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, 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 September 3, 1998, 13,610,702 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, 1998
TABLE OF CONTENTS
PART I . FINANCIAL INFORMATION
Item 1. Financial Statements: Page
Consolidated Balance Sheets
July 31, 1998 and January 31, 1998............................ 3
Consolidated Statements of Operations
Three and six month periods ended July 31, 1998 and 1997...... 4
Consolidated Statements of Cash Flows
Six month periods ended July 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.......................... 10
PART II. OTHER INFORMATION
Items 1. - 6.......................................................... 20
Signatures............................................................ 22
2
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EXCALIBUR TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
ASSETS July 31, January 31,
1998 1998
(unaudited)
---------- ----------
Current Assets:
Cash and cash equivalents ......................... $ 6,476 $ 4,939
U.S. government securities, at cost ............... 987 1,496
Accounts receivable, net of
allowance for doubtful accounts
of $651 and $527, respectively ................. 7,596 9,189
Prepaid expenses and other ........................ 1,626 1,071
-------- --------
Total current assets .......................... 16,685 16,695
Equipment and leasehold improvements,
net of accumulated depreciation of
$6,287 and $5,614,respectively .................... 2,170 2,267
Other assets ......................................... 924 1,083
-------- --------
$ 19,779 $ 20,045
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable .................................. $ 2,224 $ 2,106
Accrued expenses .................................. 1,459 1,886
Deferred revenues ................................. 2,652 2,708
Deferred compensation ............................. 247 247
-------- --------
Total current liabilities ..................... 6,582 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 ... 321 271
Common stock, par value $0.01, 40,000 shares
authorized; 13,606 and 13,179 shares issued
and outstanding, respectively .................. 136 132
Additional paid-in capital ........................ 68,424 64,714
Accumulated deficit ............................... (55,610) (51,945)
Cumulative translation adjustment ................. (74) (74)
-------- --------
Total shareholders' equity .................... 13,197 13,098
-------- --------
$ 19,779 $ 20,045
======== ========
The accompanying notes to the consolidated financial statements are an
integral part of these consolidated balance sheets.
3
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<TABLE>
<CAPTION>
EXCALIBUR TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
Three Months Ended Six Months Ended
July 31, July 31,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Software ........................... $ 4,834 $ 3,864 $ 8,565 $ 6,123
Maintenance ........................ 1,322 1,321 2,646 2,515
--------- --------- --------- ---------
6,156 5,185 11,211 8,638
--------- --------- --------- ---------
EXPENSES:
Sales and Marketing ................ 3,430 3,375 6,658 6,967
Research and product development ... 1,782 1,569 3,680 3,270
Acquired in-process research
& development .................... -- 1,284 -- 1,284
General and administrative ......... 1,019 1,106 2,242 2,208
Cost of software revenues .......... 839 699 1,520 1,450
Cost of maintenance revenues ....... 338 313 652 615
Restructuring costs ................ -- -- -- 577
--------- --------- --------- ---------
7,408 8,346 14,752 16,371
--------- --------- --------- ---------
Operating loss ....................... (1,252) (3,161) (3,541) (7,733)
OTHER INCOME/ (EXPENSES):
Interest income, net ............ 81 99 143 217
Equity in net loss of affiliate . (101) (159) (218) (262)
--------- --------- --------- ---------
Net loss ............................. (1,272) (3,221) (3,616) (7,778)
Dividends on preferred stock ......... 3 3 7 7
--------- --------- --------- ---------
Net loss applicable to common stock .. $ (1,275) $ (3,224) $ (3,623) $ (7,785)
========= ========= ========= =========
Basic and Diluted net loss per
common share ......................... $ (0.09) $ (0.25) $ (0.27) $ (0.60)
========= ========= ========= =========
Weighted-average number of common
shares outstanding ................... 13,546 13,017 13,385 12,916
========= ========= ========= =========
The accompanying notes to the consolidated financial statements are an
integral part of these consolidated statements.
