SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 0-9747
EXCALIBUR TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 85-0278207
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2000 Corporate Ridge, Suite 1095, McLean, Virginia 22102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 790-2110
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days. Yes x No __
As of November 30, 1995, 11,642,711 shares of the registrant's Common Stock, par
value $.01 per share, were outstanding.
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EXCALIBUR TECHNOLOGIES CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 1995
TABLE OF CONTENTS
PART I . FINANCIAL INFORMATION
Item 1. Financial Statements: Page
Consolidated Balance Sheets
October 31, 1995 and January 31, 1995 ...................... 3
Consolidated Statements of Operations
Fiscal quarters and nine month periods ended
October 31, 1995 and 1994 .................................. 4
Consolidated Statements of Cash Flows
Nine month periods ended October 31, 1995 and 1994 ......... 5
Notes to Consolidated Financial Statements .............. 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................... 11-14
PART II. OTHER INFORMATION
Items 1. - 6 ......................................................... 15
Signature ........................................................... 16
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EXCALIBUR TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
October 31, January 31,
1995 1995
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents .................................. $ 2,109,720 $ 2,644,742
U.S. government securities, at cost ........................ 2,480,980 2,490,396
Accounts receivable, net of allowance for
doubtful accounts of $402,000 and ....................... 4,595,946 3,650,333
$374,000, respectively
Prepaid expenses and other ................................. 490,892 484,810
------------ ------------
Total current assets .................................. 9,677,538 9,270,281
------------ ------------
U.S. government securities, at cost ........................... 6,813,078 6,114,207
Equipment and leasehold improvements, net ..................... 2,188,413 2,522,622
Other assets .................................................. 302,782 44,782
------------ ------------
$ 18,981,811 $ 17,951,892
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities:
Accounts payable ........................................... $ 1,200,121 $ 968,295
Accrued expenses ........................................... 2,010,633 2,936,060
Deferred revenues .......................................... 2,893,993 3,018,199
Deferred compensation ...................................... 1,041,254 1,164,155
Notes payable and capital lease obligations ................ 20,131 307,351
------------ ------------
Total current liabilities ............................. 7,166,132 8,394,060
------------ ------------
Notes payable, net of current portion (Note 4) ................ 67,138 82,138
Shareholders' Equity:
5% Cumulative convertible preferred stock,
$0.01 par value, preference in liquidation
$10 per share, 1,000,000 shares authorized,
27,180 shares issued and outstanding .................. 271,797 271,797
Common stock, par value $0.01, 20,000,000
shares authorized; 11,571,899 and 11,239,380
shares issued and outstanding ......................... 115,719 112,394
Deferred compensation ...................................... (10,276) (38,332)
Additional paid-in capital ................................. 47,946,763 44,522,685
Accumulated deficit since September 30, 1985
(date of reorganization) ............................. (36,556,865) (35,366,899)
Cumulative translation adjustment .......................... (18,597) (25,951)
------------ ------------
Total shareholders' equity ............................ 11,748,541 9,475,694
------------ ------------
$ 18,981,811 $ 17,951,892
============ ============
</TABLE>
The accompanying notes to the financial statements are an
integral part of these consolidated balance sheets.
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EXCALIBUR TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal quarters ended Nine months ended
October 31 October 31
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Software ................. $ 3,940,055 $ 2,408,750 $ 10,243,198 $ 6,984,796
Maintenance .............. 1,066,392 692,538 2,661,577 1,827,920
------------ ------------ ------------ ------------
5,006,447 3,101,288 12,904,775 8,812,716
------------ ------------ ------------ ------------
EXPENSES:
Sales and marketing ...... 2,380,517 1,749,687 6,243,572 7,134,103
Research and product
development ............ 1,226,391 1,094,670 3,522,035 3,889,769
General and administrative 861,037 1,261,154 2,610,471 3,366,438
Cost of software revenues 455,710 246,871 1,033,258 822,623
Cost of maintenance
revenues ............... 143,457 108,857 414,763 398,805
Other (Note 7) ........... -- -- 489,521 700,000
------------ ------------ ------------ ------------
5,067,112 4,461,239 14,313,620 16,311,738
------------ ------------ ------------ ------------
Operating loss .............. (60,665) (1,359,951) (1,408,845) (7,499,022)
OTHER INCOME / (EXPENSES):
Interest income .......... 171,838 112,577 448,390 299,964
Interest expense ......... (2,872) (15,551) (34,396) (67,623)
Other income ............. -- 200,000 -- 200,000
------------ ------------ ------------ ------------
Net income (loss) ........... $ 108,301 $ (1,062,925) $ (994,851) $ (7,066,681)
------------ ------------ ------------ ------------
Dividends on preferred stock 3,396 3,396 10,188 10,188
============ ============ ============ ============
Net income (loss) applicable
to common stock .......... $ 104,905 $ (1,066,321) $ (1,005,039) $ (7,076,869)
============ ============ ============ ============
Net income (loss) per common
share ..................... $ 0.01 $ (0.09) $ (0.09) $ (0.64)
============ ============ ============ ============
Weighted-average number of
common shares outstanding 11,540,040 11,239,380 11,403,183 11,044,838
============ ============ ============ ============
</TABLE>
The accompanying notes to the financial statements are an
integral part of these consolidated statements.
