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, 1997
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 11, 1997, 13,063,647 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 July 31, 1997
TABLE OF CONTENTS
PART I . FINANCIAL INFORMATION
Item 1. Financial Statements: Page
Consolidated Balance Sheets
July 31, 1997 and January 31, 1997........................... 3
Consolidated Statements of Operations
Three and six month periods ended July 31, 1997 and 1996..... 4
Consolidated Statements of Cash Flows
Six month periods ended July 31, 1997 and 1996............... 5
Notes to Consolidated Financial Statements................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 12
PART II. OTHER INFORMATION
Items 1 - 6............................................................ 21
Signatures ............................................................ 22
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EXCALIBUR TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
ASSETS July 31, 1997 January 31,
(unaudited) 1997
------------ ------------
Current Assets:
Cash and cash equivalents ..................... $ 4,179 $ 2,685
U.S. government securities, at cost ........... 3,889 8,427
Accounts receivable, net of allowance for
doubtful accounts of $292 and $367,
respectively ............................... 6,137 9,383
Prepaid expenses and other .................... 987 1,655
--------- ---------
Total current assets ..................... 15,192 22,150
Equipment and leasehold improvements, net of
accumulated depreciation of $4,943 and $4,179,
respectively .................................. 2,553 2,939
Other assets ..................................... 1,398 1,058
--------- ---------
$ 19,143 $ 26,147
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................... $ 773 $ 1,680
Accrued expenses............................... 1,891 2,310
Deferred revenues.............................. 2,886 2,693
Deferred compensation.......................... 446 901
--------- ---------
Total current liabilities................. 5,996 7,584
--------- ---------
Shareholders' Equity:
5% Cumulative convertible preferred stock,
$0.01 par value, preference in
liquidation $10 per share, 1,000 shares
authorized; 27 shares issued and
outstanding................................. 271 271
Common stock, par value $0.01, 40,000 shares
authorized; 13,049 and 12,449 shares
issued and outstanding, respectively........ 130 124
Additional paid-in capital..................... 64,220 61,830
Accumulated deficit............................ (51,397) (43,619)
Cumulative translation adjustment.............. (77) (43)
--------- ---------
Total shareholders' equity................ 13,147 18,563
--------- ---------
$ 19,143 $ 26,147
========= =========
The accompanying notes to the consolidated financial statements are an
integral part of these consolidated balance sheets.
3
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EXCALIBUR TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
Three Months Ended Six Months Ended
July 31, July 31,
1997 1996 1997 1996
--------- --------- --------- ---------
REVENUES:
Software ........................ $ 3,864 $ 3,262 $ 6,123 $ 6,241
Maintenance ..................... 1,321 1,057 2,515 2,079
--------- --------- --------- ---------
5,185 4,319 8,638 8,320
--------- --------- --------- ---------
EXPENSES:
Sales and marketing ............. 3,375 3,521 6,967 6,624
Research and product development 1,569 1,456 3,270 2,870
Acquired in-process research and
development ................... 1,284 -- 1,284 --
General and administrative ...... 1,106 1,085 2,208 1,940
Cost of software revenues ....... 699 322 1,450 543
Cost of maintenance revenues .... 313 412 615 736
Restructuring costs ............. -- -- 577 --
--------- --------- --------- ---------
8,346 6,796 16,371 12,713
--------- --------- --------- ---------
Operating loss ..................... (3,161) (2,477) (7,733) (4,393)
OTHER INCOME/ (EXPENSES):
Interest income, net .......... 99 223 217 414
Equity in net loss of affiliate (159) (59) (262) (59)
--------- --------- --------- ---------
Net loss ........................... (3,221) (2,313) (7,778) (4,038)
Dividends on preferred stock ....... 3 3 7 7
--------- --------- --------- ---------
Net loss applicable to common stock $ (3,224) $ (2,316) $ (7,785) $ (4,045)
Net loss per common share .......... $ (.25) $ (0.19) $ (.60) $ (0.33)
========= ========= ========= =========
Weighted-average number of common
shares outstanding ................. 13,017 12,363 12,916 12,274
========= ========= ========= =========
The accompanying notes to the consolidated financial statements are an
integral part of these consolidated statements.
