SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 0-9747
EXCALIBUR TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 85-0278207
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1921 Gallows Road, Suite 200, Vienna, Virginia 22182
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703)761-3700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days. Yes |X| No __
As of December 7, 1998, 13,689,216 shares of the registrant's Common Stock, par
value $.01 per share, were outstanding.
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EXCALIBUR TECHNOLOGIES CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 1998
TABLE OF CONTENTS
PART I . FINANCIAL INFORMATION
Item 1. Financial Statements: Page
Consolidated Balance Sheets
October 31, 1998 (unaudited) and January 31, 1998.......... 3
Consolidated Statements of Operations and
Comprehensive Income (unaudited)
Three and nine months ended October 31, 1998 and 1997...... 4
Consolidated Statements of Cash Flows (unaudited)
Nine months ended October 31, 1998 and 1997................ 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....................................................... 22
Signatures......................................................... 23
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EXCALIBUR TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
ASSETS October 31, January 31,
1998 1998
(unaudited)
-------- --------
Current Assets:
Cash and cash equivalents ....................... $ 5,684 $ 4,939
U.S. government securities, at cost ............. 999 1,496
Accounts receivable, net of allowance for
doubtful accounts of $628 and $527,
respectively ................................. 7,135 9,189
Prepaid expenses and other ...................... 2,611 1,071
-------- --------
Total current assets ........................ 16,429 16,695
Equipment and leasehold improvements,
net of accumulated depreciation of
$6,634 and $5,614,respectively .................. 2,192 2,267
Other assets ....................................... 917 1,083
-------- --------
$ 19,538 $ 20,045
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ................................ $ 2,631 $ 2,106
Accrued expenses ................................ 1,395 1,886
Deferred revenues ............................... 2,913 2,708
Deferred compensation ........................... 86 247
-------- --------
Total current liabilities ................... 7,025 6,947
-------- --------
Shareholders' Equity:
5% Cumulative convertible preferred stock,
$0.01 par value,preference in liquidation
$10 per share, 1,000 shares authorized;
27 shares issued and outstanding ............ 324 271
Common stock, par value $0.01, 40,000 shares
authorized; 13,680 and 13,179 shares issued
and outstanding, respectively ................ 137 132
Additional paid-in capital ...................... 68,583 64,714
Accumulated deficit ............................. (56,405) (51,945)
Accumulated other comprehensive income .......... (126) (74)
-------- --------
Total shareholders' equity .................. 12,513 13,098
-------- --------
Total liabilities and shareholders' equity .. $ 19,538 $ 20,045
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
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EXCALIBUR TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(unaudited)
(in thousands, except per share data)
Three Months Ended Nine Months Ended
October 31, October 31,
1998 1997 1998 1997
-------- -------- -------- --------
REVENUES:
Software ...................... $ 5,998 $ 4,976 $ 14,563 $ 11,100
Maintenance ................... 1,264 1,452 3,910 3,966
-------- -------- -------- --------
7,262 6,428 18,473 15,066
-------- -------- -------- --------
EXPENSES:
Cost of software revenues ..... 1,192 859 2,712 2,310
Cost of maintenance revenues .. 326 316 978 930
Sales and Marketing ........... 3,367 3,035 10,025 10,002
Research and product
development ................. 2,072 1,544 5,752 4,814
General and administrative .... 1,067 1,241 3,309 3,449
Restructuring costs ........... -- -- -- 577
Acquired in-process research
& development ............... -- -- -- 1,284
-------- -------- -------- --------
8,024 6,995 22,776 23,366
-------- -------- -------- --------
Operating loss .................. (762) (567) (4,303) (8,300)
OTHER INCOME/ (EXPENSES):
Interest income, net .......... 52 89 194 306
Equity in net loss of affiliate (83) (150) (299) (412)
-------- -------- -------- --------
Net loss ........................ (793) (628) (4,408) (8,406)
Dividends on preferred stock .... 3 3 10 10
======== ======== ======== ========
Net loss applicable to common
stock ......................... $ (796) $ (631) $ (4,418) $ (8,416)
======== ======== ======== ========
Net loss ........................ (793) (628) (4,408) (8,406)
Other comprehensive expense:
Foreign currency translation
adjustment .................. (52) (51) (52) (85)
-------- -------- -------- --------
Comprehensive loss .............. $ (845) $ (679) $ (4,460) $ (8,491)
======== ======== ======== ========
Basic and diluted net loss per
common share .................. $ (0.06) $ (0.05) $ (0.33) $ (0.65)
======== ======== ======== ========
Weighted-average number of
common shares outstanding ..... 13,641 13,069 13,471 12,873
======== ======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements
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EXCALIBUR TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Nine Months Ended October 31,
1998 1997
-------- --------
Cash Flows from Operating Activities:
Net loss ........................................ $ (4,408) $ (8,406)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ............... 1,099 1,173
Acquired in-process research and development -- 1,284
Equity in net loss of affiliate ............. 299 412
Changes in operating assets and liabilities:
Accounts receivable, net .................... 2,162 2,627
Prepaid expenses and other .................. (1,514) 743
Accounts payable and accrued expenses ....... (52) (946)
Deferred revenues ........................... 169 (95)
-------- --------
Net cash used in operating activities ........... (2,245) (3,208)
-------- --------
Cash Flows from Investing Activities:
Purchase of investments ......................... (984) (14,830)
Proceeds from maturities of investments ......... 1,481 20,259
Other Assets .................................... (226) (95)
Acquisition, net of cash used ................... -- 55
Purchases of equipment and leasehold
improvements .................................. (939) (605)
-------- --------
Net cash provided by (used in) investing
activities .................................... (668) 4,784
-------- --------
Cash Flows from Financing Activities:
Proceeds from the issuance of common stock ...... 3,775 436
Repayment of notes payable ...................... -- (40)
-------- --------
Net cash provided by financing activities ....... 3,775 396
-------- --------
Effect of Exchange Rate Changes on Cash ............ (117) (189)
-------- --------
Net Increase in Cash and Cash Equivalents .......... 745 1,783
Cash and Cash Equivalents, beginning of period ..... 4,939 2,685
-------- --------
Cash and Cash Equivalents, end of period ........... $ 5,684 $ 4,468
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
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EXCALIBUR TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1998
(1) THE COMPANY
The consolidated financial statements include the accounts of Excalibur
Technologies Corporation ("Excalibur") and its wholly-owned subsidiaries. These
entities are collectively referred to hereinafter as the "Company." All
significant intercompany transactions and accounts have been eliminated.