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EXCALIBUR TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the nine months ended
October 31
1995 1994
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss ......................................... $ (994,851) $(7,066,681)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ............... 780,671 842,512
Loss on disposal of assets .................. 14,570 500,000
Compensation paid in common stock ........... 36,640 438,393
Amortization of deferred compensation ....... 28,056 40,000
Changes in operating assets and liabilities:
Accounts receivable, net .................... (916,504) 19,329
Prepaid expenses and other .................. (298,244) 108,793
Accounts payable and accrued expenses ....... (691,845) (52,803)
Deferred revenues ........................... (122,455) 913,697
Deferred compensation ....................... (77,900) 270,866
Adjustment for change in fiscal year of ConQuest . (181,525) --
----------- -----------
Net cash used in operating activities ............ (2,423,387) (3,985,894)
----------- -----------
Cash Flows from Investing Activities:
Purchase of investments .......................... (8,600,234) (6,956,614)
Proceeds from maturities of investments .......... 7,910,779 6,750,735
Purchases of equipment and leasehold improvements (461,646) (554,824)
Proceeds from disposal of assets ................. -- 26,497
----------- -----------
Net cash used by investing activities ............ (1,151,101) (734,206)
----------- -----------
Cash Flows from Financing Activities:
Proceeds from notes payable ...................... 238,000 173,717
Proceeds from the issuance of common stock ....... 3,345,762 5,628,996
Dividends paid ................................... (13,590) (13,590)
Repayment of notes payable and capital leases .... (540,220) (28,439)
----------- -----------
Net cash provided by financing activities ........ 3,029,952 5,760,684
----------- -----------
The Effect of Exchange Rate Changes on Cash ......... 9,514 (85,226)
----------- -----------
Net (Decrease) Increase in Cash and Cash Equivalents (535,022) 955,358
Cash and Cash Equivalents, beginning of period ...... 2,644,742 1,279,666
----------- -----------
Cash and Cash Equivalents, end of period ............ $ 2,109,720 $ 2,235,024
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest ............................ $ 41,291 $ 50,133
=========== ===========
Supplemental Disclosures of Noncash Investing and
Financing Activities:
Purchase of treasury stock with note payable ...... $ -- $ 94,380
=========== ===========
Common stock issued under deferred compensation
arrangements .................................... $ 45,000 $ 65,000
=========== ===========
</TABLE>
The accompanying notes to the financial statements are
an integral part of these consolidated statements.
<PAGE>
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EXCALIBUR TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY
The consolidated financial statements include the accounts of Excalibur
Technologies Corporation ("Excalibur"); its wholly-owned subsidiary, Excalibur
Technologies International, Ltd. ("ETIL"); and the acquired company, ConQuest
Software, Inc. ("ConQuest"). These entities are collectively referred to
hereinafter as the "Company." All significant intercompany transactions and
accounts have been eliminated.
The Company designs, develops, markets and supports computer software products
used for the document imaging and multimedia information retrieval marketplaces.
The Company also offers consulting, training, maintenance and systems
integration services in support of its customers' use of its software products.
