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 July 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 0-9747
EXCALIBUR TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 85-0278207
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1921 Gallows Road, Suite 200, Vienna, Virginia 22182
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 761-3700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days. Yes x No__
As of September 6, 1996, 12,418,282 shares of the registrant's Common Stock, par
value $.01 per share, were outstanding.
<PAGE>
EXCALIBUR TECHNOLOGIES CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED July 31, 1996
TABLE OF CONTENTS
PART I . FINANCIAL INFORMATION
Item 1. Financial Statements: Page
Consolidated Balance Sheets
July 31, 1996 and January 31, 1996...........................3
Consolidated Statements of Operations
Fiscal quarters and six month periods ended
July 31, 1996 and 1995.......................................4
Consolidated Statements of Cash Flows
Six month periods ended July 31, 1996 and 1995...............5
Notes to Consolidated Financial Statements...................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................11
PART II. OTHER INFORMATION
Items 1. - 6...........................................................19
Signatures ............................................................20
- 2 -
<PAGE>
EXCALIBUR TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
ASSETS
July 31, January 31,
1996 1996
(unaudited)
-------- --------
<S> <C> <C>
Current Assets:
Cash and cash equivalents ......................... $ 2,171 $ 2,903
U.S. government securities, at cost ............... 13,748 10,341
Accounts receivable, net of allowance for
doubtful accounts of $383 and $375, respectively 6,575 6,942
Prepaid expenses and other ........................ 1,103 582
-------- --------
Total current assets ......................... 23,597 20,768
Equipment and leasehold improvements, net of
accumulated depreciation of $3,443 and
$2,838, respectively ............................ 2,773 1,943
Investment in affiliate (Note 3) ..................... 1,187 --
Other assets ......................................... 68 335
-------- --------
$ 27,625 $ 23,046
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable .................................. $ 1,363 $ 1,005
Accrued expenses .................................. 1,517 2,999
Deferred revenues ................................. 2,345 2,759
Deferred compensation ............................. 1,001 1,032
-------- --------
Total current liabilities .................... 6,226 7,795
-------- --------
Shareholders' Equity:
5% Cumulative convertible preferred stock,
$0.01 par value, preference in liquidation
$10 per share, 1,000 shares authorized,
27 shares issued and outstanding ............. 271 271
Common stock, par value $0.01, 40,000
shares authorized; 12,404 and 11,953
shares issued and outstanding, respectively .. 124 119
Additional paid-in capital ........................ 61,493 51,272
Accumulated deficit ............................... (40,484) (36,446)
Cumulative translation adjustment ................. (5) 35
-------- --------
Total shareholders' equity ................... 21,399 15,251
-------- --------
$ 27,625 $ 23,046
======== ========
</TABLE>
The accompanying notes to the financial statements are an
integral part of these consolidated balance sheets.
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<PAGE>
EXCALIBUR TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal quarters ended Six months ended
July 31 July 31
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES:
Software................................... $ 3,262 $ 3,410 $ 6,241 $ 6,303
Maintenance ............................... 1,057 847 2,079 1,595
------- ------- ------- -------
4,319 4,257 8,320 7,898
------- ------- ------- -------
EXPENSES:
Sales and Marketing .................... 3,521 1,783 6,624 3,863
Research and product development........ 1,804 1,178 3,421 2,295
General and administrative ............. 1,085 974 1,940 1,749
Cost of software revenues .............. 191 320 349 578
Cost of maintenance revenues ........... 195 142 379 271
Other (Note 1) ......................... -- 490 -- 490
------- ------- ------- -------
6,796 4,887 12,713 9,246
------- ------- ------- -------
Operating loss ............................ (2,477) (630) (4,393) (1,348)
OTHER INCOME/ (EXPENSES):
Interest income,net ..................... 223 131 414 245
Equity in net loss of affiliate ......... (59) -- (59) --
------- ------- ------- -------
Net loss .................................. (2,313) (499) (4,038) (1,103)
Dividends on preferred stock .............. 3 3 7 7
------- ------- ------- -------
Net loss applicable to commonstock ........ $(2,316) $ (502) $(4,045) $(1,110)
======= ======= ======= =======
Net loss per common share ................. $ (0.19) $ (0.04) $ (0.33) $ (0.10)
======= ======= ======= =======
Weighted-average number of
common sharesoutstanding .................. 12,363 11,397 12,274 11,330
======= ======= ======= =======
</TABLE>
The accompanying notes to the consolidated financial statements are an
integral part of these consolidated statements.
