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 April 30, 1997
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 June 12, 1997, 13,019,425 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 APRIL 30, 1997
TABLE OF CONTENTS
PART I . FINANCIAL INFORMATION
Page
Item 1. Financial Statements: ----
Consolidated Balance Sheets
April 30, 1997 and January 31, 1997...........................3
Consolidated Statements of Operations
Three month periods ended April 30, 1997 and 1996.............4
Consolidated Statements of Cash Flows
Three month periods ended April 30, 1997 and 1996.............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............................................................17
Signatures .............................................................18
2
EXCALIBUR TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
ASSETS
April 30, January 31,
1997 1997
(unaudited)
-------- --------
Current Assets:
Cash and cash equivalents ......................... $ 3,014 $ 2,685
U.S. government securities, at cost ............... 5,479 8,427
Accounts receivable, net of allowance for
doubtful accounts of $369 and $367, respectively 7,453 9,383
Prepaid expenses and other ........................ 1,318 1,655
-------- --------
Total current assets ......................... 17,264 22,150
Equipment and leasehold improvements, net of
accumulated depreciation of $4,569 and
$4,179, respectively ............................ 2,755 2,939
Other assets ......................................... 949 1,058
-------- --------
$ 20,968 $ 26,147
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable .................................. $ 1,319 $ 1,680
Accrued expenses .................................. 2,228 2,310
Deferred revenues ................................. 2,569 2,693
Deferred compensation ............................. 490 901
-------- --------
Total current liabilities .................... 6,606 7,584
-------- --------
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; 12,726 and 12,449
shares issued and outstanding, respectively .. 127 124
Additional paid-in capital ........................ 62,199 61,830
Accumulated deficit ............................... (48,176) (43,619)
Cumulative translation adjustment ................. (59) (43)
-------- --------
Total shareholders' equity ................... 14,362 18,563
-------- --------
$ 20,968 $ 26,147
======== ========
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
April 30,
1997 1996
-------- ---------
REVENUES:
Software........................... $ 2,259 $ 2,979
Maintenance ....................... 1,194 1,022
-------- --------
3,453 4,001
-------- --------
EXPENSES:
Sales and marketing ............... 3,592 3,103
Research and product
development ..................... 1,701 1,414
General and administrative ........ 1,102 855
Cost of software revenues ......... 752 221
Cost of maintenance revenues ...... 301 324
Restructuring costs................ 577 --
-------- --------
8,025 5,917
-------- --------
Operating loss ....................... (4,572) (1,916)
OTHER INCOME / (EXPENSES):
Interest income, net .............. 118 191
Equity in net loss of affiliate ... (103) --
-------- --------
Net loss ............................. (4,557) (1,725)
Dividends on preferred stock ......... 3 3
-------- --------
Net loss applicable to common stock .. $ (4,560) $ (1,728)
======== ========
Net loss per common share............. $ (0.36) $ (0.14)
======== ========
Weighted-average number of common
shares outstanding ................ 12,520 12,183
======== ========
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 Three Months Ended
April 30,
1997 1996
--------- ---------
Cash Flows from Operating Activities:
Net loss .......................................... $ (4,557) $ (1,725)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ................ 399 270
Equity in net loss of affiliate .............. 103 --
Loss on disposal of assets ................... -- 7
Changes in operating assets and liabilities:
Accounts receivable, net ..................... 1,968 (50)
Prepaid expenses and other ................... 347 (429)
Accounts payable and accrued expenses ........ (576) (781)
Deferred revenues ............................ (121) (275)
-------- --------
Net cash used in operating activities ............. (2,437) (2,983)
-------- --------
Cash Flows from Investing Activities:
Purchase of investments ........................... (3,474) (10,591)
Proceeds from maturities of investments ........... 6,422 3,835
Purchases of equipment and leasehold improvements . (215) (622)
-------- --------
Net cash provided by (used in) investing activities 2,733 (7,378)
-------- --------
Cash Flows from Financing Activities:
Proceeds from the issuance of common stock ........ 107 8,809
Repayment of notes payable ........................ (25) (5)
-------- --------
Net cash provided by financing activities ......... 82 8,804
-------- --------
The Effect of Exchange Rate Changes on Cash .......... (49) 21
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents . 329 (1,536)
Cash and Cash Equivalents, beginning of period ....... 2,685 2,903
-------- --------
Cash and Cash Equivalents, end of period ............. $ 3,014 $ 1,367
======== ========
Supplemental Disclosures of Cash Flow Information:
Use of deferred compensation to purchase
common stock ....................................... $ 394 $ 4
======== ========
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
April 30, 1997
(1) THE COMPANY
The consolidated financial statements include the accounts of Excalibur
Technologies Corporation ("Excalibur"); Excalibur Technologies International,
Ltd. ("ETIL"), a wholly-owned subsidiary; and ConQuest Software, Inc.