In addition, the Company performs research and development under contract and
licenses proprietary software products for use in compound-document, digital
library, positive identification, and on-line services and information retrieval
systems. The Company distributes its products through Value Added Resellers
(VARs), System Integrators (SIs), Original Equipment Manufacturers (OEMs),
distributors and a direct sales force.
(2) SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Presentation
These financial statements are unaudited and have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission
regarding interim financial reporting. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements, and it is suggested that these
consolidated financial statements be read in conjunction with the financial
statements, and the notes thereto, included in the Company's Annual Report on
Form 10-K, as amended, for the fiscal year ended January 31, 1995; its Quarterly
Report for the quarter ended July 31, 1995, as amended; and the Current Report
on Form 8-K, as amended on November 9, 1995. In the opinion of management, the
comparative and consolidated financial statements for the fiscal periods
presented herein include all adjustments that are normal and recurring which are
necessary to a fair statement of the results for the interim periods. The
results of operations for the three and nine month periods ended October 31,
1995 are not necessarily indicative of the results for the entire fiscal year
ending January 31, 1996.
In July 1995, Excalibur acquired all of the outstanding common stock of
ConQuest. The business combination was treated for accounting purposes as a
pooling of interests, and accordingly, the accompanying consolidated financial
statements reflect the combined results of the pooled businesses for the
respective periods presented.
Prior to its acquisition by Excalibur, ConQuest reported operating results on a
calendar year basis. ConQuest's separate results for the prior year have not
been restated to conform to the fiscal year of Excalibur. Therefore, the
Company's consolidated balance sheet at January 31, 1995 combines the
consolidated balance sheet of Excalibur and ETIL as of January 31, 1995 and the
balance sheet of ConQuest as of December 31, 1994. Further, ConQuest's separate
results of operations for the month ended January 31, 1995 are not reflected in
the consolidated statement of operations for the current fiscal year. The
revenues, operating loss and net loss of ConQuest for the month ended January
31, 1995 were $137,578, $176,630 and $181,525, respectively.
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A reconciliation of previously reported revenues and net income (losses) appears
below:
Quarter ended Nine months ended
October 31,1994 October 31, 1994
Revenues -
Previously reported $ 2,363,891 $ 7,450,261
ConQuest 737,397 1,362,455
---------------- ----------------
$ 3,101,288 $ 8,812,716
================ ================
Net income (loss) -
Previously reported $ (1,063,260) $ (5,679,927)
ConQuest 335 (1,386,754)
---------------- ----------------
$ (1,062,925) $ (7,066,681)
================ ================
Revenue Recognition
The Company recognizes revenue from the sale of its software products and
revenue from software royalties when the earnings process is complete and
collection is considered probable. Typically, revenue from the sale of products
is recognized upon shipment. Revenues from royalties are recognized at contract
signing provided that there are no related future performance requirements.
Revenues related to agreements with customers which contain future performance
requirements are recognized in accordance with such performance requirements.
Maintenance revenues related to ongoing services are deferred and recognized
ratably over the term of the respective agreements. Maintenance revenues that
are bundled with initial licensing fees are deferred and recognized over the
term of the related maintenance periods, typically 90 days.
Research and Development Costs
No product development costs were capitalized, and there were no capitalized
costs not yet amortized, during the nine month periods ended October 31, 1995
and 1994.
Net Income (Loss) Per Common Share
Net income (loss) per common share has been computed by dividing the net income
(loss), less dividends on preferred stock, by the weighted average number of
common shares outstanding during the periods. Common stock equivalents (stock
options, warrants and cumulative convertible preferred stock) were excluded from
the net income per share computation for the three months ended October 31, 1995
because their dilutive effect was immaterial. Common stock equivalents for the
net loss per share computations were excluded because their effects were
anti-dilutive.
Income Taxes
Due to the net loss reported for the nine month period ended October 31, 1995,
no income taxes were provided in the current fiscal quarter.
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Marketable Securities
Marketable securities, which consist of U.S. Treasury Bills entirely, are
carried at cost, adjusted for premium and discount amortization. Certain of
these securities with maturities of less than one year are classified as
long-term instruments at October 31, 1995 and January 31, 1995, as it is
management's intent to reinvest these amounts in long-term instruments upon
maturity. At October 31, 1995 and January 31, 1995, the aggregate value of
securities was $9,291,000 and $8,583,000, respectively. Effective February 1,
1994, the Company adopted Financial Accounting Standard No. 115, Accounting for
Certain Investments in Debt and Equity Securities. The adoption of SFAS No. 115
had no material impact on the Company's financial position.