4
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EXCALIBUR TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Six Months Ended July 31,
1997 1996
---------- ----------
Cash Flows from Operating Activities:
Net loss .......................................... $ (7,778) $ (4,038)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization ................ 799 605
Acquired in-process research and development . 1,284 --
Equity in net loss of affiliate .............. 262 59
Loss on disposal of assets ................... -- 8
Changes in operating assets and liabilities:
Accounts receivable, net ..................... 3,319 617
Prepaid expenses and other ................... 613 (426)
Accounts payable and accrued expenses ........ (1,476) (1,133)
Deferred revenues ............................ 183 (440)
--------- ---------
Net cash used in operating activities ............. (2,794) (4,748)
--------- ---------
Cash Flows from Investing Activities:
Purchase of investments ........................... (8,856) (12,053)
Proceeds from maturities of investments ........... 13,394 8,646
Loan to / investment in affiliate ................. (95) (488)
Acquisition, net of cash used ..................... 55 --
Purchases of equipment and leasehold improvements . (355) (1,443)
--------- ---------
Net cash provided by (used in) investing activities 4,143 (5,338)
--------- ---------
Cash Flows from Financing Activities:
Proceeds from the issuance of common stock ........ 269 9,435
Repayment of notes payable ........................ (40) (5)
--------- ---------
Net cash provided by financing activities ......... 229 9,430
--------- ---------
The Effect of Exchange Rate Changes on Cash .......... (84) (76)
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents . 1,494 (732)
Cash and Cash Equivalents, beginning of period ....... 2,685 2,903
--------- ---------
Cash and Cash Equivalents, end of period ............. $ 4,179 $ 2,171
========= =========
The accompanying notes to the consolidated financial statements are an
integral part of these consolidated statements.
5
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EXCALIBUR TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1997
(1) THE COMPANY
The consolidated financial statements include the accounts of Excalibur
Technologies Corporation ("Excalibur"); Excalibur Technologies International,
Ltd. ("ETIL"), a wholly-owned subsidiary; ConQuest Software, Inc. ("ConQuest"),
a company that was acquired in July 1995; and Interpix Software Corporation
("Interpix"), a company that was acquired in May 1997. These entities are
collectively referred to hereinafter as the "Company." All significant
intercompany transactions and accounts have been eliminated. Certain amounts
presented in the prior year's financial statements have been reclassified to
conform with the current fiscal year presentation.
The Company designs, develops, and markets knowledge retrieval software products
capable of supporting text and visual data. The Company offers consulting,
training, product maintenance and systems implementation services in support of
its software products. The Company licenses its software products directly to
commercial businesses and government agencies throughout North America, Europe
and other parts of the world, and also distributes its software products to end
users through license agreements with value-added resellers, system integrators,
original equipment manufacturers and other strategic partners.
The Company incurred net losses of $3,221,000 and $7,778,000 in the three and
six month periods ended July 31, 1997, and incurred net losses that totaled
$17,445,000 over the last three complete fiscal years. The accumulated deficit
of the Company at July 31, 1997 was $51,397,000. The combined balance of cash,
cash equivalents and investments in marketable securities was reduced by
$3,044,000 in the six months ended July 31, 1997 to a balance of $8,068,000 at
the end of the period.
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; the risks associated with acquisitions and international expansion;
the need to manage growth; certain technology risks; and the availability of
additional capital financing on terms acceptable to the Company.
(2) SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Presentation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
6
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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, 1997.
In the opinion of management, the comparative and consolidated financial
statements for the fiscal periods presented herein include all adjustments that
are normal and recurring which are necessary for a fair statement of the results
for the interim periods. The results of operations for the three and six month
periods ended July 31, 1997 are not necessarily indicative of the results for
the entire fiscal year ending January 31, 1998.
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 terms of the respective agreements, which are usually one year
in length. Maintenance revenues that are bundled with initial licensing fees are
deferred and recognized over the terms of the related maintenance periods, which
are typically 90 days.
The American Institute of Certified Public Accountants has approved for exposure
a draft Statement of Position (the "Exposure Draft") that would supersede
Statement of Position 91-1, "Software Revenue Recognition." If implemented in
its current form, the Exposure Draft would be effective for years beginning
after December 15, 1996. Management believes that the proposed changes would not
have a material adverse financial impact on the Company.
Research and Development Costs
No product development costs were capitalized, and there were no capitalized
costs not yet amortized, during the six month periods ended July 31, 1997 and
1996.
Stock-Based Compensation
Effective for the financial statements as of January 31, 1997, the Company
adopted Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting
for Stock-Based Compensation." As permitted by this pronouncement, the Company
is continuing to apply the provisions of APB Opinion No. 25 and related
Interpretations in accounting for awards to employees and directors made
pursuant to its employee stock plans. However, fair value accounting is applied
to transactions involving the Company's issuance of stock options or other
equity instruments for the acquisition of goods or services from nonemployees.
