and Cash Equivalents, beginning of period ........ 2,903 2,645
-------- --------
Cash and Cash Equivalents, end of period .............. $ 3,047 $ 2,110
======== ========
Supplemental Disclosures of Noncash Activities:
Issuance of warrants to purchase common stock ....... $ 758 $ --
Use of deferred compensation to purchase common stock 33 45
The accompanying notes to the consolidated financial statements are
an integral part of these consolidated statements.
5
EXCALIBUR TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1996
(1) THE COMPANY
Operations and Organization
The consolidated financial statements include the accounts of Excalibur
Technologies Corporation ("Excalibur"); its wholly-owned subsidiary, Excalibur
Technologies International, Ltd. ("ETIL"); and the acquired company, ConQuest
Software, Inc. ("ConQuest"). These entities are collectively referred to
hereinafter as the "Company". All significant intercompany transactions and
accounts have been eliminated. Certain amounts presented in the balance sheet at
January 31, 1996 have been reclassified to conform to the current year
presentation.
As discussed more completely below in Note 3 to the consolidated financial
statements, in July 1996, the Company made an investment in an unconsolidated
affiliate, Excalibur Technologies N.V. The Company uses the equity method of
accounting for its investment and, for the consolidated financial statements,
eliminates its share of profits included in the ending asset balances of the
affiliate.
The Company designs, develops, markets and supports computer software products
used for the knowledge retrieval marketplace. The Company also offers
consulting, training, maintenance and systems integration services in support of
its customers' use of its software products. In addition, the Company performs
research and development under contract and licenses proprietary software
products for use in compound-document, digital library, positive identification,
and online services and knowledge retrieval solutions. Distribution of the
Company's products occurs through value-added resellers, system integrators,
original equipment manufacturers, other distributors and a direct sales force to
North American and international customers including commercial firms in various
industries and government agencies.
The Company's operations are subject to certain risks and uncertainties
including, among others, actual and potential competition by entities with
greater financial resources, experience and market presence than the Company;
the success of the Company's product marketing and product distribution
strategies; risks associated with acquisitions and international expansion; the
need to manage growth; and certain technology risks. The Company incurred a net
loss of $5,762,000 in the nine months ended October 31, 1996, incurred
cumulative losses of approximately $18.6 million over the last three fiscal
years and the accumulated deficit of the Company at October 31, 1996 was
$42,208,000.
Acquisition of ConQuest Software, Inc.
In July 1995, the Company acquired ConQuest, a private company located in
Columbia, Maryland, engaged in the business of providing natural language text
management software tools. The former shareholders of ConQuest received
approximately 1,427,000 shares of common stock of Excalibur in exchange for all
6
of the common stock of ConQuest. Outstanding options to purchase common stock of
ConQuest were converted into options to purchase approximately 573,000 shares of
Excalibur common stock. The acquisition was accounted for as a pooling of
interests and, as such, the accompanying consolidated financial statements
reflect the combined results of the pooled businesses for the respective periods
presented.
The Company recorded a charge of approximately $490,000 in July 1995 for the
transaction costs to complete the merger between Excalibur and ConQuest. The
costs included legal, accounting and other professional fees of $363,000 and
other costs of $127,000.
Prior to its acquisition by Excalibur, ConQuest reported operating results on a
calendar year basis. ConQuest's separate results for the prior years were not
restated to conform to the fiscal year of Excalibur. ConQuest's separate results
of operations for the month ended January 31, 1995 were not reflected in the
consolidated statement of operations for the prior fiscal year. The revenues,
operating loss and net loss of ConQuest for the month ended January 31, 1995
were $138,000, $177,000 and $181,000, respectively.
(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, 1996.
In the opinion of management, the comparative and consolidated financial
statements for the fiscal periods presented herein include all adjustments that
are normal and recurring which are necessary for a fair statement of the results
for the interim periods. The results of operations for the three- and nine-month
periods ended October 31, 1996 are not necessarily indicative of the results for
the entire fiscal year ending January 31, 1997.
