UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended January 31, 1998
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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
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 __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of April 15, 1998 (based on the closing sales price as reported on
the NASDAQ National Market System) was $118,846,045.
The number of shares outstanding of the registrant's class of common stock as of
April 15, 1998 was 13,251,297.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1998 Annual Meeting of
Shareholders are incorporated by reference into Part III.
The Index to Exhibits begins on Page 29
EXCALIBUR TECHNOLOGIES CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 31, 1998
TABLE OF CONTENTS
Page
PART I
Item 1. Business........................................... 1
Item 2. Properties......................................... 11
Item 3. Legal Proceedings.................................. 11
Item 4. Submission of Matters to a Vote of
Security Holders................................... 11
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters........................ 12
Item 6. Selected Financial Data............................ 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 15
Item 8. Financial Statements and Supplementary Data........ 27
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 27
PART III
Item 10. Directors and Executive Officers of the Registrant. 28
Item 11. Executive Compensation ............................ 28
Item 12. Security Ownership of Certain Beneficial
Owners and Management.............................. 28
Item 13. Certain Relationships and Related Transactions..... 28
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K............................ 28
PART I
Item 1. Business.
This report contains forward looking statements that involve risks and
uncertainties. 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, as amended and section 21E of the Securities
Exchange Act of 1934, as amended, including without limitation statements
regarding the expectations, beliefs, intentions or strategies regarding the
future of Excalibur Technologies Corporation ("Excalibur" or the "Company"). 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 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 elsewhere
in this report.
Overview
Excalibur designs, develops, markets and supports enterprise-wide, accurate,
scalable and secure knowledge-retrieval software solutions. Excalibur's
comprehensive suite of knowledge retrieval products which includes Excalibur
RetrievalWare, Excalibur RetrievalWare FileRoom, Excalibur Internet Spider,
Excalibur EFS and Excalibur Visual RetrievalWare, enable individuals to quickly
access, search and retrieve relevant information residing on an enterprise's
networks, intranets, extranets and the Internet. Retrievable assets or document
data types include paper documents, text, databases, word processing documents,
PDF files, newsfeeds, groupware systems, e-mails, images and video. Excalibur's
software solutions deliver capabilities for real-time profiling and
retrospective search, combined full-text and database searching, word
meaning-based semantic searching, fault-tolerant pattern recognition-based
searching, statistical searching and a full suite of traditional keyword and
Boolean search techniques. Excalibur RetrievalWare has a modular architecture
that supports parallel processing on distributed, multi-threaded servers and is
designed to support both very large databases and large information systems with
thousands of users. Excalibur EFS is a multi-platform, commercial, end-user
software application for document imaging and information retrieval. Excalibur
offers its software solutions to information systems for workgroups, enterprises
and distributed wide area networks, including the Internet and World Wide Web.
Excalibur's software products combine two unique and complementary technologies:
semantic network and Adaptive Pattern Recognition Processing (APRP(TM)).
Semantic network leverages lexical knowledge at the highest level using built-in
knowledgebases to search for specific word meanings enriched by related terms
and concepts. The APRP(TM) technology identifies patterns in digital data,
providing the capability to build content-based retrieval applications for
virtually any type of digital information. By integrating these two approaches,
Excalibur believes that it delivers the most complete, powerful, yet easy to use
knowledge retrieval capabilities available today. The combined technology power
most Excalibur applications.
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Excalibur 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. As of January 31, 1998, more than
950 customers were using the Company's software products, approximately 300 of
which use the flagship Company product RetrievalWare.
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 total purchase
price included the value of the Excalibur shares totaling $1,822,000 and
out-of-pocket acquisition costs which totaled $45,000. The purchase price 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 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
period ended January 31, 1998 from the date of acquisition. The results of
operations for Interpix prior to the acquisition were not material.
Excalibur's wholly-owned subsidiary located in the United Kingdom, Excalibur
Technologies International, Ltd. ("ETIL"), conducts international sales
activities. Except as otherwise noted, Excalibur and its subsidiaries are
collectively referred to hereinafter as the "Company."
The Company can be contacted via email at invest@excalib.com and visited at its
web site at www.excalib.com.
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PRODUCTS
Excalibur's suite of text retrieval software components which includes Excalibur
RetrievalWare, Excalibur RetrievalWare FileRoom, Excalibur Internet Spider and
Excalibur EFS (Electronic Filing Software) is being utilized in a wide-range of
applications and solutions including electronic publishing, online information
systems, global corporate intranets, intelligence analysis and paper archival
systems. Markets include publishing, legal, manufacturing, pharmaceutical,
insurance, transportation, financial services, government and many others. The
Company provides a visual retrieval solution to the same markets with Excalibur
Visual RetrievalWare, which enables users to search for visual information
directly from their intranet, a corporate database, the Internet, or other
sources using images or video clips as clues. With the planned release of a
suite of video applications is fiscal 1999, the Company will target media,
entertainment and broadcasting companies.
Text Products:
Excalibur's text retrieval products contributed 97%, 96% and 100% of
consolidated revenue in 1998, 1997 and 1996 respectively.
Excalibur RetrievalWare
Excalibur RetrievalWare offers an advanced componentized approach to knowledge
retrieval and an alternative to traditional search and retrieval systems. It is
a comprehensive software solution designed for enterprise knowledge retrieval
and intended to empower users to find mission critical data across multiple data
types. By integrating the APRP(TM) and semantic network technologies, Excalibur
RetrievalWare delivers superior levels of power and performance throughout the
entire information management process, from data capture and indexing to
searching, retrieval and dissemination. The latest version of the product,
Excalibur RetrievalWare 6.5, was released in the third quarter of the fiscal
year ended January 31, 1998 and among other enhancements extends RetrievalWare's
capabilities to include browsing, searching and viewing paper-based assets in an
online "fileroom." Users can access and retrieve both paper-based and electronic
documents using an industry standard web-browser. Excalibur RetrievalWare
provides real time profiling which enables users to create and save Real Time
Agent Queries (Profiles) that will automatically collect incoming documents of
interest. The RetrievalWare Profiling Server filters, stores and distributes
incoming data from any source including real-time newsfeeds, relational
databases, paper repositories and the RetrievalWare Internet Spider.
With semantic networks, users can easily and automatically find the required
information in text databases by using all of the power and richness of natural
language processing. Excalibur RetrievalWare incorporates syntax, morphology and
the actual meaning of words. The baseline semantic network, created from
complete dictionaries, a thesaurus and other reference sources, gives users a
built-in knowledge base of 400,000 word meanings, 50,000 language idioms and 1.6
million word associations. Users enter straight-forward plain English queries
that are automatically enhanced by the related terms and concepts thereby
increasing the opportunity for the return of relevant data. The software
recognizes words at the root level, idioms and the multiple meanings of words.
An important benefit of this approach is the elimination of the costs associated
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with defining keywords, building topic trees, establishing expert rules and
sorting and labeling information in database fields. Excalibur RetrievalWare
also enables the integration of specialized semantic networks for legal,
medical, finance, engineering and other disciplines.
APRP(TM) identifies patterns in digital information. In text applications, it
provides fuzzy searching with a high degree of precision and recall, giving
end-users the ability to retrieve even approximations of search queries with a
high degree of confidence that all of the requested information will be returned
regardless of errors in spelling or the existence of "dirty data." The software
works at high speed and supports the rapid development of multi-language
text-retrieval systems.
Excalibur RetrievalWare provides access to both unstructured and structured
information across enterprise networks, workgroup LANs, and intranets. The
software may be deployed on a single server or on any number of physical
servers. Excalibur RetrievalWare server solutions can be run on multiple
platforms including leading UNIX and Windows NT platforms.
The Excalibur RetrievalWare product family includes the following components:
Excalibur RetrievalWare SDK
- ---------------------------
The Excalibur RetrievalWare SDK (Software Developer's Kit) is a comprehensive
set of tools for building knowledge retrieval solutions. At its core is a highly
scalable, distributed client/server architecture. Independent server processes
maximize the efficiency and reliability of document loading, indexing and query
handling and support security and encryption/decryption features. Dedicated
server processes enable integration of text search and relational database
(DBMS) storage capabilities through an open DBMS gateway. The client environment
is optimized for the development of graphical interfaces using industry standard
tools such as Java and Visual Basic. Excalibur RetrievalWare delivers Visual
Basic custom controls, remote procedure calls and open server capabilities as
well as engine-level, high-level and client/server application program
interfaces (APIs). These features speed the development of systems that can
support thousands of users and contain custom functionality.
Excalibur RetrievalWare FileRoom
- --------------------------------
Excalibur RetrievalWare FileRoom is built on Excalibur RetrievalWare technology
and is an optional component to allow loading, indexing, viewing and managing
scanned document, images and text. Users access the FileRoom through a hierarchy
consisting of fileroom documents, where each tier in the hierarchy is a
container for storing documents. Users can directly view the scanned image of a
retrieved document from the FileRoom. Graphs, diagrams, handwritten notations
and signatures in the retrieved document are immediately accessible. "Fuzzy"
searching capabilities provided by APRP(TM) give users a high level of
confidence that their queries will return all of the requested information
regardless of the quality of Optical Character Recognition (OCR) data.
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Excalibur Internet Spider
- -------------------------
Excalibur Internet Spider is a fully automated, scalable web "spider"
application that explores and returns multimedia documents from designated areas
of intranets and the World Wide Web. The highly configurable and multithreaded
Excalibur Internet Spider allows users to monitor topics of interest on
intranets or the Internet based on knowledge profiles. It can also monitor
an unlimited number of internal and external Web pages and actively gather
specific documents which are then automatically indexed for filtering and
retrieval using Excalibur RetrievalWare or an alternate data management system.
Excalibur Electronic Filing Software (EFS)
Excalibur EFS version 3.7 is the latest version of the product which was
originally introduced in 1991 and is in the process of being phased out. Users
of EFS are being migrated to RetrievalWare with FileRoom option. EFS enables
text and images to be entered into the system from computer files, scanners or
facsimile machines (after the scanned image is converted to text by optical
character recognition software) and are automatically filed and indexed in a
replica of a physical file room with file cabinets, drawers, folders, in-baskets
and wastebaskets, utilizing a graphical user interface. EFS provides users with
multiple methods for document retrieval and operates under leading UNIX
operating systems and Windows NT in a client/server environment. Client-only
implementations are available on personal computers running Microsoft Windows
and Apple Macintoshes. EFS also provides links to leading external databases and
APIs that give users the ability to integrate EFS with other software
applications and products. A variation of this software product provides
document image management capability for the World Wide Web.
Visual Products
Excalibur's visual retrieval products contributed 3% and 4% of consolidated
revenue in 1998 and 1997. No revenue was recorded for visual products in 1996.
Excalibur Visual RetrievalWare
Leveraging the APRP(TM) technology, Excalibur Visual RetrievalWare is a visual
retrieval engine and a comprehensive image processing library that enables the
development of client/server knowledge retrieval systems that automatically
index and retrieve digital images. Users can search for visual information
directly from their intranet, a corporate database, the Internet, or other
sources using images or video clips as clues. Visual data is reduced to a
searchable index that is typically less than 10% of the size of the original
image and is automatically recognized based on its shape, color and texture.
Users submit queries using examples of visual data or by authoring a visual clue
with a graphical product. Based on the shape, color and texture of the visual
clue, a list of similar or exact matches is returned. Visual RetrievalWare SDK
2.1 released in the second quarter of fiscal year 1998 contained enhancements
including Java support, multi-threaded support for multi-processor computers and
improvements in the accuracy of fuzzy searching of similar images. The product
delivers its advanced retrieval capabilities in an open, flexible, scalable and
secure architecture and is designed to be easy to implement and ready for
extension.