7
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Income Taxes
Due to the net losses reported for the six month periods ended July 31, 1997 and
1996, 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 rate
of exchange during the period. Gains or losses from translating foreign currency
financial statements are accumulated in a separate component of shareholders'
equity.
Net Loss Per Common Share
Net loss per common share has been computed by dividing the net loss for each
period, plus dividends on preferred stock, by the weighted-average number of
common shares outstanding during each period. 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.
The Company will be required to apply the provisions of SFAS No. 128, "Earnings
Per Share," commencing with its consolidated financial statements for the fiscal
quarter and year ending January 31, 1998. The pronouncement provides for the
presentation of basic and diluted earnings per share ("EPS"), replacing the
currently required primary and fully-diluted EPS. The basic EPS will be computed
by dividing reported earnings available to common shareholders by the weighted
average number of shares outstanding during the period. Diluted EPS will be
computed in a manner similar to fully-diluted EPS, except for certain changes
including the way that the treasury stock method may be applied to determine the
dilution for stock options and warrants. Companies will be required to restate
prior-period EPS to conform with the new statement. The Company does not expect
that the application of the new standard will have a material effect on future
EPS presentations or on EPS amounts reported in prior periods.
Cash, Cash Equivalents and Marketable Securities
For purposes of the balance sheets and statements of cash flows, the Company
considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents. Cash equivalents consist of funds
deposited in money market accounts. U.S. government securities are considered
investments and are excluded from cash equivalents regardless of their
maturities. Under 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, 1997 and January 31, 1997, the
aggregate fair value of the securities based upon quoted market prices was
$3,889,000 and $8,428,000, respectively.
8
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Supplemental Cash Flow Information (in thousands)
Six Months Ended
July 31,
1997 1996
-------- --------
Non-cash investing and financing activities:
Use of deferred compensation to purchase
common stock $ 438 $ 33
Issuance of warrants to purchase common stock -- 758
Common stock issued for acquisition 1,822 --
Details of acquisition:
Fair value of assets acquired $ 583 $ --
In-process research and development acquired 1,284 --
Liabilities assumed 21 --
Stock issued 1,822 --
------- ------
Cash paid 24 --
Cash acquired 79 --
------- ------
Net cash received in acquisition $ 55 $ --
======= ======
(3) ACQUISITION OF INTERPIX SOFTWARE CORPORATION
On May 5, 1997, the Company acquired Interpix, located in Santa Clara,
California, a privately-owned company and developer of a commercial technology
enabling the collection, indexing, management and presentation of multimedia
data on the Internet and corporate intranets. The purchase method of accounting
has been applied to this acquisition transaction and, accordingly, the results
of operations of Interpix have been included in the Company's consolidated
results of operations for the three and six month periods ended July 31, 1997
from the date of acquisition. The results of operations for Interpix prior to
the acquisition were not significant.
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, $1,822,000, and
out-of -pocket acquisition costs, $45,000. It was allocated to the assets
purchased and the liabilities assumed based upon their fair values on the date
of acquisition. Approximately $1,284,000 of the purchase price was allocated to
research and development projects in process and was expensed in the three month
period ended July 31, 1997. The excess of the purchase price over the fair value
of the net assets of Interpix was approximately $545,000. This amount represents
intangible assets related to the completed technology base, the assembled
workforce and tradenames acquired, and has been recorded as goodwill which is
being amortized on a straight-line basis over five years. The amount of goodwill
amortization for the three and six month periods ended July 31, 1997 was
approximately $27,000.
9
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(4) INVESTMENT IN AFFILIATE
In July 1996, the Company authorized the use of its name by Excalibur
Technologies N.V. ("ETNV"), a Belgian company incorporated in June 1996 for the
purpose of selling and marketing the Company's products and services within a
large territory including most of Northern Europe and Italy. The Company granted
to ETNV an exclusive license to distribute certain of the Company's products to
other authorized resellers and customers in the territory for approximately five
(5) years. The Company contributed approximately $488,000 in cash to ETNV in
order to purchase 13.2% of ETNV's voting capital stock. In connection with the
organization of ETNV, the Company also issued warrants to purchase 148,500
shares of the Company's common stock to certain shareholders of ETNV. The
warrants are exercisable at a price of $22.00 per share for seven years but only
if ETNV achieves certain financial objectives. In July 1997, the Company loaned
ETNV approximately $95,000.
The Company's investment in ETNV is accounted for using the equity method. The
investment exceeded the Company's share of the underlying net assets of ETNV by
approximately $827,000, including $758,000 attributable to the value of the
warrants discussed in the preceding paragraph. The excess is being amortized
over a five-year period.
