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, 1999
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 7, 1999 (based on the closing sales price as reported on
the NASDAQ National Market System) was $191,229,080.
The number of shares outstanding of the registrant's class of common stock as of
April 7, 1999 was 14,316,976.
The Index to Exhibits begins on Page 31
EXCALIBUR TECHNOLOGIES CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 31, 1999
TABLE OF CONTENTS
Page
PART I
Item 1. Business ............................................. 1
Item 2. Properties ........................................... 10
Item 3. Legal Proceedings .................................... 10
Item 4. Submission of Matters to a Vote of Security Holders .. 10
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters .................................. 11
Item 6. Selected Financial Data .............................. 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................. 13
Item 7A. Market Risk .......................................... 21
Item 8. Financial Statements and Supplementary Data .......... 22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .................. 22
PART III
Item 10. Directors and Executive Officers of the Registrant ... 23
Item 11. Executive Compensation ............................... 26
Item 12. Security Ownership of Certain Beneficial Owners
and Management ....................................... 29
Item 13. Certain Relationships and Related Transactions ....... 31
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K ............................................. 31
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 and digital asset management software
solutions. Excalibur's comprehensive suite of products which includes Excalibur
RetrievalWare, Excalibur RetrievalWare WebExpress, Excalibur RetrievalWare
FileRoom, Excalibur Internet Spider, Excalibur EFS, Excalibur Visual
RetrievalWare, Excalibur Screening Room and Excalibur Video Analysis Engine,
enables individuals to quickly capture, analyze, index, catalog, browse, access,
search, retrieve and use 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 (Portable Document Format) 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, the
Company's flagship product, 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.
It offers users a web-based unified view of all information assets and enables
highly accurate search and retrieval over these assets. Excalibur offers its
software solutions to information systems for workgroups, enterprises and
distributed wide area networks, including the Internet and World Wide Web. The
Company also offers training, consulting and maintenance services to facilitate
implementation and use of Excalibur technology.
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
search and retrieval capabilities available today. The combined technology
powers most Excalibur applications.
1
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. Revenues derived from contracts and
orders issued by agencies of the U.S. Government were approximately $4.5
million, $5.4 million and $6.0 million, respectively, in the fiscal years ended
January 31, 1999, 1998 and 1997. These revenues, expressed as a percentage of
total revenues for the fiscal year, were approximately 16%, 24% and 30%,
respectively. Financial information about the Company's operations by geographic
area is presented in Note 9 to the consolidated financial statements contained
herein.
On May 5, 1997, the Company acquired Interpix Software Corporation ("Interpix"),
located in Santa Clara, California, a privately owned company and developer of a
commercial technology enabling the collection, indexing, management and
presentation of multimedia data on the Internet and corporate intranets. The
purchase method of accounting was applied to this acquisition transaction and,
accordingly, the results of operations of Interpix have been included in the
Company's consolidated results of operations 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.
In July 1995, the Company acquired ConQuest Software, Inc., ("ConQuest") 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 option holders 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.
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.
2
PRODUCTS
Excalibur's suite of text retrieval software components which includes Excalibur
RetrievalWare, Excalibur RetrievalWare WebExpress, Excalibur RetrievalWare
FileRoom, Excalibur Internet Spider, and Excalibur EFS, 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. Excalibur Video
Analysis Engine (VAE) targets developers, programmers and owners of video assets
with the need to construct applications capable of analyzing video content and
detecting event changes. Excalibur Screening Room's markets include media and
entertainment companies, broadcasting/news organizations, video production
companies, corporations and government agencies.
Text Products:
Excalibur's text retrieval products contributed 94%, 97%, and 96% of total
consolidated revenue in 1999, 1998 and 1997, respectively.
Excalibur RetrievalWare
Excalibur RetrievalWare offers an advanced componentized approach to knowledge
retrieval, an enabling technology to knowledge management. A high-performance
scalable, more accurate alternative to traditional search and retrieval systems,
Excalibur RetrievalWare is a comprehensive software solution designed for
enterprise knowledge retrieval and intended to empower users to find mission
critical data across multiple data types, all through a unified view. 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 6.6, was released in the second quarter of the fiscal
year 1999. It extends access and retrieval from major groupware platforms such
as Microsoft Exchange and Lotus Notes. Other enhancements include extended
security features, the ability to recognize and highlight proper names and
entities and an enhanced user interface. Overall, Excalibur RetrievalWare now
supports more than 200 document formats including Microsoft Office '97.
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 Excalibur's 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 500,000 word meanings, 50,000 language
3
idioms and 1.6 million word associations. Users enter straightforward plain
English queries that are automatically enhanced by the related terms and
concepts thereby increasing the opportunity for the return of highly 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 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 advanced content management 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 documents, 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.
Document-level security lets organizations control user access at the fileroom
(library), cabinet, drawer, folder and document level.
4
Excalibur RetrievalWare WebExpress
Excalibur RetrievalWare WebExpress is a search and retrieval tool designed for
online service providers and content-rich Internet portals. RetrievalWare
WebExpress offers superior search accuracy, performance and scalability,
supporting high numbers of concurrent users searching large and heterogeneous
document collections.
Excalibur Internet Spider
Excalibur Internet Spider is a multimedia, high-performance web spider/crawler
for augmenting the knowledge retrieval capabilities of Excalibur RetrievalWare,
for stand-alone use, or for integration with other applications. In addition to
HTML-based web pages, Excalibur Internet Spider also retrieves word processing,
PDF, and multimedia assets including audio, video, and images. It is highly
configurable and multi-threaded and can crawl as deeply, broadly, and as often
as is necessary. Users who want immediate notification when items of interest
arrive can post Agent Profiles to pull links to related documents to their
desktops. Components can be deployed on multiple machines for optimum
performance and bandwidth.
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 the 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 6%, 3% and 4% of total
consolidated revenue in 1999, 1998 and 1997, respectively.
Excalibur Visual RetrievalWare
Leveraging the APRP(TM) technology, Excalibur Visual RetrievalWare is a visual
retrieval engine and a comprehensive image processing library and programmer's
toolkit that enables the development of client/server systems that automatically
index and retrieve digital images. Applications range from electronic shopping
and digital libraries to document imaging and positive identification. 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
5
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.
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.
Excalibur Video Analysis Engine (VAE)
Excalibur Video Analysis Engine is a toolkit that enables developers and
programmers to construct applications that analyze and re-purpose video content.
VAE analyzes any kind of multi-media/video asset whether it is analog or
digital, allows programmers to create multi-threaded applications and has
enhanced scalability. The toolkit is available as a Microsoft DirectShow filter
or C Library Developer's Kit. Based on the APRP(TM) technology, VAE plugs into
applications, enabling highly accurate event-change detection. VAE uses a
caching technique which compares a series of video frames based upon "event
detectors" dynamically selected by the calling program. The event detectors look
for specific occurrences in the video, triggering "event alarms" appropriate to
the developer's application. Events include cuts, fades, and dissolves.
Excalibur Screening Room
Excalibur Screening Room, which became generally available in the third quarter
of fiscal year 1999, is a comprehensive solution for real-time capturing,
analyzing, cataloguing, browsing, searching and retrieving video, as well as
related closed-caption text and metadata, over corporate intranets/extranets.
Excalibur Screening Room is aimed at entertainment organizations
(film/television), news organizations, video production companies, advertising
agencies, publishing companies, government agencies, Global 1,000 organizations
and universities with large video archives in enterprise training and
communications departments. It enables users to easily capture analog or digital
video, automatically create an intelligent video storyboard, and play it back in
any of the industry's standard video file formats. Screening Room users can then
automatically browse, search, and retrieve precisely what video clips they are
looking for without having to play or watch the video in its entirety. Excalibur
Screening Room combines the APRP(TM) technology for video analysis with
Excalibur RetrievalWare's indexing capabilities. Excalibur Screening Room
consists of four components: Capture Client, Edit Client, Browser Client, and
Video Asset Server. The Capture Client captures, analyzes and storyboards analog
or digital video assets, including live feeds and associated closed caption text
and annotations, for fast, efficient playback. The Edit Client is for use by
persons responsible for quality assurance and editorial control of storyboards
and metadata. It allows browsing, searching, editing, and annotation of
storyboards. Users can additionally output new rough cut edit segments to EDL
(Edit Decision Lists) for import into higher-end offline editing systems like
AVID and Media 100. The Browser Client allows user access to catalogs of video
assets through any standard Web browser. The Video Asset Server indexes and
stores captured video assets for instantaneous browsing, search and retrieval in
a client/server environment. Excalibur Screening Room version 1.1, released in
the third quarter of fiscal year 1999, features expanded streaming media and
database support for the RealNetworks G2 Media Player, the Sybase Adaptive
Server, and added server support for the Sun Solaris platform.
6
SERVICES
Technical Support, Implementation Support and Education
Excalibur provides technical support, or maintenance, to customers through its
technical support personnel located in the Company's Carlsbad, California;
Columbia, Maryland and Windsor, United Kingdom 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, general service updates and Web forums
for technical discussions. The web site also provides electronic forms for
opening technical support cases and suggesting product, service and Company
enhancements.
The Company also provides on-site implementation and consulting services to its
customers through employee and independent consultants who have been trained and
certified by the Company. Implementation and consulting services are offered as
a package or on a time-and-materials basis. 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. 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 products to end-user customers. The targeted customer group for the
Company's products includes 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.
Marketing efforts focus on building brand awareness and establishing demand for
the Company's products 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 products, conduct on-line demonstrations of
products and enroll in training courses as well as access passworded areas for
technical and other customer support. Excalibur Video Analysis Engine (VAE) and
technical support for VAE can be purchased via the website.
The Company leverages relationships with distributors of its software products,
and the strategic partners discussed below, for a substantial portion of its
revenues.
7
Strategic Alliances
In the fourth quarter of fiscal year 1999, the Company signed an agreement with
Inso Corporation whereby Inso will integrate Excalibur RetrievalWare with the
Inso Media Bank media asset management solution and with their product data
management solution. The arrangement also provides the basis for advanced
functionality in the form of HTML (Hypertext Markup Language) export and viewer
technology to be included in future versions of all Excalibur products.
In the fourth quarter of fiscal year 1999, the Company completed an agreement
with FileNET Corporation. As part of the development agreement, Excalibur will
integrate RetrievalWare with FileNET Panagon, FileNET's document management
software. This new synchronizer product enables end users to seamlessly execute
a single search for information in a variety of FileNET document repositories,
and other libraries and databases, including Lotus Notes and Microsoft Exchange,
and externally on the Internet.
In August 1998, the Company announced a multi-year, multi-million dollar
licensing, development and distribution agreement with Storage Technology
Corporation ("StorageTek"), a provider of network storage. The agreement gives
StorageTek rights to bundle Excalibur's advanced search and retrieval products
with its high-performance network storage products and then sell the packages as
enhanced solutions for knowledge management and digital content management
initiatives. Under the agreement, StorageTek gains distribution rights for the
full Excalibur product line, including Excalibur RetrievalWare and Excalibur
Screening Room.