Revenue Recognition
Revenues from the sale of computer software licenses are recognized upon
shipment of product provided that no significant vendor obligations remain and
that collection of the resulting receivable is considered probable. Revenues
related to agreements with customers that contain future performance
requirements are recognized when the performance requirements are satisfied.
Revenues related to customer support agreements are deferred and recognized
ratably over the term of the respective agreements, usually one year.
Maintenance revenues that are bundled with initial licensing fees are deferred
and recognized over the term of the related maintenance periods, typically 90
days.
7
Research and Development Costs
No product development costs were capitalized, and there were no capitalized
costs not yet amortized, during the three- and nine-month periods ended October
31, 1996 and 1995.
Cash, Cash Equivalents and Marketable Securities
For purposes of the balance sheets and statements of cash flows, 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. U.S. government securities are considered
investments and are excluded from cash equivalents regardless of their
maturities. Under the Statement of Financial Accounting Standard ("SFAS") No.
115, "Accounting For Certain Investments in Debt and Equity Securities," the
Company considers its marketable securities as held-to-maturity securities.
Accordingly, marketable securities, consisting entirely of U.S. government
securities, are carried at cost, adjusted for premium and discount amortization.
At October 31, 1996 and January 31, 1996, the aggregate fair value of the
securities based upon quoted market prices was $10,856,00 and $10,345,000,
respectively.
Net (Loss) Income Per Common Share
Net (loss) income per common share has been computed by dividing the net (loss)
income, less dividends on preferred stock, by the weighted-average number of
common shares outstanding during each period. Common stock equivalents (stock
options, warrants and cumulative convertible preferred stock) were excluded from
the net loss per share computations because of their anti-dilutive effect.
Common stock equivalents were excluded from the net income per share computation
for the three months ended October 31, 1995 because their dilutive effect was
immaterial.
Income Taxes
Due to the net losses reported for the three- and nine-month periods ended
October 31, 1996 and 1995, no income taxes were provided in the periods.
Translation of Foreign Financial Statements
Assets and liabilities of foreign operations are translated at the period-end
rate of exchange. Statements of operations are translated at the average rates
of exchange during the period. Gains or losses from translating foreign currency
financial statements are accumulated in a separate component of shareholders'
equity.
Accounting Pronouncements
Effective February 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." This statement will require new disclosures in the
annual consolidated financial statements about certain employee stock options
based on their fair value at the date of grant. The Company is continuing to
apply existing accounting rules for stock-based compensation pertaining to
employees as allowed under SFAS No. 123. However, fair value accounting is
required for transactions involving the issuance of stock options or other
equity instruments to acquire goods or services from nonemployees.
8
Effective February 1, 1996, the Company adopted the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
be Disposed of." SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. The impact of adopting this statement was not
material to the Company's results of operations or financial position.
(3) INVESTMENT IN AFFILIATE
In July 1996, the Company authorized the use of its name by Excalibur
Technologies N. V. ("ETNV"), a Belgian company incorporated in June 1996 for the
purpose of selling and marketing the Company's products and services within a
large territory including most of Northern Europe and Italy. The Company
contributed approximately $488,000 in cash to ETNV in consideration for 13.2% of
its voting capital stock. In connection with the organization of ETNV, the
Company issued warrants to purchase 148,500 shares of the Company's common stock
to certain shareholders of ETNV. The warrants are exercisable at a price of
$22.00 per share for seven years but only if ETNV achieves certain financial
objectives. The value of the warrants was estimated to be $758,000, and is
included at October 31, 1996 in the investment in affiliate account, net of
amortization, contained in the accompanying balance sheet.
The Company granted to ETNV an exclusive license (the "License") to distribute
certain of the Company's products to other authorized resellers and customers in
the territory for approximately five (5) years. If the revenues of ETNV in the
fifth year exceed a certain level, the License shall be automatically renewed.