</TABLE>
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EXCALIBUR TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Six Months Ended July 31,
1998 1997
--------- ---------
Cash Flows from Operating Activities:
Net loss .......................................... $ (3,616) $ (7,778)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ................. 731 799
In-process R&D costs .......................... -- 1,284
Equity in net loss of affiliate ............... 218 262
Changes in operating assets and liabilities:
Accounts receivable, net ...................... 1,616 3,319
Prepaid expenses and other .................... (581) 613
Accounts payable and accrued expenses ......... (306) (1,476)
Deferred revenues ............................. (64) 183
--------- ---------
Net cash used in operating activities ............. (2,002) (2,794)
--------- ---------
Cash Flows from Investing Activities:
Purchase of investments ........................... (984) (8,856)
Proceeds from maturities of investments ........... 1,493 13,394
Loan to / Investment in affiliate ................. (96) (95)
Acquisition, net of cash used ..................... -- 55
Purchases of equipment and leasehold improvements . (579) (355)
--------- ---------
Net cash provided by (used in) investing activities (166) 4,143
--------- ---------
Cash Flows from Financing Activities:
Proceeds from the issuance of common stock ........ 3,714 269
Repayment of notes payable ........................ -- (40)
--------- ---------
Net cash provided by financing activities ......... 3,714 229
--------- ---------
The Effect of Exchange Rate Changes on Cash .......... (9) (84)
--------- ---------
Net Increase in Cash and Cash Equivalents ............ 1,537 1,494
Cash and Cash Equivalents, beginning of period ....... 4,939 2,685
--------- ---------
Cash and Cash Equivalents, end of period ............. $ 6,476 $ 4,179
========= =========
The accompanying notes to the consolidated financial statements are an
integral part of these consolidated statements.
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EXCALIBUR TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 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 $1,272,000 and $3,616,000 in the three and
six month periods ended July 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 July 31, 1998 was $55,610,000. 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 six month
periods ended July 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.
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, 1998 and
1997.
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 the Statement of Financial Accounting Standard ("SFAS") No.
115, "Accounting For Certain Investments in Debt and Equity Securities," the
Company considers its marketable securities as held-to-maturity securities.
Accordingly, marketable securities, consisting entirely of U.S. government
securities, are carried at cost, adjusted for premium and discount amortization.
At July 31, 1998 and January 31, 1998, the aggregate fair value of the
securities based upon quoted market prices was $987,000 and $1,497,000,
respectively.
7
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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. The financial
statements presented have been prepared in accordance with SFAS No. 128. 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.
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
over a five-year period.
The amortization of the excess, as well as the Company's share of ETNV's net
loss for the period and the elimination of the Company's share of gross profit
included in ETNV's prepaid license fees at July 31, 1998 and 1997, is included
in equity in net loss of affiliate in the accompanying consolidated statement of
operations for the three and six month periods ended July 31, 1998 and 1997. At
July 31, 1998, the balance of advances and the investment, included in other
assets in the accompanying consolidated balance sheets net of accumulated
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amortization and the Company's share of the net loss of ETNV, was $423,000. At
January 31, 1998, the balance of advances and the investment, included in other
assets in the accompanying consolidated balance sheets net of accumulated
amortization and the Company's share of the net loss of ETNV, was $544,000.
For the three and six month periods ended July 31, 1998, the Company recorded
total revenues of $255,000 and $585,000, respectively, related to the software
license with ETNV. The Company recorded $502,000 for the comparable six month
period in the prior fiscal year, all of which was recorded in the second
quarter.
(4) ISSUANCES OF COMMON STOCK
During the first six months of the current fiscal year, the Company issued
approximately 97,000 shares of common stock upon the exercise of options ranging
in price from $2.07 to $10.38 per share, resulting in total cash proceeds to the
Company of approximately $414,000. In addition, the Company issued approximately
4,700 shares of common stock to participants of the employee stock purchase
plan. In the first half of last fiscal year, the exercise of stock options
resulted in total cash proceeds of approximately $89,000 and the utilization of
$438,000 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 No. 130,
"Reporting Comprehensive Income," ("SFAS 130"), during the first quarter of
fiscal 1999. SFAS 130 requires companies to report as comprehensive income all
changes in equity during a period, except those resulting from investments and
distributions to owners, in financial statements for the period in which they
are recognized. Included within accumulated other comprehensive income are the
cumulative amounts for foreign currency translation adjustments. There was no
foreign currency translation adjustment for the six months ended July 31, 1998.