The Company designs, develops and markets knowledge retrieval software products
capable of supporting paper, text, image and video data. The Company offers
consulting, training, product maintenance and systems implementation services in
support of its software products. The Company licenses its software products
directly to commercial businesses and government agencies throughout North
America, Europe and other parts of the world and also distributes its software
products to end users through license agreements with value-added resellers,
system integrators, original equipment manufacturers and other strategic
partners.
The Company incurred net losses of $793,000 and $4,408,000 in the three and nine
month periods ended October 31, 1998, and incurred net losses that totaled
$16,383,000 over the last three complete fiscal years. The accumulated deficit
of the Company at October 31, 1998 was $56,405,000. The Company's operations are
subject to certain risks and uncertainties including, among others, the
dependence upon the timing of the closing of large software licenses; actual and
potential competition by entities with greater financial resources, experience
and market presence than the Company; rapid technological changes; the success
of the Company's product marketing and product distribution strategies; the
risks associated with acquisitions and international expansion; the need to
manage growth; the need to retain key personnel and protect intellectual
property; and the availability of additional capital financing on terms
acceptable to the Company.
(2) SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Presentation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
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
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accounting principles for complete financial statements, and it is suggested
that these consolidated financial statements be read in conjunction with the
consolidated financial statements, and the notes thereto, included in the
Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1998.
In the opinion of management, the comparative and consolidated financial
statements for the fiscal periods presented herein include all adjustments that
are normal and recurring which are necessary for a fair statement of the results
for the interim periods. The results of operations for the three and nine month
periods ended October 31, 1998 are not necessarily indicative of the results for
the entire fiscal year ending January 31, 1999.
Revenue Recognition
Revenues from the sale of computer software licenses are recognized upon
shipment of product provided that the fee is fixed and determinable, persuasive
evidence of an agreement exists and collection of the resulting receivable is
considered probable. Revenues related to agreements with customers that contain
future performance requirements are recognized when the performance requirements
are satisfied. Revenues related to customer support agreements are deferred and
recognized ratably over the terms of the respective agreements, which are
usually one year in length.
The American Institute of Certified Public Accountants has issued Statement of
Position 97-2, "Software Revenue Recognition," ("SOP 97-2") that supersedes
Statement of Position 91-1. The Company has implemented SOP 97-2 and it has not
had a material financial impact on the Company.
Customization is sometimes involved in the development of a software solution by
the Company. Under these circumstances, the Company's revenues are derived from
fixed price contracts and revenue is recognized using the
percentage-of-completion method based on the relationship of actual costs
incurred to total costs estimated to be incurred over the duration of the
contract.
Research and Development Costs
No product development costs were capitalized, and there were no capitalized
costs not yet amortized, during the nine month periods ended October 31, 1998
and 1997.
Cash, Cash Equivalents and Marketable Securities
For purposes of the consolidated balance sheets and consolidated 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. 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 October 31, 1998 and January 31, 1998, the
aggregate fair value of the securities based upon quoted market prices was
$1,000,000 and $1,497,000, respectively.
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Net Loss Per Common Share
In February 1997, the Financial Accounting Standards Board, ("FASB") issued SFAS
No. 128, "Earnings Per Share." SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997. SFAS No. 128
requires dual presentation of basic and diluted earnings per share ("EPS").
Basic EPS includes no dilution and is computed by dividing net loss available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted loss per share includes the potential dilution that
would occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Stock options, warrants to purchase
common stock and cumulative convertible preferred stock were excluded from the
computation of diluted loss per share as their effect would be anti-dilutive. As
a result, the basic and diluted loss per share amounts are identical.
Income Taxes
The Company accounts for income taxes under the asset and liability method. The
Company has not recorded a provision for income taxes for the three and nine
months ended October 31, 1998 and 1997 based on the fact that the Company has
incurred net operating losses during those periods. The Company has provided a
full valuation allowance against its net deferred tax asset as of October 31,
1998.
Translation of Foreign Financial Statements
Assets and liabilities of foreign operations are translated at the period-end
rate of exchange. Statements of operations are translated at the average rates
of exchange during the period. Gains or losses from translating foreign currency
financial statements are accumulated in a separate component of shareholders'
equity.