("ConQuest"), a company that was acquired in July 1995. These entities are
collectively referred to hereinafter as the "Company." All significant
intercompany transactions and accounts have been eliminated. Certain amounts
presented in the prior year's financial statements have been reclassified to
conform with the current fiscal year presentation.
The Company designs, develops, and markets knowledge retrieval software products
capable of supporting text and visual data. 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, system integrators,
original equipment manufacturers and other strategic partners.
The Company incurred a net loss of $4,557,000 in the three months ended April
30, 1997, and incurred net losses that totaled $17,445,000 over the last three
complete fiscal years. The accumulated deficit of the Company at April 30, 1997
was $48,176,000. The combined balance of cash, cash equivalents and investments
in marketable securities was reduced by $2,619,000 in the three months ended
April 30, 1997 to a balance of $8,493,000 at the end of the period.
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; the risks associated with acquisitions and international expansion;
the need to manage growth; certain technology risks; and the availability of
additional capital financing on terms acceptable to the Company.
(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.
6
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, 1997.
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 months ended
April 30, 1997 are not necessarily indicative of the results for the entire
fiscal year ending January 31, 1998.
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 terms of the respective agreements, which are usually one year
in length. Maintenance revenues that are bundled with initial licensing fees are
deferred and recognized over the terms of the related maintenance periods, which
are typically 90 days long.
Research and Development Costs
No product development costs were capitalized, and there were no capitalized
costs not yet amortized, during the three month periods ended April 30, 1997 and
1996.
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 April 30, 1997 and January 31, 1997, the aggregate fair value of the
securities based upon quoted market prices was $5,479,000 and $8,428,000,
respectively.
7
Stock-Based Compensation
Effective for the financial statements as of January 31, 1997, the Company
adopted SFAS No. 123, "Accounting for Stock-Based Compensation." As permitted by
this pronouncement, the Company is continuing to apply the provisions of APB
Opinion No. 25 and related Interpretations in accounting for awards to employees
and directors made pursuant to its employee stock plans. However, fair value
accounting is applied to transactions involving the Company's issuance of stock
options or other equity instruments for the acquisition of goods or services
from nonemployees.
Income Taxes
Due to the net losses reported for the three month periods ended April 30, 1997
and 1996, no income taxes were provided in the periods.
Net Loss Per Common Share
Net loss per common share has been computed by dividing the net loss for the
period, plus 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 for the periods presented herein because of
their anti-dilutive effect.
The Company will be required to apply the provisions of SFAS No. 128, "Earnings
Per Share," commencing with its consolidated financial statements for the fiscal
quarter and year ending January 31, 1998. The pronouncement provides for the
presentation of basic and diluted earnings per share ("EPS"), replacing the
currently required primary and fully-diluted EPS. The basic EPS will be computed
by dividing reported earnings available to common shareholders by the weighted
average number of shares outstanding during the period. Diluted EPS will be
computed in a manner similar to fully-diluted EPS, except for certain changes
including the way that the treasury stock method may be applied to determine the
dilution for stock options and warrants. Companies will be required to restate
prior-period EPS to conform with the new statement. The Company does not expect
that the application of the new standard will have a material effect on future
EPS presentations or on EPS amounts reported in prior 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.
(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 granted
to ETNV an exclusive license to distribute certain of the Company's products to
other authorized resellers and customers in the territory for approximately five
8
(5) years. The Company contributed approximately $488,000 in cash to ETNV in
order to purchase 13.2% of ETNV's voting capital stock. In connection with the
organization of ETNV, the Company also 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 Company's investment in ETNV is accounted for using the equity method. The
investment exceeded the Company's share of the underlying net assets of ETNV by
approximately $827,000, including $758,000 attributable to the value of the
warrants discussed in the preceding paragraph. The excess is being amortized
over a five-year period.