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<PAGE>
EXCALIBUR TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
For the six months ended July 31
1996 1995
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss .......................................... $ (4,038) $ (1,103)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ................ 605 513
Equity in net loss of affiliate .............. 59 --
Loss on disposal of assets ................... 8 8
Compensation paid in common stock ............ -- 59
Changes in operating assets and liabilities:
Accounts receivable, net ..................... 617 175
Prepaid expenses and other ................... (426) (118)
Accounts payable and accrued expenses ........ (1,133) (886)
Deferred revenues ............................ (440) (184)
Adjustment for change in fiscal year of ConQuest .. -- (181)
-------- --------
Net cash used in operating activities ............. (4,748) (1,717)
-------- --------
Cash Flows from Investing Activities:
Purchase of investments ........................... (12,053) (6,685)
Proceeds from maturities of investments ........... 8,646 6,546
Investment in affiliate .......................... (488) --
Purchases of equipment and leasehold improvements . (1,443) (265)
-------- --------
Net cash (used in) provided by investing activities (5,338) (404)
-------- --------
Cash Flows from Financing Activities:
Proceeds from the issuance of common stock ........ 9,435 2,757
Proceeds from notes payable ....................... -- 238
Repayment of notes payable and capital leases ..... (5) (119)
-------- --------
Net cash provided by financing activities ......... 9,430 2,876
-------- --------
The Effect of Exchange Rate Changes on Cash .......... (76) (13)
-------- --------
Net (Decrease) Increase in Cash and Cash Equivalents . (732) 742
Cash and Cash Equivalents, beginning of period ....... 2,903 2,645
-------- --------
Cash and Cash Equivalents, end of period ............. $ 2,171 $ 3,387
======== ========
Supplemental Disclosures of Noncash Investing and Financing Activities:
Issuance of warrants to purchase common stock ...... $ 758 $ --
Use of deferred compensation to purchase common stock 33 --
</TABLE>
The accompanying notes to the consolidated financial statements are
an integral part of these consolidated statements.
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<PAGE>
EXCALIBUR TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1996
(1) THE COMPANY
Operations and Organization
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. Certain amounts presented in the balance sheet at
January 31, 1996 have been reclassified to conform to the current year
presentation.
As discussed more completely below in Note 3 to the consolidated financial
statements, in July 1996, the Company made an investment in an unconsolidated
affiliate, Excalibur Technologies N.V. The Company uses the equity method of
accounting for its investment and, for the consolidated financial statements,
eliminates its share of profits included in the ending asset balances of the
affiliate.
The Company designs, develops, markets and supports computer software products
used for the multimedia information retrieval marketplace. 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 online services and information retrieval systems.
Distribution of the Company's products occurs through value-added resellers,
system integrators, original equipment manufacturers, other distributors and a
direct sales force to North American and international customers including
commercial firms in various industries and government agencies.
The Company's operations are subject to certain risks and uncertainties
including, among others, actual and potential competition by entities with
greater financial resources, experience and market presence than the Company;
the success of the Company's product marketing and product distribution
strategies; risks associated with acquisitions and international expansion; the
need to manage growth; and certain technology risks. The Company incurred a net
loss of $4,038,000 in the six months ended July 31, 1996, incurred cumulative
losses of approximately $18.6 million over the last three fiscal years and the
accumulated deficit of the Company at July 31, 1996 was $40,484,000.
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<PAGE>
Acquisition of ConQuest Software, Inc.
In July 1995, the Company acquired ConQuest, a private company located in
Columbia, Maryland, engaged in the business of providing natural language text
management software tools. The former shareholders of ConQuest received
approximately 1,427,000 shares of common stock of Excalibur in exchange for all
of the common stock of ConQuest. Outstanding options to purchase common stock of
ConQuest were converted into options to purchase approximately 572,000 shares of
Excalibur common stock. The acquisition was accounted for as a pooling of
interests and, as such, the accompanying consolidated financial statements
reflect the combined results of the pooled businesses for the respective periods
presented.
