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 April 30, 1999
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 June 11, 1999, 14,345,528 shares of the registrant's Common Stock, par
value $.01 per share, were outstanding.
<PAGE>
EXCALIBUR TECHNOLOGIES CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED APRIL 30, 1999
TABLE OF CONTENTS
PART I . FINANCIAL INFORMATION
Item 1. Financial Statements: Page
Consolidated Balance Sheets
April 30, 1999 (unaudited) and January 31, 1999........ 3
Consolidated Statements of Operations and
Comprehensive Income (Loss) (unaudited)
Three months ended April 30, 1999 and 1998............. 4
Consolidated Statements of Cash Flows (unaudited)
Three months ended April 30, 1999 and 1998............. 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..................................................... 21
2
<PAGE>
EXCALIBUR TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
April 30, January 31,
ASSETS 1999 1999
(unaudited)
----------- ------------
Current Assets:
Cash and cash equivalents ........................ $ 9,224 $ 5,851
Short term investments ........................... 178 --
Accounts receivable, net of allowance for doubtful
accounts of $480 and $660, respectively ....... 6,894 6,402
Prepaid expenses and other ....................... 2,450 2,291
-------- --------
Total current assets ......................... 18,746 14,544
Equipment and leasehold improvements,
net of accumulated depreciation of
$7,331 and $6,986, respectively .................. 2,033 2,034
Other assets ........................................ 2,371 3,134
-------- --------
Total assets .................................. $ 23,150 $ 19,712
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of capital lease obligations ..... $ 20 $ --
Accounts payable ................................. 1,617 1,933
Accrued expenses ................................. 1,439 1,829
Deferred revenues ................................ 2,836 2,690
Deferred compensation ............................ 80 86
-------- --------
Total current liabilities .................... 5,992 6,538
-------- --------
Capital lease obligations, net of current portion 17 --
-------- --------
Total liabilities ............................ 6,009 6,538
-------- --------
Shareholders' Equity:
5% Cumulative convertible preferred stock,
$0.01 par value,preference in liquidation
$10 per share, 1,000 shares authorized;
27 shares issued and outstanding .............. 271 271
Common stock, $0.01 par value, 40,000 shares
authorized; 14,337 and 13,689 shares
issued and outstanding, respectively .......... 143 137
Additional paid-in capital ....................... 74,411 68,631
Accumulated deficit .............................. (57,680) (55,798)
Accumulated other comprehensive loss ............. (4) (67)
-------- --------
Total shareholders' equity ................... 17,141 13,174
-------- --------
Total liabilities and shareholders' equity ... $ 23,150 $ 19,712
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
EXCALIBUR TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
OTHER COMPREHENSIVE INCOME (LOSS)
(unaudited)
(in thousands, except per share data)
Three Months Ended
April 30,
1999 1998
-------- --------
REVENUES:
Software ................................... $ 6,527 $ 3,731
Maintenance ................................ 1,232 1,324
-------- --------
7,759 5,055
-------- --------
EXPENSES:
Cost of software revenues .................. 1,023 681
Cost of maintenance revenues ............... 544 314
Sales and marketing ........................ 3,894 3,228
Research and product development ........... 2,489 1,898
General and administrative ................. 1,278 1,223
-------- --------
9,228 7,344
-------- --------
Operating loss ............................... (1,468) (2,289)
OTHER INCOME / (EXPENSES):
Interest income, net ....................... 58 62
Equity in net loss of affiliate ............ (41) (117)
Write-off of investment in affiliate ....... (430) --
-------- --------
Net loss ..................................... (1,882) (2,344)
Dividends on preferred stock ................. 3 3
-------- --------
Net loss applicable to common stock .......... $ (1,885) $ (2,347)
======== ========
Basic and diluted net loss per common share .. $ (0.14) $ (0.18)
Weighted-average number of
common shares outstanding .................. 13,927 13,219
Other comprehensive income (loss):
Net loss ..................................... $ (1,882) $ (2,344)
Foreign currency translation adjustment ... 63 (40)
-------- --------
Comprehensive loss ........................... $ (1,819) $ (2,384)
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
EXCALIBUR TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
For the Three Months Ended
April 30,
1999 1998
-------- --------
Cash Flows from Operating Activities:
Net loss .......................................... $(1,882) $(2,344)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ................. 406 370
Bad debt expense .............................. 40 125
Equity in net loss of affiliate ............... 41 117
Write-off of investment in affiliate .......... 430 --
Changes in operating assets and liabilities:
Accounts receivable ........................... (579) 1,380
Prepaid expenses and other .................... 93 (689)
Accounts payable and accrued expenses ......... (690) (335)
Deferred revenues ............................. 165 (31)