Statements of Cash Flows
The marketable securities are excluded from cash equivalents regardless of their
maturities. Cash equivalents include funds deposited in money market accounts.
(3) DEFERRED COMPENSATION
ConQuest entered into arrangements with many of its officers, employees and
independent consultants to defer a portion of their compensation. Deferred
compensation payable to employees is restricted for use in the exercise of stock
options. However, if the related options have expired because the term has
lapsed or because employment has been terminated, the optionholder may request
cash redemption one year after expiration, with 90 days notice. Generally,
interest accrues on the deferred compensation of independent consultants only.
(4) NOTES PAYABLE
In October 1995, the State of Maryland licensed software at two locations in
full satisfaction of the Company's note payable in the amount of $50,000 and
accrued unpaid interest of $9,393. The borrowing occurred in March 1993, accrued
interest at the per annum rate of 7 percent, and was due in 1998.
At October 31, 1995, the Company had one note payable related to a severance
agreement with a former ConQuest employee with a balance of approximately
$80,000. This note accrued interest at 6% per annum and principal of
approximately $5,000 is paid quarterly.
(5) ISSUANCE OF STOCK AND RELATED EVENTS
During the first nine months of the current fiscal year, Excalibur issued
332,519 shares of common stock upon the exercise of options ranging from $4.28
to $15.75 per share, resulting in total proceeds to the Company of $3,346,000.
Of these, 10,518 shares were issued as payment of deferred compensation totaling
$45,000.
<PAGE>
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As consideration for the acquisition of all of the outstanding shares of stock
and options to acquire shares of ConQuest, the Company issued approximately
1,427,000 restricted shares of Excalibur common stock, and options to acquire
approximately 576,000 restricted shares of Excalibur common stock to the former
ConQuest shareholders and optionholders. In July 1995, the Company issued
options at fair market value to purchase 324,150 shares of common stock to
employees of ConQuest under the Company's 1995 Incentive Stock Option Plan at an
exercise price of $15.23 per share. These are options to purchase restricted
shares and vest over a four year period. The excess of the recorded value of the
outstanding shares of ConQuest over the par value of the shares of Excalibur
issued to effect the merger has been reflected as an increase to additional
paid-in capital.
Excalibur also issued options at fair market value to purchase 253,000 shares of
common stock to a director, officers and employees, at an exercise prices
ranging from $7.44 to $16.85 per share. Of these options, 10,000 vested
immediately and 243,000 vest over a four year period.
During the second quarter of the current fiscal year, ConQuest issued 9,160
shares of common stock at $4.00 for payment of consulting services received.
These shares were later converted to Excalibur shares.
(6) PRODUCT DISTRIBUTION AND OTHER CONTRACTS
In August 1995, the Company entered into a worldwide integration agreement with
KPMG Peat Marwick LLP (KPMG) which provides for KPMG to integrate and distribute
the Excalibur TRS(TM) Text Retrieval Server. KPMG will integrate Excalibur TRS
for text retrieval along with FileNet Corporation's document imaging and
workflow products for large-scale production solutions for the automation,
storage, tracking and retrieval of both structured an unstructured information.
Excalibur will recognize license fees on systems sold. To date no revenue has
been recognized under this contract.
In February 1995, the Company signed a one year Country License Reseller
Agreement with Zeta Holdings Limited, which granted Zeta Holdings exclusive
rights to license and distribute Excalibur EFS throughout the U.K. The contract
provided that $800,000 was to be paid to Excalibur, which amount would be
recognized ratably over the contract period of 12 months. However, the contract
was mutually terminated on July 31, 1995, with Zeta remaining as an authorized
reseller with non-exclusive distribution rights. A total of $190,000 in revenue
was recognized under this contract.
In January 1995, the Company entered into a development and distribution
agreement with International Business Machines Corporation (IBM) to integrate
Excalibur/XRS(TM) Image Retrieval Software with certain versions of IBM's
DATABASE 2 (DB2)(TM) database product. The Company will receive percentage
royalties on revenues recorded by IBM from licenses of DB2 that contain
Excalibur/XRS Image Retrieval Software, as described in the agreement. Through
October 31, 1995, $125,000 in revenue has been recognized under this contract.