(3) INVESTMENT IN AFFILIATE
In July 1996, the Company authorized the use of its name by Excalibur
Technologies N.V. ("ETNV"), a Belgian company incorporated in June 1996 for the
purpose of selling and marketing the Company's products and services within a
large territory including most of Northern Europe and Italy. The Company granted
to ETNV an exclusive license to distribute certain of the Company's products to
other authorized resellers and customers in the territory for approximately five
(5) years. The Company contributed approximately $488,000 in cash to ETNV in
order to purchase 13.2% of ETNV's voting capital stock. In connection with the
organization of ETNV, the Company also issued warrants to purchase 148,500
shares of the Company's common stock to certain shareholders of ETNV. The
warrants are exercisable at a price of $22.00 per share for seven years, but
only if ETNV achieves certain financial objectives.
The Company's investment in ETNV is accounted for using the equity method. The
investment exceeded the Company's share of the underlying net assets of ETNV by
approximately $827,000, including $758,000 attributable to the value of the
warrants discussed in the preceding paragraph. The excess is being amortized on
a straight-line basis over a five-year period.
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The amortization of the excess, as well as the Company's share of ETNV's net
loss for the period and the elimination of the Company's share of gross profit
included in ETNV's prepaid license fees at October 31, 1998 and 1997, is
included in equity in net loss of affiliate in the accompanying consolidated
statements of operations for the three and nine month periods ended October 31,
1998 and 1997. The net balances of the investment in and advances to ETNV is
included in other assets in the accompanying consolidated balance sheets. At
October 31, 1998 and January 31, 1998, the balance of the investment in and
advances to ETNV was $472,000 and $544,000, respectively, and is included in
other assets on the balance sheet.
For the three and nine month periods ended October 31, 1998, the Company
recorded total revenues of $269,000 and $929,000, respectively, related to the
software license with ETNV. The Company recorded $690,000 and $1,261,000,
respectively for the comparable three and nine month periods in the prior fiscal
year.
(4) ISSUANCES OF COMMON STOCK
During the first nine months of the current fiscal year, the Company issued
approximately 166,000 shares of common stock upon the exercise of options
ranging in price from $1.04 to $10.38 per share, resulting in total cash
proceeds to the Company of approximately $431,000 and the utilization of $99,000
in deferred compensation. In addition, the Company issued approximately 10,000
shares of common stock to participants of the employee stock purchase plan
resulting in total cash proceeds of $94,000. In the first nine months of last
fiscal year, the exercise of stock options resulted in total cash proceeds of
approximately $188,000 and the utilization of $344,000 in deferred compensation.
On May 15, 1998, the Company completed a private placement of 325,000 shares
(the "Shares") of its common stock to an unaffiliated financial institution. The
Company sold the Shares at a purchase price of $10.00 per share, resulting in
proceeds to the Company of $3,250,000. The transaction was placed directly by
the Company. The Company plans to use the proceeds to finance ongoing operations
and for general corporate purposes. Subsequent to May 15, 1999, the investor in
the private placement has the right to cause the Company to file a registration
statement under the Securities Act of 1933 covering the Shares. The Shares were
sold pursuant to an exemption from the registration requirements of the
Securities Act of 1933.
(5) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income," during the first quarter of fiscal 1999.
SFAS 130 requires additional disclosures with respect to certain changes in
assets and liabilities that previously were not required to be reported as
results of operations for the period. In addition, SFAS No. 131, "Disclosure
about Segments of an Enterprise and Related Information" was issued, which
establishes standards for the manner in which public companies report
information about operating segments, products and services, geographic areas
and major customers in annual and interim financial statements. SFAS will be
effective for the Company's filing on Form 10-K for the fiscal year ending
January 31, 1999.
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In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which will
be effective for the Company's fiscal year 2001. This statement establishes
accounting and reporting standards requiring that every derivative instrument,
including certain derivative instruments embedded in other contracts, be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement also requires that changes in the derivative's fair
value be recognized in earnings unless specific hedge accounting criteria are
met. The Company believes the adoption of SFAS No. 133 will not have a material
effect on the financial statements.
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Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
The statements contained in this report that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
without limitation statements about the Company's expectations, beliefs,
intentions or strategies regarding the future. All forward-looking statements
included in this report are based on information available to the Company on the
date hereof and the Company assumes no obligation to update any such
forward-looking statements. The forward-looking statements contained herein
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in this report.
The Company principally earns revenues from the licensing of its software
products to commercial businesses and government agencies throughout North
America, Europe and other parts of the world. The Company licenses its software
to end users directly and also distributes its software products through license
agreements with value-added resellers, system integrators, original equipment
manufacturers and other strategic partners. Revenues are provided under software
licenses with new customers and from the related sale of product maintenance,
training and implementation support services. Additions to the number of
authorized users, upgrades to newer product versions and the renewal of product
maintenance arrangements by customers pursuant to existing licenses also provide
revenues to the Company. Under software maintenance contracts, end-user
customers are typically entitled to receive telephone support, software bug
fixes and new releases of particular software products.
The Company believes that it is the technology leader in providing accurate,
scalable, secure, knowledge-retrieval software solutions capable of supporting
knowledge assets of most media types including paper documents, text, images and
video. Excalibur's products enable users to search and retrieve these types of
data through intranets, local-area and wide-area networks, extranets and the
Internet. It believes that these qualities differentiate its software products
from other search engines, toolkits and text retrieval products. The Company's
Excalibur RetrievalWare and Excalibur Visual RetrievalWare products deliver a
unified software solution for text and visual knowledge retrieval. The Company
is committed to empowering organizations by enabling people to transform
information into knowledge and is focused on the high-end of the market for
knowledge retrieval.