------- -------
Net cash used in operating activities ............. (1,976) (1,407)
------- -------
Cash Flows from Investing Activities:
Purchase of investments ........................... (178) --
Proceeds from maturities of investments ........... -- 1,496
Other assets ...................................... -- (96)
Purchases of equipment and leasehold improvements . (330) (306)
------- -------
Net cash provided by (used in) investing activities (508) 1,094
------- -------
Cash Flows from Financing Activities:
Proceeds from the exercise of stock options ....... 999 262
Gross proceeds from the issuance of common stock .. 5,037 50
Issuance cost in connection with private placement (256) --
Repayment of capital lease obligations ............ (9) --
------- -------
Net cash provided by financing activities ......... 5,771 312
------- -------
The Effect of Exchange Rate Changes on Cash .......... 86 (101)
------- -------
Net Increase (Decrease) in Cash and Cash Equivalents . 3,373 (102)
Cash and Cash Equivalents, beginning of period ....... 5,851 4,939
------- -------
Cash and Cash Equivalents, end of period ............. $ 9,224 $ 4,837
======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
EXCALIBUR TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1999
(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 enterprise-wide accurate, scalable and
secure knowledge retrieval and digital asset management software solutions
capable of supporting paper, text, image and video data. The Company offers
consulting, training, product maintenance and system 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 a net loss of $1.9 million in the three month period ended
April 30, 1999 and has incurred cumulative losses of approximately $19.4 million
over the last three fiscal years. The accumulated deficit at April 30, 1999 was
$57.7 million. The Company's operations are subject to certain risks and
uncertainties including, among others, the dependence upon the timing of the
closing on sales 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
accounting principles for complete financial statements, and it is suggested
6
<PAGE>
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, 1999.
In the opinion of management, the 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 month period ended
April 30, 1999 are not necessarily indicative of the results for the entire
fiscal year ending January 31, 2000.
Revenue Recognition
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 in fiscal year
1999 and it has not had a material financial impact on the Company.
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 term of the respective agreements, which are usually
one year in length.
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.
Cash, Cash Equivalents and Short Term Investments
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. Consequently, the carrying
amount of cash and cash equivalents approximate fair value. The balance of short
term investments at April 30, 1999 consisted of a certificate of deposit pledged
to collateralize a letter of credit required for a leased facility.
Net Loss Per Common Share
Basic loss per common share 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 common share includes the
potential dilution that would occur if securities or other contracts to issue
common stock were exercised or converted into common stock. Options to purchase
2,475,225 shares of common stock and cumulative convertible preferred stock that
were outstanding at April 30, 1999 were not included in the computation of
diluted loss per common share as their effect would be anti-dilutive. As a
result, the basic and diluted loss per common share amounts are identical.
7
<PAGE>
Income Taxes
Deferred taxes are provided utilizing the liability method, whereby deferred tax
assets are recognized for deductible temporary differences and operating loss
and tax credit carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The Company
has provided a full valuation allowance against its net deferred tax asset as of
April 30, 1999 and January 31, 1999, respectively.
Segment Reporting
The Company operates as a single segment. For the three months ended April 30,
1999, revenues from two individual customers comprised approximately 17% and
10%, respectively. Revenues derived from sales to agencies of the U.S.
Government were approximately 12% of total revenues for the current quarter.
(3) INVESTMENT IN AFFILIATE
In July 1996, the Company authorized the use of its name by Excalibur
Technologies N.V. ("ETNV"), a Belgian company incorporated in June 1996 for the
purpose of selling and marketing the Company's products and services within a
large territory including most of Northern Europe and Italy. The Company
contributed approximately $488,000 in cash to ETNV in consideration for 13.2% of
its voting capital stock. In May 1999, the Company terminated its 1996
distribution agreement with ETNV because ETNV failed to pay to Excalibur the
minimum required license fees for the quarter ended January 31, 1999 of
approximately $900,000 as well as an additional approximately $400,000 that was
due on April 20, 1999. Promptly after giving notice of such termination
Excalibur commenced a lawsuit in the United States District Court for the
Eastern District of Virginia seeking as damages such unpaid minimum license fees
and other amounts due and owing from ETNV.
