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, 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 December 5, 1997, 13,109,554 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, 1997
TABLE OF CONTENTS
PART I . FINANCIAL INFORMATION
Item 1. Financial Statements: Page
Consolidated Balance Sheets
October 31, 1997 and January 31, 1997..........................3
Consolidated Statements of Operations
Three and nine month periods ended October 31, 1997 and 1996...4
Consolidated Statements of Cash Flows
Nine month periods ended October 31, 1997 and 1996.............5
Notes to Consolidated Financial Statements.....................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................12
PART II. OTHER INFORMATION
Items 1. - 6.............................................................22
Signatures ..............................................................23
2
EXCALIBUR TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
ASSETS October 31, January 31,
1997 1997
(unaudited)
----------- -----------
Current Assets:
Cash and cash equivalents ....................... $ 4,468 $ 2,685
U.S. government securities, at cost ............. 2,998 8,427
Accounts receivable, net of allowance for
doubtful accounts of $407 and $367,
respectively ................................. 6,924 9,383
Prepaid expenses and other ...................... 860 1,655
-------- --------
Total current assets ....................... 15,250 22,150
Equipment and leasehold improvements, net of
accumulated depreciation of $5,295 and
$4,179, respectively ............................ 2,461 2,939
Other assets ....................................... 1,224 1,058
-------- --------
$ 18,935 $ 26,147
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ................................ $ 1,116 $ 1,680
Accrued expenses ................................ 2,098 2,310
Deferred revenues ............................... 2,644 2,693
Deferred compensation ........................... 403 901
-------- --------
Total current liabilities .................. 6,261 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; 13,093 and 12,449 shares issued
and outstanding, respectively ................ 131 124
Additional paid-in capital ...................... 64,425 61,830
Accumulated deficit ............................. (52,025) (43,619)
Cumulative translation adjustment ............... (128) (43)
-------- --------
Total shareholders' equity ................. 12,674 18,563
-------- --------
$ 18,935 $ 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 Nine Months Ended
October 31, October 31,
1997 1996 1997 1996
-------- -------- -------- --------
REVENUES:
Software ........................ $ 4,976 $ 4,727 $ 11,100 $ 10,968
Maintenance ..................... 1,452 1,084 3,966 3,163
-------- -------- -------- --------
6,428 5,811 15,066 14,131
-------- -------- -------- --------
EXPENSES:
Sales and marketing ............. 3,035 3,832 10,002 10,456
Research and product development 1,544 1,761 4,814 4,631
Acquired in-process research and
development ..................... -- -- 1,284 --
General and administrative ...... 1,241 1,000 3,449 2,940
Cost of software revenues ....... 859 588 2,310 1,131
Cost of maintenance revenues .... 316 408 930 1,144
Restructuring costs ............. -- -- 577 --
-------- -------- -------- --------
6,995 7,589 23,366 20,302
-------- -------- -------- --------
Operating loss ..................... (567) (1,778) (8,300) (6,171)
OTHER INCOME/ (EXPENSES):
Interest income, net .......... 89 177 306 591
Equity in net loss of affiliate (150) (123) (412) (182)
-------- -------- -------- --------
Net loss ........................... (628) (1,724) (8,406) (5,762)
Dividends on preferred stock ....... 3 3 10 10
-------- -------- -------- --------
Net loss applicable to common stock $ (631) $ (1,727) $ (8,416) $ (5,772)
======== ======== ======== ========
Net loss per common share .......... $ (0.05) $ (0.14) $ (0.65) $ (0.47)
======== ======== ======== ========
Weighted-average number of common
shares outstanding ................. 13,069 12,413 12,873 12,321
======== ======== ======== ========
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)
Nine Months Ended October 31,
1997 1996
---------- ----------
Cash Flows from Operating Activities:
Net loss ............................................ $ (8,406) $ (5,762)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization .................. 1,173 998
Acquired in-process research and development ... 1,284 --
costs
Equity in net loss of affiliate ................ 412 182
Loss on disposal of assets ..................... -- 7
Changes in operating assets and liabilities:
Accounts receivable, net ....................... 2,627 (730)
Prepaid expenses and other ..................... 743 (59)
Accounts payable and accrued expenses .......... (946) (487)
Deferred revenues .............................. (95) (311)
-------- --------
Net cash used in operating activities ............... (3,208) (6,162)
-------- --------
Cash Flows from Investing Activities:
Purchase of investments ............................. (14,830) (14,505)
Proceeds from maturities of investments ............. 20,259 13,990
Loan to / investment in affiliate ................... (95) (557)
Acquisition, net of cash used ....................... 55 --
Purchases of equipment and leasehold improvements ... (605) (2,012)
-------- --------
Net cash provided by (used in) investing activities . 4,784 (3,084)
-------- --------
Cash Flows from Financing Activities:
Proceeds from the issuance of common stock .......... 436 9,603
Repayment of notes payable .......................... (40) (14)
-------- --------
Net cash provided by financing activities ........... 396 9,589
-------- --------
The Effect of Exchange Rate Changes on Cash ............ (189) (199)
-------- --------
Net Increase in Cash and Cash Equivalents .............. 1,783 144
Cash and Cash Equivalents, beginning of period ......... 2,685 2,903
-------- --------
Cash and Cash Equivalents, end of period ............... $ 4,468 $ 3,047
======== ========
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, 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; ConQuest Software, Inc. ("ConQuest"),
a company that was acquired in July 1995; and Interpix Software Corporation
("Interpix"), a company that was acquired in May 1997. 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 net losses of $628,000 and $8,406,000 in the three and nine
month periods ended October 31, 1997, and incurred net losses that totaled
$17,445,000 over the last three complete fiscal years. The accumulated deficit
of the Company at October 31, 1997 was $52,025,000. The combined balance of
cash, cash equivalents and investments in marketable securities was reduced by
$3,646,000 in the nine months ended October 31, 1997 to a balance of $7,466,000
at the end of the period.
The Company's operations are subject to certain risks and uncertainties
including, among others, the dependence upon the timing of the closing 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.
(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 and nine month
periods ended October 31, 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.
The American Institute of Certified Public Accountants has issued Statement of
Position 97-2, "Software Revenue Recognition," ("SOP 97-2") that supersedes
Statement of Position 91-1. SOP 97-2 is effective for revenue transactions
entered into by the Company in fiscal years beginning after January 31, 1998.
Management believes that the changes contained in SOP 97-2 will not have a
material adverse financial impact on the Company.
Research and Development Costs
No product development costs were capitalized, and there were no capitalized
costs not yet amortized, during the nine month periods ended October 31, 1997
and 1996.
Stock-Based Compensation
Effective for the financial statements as of January 31, 1997, the Company
adopted Statement of Financial Accounting Standard ("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 outside 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 other outside
providers.
7
Income Taxes
Due to the net losses reported for the nine month periods ended October 31, 1997
and 1996, 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 rate of
exchange during the period. Gains or losses from translating foreign currency
financial statements are accumulated in a separate component of shareholders'
equity.
Net Loss Per Common Share
Net loss per common share has been computed by dividing the net loss for each
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.
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 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, 1997 and January 31, 1997, the
aggregate fair value of the securities based upon quoted market prices was
$2,999,000 and $8,428,000, respectively.
8
Supplemental Cash Flow Information (in thousands)
Nine Months Ended
October 31,
1997 1996
---------- ----------
Non-cash investing and financing activities:
Use of deferred compensation to purchase $ 344 $ 33
common stock
Issuance of warrants to purchase common stock -- 758
Common stock issued for acquisition 1,822 --
Details of acquisition:
Fair value of assets acquired $ 583 $ --
In-process research and development acquired 1,284 --
Liabilities assumed 21 --
Stock issued 1,822 --
---------- ----------
Cash paid 24 --
Cash acquired 79 --
---------- ----------
Net cash received in acquisition $ 55 $ --
========== ==========
(3) ACQUISITION OF INTERPIX SOFTWARE CORPORATION
On May 5, 1997, the Company acquired 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 purchase method of accounting
has been applied to this acquisition transaction and, accordingly, the results
of operations of Interpix have been included in the Company's consolidated
results of operations for the three and nine month periods ended October 31,
1997 from the date of acquisition. The results of operations for Interpix prior
to the acquisition were not significant.
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
total purchase price included the value of the Excalibur shares, $1,822,000, and
out-of-pocket acquisition costs, $45,000. It was allocated to the assets
purchased and the liabilities assumed based upon their fair values on the date
of acquisition. Approximately $1,284,000 of the purchase price was allocated to
research and development projects in process and was expensed in the three month
period ended July 31, 1997. The excess of the purchase price over the fair value
of the net assets of Interpix was approximately $545,000. This amount represents
intangible assets related to the completed technology base, the assembled
workforce and tradenames acquired, and has been recorded as goodwill which is
being amortized on a straight-line basis over five years. The amounts of
goodwill amortization for the three and nine month periods ended October 31,
1997 were approximately $27,000 and $54,000, respectively.
