SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 0-9747
EXCALIBUR TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 85-0278207
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
1921 Gallows Road, Suite 200, Vienna, Virginia 22182
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703)761-3700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days. Yes |X| No __
As of June 5, 1998, 13,268,833 shares of the registrant's Common Stock, par
value $.01 per share, were outstanding.
EXCALIBUR TECHNOLOGIES CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED APRIL 30, 1998
TABLE OF CONTENTS
PART I . FINANCIAL INFORMATION
Item 1. Financial Statements: Page
Consolidated Balance Sheets
April 30, 1998 and January 31, 1998.................... 3
Consolidated Statements of Operations
Three month periods ended April 30, 1998 and 1997...... 4
Consolidated Statements of Cash Flows
Three month periods ended April 30, 1998 and 1997...... 5
Notes to Consolidated Financial Statements............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 10
PART II. OTHER INFORMATION
Items 1. - 6................................................... 19
Signatures..................................................... 20
2
EXCALIBUR TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
April 30, January 31,
ASSETS 1998 1998
(unaudited)
-------- --------
Current Assets:
Cash and cash equivalents ........................ $ 4,837 $ 4,939
U.S. government securities, at cost .............. -- 1,496
Accounts receivable, net of allowance for doubtful
accounts of $656 and $527,respectively ........ 7,790 9,189
Prepaid expenses and other ....................... 1,774 1,071
-------- --------
Total current assets ......................... 14,401 16,695
Equipment and leasehold improvements, net
of accumulated depreciation of
$5,659 and $5,614, respectively .................. 2,233 2,267
Other assets ........................................ 1,034 1,083
-------- --------
$ 17,668 $ 20,045
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ................................. $ 2,071 $ 2,106
Accrued expenses ................................. 1,609 1,886
Deferred revenues ................................ 2,714 2,708
Deferred compensation ............................ 247 247
-------- --------
Total current liabilities .................... 6,641 6,947
-------- --------
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 .............. 317 271
Common stock, $0.01 par value, 40,000 Shares
authorized; 13,256 and 13,179 Shares
issued and outstanding, respectively .......... 133 132
Additional paid-in capital ....................... 65,026 64,714
Accumulated deficit .............................. (54,335) (51,945)
Cumulative translation adjustment ................ (114) (74)
-------- --------
Total shareholders' equity ................... 11,027 13,098
-------- --------
$ 17,668 $ 20,045
======== ========
The accompanying notes to the consolidated financial statements are an
integral part of these consolidated balance sheets.
3
EXCALIBUR TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
Three Months Ended
April 30,
1998 1997
-------- --------
REVENUES:
Software .............................. $ 3,731 $ 2,259
Maintenance ........................... 1,324 1,194
-------- --------
5,055 3,453
-------- --------
EXPENSES:
Sales and marketing ................... 3,228 3,592
Research and product development....... 1,898 1,701
General and administrative ............ 1,223 1,102
Cost of software revenues ............. 681 752
Cost of maintenance revenues .......... 314 301
Restructuring costs .................. -- 577
-------- --------
7,344 8,025
-------- --------
Operating loss .......................... (2,289) (4,572)
OTHER INCOME / (EXPENSES):
Interest income, net .................. 62 118
Equity in net loss of affiliate ....... (117) (103)
-------- --------
Net loss ................................ (2,344) (4,557)
Dividends on preferred stock ............ 3 3
======== ========
Net loss applicable to common stock...... $ (2,347) $ (4,560)
======== ========
Basic and diluted
net loss per common share ............. $ (0.18) $ (0.36)
======== ========
Weighted-average number of
common shares outstanding ............. 13,219 12,520
======== ========
The accompanying notes to the consolidated financial statements are an
integral part of these consolidated statements.