The amortization of the excess, as well as the Company's share of ETNV's net
loss for the period, is included in equity in net loss of affiliate in the
accompanying consolidated statements of operations for the three and six month
periods ended July 31, 1997 and 1996. The balance of the investment, included in
other assets in the accompanying balance sheets at July 31, 1997 and January 31,
1997, was $806,000 and $973,000, respectively, net of accumulated amortization
of $603,000 and $341,000, respectively.
(5) ISSUANCES OF COMMON STOCK
During the first six months of the current fiscal year, the Company issued
approximately 296,000 shares of common stock upon the exercise of employee stock
options ranging in price from $1.04 to $11.64 per share, resulting in total cash
proceeds to the Company of approximately $89,000 and the utilization of $438,000
in deferred compensation. In addition, approximately 28,000 shares of common
stock were issued to participants of the employee stock purchase plan at an
aggregate purchase price of approximately $182,000. The exercise of stock
options provided total cash proceeds of approximately $1,047,000 in the six
month period ended July 31, 1996.
On May 7, 1997, the Board of Directors authorized a repricing program which
allowed active current employees to elect to reprice all or some of their
outstanding options to purchase common stock of Excalibur, granted under the
1989 Incentive and the 1995 Stock Option 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 have been repriced may not be
exercised until November 8, 1997.
10
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On March 8, 1996, the Company completed a private placement of 350,000 shares of
the Company's common stock at an offering price of $25.00 per share, resulting
in net proceeds of approximately $8,388,000. Allen & Company Incorporated, a
beneficial owner of in excess of 25% of the Company's outstanding common stock,
acted as the placement agent in this transaction and received a fee of
approximately $350,000.
(6) 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. The charge primarily consisted of
severance pay and medical and other severance benefits for nineteen terminated
employees in sales, development, marketing and administrative functions. Cash
expenditures made pursuant to the restructuring were substantially completed in
the second quarter of the current fiscal year.
11
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
The Company principally earns revenues from the licensing of its software
products to commercial businesses and government agencies throughout North
America, Europe and other parts of the world. The Company licenses its software
to end users directly and also distributes its software products through license
agreements with value-added resellers, system integrators, original equipment
manufacturers, and other strategic partners. Revenues are provided under
software licenses with new customers and from the related sale of product
maintenance, training and implementation support services. Additions to the
number of authorized users, upgrades to newer product versions and the renewal
of product maintenance arrangements by customers pursuant to existing licenses
also provide revenues to the Company. Under software maintenance contracts,
customers are typically entitled to receive telephone support, software bug
fixes, and new releases of particular software products.
The Company believes that it is the technology leader in providing
enterprise-wide, accurate, scaleable, secure, knowledge-retrieval software
solutions capable of supporting both text and image information assets. It
believes that these qualities differentiate its software products from other
search engines, toolkits, and text retrieval products. The Company's Excalibur
RetrievalWare and Excalibur Visual RetrievalWare products deliver a unified
software solution for text and visual knowledge retrieval. The Company is
committed to empowering organizations by enabling people to transform
information into knowledge and is focused on the high-end of the market for
knowledge retrieval.
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 has been applied to this acquisition transaction
and, accordingly, the results of operations of Interpix have been included in
the Company's consolidated results of operations for the three and six month
periods ended July 31, 1997 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 three month period ended July 31, 1997. The excess of the
purchase price over the fair value of the net assets of Interpix was
approximately $545,000. This amount represents certain intangible assets, and
has been recorded as goodwill which is being amortized on a straight-line basis
over five years.
12
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Results of Operations
Total revenues for the second fiscal quarter ended July 31, 1997 were
$5,185,000, an increase of 20% over total revenues of $4,319,000 reported for
the corresponding fiscal quarter last year. The Company incurred a net loss of
$3,221,000, or $0.25 per common share, in the second quarter compared to a net
loss of $2,313,000, or $0.19 per common share, in the second quarter last fiscal
year. Excluding the charge of $1,284,000 for in-process research and development
costs related to the acquisition of Interpix, the net loss for the second
quarter ended July 31, 1997 was $1,937,000.
For the six months ended July 31, 1997, total revenues were $8,638,000, an
increase of 4% over total revenues of $8,320,000 reported for the same fiscal
period last year. The Company incurred a net loss of $7,778,000, or $0.60 per
common share, in the first six months of the current fiscal year compared to a
net loss of $4,038,000 million, or $0.33 per common share, in the same fiscal
period last year. Excluding the Interpix charge identified above and a $577,000
charge recorded in the first quarter related to the restructuring of operations,
the net loss for the six months ended July 31, 1997 was $5,917,000.