In connection with the original organization of ETNV, the Company issued
warrants to purchase 148,500 shares of the Company's common stock to certain
shareholders of ETNV. The warrants were exercisable at a price of $22.00 per
share for a term of seven years but only if ETNV achieved certain financial
objectives. The value of the warrants on the date of grant was estimated to be
$758,000 and was included, net of amortization, in other assets in the
consolidated balance sheet at April 30, 1998. As a result of the termination of
the Company's distribution agreement with ETNV, the unamortized value of the
warrants and investment costs totaling $430,000 were written off in the quarter
ended April 30, 1999.
Prior to termination of the distribution agreement, the Company's investment in
ETNV was accounted for using the equity method. The original investment exceeded
the Company's share of the underlying net assets of ETNV by approximately
$827,000. The excess was 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
8
<PAGE>
included in ETNV's prepaid license fees at April 30, 1999 and 1998 is included
in equity in net loss of affiliate in the accompanying consolidated statements
of operations for the three months ended April 30, 1999 and 1998. The net
balance of the investment in and advances to ETNV of $471,000 was included in
other assets in the accompanying consolidated balance sheet at January 31, 1999.
That account had a net balance of $430,000 when it was written off in the
quarter ended April 30, 1999. No revenue related to the agreement was recorded
in the first quarter of the current year. Revenue of $330,000 was recognized for
the quarter ended April 30, 1998.
(4) CAPITALIZATION
Stock Offerings
In March 1999 the Company completed a private placement of 500,000 shares (the
"Shares") of its common stock to unaffiliated accredited investors, most of whom
are institutional investors. The Shares were sold at a purchase price of $10.00
per share, resulting in net proceeds to the Company of approximately $4.7
million. Net proceeds from the placement will be used to fund ongoing operations
and general corporate purposes of the Company. The Company filed a registration
statement under the Securities Act of 1933 covering resale of the Shares on June
4, 1999. The Shares were sold pursuant to an exemption from the registration
requirements of the Securities Act of 1933.
During the first quarter of the current fiscal year, the Company issued 143,000
shares of common stock upon the exercise of options resulting in total cash
proceeds of $1,005,000 and the utilization of $6,000 of deferred compensation.
Additionally the Company issued 4,000 shares of common stock to participants of
the employee stock purchase plan resulting in cash proceeds of $38,000.
(5) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." 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.
The American Institute of Certified Public Accountants has issued Statement of
Position 98-9, "Modification of SOP-97-2, Software Revenue Recognition, With
Respect to Certain Transactions." SOP 98-9 is effective for revenue transactions
entered into in the Company's fiscal year 2001. The Company has evaluated SOP
98-9 and does not believe its adoption will have a material effect on the
financial statements.
9
<PAGE>
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 when and if they are released.
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 through a unified
web-based user interface. There are generally two markets today for the
Company's products, 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. 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 fiscal year 1999.
The following chart represents revenues and expenses (in thousands of dollars)
attributable to the text and visual product lines for the three month periods
ending April 30, 1999 and 1998. Expenses for each product line consist of direct
and allocated expenses.
10
<PAGE>
Text Products Visual Products
------------- ---------------
Three months ended Three months ended
April 30, April 30,
1999 1998 1999 1998
-------- -------- -------- --------
Total Revenue .................. $ 6,849 $ 4,861 $ 910 $ 194
Operating Expenses ............. 7,027 5,881 2,201 1,463
-------- -------- -------- --------
Operating Income (Loss) ........ $ (177) $ (1,020) $ (1,291) (1,269)
======== ======== ======== ========
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, as
video becomes a more common data type, these two markets will merge.
Results of Operations
Revenues
- --------
Total revenues increased 54% in the first quarter of the current year over the
first quarter last year. Revenue from the Company's flagship product Excalibur
RetrievalWare increased 64% in the first quarter of the current year to $5.6
million from $3.4 million in the first quarter of the prior year. RetrievalWare
revenue represented 86% of software product revenue in the first quarter of the
current year compared to 92% in the first quarter last year. Revenues from the
Visual Products Group rose to $0.9 million in the current quarter from $0.2
million in the first quarter last year. Revenue from the Visual Products Group
now represents 14% of software product revenue compared to 4% in the first
quarter last year. Due to the Company's transition from the EFS product line to
RetrievalWare, there were no sales of EFS in the first quarter of the current
year compared to sales of $0.1 million in the first quarter last year.