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Video Analysis Applications
In the fourth quarter of fiscal year 1998, the Company announced its intention
to deliver video applications that will include the Video Analysis Engine
("VAE"), a comprehensive software developers kit and a suite of applications
utilizing both the VAE and RetrievalWare, designed to enable organization and
end users to rapidly analyze, index, retrieve and manipulate analog and digital
video assets in an intranet/Internet environment. The VAE is designed for large
integrators and OEMs interested in developing leading edge video applications.
The Company plans to release a suite of video applications in fiscal 1999,
initially targeted to media, entertainment and broadcasting companies who need
to automate the analysis, indexing, cataloging, viewing, searching and retrieval
of their video assets.
SERVICES
Technical Support, Implementation Support and Training
Excalibur provides technical support, or maintenance, to customers through its
technical support organization located in the Company's Carlsbad, California
facilities and through certain product distributors. Technical support consists
of bug fixing, telephone support and product enhancements. Technical support
typically is provided to customers under a renewable annual contract. All
Excalibur service plan customers have access to the Excalibur Online Technical
Support Web site, which provides the latest product information and general
service updates. The web site also provides electronic forms for opening
technical support cases and suggesting product, service and Company
enhancements.
The Company also provides installation and consulting services to its customers
on-site through employee and independent consultants who have been trained and
certified by the Company. The Company conducts training seminars at its offices
in Vienna, Virginia; Carlsbad, California; and Windsor, UK, as well as on-site
training, for its customers and distribution channel partners. Installation and
consulting services are offered as a package or on a time-and-materials basis.
Training customers typically pay on a per-course basis for regularly scheduled
classes and on a per-day basis for on-site or dedicated courses.
Marketing and Distribution
The Company's sales and marketing strategy emphasizes the direct sale of
Excalibur RetrievalWare products and services, which are designed as an
enterprise knowledge retrieval solution, to end-user customers. The targeted
customer group for the Company's products include the world's largest
corporations and comparable government agencies and other institutions. Members
of the North American sales team are located throughout the United States. Most
of the overseas sales team is located in the United Kingdom. The Company
typically licenses its Excalibur RetrievalWare product family to end users as
either an enterprise-wide or work-group level solution.
6
Marketing efforts focus on building brand awareness and demand creating
activities and include public relations, trade show participation, direct mail
campaigns and telemarketing/lead management activities. The Company also has a
home page on the World Wide Web at www.excalib.com as part of its marketing and
sales efforts. Customers are able to learn about the suite of Excalibur
RetrievalWare and Visual RetrievalWare products, conduct on-line demonstrations
of products and enroll in training courses as well as access passworded areas
for technical and other customer support.
The Company leverages relationships with distributors of its software products,
and the strategic partners discussed below, for a substantial portion of its
revenues. Many of these strategic partner relationships began as distribution
arrangements for Excalibur EFS. Beginning in fiscal year 1997 and continuing in
fiscal year 1998, a number of these agreements were amended to provide for the
resale of Excalibur RetrievalWare products as well.
The Company's GSA Contract provides a contractual vehicle for government
agencies to place orders for EFS with the Company. It includes information about
the Company and its products and establishes pricing, terms and conditions of
sales.
Strategic Alliances
In January 1998, the Company announced a marketing and distribution agreement
with Microsoft whereby Excalibur will integrate its Video Analysis Engine
("VAE") with Microsoft NetShow (3.0) and the combined offering will be made
available to Microsoft NetShow developers and users. Microsoft NetShow provides
the ability to stream multimedia content across intranets and the Internet,
giving content providers, developers and web professionals the ability to
integrate audio and video into any web application or site. Under the terms of
the agreement, an evaluation copy of VAE for Microsoft NetShow will be
distributed with each license of Microsoft NetShow. Microsoft NetShow users can
elect to license software development kits and deployment licenses for VAE for
Microsoft NetShow directly from Excalibur.
In January 1998, the Company announced an alliance with Oracle Corporation
whereby Excalibur will deliver its Video Analysis Engine (VAE) as an extension
to the Oracle Video Server(TM) for analysis of video content. VAE, a development
environment for managing analog and digital video assets, allows developers to
create an integrated application with Oracle Video Server, a software solution
enabling application users to store, manage and deliver real-time, full screen
video and high-fidelity audio to web browsers, PCs on networks and set-top
boxes.
In October 1997, the Company entered into an agreement with International
Business Machines in the United Kingdom ("IBM-UK") whereby IBM-UK is the
exclusive reseller of the Company's Knowledge Retrieval Products to certain
government intelligence agencies in the United Kingdom. Under the terms of the
one year agreement, IBM-UK agreed to pay a minimum prepaid royalty to the
Company with provisions for ongoing royalty rates when the prepaid royalty is
depleted. Revenues derived from the Company's agreement with IBM-UK were less
than 10% of the Company's total revenues in the fiscal year ended January 31,
1998.
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In September 1997, Sony Marketing (Japan) Inc. ("SMOJ") announced a
comprehensive licensing, integration and reseller agreement with the Company for
Excalibur's family of knowledge retrieval software products, Excalibur
RetrievalWare and Excalibur Visual RetrievalWare. Under the agreement, SMOJ has
licensed Excalibur RetrievalWare and Excalibur Visual RetrievalWare and has
integrated the Japanese morphology system and dictionary into it for
localization and resale in Japan.
In July 1997, the Company entered into an agreement with Saucedo Enterprises,
who provides integration services to GTE Enterprise Solutions, a division of GTE
Corporation, for the development of a GTE Enterprise Solutions' product called
"The Bastille". The Bastille is a web-based service available to all United
States law enforcement agencies that offers a secure, private network for
information sharing and communication among law officers. Excalibur
RetrievalWare provides search, retrieval and real-time profiling capabilities
across several different data repositories and allows officers to share this
information via a private network on the Internet. Revenues derived from the
Company's agreement with Saucedo Enterprises were less than 10% of the Company's
total revenues in the fiscal year ended January 31, 1998.
In January 1997, the Company entered into an agreement with Computer Associates,
International ("CA") to integrate Excalibur RetrievalWare and Excalibur Visual
RetrievalWare into CA Jasmine, CA's object-oriented database and application
development environment. Included with each license of CA Jasmine is an
evaluation copy of Excalibur RetrievalWare for Jasmine and Excalibur Visual
RetrievalWare's Image Search Class Library. CA Jasmine users can elect to
license software developer kits and deployment licenses for RetrievalWare and
Visual RetrievalWare directly from Excalibur.
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. In connection with
the formation of ETNV, the Company acquired approximately 13.2% of ETNV's voting
capital stock. The Company granted to ETNV an exclusive license (the "License")
to distribute certain of the Company's products, including Excalibur EFS and
RetrievalWare, to other authorized resellers and end-users in the territory for
approximately five years. The License provided for the payment to the Company of
minimum license fees of $1,475,000 for fiscal year 1997 and the payment of
additional minimum license fees in each subsequent fiscal year of the License.
The shareholders of ETNV include Professional Computer Systems B.V. ("PCS"), a
software distributor that contributed its operations to ETNV. In May 1994, PCS
entered into a software distribution agreement with the Company pertaining to
the Benelux region of Europe that was superseded by the License. Revenues
recognized by the Company under its distribution licenses with both ETNV and PCS
were less than 10% of total revenues in each of the three fiscal years in the
period ended January 31, 1998.
Product Development and Advanced Research
The Company's primary technologies are its semantic network processing
techniques and its proprietary adaptive pattern recognition processing software
(APRP(TM)).
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Excalibur's semantic network leverages lexical knowledge at the highest level,
offering a system to search for specific word meanings enriched by related terms
and concepts. With semantic networks, users find information using natural
language processing. Semantic networks incorporate syntax, morphology and the
actual meaning of words as defined by published dictionaries and other reference
sources.
APRP(TM) consists of a software architecture for processing digital information
to extract patterns in the primary types of computerized data: text, image,
signal and video. The system provides high-speed pattern recognition that can be
used to store, categorize, retrieve and refine data. The processing of digital
patterns provides users with a way to store and use computerized data faster
with more flexibility and with fewer data storage requirements than competing
systems. The Company's pattern recognition methods use neural computing
techniques to process data in a non-algorithmic, parallel fashion by generating
responses to input data. Systems utilizing these methods are unlike traditional
computer systems and are now being used in areas where traditional systems have
been inefficient, such as natural language, machine vision, robotics, pattern
matching and signal recognition. Neural computing systems are "trained" by
processing data, not by programming. Once the system has extracted patterns from
the digital data, these patterns can be sorted, labeled and used to make
decisions.
The Company's research and development program focuses on enhancing and
expanding on the capabilities of its Excalibur RetrievalWare and Visual
RetrievalWare suites of products to address additional markets and exploring and
applying its proprietary pattern recognition technology in new areas such as
image recognition, character recognition and forms recognition. The Company
intends to deliver advanced video analysis technologies based on its pattern
recognition technology to enable organizations and end users to rapidly analyze,
index, retrieve and manipulate analog and digital video assets in an
intranet/Internet environment.
Certain elements of the Company's software products are supplied to the Company
by other independent software vendors under license agreements with varying
terms. Pursuant to these agreements, the Company makes periodic royalty payments
based on either revenues or units. The technologies acquired by the Company in
this manner include word processing filters, optical character recognition
engines and dictionaries and thesauruses in electronic form.
The Company has conducted research and product development of pattern
recognition and natural language systems since 1980. Research and product
development expenditures for the development of new products and enhancements to
existing products were approximately $6.4 million, $6.3 million and $4.4
million, respectively, in the fiscal years ended January 31, 1998, 1997 and
1996.
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Protection of Proprietary Technology
The Company regards its software as proprietary and relies primarily on a
combination of copyright, trademark and trade secret laws of general
applicability, employee confidentiality and invention assignment agreements,
software distribution protection agreements and other intellectual property
protection methods to safeguard its technology and software products. The
Company has not obtained patents on any of its technology. The Company also
relies upon its efforts to design and produce new products and upon improvements
to existing products, to maintain a competitive position in the marketplace.
Competition
Competition in the computer and communications industry in general and the
software development industry in particular, is intense. The Company competes in
multiple markets, including the traditional information retrieval market. This
market has current and potential competitors who are larger and more established
than the Company and have significantly greater financial, technical, marketing
and other resources than the Company. The Company considers its principal
competitive advantage to be the architecture, extensibility to multiple data
types and performance of its products. Specifically, the Company believes that
compared to its primary competition, the Company's products provide users with
more accurate results due to the semantic network and APRP technologies, an
environment which is more scalable due to the distributed search architecture
and more comprehensive searching due to the ability to search multiple types of
data. The Company differentiates its products by using new technology to provide
benefits such as labor savings from reduced manual pre-processing or
organization of data, faster retrieval, access to many kinds of data, full
integration with network architecture and more forgiving interaction in
retrieving information stored in computers. The Company competes with numerous
companies depending on the target market for their products. Most often, the
Company competes directly with companies such as Fulcrum Technologies Inc. and
Verity, Inc. in the information search and retrieval market. Additionally,
Microsoft has announced its intention to market information retrieval software
that will compete with Excalibur's products. There can be no assurance that the
Company will be able to compete successfully against current or future
competitors or that competition will not materially adversely affect the
Company's operating results and financial condition.
The Company's activities currently are subject to no particular regulation by
governmental agencies other than those routinely imposed on corporate businesses
and no such regulation is now anticipated.