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 and six month periods ended July 31, 1997 and 1996, and the percentage
change in the amounts between fiscal periods (dollars in thousands).
Three Months Ended July 31, Increase
1997 1996 (Decrease)
----------------- ----------------- ---------
Amount Percent Amount Percent Percent
-------- ------- -------- ------- ---------
Revenues:
RetrievalWare $ 3,488 67 % $ 1,622 38 % 115 %
EFS 376 7 1,640 38 (77)
-------- ------ -------- ------ ------
Total software 3,864 74 3,262 76 18
Maintenance 1,321 26 1,057 24 25
======== ====== ======== ====== ======
Total revenues $ 5,185 100 % $ 4,319 100 % 20 %
======== ====== ======== ====== ======
Expenses:
Sales and marketing $ 3,375 65 % $ 3,521 81 % (4)%
Research and product
development 1,569 30 1,456 34 8
Acquired in-process
research and development 1,284 25 -- -- n/a
General and administrative 1,106 21 1,085 25 2
Costs of sales 1,012 20 734 17 38
Restructuring costs -- -- -- -- --
======== ====== ======== ====== ======
Total expenses $ 8,346 161 % $ 6,796 157 % 23 %
======== ====== ======== ====== ======
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Six Months Ended July 31, Increase
1997 1996 (Decrease)
----------------- ----------------- ---------
Amount Percent Amount Percent Percent
-------- ------- -------- ------- ---------
Revenues:
RetrievalWare $ 5,353 62 % $ 2,844 34 % 88 %
EFS 770 9 3,397 41 (77)
-------- ------ -------- ------ ------
Total software 6,123 71 6,241 75 (2)
Maintenance 2,515 29 2,079 25 21
======== ====== ======== ====== ======
Total revenues $ 8,638 100 % $ 8,320 100 % 4 %
======== ====== ======== ====== ======
Expenses:
Sales and marketing $ 6,967 81 % $ 6,624 80 % 5 %
Research and product
development 3,270 38 2,870 35 14
Acquired in-process
research and development 1,284 15 -- -- n/a
General and administrative 2,208 25 1,940 23 14
Costs of sales 2,065 24 1,279 15 61
Restructuring costs 577 7 -- -- n/a
======== ====== ======== ====== ======
Total expenses $ 16,371 190 % $ 12,713 153 % 29 %
======== ====== ======== ====== ======
Software revenues increased by 18%, to $3,864,000 in the second quarter from
$3,262,000 in last year's fiscal second quarter, due primarily to a 199%
increase in service revenues that include implementation support, software
development and training services provided to a variety of customers. Service
revenues were approximately 18% of total software revenues in the second
quarter. License fee revenues increased 4% between fiscal periods. Excalibur
RetrievalWare software revenues increased 115% in the second quarter over
comparable revenues for the second quarter last year, and now represent
approximately 90% of total software revenues, and 67% of total revenues.
Software revenues from North American sales, which were approximately 66% of
total software revenues in the second quarter, increased by 34% from the
corresponding fiscal quarter of last year. International software revenues
declined by approximately 3% in the second quarter compared with last year's
second quarter.
For the six months ended July 31, 1997, total software revenues decreased
slightly, to $6,123,000 in the current year from $6,241,000 in the six months
ended July 31, 1996. However, Excalibur RetrievalWare software revenues
increased by 88% compared to the prior fiscal year. Service revenues, which
represented approximately 21% of total software revenues in the six months ended
July 31, 1997, increased by 217% between years. Software license fee revenues
declined 17% between years. Software revenues from North American sales, which
were approximately 69% of total software revenues in the six months ended July
31, 1997, increased by 6% from the corresponding six-month period of last year.
International software revenues declined by approximately 15% in the current
year compared with last year.
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The current year-to-date revenues were adversely impacted by factors that
affected the Company's first quarter performance. First, the ramp-up of a
significant number of sales personnel contributed to lower than expected
revenues in North America. Due to unexpected turnover among sales personnel, the
Company spent considerable resources training a largely new sales force in the
first quarter. The new personnel were subjected to a prolonged and thorough
sales training and product familiarization program that management believes
resulted in more effective selling in second quarter, but the program kept these
sales personnel out of the field during the beginning of the current fiscal
year. The second factor causing the lower revenues related to the failure to
close a joint development agreement with a strategic business partner that the
Company had expected to close in the first half of the fiscal year. Several
factors affecting the partner's business prevented them from signing this
agreement. Although the Company has a continuing relationship with this partner,
there can be no assurances that the expected agreement will occur. Third, due to
the slower than expected growth of the Company's Belgian affiliate, Excalibur
Technologies N.V. ("ETNV"), no software revenue related to ETNV's software
distribution license was recorded by the Company in the first quarter.