If the License is not renewed, the other shareholders of ETNV may exercise
options to sell their shares to the Company according to a revenue-based
formula. The Company recorded revenue of approximately $335,000 and $695,000 in
the three- and nine-month periods ended October 31, 1996 related to the License.
After a term of approximately five (5) years, the Company may exercise an option
to purchase all of the capital stock of ETNV under certain conditions and at a
price determined in accordance with a revenue-based formula. In the event that
the Company does not exercise its option, the other shareholders are permitted
to sell their shares, subject to certain limitations, through a private sale or
public offering.
The excess of the Company's investment in ETNV over its share of ETNV's
shareholders' equity is estimated to be $827,000, and is being amortized over a
five-year period. The amortization is included in equity in net loss of
affiliate in the accompanying statements of operations as well as the Company's
share of ETNV's net loss for the periods and the elimination of the Company's
share of gross profit included in ETNV's prepaid license fees at October 31,
1996.
9
(4) ISSUANCES OF COMMON STOCK
On March 8, 1996, the Company completed a private placement of 350,000 shares of
the Company's common stock at an offering price of $25.00 per share, resulting
in net proceeds of approximately $8,337,000. Allen & Company Incorporated, a
beneficial owner excluding affiliates of approximately 25% of the Company's
outstanding common stock, acted as the placement agency in this transaction and
received a fee of approximately $350,000.
During the first nine months of the current fiscal year, Excalibur issued
approximately 115,000 shares of common stock upon the exercise of options
ranging from $3.11 to $16.64 per share, resulting in total cash proceeds to the
Company of approximately $1,266,000.
10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
The Company principally earns revenue from licensing its software to value-added
resellers, system integrators, original equipment manufacturers, strategic
partners and other customers through a direct sales force. Revenues are provided
from sales to new customers and sales to current customers for additional users,
upgrades to newer product versions, telephone support, and other services. End
users of the Company's software products include commercial businesses and
government agencies throughout North America, Northern Europe and other parts of
the world.
The Company believes that it provides the only enterprise-wide, accurate,
scaleable, secure, knowledge-retrieval software solution capable of supporting
both text and image information assets, and that these factors differentiate its
products from other search engines, toolkits and text retrieval products. The
Company's Excalibur RetrievalWare and Excalibur Visual RetrievalWare products
deliver a unified software solution for text and visual information retrieval.
The Company is committed to empowering organizations and enabling people to
transform information into knowledge and is focused on capturing the intranet
and high-end of the market for knowledge retrieval.
Results of Operations
Total revenues for the third quarter ended October 31, 1996 were $5,811,000, a
16 percent increase over total revenues of $5,006,000 in the third quarter last
year. The net loss for the quarter ended October 31, 1996 was $1,724,000, or
$0.14 per common share, compared to net income of $108,000, or $0.01 per common
share, for the third quarter of the prior fiscal year. Revenues for the first
nine months of the current fiscal year increased 10% to $14,131,000 compared
with $12,905,000 reported for the same period in the prior fiscal year. The net
loss for this nine-month period was $5,762,000, or $0.47 per common share,
compared with a net loss of $995,000, or $0.09 per common share, for the same
period last year.
11
The following charts summarize the components of revenues and the categories of
expenses, including the amounts expressed as a percentage of total revenues, for
the three- and nine-month periods ended October 31, 1996 and 1995 (dollars in
thousands).