The foreign currency translation adjustment for the six months ended July 31,
1997 was $(34,000). The Company's comprehensive income for the three and six
months in the period ending July 31, 1998 was $(1,232,000) and $(3,616,000),
respectively. The Company's comprehensive income for the comparable periods last
fiscal year was $(3,239,000) and $(7,812,000), respectively.
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.
9
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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, 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.
The following chart represents revenues and expenses (in thousands of dollars)
attributable to the text and visual businesses for the three and six month
periods ending July 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.
<TABLE>
<CAPTION>
Text Business Visual Business Text Business Visual Business
------------- --------------- ------------- ---------------
Three months ended Three months ended Six months ended Six months ended
July 31, July 31, July 31, July 31,
1998 1997 1998 1997 1998 1997 1998 1997
---------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Revenue $5,966 $5,028 $ 190 $ 157 $10,827 $ 8,439 $ 384 $ 199
Operating Expenses 6,054 5,842 1,354 1,220 11,935 12,103 2,817 2,407
---------------- ------------------ ------------------ ------------------
Operating Income (Loss) $ (88) $ (814) $(1,164) $(1,063) $(1,108) $(3,664) $(2,433) $(2,208)
---------------- ------------------ ------------------ ------------------
</TABLE>
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 second fiscal quarter ended July 31, 1998 were
$6,156,000, a 19% increase over total revenues of $5,185,000 reported for the
same quarter last fiscal year. The Company incurred a net loss for the quarter
ended July 31, 1998 of $1,272,000, or $0.09 per common share, compared to a net
loss of $3,221,000, or $0.25 per common share, for 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
quarter ended July 31, 1997 was $1,937,000.
For the six months ended July 31, 1998, total revenues were $11,211,000 an
increase of 30% over total revenues of $8,638,000 reported for the corresponding
period last year. The Company incurred a net loss of $3,616,000, or $0.27 per
common share, in the first six months of the current year compared to a net loss
of $7,778,000, or $0.60 per common share, in the same period last year.
Excluding the Interpix charge identified above and a restructuring charge of
$577,000 recorded in the first quarter of the prior fiscal year, the net loss
for the six months ended July 31, 1997 was $5,917,000.
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Total expenses in the second quarter were $7,408,000, which represented an 11%
decrease from total expenses of $8,346,000 in the second quarter last year.
Total expenses for the second quarter in the prior fiscal year included the
Interpix charge for in-process research and development of $1,284,000. Excluding
the Interpix charge, expenses in the second quarter of the current year
increased approximately 5% from the second quarter in the prior year.
Total expenses for the six months ended July 31, 1998 were $14,752,000, a 10%
decrease from total expenses of $16,371,000 reported for the same period last
year. Excluding both the restructuring charge and the Interpix charge which
occurred in the first six months of the prior year, total expenses increased
approximately 2% from the corresponding six month period last year.
The charts below summarize the components of revenues and expenses, including
the amounts expressed as a percentage of total revenues, for the three and six
month periods ended July 31, 1998 and 1997, and the percentage change in the
amounts between fiscal periods (dollars in thousands).
- -------------------------------------------------------------------------------
Components of Revenue and Expenses
Three Months Ended July 31, Increase/
1998 1997 (Decrease)
----------------- ----------------- ---------
$ % $ % $
-------- ------- -------- ------- ---------
Revenues:
RetrievalWare $ 4,543 74 % $ 3,354 65 % 35 %
EFS 116 2 376 7 (69)
Visual Products Group 175 3 134 3 31
-------- ------ -------- ------ ------
Total Software 4,834 79 3,864 75 25
Maintenance 1,322 21 1,321 25 0
======== ====== ======== ====== ======
Total revenues $ 6,156 100 % $ 5,185 100 % 19 %
======== ====== ======== ====== ======
Expenses:
Sales and marketing $ 3,430 56 % $ 3,375 65 % 2 %
Research and product
development 1,782 29 1,569 30 14
General and administrative 1,019 16 1,106 21 (8)
Costs of sales 1,177 19 1,012 20 16
Acquisition of in-process
research and development -- -- 1,284 25 --
======== ====== ======== ====== ======
Total expenses $ 7,408 120 % $ 8,346 161 % (11)%
======== ====== ======== ====== ======
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- -------------------------------------------------------------------------------
Components of Revenue and Expenses
Six Months Ended July 31, Increase/
1998 1997 (Decrease)
----------------- ----------------- ---------
$ % $ % $
-------- ------- -------- ------- ---------
Revenues:
RetrievalWare $ 7,977 71 % $ 5,189 60 % 54 %
EFS 228 2 779 9 (71)
Visual Products Group 360 3 155 2 132