In August 1998, the Company announced an agreement with Lernout & Hauspie
("L&H") whereby L&H will distribute Excalibur RetrievalWare and also integrate
RetrievalWare into its multilingual language libraries enabling it to create
products capable of simultaneous cross-lingual searches. Cross-lingual searches
are of particular benefit to online publishing applications as well as
multinational corporate intranet implementations.
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, 1999.
8
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 accounts for the investment in ETNV under the equity
method since it exercises significant influence over the operating and financial
policies of ETNV. 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. In the fourth quarter of fiscal year 1999, ETNV did not make the
contractually required payment totaling approximately $900,000.
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)).
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 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 believes
the market is emerging for search products that can index and retrieve
unstructured text and multimedia data types. To that end, the Company has begun
development of a multimedia server architecture to provide integrated multimedia
search and retrieval.
9
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 $8.3 million, $6.4 million, and $6.3
million, respectively, in the fiscal years ended January 31, 1999, 1998 and
1997.
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; however on August 24,
1998, the Company filed an application with the Patent and Trademark Office to
obtain a patent on multimedia document retrieval. 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(TM) 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 Verity, Inc. and Autonomy, Inc.
in the information search and retrieval market. The Company primarily competes
with Virage, Inc. in its visual product markets. 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.
10
Employees
The Company had 201 employees at January 31, 1999, of whom 78 were in research
and development, 73 in sales and marketing, 23 in technical support and training
and 27 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.
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 Company has signed a new lease for the space that begins
upon termination of the current sublease in fiscal year 2000. The new lease
expires in calendar year 2004.
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 1999 to sublease 7,122 square
feet of the space in its Carlsbad location to a third party. The sublease
agreement expires 5/31/99. 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
and 2,832 square feet in the same building under a lease assignment that expires
in March 2001. 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 420 square feet, respectively. The
two leases for the Windsor offices expire in calendar year 1999; negotiations
are underway to extend the leases. The Vitrolles lease is a rolling contract
that requires a one-month cancellation notice.
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, 1999.
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 Stock Market under the symbol
EXCA.
The following table sets forth, for the period February 1, 1998 through January
31, 1999, 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, 1999 was 1,171. 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 1999
(February 1, 1998 - January 31, 1999)
First Quarter......................... $13 $10 1/4
Second Quarter........................ 14 9/16 9 1/2
Third Quarter......................... 11 1/2 4 1/2
Fourth Quarter........................ 12 1/16 5 1/2
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
Item 6. Selected Financial Data.
The selected financial data presented below as of January 31, 1999 and 1998 and
for the fiscal years ended January 31, 1999, 1998 and 1997 have been 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. All of the historical
information has been restated to reflect the pooling of interests with ConQuest.
12
Fiscal Years Ended January 31,
----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(in thousands, except per share data)
Statement of Operations Data:
Revenues:
Software............. $22,741 $17,202 $15,866 $15,004 $10,133
Maintenance.......... 5,198 5,215 4,393 3,671 2,505
--------- --------- --------- --------- ---------
27,939 22,417 20,259 18,675 12,638
--------- --------- --------- --------- ---------
Expenses:
Cost of software
revenues........... 3,808 3,039 1,630 1,064 767
Cost of maintenance
revenues........... 1,320 1,219 1,618 1,398 1,498
Sales and marketing.. 13,501 13,184 14,430 8,752 9,343
Research and product
development........ 8,328 6,405 6,288 4,416 4,597
General and
administrative..... 4,775 4,884 3,906 3,330 5,597
Acquired in-process
research and
development........ - 1,284 - - -
Restructuring costs.. - 577 - 653 776
Merger costs......... - - - 490 -
--------- --------- --------- --------- ---------
31,732 30,592 27,872 20,103 22,578
--------- --------- --------- --------- ---------
Operating loss......... (3,793) (8,175) (7,613) (1,428) (9,940)
Interest income, net... 239 374 781 544 344
Equity in net loss of
affiliate............ (300) (525) (341) - -
Other income........... - - - - 208
--------- --------- --------- --------- ---------
Net loss............... (3,854) (8,326) (7,173) (884) (9,388)
Dividends on cumulative,
convertible, preferred
stock................ 14 14 14 14 14
Net loss applicable to
common stock......... $(3,868) $(8,340) $(7,187) $ (898) $(9,402)
========= ========= ========= ========= =========
Basic and diluted net
loss per common share $ (0.29) $ (0.64) $ (0.58) $ (0.08) $ (0.85)
========= ========= ========= ========= =========
Weighted average number
of common shares
outstanding.......... 13,526 12,934 12,351 11,496 11,094
========= ========= ========= ========= =========
13
Balance Sheet Data
(at end of period) (1)
Cash and cash
equivalents.......... $ 5,851 $ 4,939 $ 2,685 $ 2,903 $ 2,645
Working capital........ 8,006 9,748 14,566 12,973 6,908
Total assets........... 19,712 20,045 26,147 23,046 17,951
Accumulated deficit.... (55,854) (51,945) (43,619) (36,446) (35,367)
Total shareholders'
equity (2)........... 13,174 13,098 18,563 15,251 9,475
- -------------
(1) The Company had no significant long-term debt for any of the periods
presented.
(2) No dividends have been declared or paid on the Company's common stock.
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 when and if they are released.
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 through a unified
web-based user interface. There are generally two markets today for the
Company's products, 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. Text knowledge retrieval products
include the RetrievalWare family of products and EFS. Visual products include
Visual RetrievalWare, VAE and Screening Room, an advanced end-to-end solution
for real-time capturing, analyzing, cataloguing, browsing, searching and
retrieving video over intranets and extranets, that began shipping in the second
quarter of fiscal year 1999.
The following chart represents revenues and expenses (in thousands of dollars)
attributable to the text and visual product lines for the years ending January
31, 1999, 1998 and 1997. Expenses for each product line consist of direct and
allocated expenses and exclude restructuring costs and acquired in-process
research and development costs.
15
Text Products Visual Products
Fiscal Years Ending Fiscal Years Ending
January 31, January 31,
---------------------------- ----------------------------
1999 1998 1997 1999 1998 1997
---------------------------- ----------------------------
Total Revenue $26,206 $21,791 $19,351 $ 1,733 $ 626 $ 908
Operating Expenses 24,888 24,209 22,879 6,844 4,522 4,993
---------------------------- ----------------------------
Operating Income
(Loss) $ 1,318 $(2,418) $(3,528) $(5,111) $(3,896) $(4,085)
---------------------------- ----------------------------
Note: Excludes acquired in-process R&D and restructuring costs
-----------------------------------------------------------------
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, as
video becomes a more common data type, these two markets will 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 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 of fiscal 1998.
The charge consisted of severance pay and benefits for terminated employees. All
payments associated with the restructuring charge were paid prior to the end of
fiscal year 1998.
Results of Operations
For the fiscal year ended January 31, 1999, total revenues were $27.9 million,
an increase of 25% over total revenues of $22.4 million in the prior fiscal
year. The net loss for the fiscal year ended January 31, 1999 was $3.9 million,
or $0.29 per common share, compared to a net loss of $8.3 million, or $0.64 per
common share, for the same period last fiscal year. Excluding a charge of $1.3
million for in-process research and development expenses related to the Interpix
acquisition and $0.6 million for restructuring charges, the net loss for the
fiscal year ended January 31, 1998 was $6.5 million. Total revenues in fiscal
year 1998 increased 11% from fiscal year 1997 revenues of $20.3 million. The net
loss for fiscal year 1997 was $7.2 million, or $0.58 per common share.
16
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, 1999 and the percentage
changes in the amounts between fiscal years (dollars in thousands).
Increase
(Decrease)
-----------
Components of Revenue and Expenses From From
Fiscal years ended January 31, 1998 1997
------------------------------------------------ to to
1999 1998 1997 1999 1998
-------------- -------------- -------------- ----- -----
$ % $ % $ % % %
-------------- -------------- -------------- ----- -----
Revenues:
RetrievalWare $20,859 75% $15,083 67% $ 8,572 42% 38% 76%
EFS 318 1% 1,591 7% 6,474 32% -80% -75%
Visual Products Group 1,564 6% 528 2% 820 4% 196% -36%
-------------- -------------- -------------- ---- ----
Total software $22,741 81% 17,202 77% 15,866 78% 32% 8%
Maintenance 5,198 19% 5,215 23% 4,393 22% 0% 19%
-------------- -------------- -------------- ---- ----
Total revenues $27,939 100% $22,417 100% $20,259 100% 25% 11%
============== ============== ============== ==== ====
Expenses:
Cost of sales $ 5,128 18% $ 4,258 19% $ 3,248 16% 20% 31%
Sales and marketing 13,501 48% 13,184 59% 14,430 71% 2% -9%
Research and product
development 8,328 30% 6,405 29% 6,288 31% 30% 2%
General and administrative 4,775 17% 4,884 22% 3,906 19% -2% 25%
Acquired In-process
research and development - - 1,284 6% - - -100% -
Restructuring costs - - 577 3% - - -100% -
-------------- -------------- -------------- ----- ----
Total expenses $31,732 114% $30,592 136% $27,872 138% 4% 10%
============== ============== ============== ===== ====
Revenues
Software revenues increased from $15.9 million in fiscal year 1997 to $17.2
million in fiscal year 1998 and to $22.7 million in fiscal year 1999. The
increase in software revenues in each period was attributable to increasing
market awareness and acceptance of the Company's text knowledge retrieval
products, contributions from existing OEM partners and alliances with new
partners who chose the Company as the key search component in their product
offering.
17
RetrievalWare, which emerged as the Company's dominant product line in fiscal
year 1998, continued that trend into fiscal year 1999. Software revenues from
RetrievalWare increased 38% in fiscal year 1999 to $20.9 million from $15.1
million in the prior year. Software revenues for RetrievalWare were $8.6 million
in fiscal year 1997. RetrievalWare product revenue now represents 92% of all
software revenues, compared to 88% and 54%, in fiscal years 1998 and 1997,
respectively. With the availability of RetrievalWare FileRoom, EFS software
revenues represented only 1% of total software revenue in fiscal year 1999,
compared to 9% and 41%, respectively, in fiscal years 1998 and 1997. Software
revenues from the Visual Products Group increased 196% in fiscal year 1999 to
$1.6 million from $0.5 million in the prior fiscal year. Revenues from the
Visual Products Group were 7% of software product revenue in fiscal year 1999
compared to 3% and 5%, respectively, in fiscal years 1998 and 1997.