The Company's software products are designed to enable individuals to quickly
search and retrieve relevant information residing on a LAN/WAN, intranet,
paper-based archive, extranet, video archive or the Internet. The market today
for the Company's products generally consists of two segments, text knowledge
retrieval and video indexing and retrieval. The market for text knowledge
retrieval products consists of electronic publishing, online information
services, global corporate intranets, paper archival systems as well as market,
business and government intelligence. The market for video indexing and
retrieval solutions includes application and website developers, certain
government agencies as well as commercial media, entertainment and broadcasting
companies.
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The Company analyzes its business based on these two business segments. Text
knowledge retrieval products include the RetrievalWare family of products and
EFS. Visual products include Visual RetrievalWare, VAE and Screening Room, an
advanced end-to-end solution for real-time capturing, analyzing, cataloguing,
browsing, searching and retrieving video over intranets and extranets, that
began shipping in the second quarter of this fiscal year.
The following chart represents revenues and expenses (in thousands of dollars)
attributable to the text and visual businesses for the three and nine month
periods ending October 31, 1998 and 1997. Expenses for each business consist of
expenses directly attributable to the business unit and allocated expenses and
exclude restructuring costs, merger costs and acquired in-process research and
development costs.
Text Business Visual Business
------------- ---------------
Three months ended Three months ended
October 31, October 31,
1998 1997 1998 1997
-------- -------- -------- --------
Total Revenue .................. $ 6,752 $ 6,212 $ 510 $ 216
Operating Expenses ............. 6,184 5,902 1,840 1,093
-------- -------- -------- --------
Operating Income (Loss) ........ $ 568 $ 310 $ (1,330) $ (877)
======== ======== ======== ========
Text Business Visual Business
------------- ---------------
Nine months ended Nine months ended
October 31, October 31,
1998 1997 1998 1997
-------- -------- -------- --------
Total Revenue .................. $ 17,579 $ 14,650 $ 894 $ 416
Operating Expenses ............. 18,119 18,005 4,657 3,500
-------- -------- -------- --------
Operating Income (Loss) ........ $ (540) $ (3,355) $ (3,763) $ (3,084)
======== ======== ======== ========
The Company believes that in addition to other competitive advantages, it holds
a competitive advantage in that the Company's products accommodate the indexing
and retrieval of multiple data types. The Company expects that over time, if
video becomes a more common data type, these two markets may merge.
Results of Operations
Total revenues for the third fiscal quarter ended October 31, 1998 were
$7,262,000, a 13% increase over total revenues of $6,428,000 reported for the
same quarter last fiscal year. The Company incurred a net loss for the quarter
ended October 31, 1998 of $793,000, or $0.06 per common share, compared to a net
loss of $628,000, or $0.05 per common share, for the third quarter last fiscal
year.
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For the nine months ended October 31, 1998, total revenues were $18,473,000, an
increase of 23% over total revenues of $15,066,000 reported for the
corresponding period last year. The Company incurred a net loss of $4,408,000,
or $0.33 per common share, in the first nine months of the current year compared
to a net loss of $8,406,000, or $0.65 per common share, in the same period last
year. Excluding a charge in the second quarter of the prior fiscal year of
$1,284,000 for acquired in-process research and development costs related to the
acquisition of Interpix Software Corporation ("Interpix") and a restructuring
charge of $577,000 recorded in the first quarter of the prior fiscal year, the
net loss for the nine months ended October 31, 1997 was $6,545,000.
Total expenses in the third quarter were $8,024,000, which represented a 15%
increase from total expenses of $6,995,000 in the third quarter last year. Total
expenses for the nine months ended October 31, 1998 were $22,776,000, a 3%
decrease from total expenses of $23,366,000 reported for the same period last
year. Excluding both the restructuring charge and the Interpix charge which
occurred in the prior fiscal year, total expenses increased approximately 6%
from the first nine months of the prior fiscal year.
The charts that follow summarize the components of revenues and expenses,
including the amounts expressed as a percentage of total revenues, for the three
and nine month periods ended October 31, 1998 and 1997, and the percentage
change in the amounts between fiscal periods (dollars in thousands).
Components of Revenue and Expenses Increase/
Three Months Ended October 31, ( Decrease)
1998 1997
$ % $ % %
-------------- -------------- ------
Revenues:
RetrievalWare ............ $5,482 75 % $4,391 68 % 25 %
EFS ...................... 37 1 397 6 (91)
Visual Products Group .... 479 7 188 3 155
-------------- -------------- ------
Total Software ............ 5,998 83 4,976 77 21
Maintenance ............... 1,264 17 1,452 23 (13)
-------------- -------------- ------
Total revenues ......... $7,262 100 % $6,428 100 % 13 %
-------------- -------------- ------
Expenses:
Costs of sales ........... $1,518 20 % $1,175 18 % 29 %
Sales and marketing ...... 3,367 46 3,035 47 11
Research and product
development ............ 2,072 29 1,544 24 34
General and administrative 1,067 15 1,241 19 (14)
-------------- -------------- ------
Total expenses ......... $8,024 110 % $6,995 108 % 15 %
-------------- -------------- ------
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Components of Revenue and Expenses Increase/
Nine Months Ended October 31, ( Decrease)
1998 1997
$ % $ % %
--------------- --------------- ------
Revenues:
RetrievalWare ............ $13,459 73 % $9,581 64 % 40 %
EFS ...................... 265 1 1,176 8 (77)
Visual Products Group .... 839 5 343 2 145
--------------- --------------- ------
Total Software ............ 14,563 79 11,100 74 31
Maintenance ............... 3,910 21 3,966 26 (1)
--------------- --------------- ------
Total revenues ......... $18,473 100 % $15,066 100 % 23 %
--------------- --------------- ------
Expenses:
Costs of sales ........... $ 3,690 20 % $3,240 22 % 14 %
Sales and marketing ...... 10,025 54 10,002 66 --
Research and product
development ............ 5,752 31 4,814 32 19
General and administrative 3,309 18 3,449 23 (4)
Acquired in-process
research and development -- -- 1,284 8 --
Restructure Costs ........ -- -- 577 4 --
--------------- --------------- ------
Total expenses ......... $22,776 123 % $23,366 155 % (3)%
--------------- --------------- ------
Overall revenues increased 13% in the third quarter of the current year over the
third quarter last year, including a 21% increase in software product revenue.