4
EXCALIBUR TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
For the Three Months Ended
April 30,
1998 1997
-------- --------
Cash Flows from Operating Activities:
Net loss .......................................... $(2,344) $(4,557)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ................. 370 399
Equity in net loss of affiliate ............... 117 103
Changes in operating assets and liabilities:
Accounts receivable, net ...................... 1,505 1,968
Prepaid expenses and other .................... (689) 347
Accounts payable and accrued expenses ......... (335) (576)
Deferred revenues ............................. (31) (121)
------- -------
Net cash used in operating activities ............. (1,407) (2,437)
------- -------
Cash Flows from Investing Activities:
Purchase of investments ........................... -- (3,474)
Proceeds from maturities of investments ........... 1,496 6,422
Loan to affiliate ................................. (96) --
Purchases of equipment and leasehold improvements.. (306) (215)
------- -------
Net cash provided by investing activities ......... 1,094 2,733
------- -------
Cash Flows from Financing Activities:
Proceeds from the issuance of common stock ........ 312 107
Repayment of notes payable ........................ -- (25)
------- -------
Net cash provided by financing activities ......... 312 82
------- -------
The Effect of Exchange Rate Changes on Cash .......... (101) (49)
------- -------
Net Increase (Decrease) in Cash and Cash Equivalents.. (102) 329
Cash and Cash Equivalents, beginning of period ....... 4,939 2,685
------- -------
Cash and Cash Equivalents, end of period ............. $ 4,837 $ 3,014
======= =======
Supplemental Disclosures of Noncash Investing
and Financing Activities:
Use of deferred compensation to purchase
common stock ..................................... $ -- $ 394
======= =======
The accompanying notes to the consolidated financial statements are an
integral part of these consolidated statements.
5
EXCALIBUR TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1998
(1) THE COMPANY
The consolidated financial statements include the accounts of Excalibur
Technologies Corporation ("Excalibur") and its wholly-owned subsidiaries. These
entities are collectively referred to hereinafter as the "Company." All
significant intercompany transactions and accounts have been eliminated.
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 incurred a net loss of $2,344,000 in the three months ended April
30, 1998, and incurred net losses that totaled $16,383,000 over the last three
complete fiscal years. The accumulated deficit of the Company at April 30, 1998
was $54,335,000. The Company's operations are subject to certain risks and
uncertainties including, among others, the dependence upon the timing of the
closing of large software licenses; actual and potential competition by entities
with greater financial resources, experience and market presence than the
Company; rapid technological changes; the success of the Company's product
marketing and product distribution strategies; the risks associated with
acquisitions and international expansion; the need to manage growth; the need to
retain key personnel and protect intellectual property; and the availability of
additional capital financing on terms acceptable to the Company.
(2) SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Presentation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
6
These consolidated financial statements are unaudited and have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission regarding interim financial reporting. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements, and it is suggested
that these consolidated financial statements be read in conjunction with the
consolidated financial statements, and the notes thereto, included in the
Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1998.
In the opinion of management, the comparative and consolidated financial
statements for the fiscal periods presented herein include all adjustments that
are normal and recurring which are necessary for a fair statement of the results
for the interim periods. The results of operations for the three months ended
April 30, 1998 are not necessarily indicative of the results for the entire
fiscal year ending January 31, 1999.
Revenue Recognition
Revenues from the sale of computer software licenses are recognized upon
shipment of product provided that the fee is fixed and determinable, persuasive
evidence of an agreement exists and collection of the resulting receivable is
considered probable. Revenues related to agreements with customers that contain
future performance requirements are recognized when the performance requirements
are satisfied. Revenues related to customer support agreements are deferred and
recognized ratably over the terms of the respective agreements, which are
usually one year in length.
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. The Company has implemented SOP 97-2 and it has not
had a material financial impact on the Company.
Research and Development Costs
No product development costs were capitalized, and there were no capitalized
costs not yet amortized, during the three month periods ended April 30, 1998 and
1997.
Cash, Cash Equivalents and Marketable Securities
For purposes of the balance sheets and statements of cash flows, the Company
considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents. Cash equivalents consist of funds
deposited in money market accounts. U.S. government securities are considered
investments and are excluded from cash equivalents regardless of their
maturities. Under the Statement of Financial Accounting Standard ("SFAS") No.
115, "Accounting For Certain Investments in Debt and Equity Securities," the
Company considers its marketable securities as held-to-maturity securities.
Accordingly, marketable securities, consisting entirely of U.S. government
securities, are carried at cost, adjusted for premium and discount amortization.
At April 30, 1998 there were no marketable securities held. At January 31, 1998,
the aggregate fair value of the securities based upon quoted market prices was
$1,497,000.
7
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 financial
statements presented have been prepared in accordance with SFAS No. 128. 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. Stock options, warrants to
purchase common stock and cumulative convertible preferred stock were excluded
from 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 period-end
rate of exchange. Statements of operations are translated at the average rates
of exchange during the period. Gains or losses from translating foreign currency
financial statements are accumulated in a separate component of shareholders'
equity.