The amortization of the excess, as well as the Company's share of ETNV's net
loss for the current fiscal quarter, is included in equity in net loss of
affiliate in the accompanying consolidated statement of operations for the three
months ended April 30, 1997. The balance of the investment, included in other
assets in the accompanying balance sheets at April 30, 1997 and January 31,
1997, was $870,000 and $973,000, respectively, net of accumulated amortization
of $444,000 and $341,000, respectively.
(4) ISSUANCES OF COMMON STOCK
During the first quarter of the current fiscal year, the Company issued
approximately 270,000 shares of common stock upon the exercise of options
ranging in price from $1.04 to $11.64 per share, resulting in total cash
proceeds to the Company of approximately $60,000 and the utilization of $394,000
in deferred compensation. In addition, approximately 5,000 shares of common
stock were issued to participants of the employee stock purchase plan. The
exercise of stock options provided total cash proceeds of approximately $432,000
in the first quarter of last fiscal year.
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 $8,388,000. Allen & Company Incorporated, a
beneficial owner excluding affiliates of approximately 25% of the Company's
outstanding common stock, acted as the placement agent in this transaction and
received a fee of approximately $350,000.
(5) RESTRUCTURING COSTS
The Company has implemented changes to its organization by reorganizing its
sales force and forming a new business unit, the Visual Business Group. In
connection with these changes, in the first quarter, the Company committed to a
reduction of its workforce by approximately 10% and recorded a restructuring
charge of $577,000 at April 30, 1997. The charge primarily consists of severance
pay and medical and other severance benefits for nineteen terminated employees
in sales, development, marketing and administrative functions. Cash expenditures
made pursuant to the restructuring will be completed substantially in the second
quarter of the current fiscal year.
9
(6) SUBSEQUENT EVENTS
Acquisition of Interpix
On May 5, 1997, the Company acquired Interpix Software Corporation ("Interpix"),
located in Santa Clara, California, a privately-owned company and developer of a
commercial technology enabling the collection, indexing, management and
presentation of multimedia data on the Internet and corporate intranets. The
shareholders of Interpix received 275,000 shares of common stock of Excalibur in
exchange for all of the outstanding common stock of Interpix. The purchase
method of accounting will be applied to this acquisition transaction. The
Company is in the process of allocating the purchase price to the various
acquired assets and it believes, based on its preliminary analysis, that
approximately $1,284,000 will be allocated to research and development projects
in process and expensed in the second quarter of the current fiscal year.
Repricing of Stock Options
On May 7, 1997, the Board of Directors authorized a repricing program which
allows active current employees to elect to reprice all or some of their
outstanding options to purchase common stock of Excalibur, granted under the
1989 Incentive Plan and the 1995 Stock Option Plan and ranging in exercise price
from $5.50 to $29.53 per share, to $4.75, the closing price of Excalibur common
stock on May 7, 1997. Any options that an optionholder elects to reprice may not
be exercised until November 7, 1997. Options to purchase approximately 1,226,275
shares of common stock are eligible to be repriced.
10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
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, 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.
The Company believes that it is the technology leader in providing
enterprise-wide, accurate, scaleable, secure, knowledge-retrieval software
solutions capable of supporting both text and image information assets. It
believes that these qualities differentiate its software 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 knowledge retrieval. The Company is
committed to empowering organizations by enabling people to transform
information into knowledge and is focused on the high-end of the market for
knowledge retrieval.
Results of Operations
Total revenues for the first fiscal quarter ended April 30, 1997 were
$3,453,000, a 14% decrease over total revenues of $4,001,000 reported for the
same quarter last fiscal year. The Company incurred a net loss for the quarter
ended April 30, 1997 of $4,557,000, or $0.36 per common share, compared to a net
loss of $1,725,000, or $0.14 per common share, for the first quarter last fiscal
year.
Total expenses for the Company were $8,025,000 in the first quarter, which
represented a 36% increase from total expenses of $5,917,000 in the first
quarter last fiscal year. As discussed below, total expenses for the current
quarter included a restructuring charge of $577,000, and there were
quarter-to-quarter increases in all cost categories.
Management believes that three primary factors adversely impacted the revenue
performance of the Company in the quarter.