As explained in Note 4 to the Consolidated Financial Statements contained
herein, the Company licensed the use of its name and certain software products
to ETNV in July 1996. The license agreement provides that ETNV make minimum
license fee payments to the Company each quarter, including quarterly payments
of $625,000 in the current year which represent software revenue of
approximately $500,000 per quarter. The Company's management believes that
progress has been made in starting up this operation including the establishment
of sales and support offices in several European countries and the building of a
pipeline of business opportunities. However, sales are not closing as fast as
expected, net losses have been incurred since inception, and ETNV's cash
reserves have been reduced. Consequently, in the current fiscal year, software
revenues have been recorded only when minimum license fees are received in cash.
Software revenues for the three and six month periods ended July 31, 1997
included approximately $502,000 in revenues related to the minimum license fee
for the second quarter that was paid by ETNV. Software revenues for the three
and six month periods ended July 31, 1996 contained revenues of approximately
$360,000 related to the license arrangement with ETNV.
In the second quarter of the current fiscal year, the Company also derived
software revenues from expanded software license agreements with several other
important existing customers, including the Chicago Tribune; the Los Angeles
Times; Automatic Data Processing, Inc. (ADP); and various intelligence
organizations. Excalibur RetrievalWare was selected by new customers in various
industries needing mission-critical knowledge retrieval solutions, including
Sony Marketing Inc.; Koch Industries, Inc.; eWorks! Inc.; and federal, state and
local government organizations. Software revenues in the first quarter also were
derived from license agreements with various North American and international
customers, most notably United Airlines. The airline intends to use the
Company's software to provide more than 20,000 mechanics and engineers worldwide
with the most current maintenance information via a global corporate network.
Due primarily to the expansion of the customer base with the addition of
Excalibur RetrievalWare users, maintenance revenues increased by 25% to
$1,321,000 in the second quarter from $1,057,000 in the second quarter last
year, and by 21% to $2,515,000 in the six months ended July 31, 1997 from
$2,079,000 in the corresponding period of last year.
15
<PAGE>
Sales and marketing costs decreased by 4% in the second quarter, to $3,375,000
in the current year from $3,521,000 last year, due to cost reduction measures
taken at the end of the first quarter. The workforce reduction and sales force
reorganization actions announced at that time included a reduction in the number
of sales and marketing employees. The resulting decrease in salary expense and
recruiting costs more than offset the increase in sales commissions for the
quarter. The Company also reduced the level of marketing program expenditures in
the second quarter by approximately $102,000 compared to the prior fiscal year.
For the six months ended July 31, 1997, sales and marketing expenses increased
by 5% compared with the prior fiscal year, to $6,967,000 in the current year
from $6,624,000 in the prior year, due to a 16% increase in such expenditures in
the first quarter. The Company employed 64 people in the sales and marketing
areas at July 31, 1997. There were 73 sales and marketing employees at July 31,
1996.
Total research and product development costs increased by 96%, to $2,853,000 in
the second quarter of the current fiscal year compared with $1,456,000 last
year, due primarily to the acquisition of Interpix. For the six months ended
July 31, 1997, research and development costs increased by 59%, to $4,554,000 in
the current year from $2,870,000 in the six months ended July 31, 1996. Included
in such costs for both current year periods are a $1,284,000 charge related to
the acquired in-process research and development projects of Interpix and the
costs of the Interpix product development staff since the date of acquisition.
Excluding the in-process projects charge, research and development costs
increased by approximately 8% and 14%, respectively, in the three and six month
periods ended July 31, 1997 compared with the corresponding periods of the prior
fiscal year. In the current fiscal year, the Company has reduced the number of
software engineers supporting the EFS software product resulting in an overall
reduction in the number of research and development employees to 52 at July 31,
1997. There was a total of 60 research and development employees at July 31,
1996.
In the second quarter, the Company announced the availability of Excalibur
RetrievalWare 6.1. This release features Excalibur WebSynchro and advanced
profiling and summarization capabilities, and represents the Company's first
product that integrates advanced search and retrieval technology with the web
crawling capabilities obtained from Interpix. Development efforts are proceeding
on a version of the product containing document imaging capabilities. Management
expects this release to facilitate the transition of current EFS users to
Excalibur RetrievalWare.