(3) INVESTMENT IN AFFILIATE
In July 1996, the Company authorized the use of its name by Excalibur
Technologies N.V. ("ETNV"), a Belgian company incorporated in June 1996 for the
purpose of selling and marketing the Company's products and services within a
large territory including most of Northern Europe and Italy. The Company granted
to ETNV an exclusive license to distribute certain of the Company's products to
other authorized resellers and customers in the territory for approximately five
(5) years. The Company contributed approximately $488,000 in cash to ETNV in
order to purchase 13.2% of ETNV's voting capital stock. In connection with the
organization of ETNV, the Company also issued warrants to purchase 148,500
shares of the Company's common stock to certain shareholders of ETNV. The
warrants are exercisable at a price of $22.00 per share for seven years, but
only if ETNV achieves certain financial objectives.
The Company's investment in ETNV is accounted for using the equity method. The
investment exceeded the Company's share of the underlying net assets of ETNV by
approximately $827,000, including $758,000 attributable to the value of the
warrants discussed in the preceding paragraph. The excess is being amortized
over a five-year period.
The amortization of the excess, as well as the Company's share of ETNV's net
loss for the current fiscal quarter and the elimination of the Company's share
of gross profit included in ETNV's prepaid license fees at April 30, 1998 and
April 30, 1997, is included in equity in net loss of affiliate in the
accompanying consolidated statement of operations for the three months ended
April 30, 1998 and April 30, 1997. At April 30, 1998, the balance of advances
and the investment, included in other assets in the accompanying balance sheets
net of accumulated amortization and the Company's share of the net loss of ETNV,
8
was $523,000. At January 31, 1998, the balance of advances and the investment,
included in other assets in the accompanying balance sheets net of accumulated
amortization and the Company's share of the net loss of ETNV, was $544,000.
For the three months ended April 30, 1998, the Company recorded total revenues
of $330,000 related to the software license with ETNV. No revenue was recognized
for the comparable period in the prior fiscal year.
In the first quarter of the current fiscal year, the Company amended the Master
Distribution Agreement (the "Agreement") between the Company and ETNV. The
parties agreed to amend certain sections, affecting the structure and timing of
ETNV's minimum license fee payments. The Company does not expect that the terms
of the amendment will have a material effect on its financial results.
(4) ISSUANCES OF COMMON STOCK
During the first quarter of the current fiscal year, the Company issued
approximately 72,000 shares of common stock upon the exercise of options ranging
in price from $2.07 to $5.88 per share, resulting in total cash proceeds to the
Company of approximately $261,000. In addition, the Company issued approximately
4,700 shares of common stock to participants of the employee stock purchase
plan. The exercise of stock options provided total cash proceeds of
approximately $60,000 in the first quarter of last fiscal year.
(5) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," ("SFAS 130"), during the first quarter of
fiscal 1999. SFAS 130 requires companies to report as comprehensive income all
changes in equity during a period, except those resulting from investments and
distributions to owners, in financial statements for the period in which they
are recognized. Included within accumulated other comprehensive income are the
cumulative amounts for foreign currency translation adjustments. The foreign
currency translation adjustment was $(40,000) and $(16,000) for the three months
ended April 30, 1998 and April 30, 1997, respectively. The Company's
comprehensive income for the three months in the period ending April 30, 1998
and 1997 was $(2,384,000) and $(4,573,000), respectively.
In 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information" was issued and is effective for the fiscal year ending January 31,
1999 year-end reporting. The Company is evaluating this statement to determine
the impact on its reporting and disclosure requirements.
(6) SUBSEQUENT EVENTS
On May 15, 1998, the Company completed a private placement of 325,000 shares
(the "Shares") of its common stock to an unaffiliated financial institution. The
Company sold the shares at a purchase price of $10.00 per share, resulting in
proceeds to the Company of $3,250,000. The transaction was placed directly by
the Company. The Company plans to use the proceeds to finance ongoing operations
and for general corporate purposes. Subsequent to May 15, 1999, the investor in
the private placement has the right to cause the Company to file a registration
statement under the Securities Act of 1933 covering the Shares. The Shares were
sold pursuant to an exemption from the registration requirements of the
Securities Act of 1933.