Total software revenue increased 75% in the first quarter this year to $6.5
million from $3.7 million in the first quarter last year. International software
revenues increased 51% to $2.0 million in the first quarter of the current year
from $1.4 million in the first quarter 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 month
periods ended April 30, 1999 and 1998, and the percentage change in the amounts
between fiscal periods (dollars in thousands).
11
<PAGE>
Components of Revenue and Expenses Increase/
Three Months Ended April30, (Decrease)
1999 1998
-------------- -------------- ------
% of % of
total total
$ revenues $ revenues %
-------------- -------------- ------
Revenues:
RetrievalWare ............ $5,642 73 % $3,434 68 % 64 %
EFS ...................... -- -- 112 2 (100)
Visual Products Group .... 885 11 185 4 378
-------------- -------------- ------
Total Software ............ 6,527 84 3,731 74 75
Maintenance ............... 1,232 16 1,324 26 (7)
-------------- -------------- ------
Total revenues ......... $7,759 100 % $5,055 100 % 53 %
-------------- -------------- ------
Expenses:
Costs of sales ........... $1,567 20 % $ 995 20 % 57 %
Sales and marketing ...... 3,894 50 3,228 64 21
Research and product
development ............ 2,489 32 1,898 38 31
General and administrative 1,278 16 1,223 24 4
-------------- -------------- ------
Total expenses ......... $9,228 119 % $7,344 145 % 26 %
-------------- -------------- ------
Revenue increases continue to be driven by three primary areas of growth. These
include increased sales to organizations with major intranets and corporate
portal installations, increased sales to Internet businesses and web content
providers, and increased indirect sales via major integration and distribution
partnerships.
The first area of revenue growth came from sales of RetrievalWare to
organizations with large intranets seeking to implement high performance search
and retrieval software or replace existing search technology. Typically these
are maturing corporate intranet sites dealing with expanding amounts of content
and multimedia datatypes that need to be effectively accessed and utilized by
the organization. Software license sales to the intranet or knowledge management
market were 50% of all software license sales in the first quarter of the
current year and 57% in the first quarter of the prior year.
A second area of revenue growth came from sales of Excalibur RetrievalWare and
WebExpress to Internet web portals looking to provide customers with an enhanced
search experience. Typically these are online businesses who place a high value
on their content and whose customers demand the most accurate search results
from the greatest amount of information. In the first quarter, the Company
signed a new agreement with Information Handling Services Group ("IHS"), the
world's largest single source of engineering, technical and regulatory
information. Revenues derived from IHS were 10.4% of total revenues in the first
quarter. Overall, there are now more than 40 companies using Excalibur products
to power online information services and applications. Sales to Internet
businesses and web content providers represented 20% of software license
revenues in the first quarter of the current year compared to 17% in the first
quarter last year.
12
<PAGE>
The third area of growth came from existing OEM partners such as Storage
Technology Corporation ("StorageTek"). The Company's partnership with StorageTek
calls for the joint development of advanced solutions called Network Appliances
which are integrated software, tape and disk storage solutions that enable fast,
easy and intelligent management of large amounts of corporate information
ranging from electronic text to video. Currently there are two new appliances
that have been built upon Excalibur RetrievalWare and Excalibur Screening Room
products. The Media Management Network Appliance utilizing Excalibur Screening
Room was shipped in April of 1999, while the MessageVault e-mail appliance
utilizing Excalibur RetrievalWare is scheduled to be shipped in June of 1999. In
the first quarter of the current year, the Company recognized approximately $1.3
million from the StorageTek agreement. To date, revenue of approximately $3.6
million has been recognized from the StorageTek agreement. The balance will be
recognized as revenue over the remainder of the current fiscal year. Overall,
the Company's indirect sales strategy continues to focus on strategic OEM
agreements that provide real revenue opportunity. OEM relationships provided 30%
of license revenue for the first quarter of the current year compared to 26%
during the same period last year.
Maintenance revenue dropped 7% in the first quarter this year to $1.2 million
from $1.3 million in the first quarter last year. The decrease is due to the
continued transition of the business from EFS to RetrievalWare as well as the
increase in revenues from OEM agreements that do not have significant
maintenance components. While the EFS customer base in general is not renewing
their maintenance contracts, the RetrievalWare base of maintenance contracts
continues to grow as RetrievalWare license sales grow, but the overall effect is
a flattening of maintenance revenue in the current fiscal year.