Employees
The Company had 168 employees at January 31, 1998, of whom 56 were in research
and development, 61 in sales and marketing, 29 in technical support and training
and 22 in finance and administration. The employees are not covered by
collective bargaining agreements and the management of the Company considers
relations with employees to be good. Competition for qualified personnel within
the Company's industry is intense. There can be no assurance that the Company
will be able to continue to attract, hire, or retain qualified personnel and the
inability to do so could have a material adverse effect upon the Company's
operating results and financial condition.
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Item 2. Properties.
The Company's corporate headquarters facilities are occupied under two sublease
agreements that expire in calendar year 1999 for a total of approximately 18,700
square feet of space in an office building located at 1921 Gallows Road, Vienna,
Virginia 22182. The lease commenced in May 1996.
The Company leases three facilities that serve primarily as software development
and customer support centers. The Company occupies approximately 31,000 square
feet of space in an office building, under a six-year lease that expires in
November 2001, located at 1959 Palomar Oaks Way, Carlsbad, California 92009. The
Company entered into an agreement in fiscal year 1998 to sublease 7,122 square
feet of the space in its Carlsbad location to a third party. The sublease
agreement expires 4/30/98. The Company also occupies approximately 8,125 square
feet of space in an office building located at 10440 Little Patuxent Parkway,
Columbia, Maryland 21044 under a five-year lease that expires in December 2000.
Additionally the Company leases 2,863 square feet of space in an office building
at 4675 Stevens Creek Boulevard, Santa Clara, California 95051. The three year
lease expires June 30, 2000.
The Company leases office space in Windsor, England and Vitrolles, France in
support of its international sales operation. Under these leases, the Company
occupies approximately 3,400 square feet and 800 square feet, respectively. The
two leases for the Windsor offices expire in 1999 and the Vitrolles lease is
renewable every three years over a nine year period, but may be canceled with
six months notice.
During the fiscal years ended January 31, 1997 and 1996, the Company vacated
leased facilities located in McLean, Virginia and San Diego, California. The
leases for the two facilities expired in May 1997 and January 1998 respectively.
The Company believes that its facilities are maintained in good operating
condition and are adequate for its operations.
Item 3. Legal Proceedings.
There are no material pending legal proceedings to which the Company is a party.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to the shareholders for a vote in the three
month period ended January 31, 1998.
11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
The Company's common stock is traded in the over-the-counter market and is
listed on the National Market System of the NASDAQ System under the symbol EXCA.
The following table sets forth, for the period February 1, 1996 through January
31, 1998, the high and low sale prices for the common stock as reported by the
National Market System of NASDAQ. The number of shareholders of record as of
January 31, 1998, was 1,202. The Company has never declared or paid dividends on
its common stock and anticipates that, for the foreseeable future, it will not
pay dividends on its common stock.
High Low
---- ---
Fiscal 1998
(February 1, 1997 - January 31, 1998)
First Quarter.................... $ 13 5/8 $ 4
Second Quarter................... 6 3/4 4
Third Quarter.................... 13 11/16 5 1/2
Fourth Quarter................... 11 7/8 7 1/2
Fiscal 1997
(February 1, 1996 - January 31, 1997)
First Quarter.................... $ 32 $ 22 1/4
Second Quarter................... 26 3/4 14 1/4
Third Quarter.................... 18 3/4 13 5/8
Fourth Quarter................... 19 12
Item 6. Selected Financial Data.
The selected financial data presented below are derived from the Company's
consolidated financial statements and should be read in conjunction with such
consolidated financial statements and notes thereto included elsewhere in this
Annual Report on Form 10-K. The selected financial data presented below as of
January 31, 1996, 1995 and 1994 and for the fiscal years ended January 31, 1995
and 1994 have been derived from consolidated financial statements of the Company
not contained herein. All of the historical information has been restated to
reflect the pooling of interests with ConQuest Software, Inc. ("ConQuest").
12
Fiscal Years Ended January 31,
----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(in thousands, except per share data)
Statement of Operations Data:
Revenues:
Software............. $17,202 $ 15,866 $15,004 $ 10,133 $ 10,878
Maintenance.......... 5,215 4,393 3,671 2,505 1,407
--------- --------- -------- --------- ---------
22,417 20,259 18,675 12,638 12,285
--------- --------- -------- --------- ---------
Expenses:
Sales and marketing.. 13,184 14,430 8,752 9,343 10,049
Research and product
development........ 6,405 6,288 4,416 4,597 4,948
Acquired in-process
research and
development........ 1,284 - - - -
General and
administrative..... 4,884 3,906 3,330 5,597 3,758
Cost of software
revenues........... 3,039 1,630 1,064 767 884
Cost of maintenance
revenues........... 1,219 1,618 1,398 1,498 1,428
Restructuring costs.. 577 - 653 776 -
Merger costs......... - - 490 - -
--------- --------- -------- --------- ---------
30,592 27,872 20,103 22,578 21,067
--------- --------- -------- --------- ---------
Operating loss......... (8,175) (7,613) (1,428) (9,940) (8,782)
Interest income, net... 374 781 544 344 463
Equity in net loss of
affiliate............ (525) (341) - - -
Other income........... - - - 208 -
--------- --------- -------- --------- ---------
Net loss (8,326) (7,173) (884) (9,388) (8,319)
Preferred stock
dividends............ 14 14 14 14 14
--------- --------- -------- --------- ---------
Net loss applicable to
common stock......... $(8,340) $ (7,187) $ (898) $ (9,402) $ (8,333)
========= ========= ======== ========= =========
Basic and diluted net
loss per share of
common stock......... $ (0.64) $ (0.58) $ (0.08) $ (0.85) $ (0.79)
========= ========= ======== ========= =========
Weighted average number
of shares of common
stock outstanding.... 12,934 12,351 11,496 11,094 10,532
========= ========= ======== ========= =========
13
Balance Sheet Data
(at end of period) <F1>:
Cash and cash
equivalents.......... $ 4,939 $ 2,685 $ 2,903 $ 2,645 $ 1,280
Working capital........ 9,747 14,566 12,973 6,908 1,788
Total assets........... 20,045 26,147 23,046 17,951 18,015
Accumulated deficit.... (51,945) (43,619) (36,446) (35,367) (25,965)
Total shareholders'
equity <F2>.......... 13,098 18,563 15,251 9,475 12,363
- -------------
<FN>
<F1> The Company had no significant long-term debt for any of the periods
presented.
<F2> No dividends have been declared or paid on the Company's common stock.
</FN>
14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Overview
The statements contained in this report that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
without limitation statements about the Company's expectations, beliefs,
intentions or strategies regarding the future. All forward-looking statements
included in this report are based on information available to the Company on the
date hereof and the Company assumes no obligation to update any such
forward-looking statements. The forward-looking statements contained herein
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in this report.
The Company principally earns revenues from the licensing of its software
products to commercial businesses and government agencies throughout North
America, Europe and other parts of the world. The Company licenses its software
to end users directly and also distributes its software products through license
agreements with value-added resellers, system integrators, original equipment
manufacturers 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,
scalable, 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.
The Company's software products are designed to enable individuals to quickly
search and retrieve relevant information residing on a LAN/WAN, intranet,
paper-based archive, extranet, video archive or the Internet. The market today
for the Company's products generally consists of two segments, text knowledge
retrieval and video indexing and retrieval. The market for text knowledge
retrieval products consists of electronic publishing, online information
services, global corporate intranets, paper archival systems as well as market,
business and government intelligence. The market for video indexing and
retrieval solutions includes application and website developers, certain
government agencies as well as commercial media, entertainment and broadcasting
companies.
15
The Company analyzes its business based on these two business segments. Text
knowledge retrieval products include the RetrievalWare family of products and
EFS. Visual products include Visual RetrievalWare, VAE and the suite of video
applications to be released in fiscal year 1999.
The following chart represents revenues and expenses (in thousands of dollars)
attributable to the text and visual businesses for the years ending January 31,
1998, 1997 and 1996. Expenses for each business consist of expenses directly
attributable to the business unit and allocated expenses and exclude
restructuring costs, merger costs and acquired in-process research and
development costs.
Text Business Visual Business
Fiscal Years Ending Fiscal Years Ending
January 31, January 31,
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
Total Revenue $21,791 $19,351 $18,675 $ 626 $ 908 $ -
Operating Expenses 24,209 22,879 15,926 4,522 4,993 3,034
------- ------- ------- ------ ------ ------
Operating Income
(Loss) $(2,418) $(3,528) $ 2,749 $(3,896) $(4,085) $(3,034)
The Company believes that in addition to other competitive advantages, it holds
a competitive advantage in that the Company's products accommodate the indexing
and retrieval of multiple data types. The Company expects that over time, if
video becomes a more common data type, these two markets may merge.
On May 5, 1997, the Company acquired Interpix Software Corporation, 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 year ended January 31, 1998 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 fiscal year 1998.
The Company reorganized its sales force and made other changes to the overall
organization at the end of the first quarter of fiscal year 1998. 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
consisted of severance pay and benefits for terminated employees. All payments
associated with the restructuring charge were paid prior to the fiscal year end.
16
In July 1995, the Company acquired ConQuest Software, Inc, a private company
engaged in the business of providing natural language text management software
tools. The acquisition was effected through the Company's issuance of common
stock and options to purchase common stock to the former ConQuest shareholders
and optionholders in exchange for all of the outstanding common stock of
ConQuest. The business combination was accounted for as a pooling of interests
and, accordingly, the Company's consolidated financial statements and the
discussion and analysis of such statements contained herein reflect the combined
results of the pooled businesses for all of the periods presented.
Results of Operations
For the fiscal year ended January 31, 1998, total revenues were $22,417,000, an
increase of 11% over total revenues of $20,259,000 in the prior fiscal year. The
net loss for the fiscal year ended January 31, 1998 was $8,326,000, or $0.64 per
common share, compared to a net loss of $7,173,000, or $0.58 per common share,
for the same period last fiscal year. Excluding a charge of $1,284,000 for
in-process research and development expenses related to the Interpix acquisition
and $577,000 for restructuring charges, the net loss for the fiscal year ended
January 31, 1998 was $6,465,000. The prior-year total revenues amount
represented an 8% increase over total revenues of $18,675,000 in the fiscal year
ended January 31, 1996. The net loss for fiscal year 1996 was $884,000, or $0.08
per common share.
17
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 fiscal years in the period ended January 31, 1998 and the percentage
changes in the amounts between fiscal years (dollars in thousands).