9
(4) 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
(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. In July 1997, the Company loaned
ETNV approximately $95,000.
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, the Company's share of ETNV's net loss for the
period, and the elimination of the Company's share of gross profit in the ending
balances of ETNV's prepaid license fees are included in equity in net loss of
affiliate in the accompanying consolidated statements of operations for the
three and nine month periods ended October 31, 1997 and 1996. The balance of the
investment, included in other assets in the accompanying balance sheets at
October 31, 1997 and January 31, 1997, was $656,000 and $973,000, respectively,
net of accumulated amortization of $753,000 and $341,000, respectively.
For the three and nine months ended October 31, 1997, the Company recorded total
revenues of $690,000 and $1,261,000, respectively, related to the software
license with ETNV including license fees and maintenance revenues. The
comparable amounts for the corresponding periods of the prior year were $347,000
and $722,000, respectively.
(5) ISSUANCES OF COMMON STOCK
During the first nine months of the current fiscal year, the Company issued
approximately 332,000 shares of common stock upon the exercise of employee stock
options ranging in price from $1.04 to $11.64 per share, resulting in total cash
proceeds to the Company of approximately $188,000 and the utilization of
$344,000 in deferred compensation. In addition, approximately 35,000 shares of
common stock were issued to participants of the employee stock purchase plan at
an aggregate purchase price of approximately $235,000. The exercise of stock
options provided total cash proceeds of approximately $1,266,000 in the nine
month period ended October 31, 1996.
10
On May 7, 1997, the Board of Directors authorized a repricing program which
allowed active current employees to elect to reprice all or some of their
outstanding options to purchase common stock of Excalibur, granted under the
1989 and the 1995 Incentive Plans 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. Options to purchase approximately 1,176,000 shares of common stock were
repriced. Stock options that were repriced were not exercisable until November
8, 1997.
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 of in excess of 25% of the Company's outstanding common stock,
acted as the placement agent in this transaction and received a fee of
approximately $350,000.
(6) RESTRUCTURING COSTS
The Company reorganized its sales force and made other changes to its overall
organization in April 1997. In connection with these changes, the Company
reduced its workforce by approximately 10% and recorded a restructuring charge
of $577,000 in the first quarter. The charge primarily consisted 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 were substantially completed in the second
quarter of the current fiscal year.
(7) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1997, SFAS No. 129, "Disclosure of Information about Capital
Structure", was issued and is effective for the Company's fiscal year ending
January 31, 1998. In June 1997, SFAS No. 130, "Reporting Comprehensive Income",
and SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information" were issued and are effective for the fiscal year ending January
31, 1999. The Company has not determined the impact of the implementation of
these pronouncements.
11
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 accurate,
scaleable, secure, knowledge-retrieval software solutions capable of supporting
knowledge assets of most media types including paper documents, text, images,
and video. Excalibur's products enable users to search and retrieve these types
of data through intranets, local-area and wide-area networks, extranets, and the
Internet. 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.
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
purchase method of accounting was applied to this acquisition transaction and,
accordingly, the results of operations of Interpix have been included in the
Company's consolidated results of operations for the three and nine month
periods ended October 31, 1997 from the date of acquisition. The shareholders of
Interpix received 275,000 shares of common stock of Excalibur in exchange for
all of the outstanding common stock of Interpix. Approximately $1,284,000 of the
purchase price was allocated to research and development projects in process and
was expensed in the second quarter of the current fiscal year.
The Company reorganized its sales force and made other changes to the overall
organization at the end of the first quarter of the current fiscal year. In
connection with these changes, the Company reduced its workforce by
approximately 10% and recorded a restructuring charge of $577,000 in the first
quarter. The charge primarily consisted of severance pay and benefits for
terminated employees.
12
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.
Results of Operations
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 and nine month periods ended October 31, 1997 and 1996, and the
percentage change in the amounts between fiscal periods (dollars in thousands).