Costs of Sales
- --------------
Costs of sales increased 58% to $1.6 million in the first quarter of the current
year from $1.0 million in the first quarter last year. The increase is related
primarily to the sales volume increase. Costs of sales expressed as a percentage
of total sales was 20% in both the first quarter of the current year as well as
last year.
Operating Expenses
- ------------------
Sales and marketing expenses increased 21% in the quarter ended April 30, 1999
to $3.9 million from $3.2 million in the first quarter last year, representing
50% and 64% of total revenues, respectively. The number of employees in the
sales and marketing departments has increased from the prior year to promote and
support the increased sales effort, including the StorageTek product line, which
did not exist in the first quarter of the prior year. The decrease in sales and
marketing expenses as a percentage of total revenues is attributed to the
increased revenues in the current quarter.
Total research and product development costs increased 31% to $2.5 million in
the first quarter of the current year compared with $1.9 million in the first
quarter last year. The increase in absolute dollars is largely due to the
creation of the joint development lab with StorageTek. The lab, established in
the third quarter of fiscal 1999, has integrated 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.
13
<PAGE>
Based on expected demand, efforts were accelerated to complete development of
these StorageTek network appliance products. Text and Visual research and
development expenses also increased in the first quarter of the current year
compared to last year as the Company continued to invest in the enhancement of
its RetrievalWare and Visual product lines. In the first quarter, the Company
released Excalibur Screening Room 2.0, a web-based, end-to-end solution for
real-time capturing, analyzing, cataloguing, browsing, searching, retrieving and
publishing video, as well as related closed-caption text and metadata, in a
range of applications. The Company also expects to release RetrievalWare 6.7 in
the second half of this year.
General and administrative expenses increased 4% in the first quarter to $1.3
million from $1.2 million in the first quarter last year, representing 16% and
24% of total revenues, respectively. The increase in dollar amounts is
attributable to additional management information systems personnel and related
costs necessary to support the overall increased staffing of the Company.
Net interest income declined slightly to $58,000 in the first quarter of the
current year from $62,000 in the comparable period last year due to a slightly
lower rate of return on invested funds. Prior to termination of the distribution
agreement with the Company's affiliate ETNV in May 1999, the Company's equity in
the net loss of ETNV was $42,000 for the quarter ended April 30, 1999. For the
three month period ended April 30,1998, the equity in the net loss of ETNV was
$117,000. The remaining balance of the investment in ETNV of $430,000 was
written off in the current quarter as a result of the termination of the
distribution agreement with ETNV.
14
<PAGE>
Liquidity and Capital Resources
In the three months ended April 30, 1999, the Company's combined balance of
cash, cash equivalents and short term investments increased by $3.5 million to
$9.4 million as summarized below (in thousands). At April 30, 1999, investments
consist of a certificate of deposit pledged to collateralize a letter of credit.
April 30, January 31,
1999 1999 Change
---------- ----------- ----------
Cash and cash
equivalents $ 9,224 $ 5,851 $ 3,373
Short term
investments 178 -- 178
---------- ----------- ----------
Total $ 9,402 $ 5,851 $ 3,551
========== =========== ==========
Cash of $2.0 million used to fund operating activities was more than the net
loss of $1.9 million for the three months ended April 30, 1999. Non-cash charges
totaling $0.9 million offsetting cash used in operations included depreciation
and amortization of $0.4 million. Also included in the non-cash charges was the
Company's amortization of the excess of the Company's investment over the
underlying net book value of ETNV and the write off of the balance of the
investment in ETNV totaling $0.4 million. These non-cash charges were offset by
a $0.6 million increase in the balance of accounts receivable and a $0.7 million
reduction in accounts payable and accrued expenses.
In the first quarter of the current year investing activities used $0.5 million.
The purchase of a certificate of deposit used $0.2 million,while purchases of
equipment and leasehold improvements used $0.3 million.
Net proceeds of $4.7 million were provided by a private placement of 500,000
shares of common stock sold at $10.00 per share to unaffiliated accredited
investors, most of whom are institutional investors. Cash of $1.1 million was
provided from the exercise of employee stock options and issuances of stock
under the employee stock purchase plan.