For the nine months ended October 31, 1998, overall revenues increased 23% and
software revenues increased 31% over the same period last year. Overall revenue
increases are attributable to three primary areas of growth. The first is
increasing sales via major integration and distribution partnerships. The
Company is beginning to generate revenue from major corporate partners and
continues to expand relationships with others. In July 1998, the Company entered
into an agreement with Storage Technology Corporation ("StorageTek") which calls
for the joint development of advanced solutions called Network Appliances, which
are based on RetrievalWare and Screening Room products. StorageTek has committed
to a prepaid license in the moderate seven figure range for licensing fees over
18 months and will also pay royalties on resale of current Excalibur products
and future products to be jointly developed. In the quarter, the Company
recognized $695,000 from this agreement. To date, the Company has recognized
$976,000 related to the agreement; the remainder of the prepaid license payments
will be recognized over the next twelve months. Other significant partnership
activity in the third quarter included new and expanded agreements with OCS of
Madrid, Excalibur's main distributor in Spain and South America; Informix
Software, who extended their license for Excalibur's text retrieval search
engine; and Thermo Info France.
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A second area of growth is coming from online services and sales of the
Company's new product Excalibur WebExpress, which is RetrievalWare designed
specifically for this market. Online services with paid subscribers are
demanding more accurate and comprehensive access to large volumes of diverse
information ranging from scanned paper to electronic text to images to video.
WebExpress provides optimum retrieval capabilities for online service users. In
the third quarter, new customers choosing Excalibur WebExpress included
Encyclopedia Britannica, Copley News Services and Knowledge Link.
The third area is the continued growth of RetrievalWare sales into corporate and
government accounts, both in the U.S. and abroad. Sales of Excalibur
RetrievalWare, the Company's flagship product, increased 25% in the current
quarter to $5,482,000 from $4,391,000 in the comparable quarter last year.
RetrievalWare revenue increased 40% in the first nine months of the current year
to $13,459,000 from $9,581,000 in the comparable period last year. RetrievalWare
sales were 92% of software revenue in the first nine months of the current year
compared to 86% in the first nine months of the prior year. Included in third
quarter revenue was a $1,149,000 RetrievalWare license sold to the United
Kingdom Ministry of Defense. The agreement grants the agency an internal use
license for indexing and retrieving complex text based data. With the
availability of RetrievalWare FileRoom, EFS software revenue is now negligible
and represented only 1% of total software revenue in the current quarter and 2%
for the first nine months of the current year. Software revenue from the Visual
Products Group increased 155% in the quarter to $479,000 from $188,000 in the
comparable quarter last year. In the first nine months of the current year,
software revenue from the Visual Products Group increased 145% to $839,000
compared to $343,000 in the first nine months of the prior year. Visual Products
revenue represented 8% and 6% respectively of software revenue for the three and
nine month periods ended October 31, 1998, compared to 4% and 3% for the
comparable periods last fiscal year.
Maintenance revenue dropped 13% in the third quarter this year to $1,264,000
from $1,452,000 in the third quarter last year. For the first nine months of the
current year, maintenance revenue dropped 1% to $3,910,000 from $3,966,000. The
decrease is due to the combination of two factors. In the third quarter of the
prior fiscal year, the Company made a non-recurring adjustment, increasing
international maintenance revenue. Excluding that adjustment, total maintenance
revenue in the current fiscal year was basically flat with last year. This is
due to the transition of the business from EFS to RetrievalWare. The EFS
customer base in general is not renewing their maintenance contracts. The
RetrievalWare base of maintenance contracts is growing as RetrievalWare license
sales grow, but the overall effect is a flattening of maintenance revenue in the
current fiscal year.
Software revenue from North American sales increased 34% in the third quarter
and 35% in the first nine months of the current year compared to the same
periods last year. While North American Federal software revenue declined by 37%
in the third quarter and 28% in the first nine months, North American Commercial
software revenue increased 40% in the third quarter and 56% in the first nine
months of the current year compared to last year. North American software
revenue represented 58% and 63%, respectively, of total software revenue in the
third quarter and the first nine months of the current fiscal year.
International software revenues increased 6% in the third quarter and 25% in the
first nine months of the current year compared with last year. International
software revenue growth was somewhat hindered by lingering effects of the Asian
financial crisis.
- 15 -
<PAGE>
Sales and marketing costs increased 11% in the quarter to $3,367,000 from
$3,035,000 last year but remained flat at $10,025,000 in the first nine months
of the current year compared to $10,002,000 in the first nine months of last
year. The increase results from the Company's new product marketing this year,
including trade show activity and direct mail programs. The restructuring in the
first quarter of fiscal year 1998 resulted in reduced salaries, benefits, travel
and other employee related costs that have remained relatively constant since
and explains the level sales and marketing costs in the first nine months of
this year compared to last.