The Company generated record revenues by continuing to attract prominent
corporate customers in fiscal year 1999. While maintaining the Company's current
customer base, Excalibur attracted new customers seeking industry leading
retrieval technology including ABC Inc., Copley Press, ICI Chemical, British
Gas, the Capital Group and Virginia Power. In October 1998, the Company released
RetrievalWare WebExpress, a high-performance, search and retrieval software
solution developed specifically for web publishers, online services and content
providers seeking more accurate and comprehensive access to large volumes of
diverse information ranging from scanned paper to electronic text, images and
video. New Excalibur customers choosing Excalibur WebExpress included
Encyclopedia Britannica, Powerize.com, Careerpath.com and several government
online customers.
In fiscal year 1999, the Company generated increased revenues through major
integration and software distribution licenses with strategic partners. In July
1998, the Company signed a strategic licensing, development and distribution
agreement with Storage Technology Corporation ("StorageTek"). Excalibur's
advanced retrieval software has been coupled with StorageTek's high-performance
network storage products to create advanced solutions called Network Appliances.
StorageTek committed to a prepaid license for licensing fees over 18 months and
will also pay royalties on resale of current Excalibur products and future
products to be jointly developed. The Company recognized $2.3 million in fiscal
year 1999 related to the agreement using the percentage-of-completion method
based on the relationship of actual costs incurred to total costs estimated to
be incurred over the duration of the contract; the remainder of the prepaid
license payments will be recognized in fiscal year 2000. In the fourth quarter
of fiscal year 1999, the Company signed an agreement with Inso Corporation
whereby Inso will integrate Excalibur RetrievalWare with the Inso Media Bank
media asset management solution and with their product data management solution.
The arrangement also provides the basis for advanced functionality in the form
of HTML export and viewer technology to be included in future versions of all
Excalibur products. The Company recognized $3 million of revenue from the
agreement in the fourth quarter of fiscal year 1999 relative to a five-year paid
up license to Inso Corporation.
Revenues from international operations are provided primarily by software
licenses with various European commercial and government customers and a
well-established European reseller network. The Company's international sales
operation, Excalibur Technologies International, Ltd. ("ETIL"), headquartered in
the United Kingdom experienced decreased revenues in the current fiscal year.
International revenues excluding Canada dropped 6% in fiscal year 1999 to $7.3
18
million from $7.8 million in fiscal year 1998. International revenues excluding
Canada were $5.9 million in fiscal year 1997. International software revenues
were negatively impacted by financial difficulties of ETNV, the Company's
primary continental European distribution channel. The Company recognized $0.8
million of software revenue related to the ETNV contract in fiscal year 1999
compared to $1.5 million in fiscal year 1998. A payment of 32,000,000 Belgian
Francs, or approximately $0.9 million, was due from ETNV to Excalibur in January
1999. The payment was not made and accordingly, no revenue from ETNV was
recorded in the fourth quarter. The Company's revenues from international
operations were also negatively affected by the Asian financial crisis that
impacted Excalibur sales in the Pacific Rim. Revenues from the Pacific Rim were
10% less in fiscal year 1999 compared to 1998 and decreased 15% in fiscal year
1998 compared to fiscal year 1997.
Software maintenance and customer support revenues were $5.2 million in fiscal
year 1999 and $5.2 million and $4.4 million, respectively, in fiscal years 1998
and 1997. Flat maintenance revenues in fiscal year 1999 compared to 1998 were
attributable to the transition of the business from EFS to RetrievalWare. The
EFS customer base in general is not renewing their maintenance contracts. While
this is somewhat offset by growth in the RetrievalWare base of maintenance
contracts as RetrievalWare license sales grow, the overall effect was a
flattening of maintenance in the current fiscal year. Maintenance revenues
increased 19% in fiscal year 1998 compared to 1997. That increase was attributed
to additions to the RetrievalWare customer base.
Operating Expenses
Cost of sales increased from $3.2 million in fiscal year 1997 to $4.3 million in
fiscal year 1998 and to $5.1 million in fiscal year 1999, representing 16%, 19%
and 18% of total sales, respectively. The cost of sales increase in fiscal year
1999 was attributable to the higher revenues and increased ETIL cost of sales
due to higher royalties for new language versions of RetrievalWare and greater
use of partners. The increase in cost of sales in fiscal year 1998 related
primarily to the formation of a product implementation group at the end of
fiscal year 1997 which resulted in additional salaries expense, implementation
project subcontractors expense, and increased overhead costs in fiscal year
1998. Additionally, due to the acquisition of Interpix in fiscal year 1998, cost
of sales contained associated amortization expense of intangible assets.
Sales and marketing expenses increased 2% in fiscal year 1999, from $13.2
million in fiscal year 1998 to $13.5 million in fiscal year 1999. The increase
in expenses resulted from personnel growth in ETIL and the marketing department.
Sales and marketing expenses were 48% of revenues in fiscal year 1999 compared
to 59% in fiscal year 1998. In fiscal year 1998, sales and marketing costs
decreased 9% to $13.2 million from $14.4 million in fiscal year 1997. The
reduction in expenses in fiscal year 1998 resulted from the reorganization in
the first quarter of fiscal year 1998.
Research and product development costs increased from $6.3 million in fiscal
year 1997 to $6.4 million in fiscal year 1998 and to $8.3 million in fiscal year
1999, representing 31%, 29% and 30% of revenues, respectively. The majority of
the increase in fiscal year 1999 was attributable to the establishment of the
joint development lab with StorageTek. The lab has integrated StorageTek
products with Excalibur's advanced products for crawling, indexing, searching,
retrieving and distributing all enterprise digital content, to create advanced
solutions that make enterprise-wide information assets easier to archive, access
19
and leverage. Established in the third quarter of fiscal 1999, the lab focused
efforts to complete development of StorageTek network appliance products, the
first of which was delivered in March of 1999. Text and visual expenses also
increased as the Company continued to invest in the enhancement of its
RetrievalWare and visual product lines. In fiscal year 1998, continued
development of Excalibur RetrievalWare products was emphasized while EFS product
development was significantly curtailed. Increased costs associated with the
development of RetrievalWare products were offset by the diminished expenses
associated with the EFS products. As a result, research and product development
costs increased only 2% in fiscal year 1998.
General and administrative expenses decreased 2% in fiscal year 1999 to $4.8
million from $4.9 million in fiscal year 1998, representing 17% and 22% of
revenues, respectively. The majority of the decrease in fiscal year 1999 was due
to a reduction in corporate expenses. In fiscal year 1998, general and
administrative expenses increased 25% from $3.9 million in fiscal year 1997. The
increase was the result of 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 1999, 1998 and
1997 was $493,000, $250,000, and $150,000, respectively.
In the second quarter of fiscal year 1998, the Company recorded an expense of
$1.3 million for the cost of in-process research and development acquired in the
merger with Interpix. This acquisition 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.
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 $0.6 million in the first quarter. The charge consisted of severance pay and
benefits for terminated employees. All expenditures relative to this
restructuring charge were made in fiscal year 1998.
The activities for fiscal year 1999, including those discussed above, resulted
in total expenses of $31.7 million, a 4% increase from total expenses of $30.6
million in the prior fiscal year. In fiscal year 1998, total expenses increased
by 10% from $27.9 million in fiscal year 1997. The total number of employees
increased from 168 at the beginning of the current fiscal year to 201 at January
31, 1999. The Company had 173 employees at January 31, 1997.
Due to a decreased level of invested funds, net interest income decreased from
$0.8 million in 1997 to $0.4 million in 1998 and to $0.2 million in 1999. 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, 1999. This charge in fiscal 1999, 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, 1999, was $0.3 million. The corresponding charge was $0.5 million in fiscal
year 1998 and $0.3 million in fiscal year 1997.
20
Liquidity and Capital Resources
In the fiscal year ended January 31, 1999, the Company's combined balance of
cash, cash equivalents and investments in marketable securities decreased by
$0.6 million to $5.9 million 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.
January 31, January 31,
1999 1998 Change
-------- --------- ---------
Cash and
cash equivalents $ 5,851 $ 4,939 $ 912
Investments - 1,496 (1,496)
-------- --------- ---------
Total $ 5,851 $ 6,435 $ (584)
======== ========= =========
The Company's operating activities used cash of $3.0 million in fiscal year
1999. The net loss of $3.9 million was offset by non-cash charges of $1.8
million, including $1.5 million in depreciation and amortization, $0.5 million
in bad debt expense and $0.3 million for the Company's share of the net loss of
ETNV and amortization of ETNV warrants. Reductions in accounts receivable
provided $2.3 million while increases in prepaid expenses used $3.4 million.
Reductions in accounts payable, accrued expenses and deferred revenues used $0.3
million.
In fiscal year 1998, cash of $4.4 million used to fund operations was
significantly less than the $8.3 million net loss for the year due primarily to
several non-cash charges. Those charges, which totaled $3.4 million, included
acquired research and development costs of $1.3 million, depreciation and
amortization of $1.5 million and the Company's share of the net loss of ETNV and
amortization of ETNV warrants totaling $0.5 million. Reductions in accounts
receivable and prepaid expenses provided $0.5 million.
During fiscal year 1999, investing activities provided $0.1 million. Net cash
provided from the maturity of U.S. Treasury Bills totaled $1.5 million while
purchases of computer and other equipment used $1.1 million. Loans to and
investments in the Company's affiliate, ETNV, included in other assets, used
$0.2 million. In fiscal year 1998, investing activities provided $6.1 million.
Net cash of $6.9 million was provided from the maturity of U.S. Treasury Bills.
Cash of $0.1 million was also provided as a result of the acquisition of
Interpix. Cash was used to purchase computer and other equipment totaling $0.8
million and to make a $0.1 million loan to ETNV.
Financing activities provided $3.8 million in fiscal year 1999. A private
placement of 325,000 shares of common stock to an unaffiliated financial
institution at a purchase price of $10.00 per share provided $3.3 million. Cash
of $0.6 million was provided from the exercise of employee stock options and
issuances of stock under the employee stock purchase plan. In fiscal year 1998,
the exercise of employee stock options and issuances of stock under the employee
stock purchase plan provided $0.6 million.
21
The number of days sales outstanding ("DSO") at January 31, 1999 was 61, a
decrease from 116 days at January 31, 1998. Management believes that the
allowance for doubtful accounts of $0.7 million at January 31, 1999 is adequate.
As of January 31, 1999, the Company's balances of cash and cash equivalents was
$5.9 million. The Company completed a private placement of 500,000 shares of its
common stock in March 1999 at a purchase price of $10 per share. Net proceeds of
$4.7 million from the placement will be used to fund ongoing operations and
general corporate purposes of the Company. 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 primarily used 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.
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 dependent 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
22
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.
As of January 31, 1999, the Company had net operating loss carryforwards
("NOLs") of approximately $67,957,000. 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
$3,854,000 for the fiscal year ended January 31, 1999. The accumulated deficit
of the Company at January 31, 1999 was $55,798,000. 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.