General and administrative expenses increased by 2% in the current quarter to
$1,106,000 from $1,085,000 in the comparable quarter last year. For the six
months ended July 31, 1997, general and administrative costs increased by 14%,
to $2,208,000 in the current year from $1,940,000 in the six months ended July
31, 1996. Since last year's first quarter, the Company has moved its corporate
headquarters to a larger facility and added employees to the human resources,
contracts, management information systems and financial planning and analysis
functions, thereby increasing salaries expense primarily. Related costs also
increased including office rent, telephone, depreciation and other equipment
costs although recruiting and moving costs have declined. Consulting expense
decreased between quarters due to a reduction in the use of external resources
for investor relations and strategic planning.
16
<PAGE>
Costs of sales increased by 38%, to $1,012,000 in the current quarter from
$734,000 in the second quarter last year. For the six months ended July 31,
1997, cost of sales increased by 61%, to $2,065,000 in the current year from
$1,279,000 in the six months ended July 31, 1996. The increase relates primarily
to the addition of three training instructors and the formation of a product
implementation group which had 8 employees at July 31, 1997. At July 31, 1996,
this group did not exist. The increase in the number of employees in these areas
resulted in additional salaries expense, as well as increased overhead costs.
Costs for the three and six month periods ended July 31, 1997 also included the
costs of implementation project subcontractors and increased costs related to
the resale of third-party software products. Costs of sales in the first quarter
of the current year included the costs of new users manuals and other
documentation related to the 6.0 release of Excalibur RetrievalWare and an
updated version of the Excalibur EFS product. The costs of the customer support
group have declined in the current fiscal year, resulting in decreased costs of
maintenance in the three and six month periods ended July 31, 1997 compared with
the corresponding periods of last year.
As indicated above, the Company reorganized its sales force and made other
changes to the overall organization at the end of the first quarter of the
current fiscal year. In connection with these changes, the Company reduced its
workforce by approximately 10% and recorded a restructuring charge of $577,000
in the first quarter. The charge primarily consisted of severance pay and
benefits for terminated employees.
Net interest income declined to $99,000 and $217,000, respectively, in the three
and six month periods ended July 31, 1997 from $223,000 and $414,000,
respectively, in the comparable fiscal periods of last year due to a decrease in
the level of investment securities held. The Company's equity in the net loss of
ETNV was $159,000 in the current quarter, and $262,000 for the six months ended
July 31, 1997. The Company's equity in ETNV's net loss was $59,000 for both the
three and six month periods ended July 31, 1996--ETNV was not formed until July
1996.
Liquidity and Capital Resources
In the six months ended July 31, 1997, the Company's combined balance of cash,
cash equivalents and investments in marketable securities decreased by
$3,044,000 to $8,068,000 as summarized below (in thousands). At July 31, 1997
and January 31, 1997, investments in marketable securities consisted of U.S.
Treasury Bills with maturities of less than one year.
July 31, January 31,
1997 1997 Change
--------- --------- ---------
Cash and cash
equivalents $ 4,179 $ 2,685 $ 1,494
Investments 3,889 8,427 (4,538)
========= ========= =========
Total $ 8,068 $ 11,112 $ (3,044)
========= ========= =========
17
<PAGE>
During the six months ended July 31, 1997, cash was used to fund operating
activities, and to purchase computer and other equipment with a cost of
$355,000. The Company also made a $95,000 loan to ETNV. The amount of cash used
in operations during the six months ended July 31, 1997, $2,794,000, was
substantially less than the net loss for the period, $7,778,000, due primarily
to a significant reduction in the level of accounts receivable and other current
assets. The amount of cash provided by the $3,319,000 reduction in the balance
of accounts receivable and the $613,000 reduction in the balance of other
current assets was offset somewhat by the use of $1,476,000 cash to reduce
accounts payable and accrued liabilities. The net loss for the current year also
included non-cash charges totaling $2,345,000. Cash was provided from the
maturity of Treasury Bills, $4,538,000, and the exercise of employee stock
options, $269,000. Net cash of $55,000 was provided as a result of the
acquisition of Interpix.
Last year, cash used in operations during the first six months was $4,748,000,
fixed asset additions were $1,443,000 and the initial investment of $488,000 was
made in ETNV. However, in March 1996, the Company completed a private placement
sale of its common stock that provided net cash proceeds of approximately
$8,388,000, and the exercise of stock options by employees provided $1,047,000
cash.