Three Months Ended October 31, Increase
1997 1996 (Decrease)
-------------------- ------------------- ---------
Amount Percent Amount Percent Percent
---------- --------- --------- --------- ---------
Revenues:
RetrievalWare $ 4,579 71 % $ 3,061 53 % 50 %
EFS 397 6 1,666 28 (76)
---------- --------- --------- --------- -------
Total software 4,976 77 4,727 81 5 %
Maintenance 1,452 23 1,084 19 34
========== ========= ========= ========= =========
Total revenues $ 6,428 100 % $ 5,811 100 % 11 %
========== ========= ========= ========= =========
Expenses:
Sales and marketing $ 3,035 47 % $ 3,832 66 % (21) %
Research and product
development 1,544 24 1,761 30 (12)
General and
administrative 1,241 19 1,000 17 24
Costs of sales 1,175 18 996 17 18
========== ========= ========= ========= =========
Total expenses $ 6,995 108 % $ 7,589 130 % (8) %
========== ========= ========= ========= =========
13
Nine Months Ended October 31, Increase
1997 1996 (Decrease)
-------------------- ------------------- ---------
Amount Percent Amount Percent Percent
---------- --------- --------- --------- ---------
Revenues:
RetrievalWare $ 9,933 66 % $ 5,905 42 % 68 %
EFS 1,167 8 5,063 36 (77)
---------- --------- --------- --------- ---------
Total software 11,100 74 10,968 78 1
Maintenance 3,966 26 3,163 22 25
========== ========= ========= ========= =========
Total revenues $ 15,066 100 % $ 14,131 100 % 7 %
========== ========= ========= ========= =========
Expenses:
Sales and marketing $ 10,002 66 % $ 10,456 74 % (4) %
Research and product
development 4,814 32 4,631 33 4
Acquired in-process
research and
development 1,284 8 -- -- n/a
General and
administrative 3,449 23 2,940 21 17
Costs of sales 3,240 22 2,275 16 42
Restructuring costs 577 4 -- -- n/a
========== ========= ========= ========= =========
Total expenses $ 23,366 155 % $ 20,302 144 % 15 %
========== ========= ========= ========= =========
Total revenues for the third fiscal quarter ended October 31, 1997 were
$6,428,000, an increase of 11% over total revenues of $5,811,000 reported for
the corresponding fiscal quarter last year. The Company incurred a net loss of
$628,000, or $0.05 per common share, in the third quarter compared to a net loss
of $1,724,000, or $0.14 per common share, in the third quarter last fiscal year.
For the nine months ended October 31, 1997, total revenues were $15,066,000, an
increase of 7% over total revenues of $14,131,000 reported for the same fiscal
period last year. The Company incurred a net loss of $8,406,000, or $0.65 per
common share, in the first nine months of the current fiscal year compared to a
net loss of $5,762,000, or $0.47 per common share, in the same fiscal period
last year. Excluding the second quarter charge of $1,284,000 for in-process
research and development costs related to the acquisition of Interpix and a
$577,000 charge recorded in the first quarter related to the restructuring of
operations, the net loss for the nine months ended October 31, 1997 was
$6,545,000.
14
Software revenues increased on a world-wide basis by 5%, to $4,976,000 in the
third quarter from $4,727,000 in last year's fiscal third quarter, due primarily
to a 79% increase in service revenues that include implementation support,
training and other services provided to a variety of customers. Service revenues
were approximately 13% of total software revenues in the third quarter, and were
derived primarily from activities supporting federal government and commercial
customers. License fee revenues decreased 1% between fiscal periods.
International software revenues, which were approximately 48% of total software
revenues in the third quarter, increased by approximately 73% compared with last
year's third quarter, primarily due to a new distribution license agreement with
IBM in the United Kingdom, the expansion or renewal of several other product
distribution arrangements, and increased software revenues associated with the
distribution license with ETNV. Software revenues from North American sales
declined by 23% from the corresponding fiscal quarter of last year.
For the nine months ended October 31, 1997, total software revenues increased
slightly, to $11,100,000 in the current year from $10,968,000 in the nine months
ended October 31, 1996. Service revenues, which represented approximately 17% of
total software revenues in the nine months ended October 31, 1997, increased by
152% between years. Software license fee revenues declined 10% between years.
International software revenues, which were approximately 39% of total software
revenues for the nine months ended October 31, 1997, increased by approximately
18% in the current year compared with last year. Software revenues from North
American sales declined by 7% from the corresponding nine-month period of last
year.