Other Factors
Year 2000
On July 29, 1998, the Securities and Exchange Commission issued additional
guidance on disclosures that public companies should make related to the Year
2000. The new release was effective for the Company's October 31, 1998 interim
reporting. In addition to historical information, the disclosure contains
forward-looking statements within the meaning of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995. Such statements are based
on management's current expectations and are subject to a number of factors,
risks and uncertainties which could cause actual results to differ materially
from those described in the forward-looking statements.
State of Readiness
The Company currently has facilities in six locations, each of which is
responsible for its own development information technology systems, herein known
as "Non-IT systems", while corporate information technology systems, herein
known as "IT systems", are managed by the Company's Management Information
Systems department ("MIS"). For the purposes of Year 2000 compliance, the
corporate MIS department is managing the task of verifying that all Company
systems are date compliant, including reviewing and analyzing all development
23
platforms, not directly under MIS control. This umbrella process was initiated
in order to ensure the Company would be able to continue developing its products
without disruption after January 1, 2000. To ensure that Non-IT and IT systems
are, or will be, compliant; the Company has undertaken a full survey of all
systems within the Company at all locations. This survey covers all user desktop
and laptop systems; all IT systems, servers, and operating systems; all critical
applications, including financial, accounting, corporate database, human
resources and administrative systems; and all Non-IT systems, servers, operating
systems and third party coding products. The majority of the Company's efforts
regarding Year 2000 readiness are associated with internal data processing
systems. In all material respects, products manufactured by the Company are
already Year 2000 compliant, although the individual platforms upon which
product(s) are developed are still under review and analysis. Due to the recent
upgrade of many of the Company's IT systems, the majority of these systems are
either currently prepared for Year 2000 in all material respects or are in the
process of being upgraded to standardized systems and applications which will
meet this objective. Most IT systems and applications which are deemed Year 2000
compliant by the software vendors are tested by the Company to verify these
claims. At this time, critical financial, accounting and corporate database
systems have been tested, and Non-IT systems are in the process of being tested.
These testing proportions are related to both the magnitude and perceived risk
of system non-compliance and future testing will be scheduled in accordance with
these criteria. For the remaining IT systems and the Non-IT systems, plans with
critical dates are being developed to monitor the Company's progress toward the
overall objective of Year 2000 compliance. The Company's anticipates readiness
for Year 2000 by early in the fourth quarter of fiscal year 2000.
Costs to Address Year 2000 Issues
Historical and estimated costs of remediation to this point have not been
material. The Company has resolved IT systems compliance issues through normal
replacement and upgrades of software. Non-IT systems are being addressed on a
case by case basis through the use of existing MIS resources. Most of the Non-IT
systems remedial activity to this point has involved applying low or zero cost
patches to operating systems and platforms using existing MIS resources to
achieve a date compliance level. The Company will continue to monitor Year 2000
remediation costs and will update its estimate of future remediation costs, if
any, as it completes its Non-IT systems analysis.
Key Considerations and Contingency Plans
At the current time, the Company's Year 2000 readiness plan anticipates that
both IT and Non-IT systems and applications will be Year 2000 compliant in all
material respects by early in the fourth quarter of fiscal year 2000. This
assessment is based on the Company's analysis to date and detailed findings at
its Vienna, Virginia and Columbia, Maryland locations. There can be no
assurance, however, of complete compliance based on the status to date. However,
since the Company is not dependent upon any single IT or Non-IT system for the
majority of its revenue, it is unlikely that any single system will have an
adverse effect on the Company as a whole. Contingency plans will involve the
procurement of newer platforms for Non-IT systems and the temporary use of
standardized commercial off-the-shelf replacement modules for IT applications
and business functions. While at present there are no indications that any
contingency plans will be necessary or that there will be revenue disruptions,
there can be no assurances that this will necessarily be the case.
24
EURO Conversion
On January 1, 1999, the exchange rates of eleven countries (Germany, France, the
Netherlands, Austria, Italy, Spain, Finland, Ireland, Belgium Portugal, and
Luxembourg) were fixed amongst one another and became the currencies of the
EURO. The currencies of the eleven countries will remain in circulation until
mid-2002. The EURO currency will be introduced on January 1, 2002. The Company
does not expect future balance sheets and statements of earnings and cash flows
to be materially impacted by the EURO Conversion.
New Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income," during the first quarter of fiscal 1999.
SFAS 130 requires additional disclosures with respect to certain changes in
assets and liabilities that previously were not required to be reported as
results of operations for the period.
In 1998, the Company adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information." FAS
131 supercedes FAS 14, "Financial Reporting for Segments of a Business
Enterprise", replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments. FAS 131 also requires
disclosures about products and services, geographic areas and major customers.
The adoption of FAS 131 did not affect results of operations or financial
position but did affect the disclosures of segment information. The Company
accounts for all operations as one segment.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which will
be effective for the Company's fiscal year 2001. This statement establishes
accounting and reporting standards requiring that every derivative instrument,
including certain derivative instruments embedded in other contracts, be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement also requires that changes in the derivative's fair
value be recognized in earnings unless specific hedge accounting criteria are
met. The Company believes the adoption of SFAS No. 133 will not have a material
effect on the financial statements.
The American Institute of Certified Public Accountants has issued Statement of
Position 98-9, "Modification of SOP-97-2, Software Revenue Recognition, With
Respect to Certain Transactions." SOP 98-9 is effective for revenue transactions
entered into in the Company's fiscal year 2001. The Company has evaluated SOP
98-9 and does not believe its adoption will have a material effect on the
financial statements.
25
Item 7A. Market Risk
The Company's market risk is principally confined to changes in foreign currency
exchange rates and potentially adverse effects of differing tax structures.
International revenues from ETIL, the Company's foreign sales subsidiary located
in the United Kingdom, were approximately 26% of total revenue in fiscal year
1999. International sales are made mostly from the Company's foreign subsidiary
and are typically denominated in British pounds, the local currency.
Additionally, the subsidiary incurs most of its expenses in the local currency.
Accordingly, the local currency is ETIL's functional currency.
The Company's exposure to foreign exchange rate fluctuations arises in part from
intercompany accounts in which costs incurred in the United States are charged
to ETIL. The Company is also exposed to foreign exchange rate fluctuations as
the financial results of ETIL are translated into U.S. dollars in consolidation.
As exchange rates vary, those results when translated may vary from expectations
and adversely impact overall expected profitability.
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.
26
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information Concerning Directors and Executive Officers
Name Age Position
- ---- --- --------
Donald R. Keough 72 Chairman of the Board of Directors
Patrick C. Condo 42 President and Chief Executive Officer,
Director
Richard M. Crooks, Jr. 59 Director
John S. Hendricks 47 Director
W. Frank King III 59 Director
John G. McMillian 72 Director
Philip J. O'Reilly 61 Director
Donald R. Keough has been Chairman of the Board of Directors and a Director of
the Company since June 1996. Mr. Keough has been an advisor to the Board of
Directors of the Coca-Cola Company since April 15, 1993, and Chairman of the
Board of Allen & Company Incorporated, a New York investment banking firm that
is the Company's largest shareholder, since April 15, 1993. Mr. Keough retired
as President, Chief Operating Officer and a Director of the Coca-Cola Company on
April 15, 1993, where he had been employed since 1950. From 1986 to 1993, he
also served as Chairman of the Board of Coca-Cola Enterprises, Inc., the world's
largest bottling system. Mr. Keough serves on the Board of Directors of Allen &
Company Incorporated, H.J. Heinz Company, The Washington Post Company,
McDonald's Corporation and USA Networks, Inc.
Patrick C. Condo was named President and Chief Executive Officer in November
1995, and a Director in January 1996. Mr. Condo was President from May 1995 to
November 1995. He became Executive Vice President in January 1995 after serving
as the Director of Business Development from November 1992. From October 1987 to
November 1992, Mr. Condo held several manager level positions for Digital
Equipment Corporation's Image, Video and Voice Business Unit and Software
Business Group in New Hampshire.
Richard M. Crooks, Jr. has been a Director of the Company since June 1990 and
was Chairman of the Board from June 1990 to June 1996. Mr. Crooks has been
President of RMC Consultants, a financial advisory services firm, since June
1990. Mr. Crooks is a director of and consultant to Allen & Company
Incorporated. Mr. Crooks served as a Managing Director of Allen & Company
Incorporated for more than five years prior to June 1990. Mr. Crooks is a
director of Cypress Bioscience Inc., a biotechnology company engaged in
developing, manufacturing and marketing products for the treatment of
immune-related diseases and cancers.
27
John S. Hendricks was appointed as a Director of the Company in May 1997. He has
been Chairman and Chief Executive Officer of Discovery Communications, Inc., a
privately held, diversified media company, since he founded the company in 1982
in order to develop a new cable television service. The effort resulted in the
launch of the Discovery Channel in 1985, which has become one of the world's
largest cable television networks. Mr. Hendricks is a member of the boards of
various cable television industry groups, educational institutions and other
organizations promoting natural history and science. Mr. Hendricks is Chairman
of the Board of Governors of the National Academy of Cable Programming.
W. Frank King III was elected a Director of the Company in June 1992. He is
presently a private investor. Dr. King served as President, Chief Executive
Officer, and a Director of PSW Technologies, Inc., a leading provider of
technology for open systems computing, from 1992 to August 1998. From 1988 to
November 1991, Dr. King was a Senior Vice President of Development of Lotus
Development Corporation. Prior to joining Lotus, Dr. King held various positions
with IBM over 19 years, the most recent as Vice President of Development in its
Entry Systems Division. Dr. King is a director of SystemSoft Corporation, a
software engineering company; Auspex, Inc., a computer server manufacturer; Best
Software Inc., a provider of human resource, asset and payroll management
software solutions; and Natural Microsystems, Inc., a developer of telephony
products.
John G. McMillian was elected a Director in June 1996. Mr. McMillian owns a half
interest in Peter Hughes Diving Company, a charter company, and Contender Boats,
Inc., a boat manufacturer. He was Chairman and Chief Executive Officer of
Allegheny & Western Energy Corporation, a natural gas production and
distribution company, from July 1987 until July 1995, when the company was sold.
Mr. McMillian serves on the Advisory Committee of Sun Trust Miami, N.A.
Philip J. O'Reilly has been a Director of the Company since April 1988. Mr.
O'Reilly is a partner in the law firm of O'Reilly, Marsh, Kearney & Corteselli
P.C., in Mineola, New York. Mr. O'Reilly has been in private practice for more
than the past five years. Mr. O'Reilly is a director of Cypress Bioscience Inc.,
a biotechnology company engaged in developing, manufacturing and marketing
products for the treatment of immune-related diseases and cancers.
Information Concerning the Board of Directors and Its Committees
The Board of Directors held six meetings during the fiscal year ended January
31, 1999. Each incumbent director attended more than 75% of the aggregate number
of meetings of the Board of Directors and appropriate Committees held during
fiscal year 1999 since their election.