In May of 1994, the Company entered into a Software Distribution Agreement with
Professional Computer Systems B.V. (PCS). The contract was subsequently amended
in January of 1995 to extend the contract expiration date to January 31, 1996.
The agreement grants PCS exclusive rights to license and distribute Excalibur
EFS(R) throughout Belgium, The Netherlands, and Luxembourg. The contract
provides for $1,000,000 to be paid to the Company, which is being recognized
ratably over the contract period of twenty-one months.
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On May 19, 1994, the Company signed a developer agreement with IBM for a
nonexclusive, worldwide license to IBM of the object code for Excalibur TRL Text
Retrieval Library and Excalibur TRS Text Retrieval Server for a period of seven
years after the date of delivery. IBM will embed Excalibur TRL and Excalibur TRS
as add-on features of their text retrieval product, SearchManager. Excalibur
will receive percentage royalties against revenue received by IBM from licenses
of SearchManager containing Excalibur TRL and/or TRS technology. No revenue has
been recognized under this agreement through October 31, 1995.
The Company signed an agreement with PRC, Inc. (PRC), a systems integrator, in
February 1993, under which the Company provides its software to PRC as part of a
federal procurement. This contract represents a minimum of $2 million in
revenues from PRC, payable periodically through the end of fiscal 1996. Revenues
of $29,000 and $87,000 were recognized in the third quarter and nine month
period of the current year. Aggregate revenue recognized to date is $1,681,000.
The Company has earned research, development and royalty fees under a series of
contracts with Nikkei Information Systems Co., Ltd. (NIS), a Japanese company,
since 1985. Under the current agreement, which is effective June 1, 1993 through
January 31, 1996, with automatic extensions of successive one-year periods, NIS
pays a minimum monthly royalty fee of $34,583 through January 31, 1996, against
royalties on the revenue generated. To date, the monthly royalties earned by the
Company have rarely exceeded the minimum monthly royalty, and it is anticipated
that the minimums will not be exceeded in the foreseeable future. The agreement
also allows for distribution of third party products containing the Company's
software technologies into Japan under a royalty sharing accord with NIS.
(7) OTHER INCOME AND EXPENSES
In July 1995, the Company recorded a charge of approximately $490,000 for the
estimated transaction costs to complete the merger between Excalibur and
ConQuest. The estimated costs included legal, accounting and other professional
fees of $363,000 and other costs of $127,000.
In July 1994, the Company recorded a charge of $700,000 relating to the closing
of a remote development facility and the write-off of certain computer
equipment.
In the prior year, ConQuest received approximately $200,000 from its former
landlord as incentive for ConQuest to terminate its lease for office space.
(8) RESTRUCTURING COSTS
In the fourth quarter of fiscal year 1996, the Company completed an assessment
of its personnel and facilities requirements and finalized a corporate
reorganization and relocation plan. The plan provides for the relocation of the
Company's corporate headquarters from San Diego, California to McLean, Virginia
and the consolidation of the product development and related customer support
teams into two facilities. The relocation moves corporate management closer to
the Company's major domestic and European customers and better organizes the
technical staff to support major product development initiatives. Consequently,
the Company anticipates that it will record a restructuring charge estimated to
be in the range of $500,000 to $700,000 in the fourth quarter of the current
fiscal year. This charge will be in addition to the charge discussed in Note 7
contained herein relating to the transaction costs of the ConQuest acquisition.
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The Company principally earns revenue from licensing its software to end-users,
SIs and OEMs through its distributors, VARs, strategic partners and direct sales
force. This includes both sales to new customers and sales to current customers
for additional users, upgrades to newer product versions, telephone support, and
other services. Revenues generated from product licenses can vary significantly
within a period due to the relatively long sales cycle, variations in the size
of license agreements, and the number of shipments made. Historically, the
volume of customer orders and product shipments is greatest at the end of a
period, and the Company often recognizes a significant portion of license
revenue in the last days of each quarter. Deferred revenue of $2,894,000 at
October 31, 1995, related primarily to maintenance agreements and training, and
is not expected to cause significant fluctuations in future quarterly revenue.