Three months ended October 31,
1996 1995
-------------------- ----------------------
Amount % Amount %
--------- --------- --------- -----------
Revenues:
Software $ 4,727 81 % $ 3,940 79 %
Maintenance 1,084 19 1,066 21
========= ======== ========= ========
$ 5,811 100 % $ 5,006 100 %
========= ======== ========= ========
Expenses:
Sales and marketing $ 3,832 66 % $ 2,381 48 %
Research and product
development 2,136 37 1,226 24
General and administrative 1,000 17 861 17
Cost of software revenues 396 8 * 456 12 *
Cost of maintenance
revenues 225 21 * 143 13 *
========= ======== ========= ========
$ 7,589 131 % $ 5,067 101 %
========= ======== ========= ========
Nine months ended October 31,
1996 1995
-------------------- ----------------------
Amount % Amount %
--------- --------- --------- -----------
Revenues:
Software $ 10,968 78 % $ 10,243 79 %
Maintenance 3,163 22 2,662 21
========= ======== ========= ========
$ 14,131 100 % $ 12,905 100 %
========= ======== ========= ========
Expenses:
Sales and marketing $ 10,456 74 % $ 6,244 48 %
Research and product
development 5,557 39 3,522 27
General and administrative 2,940 21 2,610 20
Cost of software revenues 746 7* 1,033 10*
Cost of maintenance
revenues 603 19* 415 16*
Merger costs -- -- 490 4
========= ======== ========= ========
$ 20,302 144 % $ 14,314 111 %
========= ======== ========= ========
*expressed as a percentage of related revenues
12
Software revenues increased 20% in the current quarter to $4,727,000 from
$3,940,000 in the comparable period of the prior fiscal year. Sales of the
Company's Excalibur RetrievalWare products increased significantly in the
quarter with revenues related to this product increasing 97% from the third
quarter last year, and, for the first time, Excalibur RetrievalWare software
revenues exceeding revenues from any other of its products. The Company believes
that Excalibur RetrievalWare product revenues increased in the quarter as the
result of various factors including product marketing and promotion programs,
more effective selling efforts, the availability of a major new release of the
product and the recent introduction of the visual version of the product. Strong
demand for the Company's software products overseas continued in the quarter.
Software revenues obtained from the sale of products in Europe and the Pacific
Rim region increased 109% from last year's revenues in these areas. Major
changes made to the North American sales organization earlier in the current
fiscal year favorably affected revenues in the quarter. Although total software
revenues derived from sales to commercial North American customers in the
quarter were slightly less than last fiscal year, the revenues increased
substantially from the second quarter of the current fiscal year. Overall, the
average size of a software license sale increased in the quarter, although, due
to continuing competitive pressures, revenues related to the initial signing of
software licenses in the commercial area have not been as large as originally
expected for this fiscal year.
New business developments in the current quarter included the establishment of a
long-term agreement with Sequent Computer Systems, Inc. to market and sell
Excalibur RetrievalWare as a critical enabling technology to Sequent's business
information capture, storage and retrieval solutions and an expansion of the
Company's strategic partner relationship with Informix whereby the Company is
developing, for resale by the Company, three Informix Universal Server Datablade
modules. There were also several significant new applications of Excalibur
RetrievalWare by North American commercial customers. The World Bank licensed
Excalibur RetrievalWare in order to incorporate the product into its intranet
and standardize the way in which 10,000 employees worldwide can access and find
organizational information regardless of its data type or location. Sierra
On-Line and P.F.Collier licensed Excalibur RetrievalWare to provide
high-performance information search and retrieval in a new CD-rom-based
electronic encyclopedia.
Due to the current quarter increase, software revenues increased 7% in the
nine-month period ended October 31, 1996 to $10,968,000 from $10,243,000 in the
corresponding nine-month period of the prior fiscal year.
Maintenance revenues were $1,084,000 and $3,163,000, respectively, in the three-
and nine-month periods ended October 31, 1996 compared with $1,066,000 and
$2,662,000, respectively, in the corresponding periods of the prior fiscal year.
The increases in each period were due to the expanding base of Excalibur
RetrievalWare and EFS customers.
In the current quarter, the Company continued to invest in the business as
planned primarily by increasing product development, sales and marketing
expenditures; and investing in expanded distribution channels and the
organization infrastructure. The major investment in product development during
the current fiscal year has resulted in new products and new product features.