Increase
(Decrease)
From fiscal
Fiscal years ended January 31, year
------------------------------------------------ ------------
1998 1997 1996 1997 1996
-------------- -------------- -------------- ---- ----
$ % $ % $ % % %
------- ---- ------- ---- ------- ---- ---- ----
Revenues:
RetrievalWare $15,083 67% $ 8,572 42% $ 4,792 26% 76% 79%
EFS 1,591 7% 6,474 32% 10,212 55% -75% -37%
Visual Products
Group 528 2% 820 4% -- -- -36% --%
------- ---- ------- ---- ------- ---- ---- ----
Total software 17,202 77% 15,866 78% 15,004 80% 8% 6%
Maintenance 5,215 23% 4,393 22% 3,671 20% 19% 20%
------- ---- ------- ---- ------- ---- ---- ----
Total revenues $22,417 100% $20,259 100% $18,675 100% 11% 8%
======= ==== ======= ==== ======= ==== ==== ====
Expenses:
Sales and
marketing $13,184 59% $14,429 71% $ 8,752 47% -9% 65%
Research and
product
development 6,405 29% 6,289 31% 4,416 24% 2% 42%
Acquisition of
In-process
research and
development 1,284 6% -- -- -- -- -- --
General and
administrative 4,884 22% 3,906 19% 3,330 18% 25% 17%
Cost of
revenues 4,258 19% 3,248 16% 2,462 13% 31% 32%
Restructure &
merger costs 577 3% -- -- 1,143 6% - -100%
------- ---- ------- ---- ------- ---- ---- -----
Total expenses $30,592 136% $27,872 138% $20,103 108% 10% 39%
======= ==== ======= ==== ======= ==== ==== =====
18
Software revenues increased 8% in the current fiscal year to $17,202,000 from
$15,866,000 in the prior fiscal year. During fiscal year 1998 the Company
effectively transitioned from the EFS product line to the Excalibur
RetrievalWare product family. RetrievalWare revenue growth was positively
impacted by the introduction of the RetrievalWare FileRoom product in the third
quarter of fiscal 1998, which allowed the EFS customer base to make a smooth
transition to RetrievalWare. Product revenue from RetrievalWare increased 76% to
$15,083,000 in fiscal year 1998 from $8,572,000 last year. Revenues for
RetrievalWare were $4,792,000 in fiscal year 1996. Excalibur RetrievalWare has
emerged as the Company's dominant product line representing 88% of software
revenues in fiscal 1998 compared to 54% and 32%, in fiscal years 1997 and 1996,
respectively.
The Company continued to attract some of the world's largest organizations as
customers in fiscal year 1998. Some of Excalibur's new customers include Sony
Marketing of Japan and Applied Materials. Excalibur was chosen as the key
retrieval technology for Anheuser Busch, Boeing and the United States Department
of Agriculture. In the broadcasting and entertainment industry, Turner
Entertainment and Viacom were new customers in fiscal year 1998. In
telecommunications, the Company forged new agreements with GTE, Northern Telecom
and Geo-Com.
The Company also earns revenues through software distribution licenses with
strategic partners. In the second quarter of fiscal year 1998 the Company
announced its new partners' program, Excalibur Edge(TM). The Program provides
partners with the Excalibur RetrievalWare family of products and includes
marketing opportunities, comprehensive sales support, product certification and
entry into the knowledge retrieval market. Some of the world's largest
technology companies have become Excalibur partners including Microsoft,
Computer Associates, Sony Marketing of Japan, Sequent Computer Systems, Inc.,
Informix Software Inc., Korea Electric Power Data Network Co. Ltd. ("KDN"),
Trion Technologies, Inc., BTG Inc. and KPMG Peat Marwick LLP.
Revenue growth continued during fiscal year 1998 for the Company's international
sales operation, Excalibur Technologies International, Ltd. ("ETIL"),
headquartered in the United Kingdom. Revenues were $7,838,000, $5,940,000 and
$3,551,000, respectively, in fiscal years 1998, 1997 and 1996. The increases in
revenues in fiscal years 1998 and 1997 over the previous fiscal years were 32%
and 67%, respectively. Overall revenue of the Company's international operations
increased in spite of the Asian financial crisis which had a negative impact on
Excalibur sales in the Pacific Rim. Revenues in the Pacific Rim were 15% less in
fiscal year 1998 compared to 1997. Pacific Rim revenues increased 97% in fiscal
year 1997 compared to 1996. During this three-year period, revenues from
international operations have been provided primarily by software licenses with
various European commercial and government customers and a well-established
European reseller network.
Excalibur continued to expand its government market presence both in the U.S.
and abroad. This included new installations supporting the U.S. Army, Navy, Air
Force and intelligence community, along with new installations for government
entities in Sweden.
19
The Company's transition to the Excalibur RetrievalWare product line and the
introduction of RetrievalWare FileRoom resulted in the continued downward trend
of EFS software product revenue in fiscal year 1998. Revenues from the licensing
of Excalibur EFS software products, expressed as a percentage of total software
revenue was 9% in fiscal year 1998, compared to 41% and 68%, respectively, in
fiscal years 1997 and 1996. The Company continued to focus development and sales
and marketing expenditures in fiscal year 1998 on RetrievalWare and Visual
RetrievalWare software products. The decline in EFS revenues was more than
offset by increased sales of RetrievalWare products.
Software maintenance and customer support revenues were $5,215,000, $4,393,000
and $3,671,000, respectively, in fiscal years 1998, 1997 and 1996. The increases
in revenues in fiscal years 1998 and 1997 over the previous fiscal years were
19% and 20%, respectively. Additions to the RetrievalWare customer base
accounted for the increased revenues.
Sales and marketing costs decreased 9% in fiscal year 1998, from $14,429,000 in
fiscal year 1997 to $13,184,000 in fiscal year 1998. A reduction in marketing
programs that do not directly relate to revenues in the current fiscal year was
a major component of the decrease. The reorganization in the first quarter of
fiscal year 1998 resulted in significant organizational and management changes.
As part of a company-wide workforce reduction of 10%, the number of sales and
marketing personnel decreased from 66 at the end of fiscal year 1997 to 61 at
the end of fiscal year 1998. As a result, salaries, benefits, travel and other
employee related costs were reduced.
In fiscal year 1997, sales and marketing costs increased by 65% to $14,429,000
from $8,752,000 in fiscal year 1996. During fiscal year 1997 the Company was
focused on building the sales, marketing and business development staffs. A
total of 15 people were added to these departments. As a result, salaries,
benefits, travel, recruiting fees and certain other employee costs increased
significantly between fiscal years. The Company incurred increased costs in
connection with its product promotion and brand recognition programs. The
Company was very active in demonstrating its products at trade shows and
industry meetings, creating new product literature and advertising in computer
industry trade publications. The Company also engaged the services of a public
relations firm to assist its marketing efforts resulting in increased consulting
costs. In fiscal year 1997, the Company also recorded employee severance costs,
including salaries and benefits, amounting to approximately $358,000, related to
the termination of certain sales, marketing and business development personnel.
During fiscal year 1998, the Company continued to develop new products and new
product features while increasing research and product development expenses
modestly. Research and product development costs increased 2% in fiscal year
1998 to $6,405,000 from $6,289,000 in fiscal year 1997. Continued development of
the Excalibur RetrievalWare products was emphasized in fiscal year 1998 while
EFS product development was significantly curtailed. The reduction in costs
associated with the development of the EFS product line was offset by similar
increases in costs for the development of Excalibur RetrievalWare products.
During the year, the Company introduced Excalibur RetrievalWare 6.5 which
features several major enhancements including the introduction of Excalibur
RetrievalWare FileRoom. The FileRoom option represents an upgrade path for users
of the Company's EFS product and is designed to help organizations better
utilize all of their knowledge assets by enabling them to search for both
paper-based and electronic documents as a unified view using an industry
standard web-browser. In addition, Excalibur RetrievalWare 6.5 delivers enhanced
summarization capabilities, search client improvements and metadata clustering.
20
In the second quarter of fiscal year 1998, the Company recorded a charge to
expense of $1,284,000 for the cost of in-process research and development
acquired in the merger with Interpix. The purchase facilitated the broadening of
the Company's product line with the introduction of Excalibur Internet Spider, a
multimedia web crawler that enables end users and application developers to
access and leverage multimedia information published on intranets and the World
Wide Web. Cost cutting measures taken in the first quarter of fiscal year 1998
helped offset the additional expenses associated with the Interpix development
group. Streamlining of the services department and a reduction of the work force
reduced employee related expenses of research and development. Including the
acquired Interpix employees, personnel in the research and product development
decreased by one person, to 85 in fiscal year 1998.
In fiscal year 1997, the Company made a major investment in product development
in order to develop new products and enhance existing products. During fiscal
year 1997 the Company introduced RetrievalWare Version 6.0 as well as Visual
RetrievalWare, an application development environment product that enables users
to search for visual information directly from their intranets, corporate data
bases, the Internet and other sources. As a result, research and product
development costs increased 42% in fiscal year 1997 to $6,289,000 from
$4,416,000 in fiscal year 1996. Most of the increase was due to the addition of
25 employees to the technical staff, including software engineering and
management personnel and to the expansion of the product development facilities.
Consequently, salaries and other employee costs increased between years as well
as office rent, equipment costs and computer equipment depreciation.
General and administrative expenses increased from $3,330,000 in fiscal year
1996 to $3,906,000 in fiscal year 1997 and to $4,884,000 in fiscal year 1998.
The increases were primarily due to increased staffing and related expenditures
in the areas of human resources, information systems and financial analysis
required to support the Company's growth. Bad debt expense in fiscal years 1998,
1997 and 1996 was $250,000, $150,000 and $91,000, respectively.
In fiscal year 1998, the cost of revenues, expressed as a percentage of total
revenues, was 19%, a 3% increase over the 16% recorded in fiscal year 1997. Cost
of revenues was $4,258,000 and $3,248,000, respectively, in fiscal years 1998
and 1997. The increase relates primarily to the formation of a product
implementation group late in fiscal year 1997, which grew to 8 employees by the
end of fiscal year 1998, resulting in additional salaries expense,
implementation project subcontractors expense, as well as increased overhead
costs. Additionally, cost of revenues in fiscal year 1998 contained amortization
expense of intangible assets associated with the acquisition of Interpix. A
series of Excalibur RetrievalWare releases shipped throughout the year also
factored into the increase. Costs of electronic media, documentation and related
shipping costs all increased as a result. Reorganization and streamlining of the
customer support group in the first quarter of the current fiscal year cut
expenses and decreased the costs of maintenance as compared with the
corresponding costs in fiscal year 1997.
The cost of revenues, expressed as a percentage of total revenues, increased 3%,
to 16% in fiscal year 1997 from 13% in fiscal year 1996. Upgraded training
facilities and additional staffing in the education services department were
primarily responsible for the increase. Increased costs associated with
supporting the larger installed base of Excalibur RetrievalWare end-users were
also a contributing factor.
21
The Company reorganized its sales force and made other changes to the overall
organization at the end of the first quarter of fiscal year 1998. The Company
reduced its workforce by approximately 10% and recorded a restructuring charge
of $577,000 in the first quarter. The charge consisted of severance pay and
benefits for terminated employees. In fiscal year 1996, the Company recorded a
restructuring charge of $653,000 related to the relocation of its headquarters
from California to the Washington, D.C. area and the consolidation of the
technical teams into two facilities. The costs consisted primarily of severance
payments to terminated employees and leased facility abandonment costs. The
Company also incurred $490,000 in legal, accounting and other costs associated
with the merger with ConQuest.
The activities for fiscal year 1998, including those discussed above, resulted
in total expenses of $30,592,000, a 10% increase from total expenses of
$27,872,000 in the previous fiscal year. In fiscal year 1997, total expenses
increased by 39% to $27,872,000 from $20,103,000 in fiscal year 1996. The total
number of employees decreased from 173 employees at the beginning of the current
fiscal year to 168 at January 31, 1998. The Company had 126 employees at January
31, 1996.
As a result of a decreased level of investments held during fiscal year 1998,
net interest income decreased to $374,000 from $781,000 in fiscal year 1997. Net
interest income increased $237,000 in fiscal year 1997, from $544,000 in fiscal
year 1996, primarily due to a higher level of invested funds. As discussed in
Note 3 to the consolidated financial statements contained herein, the Company
recorded its equity in the net loss of its affiliate, ETNV, for the fiscal year
ended January 31, 1998. This charge in fiscal 1998, including the amortization
of the excess of the Company's investment over the Company's share of the
underlying net assets of ETNV and the elimination by the Company of its share of
its gross profit included in ETNV's prepaid license balance at January 31, 1998,
was $525,000.