9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
The statements contained in this report that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
without limitation statements about the Company's expectations, beliefs,
intentions or strategies regarding the future. All forward-looking statements
included in this report are based on information available to the Company on the
date hereof and the Company assumes no obligation to update any such
forward-looking statements. The forward-looking statements contained herein
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in this report.
The Company principally earns revenues from the licensing of its software
products to commercial businesses and government agencies throughout North
America, Europe and other parts of the world. The Company licenses its software
to end users directly and also distributes its software products through license
agreements with value-added resellers, system integrators, original equipment
manufacturers 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.
10
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 later in the current fiscal year.
The following chart represents revenues and expenses (in thousands of dollars)
attributable to the text and visual businesses for the three months ending April
30, 1998 and 1997. 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
------------------ ------------------
Three months ended Three months ended
April 30, April 30,
1998 1997 1998 1997
------------------ ------------------
Total Revenue $4,861 $3,411 $ 194 $ 42
Operating Expenses 5,881 6,261 1,463 1,187
------------------ ------------------
Operating Income (Loss) $(1,020) $(2,850) $(1,269) $(1,145)
================== ==================
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.
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 have been paid.
Results of Operations
Total revenues for the first fiscal quarter ended April 30, 1998 were
$5,055,000, a 46% increase over total revenues of $3,453,000 reported for the
same quarter last fiscal year. The Company incurred a net loss for the quarter
ended April 30, 1998 of $2,344,000, or $0.18 per common share, compared to a net
loss of $4,557,000, or $0.36 per common share, for the first quarter last fiscal
year.
Total expenses for the Company were $7,344,000 in the first quarter, which
represented an 8% decrease from total expenses of $8,025,000 in the first
quarter last fiscal year. Total expenses for the first quarter in the prior
fiscal year included the restructuring charge of $577,000. Excluding the
restructuring charge, expenses in the first quarter of the current fiscal year
decreased approximately 1% from the first quarter in the prior fiscal year.
11
The chart that follows summarizes the components of revenues and the categories
of expenses, including the amounts expressed as a percentage of total revenues,
for the three month periods ended April 30, 1998 and 1997, and the percentage
change in the amounts between fiscal quarters (dollars in thousands).
Components of Revenue and Expenses Increase
Three Months Ended April 30, (Decrease)
1998 1997
$ % $ % %
--------------- -------------- --------
Revenues:
RetrievalWare $3,434 68 % $1,835 53 % 87 %
EFS 112 2 403 12 (72)
Visual Products Group 185 4 21 1 781
--------------- -------------- --------
Total Software 3,731 74 2,259 65 65
Maintenance 1,324 26 1,194 35 11
--------------- -------------- --------
Total revenues $5,055 100 % $3,453 100 % 46 %
--------------- -------------- --------
Expenses:
Sales and marketing $3,228 64 % $3,592 104 % (10)
Research and product
development 1,898 38 1,701 49 12
General and
administrative 1,223 24 1,102 32 11
Costs of sales 995 20 1,053 30 (6)
Restructure costs -- -- 577 -- --
------------------------- --------------- -------------- --------
Total expenses $7,344 145 % $8,025 232 % (8)%
------------------------- --------------- -------------- --------
While overall first quarter revenues increased 46% over the first quarter last
year, software product revenue increased 65%. The Company attributes revenue
increases to a combination of factors including increasing revenue from
pilot-to-enterprise accounts; expanded sales into the online services market,
and new customers in the growing market for highly accurate and scalable search
and retrieval systems. Product revenue from the Company's flagship product
Excalibur RetrievalWare increased 87% in the current quarter to $3,434,000 from
$1,835,000 in the comparable quarter last fiscal year. RetrievalWare sales were
92% of software revenue in the current quarter compared to 81% in the first
quarter last year. The Company's transition to the Excalibur RetrievalWare
product line and the introduction of RetrievalWare Fileroom during the last
fiscal year resulted in the continued downward trend of EFS software product
revenue. EFS software revenue was 3% of total software product revenue in the
first quarter of the current fiscal year compared to 18% in the same period last
year. Software revenue from the Visual Products Group of $185,000 in the current
quarter represented 5% of software product revenue compared to 1% in the same
period last year. The Company did not recognize any revenue in the first quarter
of the current year from the VAE product or video applications which will be
released later this year. Expansion of the Excalibur RetrievalWare customer base
resulted in an 11% increase in maintenance revenues to $1,324,000 in the first
quarter this year from $1,194,000 in the first quarter last year. Revenue
results in the first quarter of this year were primarily a result of the efforts
of a direct sales force.