First, the slow ramp up of a significant number of sales personnel contributed
to lower than expected revenues in North America. Total revenues for North
America were approximately $2,698,000 in the current year quarter; comparable
revenues were $3,149,000 a year ago. Due to unexpected turnover among sales
personnel, the Company spent considerable resources training a largely new sales
force in the first quarter. The new personnel were subjected to a prolonged and
thorough sales training and product familiarization program that management
believes will result in more effective selling in the future, but the program
kept these sales personnel out of the field during this time.
11
The second factor causing the lower revenues related to the failure to close a
joint development agreement with a strategic business partner that the Company
had expected to close in the first quarter. Several factors affecting the
partner's business prevented them from signing this agreement. Although the
Company has a continuing and solid relationship with this partner, there can be
no assurances that the expected agreement will occur.
Third, the slow ramp up of revenues generated by the Company's Belgian
affiliate, Excalibur Technologies N.V. ("ETNV"), resulted in an interruption of
revenue recorded by the Company related to this arrangement. As explained in
Note 3 to the Consolidated Financial Statements contained herein, the Company
licensed the use of its name and certain software products to this affiliated
company in July 1996. The license agreement provides that ETNV make minimum
license fee payments to the Company each quarter, including quarterly payments
of $625,000 in the current year which represent software revenue of
approximately $500,000 per quarter. The Company's management believes that
progress has been made in starting up this operation including the establishment
of sales and support offices in several European countries and the building of a
pipeline of business opportunities. However, sales are not closing as fast as
expected, net losses have been incurred since inception, and ETNV's cash
reserves have been reduced. Due to the slower than expected growth of ETNV, no
software revenue was recorded by the Company in the current quarter. The
shareholders of ETNV include a company that was a significant reseller of the
Company's products and that contributed its operations to ETNV in connection
with its formation. The Company's revenues for the first quarter last year
included over $270,000 related the previous reseller agreement. Due primarily to
these items, the revenues from international operations of the Company declined
11% to approximately $755,000 in the current quarter from $852,000 last year.
The following chart summarizes the components of revenues and the categories of
expenses, including the amounts expressed as a percentage of total revenues, for
the three month periods ended April 30, 1997 and 1996, and the percentage change
in the amounts between fiscal quarters (dollars in thousands).
Three Months Ended April 30, Increase
1997 1996 (Decrease)
---------------- ---------------- -------
Amount % Amount % %
------- ------ ------- ------ -------
Revenues:
RetrievalWare $ 1,865 54 % $ 1,222 30 % 53 %
EFS 394 11 1,757 44 (78)
------- ------ ------- ------ -------
Total Software 2,259 65 2,979 74 (24)
Maintenance 1,194 35 1,022 26 17
------- ------ ------- ------ -------
Total revenues $ 3,453 100 % $ 4,001 100 % (14) %
======= ====== ======= ====== =======
Expenses:
Sales and marketing $ 3,592 104 % $ 3,103 78 % 16 %
Research and
product development 1,701 49 1,414 35 20
General and administrative 1,102 32 855 21 29
Costs of sales 1,053 30 545 14 93
Restructuring costs 577 17 -- -- 100
------- ------ ------- ------ -------
Total expenses $ 8,025 232 % $ 5,917 148 % 36 %
======= ====== ======= ====== =======
12
Software revenues related to Excalibur RetrievalWare increased 53% in the
current quarter to $1,865,000 from $1,222,000 in the comparable quarter last
year, and constituted 54% of total revenues. The increase included growth in
revenues related to training and implementation support. Excalibur RetrievalWare
software revenues were 30% of total revenues in the first quarter last year.
Excalibur EFS software revenues declined 78% in the quarter from $1,757,000 last
year to $394,000 in the current year, reflecting the Company's efforts to focus
its sales promotion and marketing efforts on the Excalbur RetrievalWare product
line and the lack of revenues related to ETNV as discussed above. Combined
software revenues decreased 24% in the quarter from $2,979,000 a year ago to
$2,259,000 in the current year. Due primarily to the expansion of the customer
base by the addition of Excalibur RetrievalWare users, maintenance revenues
increased by 17% to $1,194,000 in the current quarter from $1,022,000 in the
first quarter last year.
Software revenues for the current quarter included revenues of approximately
$606,000 related to the recently-announced license of Excalibur RetrievalWare to
United Airlines. The airline intends to use the Company's software to provide
more than 20,000 mechanics and engineers worldwide with the most current
maintenance information via its global corporate network. Initial revenue from
this license represented 27% and 18%, respectively, of software and total
revenues for the first quarter of the current fiscal year.