The Company recorded a charge of approximately $490,000 in July 1995 for the
transaction costs to complete the merger between Excalibur and ConQuest. The
costs included legal, accounting and other professional fees of $363,000 and
other costs of $127,000.
Prior to its acquisition by Excalibur, ConQuest reported operating results on a
calendar year basis. ConQuest's separate results for the prior years were not
restated to conform to the fiscal year of Excalibur. ConQuest's separate results
of operations for the month ended January 31, 1995 were not reflected in the
consolidated statement of operations for the prior fiscal year. The revenues,
operating loss and net loss of ConQuest for the month ended January 31, 1995
were $138,000, $177,000 and $181,000, respectively.
(2) SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Presentation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
These consolidated financial statements are unaudited and have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission regarding interim financial reporting. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements, and it is suggested
that these consolidated financial statements be read in conjunction with the
consolidated financial statements, and the notes thereto, included in the
Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1996.
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 six month
periods ended July 31, 1996 are not necessarily indicative of the results for
the entire fiscal year ending January 31, 1997.
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<PAGE>
Revenue Recognition
Revenues from the sale of computer software licenses are recognized upon
shipment of product provided that no significant vendor obligations remain and
that collection of the resulting receivable is considered probable. Revenues
related to agreements with customers that contain future performance
requirements are recognized when the performance requirements are satisfied.
Revenues related to customer support agreements are deferred and recognized
ratably over the term of the respective agreements, usually one year.
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 three and six month periods ended July 31,
1996 and 1995.
Cash, Cash Equivalents and Marketable Securities
For purposes of the balance sheets and statements of cash flows, the Company
considers all highly liquid investments purchased with a maturity of three
months or less to be cash equivalents. Cash equivalents consist of funds
deposited in money market accounts. U.S. government securities are considered
investments and are excluded from cash equivalents regardless of their
maturities. Under the Statement of Financial Accounting Standard ("SFAS") No.
115, "Accounting For Certain Investments in Debt and Equity Securities," the
Company considers its marketable securities as held-to-maturity securities.
Accordingly, marketable securities, consisting entirely of U.S. government
securities, are carried at cost, adjusted for premium and discount amortization.
At July 31, 1996 and January 31, 1996, the aggregate fair value of the
securities based upon quoted market prices was $13,733,000 and $10,345,000,
respectively.
Net Income (Loss) Per Common Share
Net loss per common share is calculated based on the weighted-average number of
common shares outstanding during each period, after deducting the dividends on
preferred stock. Common stock equivalents (stock options, warrants and
cumulative convertible preferred stock) were excluded from the net loss per
share computations for the periods presented herein because of their
anti-dilutive effect.
Income Taxes
Due to the net losses reported for the three and six month periods ended July
31, 1996 and 1995, no income taxes were provided in the periods.
Translation of Foreign Financial Statements
Assets and liabilities of foreign operations are translated at the period-end
rate of exchange. Statements of operations are translated at the average rates
of exchange during the period. Gains or losses from translating foreign currency
financial statements are accumulated in a separate component of shareholders'
equity.
- 8 -
<PAGE>
Accounting Pronouncements
Effective February 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." This statement will require new disclosures in the
annual consolidated financial statements about certain employee stock options
based on their fair value at the date of grant. The Company is continuing to
apply existing accounting rules for stock-based compensation pertaining to
employees as allowed under SFAS No. 123. However, fair value accounting is
required for transactions involving the issuance of stock options or other
equity instruments to acquire goods or services from nonemployees.
Effective February 1, 1996, the Company adopted the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
be Disposed of." SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. The impact of adopting this statement was not
material to the Company's results of operations or financial position.