The Company's revenues increased 61% in the third quarter of fiscal year 1996 to
$5,006,000 compared to $3,101,000 for the third quarter of the prior fiscal
year. Current year-to-date revenues of $12,905,000 increased 46% from $8,813,000
for the year-to-date period ended October 31, 1994. The Company's strongest
revenue growth was from the RetrievalWare software product and international
operations.
Revenues Quarter ended October 31 Year-to-date ended October 31
(thousands) 1995 Change 1994 1995 Change 1994
------------------------ --------------------------
Software $ 3,940 64% $ 2,409 $10,243 47% $ 6,985
Maintenance 1,066 54% 692 2,662 46% 1,828
------------------------ --------------------------
$ 5,006 61% $ 3,101 $12,905 46% $ 8,813
Revenues from the sale of RetrievalWare products increased $1,043,000, or 152%,
to $1,729,000 in the third quarter of the current fiscal year, compared to
$686,000 a year ago. Year-to-date revenues from the licensing of such products
increased by $2,470,000, or 200%, to $3,702,000 from $1,232,000 a year ago. The
increases were due to a number of large product licenses sold during the current
year.
International revenues increased over the prior year by 35% to $732,000 in the
third quarter and by 42% to $2,168,000 for the year-to-date. Revenues generated
through Excalibur EFS license agreements, maintenance support agreements, and
training increased for both the quarter and year-to-date periods over last year.
The product license growth was largely due to revenues generated through the
international resellers.
Maintenance revenues increased over the prior year by 54% to $1,066,000 in the
third quarter and by 46% to $2,662,000 for the year-to-date. Maintenance
revenues represented 21% of total revenues for both periods in the current year,
compared to 22% and 21% of total revenues for the quarter and year-to-date
periods in the prior year. The dollar increases were due to a larger customer
base for both the Excalibur and ConQuest products and the Company's continued
efforts to keep customers current on annual maintenance contracts.
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Total operating expenses for the third quarter were $5,067,000 this year, an
increase of $606,000, or 14%, from last year that was due primarily to increased
sales and marketing expenditures. The Company expects to increase marketing and
employee costs to take advantage of expanding market opportunities. For the nine
month period ended October 31, 1995, total operating expenses were $14,314,000,
a decrease of $1,998,000, or 12%, compared to the first nine months of last year
that was due to the personnel and other cost reductions that took place at the
end of the prior fiscal year in connection with the distribution channel
reorganization and the Company's continued efforts to control expenses.
The continued expansion of international operations resulted in increased
expenses. International operating expenses increased 65% for the quarter and 61%
for the nine month periods ending October 31, 1995 compared to the same periods
last year to $732,000 and $2,168,000, respectively. International operating
expenses represented 11% of total expenses in the third quarter and 10% of total
expenses for the year-to-date period this year, compared to 4% and 5% for the
respective periods last year.
Operating Expenses Quarter ended October Year-to-date ended
31 October 31
(thousands) 1995 Change 1994 1995 Change 1994
------------------------ ------------------------
Sales and
marketing $ 2,381 36% $ 1,750 $ 6,244 (12%) $ 7,134
Percentage of total
revenue 48% 56% 48% 81%
- -----------------------------------------------------------------------------
Research and product
development $ 1,226 12% $ 1,095 $ 3,522 (9%) $ 3,890
Percentage of total
revenue 24% 35% 27% 44%
- -----------------------------------------------------------------------------
General and
administrative $ 861 (32%) $ 1,261 $ 2,610 (22%) $ 3,366
Percentage of total
revenue 17% 41% 20% 38%
- -----------------------------------------------------------------------------
Total operating
expenses $ 5,067 14% $ 4,461 $14,314 (12%) $16,312
Percentage of total
revenue 101% 144% 111% 185%
- -----------------------------------------------------------------------------
Sales and marketing expenses increased $631,000 to $2,381,000 in the third
quarter this year, a 36% increase from expenses of $1,750,000 in the third
quarter last year. For the nine month period ended October 31, 1995, sales and
marketing expenses decreased 12%, or $890,000, to $6,244,000. The increase in
the quarterly expenses is primarily due to an overall increase in sales
commissions and increased employee costs in international operations. The
Company's continued emphasis on VAR channels has lowered its product promotion
costs and overall sales and marketing expenses. Significant reductions have been
achieved in employee costs, travel and entertainment, and office costs through
tighter expense controls. With the exception of the international sales group,
the headcount in the sales and marketing departments has remained constant while
supporting an increased sales volume.