Liquidity and Capital Resources
In the fiscal year ended January 31, 1998, the Company's combined balance of
cash, cash equivalents and investments in marketable securities decreased by
$4,677,000 to $6,435,000 as summarized below (in thousands). At January 31, 1998
and 1997, investments in marketable securities consisted of U.S.Treasury Bills
with maturities of less than one year.
January 31 January 31
1998 1997 Change
---------- ----------- -----------
Cash and cash
equivalents $ 4,939 $ 2,685 $ 2,254
Investments 1,496 8,427 (6,931)
---------- ----------- -----------
Total $ 6,435 $ 11,112 $ (4,677)
========== =========== ===========
22
Cash of $4,376,000, used to fund operations for the fiscal year ended January
31, 1998, was significantly less than the $8,326,000 net loss for the year due
primarily to several non-cash charges. Those charges, which totaled $3,350,000,
included acquired research and development costs of $1,284,000, depreciation and
amortization of $1,540,000 and the Company's share of the net loss of ETNV and
amortization of ETNV warrants totaling $525,000. Reductions in accounts
receivable and prepaid expenses provided $781,000. In fiscal year 1997 cash used
in operations was $8,703,000, consisting primarily of the $7,173,000 loss.
In fiscal year 1998, the exercise of employee stock options provided $613,000.
In fiscal year 1997, $9,722,000 was provided from the issuance of common stock.
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 $1,334,000.
For the year ended January 31, 1998, net cash was provided from the maturity of
Treasury Bills of $6,931,000. Net cash of $55,000 was provided as a result of
the acquisition of Interpix. In the current year, cash was also used to purchase
computer and other equipment with a total cost of $757,000 and to make a $95,000
loan to ETNV. In fiscal year 1997 fixed asset additions totaled $2,394,000. Cash
was used to fund the purchase of furniture, equipment and leasehold improvements
for the Company's new corporate headquarters in Vienna, Virginia. In July 1996,
the Company made a cash investment of $488,000 in ETNV and incurred
organizational costs of approximately $68,000 in connection with its formation,
thereby acquiring approximately 13.2% of the outstanding voting capital stock.
The number of days sales outstanding ("DSO") at January 31, 1998 declined
significantly from the number at January 31, 1997. Management believes that the
allowance for doubtful accounts of $527,000 at January 31, 1998 is adequate.
The Company's current balances of cash, cash equivalents and investments are
expected to provide sufficient cash to meet the Company's current projected
needs for the next fiscal year. Historically, the Company has used cash provided
primarily from sales of its common stock to fund its operating losses. If the
Company fails to achieve its operating plan for fiscal year 1999, the Company's
balance of cash, cash equivalents and marketable securities may be reduced
substantially. The Company may be required to pursue additional external sources
of financing to support its operations and capital requirements. There can be no
assurance that external sources of financing will be available to fund the
Company's ongoing operations or other capital requirements on terms acceptable
to the Company.
23
Factors That May Affect Future Results
The Company's business environment is characterized by intense competition,
rapid technological changes, changes in customer requirements and emerging new
market segments. Consequently, to compete effectively, the Company must make
frequent new product introductions and enhancements while protecting its
intellectual property, retain its key personnel and deploy sales and marketing
resources to take advantage of new business opportunities. Future operating
results will be affected by the ability of the Company to expand its product
distribution channels and to manage the expected growth of the Company. Future
results may also be impacted by the effectiveness of the Company in executing
future acquisitions and integrating the operations of acquired companies with
those of the Company. Failure to meet any of these challenges could adversely
affect future operating results.
The Company's quarterly operating results have varied substantially in the past
and are likely to vary substantially from quarter to quarter in the future due
to a variety of factors. In particular, the Company's period-to-period operating
results are significantly dependent upon the timing of the closing of large
license agreements. In this regard, the purchase of the Company's products can
require a significant capital investment from a potential customer which the
customer generally views as a discretionary cost that can be deferred or
canceled due to budgetary or other business reasons and can involve long sales
cycles of six months or more. Estimating future revenues is also difficult
because the Company ships its products soon after an order is received and as
such does not have a significant backlog. Thus, quarterly license fee revenues
are heavily 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.
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 somewhat inhibited the overall
revenue growth that management had expected for the last four quarters.
24
As a result, near the end of the first quarter of fiscal year 1998, the
short-term revenue expectations of management were moderated and planned
expenditures were reduced. As discussed previously, 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 has facilitated 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 video 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,
third and fourth quarters of fiscal year 1998. Revenues for each of these
quarters were increased from first quarter revenues and the level of quarterly
costs and expenses was reduced. As a result, operating losses were reduced in
the second and third quarters of fiscal year 1998 and net income of $80
thousand, or $0.01 per common share was recorded in the fourth quarter of fiscal
year 1998. The use of cash was slowed 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 next
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.
As of January 31, 1998, the Company had significant net operating loss
carryforwards ("NOLs") of approximately $67,066,000. The deferred tax assets
representing the benefits of the NOLs have been offset completely by a valuation
allowance due to the Company's lack of an earnings history. The Company incurred
a net loss of $8,326,000 for the fiscal year ended January 31, 1998 and has
incurred cumulative losses of approximately $16,383,000 over the last three
fiscal years. The accumulated deficit of the Company at January 31, 1998 was
$51,945,000. The realization of the benefits of the NOLs is dependent on
sufficient taxable income in future fiscal years. Lack of future earnings, or a
change in the ownership of the Company, could adversely affect the Company's
ability to utilize the NOLs. Further, because there was a change in the
ownership of ConQuest in fiscal year 1996, 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.
25
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company believes that inflation has not had a material effect on the results
of its operations to date.
Other Factors
The Company is in the process of identifying operating and application software
challenges related to the year 2000. While the Company expects to resolve year
2000 compliance issues substantially through normal replacement and upgrades of
software, there can be no assurance that there will not be interruption of
operations or other limitations of system functionality or that the Company will
not incur substantial costs to avoid such limitations. Any failure to
effectively monitor, implement or improve the Company's operational, financial,
management and technical support systems could have a material adverse effect on
the Company's business and consolidated results of operations.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board, ("FASB") issued SFAS
No. 128, "Earnings Per Share." SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997. SFAS No. 128
requires dual presentation of basic and diluted earnings per share ("EPS").
Basic EPS includes no dilution and is computed by dividing net loss available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted loss per share includes the potential dilution that
would occur if securities or other contracts to issue common stock were
exercised or converted into common stock. The Company has implemented SFAS No.
128 in fiscal year 1998 and it has had no material impact.
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 is
evaluating these statements to determine the impact on its reporting and
disclosure requirements.
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, "Software Revenue Recognition," is
effective for revenue transactions entered into by the Company in its fiscal
year ending January 31, 1999. Management believes that the changes contained in
SOP 97-2 will not have a material adverse financial impact on the Company.
26
Item 8. Financial Statements and Supplementary Data.
Financial statements and supplementary data of the Company are submitted as a
separate section of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
27
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information on directors and executive officers of the Company will be included
under the heading "Election of Directors" and elsewhere in the Company's
definitive Proxy Statement relating to the Annual Meeting of Shareholders to be
held on June 18, 1998 (the "Proxy Statement") which is incorporated herein by
reference.
Item 11. Executive Compensation.
Information on executive compensation will be included under the heading
"Executive Compensation" of the Proxy Statement incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information of beneficial ownership of the Company's voting securities by each
director and all officers and directors as a group and by any person known to
beneficially own more than 5% of any class of voting security of the Company
will be included under the heading "Security Ownership of Certain Beneficial
Owners and Management" in the Proxy Statement incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
Information relating to certain relationships and related transactions will be
included under the heading "Certain Relationships and Related Transactions" in
the Proxy Statement incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents filed as part of Form 10-K
1. Financial Statements:
The following financial statements of the Company are submitted in a
separate section pursuant to the requirements of Form 10-K, Part I,
Item 8 and Part IV, Items 14(a) and 14(d):
Index to Consolidated Financial Statements
Report of Independent Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
28
2. Schedules Supporting Financial Statements:
The following schedule is filed as part of this Annual Report on Form
10-K and should be read in conjunction with the Company's consolidated
financial statements:
Report of Independent Public Accountants, on Schedule
Schedule II, Valuation and Qualifying Accounts
All other schedules are omitted because they are not required,
are inapplicable, or the information is otherwise shown in the
consolidated financial statements or notes to the consolidated
financial statements.
3. Exhibits:
Exhibit Number and Description
------------------------------
2.01 Agreement and Plan of Merger Between Excalibur, Excalibur
Acquisition Corporation and ConQuest Software, Inc., dated
July 5, 1995. (2)
2.02 Agreement of Merger Between Excalibur, EXCA Acquisition
Corporation and Interpix Software Corporation, dated May 2,
1997.
3.01 Certificate of Incorporation of Excalibur Technologies
Corporation. (1)
3.02 Amendment of the Certificate of Incorporation dated
June 28, 1996. (6)
3.03 Bylaws of Excalibur Technologies Corporation. (1)
10.04 Consulting Agreement with James W. Dowe III, dated
July 1, 1990. (1)
10.05 Incentive Stock Option Plan, dated April 1989. (1)
10.06 Agreement and Plan of Merger Between Excalibur, Excalibur
Acquisition Corporation and ConQuest Software, Inc., dated
July 5, 1995. (2)
10.07 Employment Agreement, dated July 20, 1995, with Edwin R.
Addison. (4)
10.08 1995 Incentive Plan, dated November 1995. (3)
10.09 ConQuest Incentive Stock Option Plan, dated August 19,
1993. (4)
10.10 Office Lease (10440 Little Patuxent Parkway, Suite 800,
Columbia, Maryland), commencing January 1, 1996. (4)
29
10.11 Office Lease (1959 Palomar Oaks Way, Carlsbad, California),
commencing November 15, 1995. (4)
10.12 Office Lease (1921 Gallows Road, Vienna, Va.), commencing
May 1996. (4)
10.13 Excalibur Technologies Corporation Employee Stock Purchase
Plan, effective August 1, 1996. (5)
10.14 Office Lease (4675 Stevens Creek Boulevard, Santa Clara,
California 95051), commencing July 1, 1997
22.01 Subsidiaries of Excalibur Technologies Corporation.
23.01 Consent of Arthur Andersen LLP, Independent Public
Accountants.
- ----------------------
(1) Incorporated herein by reference to Form 10-K for the year ended January
31, 1991, filed April 22, 1991.
(2) Incorporated herein by reference to Form 8-K, filed August 4, 1995.
(3) Incorporated herein by reference to the Proxy Statement for the 1995
Annual Meeting of Shareholders, dated October 16, 1995.
(4) Incorporated herein by reference to Form 10-K for the year ended January
31, 1996, filed April 30, 1996.
(5) Incorporated herein by reference to the Proxy Statement for the 1996
Annual Meeting of Shareholders, dated May 28, 1996.
(6) Incorporated herein by reference to Form 10-K for the year ended January
31, 1997, filed April 28, 1997.
(b) Reports on Form 8-K.
None.
30
Index to Consolidated Financial Statements Page
Reports of Independent Public Accountants F-1, F-21
Consolidated Balance Sheets
As of January 31, 1998 and 1997 F-2
Consolidated Statements of Operations
For the fiscal years ended January 31, 1998, 1997 and 1996 F-3
Consolidated Statements of Shareholders' Equity
For the fiscal years ended January 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Cash Flows
For the fiscal years ended January 31, 1998, 1997 and 1996 F-5
Notes to Consolidated Financial Statements F-7
Schedule II - Valuation and Qualifying Accounts
For the fiscal years ended January 31, 1998, 1997 and 1996 F-22
31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Excalibur Technologies Corporation:
We have audited the accompanying consolidated balance sheets of Excalibur
Technologies Corporation (a Delaware corporation) and subsidiaries as of January
31, 1998 and 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended January 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Excalibur Technologies
Corporation and subsidiaries as of January 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended January 31, 1998 in conformity with generally accepted accounting
principles.