The Company recently introduced Excalibur RetrievalWare Version 6.0 as a
comprehensive software solution for enterprise knowledge retrieval. This product
delivers access to a variety of information resources including real-time,
13
archival and legacy data and text documents in multiple languages. The Company
has also announced the availability of Excalibur Visual RetrievalWare, an
application development environment product that enables users to search for
visual information directly from their intranets, corporate databases, the
Internet and other sources. Yahoo!, a leading guide to the Internet, is the
first to use this product to provide intelligent image-based searching over the
Internet. The Company has made large expenditures in the marketing of the new
products and the continuation of the program to significantly increase potential
customer recognition of the Company and the Excalibur RetrievalWare product
brand name. In the current year, the Company has built what the Company believes
will be a more effective organization and sales management team to provide
intranet and other high-end information retrieval solutions directly to large
corporate, government and other institutional customers and to support the
distribution of the Company's products through major reseller channels managed
by large strategic partners.
Consequently, these and other activities resulted in total expenses for the
current quarter of $7,589,000, a 50% increase from total expenses of $5,067,000
in the corresponding quarter of the previous fiscal year. For the year, total
expenses increased by 42%, to $20,302,000 in the nine-month period ended October
31, 1996 from $14,314,000 in the same period a year ago. Total headcount has
increased from 126 employees at the beginning of the current fiscal year to 181
employees at October 31, 1996. The current year total expense amounts represent
131% and 144% of total revenues, respectively, for the three and nine months
ended October 31, 1996. The comparative percentages for the corresponding prior
fiscal year periods were 101% and 111%, respectively.
Sales and marketing costs increased 61% in the current quarter, from $2,381,000
in the prior year quarter to $3,832,000 in the current year. In the nine-month
period ended October 31, 1996, sales and marketing expenses increased by 67%,
from $6,244,000 in the prior fiscal year to $10,456,000 in the current fiscal
year period. On a net basis, the Company has added a total of 23 people to the
sales, marketing and business development staffs in the current fiscal year. As
a result, salaries, benefits, travel, recruiting fees and certain other employee
costs have increased significantly between fiscal years. The Company incurred
increased costs in connection with its product promotion and brand recognition
programs. The Company has been very active in demonstrating its products at
trade shows and industry meetings, creating new product literature and
advertising in computer industry trade publications. The Company has also
engaged the services of a public relations firm to assist its marketing efforts
resulting in increased consulting costs in the current fiscal year. In the
current year third quarter, the Company recorded employee severance costs,
including salaries and benefits amounting to approximately $300,000, related to
the termination of certain sales, marketing and business development personnel.
Research and product development costs increased 74% and 58%, respectively, in
the quarter and nine-month period ended October 31, 1996 compared with the
corresponding prior fiscal year periods. Such expenses were $2,136,000 and
$5,557,000, respectively, in the three- and nine-month periods ended October 31,
1996, and they were $1,226,000 and $3,522,000, respectively, in the comparable
periods of the prior fiscal year. Most of the increases relate to the addition
of new employees to the technical staff in the current fiscal year and to the
expansion of the product development facilities. Consequently, salaries and
other employee costs have increased between years as well as office rent,
equipment costs and computer equipment depreciation.
14
General and administrative expenses have increased in the current fiscal year.
Such costs increased 16% in the current quarter to $1,000,000 compared with
$861,000 in last year's third quarter. On a year-to-date basis, general and
administrative costs have increased by 13%, to $2,940,000 in the current fiscal
year compared with $2,610,000 in the prior fiscal year. Payroll and other
employee costs associated with additions to the administrative staff in the
areas of human resources, information systems and financial analysis have
increased costs in the current fiscal year. In the current fiscal year, the
Company also has utilized outside firms to assist in the areas of investor
relations and strategic planning resulting in increased consulting expenses.