-------- ------ -------- ------ ------
Total Software 8,565 76 6,123 71 40
Maintenance 2,646 24 2,515 29 5
======== ====== ======== ====== ======
Total revenues $ 11,211 100 % $ 8,638 100 % 30 %
======== ====== ======== ====== ======
Expenses:
Sales and marketing $ 6,658 59 % $ 6,967 81 % (4)%
Research and product
development 3,680 33 3,270 38 13
General and administrative 2,242 20 2,208 25 2
Costs of sales 2,172 20 2,065 24 5
Restructuring costs -- -- 577 7 --
Acquisition of in-process
research and development -- -- 1,284 15 --
======== ====== ======== ====== ======
Total expenses $ 14,752 132 % $ 16,371 190 % (10)%
======== ====== ======== ====== ======
While overall revenues increased 19% in the second quarter of the current year
over the second quarter last year, software product revenue increased 25%. For
the six months ended July 31, 1998, overall revenues increased 30% including a
40% increase in software revenues over the same period last year. Revenue
increases are largely attributable to two factors. The first is a continued
increase in demand for Excalibur RetrievalWare. The Company believes this demand
is being driven by increasing awareness of value associated with
high-performance search and retrieval applications emphasizing accuracy and
scalability at both the departmental and enterprise levels. Product revenue from
the Company's flagship product Excalibur RetrievalWare increased 35% in the
current quarter to $4,543,000 from $3,354,000 in the comparable quarter last
year. RetrievalWare sales increased 54% in the first six months of the current
year to $7,977,000 from $5,189,000 in the comparable period last year.
RetrievalWare sales were 93% of software revenue in the first six months of the
current year compared to 85% in the first six months of the prior year. With the
availability of RetrievalWare FileRoom, software revenue from EFS is now minimal
and represented 2% of total software revenue in the current quarter and 3% for
the first six months of the current year. Software revenue from the Visual
Products Group increased 132% to $360,000 in the first six months of the current
year compared to $155,000 in the first six months of the prior year. Visual
Products revenue represented 4% of software revenue for the three and six month
periods ended July 31, 1998. Maintenance revenue of $1,322,000 in the second
quarter this year was flat when compared to maintenance revenue of $1,320,000 in
the same period last year, and increased 5% to $2,646,000 in the six months
ended July 31, 1998 from $2,515,000 in the same period last year. The modest
growth in maintenance revenue results from the Company's transition from the EFS
product line to RetrievalWare Fileroom. With the transition, the Company
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diminished its investment in EFS development and there have resultantly been no
further enhancements made to the product. Maintenance renewals for EFS have
declined in fiscal year 1999 when compared to the same three and six month
periods last year. Revenue results in the first six months of the current year
were primarily a result of the efforts of a direct sales force.
Software revenue from North American sales, which were approximately 69% of
total software revenues in the second quarter, increased 31% from the same
quarter last year. International software revenues increased 15% in the second
quarter compared with last year. Software revenues from North American sales,
which were approximately 66% of total software revenues in the six months ended
July 31, 1998, increased 35% from the corresponding six month period of last
year. International software revenues increased approximately 50% in the first
six months of this year from the same period last year.
A second area contributing to revenue growth is increasing interest from large
software and hardware companies looking to provide high-performance search and
retrieval as part of their product offerings. In the second quarter of the
current year, the Company signed a multi-year, multi-million dollar licensing,
development and distribution agreement with StorageTek, a provider of network
storage. The comprehensive agreement, which the Company believes to be the most
significant in its history, gives StorageTek immediate rights to bundle
Excalibur's advanced search and retrieval products with its high-performance
network storage products and then sell the packages as enhanced solutions for
knowledge management and digital content management initiatives. 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 second quarter of
this year, the Company recognized $276,000 of revenue related to the agreement.
The Company also reached an agreement with Lernout & Hauspie (L&H), a global
leader in advanced speech and language solutions for computers, automobiles,
telecommunications, embedded products, consumer goods and the Internet. The
agreement calls for L&H to integrate RetrievalWare with their multi-lingual
language libraries enabling them to create new products capable of advanced
cross-lingual search. In the second quarter of this year, the Company recognized
$900,000 of revenue related to the agreement, which represents the entire amount
payable to the Company.