The Board of Directors has established a number of Committees. The Audit
Committee, consisting of Mr. McMillian (Chairman), Dr. King and Mr. O'Reilly,
met seven times during fiscal year 1999. The Audit Committee meets with the
Company's management, including its Chief Financial Officer, and its independent
accountants several times a year to discuss internal controls and accounting
matters, the Company's financial statements, and the scope and results of the
auditing programs of the independent accountants. The Compensation Committee,
currently composed of three directors, Messrs. Crooks (Chairman), Hendricks and
O'Reilly, administers management compensation and makes recommendations in that
regard to the Board. The Compensation Committee met on two occasions during
fiscal 1999. The Stock Option Plan Administration Committee, which currently
consists of Messrs. Crooks (Chairman) and O'Reilly, administers the Company's
Stock Option Plans. The Stock Option Administration Committee met twice during
fiscal 1999.
28
Each non-employee director is paid $5,000 for each meeting of the Board or its
Committees attended, whether in person or by telephone, up to a maximum of
$20,000 per fiscal year. Messrs. Keough and Crooks are not paid the foregoing
fees. All directors are reimbursed for their expenses in attending meetings of
the Board or its Committees. Each non-employee director receives options to
purchase 25,000 shares of common stock of Excalibur upon joining the Board and
additional options to purchase 25,000 shares of common stock of Excalibur after
each subsequent five-year period of service as a member of the Board. The
Chairman may be granted additional options to purchase 25,000 shares of common
stock of Excalibur upon being elected Chairman and after each subsequent
five-year period of service. Mr. Keough has not been granted any stock options.
Executive Officers and Key Employees of the Registrant
Each year, the Board of Directors appoints the executive officers of the Company
to serve until the next Annual Meeting of Shareholders and until their
successors have been duly appointed and qualified. The following information
indicates the position, age and business experience of the current executive
officers, Messrs. Condo, Buchanan and Nelson, as well as key employees of the
Company. There are no family relationships between any of the executive officers
of the Company.
Name Age Position
- ---- --- --------
Patrick C. Condo 42 President and Chief Executive Officer
James H. Buchanan 43 Vice President, Chief Financial Officer,
Treasurer and Secretary
Paul E. Nelson 36 Senior Vice President, Product Development
Daniel C. Agan 46 Vice President, Worldwide Marketing
Steven S. Biegler 50 Vice President, Customer Services
Kamran Khan 35 Vice President, Worldwide Sales
David Nunnerley 42 Vice President, Visual Product Development
See the discussion included in the preceding section for the business experience
of Mr. Condo.
James H. Buchanan joined the Company as Chief Financial Officer in September
1995. Mr. Buchanan was elected Secretary and Treasurer of the Company on
November 17, 1995. From March 1991 to August 1995, Mr. Buchanan was Vice
President, Controller and Treasurer of Legent Corporation, a software
development company. Prior to that, he held several financial management
positions with Norfolk Southern Corporation and PepsiCo. Mr. Buchanan is a
certified public accountant.
29
Paul E. Nelson was named the Company's Senior Vice President, Product
Development in January 1998. Mr. Nelson served as a Director of the Company from
January 1, 1997 to July 21, 1997. He joined the Company as Vice President, Text
Products in July 1995 in connection with the Company's acquisition of ConQuest
Software, Inc. ("ConQuest"), a company that Mr. Nelson co-founded in 1990. Mr.
Nelson was Senior Vice President of Product Development and a Director of
ConQuest.
Daniel C. Agan joined the Company as Vice President, Worldwide Marketing in
September 1996. From 1991 through 1996, Mr. Agan was President and Chief
Executive Officer of Agan Associates, Limited, a marketing consulting firm with
experience providing executive-level service to a diverse range of clients in
the technology, on-line and broadcasting industries. Prior to this, Mr. Agan
spent fifteen years with the Public Broadcasting Service (PBS) where he served
in a variety of capacities, most notably as Senior Vice President for National
Programming and Promotion.
Steven S. Biegler was named Vice President, Customer Services in February 1998.
Since joining the Company in May 1996 as Director of Professional Services, Mr.
Biegler has overseen technical support, implementation services, education
services and software manufacturing, shipping and receiving. From 1995 to 1996,
Mr. Biegler was Vice President of Operations for Seiko Computer Systems. Prior
to that, he was Vice President of Product Support and Installations for Summit
Information Systems since 1993.
Kamran Khan was named Vice President, Worldwide Sales in May 1997. Previously,
Mr. Khan held several sales management positions since joining the Company in
September 1993. Mr. Khan served as general manager of the Company's
international sales operation and wholly-owned subsidiary Excalibur
Technologies, Ltd., located in the United Kingdom, from August 1995 until his
appointment to Vice President. Prior to joining the Company, Mr. Khan held
various positions, including regional business manager, with PAFEC Limited, a
leading firm in the United Kingdom involved with the development and
implementation of computer-aided engineering and engineering document management
software systems.
David Nunnerley was named Vice President, Visual Product Development in February
1998 and has been instrumental in the development of the Company's visual
products since joining the Company in 1996. From 1994 to 1996, Mr. Nunnerley was
Vice President of Engineering for Videopress Software, a software company
providing video delivery products and solutions to cable companies deploying
cable modems. Prior to that, Mr. Nunnerley held various product
management/marketing roles and management positions with Digital Equipment
Corporation.
Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 and regulations of the SEC
thereunder require the Company's executive officers and directors, and persons
who own more that ten percent of a registered class of the Company's equity
securities, to file reports of initial ownership and changes in ownership with
the SEC. Based solely on its review of copies of such forms received by the
Company, or on written representations from certain reporting persons that no
other reports were required for such persons, the Company believes that during
or with respect to the period from February 1, 1998 to January 31, 1999 all of
the Section 16(a) filing requirements applicable to its executive officers,
directors and ten percent shareholders were complied with on a timely basis.
30
Item 11. Executive Compensation.
Summary Compensation Table
The following table presents information concerning the compensation of the
Chief Executive Officer and each of the other most highly compensated executive
officers during the 1999 fiscal year (collectively, the "Named Executive
Officers") for services rendered in all capacities to the Company for the fiscal
year ended January 31, 1999, as well as the previous two fiscal years:
Long Term Compensation
----------------------------------------
Annual Compensation Awards Payouts
---------------------------- ---------------------- ----------------
Other Securities All
Annual Restricted Under- Other
Compen- Stock lying LTIP Compen-
Name and Principal Fiscal sation Award(s) Options/ Payouts sation
Position Year Salary($) Bonus($) ($) ($) SAR's(#) ($) ($)
- -------------------- ---- --------- -------- ------- ---------- ---------- ------- -------
Patrick C. Condo 1999 225,000 71,281 -- -- -- -- --
Chief Executive 1998 200,000 86,000 -- -- 400,000 <F1> -- --
Officer and President 1997 200,000 46,200 -- -- -- -- --
James H. Buchanan 1999 180,000 57,024 -- -- 10,000 -- --
Vice President, Chief 1998 165,514 70,950 -- -- 150,000 <F2> -- --
Financial Officer, 1997 155,688 34,650 -- -- -- -- 1,395 <F3>
Secretary and Treasurer
Paul E. Nelson 1999 165,000 81,800 -- -- -- -- --
Senior Vice President, 1998 157,500 69,586 -- -- 84,750 <F4> -- --
Product Development 1997 150,000 34,650 -- -- -- -- --
<FN>
<F1> This amount includes options to purchase 300,000 shares that were granted
in prior years and subsequently repriced on May 8, 1997.
<F2> This amount includes options to purchase 100,000 shares that were granted
in prior years and subsequently repriced on May 8, 1997.
<F3> Other compensation includes the reported value of a quota club trip
attended by the officer's spouse.
<F4> Represents options to purchase 84,750 shares that were granted in prior
years and subsequently repriced on May 8, 1997.
</FN>
31
Option Grants in Last Fiscal Year
The following table sets forth certain information concerning options granted
during fiscal 1999 to the Named Executive Officers.
Potential Realizable
Individual Grants Value at Assumed
----------------- Annual Rates of
% of Total Stock Price
Options Appreciation for
Granted to Exercise Option Term(2)
Options Employees in or Base Expiration -------------
Name Granted (#) Fiscal Year (1) Price Date 5%($) 10%($)
- ----------- ----------- --------------- -------- ---------- ----- ------
Patrick C.
Condo -- -- -- -- -- --
James H.
Buchanan 10,000 4.0% $6.25 9/01/08 39,306 99,609
Paul E.
Nelson -- -- -- -- -- --
- -------------------------------------------
(1) These options vest in equal 12-1/2% increments every six months from the
dates of original grant.
(2) The amounts shown are hypothetical gains that would exist for the respective
options if exercised at the end of the option term. The assumed 5% and 10%
rates of stock price appreciation are mandated by rules of the Securities
and Exchange Commission and do not represent the Company's estimate or
projection of future increases in the price of its Common Stock.
32
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Values
The following table sets forth, as of January 31, 1999, the number of options
and the value of exercised and unexercised options held by the Named Executive
Officers.
- ------------------------------------------------------------------
Number of
Securities
Underlying Value of
Unexercised Unexercised
Shares Options/SARS In-the Money
Acquired at Fiscal Options/SARS at
on Value Year-End (#) Fiscal Year-End ($)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable (1)
- ---------------- -------- -------- --------------- -------------------
Patrick C. Condo -- -- 287,500/112,500 $1,742,988/$494,212
James H. Buchanan -- -- 87,500/ 72,500 $516,387/$334,693
Paul E. Nelson -- -- 74,156/ 10,594 $468,147/ $66,880
(1) The closing price of the Company's common stock on January 29, 1999, the
last trading day of the Company's fiscal year, was $11.063 per share.
Employment Agreements
Under an agreement between the Company and Patrick C. Condo, President and Chief
Executive Officer entered into in May 1998, Mr. Condo will be paid an amount
equal to twelve months of base salary plus bonus compensation and continuation
of his employee benefits for one year in the event Mr. Condo's employment is
terminated or he is removed from his position as Chief Executive Officer within
six months following certain "change of control" events relating to the Company.
Such arrangement was approved by the full Board of Directors. For fiscal 1999,
Mr. Condo's annual salary and bonus amounted to $296,281.
The offer of employment letter dated September 7, 1995 for James H. Buchanan,
Chief Financial Officer, Secretary and Treasurer of the Company, stipulates that
Mr. Buchanan will be paid an amount equal to twelve months of base salary in
semi-monthly installments should his employment be terminated by the Company
without cause.
33
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee during fiscal 1999 were Messrs.