The Company has nearly completed the transition of its product line from
Excalibur Electronic Filing Software ("EFS") to the Excalibur RetrievalWare
family of products, a new class of advanced knowledge retrieval products.
Excalibur RetrievalWare represented approximately 92% of total software revenues
in the third quarter, and 71% of total revenues. Excalibur RetrievalWare
software revenues increased 50% in the third quarter over comparable revenues
for the third quarter last year. Excalibur RetrievalWare represented 89% of
total software revenues for the nine months ended October 31, 1997, and 66% of
total revenues for the same period. Excalibur RetrievalWare software revenues
increased by 68% in the nine months ended October 31, 1997 compared with the
corresponding period of the prior fiscal year.
In the quarter, Excalibur RetrievalWare was selected by several new customers
while the Company expanded the license arrangements with existing customers in a
variety of industries, including broadcasting, entertainment, on-line services,
manufacturing, telecommunications and the federal and foreign governments. The
Company also increased its channel activity and completed or expanded agreements
with several product distribution partners, most notably in the United Kingdom,
Spain, Korea and South America.
15
As explained in Note 4 to the Consolidated Financial Statements contained
herein, the Company licensed the use of its name and certain software products
to ETNV 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. In October, ETNV concluded its most
successful quarter of operations to date. However, the Company continued to
record software revenues related to its license arrangement with ETNV only when
minimum license fees are received by the Company in cash. Software revenues for
the three and nine month periods ended October 31, 1997 included approximately
$509,000 and $1,011,000, respectively, in revenues related to minimum license
fees that were paid by ETNV. Software revenues for the three and nine month
periods ended October 31, 1996 contained revenues of approximately $336,000 and
$708,000, respectively, related to the license arrangement with ETNV.
The Company's total revenues for the third quarter were the highest ever
reported by the Company, although current year revenues continue to be adversely
impacted by changes in the North American sales organization. Due to unexpected
turnover among sales personnel, the Company spent considerable resources
training a largely new sales force in the first quarter of the current fiscal
year. The new personnel were subjected to a prolonged and thorough sales
training and product familiarization program. Management believes that these
efforts resulted in more effective selling in the second and third quarters
compared with the first quarter. However, there can be no assurances that the
improvement in sales productivity will continue at the same rate experienced in
the last two quarters of the current year.
Due primarily to the expansion of the customer base with the addition of
Excalibur RetrievalWare users, maintenance revenues increased by 34% to
$1,452,000 in the third quarter from $1,084,000 in the third quarter last year,
and by 25% to $3,966,000 in the nine months ended October 31, 1997 from
$3,163,000 in the corresponding period of last year.
Due to cost reduction measures taken earlier in the current fiscal year, sales
and marketing costs in the third quarter were $797,000 less than they were a
year ago. Sales and marketing costs were $3,035,000 in the third quarter
compared with $3,832,000 last year, which represented a 21% reduction between
fiscal years. At the end of the current year first quarter, the Company reduced
its workforce, reorganized the sales personnel and postponed marketing programs
that did not directly support short-term revenue goals. As a result, salaries
expense, benefit costs, marketing program costs, and travel costs were reduced.
These cost reductions represented the substantial portion of the total decrease
in sales and marketing costs for the quarter. Due to the reduced level of sales
and marketing costs in the third quarter, sales and marketing expenses for the
nine months ended October 31, 1997, decreased by 4% compared with the prior
fiscal year, to $10,002,000 in the current year from $10,456,000 in the prior
year. The Company employed 62 people in the sales and marketing areas at October
31, 1997. There were 74 sales and marketing employees at October 31, 1996.
16
Total research and product development costs decreased by 12%, to $1,544,000 in
the third quarter of the current fiscal year compared with $1,761,000 last year.
In the third quarter, the Company significantly reduced the development
activities associated with the EFS product line. This reduction more than offset
the additional costs of the Interpix product development staff and the increase
in the costs of text products development, and resulted in decreased salary and
benefit costs, consulting expenses, equipment costs, and recruiting costs for
the quarter. For the nine months ended October 31, 1997, research and
development costs increased by 4%, to $4,814,000 in the current year from
$4,631,000 in the nine months ended October 31, 1996 as the EFS product
reductions were not enough to offset the year-to-date increases in text and
internet product development costs. There were 53 research and development
employees at October 31, 1997; there were 59 such employees at October 31, 1996.