/s/ARTHUR ANDERSEN LLP
Washington, D.C.,
February 27, 1998
F-1
EXCALIBUR TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
January 31,
------------------------
ASSETS 1998 1997
--------- ---------
Current Assets:
Cash and cash equivalents.................... $ 4,939 $ 2,685
U.S. government securities, at cost.......... 1,496 8,427
Accounts receivable, net..................... 9,189 9,383
Prepaid expenses and other .................. 1,071 1,655
--------- ---------
Total current assets.................... 16,695 22,150
Equipment and Leasehold Improvements, net....... 2,267 2,939
Other Assets.................................... 1,083 1,058
--------- ---------
$ 20,045 $ 26,147
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................. $ 2,106 $ 1,680
Accrued expenses............................. 1,886 2,310
Deferred revenues............................ 2,708 2,693
Deferred compensation........................ 247 901
--------- ---------
Total current liabilities............... 6,947 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, $0.01 par value, 40,000
Shares authorized; 13,179 and 12,449
shares issued and outstanding.......... 132 124
Additional paid-in capital................... 64,714 61,830
Accumulated deficit ......................... (51,945) (43,619)
Cumulative translation adjustment............ (74) (43)
--------- ---------
Total shareholders' equity.............. 13,098 18,563
--------- ---------
$ 20,045 $ 26,147
========= =========
The accompanying notes to the consolidated financial statements are an
integral part of these consolidated balance sheets.
F-2
EXCALIBUR TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
For the Fiscal Years Ended January 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
Revenues:
Software ..................... $ 17,202 $ 15,866 $ 15,004
Maintenance .................. 5,215 4,393 3,671
-------- -------- --------
22,417 20,259 18,675
-------- -------- --------
Expenses:
Sales and marketing .......... 13,184 14,430 8,752
Research and product
development ................ 6,405 6,288 4,416
Acquired in-process research
and development ............ 1,284 -- --
General and administrative ... 4,884 3,906 3,330
Cost of software revenues .... 3,039 1,630 1,064
Cost of maintenance revenues.. 1,219 1,618 1,398
Restructuring costs .......... 577 -- 653
Merger costs ................. -- -- 490
-------- -------- --------
30,592 27,872 20,103
-------- -------- --------
Operating loss .................. (8,175) (7,613) (1,428)
Other income (expenses):
Interest income, net ......... 374 781 544
Equity in net loss of
affiliate ................... (525) (341) --
-------- -------- --------
Net loss ........................ (8,326) (7,173) (884)
Dividends on preferred stock .... 14 14 14
-------- -------- --------
Net loss applicable to
common stock ................. $ (8,340) $ (7,187) $ (898)
======== ======== ========
Basic and diluted net loss per
common share ................. $ (0.64) $ (0.58) $ (0.08)
======== ======== ========
Weighted-average number of
common shares outstanding .... 12,934 12,351 11,496
======== ======== ========
The accompanying notes to the consolidated financial statements are an
integral part of these consolidated statements.
F-3
EXCALIBUR TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Preferred Stock Common Stock Add'l Cumulative
--------------- ------------ Paid-in Deferred Accumulated Translation
Shares $ Shares $ Capital Comp. Deficit Adjust. Total
------ ----- ------ ---- -------- ------- --------- ------ --------
Balance, January 31, 1995. 27 $ 271 11,231 $112 $44,523 $ (38) $(35,367) $ (26) $ 9,475
Issuance of common stock
upon exercise of options.. - - 714 7 6,726 - - - 6,733
Issuance of common stock
for services.............. - - 8 - 36 - - - 36
Amortization of deferred
compensation.............. - - - - (13) 38 - - 25
Accrued dividends paid.... - - - - - - (14) - (14)
Translation adjustment.... - - - - - - - 61 61
Adjustment for change in
ConQuest fiscal year...... - - - - - - (181) - (181)
Net loss.................. - - - - - - (884) - (884)
------ ----- ------ ---- -------- ------- --------- ------ --------
Balance, January 31, 1996. 27 $ 271 11,953 $119 $51,272 - $(36,446) $ 35 $15,251
Issuance of common stock
upon exercise of options.. - - 146 1 1,416 - - - 1,417
Sale of common stock, net
of offering costs......... - - 350 4 8,384 - - - 8,388
Issuance of warrants to
ETNV investors............ - - - - 758 - - - 758
Translation adjustment.... - - - - - - - (78) (78)
Net loss.................. - - - - - - (7,173) - (7,173)
------ ----- ------ ---- -------- ------- --------- ------ --------
Balance, January 31, 1997. 27 $ 271 12,449 $124 $61,830 - $(43,619) $ (43) $18,563
Issuance of common stock
upon exercise of options.. - - 415 4 781 - - - 785
Issuance of common stock
for acquisition of
Interpix.................. - - 275 3 1,819 - - - 1,822
Issuance of common stock
for Employee Stock
Purchase Plan............. - - 40 1 284 - - - 285
Translation adjustment.... - - - - - - - (31) (31)
Net loss.................. - - - - - - (8,326) - (8,326)
------ ----- ------ ---- -------- ------- --------- ------ --------
Balance, January 31, 1998. 27 $ 271 13,179 132 $64,714 - $(51,945) $ (74) $13,098
====== ===== ====== ==== ======== ======= ========= ====== ========
The accompanying notes to the consolidated financial statements are an
integral part of these consolidated statements.
F-4
EXCALIBUR TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Fiscal Years Ended
January 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
Cash Flows from Operating Activities:
Net loss ................................... $ (8,326) $ (7,173) $ (884)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ........... 1,540 1,367 1,048
Acquired in-process research and
development costs........................ 1,284 -- --
Equity in net loss of affiliate ......... 525 341 --
Loss on disposal of assets .............. 2 36 66
Compensation paid in common stock ....... -- -- 36
Amortization of deferred compensation ... -- -- 25
Changes in operating assets and liabilities:
Accounts receivable, net ................ 254 (2,324) (3,289)
Prepaid expenses and other .............. 527 (767) (476)
Accounts payable and accrued expenses ... (193) (97) (41)
Deferred revenues ....................... 11 (86) (244)
Adjustment for change in fiscal year
of ConQuest.............................. -- -- (181)
-------- -------- --------
Net cash used in operating activities ... (4,376) (8,703) (3,940)
-------- -------- --------
Cash Flows from Investing Activities:
Purchase of investments ................. (22,301) (17,959) (12,023)
Proceeds from maturities of investments.. 29,231 19,873 10,287
Purchases of equipment and leasehold
improvements............................. (757) (2,394) (541)
Loan to/Investment in affiliate ......... (95) (556) --
Acquisition, net of cash used ........... 55 -- --
-------- -------- --------
Net cash provided by (used in)
investing activities..................... 6,133 (1,036) (2,277)
-------- -------- --------
Cash Flows from Financing Activities:
Proceeds from notes payable ............. -- -- 238
Proceeds from the issuance of
common stock............................. 613 9,722 6,688
Dividends paid .......................... -- -- (14)
Repayment of notes payable .............. (40) (39) (549)
-------- -------- --------
Net cash provided by financing
activities............................... 573 9,683 6,363
-------- -------- --------
The Effect of Exchange Rate Changes
on Cash..................................... (76) (162) 112
-------- -------- --------
Net Increase (Decrease) in Cash and
Cash Equivalents............................ 2,254 (218) 258
Cash and Cash Equivalents,
beginning of period......................... 2,685 2,903 2,645
-------- -------- --------
Cash and Cash Equivalents, end of period ... $ 4,939 $ 2,685 $ 2,903
======== ======== ========
The accompanying notes to the consolidated financial statements are an
integral part of these consolidated statements.
F-5
EXCALIBUR TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued, in thousands)
For the Fiscal Years Ended
January 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
Supplemental Disclosures of Cash Flow
Information:
Cash paid for interest................... $ 2 $ 11 $ 61
========= ========= =========
Supplemental Disclosures of Noncash
Investing and Financing Activities:
Issuance of warrants to purchase
common stock............................. $ - $ 758 $ -
========= ========= =========
Stock options exercised under
deferred compensation arrangements....... $ 457 $ 83 $ 45
========= ========= =========
Issuance of common stock to acquire
Interpix................................. $ 1,822 $ - $ -
========= ========= =========
The accompanying notes to the consolidated financial statements are an
integral part of these consolidated statements .
F-6
EXCALIBUR TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY
Operations and Organization
The consolidated financial statements include the accounts of Excalibur
Technologies Corporation ("Excalibur") and its wholly-owned subsidiaries. These
entities are collectively referred to hereinafter as the "Company." All
significant intercompany transactions and accounts have been eliminated. Certain
amounts presented in the prior years' financial statements have been
reclassified to conform with the fiscal year 1998 presentation.
The Company designs, develops and markets knowledge retrieval software products
capable of supporting paper, text, image and video 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 has incurred cumulative losses of approximately $16.4 million over
the last three fiscal years and the accumulated deficit of the Company at
January 31, 1998 was $51.9 million. 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.
The Company's current balances of cash, cash equivalents and investments are
expected to provide sufficient cash to meet the Company's current projected
needs for the next fiscal year. Historically, the Company has used cash provided
primarily from sales of its common stock to fund its operating losses. If the
Company fails to achieve its operating plan for fiscal year 1999, the Company's
balance of cash, cash equivalents and marketable securities may be reduced
substantially. The Company may be required to pursue additional external sources
of financing to support its operations and capital requirements. There can be no
assurance that external sources of financing will be available to fund the
Company's ongoing operations or other capital requirements on terms acceptable
to the Company.
F-7
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 period ended January 31, 1998 from the date of
acquisition. The results of operations for Interpix prior to the acquisition
were not material.
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 totaling
$1,822,000 and out-of-pocket acquisition costs which totaled $45,000. The
purchase price 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 is being amortized on a straight-line basis over five years. The
amount of amortization for the year ended January 31, 1998 was approximately
$81,000.
Acquisition of ConQuest Software, Inc.
In July 1995, Excalibur acquired ConQuest, a private company located in
Columbia, Maryland, engaged in the business of providing natural language text
management software tools. The former shareholders of ConQuest received
approximately 1,427,000 shares of common stock of Excalibur in exchange for all
of the common stock of ConQuest. Outstanding options to purchase common stock of
ConQuest were converted into options to purchase approximately 572,000 shares of
Excalibur common stock. The acquisition was accounted for as a pooling of
interests and, as such, the accompanying consolidated financial statements
reflect the combined results of the pooled businesses for the respective periods
presented. In fiscal year 1996, the Company recorded a charge of approximately
$490,000 for the estimated transaction costs of completing the merger between
Excalibur and ConQuest. The costs included legal, accounting and other
professional fees of $363,000 and other costs of $127,000. These costs were paid
by January 31, 1996.
F-8
Separate results of Excalibur and ConQuest for the periods preceding the
acquisition are as follows (in thousands):
Fiscal quarter
ended
April 30, 1995
Revenues: --------------
Excalibur, previously reported $ 2,801
ConQuest ...................... 840
---------
Total, as restated .............. $ 3,641
=========
Net Loss:
Excalibur, previously reported $ (466)
ConQuest ..................... (137)
---------
Total, as restated ............. $ (603)
=========
Prior to its acquisition by Excalibur, ConQuest reported operating results on a
calendar year basis. ConQuest's separate results for prior years have not been
restated to conform to the fiscal year of Excalibur. Therefore, ConQuest's
separate results of operations for the month ended January 31, 1995 are not
reflected in the consolidated statement of operations for the fiscal year ended
January 31, 1996. The revenues, operating loss and net loss of ConQuest for the
month ended January 31, 1995 were $138,000, $177,000 and $181,000, respectively.