The cost of software revenues declined by $60,000 and $287,000, respectively, in
the three- and nine-month periods ended October 31, 1996. These costs were
$396,000 and $456,000, respectively, in the quarters ended October 31, 1996 and
1995, and $746,000 and $1,033,000, respectively, in the nine-month periods ended
October 31, 1996 and 1995. The Company negotiated an amendment to a third-party
royalty agreement resulting in a reduction in the royalty rate applicable to
revenues derived from the license of Excalibur RetrievalWare products. In
addition, activity conducted pursuant to development contracts was greater in
the prior year. The cost of maintenance revenues increased in the quarter and
nine-month periods ended October 31, 1996 compared with the comparable periods
of the prior fiscal year due primarily to the increased costs associated with
supporting the larger installed base of Excalibur RetrievalWare end users. The
costs were $225,000 and $143,000, respectively, in the quarters ended October
31, 1996 and 1995, and they were $603,000 and $415,000, respectively, in the
nine-month periods ended October 31, 1996 and 1995.
Expenses in the nine month period ended October 31, 1995 included $490,000 in
legal, accounting and other costs associated with the merger with ConQuest.
As a result of an increased level of investments and improved rates of return,
net interest income increased to $177,000 and $591,000, respectively, in the
three- and nine-month periods ended October 31, 1996 compared with $169,000 and
$414,000, respectively, in the corresponding periods of the prior fiscal year.
As discussed in Note 3 to the consolidated financial statements contained
herein, the Company recorded its equity in the net loss of its affiliate, ETNV,
for the quarter and nine-month periods ended October 31, 1996. These charges,
totaling $123,000 and $182,000, respectively, are contained in the other expense
section of the accompanying consolidated statements of operations.
Liquidity and Capital Resources
In the nine months ended October 31, 1996, the Company's combined balance of
cash, cash equivalents and investments in marketable securities increased by
$659,000 to $13,903,000 as summarized below (in thousands). At October 31, 1996
and January 31, 1996, investments in marketable securities consisted of U.S.
Treasury Bills with maturities of less than one year.
October 31, January 31,
1996 1996 Change
---------- ----------- -----------
Cash and cash
equivalents $ 3,047 $ 2,903 $ 144
Investments 10,856 10,341 515
========== =========== ===========
Total $ 13,903 $ 13,244 $ 659
========== =========== ===========
15
As indicated in Note 4 to the Consolidated Financial Statements contained
herein, the Company completed a private placement sale of its common stock in
March, 1996. The increase in investments during the current fiscal year was due
to the receipt of the net proceeds of the offering, approximately $8,337,000.
The Company also received approximately $1,266,000 cash proceeds from the
exercise of employee stock options in the current fiscal year. There can be no
assurance that the Company will be able to obtain such funds from investors and
employees in the future, if required.
Cash was used to fund the net loss for the nine month period ended October 31,
1996 of $5,762,000 and to pay obligations accrued at January 31, 1996 including
commissions, bonuses, restructuring costs and payroll taxes collected in
connection with the exercise of employee stock options. Cash was used to prepay
corporate insurance premiums, to purchase computer equipment and furniture for
new employees and to fund the necessary improvements made to leased office space
in Vienna, Virginia, now serving as the Company's corporate headquarters.
In July 1996, the Company made a cash investment of $488,000 in Excalibur
Technologies N.V. thereby acquiring approximately 13.2% of the outstanding
voting capital stock and incurred costs of approximately $69,000 related to the
establishment of this affilate. This transaction is discussed in Note 3 to the
consolidated financial statements contained herein.
Accounts receivable increased by $892,000 to a balance of $8,209,000 at October
31, 1996, before reduction for the allowance for doubtful accounts. The
comparable balance at January 31, 1996 was $7,317,000. The number of days sales
outstanding rose in the period due primarily to outstanding balances with
extended payment terms. The Company also reclassified the discounted amount of
an installment payment due from a customer in June 1997, approximately $277,000,
from noncurrent assets to accounts receivable in the current fiscal year. As
indicated above, the Company added $132,000 to the allowance for doubtful
accounts in the current fiscal year and wrote-off $121,000 in uncollectible
accounts that were specifically reserved for at January 31, 1996. Management
believes that the allowance for doubtful accounts of $386,000 at October 31,
1996 is adequate.