12
Software revenues for the current quarter included revenue from several
customers who started out as either pilot or departmental installations and
converted to enterprise-wide implementations. Most notably was the ICI Group,
one of the world's largest chemical companies, which expanded the use of
RetrievalWare to form the basis for a corporate initiative into knowledge
management on a worldwide basis.
A second key area of revenue growth in the quarter, as well as a significant
opportunity for increased sales in the future, was the online services market.
LEGI-SLATE, an expert legislative and regulatory intelligence service and
wholly-owned subsidiary of The Washington Post Company, selected RetrievalWare
to enhance its online service that provides clients with in-depth, real-time
analysis of recent legislative and political developments. Other online
providers who executed new or expanded licensing agreements in the first quarter
included Gazette Newspapers, Federal Filings, Laser Tech and Aspen Systems.
A third key area contributing to revenue growth was new customers in the growing
market for highly accurate and scalable search and retrieval systems. In the
first quarter, Excalibur was chosen as the key retrieval technology by
multi-national corporate customers including Hoffmann-La Roche, Xerox and the
Capital Group. In addition to these corporate customers, the Company 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 installs for several state and local
government entities. Overall, Excalibur North American sales increased 28% over
the same period a year ago and represented 67% of total revenue in the quarter.
The Company continued its overseas expansion with new customer agreements and
significant customer upgrades throughout Europe and South America. In the U.K.
and France, notable agreements in addition to ICI, were David Lloyds, Yorkshire
Water, and Sesin. Total revenue from international sales increased 109% compared
to the same period a year ago and represented 33% of total revenue in the
quarter. International software revenue increased 128% in the first quarter from
the comparable period last year.
Sales and marketing costs decreased 10% in the quarter, to $3,228,000 in the
current year compared to $3,592,000 last year. Salaries, benefits, travel and
other employee related costs were reduced as a result of the restructuring in
the first quarter of fiscal year 1998. Telephone and other office expenses also
declined as a result of the lower head count. The Company employed 64 people in
the sales and marketing areas at April 30, 1998 compared to 71 at April 30,
1997. Marketing program expenses declined 13% due to reduced public relations
and international marketing expenditures.
Research and product development costs increased 12% to $1,898,000 in the first
quarter of the current fiscal year compared with $1,701,000 last year due to
increased investment in both Text and Visual research and development as the
Company prepares to release RetrievalWare version 6.6 and new visual products.
Text expenses increased 14%, primarily due to increases in salaries, as
headcount in the Text department increased to 44 at April 30, 1998 from 40 at
April 30, 1997. Visual expenses increased 10% in the first quarter of the
current year compared to the same period last year. The increase in Visual
expenses was due to the use of consultants as the Company prepares to release
its new visual products.
13
General and administrative expenses increased 11% in the current quarter to
$1,223,000 from $1,102,000 in the comparable quarter last year. The increase in
general and administrative expenses in absolute dollars was due in part to an
increase in the amount taken as reserve for bad debt. Consulting, equipment and
depreciation costs increased between quarters due to corporate network
communications and database upgrades. General and administrative expenses as a
percentage of total revenue decreased to 24% in the first quarter of this year
from 32% last year.
Costs of sales decreased by 6% between quarters to $995,000 in the current year
from $1,053,000 last year. Electronic media, documentation and shipping costs
were higher in the first quarter last year due to the release of Excalibur
RetrievalWare 6.0 and an updated version of the Excalibur EFS product.
Subcontracted training and related expenses were also reduced in the current
quarter.
In the first quarter of fiscal year 1998, the Company implemented changes to its
organization by reorganizing its sales force and forming a new business unit,
the Visual Business Group. In connection with these changes the Company
committed to a reduction of its workforce by approximately 10% and recorded a
restructuring charge of $577,000. The charge primarily consists of severance pay
for terminated employees. All cost associated with the restructuring have been
paid.
Net interest income declined to $62,000 in the current quarter from $118,000 in
the comparable quarter last year due to a decrease in the level of investment
securities held. The Company's equity in the loss of its affiliate, ETNV, was
$117,000 in the first quarter of the current year compared to $103,000 in the
first quarter last year.