Total research and product development costs increased 34% to $2,072,000 in the
third quarter of the current year compared with $1,544,000 in the third quarter
last year. For the nine months ended October 31, 1998, total research and
development costs increased 19% to $5,752,000 from $4,814,000 in the first nine
months of the prior year. The establishment of the joint development lab with
StorageTek accounted for the majority of the increase in the third quarter. The
lab, staffed by full-time Excalibur and StorageTek engineers, will closely
integrate StorageTek products with Excalibur's advanced products for crawling,
indexing, searching, retrieving and distributing all enterprise digital content,
to create advanced solutions that make enterprise-wide information assets easier
to archive, access and leverage. The increase for the first nine months of this
year over the same period last year was due to increased investment in the
Company's RetrievalWare and visual product lines, as well as the addition of
StorageTek Joint Development Lab. The Company continued to enhance RetrievalWare
products and its new visual product, Screening Room, and accelerated efforts to
complete development of StorageTek network appliance products. In total,
headcount in the Research and Development departments increased to 66 employees
at the end of the current quarter compared to 53 at the end of the third quarter
of the prior year. Additionally, as part of the increased R&D investment this
year, the Company utilized a greater number of third-party development
contractors. The Company believes that the investment in the acceleration of the
delivery of the network appliances will provide a positive return next year.
General and administrative expenses decreased 14% in the third quarter to
$1,067,000 from $1,241,000 in the third quarter last year. For the first nine
months of the current year, general and administrative expenses decreased 4% to
$3,309,000 from $3,449,000 in the same period last year. The decrease is due to
a reduction in corporate expenses this year, including insurance and shareholder
expenses.
Costs of sales increased 29% to $1,518,000 in the third quarter of the current
year from $1,175,000 in the third quarter last year. Costs of sales increased
14% to $3,690,000 in the first nine months of the current year from $3,240,000
in the same period last year. The variance is mostly due to the increased sales
volume. Increased third-party royalty costs due to the addition of new language
versions of RetrievalWare have also contributed to the increase in costs of
sales from the third quarter of the prior year. Costs of sales expressed as a
percentage of total sales was 21% in the third quarter of the current year
compared to 18% in the third quarter last year, and decreased to 20% in the
first nine months of the current year from 22% in the comparable period last
year.
- 16 -
<PAGE>
Net interest income declined to $52,000 and $194,000, respectively, in the three
and nine month periods ended October 31, 1998 from $89,000 and $306,000,
respectively, in the comparable periods last year due to a decrease in the level
of investment securities held. The Company's equity in the loss of its
affiliate, ETNV, was $83,000 in the third quarter, and $299,000 for the nine
months ended October 31, 1998. For the three and nine month periods ended
October 31, 1997, the equity in the net loss of ETNV was $150,000 and $412,000,
respectively.
Liquidity and Capital Resources
In the nine months ended October 31, 1998, the Company's combined balance of
cash, cash equivalents and investments in marketable securities increased by
$248,000 to $6,683,000 as summarized below (in thousands). At October 31, 1998
and January 31, 1998, investments in marketable securities consisted of U.S.
Treasury Bills with maturities of less than one year.
October 31, January 31,
1998 1998 Change
---------- ----------- ----------
Cash and cash
equivalents $ 5,684 $ 4,939 $ 745
Investments 999 1,496 (497)
---------- ----------- ----------
Total $ 6,683 $ 6,435 $ 248
========== =========== ==========
Cash of $2,245,000 used to fund operating activities was less than the net loss
of $4,408,000 for the nine months ended October 31, 1998. A reduction of
$2,162,000 in the balance of accounts receivable was offset somewhat by an
increase in prepaid and other expenses of $1,514,000. Reductions in accounts
payable and accrued expenses used $52,000, while increased deferred revenues
contributed $169,000. The non-cash charges offsetting cash used in operations
were depreciation and amortization of $1,099,000, and the Company's share of the
net loss of ETNV and the amortization of the excess of the Company's investment
over the underlying net book value of ETNV totaling $299,000.
During the first nine months of the current year, the maturity of Treasury bills
provided net cash of $1,481,000. Treasury bill purchases used $984,000.
Purchases of equipment and leasehold improvements used $939,000 and loans to and
investments in the Company's affiliate, ETNV, used $226,000.
Proceeds of $3,250,000 were provided by a private placement of 325,000 shares of
common stock to an unaffiliated financial institution at a purchase price of
$10.00 per share. Cash of $525,000 was provided from the exercise of employee
stock options and issuances of stock under the employee stock purchase plan.
The reduction in the level of accounts receivable during the first nine months
of the current year resulted in a decrease in the number of days sales
outstanding ("DSO") at October 31, 1998. Management believes that the allowance
for doubtful accounts of $628,000 at October 31, 1998 is adequate.
- 17 -
<PAGE>
Factors That May Affect Future Results
The Company's business environment is characterized by intense competition,
rapid technological changes, changes in customer requirements and emerging new
market segments. Consequently, to compete effectively, the Company must make
frequent new product introductions and enhancements while protecting its
intellectual property, retain its key personnel and deploy sales and marketing
resources to take advantage of new business opportunities. Future operating
results will be affected by the ability of the Company to expand its product
distribution channels and to manage the expected growth of the Company. Future
results may also be impacted by the effectiveness of the Company in executing
future acquisitions and integrating the operations of acquired companies with
those of the Company. Failure to meet any of these challenges could adversely
affect future operating results.