Crooks, Hendricks and O'Reilly, none of whom is an officer or employee of the
Company or its subsidiaries. No member of the Compensation Committee or
executive officer of the Company has a relationship that would constitute an
interlocking relationship with executive officers or directors of another
entity.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of March 29, 1999, information concerning the
ownership of Common Stock of the Company of (i) all persons known to the Company
to beneficially own 5% or more of the Company's Common Stock, (ii) each director
of the Company, (iii) each Named Executive Officer and (iv) all directors and
executive officers of the Company as a group.
Amount and Nature Percent
Name and Address of Beneficial of Class
of Beneficial Owner Ownership (1) Owned
- ------------------- ------------- -----
Allen & Company Incorporated 3,725,846 (2)(3) 26.6%
711 Fifth Avenue
New York, NY 10022
Alliance Capital Management L.P. 818,100 (4) 5.9%
Donald R. Keough 130,000 (5) *
Patrick C. Condo 313,997 (6) 2.2%
Richard M. Crooks, Jr. 399,750 (7) 2.9%
John S. Hendricks 25,000 (8) *
W. Frank King III 38,000 (9) *
John G. McMillian 40,000 (10) *
Philip J. O'Reilly 55,000 (11) *
James H. Buchanan 110,062 (12) *
Paul E. Nelson 363,185 (13) 2.6%
All directors and executive
officers as a group (9 persons) 1,474,994 (14) 10.2%
* Represents less than one percent of the outstanding common stock.
34
(1) To the Company's knowledge, each person listed has sole voting and
investment power as to the shares indicated, except as described below.
(2) Does not include shares owned by persons, including Messrs. Keough and
Crooks and entities which, together with Allen & Company Incorporated, may
be considered a "group," as such term is defined by Section 13(d) of the
Securities Exchange Act of 1934, because (as reported on Schedule 13D filed
with the SEC on July 21, 1997) many of these persons or entities are Allen
stockholders, officers, directors, relatives or affiliates of the foregoing.
No person or entity included in this possible "group," with the exception of
Allen & Company Incorporated, owns 5% or more of the outstanding common
stock.
(3) Includes 271,800 shares of common stock issuable upon conversion of 27,180
shares of the Company's cumulative convertible preferred stock.
(4) Based on information contained in a Schedule 13G filed with the Securities
and Exchange Commission on February 16, 1999 by The Equitable Companies
Incorporated and other entities as parent holding companies of Alliance
Capital Management L.P.
(5) Does not include shares owned by Allen & Company Incorporated, of which Mr.
Keough is Chairman of the Board, and as to which shares Mr. Keough disclaims
beneficial ownership.
(6) Includes (a) 10,000 shares of common stock owned beneficially but not of
record upon exercise of stock options at a price of $4.75 per share expiring
November 13, 2002; (b) 15,000 shares of common stock owned beneficially but
not of record upon exercise of stock options at a price of $4.75 per share,
expiring January 4, 2004; (c) 75,000 shares of common stock owned
beneficially but not of record upon exercise of stock options at a price of
$4.75 per share, expiring December 6, 2004; (d) 87,500 shares of common
stock owned beneficially but not of record, issuable upon exercise of stock
options at a price of $4.75 per share, expiring June 2, 2005; (e) 87,500
shares of common stock owned beneficially but not of record, issuable upon
exercise of stock options at a price of $4.75 per share expiring November 1,
2005; and (f) 37,500 shares of common stock owned beneficially but not of
record, issuable upon exercise of stock options at a price of $7.63 per
share expiring August 13, 2007.
(7) Includes (a) 50,000 shares of common stock owned beneficially but not of
record, issuable upon exercise of stock options of the Company at a price of
$16.10 per share expiring June 28, 2000, and (b) 50,000 shares of common
stock issuable upon exercise of stock options of the Company at a price of
$20.56 per share expiring November 27, 2005. Does not include shares owned
by Allen & Company Incorporated, of which Mr. Crooks is a director and as to
which shares Mr. Crooks disclaims beneficial ownership.
(8) Includes 25,000 shares of common stock owned beneficially but not of record,
issuable upon exercise of stock options the Company at a price of $4.875 per
share expiring June 2, 2007.
(9) Includes (a) 13,000 shares of common stock owned beneficially but not of
record, issuable upon exercise of stock options of the Company at a price of
$12.50 per share, expiring July 2, 2002; and (b) 25,000 shares of common
stock owned beneficially but not of record, issuable upon exercise of stock
options of the Company at a price of $4.75 per share, expiring May 8, 2007.
35
(10)Includes (a) 25,000 shares of common stock owned beneficially but not of
record, issuable upon exercise of stock options of the Company at a price of
$22.50 per share, expiring June 28, 2006, and (b) 10,000 shares of common
stock owned beneficially but not of record, issuable upon exercise of stock
options of the Company at a price of $14.00 per share, expiring October 28,
2006.
(11)Includes (a) 25,000 shares of common stock owned beneficially but not of
record, issuable upon exercise of stock options of the Company at a price of
$13.00 per share expiring March 12, 2003; and (b) 25,000 shares of common
stock owned beneficially but not of record, issuable upon exercise of stock
options of the Company at a price of $6.75 per share expiring December 1,
2008.
(12)Includes (a) 26,250 shares of common stock owned beneficially but not of
record, issuable upon exercise of stock options of the Company at a price of
$4.75 per share expiring September 13, 2005; (b) 61,250 shares owned
beneficially but not of record, issuable upon exercise of stock options of
the Company at a price of $4.75 per share expiring November 1, 2005; (c)
18,750 shares of common stock owned beneficially but not of record, issuable
upon exercise of stock options of the Company at a price of $4.75 per share
expiring August 13, 2007; and (d) 2,500 shares of common stock owned
beneficially but not of record, issuable upon exercise of stock options of
the Company at a price of $6.25 per share expiring September 1, 2008.
(13)Includes 74,156 shares of common stock owned beneficially but not of
record, issuable upon exercise of stock options of the Company at a price of
$4.75 per share expiring July 20, 2005.
(14)Includes 743,406 shares of common stock owned beneficially but not of
record, issuable upon the exercise of options to purchase common stock of
the Company.
Item 13. Certain Relationships and Related Transactions.
Donald R. Keough, the Chairman of the Board of Directors of the Company, is the
Chairman of the Board of Allen & Company Incorporated ("Allen"). Richard M.
Crooks, Jr., a director of the Company, is a director of and consultant to
Allen.
The Company's policy is that it will not make loans to, or enter into other
transactions with directors, officers or affiliates unless such loans or
transactions are approved by a majority of the Company's independent
disinterested directors, may reasonably be expected to benefit the Company, and
will be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
See also "Compensation Committee Interlocks and Insider Participation" above.
36
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
Reports of Independent Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations and
Other Comprehensive Income (Loss)
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
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 II for the years
ended January 31, 1998 and 1997
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. (7)
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)
37
10.01 Incentive Stock Option Plan, dated April 1989. (1)
10.02 Agreement and Plan of Merger Between Excalibur,
Excalibur Acquisition Corporation and ConQuest
Software, Inc., dated July 5, 1995. (2)
10.03 1995 Incentive Plan, dated November 1995. (3)
10.04 ConQuest Incentive Stock Option Plan, dated August 19, 1993. (4)
10.05 Office Lease (10440 Little Patuxent Parkway, Suite 800,
Columbia, Maryland), commencing January 1, 1996. (4)
10.06 Office Lease (1959 Palomar Oaks Way, Carlsbad,
California), commencing November 15, 1995. (4)
10.07 Excalibur Technologies Corporation Employee Stock
Purchase Plan, effective August 1, 1996. (5)
10.08 Office Lease (4675 Stevens Creek Boulevard, Santa Clara,
California 95051), commencing July 1, 1997. (7)
10.09 Office Lease (1921 Gallows Road, Vienna, Virginia 22182),
commencing May 1, 1999.
10.10 Employment agreement with James H. Buchanan,
dated September 7, 1995.
21.01 Subsidiaries of Excalibur Technologies Corporation.
23.01 Consent of PricewaterhouseCoopers LLP, Independent Public
Accountants.
27.01 Financial Data Schedule
- ----------------------
(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.
(7) Incorporated herein by reference to Form 10-K for the year ended January
31, 1998, filed April 23, 1998.
38
(b) Reports on Form 8-K.
Two Forms 8-K were filed during the last quarter of fiscal year 1999. On
November 4, 1998, the Company filed a Form 8-K for Item 4, reporting the
disengagement of its independent accounting firm. On November 9, 1998, the
Company filed a Form 8-K for Item 4, reporting the engagement of its new
independent accounting firm.
Index to Consolidated Financial Statements Page
- ------------------------------------------ ----
Reports of Independent Public Accountants F-1, F-2,
F-21
Consolidated Balance Sheets
As of January 31, 1999 and 1998 F-3
Consolidated Statements of Operations and Other
Comprehensive Income (Loss)
For the fiscal years ended January 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Shareholders' Equity
For the fiscal years ended January 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows
For the fiscal years ended January 31, 1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7
Schedule II - Valuation and Qualifying Accounts
For the fiscal years ended January 31, 1999, 1998 and 1997 F-22
39
F-3
Report of Independent Accountants
To the Stockholders and Board of Directors of
Excalibur Technologies Corporation:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) present fairly, in all material respects, the
financial position of Excalibur Technologies Corporation and its subsidiaries at
January 31, 1999, and the results of their operations and their cash flows for
the year then ended, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule for
the year ended January 31, 1999, listed in the index appearing under Item
14(a)(2) presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
/s/PricewaterhouseCoopers LLP
McLean, Virginia
February 26, 1999, except for Note 1, Paragraph 4, as to which the date is
March 30, 1999.