(3) INVESTMENT IN AFFILIATE
In July 1996, the Company authorized the use of its name by Excalibur
Technologies N.V. ("ETNV"), a Belgian company incorporated in June 1996 for the
purpose of selling and marketing the Company's products and services within a
large territory including most of Northern Europe and Italy. The Company
contributed approximately $488,000 in cash to ETNV in consideration for 13.2% of
its voting capital stock. In connection with the organization of ETNV, the
Company issued warrants to purchase 148,500 shares of the Company's common stock
to certain shareholders of ETNV. The warrants are exercisable at a price of
$22.00 per share for seven years but only if ETNV achieves certain financial
objectives. The value of the warrants is estimated to be $758,000, and is
included at July 31, 1996 in the investment in affiliate account, net of
amortization, contained in the accompanying balance sheet.
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 (5) years. If the revenues of ETNV in the
fifth year exceed a certain level, the License shall be automatically renewed.
If the License is not renewed, the other shareholders of ETNV may exercise
options to sell their shares to the Company according to a revenue-based
formula. The Company recorded revenue of approximately $360,000 in July 1996
related to the License.
After a term of approximately five (5) 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.
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<PAGE>
The excess of the Company's investment in ETNV over its share of ETNV's
shareholders' equity is estimated to be $758,000, and is being amortized over a
five-year period. The amortization is included in equity in net loss of
affiliate in the accompanying statement of operations 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 July 31, 1996.
(4) ISSUANCES OF COMMON STOCK
On March 8, 1996, the Company completed a private placement of 350,000 shares of
the Company's common stock at an offering price of $25.00 per share, resulting
in net proceeds of approximately $8,337,000. Allen & Company Incorporated, a
shareholder of the Company, acted as the placement agency in this transaction
and received a fee of approximately $350,000.
During the first six months of the current fiscal year, Excalibur issued
approximately 101,000 shares of common stock upon the exercise of options
ranging from $3.11 to $16.64 per share, resulting in total cash proceeds to the
Company of approximately $1,098,000.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
The Company principally earns revenue from licensing its software to value-added
resellers, system integrators, original equipment manufacturers, strategic
partners and other customers through a direct sales force. Revenues are provided
from sales to new customers and sales to current customers for additional users,
upgrades to newer product versions, telephone support, and other services.
The acquisition of ConQuest was effected through the issuance of Excalibur
common stock and options to purchase Excalibur common stock to the former
ConQuest shareholders and optionholders in exchange for all of the outstanding
common stock of ConQuest. The business combination was accounted for as a
pooling of interests and, accordingly, the Company's consolidated financial
statements and the discussion and analysis of such statements contained herein
reflect the combined results of the pooled businesses for the respective periods
presented.
Results of Operations
Total revenues for the second quarter ended July 31, 1996 were $4,319,000, a one
percent increase over total revenues of $4,257,000 in the second quarter last
year. The net loss for the quarter ended July 31, 1996 was $2,313,000, or $0.19
per common share, compared to a net loss of $499,000 or $0.04 per common share,
for the second quarter of the prior fiscal year.
Revenues for the first six months of the current fiscal year increased 5% to
$8,320,000 compared with $7,898,000 reported for the same period in the prior
fiscal year. The net loss for this six month period was $4,038,000, or $.33 per
common share, compared with a net loss of $1,103,000, or $.10 per common share,
for the same period last year.
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<PAGE>
The following charts summarize the components of revenues and the categories of
expenses, including the amounts expressed as a percentage of total revenues, for
the three and six month periods ended July 31, 1996 and 1995 (dollars in
thousands).