Due to the reduction in the balance of accounts receivable during the current
fiscal year, including accounts with payment terms beyond the normal practice of
30 to 45 days, the number of days sales outstanding ("DSO") at July 31, 1997
declined from the number at January 31, 1997. Management believes that the
allowance for doubtful accounts of $292,000 at July 31, 1997 is adequate.
Factors That May Affect Future Results
Primarily due to the large operating losses incurred by the Company, the
Company's balance of cash, cash equivalents and investments has declined
substantially in the last five fiscal quarters. Various factors, including those
discussed above pertaining to the first quarter of the current fiscal year, have
inhibited the revenue growth that management expected during this period. As a
result, the short-term revenue expectations of management were moderated, and
planned expenditures were reduced. As discussed above and in Note 6 to the
Consolidated Financial Statements contained herein, the Company reduced its
workforce by approximately 10% from the number of employees at April 30, 1997,
and, with a few select exceptions in the sales and development areas, curtailed
the hiring of new employees. In addition, the Company postponed certain programs
and expenses in order to achieve an overall reduction in expenditures.
Management believes that these actions, and the investments of time and money in
the training of the sales force, has improved sales productivity, and has not
adversely affected the Company's ability to compete effectively in the current
fiscal year.
The text development staff is focused on the completion of a product that will
facilitate the transition of the installed customer base of Excalibur EFS to
Excalibur RetrievalWare. The Company expects to release this version of the
product by the end of the current fiscal year. As discussed in Note 3 to the
Consolidated Financial Statements, the Company completed the acquisition of
Interpix in May 1997. Through this acquisition, the Company added complementary
technology which management believes will enhance the web crawling and web
publishing capabilities of its products in Internet and intranet environments.
18
<PAGE>
In addition, the Company has made other organizational changes in order to
sharpen the focus on developing opportunities for Excalibur Visual RetrievalWare
and to increase the pace of product development and release.
Management believes that the changes and initiatives discussed above should slow
down the use of cash by the Company. Consequently, the current balance of cash,
cash equivalents and investments is expected to be sufficient to fund the
Company's current projected cash needs for the remainder of the current fiscal
year.
Historically, the Company has used primarily cash provided by sales of its
common stock to fund its operating losses. Should the actions taken by
management be ineffective in reducing the net losses and the use of cash in the
next several quarters, the Company may be required to pursue additional external
sources of financing 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.
The market for the Company's software products is growing rapidly and the
Company's business environment is characterized by rapid technological changes,
changes in customer requirements and new emerging market segments. 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 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. Failure
to meet any of these challenges could adversely affect future operating results.
The Company has significant net operating loss carryforwards ("NOLs") of
approximately $59 million. The deferred tax assets representing the benefits of
the NOLs have been offset completely by a valuation allowance due to the
Company's lack of an earnings history. The 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 Software, Inc. ("ConQuest") in July 1995,
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.
19
<PAGE>
The foregoing discussion may also contain comments about management's future
expectations, performance, plans and prospects which might constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Act of 1995. There can be no assurances that expected future results
will be achieved. Actual results may differ materially from management's
expectations as the result of the various important factors discussed above
including, but not limited to, the success of our relationships with strategic
partners, the Company's ability to continue to develop competitive products and
make timely product releases, the effects of competition, and the rapidly
changing marketplace.
The Company believes that inflation has not had a material effect on the results
of its operations to date.
The Company can be contacted via e-mail at [email protected] or visited at its
web site at www.excalib.com.
20
<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 1997 Annual Meeting of Shareholders was held on July 23, 1997.
(b) The following individuals were elected to serve as the Board of
Directors for the terms expiring at the 1998 Annual Meeting:
Number of Shares Voted
----------------------
For Withheld
--- --------
Donald R. Keough 9,365,872 266,132
Patrick C. Condo 9,312,801 319,203
Richard M. Crooks, Jr 9,355,169 276,835
John S. Hendricks 9,366,508 265,496
W. Frank King III 9,374,211 257,793
John G. McMillian 9,366,022 265,982
Philip J. O'Reilly 9,349,630 282,374
Shaun C. Viguerie 9,352,530 279,474
(c) No other business came before the meeting.
Item 5. Other Information None.
Item 6. Exhibits and Reports on Form 8-K
On May 16, 1997, the Company filed a report on Form 8-K announcing the stock
option repricing program discussed in Note 5 to the Consolidated Financial
Statements contained herein.
21
<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 12, 1997 By: /s/ Patrick C. Condo
------------------------
Patrick C. Condo
President and Chief Executive Officer
September 12, 1997 By: /s/ James H. Buchanan
-------------------------
James H. Buchanan
Chief Financial Officer
22
<PAGE>
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