In addition to numerous upgrades to existing customers, some of the Company's
new RetrievalWare customers included Bull Information Systems, Zeneca, major
government agencies including the General Services Administration, and several
other state and local government installations. The Company also signed new OEM
agreements with DALiM and Sherpa Corporation and continued to expand agreements
with existing partners such as GTE and Korea Data Networks.
Sales and marketing costs increased 2% in the quarter to $3,430,000 from
$3,375,000 last year but decreased 4% to $6,658,000 from $6,967,000 in the first
six months of the current year compared to last year. 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 during
the current year. While the higher volume of sales in the first six months of
the current year resulted in increased commission expense compared to the
corresponding period last year, these higher commissions were offset by a
reduction in the level of marketing program expenditures by $164,000 compared to
the first six months of last fiscal year.
14
<PAGE>
Total research and product development costs increased 14% to $1,782,000 in the
second quarter of the current year compared with $1,569,000 in the second
quarter last year. For the six months ended July 31, 1998, total research and
development costs increased 13% to $3,680,000 from $3,270,000 in the first six
months of the prior year. Text and Visual research and development costs both
increased as the Company continued to invest in new products and enhance
existing products. Text expenses, included in total research and product
development costs, increased 10% in the first six months of the fiscal year
compared to the prior year due to increased headcount and employee related
expenses as the Company released Excalibur RetrievalWare Version 6.6 in the
second quarter. Version 6.6 features several major enhancements including a
knowledge plug-in architecture and new plug-ins for extending access and
retrieval from major groupware platforms such as Microsoft Exchange and Lotus
Notes. Other enhancements include extended security features, the ability to
recognize and highlight proper names and entities, and an enhanced user
interface. Overall, Excalibur RetrievalWare now supports more than 200 document
formats including Microsoft Office '97. Visual expenses, included in total
research and product development costs, increased 17% in the first six months of
the current year compared to the same period last year in preparation for the
release of Excalibur Screening Room. Consulting expenses represented a major
portion of that increase.
General and administrative expenses decreased 8% in the second quarter to
$1,019,000 from $1,106,000 in the comparable quarter last year. For the first
six months of the current year General and administrative expenses increased 2%
to $2,242,000 from $2,208,000 in the first six months of the prior year. General
and administrative expenses have remained relatively equal to their levels in
the prior fiscal year.
Costs of sales increased 16% to $1,177,000 in the second quarter of the current
year from $1,012,000 last year. For the first six months of the current year
costs of sales increased 5% to $2,172,000 from $2,065,000 in the first six
months of the prior year. The increase is directly attributable to the increased
sales volume in the current year. Costs of sales expressed as a percentage of
total sales was 19% for the second quarter of the current year compared to 20%
for the second quarter last year and decreased to 20% in the first six months of
the current year from 24% in the first six months of the prior year.
Net interest income declined to $81,000 and $143,000, respectively, in the three
and six month periods ended July 31, 1998 from $99,000 and $217,000,
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 $101,000 in the second quarter, and $218,000 for the six
months ended July 31, 1998. The Company's equity in the loss of ETNV was
$159,000 and $262,000, respectively for the three and six month periods ended
July 31, 1997.
15
<PAGE>
Liquidity and Capital Resources
In the six months ended July 31, 1998, the Company's combined balance of cash,
cash equivalents and investments in marketable securities increased by
$1,028,000 to $7,463,000 as summarized below (in thousands). At July 31, 1998
and January 31, 1998, investments in marketable securities consisted of U.S.
Treasury Bills with maturities of less than one year.
July 31, January 31,
1998 1998 Change
--------- --------- ---------
Cash and cash
equivalents $ 6,476 $ 4,939 $ 1,537
Investments 987 1,496 (509)
========= ========= =========
Total $ 7,463 $ 6,435 $ 1,028
========= ========= =========
During the six months ended July 31, 1998, cash of $2,002,000 used to fund
operating activities was less than the net loss of $3,616,000 due primarily to a
significant reduction in the level of accounts receivable. The balance of
accounts receivable declined by $1,616,000. Other non-cash charges offsetting
cash used in operations were depreciation and amortization of $731,000 and the
Company's share of the net loss of ETNV and amortization of the excess of the
Company's investment over the underlying net book value of ETNV totaling
$218,000. Increased prepaid expenses and reductions in accounts payable used
$887,000.