Sales and marketing costs increased by 16% in the quarter, from $3,103,000 last
year to $3,592,000 in the current year, due to an increase in the number of
sales and marketing employees. The increase in the number of employees between
fiscal quarters, which occurred primarily in corporate marketing and at the
Company's international sales operation located in the United Kingdom, resulted
in higher salary expense and related personnel costs including benefits,
telephone costs, equipment depreciation and travel costs. These expense
increases were partially offset by a reduction in expenditures related to
marketing programs. The Company employed 71 people in the sales and marketing
areas at April 30, 1997. There were 65 sales and marketing employees at April
30, 1996.
Research and product development costs increased by 20% to $1,701,000 in the
first quarter of the current fiscal year compared with $1,414,000 last year due
primarily to an expansion of the technical staff responsible for the development
and enhancement of the Excalibur RetrievalWare product line. The Company began
to ship a major release of Excalibur RetrievalWare, version 6.0, near the end of
the year. This increase in personnel resulted in an increase in salaries expense
primarily, and also increases in related expenses such as benefits, equipment
costs and depreciation. The Company had a total of 57 research and development
employees at April 30, 1997; there were 45 such employees at April 30, 1996.
General and administrative expenses increased by 29% in the current quarter to
$1,102,000 from $855,000 in the comparable quarter last year. Since last year's
first quarter, the Company has added employees to the human resources,
contracts, management information systems and financial planning and analysis
functions, thereby increasing salaries expense primarily. Related costs also
increased including equipment, telephone and other office costs. Consulting
expense increased between quarters due to the use of temporary technicians in
the current year for projects to improve the Company's internal data and
communications network.
13
Costs of sales increased by 93% between quarters, from $545,000 last year to
$1,053,000 in the current year. The increase relates primarily to the addition
of three training instructors and the formation of a product implementation
group which had 7 employees at April 30, 1997. At April 30, 1996, this group did
not exist. The increase in the number of employees in these areas resulted in
additional salaries expense, as well as increased overhead costs. Costs of sales
in the first quarter of the current year also included the costs of new users
manuals and other documentation related to the release of Excalibur
RetrievalWare discussed above and an updated version of the Excalibur EFS
product. The costs of the customer support group declined slightly between
quarters.
The Company implemented changes to its organization by reorganizing its sales
force and forming a new business unit, the Visual Business Group. In connection
with these changes, in the first quarter, the Company committed to a reduction
of its workforce by approximately 10% and recorded a restructuring charge of
$577,000. The charge primarily consists of severance pay and benefits for
terminated employees.
Net interest income declined to $118,000 in the current quarter from $191,000 in
the comparable quarter last year due to a decrease in the level of investment
securities held. The Company's equity in the loss of its affiliate, ETNV, was
$103,000 in the quarter. There was no corresponding item in the prior year
period as ETNV was not formed until June 1996.
Liquidity and Capital Resources
In the three months ended April 30, 1997, the Company's combined balance of
cash, cash equivalents and investments in marketable securities decreased by
$2,619,000 to $8,493,000 as summarized below (in thousands). At April 30, 1997
and January 31, 1997, investments in marketable securities consisted of U.S.
Treasury Bills with maturities of less than one year.
April 30, January 31,
1997 1997 Change
--------- -------- --------
Cash and cash
equivalents $ 3,014 $ 2,685 $ 329
Investments 5,479 8,427 (2,948)
------- ------- -------
Total $ 8,493 $11,112 $(2,619)
======= ======= =======
During the three months ended April 30, 1997, cash was used to fund operating
activities and to purchase computer and other equipment. The amount of cash used
in operations during the first quarter, $2,437,000, was less than the net loss
for the quarter, $4,557,000, due primarily to a significant reduction in the
level of accounts receivable. The balance of accounts receivable declined by
$1,928,000.
The Company received approximately $107,000 cash proceeds from the sale of
common stock during the quarter ended April 30, 1997. In addition, deferred
compensation balances totaling $394,000 were utilized in connection with the
exercise of stock options during the quarter.