Three months ended July 31
1996 1995
-------------------- ----------------------
Amount % Amount %
--------- -------- --------- ---------
Revenues:
Software $ 3,262 76 % $ 3,410 80 %
Maintenance 1,057 24 847 20
========= ======== ========== =========
$ 4,319 100 % $ 4,257 100 %
========= ======== ========== =========
Expenses:
Sales and marketing $ 3,521 82 % $ 1,783 42 %
Research and product
development 1,804 42 1,178 28
General and administrative 1,085 25 974 23
Cost of software revenues 191 6* 320 9*
Cost of maintenance
revenues 195 18* 142 17*
Other -- -- 490 12
========= ======== ========== =========
$ 6,796 157 % $ 4,887 115 %
========= ======== ========== =========
Six months ended July 31
1996 1995
-------------------- -----------------------
Amount % Amount %
--------- --------- --------- -----------
Revenues:
Software $ 6,241 75 % $ 6,303 80 %
Maintenance 2,079 25 1,595 20
========= ========= ========= ===========
$ 8,320 100 % $ 7,898 100 %
========= ========= ========= ===========
Expenses:
Sales and marketing $ 6,624 80 % $ 3,863 49 %
Research and product
development 3,421 41 2,295 29
General and administrative 1,940 23 1,749 22
Cost of software revenues 349 6* 578 9*
Cost of maintenance
revenues 379 18* 271 17*
Other -- -- 490 6
========= ========= ========= ===========
$ 12,713 153 % $ 9,246 117 %
========= ========= ========= ===========
*expressed as a percentage of related revenues
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<PAGE>
Software revenues declined 4% in the current quarter to $3,262,000 from
$3,410,000 in the comparable period of the prior fiscal year. Sales of the
Company's RetrievalWare products increased in the quarter but the increase was
more than offset by a decline in the sales of the Company's EFS (Electronic
Filing Software) product. Factors that are expected to benefit RetrievalWare
product revenues throughout the remainder of the current fiscal year include
product marketing and promotion programs, more effective selling efforts, the
availability of new releases of the product in the second half of the current
fiscal year and the recent announcement of the visual version of the product.
Software revenues obtained from the sale of products in the Federal and
international areas increased in the current quarter compared with the last
year's second quarter, but North American commercial product revenues declined
sharply in the quarter. The Company believes that the major changes discussed
below that occurred in the North American sales organization adversely affected
sales efforts in the quarter while the changes were being implemented. Overall,
the number of new software licenses sold in the current quarter increased
compared with the prior year. However, revenues related to the initial signing
of software licenses in the commercial online and OEM areas have not been as
large as originally expected for the current fiscal year. Due to the current
quarter decline primarily, software revenues decreased by 1% in the six-month
period ended July 31, 1996 to $6,241,000 from $6,303,000 in the corresponding
six-month period of the prior fiscal year.
New business developments in the current quarter included the establishment of
strategic partner relationships with industry leaders Informix and Computer
Associates, among others, in order to expand the installed base of end-user
customers and the license of the Company's new visual RetrievalWare solution to
Keyware Technologies. The Company extended its international operations through
the establishment of Excalibur Technologies N.V., a Belgian affiliate
incorporated in June 1996 for the purpose of marketing, selling and supporting
the Company's products within a territory including Belgium, The Netherlands,
Austria, Italy, Germany, Denmark, Norway, Sweden, Finland, Switzerland and
Luxembourg, as discussed in Note 3 to the consolidated financial statements
included herein.
Maintenance revenues were $1,057,000 and $2,079,000, respectively, in the three-
and six-month periods ended July 31, 1996 compared with $847,000 and $1,595,000,
respectively in the corresponding periods of the prior fiscal year. The
increases in each period were due to the expanding EFS customer base and the
current year amortization of revenue deferred last year for the maintenance and
support of software licensed to customers with large installations of the
RetrievalWare software product.
In the current quarter, the Company continued to invest in the business as
planned, despite the revenue performance, by increasing product development,
sales and marketing expenditures; expanding its facilities; enhancing
productivity through the acquisition of upgraded computers; and investing in
expanded distribution channels. The major investment in product development
during the current fiscal year has resulted in the new products and new product
features that were announced in the current quarter and are expected to begin
shipping to customers in the second half of the current fiscal year. The Company
has made large expenditures in the marketing of the new products and the
continuation of the program to significantly increase potential customer
recognition of the Company and the Retrieval Ware product brand name. In the
current year, the Company has built what the Company believes will be a more
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<PAGE>
effective organization to provide intranet and other high-end information
retrieval solutions directly to large corporate, government and other
institutional customers and to support the distribution of the Company's
products through major reseller channels managed by large strategic partners. As
a result, the North American sales group has been overhauled, with the rate of
change accelerated in the second quarter of the current fiscal year. There are
new personnel throughout the organization and new sales leadership.