The maturity of Treasury Bills provided net cash of $1,493,000 during the six
months of the current year. Treasury Bill purchases used $984,000. Purchases of
equipment and leasehold improvements used $579,000.
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 $464,000 was provided from the exercise of employee
stock options and issuances of stock under the employee stock purchase plan.
Despite the reduction in the balance of accounts receivable during the first six
months of the current year, the number of days sales outstanding ("DSO") at July
31, 1998 remained the same as it was at January 31, 1998. This can be attributed
to the large amount of revenue generated near the end of each quarter.
Management believes that the allowance for doubtful accounts of $651,000 at July
31, 1998 is adequate.
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
16
<PAGE>
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, as described in Note
4 of the Consolidated Financial Statements, 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 moderated 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,
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.
17
<PAGE>
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 six months of the current fiscal
year have increased 30% over the total revenue reported for the same period last
fiscal year. The level of quarterly costs and expenses was reduced and has
remained relatively flat over the past several quarters. However, some increases
in expenses are expected as revenues increase and the Company ships new video
products throughout the current 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 used primarily 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 $3,616,000 for the six month period ended July 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 July 31, 1998 was
$55,610,000. 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.
18
<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. The Company is evaluating this guidance to determine the impact on
its reporting and disclosure requirements.
The Company is in the process of identifying operating and application software
challenges related to the year 2000. While the Company expects to resolve year
2000 compliance issues substantially through normal replacement and upgrades of
software, there can be no assurance that there will not be interruption of
operations or other limitations of system functionality or that the Company will
not incur substantial costs to avoid such limitations. Any failure to
effectively monitor, implement or improve the Company's operational, financial,
management and technical support systems could have a material adverse effect on
the Company's business and consolidated results of operations.
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.
19
<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
- -------
The 1998 Annual Meeting of Shareholders was held June 18, 1998.
a) The following individuals were elected to serve as the Board of
Directors for the terms expiring at the 1999 Annual meeting:
Number of Shares Voted
----------------------
For Withheld
---------------------
Donald R. Keough 11,489,964 242,499
Patrick C. Condo 11,417,494 314,969
Richard M. Crooks, Jr. 11,482,954 249,509
John S. Hendricks 11,490,004 242,459
W. Frank King III 11,490,004 242,459
John G. McMillian 11,489,824 242,639
Philip J. O'Reilly 11,489,664 242,799
b) The shareholder proposal described in the Proxy Statement received
the following number of votes:
For Against Withheld
-----------------------------------
899,988 7,565,630 480,450
Item 5. Other Information
- -------
In the second quarter of the current year, the Company signed a
multi-year, multi-million dollar licensing, development and
distribution agreement with StorageTek, a provider of network
storage. The comprehensive agreement gives StorageTek immediate
rights to bundle Excalibur's advanced search and retrieval products
with its high-performance network storage products and then sell the
packages as enhanced solutions for knowledge management and digital
content management initiatives. In addition, the agreement calls for
StorageTek and Excalibur to jointly develop a new class of advanced
information management solutions. These solutions will combine
StorageTek's storage technologies with Excalibur's advanced text
20
<PAGE>
retrieval and video asset management products to create complete,
off-the-shelf, turn-key solutions targeting specific markets.
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. To facilitate rapid time-to-market of these
solutions, Excalibur and StorageTek are creating a joint solutions
development lab that will be located in Louisville, Colorado and will
be staffed by dedicated Excalibur and StorageTek engineers. This lab
will produce these new content management products which will be sold
by StorageTek worldwide.
Item 6. Exhibits and Reports on Form 8-K
- -------
On May 29, 1998, the Company filed a report on Form 8-K announcing
the private placement of 325,000 shares of its common stock as
discussed in Note 4 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 14, 1998 By: /s/ Patrick C. Condo
--------------------
Patrick C. Condo
President and Chief Executive Officer
(Principal Executive Officer)
September 14, 1998 By: /s/ James H. Buchanan
---------------------
James H. Buchanan
Chief Financial Officer
(Principal Financial and
Accounting Officer)
22
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