As indicated above, the Company recorded a charge to expense of $1,284,000 in
the second quarter of the current fiscal year for the cost of in-process
research and development acquired in the merger with Interpix.
In the third quarter of the current fiscal year, the Company introduced
Excalibur RetrievalWare 6.5, which delivers enhanced summarization capabilities,
search client improvements and metadata clustering, and includes the FileRoom
add-on module. The FileRoom option represents an upgrade path for users of the
Company's Excalibur EFS product and is designed to provide organizations with a
unified capability to access and search both paper-based and electronic
documents, including office data, Internet and intranet data, groupware data,
relational database information and other digital assets, from a single user
interface. The Company also broadened its product line with the introduction of
Excalibur Internet Spider, a mutimedia web crawler, that enables end users and
applications developers to access and leverage mutimedia information published
on the world-wide web. Beginning in the fourth quarter, the Company expects
increased sales and marketing costs associated with the introduction of its new
products, including a new application for the management of mutimedia and video
assets that will operate in conjunction with Excalibur RetrievalWare.
General and administrative expenses increased by 24% in the current quarter to
$1,241,000 from $1,000,000 in the comparable quarter last year. For the nine
months ended October 31, 1997, general and administrative costs increased by
17%, to $3,449,000 in the current year from $2,940,000 in the nine months ended
October 31, 1996. Since early last year, the Company has added employees to the
human resources, contracts, management information systems and financial
planning and analysis functions, thereby increasing salaries expense for both
the current quarter and year-to-date periods. Increased salaries expense
represented a significant portion of the total increase of general and
administrative expenses for both the quarter and year-to-date periods. Related
costs also increased in each current year period including office rent,
telephone, depreciation and other equipment costs although recruiting and moving
costs have declined. General and administrative expenses included bad debt
expense of $134,000 and $207,000, respectively, in the quarter and nine month
periods ended October 31, 1997. The comparable bad debt expense amounts recorded
last year were $1,000 and $128,000, respectively.
17
Costs of sales increased by 18% to $1,175,000 in the current quarter from
$996,000 in the third quarter of last year. For the nine months ended October
31, 1997, costs of sales increased by 42%, to $3,240,000 in the current year
from $2,275,000 in the nine months ended October 31, 1996. The increases relate
primarily to the formation of a product implementation group late in the prior
fiscal year, which had grown to 8 employees at October 31, 1997, resulting in
additional salaries expense and increased overhead costs. Costs for the three
and nine month periods ended October 31, 1997 also included the costs of
implementation project subcontractors, the amortization of goodwill associated
with the acquisition of Interpix, and the increased costs of new users manuals
and other documentation related to the series of Excalibur RetrievalWare
releases in the current fiscal year and an updated version of the Excalibur EFS
product. The costs of the customer support group have declined in the current
fiscal year, resulting in decreased costs of maintenance in the three and nine
month periods ended October 31, 1997 compared with the corresponding periods of
last year.
Net interest income declined to $89,000 and $306,000, respectively, in the three
and nine month periods ended October 31, 1997 from $177,000 and $591,000,
respectively, in the comparable fiscal periods of last year due to a decrease in
the level of investment securities held. The Company's equity in the net loss of
ETNV was $150,000 in the current quarter, and $412,000 for the nine months ended
October 31, 1997. The Company's equity in ETNV's net loss was $123,000 and
$182,000, respectively, for the three and nine month periods ended October 31,
1996. ETNV did not begin operations until July 1996.
Liquidity and Capital Resources
In the nine months ended October 31, 1997, the Company's combined balance of
cash, cash equivalents and investments in marketable securities decreased by
$3,646,000 to $7,466,000 as summarized below (in thousands). At October 31, 1997
and January 31, 1997, investments in marketable securities consisted of U.S.
Treasury Bills with maturities of less than one year.
October 31, January 31,
1997 1997 Change
---------- ---------- -----------
Cash and cash
equivalents $ 4,468 $ 2,685 $ 1,783
Investments 2,998 8,427 (5,429)
========== ========== ===========
Total $ 7,466 $ 11,112 $ (3,646)
========== ========== ===========
The amount of cash used in operations during the nine months ended October 31,
1997, $3,208,000, was substantially less than the net loss for the period,
$8,406,000, due to a significant reduction in the level of accounts receivable
and other current assets, and several large non-cash charges. The amount of cash
provided by the $2,627,000 reduction in the balance of accounts receivable and
the $743,000 reduction in the balance of other current assets was offset
somewhat by the use of $946,000 cash to reduce accounts payable and accrued
liabilities. The non-cash charges, which totaled $2,869,000, included acquired
research and development costs of $1,284,000, depreciation and amortization of
$1,173,000, and the Company's share of ETNV's net loss of $412,000. In the
current year, cash was also used to purchase computer and other equipment with a
total cost of $605,000, and to make a $95,000 loan to ETNV.