14
Despite the reduction in the balance of accounts receivable during the quarter,
the number of days sales outstanding ("DSO") at April 30, 1997 remained
relatively constant. The balance of accounts with payment terms beyond the
normal practice of 30 to 45 days decreased in the quarter, but the effect of
this reduction on the DSO was mitigated by the large amount of revenue generated
near the end of the quarter. Management believes that the allowance for doubtful
accounts of $369,000 at April 30, 1997 is adequate.
Factors That May Affect Future Results
Primarily due to the large operating losses incurred by the Company, the
Company's balance of cash, cash equivalents and investments has declined
substantially in the last twelve months. Various factors, including those
discussed above, have inhibited the revenue growth that management expected
during this period. As a result, the short-term revenue expectations of
management have been moderated, and adjustments in current spending levels have
been made. As discussed above and in Note 5 to the Consolidated Financial
Statements contained herein, the Company has reduced its workforce by
approximately 10% from the number of employees at April 30, 1997, and, with a
few select exceptions in the sales and development areas, has curtailed the
hiring of new employees. In addition, the Company has postponed certain programs
and expenses in order to achieve an overall reduction in expenditures.
Management believes that these actions, and the investments of time and money in
the training of the sales force, will improve sales productivity, and will not
adversely affect the Company's ability to compete effectively throughout the
remainder of this fiscal year.
The text development staff is focused on the completion of a product that will
facilitate the transition of the installed customer base of Excalibur EFS to
Excalibur RetrievalWare. Although delays have been experienced, the Company
expects to begin shipping this product in the third quarter of the current
fiscal year. As discussed in Note 6 to the Consolidated Financial Statements,
the Company recently completed the acquisition of Interpix Software Corporation.
Through this acquisition, the Company added complementary technology which
management believes will enhance the web crawling and web publishing
capabilities of its products in Internet and intranet environments. In addition,
the Company recently announced the formation of the Visual Business Group to
sharpen the focus on developing opportunities for Excalibur Visual RetrievalWare
and to increase the pace of product development and release.
Management believes that the changes and initiatives discussed above should
position the Company to perform better during the rest of the year, to improve
operating results, and to slow down the use of cash. Management does not believe
that the Company's business is declining. Consequently, the current balance of
cash, cash equivalents and investments is expected to be sufficient to fund the
Company's current projected cash needs for the remainder of the current fiscal
year.
Historically, the Company has used primarily cash provided by sales of its
common stock to fund its operating losses. Should the actions taken by
management be ineffective in reducing the net losses and the use of cash in the
next several quarters, the Company may be required to pursue additional external
sources of financing to support its operations and capital requirements. There
can be no assurances that external sources of financing will be available if
required, or that such financing will be available on terms acceptable to the
Company.
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The market for the Company's software products is growing rapidly and the
Company's business environment is characterized by rapid technological changes,
changes in customer requirements and new emerging market segments. 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 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. Failure
to meet any of these challenges could adversely affect future operating results.
The Company has significant net operating loss carryforwards ("NOLs") of
approximately $59 million. 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 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 Software, Inc. ("ConQuest") in July 1995,
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 foregoing discussion may also contain comments about management's future
expectations, performance, plans and prospects which might constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Act of 1995. There can be no assurances that expected future results
will be achieved. Actual results may differ materially from management's
expectations as the result of the various important factors discussed above
including, but not limited to, the success of our relationships with strategic
partners, the Company's ability to continue to develop competitive products and
make timely product releases, the effects of competition, and the rapidly
changing marketplace.
The Company believes that inflation has not had a material effect on the results
of its operations to date.
The Company can be contacted via e-mail at inof@excalib.com or visited at its
web sit at www.excalib.com.
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PART II-- OTHER INFORMATION
Item 1. Legal Proceedings None.
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Item 2. Changes in Securities None.
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Item 3. Defaults upon Senior Securities None.
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Item 4. Submission of Matters to Vote of Security Holders None.
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Item 5. Other Information None.
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Item 6. Exhibits and Reports on Form 8-K
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On May 16, 1997, the Company filed a report on Form 8-K announcing the stock
option repricing program discussed in Note 6 to the Consolidated Financial
Statements contained herein.
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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
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June 12, 1997 By: /s/ Patrick C. Condo
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Patrick C. Condo
President and Chief Executive Officer
June 12, 1997 By: /s/ James H. Buchanan
-------------------------
James H. Buchanan
Chief Financial Officer
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