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Excalibur Technologies Corporation:
We have audited the accompanying consolidated balance sheet of Excalibur
Technologies Corporation (a Delaware corporation) and subsidiaries as of January
31, 1998, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the two 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 the results of their
operations and their cash flows for each of the two 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-2
EXCALIBUR TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
January 31,
--------------------
ASSETS 1999 1998
-------- --------
Current Assets:
Cash and cash equivalents ....................... $ 5,851 $ 4,939
U.S. government securities, at cost ............. -- 1,496
Accounts receivable, net ........................ 6,402 9,189
Prepaid expenses and other ...................... 2,291 1,071
-------- --------
Total current assets ........................ 14,544 16,695
Equipment and leasehold improvements, net .......... 2,034 2,267
Other assets ....................................... 3,134 1,083
-------- --------
$ 19,712 $ 20,045
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ................................ $ 1,933 $ 2,106
Accrued expenses ................................ 1,829 1,886
Deferred revenues ............................... 2,690 2,708
Deferred compensation ........................... 86 247
-------- --------
Total current liabilities ................... 6,538 6,947
-------- --------
Commitments and Contingencies
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; 13,689 and 13,179
shares issued and outstanding ................ 137 132
Additional paid-in capital ...................... 68,631 64,714
Accumulated deficit ............................. (55,798) (51,945)
Accumulated other comprehensive loss ............ (67) (74)
-------- --------
Total shareholders' equity .................. 13,174 13,098
-------- --------
$ 19,712 $ 20,045
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
EXCALIBUR TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
OTHER COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
For the Fiscal Years Ended
January 31,
-------- -------- --------
1999 1998 1997
-------- -------- --------
Revenues:
Software ................................ $ 22,741 $ 17,202 $ 15,866
Maintenance ............................. 5,198 5,215 4,393
-------- -------- --------
27,939 22,417 20,259
-------- -------- --------
Expenses:
Cost of software revenues ............... 3,808 3,039 1,630
Cost of maintenance revenues ............ 1,320 1,219 1,618
Sales and marketing ..................... 13,501 13,184 14,430
Research and product development ........ 8,328 6,405 6,288
General and administrative .............. 4,775 4,884 3,906
Restructuring costs ..................... -- 577 --
Acquired in-process research
and development ....................... -- 1,284 --
-------- -------- --------
31,732 30,592 27,872
-------- -------- --------
Operating loss ............................ (3,793) (8,175) (7,613)
Other income (expenses):
Interest income, net .................... 239 374 781
Equity in net loss of affiliate ......... (300) (525) (341)
-------- -------- --------
Net loss .................................. $ (3,854) $ (8,326) $ (7,173)
Dividends on preferred stock .............. 14 14 14
-------- -------- --------
Net loss applicable to common stock ....... $ (3,868) $ (8,340) $ (7,187)
======== ======== ========
Basic and diluted net loss per common share $ (0.29) $ (0.64) $ (0.58)
Weighted-average number of
common shares outstanding............... 13,526 12,934 12,351
Other comprehensive income (loss):
Net loss .................................. $ (3,854) $ (8,326) $ (7,173)
Foreign currency translation adjustment . 7 (31) (78)
-------- -------- --------
Comprehensive loss ........................ $ (3,847) $ (8,357) $ (7,251)
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
EXCALIBUR TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands) Accumulated
Other
Compre-
Preferred Stock Common Stock Add'l hensive
--------------- ------------ Paid-in Accumulated Income
Shares $ Shares $ Capital Deficit (Loss) Total
------ ----- ------ ---- -------- --------- ------ --------
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
Foreign Currency
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
Foreign Currency
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
Private Placement......... - - 325 3 3,247 - - 3,250
Issuance of common stock
upon exercise of options.. - - 167 2 533 - - 535
Issuance of common stock
for Employee Stock
Purchase Plan............. - - 19 - 137 - - 137
Foreign Currency
Translation adjustment.... - - - - - - 7 7
Net loss.................. - - - - - (3,854) - (3,854)
------ ----- ------ ---- -------- --------- ------ --------
Balance, January 31, 1999. 27 $ 271 13,689 $137 $68,631 $(55,798) $ (67) $13,174
====== ===== ====== ==== ======== ========= ====== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
EXCALIBUR TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Fiscal Years Ended
January 31,
--------------------------------
1999 1998 1997
-------- -------- --------
Cash Flows from Operating
Activities:
Net loss ................................... $ (3,854) $ (8,326) $ (7,173)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization ........... 1,486 1,540 1,367
Bad debt expense ........................ 493 250 150
Acquired in-process research
and development costs ................... -- 1,284 --
Equity in net loss of affiliate ......... 300 525 341
Loss on disposal of assets .............. -- 2 36
Changes in operating assets and liabilities:
Accounts receivable, net ................ 2,349 4 (2,474)
Prepaid expenses and other .............. (3,425) 527 (767)
Accounts payable and accrued expenses ... (296) (193) (97)
Deferred revenues ....................... (35) 11 (86)
-------- -------- --------
Net cash used in operating activities ... (2,982) (4,376) (8,703)
-------- -------- --------
Cash Flows from Investing Activities:
Purchase of investments ................. (984) (22,301) (17,959)
Proceeds from maturities of investments . 2,480 29,231 19,873
Purchases of equipment and
leasehold improvements .................. (1,141) (757) (2,394)
Other assets ............................ (256) (95) (556)
Purchase of business, net of cash used .. -- 55 --
Net cash provided by (used in) -------- -------- --------
investing activities ................... 99 6,133 (1,036)
-------- -------- --------
Cash Flows from Financing Activities:
Proceeds from the issuance of common stock 3,822 613 9,722
Repayment of notes payable .............. -- (40) (39)
-------- -------- --------
Net cash provided by financing activities 3,822 573 9,683
-------- -------- --------
Effect of Exchange Rate Changes on Cash .... (27) (76) (162)
-------- -------- --------
Net Increase (Decrease) in Cash
and Cash Equivalents ...................... 912 2,254 (218)
Cash and Cash Equivalents, beginning of year 4,939 2,685 2,903
-------- -------- --------
Cash and Cash Equivalents, end of year ..... $ 5,851 $ 4,939 $ 2,685
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial 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.
The Company designs, develops and markets enterprise-wide accurate, scalable and
secure knowledge retrieval and digital asset management software solutions
capable of supporting paper, text, image and video data. The Company offers
consulting, training, product maintenance and system 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 $19.4 million over
the last three fiscal years and the accumulated deficit of the Company at
January 31, 1999 was $55.8 million. The Company's operations are subject to
certain risks and uncertainties including, among others, the dependence upon the
timing of the closing on sales 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 balances of cash and cash equivalents at January 31, 1999, in
addition to net proceeds of $4.7 million from a private placement in March 1999,
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 2000, the Company's
balance of cash and cash equivalents 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.
Acquisition of Interpix Software Corporation
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
F-7
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 were included in the Company's consolidated
results of operations 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 that 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 upon the effective date of the acquisition.
The excess of the purchase price over the fair value of the net assets of
Interpix was approximately $575,000. This amount represents intangible assets
related to the completed technology base, the assembled workforce and tradenames
acquired, is included in other assets in the consolidated balance sheet, and is
being amortized on a straight-line basis over five years. Amortization expense
for the year ended January 31, 1999 was approximately $111,000 and accumulated
amortization at January 31, 1999 was $192,000.
(2) SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
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
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 in fiscal year
1999 and it has not had a material financial impact on the Company.
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 term of the respective agreements, which are usually
one year in length.
Customization is sometimes involved in the development of a software solution by
the Company. Under these circumstances, the Company's revenues are derived from
fixed price contracts and revenue is recognized using the
percentage-of-completion method based on the relationship of actual costs
incurred to total costs estimated to be incurred over the duration of the
contract.
F-8
Research and Development Costs
Software development costs are included in research and development and are
expensed as incurred. Statement of Financial Accounting Standards ("SFAS") No.
86, "Accounting for the Cost of Computer Software to be Sold, Leased or
Otherwise Marketed" requires the capitalization of certain software development
costs once technological feasibility is established, which the Company generally
defines as completion of a working model. Capitalization ceases when the
products are available for general release to customers, at which time
amortization of the capitalized costs begins on a straight-line basis over the
estimated product life, or on the ratio of current revenues to total projected
product revenues, whichever is greater. To date, the period between achieving
technological feasibility and the general availability of such software has been
short, and software development costs qualifying for capitalization have been
insignificant. Accordingly, the Company has not capitalized any software
development costs.
Cash, Cash Equivalents and Marketable Securities
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. 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, the aggregate fair value
of the securities based upon quoted market prices was $1.5 million.
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. The Company
has provided a full valuation allowance against its net deferred tax asset as of
January 31, 1999 and 1998, respectively.
Equipment and Leasehold Improvements
Office furniture and computer equipment are recorded at cost. 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 shorter
of the term of the applicable lease or the useful life of the asset.
F-9
Expenditures for normal repairs and maintenance are charged to operations as
incurred. The cost of property and equipment retired or otherwise disposed of
and the related accumulated depreciation or amortization are removed from the
accounts and any resulting gain or loss is reflected in current operations.
Net Loss Per Common Share
Basic earnings per share 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 2,561,423
shares of common stock, 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, 1999 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 major corporations, including distributors that
serve a wide variety of U.S. and foreign markets, and to government agencies.
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 $660,000 and $527,000 respectively, at January 31, 1999
and 1998.
Impairment of Long-lived Assets
The Company periodically evaluates the recoverability of its long-lived assets.
This evaluation consists of a comparison of the carrying value of the assets
with the assets' expected future cash flows, undiscounted and without interest
costs. Estimates of expected future cash flows represent management's best
estimate based on reasonable and supportable assumptions and projections. If the
expected future cash flow, undiscounted and without interest charges, exceeds
the carrying value of the asset, no impairment is recognized. Impairment losses
are measured as the difference between the carrying value of long-lived assets
and their fair value.
F-10
(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 a term of seven years but only if ETNV achieves certain
financial objectives. The value of the warrants on the date of grant was
estimated to be $758,000 and is included, net of amortization, in other assets
in the consolidated balance sheets.
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, 1999 and 1998 is included
in equity in net loss of affiliate in the accompanying consolidated statements
of operations for the fiscal years ended January 31, 1999, 1998 and 1997. The
net balances of the investment in and advances to ETNV is included in other
assets in the accompanying consolidated balance sheets. At January 31, 1999 and
1998, the investment balance was $471,000 and $544,000, respectively.
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 an option to
sell their shares to the Company according to a revenue-based formula. The
Company recorded total revenues of $938,675 and $1,656,000 in the fiscal years
ended January 31, 1999 and 1998, respectively, related to the License. In the
fourth quarter of fiscal year 1999, ETNV did not make its contractually required
payment totaling approximately $900,000.
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.
F-11
(4) CAPITALIZATION
Stock Offerings
During the second quarter of fiscal year 1999, 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, representing the approximate fair market value of the
stock on the date of issuance, resulting in proceeds to the Company of
$3,250,000. The transaction was placed directly by the Company. The Shares were
sold pursuant to an exemption from the registration requirements of the
Securities Act of 1933.
Cumulative Convertible Preferred Stock
The Company has issued 271,000 shares of 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, 1999
is approximately $56,000.
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 over holders of the Company's common
stock.
(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 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 1999, 1998 or 1997. Of the total number of shares authorized for
stock options, options to purchase 2,561,423 shares are outstanding and 557,530
shares are available for future grants.
Each qualified incentive stock option granted pursuant to the plans has an
exercise price equal to the fair market value of the underlying 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
F-12
non-qualified options and other stock-based compensation based on the difference
between the fair market value of the underlying common 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 year 1999, 1998 or 1997.