14
Liquidity and Capital Resources
In the three months ended April 30, 1998, the Company's combined balance of
cash, cash equivalents and investments in marketable securities decreased by
$1,598,000 to $4,837,000 as summarized below (in thousands). At January 31,
1998, investments in marketable securities consisted of U.S. Treasury Bills with
maturities of less than one year.
April 30, January 31,
1998 1998 Change
------- -------- ---------
Cash and cash equivalents $ 4,837 $ 4,939 $ (102)
Investments.............. -- 1,496 (1,496)
------- ------- --------
Total $ 4,837 $ 6,435 $(1,598)
======= ======= ========
During the three months ended April 30, 1998, cash of $1,407,000 used to fund
operating activities was less than the net loss of $2,344,000 due primarily to a
significant reduction in the level of accounts receivable. The balance of
accounts receivable declined by $1,505,000. Other non-cash charges offsetting
cash used in operations were depreciation and amortization of $370,000 and the
Company's share of the net loss of ETNV and amortization of the excess of the
Company's investment over the underlying net book value of ETNV totaling
$117,000. Increased prepaid expenses and reductions in accounts payable used
$1,024,000.
For the quarter ended April 30, 1998, net cash of $1,496,000 was provided from
the maturity of Treasury Bills. Purchases of equipment and leasehold
improvements used $306,000. Cash of $312,000 was provided from the exercise of
employee stock options and issuances of stock under the employee stock purchase
plan.
Despite the reduction in the balance of accounts receivable during the quarter,
the number of days sales outstanding ("DSO") at April 30, 1998 increased from
January 31, 1998. This can be attributed to the large amount of revenue
generated near the end of the quarter. Management believes that the allowance
for doubtful accounts of $656,000 at April 30, 1998 is adequate.
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.
15
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 approximately $8,388,000 from a private placement in March 1996 were
received. As a result, subsequent to the end of the first quarter this year as
described in Note 6 of the Consolidated Financial Statements, the Company
completed a private placement sale of 325,000 shares of common stock for $10 per
share, resulting in proceeds of $3,250,000.
Various factors, including those discussed above, have somewhat inhibited the
overall revenue growth that management had expected in the prior fiscal year. 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 Company 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.
16
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 since
inception of such changes. Quarterly revenues increased steadily throughout
fiscal year 1998 and first quarter revenues in the current fiscal year increased
46% from the first quarter of fiscal year 1998. The level of quarterly costs and
expenses was reduced and have remained relatively flat over the past few
quarters. However, some increases in expenses are expected as revenues increase
and the Company begins to ship new video products later this year. Including the
receipt of $3,250,000 in proceeds from the private placement on May 15, 1998,
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 current
fiscal year. Historically, the Company has used primarily cash provided by sales
of its common stock to fund its operating losses. If the actions taken by
management are not effective in achieving profitable operating results, the
Company may be required to pursue additional external sources of financing in
the future to support its operations and capital requirements. There can be no
assurances that external sources of financing will be available if required, or
that such financing will be available on terms acceptable to the Company.
As of January 31, 1998, the Company had significant net operating loss
carryforwards ("NOLs") of approximately $68 million. The deferred tax assets
representing the benefits of the NOLs have been offset completely by a valuation
allowance due to the Company's lack of an earnings history. The Company incurred
a net loss of $2,344,000 for the quarter ended April 30, 1998 and has incurred
cumulative losses of approximately $16,383,000 over the last three fiscal years.
The accumulated deficit of the Company at April 30, 1998 was $54,335,000. 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.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company believes that inflation has not had a material effect on the results
of its operations to date.
17
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 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information" was issued and is effective for the fiscal year ending January 31,
1999 year-end reporting. The Company is evaluating this statement 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. The Company has implemented SOP 97-2 and it has
not had a material financial impact on the Company.
18
PART II-- OTHER INFORMATION
Item 1. Legal Proceedings None.
Item 2. Changes in Securities None.
Item 3. Defaults upon Senior Securities None.
Item 4. Submission of Matters to Vote
of Security Holders None.
Item 5. Other Information None.
Item 6. Exhibits and Reports on Form 8-K None.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EXCALIBUR TECHNOLOGIES CORPORATION
June 12, 1998 By: /s/ Patrick C. Condo
--------------------
Patrick C. Condo
President and Chief Executive Officer
(Principal Executive Officer)
June 12, 1998 By: /s/ James H. Buchanan
---------------------
James H. Buchanan
Chief Financial Officer
(Principal Financial and Accounting Officer)
20