Research and product development expenditures increased $131,000 to $1,226,000
in the third quarter this year primarily due to increased development
expenditures relating to the ConQuest software product. Expenses for the nine
months ended October 31, 1995 decreased 9%, or $368,000, to $3,522,000. Prior to
the third quarter, reductions in overall equipment and depreciation costs, as
well as decreases in Excalibur's application product development expenditures,
have more than offset increased spending for the ConQuest software product and
embedded technology development.
<PAGE>
- 13 -
General and administrative expenditures for the third quarter this year dropped
$400,000, or 32%, in the third quarter and $756,000, or 22%, in the nine month
period ended October 31, 1995 compared to the same periods of the prior year.
These reductions reflect decreased employee costs and corporate expenses. Prior
year expenses included $120,000 and $170,000 for the third quarter and the nine
month period ended October 31, 1994, respectively, for litigation costs related
to a lawsuit settled in February 1995. The amortization of compensation expense
related to stock options granted to an officer of the Company accounted for
$60,000 and $180,000 of prior year expense for the quarter and the nine month
period ended October 31, 1994, respectively. Additionally, the Company increased
the bad debt reserve in the third quarter of the prior fiscal year by $100,000.
Costs of Revenues Quarter ended Year-to-date ended
October 31 October 31
(thousands) 1995 Change 1994 1995 Change 1994
---------------------- ------------------------
Software costs $ 456 85% $ 247 $ 1,033 26% $ 823
Percentage of
software revenue 12% 10% 10% 12%
- ----------------------------------------------------------------------------
Maintenance costs $ 143 31% $ 109 $ 415 4% $ 399
Percentage of
maintenance revenue 13% 16% 16% 22%
- ----------------------------------------------------------------------------
The overall cost of revenues increased along with the higher volume of sales.
Software costs increased $209,000 to $456,000 in the third quarter this year and
$210,000 to $1,033,000 for the nine months ended October 31, 1995 due to greater
royalty payments. The cost of maintenance revenues increased $34,000 to $143,000
for the quarter and $16,000 to $415,000 for the nine months ended October 31,
1995, but dropped as a percentage of the related revenue. The increased customer
support base has been handled without a significant increase in the costs of
maintaining the operations of the technical support department.
During the second quarter of the current year, the Company incurred legal,
accounting, and other transaction costs related to the merger of Excalibur and
ConQuest that were recorded as other expense of $490,000 in the statement of
operations.
In the fourth quarter of fiscal year 1996, the Company completed an assessment
of its personnel and facilities requirements and finalized a corporate
reorganization and relocation plan. The plan provides for the relocation of the
Company's corporate headquarters from San Diego, California to McLean, Virginia
and the consolidation of the product development and related customer support
teams into two facilities. The relocation moves corporate management closer to
the Company's major domestic and European customers and better organizes the
technical staff to support major product development initiatives. Consequently,
the Company anticipates that it will record a restructuring charge estimated to
be in the range of $500,000 to $700,000 in the fourth quarter of the current
fiscal year. This charge will be in addition to the charge discussed above
contained herein relating to the transaction costs of the ConQuest acquisition.
The other expense in the second quarter of the prior fiscal year consisted of a
charge of $200,000 for the closing of a remote development facility in an effort
to consolidate operations and control costs. Additionally, the Company reviewed
its computer requirements, and consistent with its strategic direction, recorded
an estimated charge of $500,000 for equipment no longer meeting the requirements
of its current product development.
Interest income was $172,000 in the third quarter and $448,000 year-to-date this
year compared to $113,000 in the third quarter and $300,000 year-to-date last
year. The increases of 52% for the third quarter and 49% for the year-to-date
were primarily due to higher average cash and investment balances this year as
compared to last year and a higher rate of return on reinvested funds.
The Company generated net income of $108,000, or $0.01 per common share, for the
third quarter this year compared to a loss of $1,066,000, or $0.09 per common
share, for the third quarter last year. The year-to-date loss was $1,005,000, or
$0.09 per common share, compared to $7,077,000, or $0.64 per common share, last
year.