The following table summarizes the Company's activity for all of its stock
option awards:
Weighted-
Average
Number of Range of Exercise
Options Exercise Prices Price
------- --------------- -----
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
Granted .......................... 249,501 5.50 - 13.88 8.10
Exercised ........................ (166,815) 1.04 - 10.38 3.20
Canceled ......................... (152,899) 4.14 - 16.02 7.94
---------- --------------- -------
Balance, January 31, 1999 ........ 2,561,423 $ 1.04 - 22.50 $ 8.14
========== =============== =======
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 shares of the Company's common stock, 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 1,796,090, 1,530,918 and 1,738,246 shares of the Company's
common stock were vested and exercisable at January 31, 1999, 1998 and 1997,
respectively, at weighted-average exercise prices of $8.64, $8.89 and $10.56 per
share, respectively.
F-13
The following table summarizes additional information about stock options
outstanding at January 31, 1999:
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 $4.63 203,571 7.48 years $ 4.35 171,695 $ 4.31
$ 4.75 1,094,388 6.41 4.75 838,887 4.75
$ 4.88 to $ 8.56 522,000 7.50 7.29 203,798 7.46
$ 8.63 to $17.02 641,464 5.01 13.72 481,710 14.78
$20.56 to $22.50 100,000 7.11 21.53 100,000 21.53
---------------- --------- ----------- ------ ----------- ------
2,561,423 6.40 years $ 8.14 1,796,090 $ 8.64
========= =========== ====== =========== ======
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 1999, 1998 and 1997 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).
1999 1998 1997
------- ------- -------
Net loss, as reported $ 3,854 $ 8,326 $ 7,173
Pro forma compensation expense 4,046 3,898 2,533
------- ------- -------
Pro forma net loss $ 7,900 $12,224 $ 9,706
======= ======= =======
Basic and diluted net loss
per common share, as reported $ 0.29 $ 0.64 $ 0.58
Basic and diluted net loss
per common share, pro forma $ 0.58 $ 0.95 $ 0.79
The fair value of each option was estimated on the date of grant using the
Black-Scholes option-pricing model. The following table shows the assumptions
used for the grants that occurred in each fiscal year.
F-14
1999 1998 1997
------------ ------------ ----------
Expected volatility 65% 65% 60%
Risk free interest rates 4.5% to 5.6% 5.7% to 6.5% 6.5%
Dividend yield None None None
Expected lives 5 years 5 years 4 years
The weighted average fair value per share for stock option grants that were
awarded in fiscal years 1999, 1998 and 1997 was $4.77, $4.24 and $9.76,
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, 18,652,
40,252 and 3,253 shares were purchased by employees in fiscal year 1999, 1998
and 1997, respectively. 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 Software Inc., a private software company acquired in June 1995 by the
Company, 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 1999, 1998 and
1997, deferred compensation of $161,000, $654,000 and $99,000, respectively, was
settled. The portion of the deferred compensation balance related to independent
consultants was settled in fiscal year 1998.
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. ConQuest had a similar plan established for the
benefit of its employees that was merged into the Company's plan effective
December 31, 1996. The Company did not make any contributions to the employee
savings plan in fiscal years 1999, 1998, or 1997.
(6) INCOME TAXES
As the Company incurred pretax losses for the fiscal years presented herein,
there are no income taxes provided in the accompanying consolidated statements
of operations. At January 31, 1999, the Company had net operating loss
carryforwards ("NOLs") of approximately $67,957,000 that expire at various dates
through fiscal year 2014. 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
F-15
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, 1999 and 1998 were as
follows (in thousands):
1999 1998
Deferred tax assets -------- --------
Net operating loss carryforwards of
Excalibur, not yet utilized $ 25,824 $ 24,256
Net operating loss carryforwards of
ConQuest, not yet utilized 1,229 1,229
Other 513 427
--------- ---------
Total deferred tax assets 27,566 25,912
Valuation reserve (27,435) (25,819)
--------- ---------
131 93
(131) (93)
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.
(7) COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company conducts its operations using leased office facilities. The leases
terminate at various dates through fiscal year 2004. 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, 1999 are as follows (in thousands):
Year Ending
January 31,
-----------
2000 $ 1,375
2001 1,446
2002 1,035
2003 579
2004 596
----------
$ 5,031
==========
Total rental expense under operating leases, net of sublease income of $102,064,
$292,425, and $253,484 in fiscal years 1999, 1998 and 1997, respectively, was
approximately $1,303,000, $1,190,000 and $1,070,000, respectively.
F-16
Employment Agreements
Under an agreement between the Company and Patrick C. Condo, President and Chief
Executive Officer entered into in May 1998, Mr. Condo will be paid an amount
equal to twelve months of base salary plus bonus compensation and continuation
of his employee benefits for one year in the event Mr. Condo's employment is
terminated or he is removed from his position as Chief Executive Officer within
six months following certain "change of control" events relating to the Company.
Such arrangement was approved by the full Board of Directors.
The offer of employment letter dated September 7, 1995 for James H. Buchanan,
Chief Financial Officer, Secretary and Treasurer of the Company, stipulates that
Mr. Buchanan will be paid an amount equal to twelve months of base salary in
semi-monthly installments should his employment be terminated by the Company
without cause.
(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.
(9) SEGMENT INFORMATION
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, Excalibur
Technologies International, Ltd. ("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,
------------------------------
1999 1998 1997
---- ---- ----
Sales to unaffiliated customers:
United States $20,336 $14,134 $14,222
United Kingdom 4,490 3,460 1,915
All Other 3,113 4,823 4,122
------- ------- -------
$27,939 $22,417 $20,259
======= ======= =======
Long-lived assets:
United States $ 5,072 $ 3,255 $ 3,897
All Other 96 95 100
------- ------- -------
$ 5,168 $ 3,350 $ 3,997
======= ======= =======
F-17
Major Customers
Revenues derived from contracts and orders issued by agencies of the U.S.
Government were approximately $4,493,000, $5,379,000, and $6,004,000,
respectively, in the fiscal years ended January 31, 1999, 1998 and 1997. These
revenues, expressed as a percentage of total revenues for the fiscal year, were
approximately 16%, 24%, and 30%, respectively. Revenues derived from Inso
Corporation in fiscal year 1999 of $2,958,000 accounted for 11% of the Company's
total revenues. No single customer accounted for 10% or more of the Company's
revenue in the fiscal years ended January 31, 1998 and 1997.
(10) OTHER FINANCIAL DATA
a) Prepaid expenses and other at January 31,1999 and 1998 consisted of the
following (in thousands):
1999 1998
------ ------
Prepaid licenses $1,510 $ -
Prepaid other 781 1,071
------ ------
$2,291 $1,071
====== ======
b) Equipment and leasehold improvements at January 31, 1999 and 1998 consisted
of the following (in thousands):
1999 1998
------ ------
Computer equipment $7,269 $6,297
Office furniture 1,348 1,220
Leasehold improvements 403 364
------ ------
9,020 7,881
Less accumulated depreciation (6,986) (5,614)
------ ------
$2,034 $2,267
====== ======
c) Other assets at January 31, 1999 and 1998 consist of the following
(in thousands):
1999 1998
------ ------
Prepaid licenses $2,214 $ -
Other 920 1,083
------ ------
$3,134 $1,083
====== ======
F-18
d) Accrued expenses at January 31, 1999 and 1998 consist of the
following (in thousands):
1999 1998
------ ------
Accrued payroll $1,469 $1,292
Other 360 594
------ ------
$1,829 $1,886
====== ======
e) The Company paid legal fees and expenses totaling approximately $221,000 in
fiscal year 1997 to a law firm in which a former director of the Company was a
partner. No such fees were paid in fiscal years 1999 and 1998.
(11) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income," during the first quarter of fiscal 1999.
SFAS 130 requires additional disclosures with respect to certain changes in
assets and liabilities that previously were not required to be reported as
results of operations for the period.
In 1998, the Company adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information." FAS
131 supercedes FAS 14, "Financial Reporting for Segments of a Business
Enterprise", replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments. FAS 131 also requires
disclosures about products and services, geographic areas and major customers.
The adoption of FAS 131 did not affect results of operations or financial
position but did affect the disclosures of segment information. The Company
accounts for all operations as one segment.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which will
be effective for the Company's fiscal year 2001. This statement establishes
accounting and reporting standards requiring that every derivative instrument,
including certain derivative instruments embedded in other contracts, be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement also requires that changes in the derivative's fair
value be recognized in earnings unless specific hedge accounting criteria are
met. The Company believes the adoption of SFAS No. 133 will not have a material
effect on the financial statements.
The American Institute of Certified Public Accountants has issued Statement of
Position 98-9, "Modification of SOP-97-2, Software Revenue Recognition, With
Respect to Certain Transactions." SOP 98-9 is effective for revenue transactions
entered into in the Company's fiscal year 2001. The Company has evaluated SOP
98-9 and does not believe its adoption will have a material effect on the
financial statements.
F-19
(12) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
(in thousands)
For the Fiscal Years Ended
January 31,
-----------------------------
1999 1998 1997
------- ------- -------
Supplemental Disclosures of Cash
Flow Information:
Cash paid for interest.................. $ - $ 2 $ 11
======= ======= =======
Supplemental Disclosures of Noncash
Investing and Financing Activities:
Issuance of warrants to
purchase common stock................... $ - $ - $ 758
======= ======= =======
Stock options exercised under
deferred compensation arrangements...... $ 100 $ 457 $ 83
======= ======= =======
Issuance of common stock to
acquire Interpix........................ $ - $ 1,822 $ -
======= ======= =======
F-20
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Excalibur Technologies Corporation:
We have audited in accordance with generally accepted auditing standards,
the consolidated balance sheet of Excalibur Technologies Corporation as of
January 31, 1998 and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the two years in the period
ended January 31, 1998 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, 1999, 1998 AND 1997
------------------------------------------------------
Translation
Balance at Additions Deductions Adjustment Balance
Beginning Charged From During at End
Description of Year to Expense Reserves the Period of Year
- ------------ ------- ---------- -------- ---------- -------
1999
- ----
Deducted from
accounts receivable:
For doubtful accounts $527,000 $493,000 $356,000 (a) $(4,000) $660,000
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
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 28, 1999
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 28, 1999
- --------------------- Officer and Director --------------
Patrick C. Condo (Principal Executive Officer)
/s/Donald R. Keough April 21, 1999
- ---------------------- Chairman of the Board --------------
Donald R. Keough
/s/James H. Buchanan Chief Financial Officer April 28, 1999
- --------------------- Secretary and Treasurer (Principal --------------
James H. Buchanan Financial and Accounting Officer)
/s/Richard M. Crooks, Jr. April 29, 1999
- ------------------------- Director --------------
Richard M. Crooks, Jr.
/s/John S. Hendricks April 23, 1999
- --------------------- Director --------------
John S. Hendricks
/s/W. Frank King III April 27, 1999
- --------------------- Director --------------
W. Frank King III
/s/John G. McMillian April 27, 1999
- --------------------- Director --------------
John G. McMillian
/s/Philip J. O'Reilly April 29, 1999
- --------------------- Director --------------
Philip J. O'Reilly