The high sales volume and increase in the level of accounts receivable during
the first quarter of the current year resulted in an increase in the number of
days sales outstanding ("DSO") at April 30, 1999. Management believes that the
allowance for doubtful accounts of $480,000 at April 30, 1999 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
15
<PAGE>
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 dependent 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.
As of January 31, 1999, the Company had 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
$1.9 million for the three months ended April 30, 1999. The accumulated deficit
of the Company at April 30, 1999 was $57.7 million. 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 $3.2
million 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.
16
<PAGE>
Year 2000
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 was effective for the Company's October 31, 1998 interim
reporting. 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 are in the process of being 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 early in the fourth quarter of fiscal year 2000.
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
case by case basis through the use of existing MIS resources. Most of the Non-IT
17
<PAGE>
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 early in the fourth quarter of fiscal year 2000. 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 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.
EURO Conversion
- ---------------
On January 1, 1999, the exchange rates of eleven countries (Germany, France, the
Netherlands, Austria, Italy, Spain, Finland, Ireland, Belgium Portugal, and
Luxembourg) were fixed amongst one another and became the currencies of the
EURO. The currencies of the eleven countries will remain in circulation until
mid-2002. The EURO currency will be introduced on January 1, 2002. The Company
does not expect future balance sheets and statements of earnings and cash flows
to be materially impacted by the EURO Conversion.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." 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.
The American Institute of Certified Public Accountants has issued Statement of
Position 98-9, "Modification of SOP-97-2, Software Revenue Recognition, With
Respect to Certain Transactions." SOP 98-9 is effective for revenue transactions
entered into in the Company's fiscal year 2001. The Company has evaluated SOP
98-9 and does not believe its adoption will have a material effect on the
financial statements.
18
<PAGE>
Market Risk
The Company's market risk is principally confined to changes in foreign currency
exchange rates and potentially adverse effects of differing tax structures.
International sales are made mostly from ETIL, the Company's foreign sales
subsidiary, and are typically denominated in British pounds. The Company's
exposure to foreign exchange rate fluctuations arises in part from intercompany
accounts in which royalties on ETIL sales are charged to ETIL and recorded as
intercompany receivables on the books of the U.S. parent company. The Company is
also exposed to foreign exchange rate fluctuations as the financial results of
ETIL are translated into U.S. dollars in consolidation. As exchange rates vary,
those results when translated may vary from expectations and adversely impact
overall expected profitability.
19
<PAGE>
PART II-- OTHER INFORMATION
Item 1. Legal Proceedings
- -------
On May 3, 1999 the Company commenced a lawsuit against Excalibur Technologies
N.V. (ETNV) in the United States District Court for the Eastern District of
Virginia seeking as damages unpaid license fees and other amounts due and owing
from ETNV pursuant to a distribution agreement between the Company and ETNV of
approximately $1.4 million.
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
- -------
Two Forms 8-K were filed during the first quarter of fiscal year 2000.
On February 19, 1999, the Company filed a Form 8-K for Item 5, reporting the
date of its Annual Meeting of Shareholders and the deadline for receipt of
shareholder proposals intended for presentation by such shareholders at the
Annual Meeting.
On March 26, 1999, the Company filed a Form 8-K for Item 5, reporting a private
placement of 500,000 shares of its common stock.
20
<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
June 11, 1999 By: /s/ Patrick C. Condo
--------------------
Patrick C. Condo
President and Chief Executive Officer
(Principal Executive Officer)
June 11, 1999 By: /s/ James H. Buchanan
---------------------
James H. Buchanan
Chief Financial Officer
(Principal Financial and Accounting Officer)
<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> 3-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-END> APR-30-1999
<CASH> 9,224
<SECURITIES> 178
<RECEIVABLES> 7,374
<ALLOWANCES> 480
<INVENTORY> 0
<CURRENT-ASSETS> 18,746
<PP&E> 9,364
<DEPRECIATION> 7,331
<TOTAL-ASSETS> 23,150
<CURRENT-LIABILITIES> 5,992
<BONDS> 0
0
271
<COMMON> 143
<OTHER-SE> 16,727
<TOTAL-LIABILITY-AND-EQUITY> 23,150
<SALES> 6,527
<TOTAL-REVENUES> 7,759
<CGS> 1,023
<TOTAL-COSTS> 5,461
<OTHER-EXPENSES> 3,767
<LOSS-PROVISION> 40
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> (1,882)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,882)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,882)
<EPS-BASIC> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>