<PAGE>
- 14 -
Liquidity and Capital Resources
The Company's combined balance of cash, cash equivalents and liquid investments
increased by approximately $154,000 to $11,404,000 in the nine months ended
October 31, 1995. Cash and cash equivalents decreased by $535,000 over the first
nine months of fiscal 1996 to $2,110,000 at October 31, 1995. Operating
activities used $2,423,000 in cash, primarily as a result of the net loss of
$995,000, an increase in accounts receivable of $917,000, and a $692,000
reduction of accounts payable and accrued expenses. The Company also repaid
$540,000 in ConQuest notes payable, had net purchases of government securities
of approximately $689,000, and purchased equipment and leasehold improvements of
approximately $462,000. Proceeds from exercises of stock options provided
$3,346,000 in cash.
The Company usually generates the majority of its quarterly revenue in the last
month of a quarter, which creates higher receivables at the end of a reporting
period, as measured by the average sales per day in accounts receivable. Despite
the higher overall balance of receivables compared to January 31, 1995, the
increased volume in sales for the quarter resulted in a relatively consistent
level for the average days sales outstanding of 97 at the end of the third
quarter this year. Accounts receivable includes amounts billed for annual
maintenance contracts booked to deferred revenue and recognized ratably over the
twelve-month period, which may overstate the average days sales outstanding. The
Company's normal payment terms are net 30 days, but the average collection time
is approximately 60 days, including international receivables which tend to have
longer payment cycles. International accounts receivable represented 26% of
total accounts receivable at October 31, 1995. The Company has not had any
significant bad debt expense charges.
A large sale to an end user of the RetrievalWare software product that occurred
in the third quarter of the current fiscal year included financing for a portion
of the software license fee. Installment payments of $300,000 each are due by
October 1996 and October 1997. The $300,000 payment due in October 1997 is
recorded net of a discount to its present value and is included in non-current
assets. From time to time in the normal course of business, the Company may
offer long-term financing in connection with a large sale.
In addition to normal operating expenses, longer term cash requirements are
anticipated for financing continued growth and the development or enhancement of
software products. The Company believes, based on its anticipated results of
operations for fiscal year 1996, that existing cash and other liquid investments
are adequate to fund current operating requirements.
<PAGE>
- 15 -
PART II-- OTHER INFORMATION
Item 1. Legal Proceedings None.
Item 2. Changes in Securities None.
Item 3. Defaults upon Senior Securities None.
Item 4. Submission of Matters to Vote of Security Holders None.
Item 5. Other Information
On November 17, 1995, the Company issued a press release announcing Patrick C.
Condo had been elected to the position of Chief Executive Officer. Mr. Condo was
named President in May 1995, and he succeeds J.M. Kennedy who resigned following
an absence due to illness. Mr. Kennedy remains a director of the Company.
The Company relocated its corporate headquarters from San Diego, California to
McLean, Virginia on November 27, 1995.
Item 6. Exhibits and Reports on Form 8-K
On November 22, 1995, the Company filed a Report on Form 8-K containing its
unaudited results of operations for the seven month period ended August 31,
1995, which included thirty days of postmerger combined operations. The
publication of these results satisfied the requirement of ASR No. 135 which
prohibits sales of Excalibur shares by Excalibur affiliates prior to such
publication. Excalibur completed its acquisition of ConQuest Software, Inc. on
July 20, 1995.
On August 4, 1995, the Company filed a Report on Form 8-K to disclose that on
July 20, 1995, it had completed its acquisition of all the outstanding shares of
common stock and options to acquire shares of common stock of ConQuest Software,
Inc.
On September 12, 1995 and on November 9, 1995, the Company filed amendments to
its Report on Form 8-K, dated August 4, 1995, containing the audited financial
statements and the required pro forma financial information relating to the
Company's acquisition of ConQuest Software, Inc.
<PAGE>
- 16 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EXCALIBUR TECHNOLOGIES CORPORATION
December 15, 1995 By: /s/ Patrick C. Condo
------------------------
Patrick C. Condo
President and Chief Executive Officer
December 15, 1995 By: /s/ James H. Buchanan
------------------------
James H. Buchanan
Chief Financial Officer
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271,797
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