18
In the nine months ended October 31, 1997, net cash was provided from the
maturity of Treasury Bills, $5,429,000, and the exercise of employee stock
options, $436,000. Net cash of $55,000 was provided as a result of the
acquisition of Interpix.
Last year, cash used in operations during the first nine months was $6,162,000,
fixed asset additions were $2,012,000, and the initial investment of $557,000
was made in ETNV. However, in March 1996, the Company completed a private
placement sale of its common stock that provided net cash proceeds of
approximately $8,388,000, and the exercise of stock options by employees
provided $1,215,000 cash.
Due to the reduction in the balance of accounts receivable during the current
fiscal year, including amounts with payment terms beyond the normal practice of
30 to 45 days and amounts related to overdue accounts, the number of days sales
outstanding ("DSO") at October 31, 1997 declined from the number at January 31,
1997. Management expects that the Company's DSO at January 31, 1998 will be less
than the comparable number at January 31, 1997, although it does expect the
number to increase in the fourth quarter of the current year. Management
believes that the allowance for doubtful accounts of $407,000 at October 31,
1997 is adequate.
Factors That May Affect Future 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 dependant 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.
19
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.
Primarily due to large operating losses incurred by the Company, its balance of
cash, cash equivalents and investments has declined substantially since the
proceeds of the private placement discussed above were received. Various
factors, including those discussed above, have inhibited the revenue growth that
management had expected for the last four quarters.
As a result, near the end of the first quarter, the short-term revenue
expectations of management were moderated, and planned expenditures were
reduced. As discussed above and in Note 6 to the Consolidated Financial
Statements contained herein, the Company reduced its workforce by approximately
10% from the number of employees at April 30, 1997. In addition, the Company
postponed certain long-range programs and curtailed other expenses in order to
achieve an overall reduction in expenditures. Marketing efforts were focused on
the increase of current year revenues. The text development staff was focused on
the completion of version 6.5 of the Excalibur RetrievalWare product and the
related FileRoom option, a product that management believes will facilitate the
transition of the installed customer base of Excalibur EFS to Excalibur
RetrievalWare. The Company began to ship these products to customers in October
1997. The Company has also released the Excalibur Internet Spider, a product
that enhances the web crawling and web publishing capabilities of Excalibur
RetrievalWare, or other data management systems, in Internet and intranet
environments. In addition, the Company has made other organizational changes in
order to sharpen the focus of product development and business development
efforts on selected applications of the Excalibur Visual RetrievalWare
technology.
Management believes that the changes and initiatives discussed above, and the
investments of time and money in the training of the sales force, improved sales
productivity and the overall financial performance of the Company in the second
and third quarters of the current fiscal year. Revenues for each of these
quarters were significantly increased from first quarter revenues, and the level
of quarterly costs and expenses has been reduced. As a result, operating losses
have been reduced and the use of cash has been slowed significantly during this
period. 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. If the actions taken by management
are not effective in achieving profitable operating results, the Company may be
required to pursue additional external sources of financing in the future 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.
20
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,
particularly its international operations. 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 has significant net operating loss carryforwards ("NOLs") of
approximately $60 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 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 info@excalib.com or visited at its
web site at www.excalib.com.
21
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
Any proposal which an eligible shareholder wishes to include in the proxy
statement for the Company's 1998 Annual Meeting of Shareholders must be received
by the Company at its principal executive offices at 1921 Gallows Road, Suite
200, Vienna, Virginia 22182, not later than January 29, 1998.
Item 6. Exhibits and Reports on Form 8-K None.
22
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
----------------------------------
(Registrant)
December 8, 1997 By: /s/ Patrick C. Condo
--------------------
Patrick C. Condo
President and Chief Executive Officer
(Principal Executive Officer)
December 8, 1997 By: /s/ James H. Buchanan
---------------------
James H. Buchanan
Chief Financial Officer
(Principal Financial and Accounting
Officer)
23