Consequently, these and other activities resulted in total expenses for the
current quarter of $6,796,000, a 39% increase from total expenses of $4,887,000
in the corresponding quarter of the previous fiscal year. For the year, total
expenses increased by 37%, to $12,713,000 in the six-month period ended July 31,
1996 from $9,246,000 in the same period a year ago. Total headcount has
increased from 126 people at the beginning of the current fiscal year to 172
employees at July 31, 1996. The current year total expense amounts represent
157% and 153% of total revenues, respectively, for the three and six months
ended July 31, 1996. The comparative percentages for the corresponding prior
fiscal year periods were 115% and 117%, respectively.
Sales and marketing costs increased 97% in the current quarter, from $1,783,000
in the prior year quarter to $3,521,000 in the current year. In the six-month
period ended July 31, 1996, sales and marketing expenses increased by 71%, from
$3,863,000 in the prior fiscal year to $6,624,000 in the current fiscal year
period. On a net basis, the Company has added employees to the sales, marketing
and business development staffs. As a result, salaries, benefits, commissions,
travel, recruiting fees and other employee costs have increased significantly
between fiscal years. The Company incurred increased costs in connection with
its product promotion and brand recognition programs. The Company has been very
active in demonstrating its products at trade shows and industry meetings,
creating new product literature and advertising in computer industry trade
publications. The Company has also engaged the services of a public relations
firm to assist its marketing efforts resulting in increased consulting costs in
the current fiscal year.
Research and product development costs increased 53% and 49%, respectively, in
the quarter and six-month period July 31, 1996 compared with the corresponding
prior fiscal year periods. Such expenses were $1,804,000 and $3,421,000,
respectively, in the threeand six-month periods ended July 31, 1996, and they
were $1,178,000 and $2,295,000, respectively, in the comparable periods of the
prior fiscal year. Most of the increases relate to the addition of new employees
to the technical staff in the current fiscal year and to the expansion of the
product development facilities. Consequently, salaries and other employee costs
have increased between years as well as office rent, equipment costs and
computer equipment depreciation.
General and administrative expenses have increased in the current fiscal year.
Such costs increased 11% in the current quarter to $1,085,000 compared with
$974,000 in last year's second quarter. On a year-to-date basis, general and
administrative costs have increased also by 11%, to $1,940,000 in the current
fiscal year compared with $1,749,000 in the prior fiscal year. Costs for the
three- and six-month periods ended July 31, 1996 include charges of $29,000 and
$129,000, respectively, to increase the allowance for doubtful accounts. Payroll
and other employee costs associated with additions to the administrative staff
in the areas of human resources, investor relations, information systems and
financial analysis will increase costs in the second half of the current fiscal
year.
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<PAGE>
The cost of software revenues declined by $129,000 and $229,000, respectively,
in the three- and six-month periods ended July 31, 1996. These costs were
$191,000 and $320,000, respectively, in the quarters ended July 31, 1996 and
1995, and $349,000 and $578,000, respectively, in the six-month periods ended
July 31, 1996 and 1995. The Company negotiated an amendment to a third-party
royalty agreement resulting in a reduction in the royalty rate applicable to
revenues derived from the sale of RetrievalWare products. In addition, activity
conducted pursuant to development contracts was greater in the prior year. The
cost of maintenance revenues increased in the current quarter and in the
six-month period ended July 31, 1996 compared with the comparable periods of the
prior fiscal year due primarily to the increased costs associated with
supporting the larger installed base of RetrievalWare end users. However, the
cost of maintenance, expressed as a percentage of maintenance revenues has
remained relatively constant between fiscal years. Such percentage was 18% in
both the three- and six-month periods ended July 31, 1996 and it was 17% in both
the three- and six-month periods ended July 31, 1995. The costs were $195,000
and $142,000, respectively, in the quarters ended July 31, 1996 and 1995, and
they were $379,000 and $271,000, respectively, in the six-month periods ended
July 31, 1996 and 1995.
Expenses for both the three- and six-month periods ended July 31, 1995 included
$490,000 in legal, accounting and other costs associated with the merger with
ConQuest.
As a result of an increased level of investments and improved rates of return,
net interest income increased to $223,000 and $414,000, respectively, in the
three- and six-month periods ended compared with $131,000 and $245,000,
respectively, in the corresponding periods of the prior fiscal year. As
discussed in Note 3 to the consolidated financial statements contained herein,
the Company recorded its equity in the net loss of its newly-created affiliate,
ETNV, for the quarter ended July 31, 1996. This charge, totaling $59,000, is
contained in the other expense section of the accompanying consolidated
statement of operations.