(2) SIGNIFICANT ACCOUNTING POLICIES
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.
Revenue Recognition
Revenues from the sale of computer software licenses are recognized upon
shipment of product provided that no significant vendor obligations remain and
that collection of the resulting receivable is considered probable. Revenues
related to agreements with customers that contain future performance
requirements are recognized when the performance requirements are satisfied.
Revenues related to customer support agreements are deferred and recognized
ratably over the term of the respective agreements, which are usually one year
in length.
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, "Software Revenue Recognition," is
effective for revenue transactions entered into by the Company in its fiscal
year ending January 31, 1999. Management believes that the changes contained in
SOP 97-2 will not have a material adverse financial impact on the Company.
F-9
Research and Development Costs
No product development costs were capitalized and there were no capitalized
costs not yet amortized, during the fiscal years ended January 31, 1998, 1997
and 1996.
Cash and Cash Equivalents
For purposes of the consolidated balance sheets and statements of cash flows,
the Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents. U.S. government securities are
considered to be investments and are excluded from cash equivalents regardless
of their maturities. Cash equivalents consist of funds deposited in money market
accounts. Consequently, the carrying amount of cash and cash equivalents
approximates fair value.
Marketable Securities
Under Statement of Financial Accounting Standard ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," the Company classifies
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 January 31,
1998 and 1997, the aggregate fair value of the securities based upon quoted
market prices was $1,497,000 and $8,428,000 respectively.
Income Taxes
Deferred taxes are provided utilizing the liability method as prescribed by SFAS
No. 109, "Accounting for Income Taxes," whereby deferred tax assets are
recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
Depreciation and Amortization
Depreciation of office furniture and equipment is provided on a straight-line
basis over the estimated useful lives of the assets, generally three to ten
years. Amortization of leasehold improvements is provided on a straight-line
basis over the term of the applicable lease.
F-10
Net Loss Per Common Share
In February 1997, the Financial Accounting Standards Board, ("FASB") issued SFAS
No. 128, "Earnings Per Share." SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997. The Company has
implemented SFAS No. 128 in fiscal year 1998. SFAS No. 128 requires dual
presentation of basic and diluted earnings per share ("EPS"). Basic EPS includes
no dilution and is computed by dividing net loss available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted loss per share includes the potential dilution that would occur
if securities or other contracts to issue common stock were exercised or
converted into common stock. Options to purchase 2,631,636 shares of common
stock, and warrants to purchase 148,500 shares of common stock with exercise
prices ranging from $1.04 to $22.50 per share, and cumulative convertible
preferred stock that were outstanding at January 31, 1998 were not included in
the computation of diluted loss per share as their effect would be
anti-dilutive. As a result, the basic and diluted loss per share amounts are
identical.
Translation of Foreign Financial Statements
Assets and liabilities of foreign operations are translated at the year-end rate
of exchange. Statements of operations are translated at the average rates of
exchange during the year. Gains or losses from translating foreign currency
financial statements are accumulated in a separate component of shareholders'
equity.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash equivalents, marketable securities and
accounts receivable. Management believes that the Company's investment policy
limits the Company's exposure to concentrations of credit risk. The Company
sells its products primarily to government agencies and to major corporations,
including distributors that serve a wide variety of U.S. and foreign markets.
The Company extends credit to its corporate customers based on an evaluation of
the customer's financial condition, generally without requiring a deposit or
collateral. Exposure to losses on receivables is principally dependent on each
customer's financial condition. The Company monitors its exposure for credit
losses and maintains an allowance for anticipated losses. The allowance for
doubtful accounts was $527,000 and $367,000 respectively, at January 31, 1998
and 1997.
Impairment of Long-lived Assets
The Company complies with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. To determine recoverability of its long-lived assets, the Company
evaluates whether future undiscounted net cash flows will be less than the
carrying amounts of net assets. Impairment is measured at fair value.
F-11
(3) INVESTMENT IN AFFILIATE
In July 1996, the Company authorized the use of its name by Excalibur
Technologies N. V. ("ETNV"), a Belgian company incorporated in June 1996 for the
purpose of selling and marketing the Company's products and services within a
large territory including most of Northern Europe and Italy. The Company
contributed approximately $488,000 in cash to ETNV in consideration for 13.2% of
its voting capital stock. In connection with the organization of ETNV, the
Company issued warrants to purchase 148,500 shares of the Company's common stock
to certain shareholders of ETNV. The warrants are exercisable at a price of
$22.00 per share for seven years but only if ETNV achieves certain financial
objectives. The value of the warrants was estimated to be $758,000 and is
included at January 31, 1998 in the investment in affiliate account, net of
amortization, contained in the accompanying consolidated balance sheets.
The Company granted to ETNV an exclusive license (the "License") to distribute
certain of the Company's products to other authorized resellers and customers in
the territory for approximately five years. If the revenues of ETNV in the fifth
year exceed a certain level, the License shall automatically be renewed. If the
License is not renewed, the other shareholders of ETNV may exercise options to
sell their shares to the Company according to a revenue-based formula. The
Company recorded revenue of approximately $1,656,000 and $1,191,000 in the
fiscal years ended January 31, 1998 and 1997, respectively, related to the
License.
After a term of approximately five years, the Company may exercise an option to
purchase all of the capital stock of ETNV under certain conditions and at a
price determined in accordance with a revenue-based formula. In the event that
the Company does not exercise its option, the other shareholders are permitted
to sell their shares, subject to certain limitations, through a private sale or
public offering.
The 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. 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 period and the elimination of the Company's share of gross profit
included in ETNV's prepaid license fees at January 31, 1998 and January 31, 1997
is included in equity in net loss of affiliate in the accompanying consolidated
statements of operations for the fiscal year ended January 31, 1998 and January
31, 1997. At January 31, 1998, the investment balance, included in other assets
in the accompanying consolidated balance sheets net of accumulated amortization
and the Company's share of the net loss of ETNV, was $544,000. At January 31,
1997, the investment balance, included in other assets in the accompanying
consolidated balance sheets net of accumulated amortization and the Company's
share of the net loss of ETNV, was $973,000.
F-12
(4) CAPITALIZATION
Stock Offerings
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
("Allen"), a shareholder of the Company, acted as the placement agent in this
transaction and received a fee of approximately $350,000.
Cumulative Convertible Preferred Stock
The cumulative convertible preferred stock is convertible into common stock at
the rate of 10 shares of common stock per share of cumulative convertible
preferred stock. Holders of the cumulative convertible preferred stock are
entitled to receive cumulative dividends of $0.50 per share per annum, payable
annually on April 1 if declared by the Board of Directors, in cash or shares of
common stock (to be determined by the Board of Directors) valued at the lower of
$1.00 per share or the market price on the date of declaration. The amount of
accumulated dividends that have not been declared or accrued at January 31, 1998
is approximately $42,000.
In the event of voluntary liquidation, dissolution or winding-up of the Company
or upon any distribution of assets, whether voluntary or involuntary, holders of
the convertible preferred stock would have a liquidation preference of $10 per
share, plus accrued and unpaid dividends.
(5) EMPLOYEE BENEFIT PLANS
Stock Options
The Company has adopted certain stock option plans to attract, retain and reward
key employees. The plans are administered by a Committee appointed by the Board
of Directors, which has the authority, among other things, to determine which
officers, directors and key employees are awarded options pursuant to the plans
and the terms and option exercise prices of the stock options. In addition, from
time to time, the Board of Directors awards stock options outside the plans; no
such awards occurred in fiscal years 1998 or 1997. Of the total number of shares
authorized for stock options, options to purchase 2,631,636 shares are
outstanding and 723,631 shares are available for future grants, including the
1,000,000 shares authorized by the Company's shareholders in June 1996.
Each qualified incentive stock option granted pursuant to the plans has an
exercise price equal to the fair market value of the common stock at the date of
grant, a ten-year term and typically a four-year vesting period. A non-qualified
option granted pursuant to the plans may contain an exercise price that is below
the fair market value of the common stock at the date of grant and/or may be
immediately exercisable. The term of non-qualified options is usually five or
ten years. The Company records expense related to certain non-qualified options
and other stock-based compensation based on the difference between the fair
market value of the stock at the date of award and the exercise price, if any,
over the vesting period. There was no expense related to stock-based
compensation awards recorded in the accounts during fiscal years 1998 and 1997.
There was $61,000 of such expense recorded in fiscal year 1996.
F-13
The following table summarizes the Company's activity for all of its stock
option awards:
Weighted-
Number of Range of Average
Options Exercise Prices Exercise Price
---------- --------------- --------------
Balance, January 31, 1995 2,416,896 1.00 - 17.02 9.22
Granted 912,150 7.44 - 26.21 15.72
Exercised (713,905) 1.00 - 16.91 9.50
Canceled (197,363) 7.44 - 16.64 11.42
---------- --------------- --------------
Balance, January 31, 1996 2,417,778 1.04 - 26.21 11.41
Granted 473,500 13.00 - 29.64 18.72
Exercised (142,455) 2.07 - 16.64 10.21
Canceled (85,665) 9.54 - 29.64 18.41
---------- --------------- --------------
Balance, January 31, 1997 2,663,158 1.04 - 29.53 12.53
Granted 812,213 4.25 - 13.25 7.35
Exercised (413,060) 1.04 - 11.64 1.91
Canceled (430,675) 4.25 - 28.69 14.53
---------- --------------- --------------
Balance, January 31, 1998 2,631,636 $ 1.04 - 22.50 $ 7.81
========== =============== ==============
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 already vested and repriced were not
exercisable until November 8, 1997.
Options to purchase 1,530,918, 1,738,246 and 1,534,235 shares of the Company's
common stock were vested and exercisable at January 31, 1998, 1997 and 1996,
respectively, at weighted-average per share exercise prices of $8.89, $10.56 and
$9.37, respectively.
F-14
The following table summarizes additional information about stock options
outstanding at January 31, 1998:
Options Outstanding Options Exercisable
------------------------------------ ---------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number of Contractual Exercise Number Exercise
Exercise Prices Options Life Price Exercisable Price
- ------------------ ----------- ----------- --------- ----------- ---------
$ 1.04 to $ 4.63 319,223 7.41 years $ 3.54 200,847 $ 2.93
$ 4.75 1,218,825 7.47 4.75 655,204 4.75
$ 4.88 to $10.38 488,325 7.94 8.16 127,499 7.44
$10.50 to $17.02 505,013 4.85 14.84 447,275 15.21
$20.56 to $22.50 100,250 8.11 21.53 100,093 21.53
----------------- ----------- ----------- --------- ----------- ---------
2,631,636 7.07 years $ 7.81 1,530,918 $ 8.89
=========== =========== ========= =========== =========
The Company adopted the disclosure requirements of SFAS No. 123, "Accounting for
Stock-Based Compensation," effective for the Company's January 31, 1997
consolidated financial statements. The Company applies APB Opinion No. 25 and
related Interpretations in accounting for its plans. Accordingly, compensation
cost has been recognized for its stock plans based on the intrinsic value of the
stock option at date of grant (i.e., the difference between the exercise price
and the fair value of the Company's common stock).
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans made in fiscal years 1998, 1997 and 1996 consistent with the method of
SFAS No.123, the Company's net loss and loss per share would have been increased
to the pro forma amounts indicated below (amounts in thousands except per share
data).