The Company's current balances of cash, cash equivalents and investments,
together with funds anticipated from future operations, are expected to provide
sufficient cash to meet the Company's current projected needs for the remainder
of the current fiscal year.
16
Factors That May Affect Future Results
The Company believes that the market for the Company's software products is
growing rapidly and that the Company's business environment is characterized by
rapid technological changes, changes in customer requirements, new emerging
market segments and increased competition. Consequently, to compete effectively,
the Company must make frequent new product introductions and enhancements and
deploy sales and marketing resources to take advantage of new business
opportunities. The ability of the Company to achieve and manage the expected
growth of the business and to develop new products will depend on the Company's
success in retaining its key personnel and adding new employees with appropriate
skills at the right times. Failure to make timely product introductions and
enhancements or to capitalize on new market opportunities as they emerge may
adversely affect future operating results.
The Company's operations are also subject to certain other risks and
uncertainties including, among others, the effectiveness of actual and potential
competition, the success of the Company's relationships with its strategic
partners and other distributors of the Company's products, and the risks
associated with acquisitions and international expansion. The Company's business
is seasonal. Typically, revenues in the first half of the fiscal year,
particularly in the first quarter, are lower than total revenues in the second
half of the fiscal year. Revenues generated from product licenses can vary
significantly within a period due to the relatively long sales cycle, variations
in the size of license agreements, and the number of shipments made.
Historically, the volume of customer orders and product shipments is greatest at
the end of a reporting period, and the Company often recognizes a significant
portion of license revenue towards the end of each fiscal period. Deferred
revenues of $2,490,000 at October 31, 1996, related primarily to maintenance
agreements and training, are not expected to cause significant fluctuations in
future quarterly revenue.
The Company has significant net operating loss carryforwards ("NOLs") of
approximately $52,341,000. The deferred tax assets representing the 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
$5,762,000 for the nine months ended October 31, 1996, incurred cumulative
losses of approximately $18,591,000 over the last three fiscal years and the
accumulated deficit of the Company at October 31, 1996 was $42,208,000. 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. Further, because there was a change in the ownership of
ConQuest last year, the Company's ability to utilize NOLs relating to ConQuest
of approximately $3,233,000 may be limited. 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.
17
Adoption of New Accounting Standards
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." It encourages, but does not require, companies to recognize
compensation expense for grants of stock and stock options to employees based on
new fair value accounting rules. Companies that choose not to adopt the new
rules will continue to apply the existing accounting rules. However, fair value
accounting is required for transactions involving the issuance of stock options
or other equity instruments to acquire goods or services from nonemployees. SFAS
No. 123 is effective for the Company's fiscal year 1997 consolidated financial
statements. The Company has not adopted the new fair value accounting rules of
SFAS No. 123 for employee stock options and will continue to apply existing
accounting rules for stock-based compensation pertaining to employees as allowed
under SFAS No. 123.
However, SFAS No. 123 will require the Company, in its fiscal 1997 audited
consolidated financial statements, to disclose pro forma net income/loss and
earnings per share under the fair value accounting method for stock option
grants that occurred subsequent to January 31, 1995. In addition, the Company
will be required to expand its disclosure about plan terms, exercise prices and
the assumptions used in measuring the fair value of stock-based grants. Although
the Company has not performed the pro forma calculations required by SFAS No.
123, it expects that the pro forma results will be lower than the historical
results reported herein.
Effective February 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed
of." SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The impact of adopting this statement was not material
to the Company's results of operations or financial position.
###
The Company can be contacted via e-mail at info@excalib.com or visited at its
web site at www.excalib.com.
18
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.
Item 6. Exhibits and Reports on Form 8-K None.
19
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
----------------------------------
December 5, 1996 By: /s/ Patrick C. Condo
---------------------
Patrick C. Condo
President and Chief Executive Officer
December 5, 1996 By: /s/ James H. Buchanan
----------------------
James H. Buchanan
Chief Financial Officer
20