Liquidity and Capital Resources
In the six months ended July 31, 1996, the Company's combined balance of cash,
cash equivalents and investments in marketable securities increased by
$2,675,000 to $15,919,000 as summarized below (in thousands). At July 31, 1996
and January 31, 1996, investments in marketable securities consisted of U.S.
Treasury Bills with maturities of less than one year.
July 31, January 31,
1996 1996 Change
---------- ----------- -----------
Cash and cash
equivalents $ 2,171 $ 2,903 $ (732)
Investments 13,748 10,341 3,407
========== =========== ===========
Total $ 15,919 $ 13,244 $ 2,675
========== =========== ===========
- 15 -
<PAGE>
As indicated in Note 4 to the Consolidated Financial Statements contained
herein, the Company completed a private placement sale of its common stock in
March, 1996. The increase in investments during the current fiscal year was due
to the receipt of the net proceeds of the offering, approximately $8,337,000.
The Company also received approximately $1,098,000 cash proceeds from the
exercise of employee stock options in the current fiscal year. There can be no
assurance that the Company will be able to obtain such funds from investors and
employees in the future, if required.
Cash was used to fund the net loss for the six month period ended July 31, 1996
of $4,038,000 and to pay obligations accrued at January 31, 1996 including
commissions, bonuses, restructuring costs and payroll taxes collected in
connection with the exercise of employee stock options. Cash was used to prepay
corporate insurance premiums, to purchase computer equipment and furniture for
new employees and to fund the necessary improvements made to leased office space
in Vienna, Virginia, now serving as the Company's corporate headquarters.
In July 1996, the Company made a cash investment of $488,000 in Excalibur
Technologies N.V. thereby acquiring approximately 13.2% of the outstanding
voting capital stock. This transaction is discussed in Note 3 to the
consolidated financial statements contained herein.
Accounts receivable decreased by $359,000 to a balance of $6,958,000 at July 31,
1996, before reduction for the allowance for doubtful accounts. The comparable
balance at January 31, 1996 was $7,317,000. The number of days sales outstanding
rose in the period due primarily to outstanding balances with extended payment
terms. The Company also reclassified the discounted amount of an installment
payment due from a customer in June 1997, approximately $277,000, from
noncurrent assets to accounts receivable in the current fiscal year. As
indicated above, the Company added $129,000 to the allowance for doubtful
accounts in the period and wrote-off $121,000 in uncollectible accounts that
were specifically reserved for at January 31, 1996. Management believes that the
allowance for doubtful accounts of $383,000 at July 31, 1996 is adequate.
The Company's current balances of cash, cash equivalents and investments,
together with funds anticipated from future operations, are expected to provide
sufficient cash to meet the Company's current projected needs for the remainder
of the current fiscal year, including the payment of the remaining restructuring
costs, and the purchase of computer equipment for new employees.
Factors That May Affect Future Results
The Company believes that the market for the Company's software products is
growing rapidly and that the Company's business environment is characterized by
rapid technological changes, changes in customer requirements, new emerging
market segments and increased competition. Consequently, to compete effectively,
the Company must make frequent new product introductions and enhancements and
deploy sales and marketing resources to take advantage of new business
opportunities. The ability of the Company to achieve and manage the expected
growth of the business and to develop new products will depend on the Company's
success in retaining its key personnel and adding new employees with appropriate
skills at the right times. Failure to make timely product introductions and
enhancements or to capitalize on new market opportunities as they emerge may
adversely affect future operating results.
- 16 -
<PAGE>
The Company's operations are also subject to certain other risks and
uncertainties including, among others, the effectiveness of actual and potential
competition, the success of the Company's relationships with its strategic
partners and other distributors of the Company's products, and the risks
associated with acquisitions and international expansion. The Company's business
is seasonal. Typically, revenues in the first half of the fiscal year,
particularly in the first quarter, are lower than total revenues in the second
half of the fiscal year. 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 reporting period, and the Company often recognizes a significant
portion of license revenue towards the end of each fiscal period. Deferred
revenues of $2,345,000 at July 31, 1996, related primarily to maintenance
agreements and training, are not expected to cause significant fluctuations in
future quarterly revenue.