1998 1997 1996
-------- -------- --------
Net loss, as reported .............. $ 8,326 $ 7,173 $ 884
Pro forma compensation expense...... 3,898 2,533 1,141
-------- -------- --------
Pro forma net loss.................. $12,224 $ 9,706 $ 2,025
======== ======== ========
Basic and diluted net loss per share,
as reported....................... $ 0.64 $ 0.58 $ 0.08
Basic and diluted net loss per share,
pro forma........................ 0.95 0.79 0.18
F-15
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model. The following assumptions were used for the
grants that occurred in fiscal year 1998; no dividend yield, expected volatility
of 65%, risk-free interest rates ranging from 5.7% to 6.5% and expected lives of
five years. Grants that occurred in fiscal years 1997 and 1996 used the
following assumptions; no dividend yield, expected volatility of 60%, a
risk-free interest rate of approximately 6.5% and expected lives of four years.
The weighted average fair value per share for stock option grants that were
awarded in fiscal years 1998, 1997 and 1996 was $4.24, $9.76 and $7.17,
respectively.
Employee Stock Purchase Plan
In June 1996, the Company's shareholders approved the adoption of a
non-compensatory stock purchase plan for all active employees. Of the 250,000
shares of common stock that were reserved for issuance thereunder, 40,252 shares
were purchased by employees in fiscal year 1998. The plan provides that
participating employees may purchase common stock each plan quarter at a price
equal to 85% of the closing price at the end of the quarterly period. Payment
for the shares is made through authorized payroll deductions of up to 10% of
eligible annual compensation.
Deferred Compensation
ConQuest entered into arrangements with certain of its officers, employees and
independent consultants to defer a portion of their compensation. Deferred
compensation of employees is restricted for use in the exercise of stock
options. However, if an employee's options expire because the option terms lapse
or because employment terminates, the employee may request cash redemption one
year after expiration, with 90 days notice. During fiscal years 1998, 1997 and
1996, deferred compensation of $654,000, $99,000 and $45,000, respectively, was
settled. The deferred consulting portion of the deferred compensation balance
was settled in fiscal year 1998. Pursuant to the merger with ConQuest, deferred
compensation of $88,000 was paid in cash in fiscal year 1996. Effective January
1, 1993, ConQuest revised the deferred compensation arrangements and
discontinued the accrual of interest on deferred compensation balances for
employees only. Accrued interest, which is included in the deferred compensation
balances on the accompanying consolidated statements, was $11,000, $73,000 and
$60,000 at January 31, 1998, 1997 and 1996, respectively.
Employee Savings Plan
The Company has an employee savings plan that qualifies under Section 401(k) of
the Internal Revenue Code. Under the plan, participating eligible employees in
the United States may defer up to 20 percent of their pre-tax salary, but not
more than statutory limits. During fiscal year 1996, the Company made a
discretionary contribution of $3,000 to the savings plan; no other such
contributions were made for fiscal years 1998 or 1997. ConQuest had a similar
plan established for the benefit of its employees that was merged into the
Company's plan effective December 31, 1996.
F-16
(6) INCOME TAXES
As the Company incurred pretax losses for the fiscal year periods presented
herein, there are no income taxes provided in the accompanying statements of
operations. At January 31, 1998, the Company had net operating loss
carryforwards ("NOLs") of approximately $67,066,000 that expire at various dates
beginning in fiscal year 1999 through fiscal year 2013. The realization of the
benefits of the NOLs is dependent on sufficient taxable income in future fiscal
years. Lack of future earnings, a change in the ownership of the Company, or the
application of the alternative minimum tax rules could adversely affect the
Company's ability to utilize the NOLs. Further, because there was a change in
the ownership of ConQuest in fiscal year 1996, the Company's ability to utilize
NOLs related to ConQuest's operations of approximately $3,233,000 may be
limited. The Company's net deferred tax assets at January 31, 1998 and 1997 were
as follows (in thousands):
1998 1997
--------- ---------
Deferred tax assets
Net operating loss carryforwards of
Excalibur, not yet utilized $ 24,256 $ 21,186
Net operating loss carryforwards of
ConQuest, not yet utilized 1,229 1,229
Other 427 1,113
--------- ---------
Total deferred tax assets 25,912 23,528
Valuation reserve (25,819) (23,464)
--------- ---------
93 64
(93) (64)
Deferred tax liabilities --------- ---------
Net deferred tax assets $ - $ -
========= =========
Though management believes that future net operating income and taxable income
of the Company may be sufficient to utilize a substantial amount of the benefits
of the Company's net operating loss carryforwards and to realize its deferred
tax assets, a valuation allowance has been recorded to offset completely the
carrying value of the deferred tax assets due to the Company's lack of prior
earnings and the size of the accumulated deficit.
F-17
(7) COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company conducts its operations using leased office facilities. The leases
terminate at various dates through fiscal year 2003. The Company also has
operating leases for automobiles at its foreign subsidiary that are included in
the figures below. Future minimum rental payments under non-cancelable operating
leases as of January 31, 1998, net of sublease payments, are as follows (in
thousands):
Year Ending
January 31,
-----------
1999 $ 1,138
2000 1,009
2001 777
2002 463
2003 8
----------
$ 3,395
==========
Total rental expense under operating leases, net of sublease income, was
approximately $1,190,000, $1,070,000 and $870,000 in fiscal years 1998, 1997 and
1996, respectively.
Employment Agreements
In connection with the merger with ConQuest, the Company entered into employment
agreements with four former officers of ConQuest. The employment agreements,
which expired in July 1997, provided for minimum aggregate annual salary
compensation of $548,000 plus incentive compensation.
(8) 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 of fiscal year 1998. The charge primarily
consisted of severance pay and medical and other severance benefits for nineteen
terminated employees in sales, development, marketing and administrative
functions. All payments associated with the restructuring charge were paid prior
to the end of fiscal year 1998.
F-18
In fiscal year 1996, the Company completed an assessment of its personnel and
facilities requirements and finalized a corporate restructuring and relocation
plan. This plan included the relocation of the Company's corporate headquarters
from San Diego, California to Northern Virginia and the consolidation of the
product development and related customer support teams into two facilities. The
relocation was made to move corporate management closer to the Company's major
domestic and European customers and to better organize the technical staff to
support major product development initiatives. Consequently, the Company
recorded a restructuring charge of $653,000 in fiscal year 1996. This charge
consisted of severance payments to terminated employees, including a balance
payable to the Company's former Chief Executive Officer under an employment
agreement and lease abandonment costs. A substantial amount of the balance
accrued at January 31, 1996, was paid during fiscal year 1997, the remaining
balance was paid prior to the end of fiscal year 1998.
(9) OPERATIONS BY GEOGRAPHIC AREA
The major portion of the Company's sales to overseas customers during the three
most recent fiscal years was made by the Company's foreign subsidiary, ETIL,
which was established in the United Kingdom during fiscal year 1993. The
following table presents information about the Company's operations by
geographical area (in thousands):
Fiscal Years Ended January 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
Sales to unaffiliated customers:
North American operations $ 14,579 $ 14,319 $ 15,124
ETIL 7,838 5,940 3,551
--------- --------- ---------
$ 22,417 $ 20,259 $ 18,675
========= ========= =========
Net loss:
North American operations $ (8,165) $ (7,054) $ (597)
ETIL (161) (119) (287)
--------- --------- ---------
$ (8,326) $ (7,173) $ (884)
========= ========= =========
Identifiable assets:
North American operations $ 13,639 $ 21,942 $ 20,528
ETIL 6,406 4,205 2,518
--------- --------- ---------
$ 20,045 $ 26,147 $ 23,046
========= ========= =========
F-19
(10) OTHER FINANCIAL DATA
a) Equipment and leasehold improvements at January 31, 1998 and 1997 consist of
the following (in thousands):
1998 1997
------ ------
Computer equipment $6,297 $5,693
Office furniture 1,220 1,118
Leasehold improvements 364 307
------ ------
7,881 7,118
Less accumulated depreciation 5,614 4,179
------ ------
$2,267 $2,939
====== ======
b) Accrued liabilities at January 31, 1998 and 1997
consist of the following (in thousands):
1998 1997
------ ------
Accrued compensation $1,292 $1,503
Accrued taxes 171 199
Accrued restructuring costs -- 41
Other 423 567
------ ------
$1,886 $2,310
====== ======
c) The Company paid legal fees and expenses totaling approximately $221,000 and
$361,000 in fiscal years 1997 and 1996 respectively to a law firm in which a
former director of the Company was a partner. No such fees were paid in fiscal
year 1998.
d) Revenues derived from contracts and orders issued by agencies of the U.S.
Government were approximately $5,379,000, $6,004,000 and $4,255,000,
respectively, in the fiscal years ended January 31, 1998, 1997 and 1996. These
revenues, expressed as a percentage of total revenues for the fiscal year, were
approximately 24%, 30% and 23%, respectively. No single customer accounted for
10% or more of the Company's revenue in the fiscal years ended January 31, 1998,
1997 and 1996.
(11) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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 is evaluating these statements to determine the impact on its
reporting and disclosure requirements.
F-20
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Excalibur Technologies Corporation:
We have audited in accordance with generally accepted auditing standards,
the financial statements of Excalibur Technologies Corporation included in this
Form 10-K and have issued our report thereon dated February 27, 1998. Our audit
was made for the purpose of forming an opinion on the basic financial statements
taken as a whole. The schedule listed in the index is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ARTHUR ANDERSEN LLP
Washington, D.C.,
February 27, 1998
F-21
SCHEDULE II
EXCALIBUR TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR FISCAL YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
------------------------------------------------------
Translation
Balance at Additions Deductions Adjustment Balance
Beginning Charged From During at End
Description of Year to Expense Reserves the Period of Year
- ------------ ------- ---------- -------- ---------- -------
1998
- ----
Deducted from
accounts receivable:
For doubtful accounts $367,000 $250,000 $ 93,000 (a) $ 3,000 $527,000
1997
- ----
Deducted from
accounts receivable:
For doubtful accounts $375,000 $150,000 $156,000 (a) $(2,000) $367,000
1996
- ----
Deducted from
accounts receivable:
For doubtful accounts $374,000 $ 91,000 $ 96,000 (a) $ 6,000 $375,000
Note (a) - Uncollected receivables written off, net of recoveries.
F-22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/Patrick C. Condo
-------------------
Patrick C. Condo
President and Chief Executive Officer
Date: April 22, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/Patrick C. Condo President, Chief Executive April 22, 1998
- --------------------- Officer and Director --------------
Patrick C. Condo (Principal Executive Officer)
/s/Donald R. Keough April 23, 1998
- ---------------------- Chairman of the Board --------------
Donald R. Keough
/s/James H. Buchanan Chief Financial Officer April 22, 1998
- --------------------- Secretary and Treasurer (Principal --------------
James H. Buchanan Financial and Accounting Officer)
/s/Richard M. Crooks, Jr. April 13, 1998
- ------------------------- Director --------------
Richard M. Crooks, Jr.
/s/John S. Hendricks April 15, 1998
- --------------------- Director --------------
John S. Hendricks
/s/W. Frank King III April 22, 1998
- --------------------- Director --------------
W. Frank King III
/s/John G. McMillian April 23, 1998
- --------------------- Director --------------
John G. McMillian
/s/Philip J. O'Reilly April 13, 1998
- --------------------- Director --------------
Philip J. O'Reilly
/s/Shaun C. Viguerie April 16, 1998
- --------------------- Director --------------
Shaun C. Viguerie