The Company's quarterly operating results have varied substantially in the past
and are likely to vary substantially from quarter to quarter in the future due
to a variety of factors. In particular, the Company's period-to-period operating
results are significantly dependent upon the timing of the closing of large
license agreements. In this regard, the purchase of the Company's products can
require a significant capital investment from a potential customer which the
customer generally views as a discretionary cost that can be deferred or
canceled due to budgetary or other business reasons and can involve long sales
cycles of six months or more. Estimating future revenues is also difficult
because the Company ships its products soon after an order is received and as
such does not have a significant backlog. Thus, quarterly license fee revenues
are heavily dependant upon a limited number of orders for large licenses
received and shipped within the same quarter. Moreover, the Company has
generally recorded a significant portion of its total quarterly license fee
revenues in the third month of a quarter, with a concentration of these revenues
occurring in the last half of that third month. This concentration of revenues
is influenced by customer tendencies to make significant capital expenditures at
the end of a fiscal quarter. The Company expects these revenue patterns to
continue for the foreseeable future.
Despite the uncertainties in its revenue patterns, the Company's operating
expenses are based upon anticipated revenue levels and such expenses are
incurred on an approximately ratable basis throughout a quarter. As a result, if
expected revenues are deferred or otherwise not realized in a quarter for any
reason, the Company's business, operating results and financial condition would
be materially adversely affected.
Primarily due to large operating losses incurred by the Company, its balance of
cash, cash equivalents and investments declined substantially since the proceeds
of approximately $8,388,000 from a private placement in March 1996 were
received. As a result, during the second quarter this year, the Company
completed a private placement sale of 325,000 shares of common stock for $10 per
share, resulting in proceeds of $3,250,000.
Various factors, including those discussed above, have somewhat inhibited the
overall revenue growth that management had expected in the prior fiscal year. As
a result, near the end of the first quarter of fiscal year 1998, the short-term
revenue expectations of management were adjusted and planned expenditures were
reduced. As discussed previously, the Company reduced its workforce by
approximately 10% from the number of employees at April 30, 1997. In addition,
- 18 -
<PAGE>
the Company postponed certain long-range programs and curtailed other expenses
in order to achieve an overall reduction in expenditures. Marketing efforts were
focused on the increase of current year revenues. The Company made other
organizational changes in order to sharpen the focus of product development and
business development efforts on selected video applications of the Excalibur
Visual RetrievalWare technology.
Management believes that the changes and initiatives discussed above and the
investments of time and money in the training of the sales force, improved sales
productivity and the overall financial performance of the Company since
inception of such changes. Quarterly revenues increased steadily throughout
fiscal year 1998 and revenues for the first nine months of the current fiscal
year have increased 23% over the total revenue reported for the same period last
fiscal year. Software revenue has increased 31% in the first nine months of the
current year compared to last year. The level of quarterly costs and expenses
was reduced and had remained relatively flat over the past several quarters.
However, the establishment of the joint development lab with StorageTek resulted
in an increase in expenses this quarter that is expected to continue as the
Company accelerates the delivery of the network appliances. The Company believes
that this investment will provide a positive return next fiscal year. Including
the receipt of $3,250,000 in proceeds from the private placement on May 15,
1998, the current balance of cash, cash equivalents and investments is expected
to be sufficient to fund the Company's current projected cash needs for the
current fiscal year. Historically, the Company has primarily used cash provided
by sales of its common stock to fund its operating losses. If the actions taken
by management are not effective in achieving profitable operating results, the
Company may be required to pursue additional external sources of financing in
the future to support its operations and capital requirements. There can be no
assurances that external sources of financing will be available if required, or
that such financing will be available on terms acceptable to the Company.
As of January 31, 1998, the Company had significant net operating loss
carryforwards ("NOLs") of approximately $68 million. The deferred tax assets
representing the benefits of the NOLs have been offset completely by a valuation
allowance due to the Company's lack of an earnings history. The Company incurred
a net loss of $4,408,000 for the nine month period ended October 31, 1998 and
has incurred cumulative losses of approximately $16,383,000 over the last three
fiscal years. The accumulated deficit of the Company at October 31, 1998 was
$56,405,000. The realization of the benefits of the NOLs is dependent on
sufficient taxable income in future fiscal years. Lack of future earnings, or a
change in the ownership of the Company, could adversely affect the Company's
ability to utilize the NOLs. Further, because there was a change in the
ownership of ConQuest in fiscal year 1996, the Company's ability to utilize NOLs
relating to ConQuest of approximately $3,233,000 may be limited. Despite the NOL
carryforwards, the Company may have income tax liability in future years due to
the application of the alternative minimum tax rules of the Internal Revenue
Code.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company believes that inflation has not had a material effect on the results
of its operations to date.
- 19 -
<PAGE>
Other Factors
On July 29, 1998, the Securities and Exchange Commission issued additional
guidance on disclosures that public companies should make related to the Year
2000. The new release is effective for the Company's October 31, 1998 interim
reporting and the Company is providing this disclosure in accordance with this
guidance. In addition to historical information, the disclosure contains
forward-looking statements within the meaning of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995. Such statements are based
on management's current expectations and are subject to a number of factors,
risks and uncertainties which could cause actual results to differ materially
from those described in the forward-looking statements.