The Company has significant net operating loss carryforwards ("NOLs") of
approximately $51,592,000. 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
$4,038,000 for the six months ended July 31, 1996, incurred cumulative losses of
approximately $18,591,000 over the last three fiscal years and the accumulated
deficit of the Company at July 31, 1996 was $40,484,000. 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 last year, the Company's
ability to utilize NOLs relating to ConQuest of approximately $2,855,000 may be
limited. Despite the NOL carryforwards, the Company may have income tax
liability in future years due to the application of the alternative minimum tax
rules of the Internal Revenue Code.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company believes that inflation has not had a material effect on the results
of its operations to date.
- 17 -
<PAGE>
Adoption of New Accounting Standards
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." It encourages, but does not require, companies to recognize
compensation expense for grants of stock and stock options to employees based on
new fair value accounting rules. Companies that choose not to adopt the new
rules will continue to apply the existing accounting rules. However, fair value
accounting is required for transactions involving the issuance of stock options
or other equity instruments to acquire goods or services from nonemployees. SFAS
No. 123 is effective for the Company's fiscal year 1997 consolidated financial
statements. The Company has not adopted the new fair value accounting rules of
SFAS No. 123 for employee stock options and will continue to apply existing
accounting rules for stock-based compensation pertaining to employees as allowed
under SFAS No. 123.
However, SFAS No. 123 will require the Company, in its fiscal 1997 audited
consolidated financial statements, to disclose pro forma net income/loss and
earnings per share under the fair value accounting method for stock option
grants that occurred subsequent to January 31, 1995. In addition, the Company
will be required to expand its disclosure about plan terms, exercise prices and
the assumptions used in measuring the fair value of stock-based grants. Although
the Company has not performed the pro forma calculations required by SFAS No.
123, it expects that the pro forma results will be lower than the historical
results reported herein.
Effective February 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed
of." SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The impact of adopting this statement was not material
to the Company's results of operations or financial position.
- 18 -
<PAGE>
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
(a) The 1996 Annual Meeting of Shareholders was held on June 28, 1996.
(b) The following individuals were elected to serve as the Board of Directors
for the terms expiring at the 1997 Annual Meeting:
Number of Shares Voted
----------------------
For Withheld
--- --------
Richard M. Crooks, Jr 9,712,636 284,549
Patrick C. Condo 9,717,345 279,840
Edwin R. Addison 9,711,487 285,698
James W. Dowe, III 9,423,018 574,167
Jay H. Diamond 9,370,343 626,842
J. M. Kennedy 9,369,333 627,952
W. Frank King, III 9,716,845 280,340
Philip J. O'Reilly 9,370,343 626,842
Donald R. Keough 9,716,945 280,240
John G.McMillian 9,717,032 280,153
Shawn C.Viguerie 9,769,708 227,477
(c) The shareholders voted 9,496,748 shares in the affirmative and 467,963
shares in the negative to approve adoption of an amendment to the Company's
Certificate of Incorporation to increase the number of shares of common stock,
par value $.01 per share, from 20,000,000 to 40,000,000 shares.
(d) The shareholders voted 6,969,410 shares in the affirmative and 745,776
shares in the negative to approve an increase in the number of shares of common
stock which may be granted under the 1989 Incentive Plan from 2,450,000 to
3,450,000.
(e) In the only other matter voted upon, the shareholders voted 7,871,911 shares
in the affirmative and 141,356 shares in the negative to approve the Excalibur
Technologies 1996 Employee Stock Purchase Plan.
Item 5. Other Information None.
Item 6. Exhibits and Reports on Form 8-K None.
- 19 -
<PAGE>
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
September 13, 1996 By:/s/Patrick C. Condo
----------------------
Patrick C. Condo
President and Chief Executive Officer
September 13, 1996 By:/s/James H. Buchanan
-----------------------
James H. Buchanan
Chief Financial Officer
- 20 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
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<PERIOD-END> JUL-31-1996
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271
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