State of Readiness
- ------------------
The Company currently has facilities in six locations, each of which is
responsible for its own development information technology systems, herein known
as "Non-IT systems", while corporate information technology systems, herein
known as "IT systems", are managed by the Company's Management Information
Systems department ("MIS"). For the purposes of Year 2000 compliance, the
corporate MIS department is managing the task of verifying that all Company
systems are date compliant, including reviewing and analyzing all development
platforms, not directly under MIS control. This umbrella process was initiated
in order to ensure the Company would be able to continue developing its products
without disruption after January 1, 2000. To ensure that Non-IT and IT systems
are, or will be, compliant; the Company has undertaken a full survey of all
systems within the Company at all locations. This survey covers all user desktop
and laptop systems; all IT systems, servers, and operating systems; all critical
applications, including financial, accounting, corporate database, human
resources and administrative systems; and all Non-IT systems, servers, operating
systems and third party coding products. The majority of the Company's efforts
regarding Year 2000 readiness are associated with internal data processing
systems. In all material respects, products manufactured by the Company are
already Year 2000 compliant, although the individual platforms upon which
product(s) are developed are still under review and analysis. Due to the recent
upgrade of many of the Company's IT systems, the majority of these systems are
either currently prepared for Year 2000 in all material respects or are in the
process of being upgraded to standardized systems and applications which will
meet this objective. Most IT systems and applications which are deemed Year 2000
compliant by the software vendors are tested by the Company to verify these
claims. At this time, critical financial, accounting and corporate database
systems have been tested, and Non-IT systems remain to be tested. These testing
proportions are related to both the magnitude and perceived risk of system
non-compliance and future testing will be scheduled in accordance with these
criteria. For the remaining IT systems and the Non-IT systems, plans with
critical dates are being developed to monitor the Company's progress toward the
overall objective of Year 2000 compliance. The Company's anticipates readiness
for Year 2000 by mid-year 1999.
Costs to Address Year 2000 Issues
- ---------------------------------
Historical and estimated costs of remediation to this point have not been
material. The Company has resolved IT systems compliance issues through normal
replacement and upgrades of software. Non-IT systems are being addressed on a
- 20 -
<PAGE>
case by case basis through the use of existing MIS resources. Most of the Non-IT
systems remedial activity to this point has involved applying low or zero cost
patches to operating systems and platforms using existing MIS resources to
achieve a date compliance level. The Company will continue to monitor Year 2000
remediation costs and will update its estimate of future remediation costs, if
any, as it completes its Non-IT systems analysis.
Key Considerations and Contingency Plans
- ----------------------------------------
At the current time, the Company's Year 2000 readiness plan anticipates that
both IT and Non-IT systems and applications will be Year 2000 compliant in all
material respects by June 1999. This assessment is based on the Company's
analysis to date and detailed findings at its Vienna, Virginia and Columbia,
Maryland locations. There can be no assurance, however, of complete compliance
based on the status to date. However, since the Company is not dependent upon
any single IT or Non-IT system for the majority of its revenue, it is unlikely
that any single system will have an adverse material effect on the Company as a
whole. Contingency plans will involve the procurement of newer platforms for
Non-IT systems and the temporary use of standardized commercial off-the-shelf
replacement modules for IT applications and business functions. While at present
there are no indications that any contingency plans will be necessary or that
there will be revenue disruptions, there can be no assurances that this will
necessarily be the case.
New Accounting Pronouncements
In 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information" was issued and is effective for the fiscal year ending January 31,
1999 year-end reporting. The Company is evaluating this statement to determine
the impact on its reporting and disclosure requirements.
The American Institute of Certified Public Accountants has issued Statement of
Position 97-2, "Software Revenue Recognition," ("SOP 97-2") that supersedes
Statement of Position 91-1. SOP 97-2, "Software Revenue Recognition," is
effective for revenue transactions entered into by the Company in its fiscal
year ending January 31, 1999. The Company has implemented SOP 97-2 and it has
not had a material financial impact on the Company.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which will
be effective for the Company's fiscal year 2001. This statement establishes
accounting and reporting standards requiring that every derivative instrument,
including certain derivative instruments embedded in other contracts, be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement also requires that changes in the derivative's fair
value be recognized in earnings unless specific hedge accounting criteria are
met. The Company believes the adoption of SFAS No. 133 will not have a material
effect on the financial statements.
- 21 -
<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 None.
- -------
Item 5. Other Information None.
- -------
Item 6. Exhibits and Reports on Form 8-K None.
- -------
- 22 -
<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
December 14, 1998 By: /s/ Patrick C. Condo
------------------------
Patrick C. Condo
President and Chief Executive Officer
(Principal Executive Officer)
December 14, 1998 By: /s/ James H. Buchanan
-------------------------
James H. Buchanan
Chief Financial Officer
(Principal Financial and Accounting Officer)
- 23 -
<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> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-END> OCT-31-1998
<CASH> 5,684
<SECURITIES> 999
<RECEIVABLES> 7,763
<ALLOWANCES> 628
<INVENTORY> 0
<CURRENT-ASSETS> 16,429
<PP&E> 8,826
<DEPRECIATION> 6,634
<TOTAL-ASSETS> 19,538
<CURRENT-LIABILITIES> 7,025
<BONDS> 0
0
324
<COMMON> 137
<OTHER-SE> 12,052
<TOTAL-LIABILITY-AND-EQUITY> 19,538
<SALES> 14,563
<TOTAL-REVENUES> 18,473
<CGS> 2,712
<TOTAL-COSTS> 13,715
<OTHER-EXPENSES> 9,061
<LOSS-PROVISION> 1
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,408)
<INCOME-TAX> 0
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</TABLE>
