SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 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 No __
As of December 9, 1999, 14,409,409 shares of the registrant's Common Stock, par
value $.01 per share, were outstanding.
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EXCALIBUR TECHNOLOGIES CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 1999
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements: Page
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Consolidated Balance Sheets
October 31, 1999 (unaudited) and January 31, 1999 . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations and Comprehensive Income (Loss) (unaudited)
Three and nine months ended October 31, 1999 and 1998 . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows (unaudited)
Nine months ended October 31, 1999 and 1998 . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statement . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
PART II. OTHER INFORMATION
Items 1. - 6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
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EXCALIBUR TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
ASSETS October 31, 1999 January 31, 1999
(unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 6,468 $ 5,851
Short term investments. . . . . . . . . . . . . . . . . . 178 --
Accounts receivable, net of allowance for doubtful
accounts of $625 and $660, respectively. . . . . . . . . 9,690 6,402
Prepaid expenses and other. . . . . . . . . . . . . . . . 2,747 2,291
------------------ ------------------
Total current assets . . . . . . . . . . . . . . . . . 19,083 14,544
Equipment and leasehold improvements, net of accumulated
depreciation of $7,999 and $6,986, respectively . . . . 1,750 2,034
Other assets. . . . . . . . . . . . . . . . . . . . . . . 1,774 3,134
------------------ ------------------
Total assets . . . . . . . . . . . . . . . . . . . . . $ 22,607 $ 19,712
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of capital lease obligations. . . . . . . $ 9 $ --
Accounts payable. . . . . . . . . . . . . . . . . . . . . 2,144 1,933
Accrued expenses. . . . . . . . . . . . . . . . . . . . . 1,482 1,829
Deferred revenues . . . . . . . . . . . . . . . . . . . . 2,650 2,690
Deferred compensation . . . . . . . . . . . . . . . . . . 80 86
------------------ ------------------
Total current liabilities. . . . . . . . . . . . . . . 6,365 6,538
------------------ ------------------
Capital lease obligations, net of current portion . . . . 12 --
------------------ ------------------
Total liabilities. . . . . . . . . . . . . . . . . . . 6,377 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; 14,377 and 13,689
shares issued and outstanding, respectively. . . . . . . 144 137
Additional paid-in capital. . . . . . . . . . . . . . . . 74,640 68,631
Accumulated deficit . . . . . . . . . . . . . . . . . . . (58,847) (55,798)
Accumulated other comprehensive income (loss) . . . . . . 22 (67)
------------------ ------------------
Total shareholders' equity . . . . . . . . . . . . . . 16,230 13,174
------------------ ------------------
Total liabilities and shareholders' equity . . . . . $ 22,607 $ 19,712
================== ==================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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EXCALIBUR TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(unaudited)
(in thousands, except per share data)
Three Months Ended Nine Months Ended
October 31, October 31,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Software . . . . . . . . . . . . . . . . . $ 7,003 $ 5,998 $21,413 $14,563
Maintenance. . . . . . . . . . . . . . . . 1,363 1,264 3,783 3,910
-------- -------- -------- --------
8,366 7,262 25,196 18,473
-------- -------- -------- --------
EXPENSES:
Cost of software revenues. . . . . . . . . 1,229 1,192 3,510 2,712
Cost of maintenance revenues . . . . . . . 542 326 1,618 978
Sales and marketing. . . . . . . . . . . . 4,064 3,367 11,708 10,025
Research and product development . . . . . 2,173 2,072 7,035 5,752
General and administrative . . . . . . . . 1,369 1,067 4,081 3,309
-------- -------- -------- --------
9,377 8,024 27,952 22,776
-------- -------- -------- --------
Operating loss . . . . . . . . . . . . . . . (1,011) (762) (2,756) (4,303)
-------- -------- -------- --------
OTHER INCOME/ (EXPENSES):
Interest income, net. . . . . . . . . . 55 52 179 194
Equity in net loss of affiliate . . . . -- (83) (41) (299)
Write-off of investment in affiliate. . -- -- (430) --
-------- -------- -------- --------
Net loss . . . . . . . . . . . . . . . . . . (956) (793) (3,048) (4,408)
Dividends on preferred stock . . . . . . . . 3 3 10 10
-------- -------- -------- --------
Net loss applicable to common stock. . . . . $ (959) $ (796) $(3,058) $(4,418)
======== ======== ======== ========
Basic and diluted net loss per common share. $ (0.07) $ (0.06) $ (0.21) $ (0.33)
Weighted-average number of common shares
outstanding. . . . . . . . . . . . . . 14,363 13,641 14,215 13,471
Other comprehensive income (loss):
Net loss . . . . . . . . . . . . . . . . . . (956) (793) (3,048) (4,408)
Foreign currency translation adjustment 18 (52) 89 (52)
-------- -------- -------- --------
Comprehensive loss . . . . . . . . . . . . . $ (938) $ (845) $(2,959) $(4,460)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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EXCALIBUR TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Nine Months Ended
October 31,
1999 1998
-------- --------
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Cash Flows from Operating Activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(3,048) $(4,408)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 1,126 1,099
Bad debt expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 340 125
Equity in net loss of affiliate . . . . . . . . . . . . . . . . . . . . . 41 299
Write-off of investment in affiliate. . . . . . . . . . . . . . . . . . . 430 --
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,612) 2,037
Prepaid expenses and other. . . . . . . . . . . . . . . . . . . . . . . . 348 (1,514)
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . (136) (52)
Deferred revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . (36) 169
-------- --------
Net cash used in operating activities . . . . . . . . . . . . . . . . . . . (4,547) (2,245)
-------- --------
Cash Flows from Investing Activities:
Purchases of equipment and leasehold improvements . . . . . . . . . . . . . (706) (939)
Purchase of investments . . . . . . . . . . . . . . . . . . . . . . . . . . (178) (984)
Proceeds from maturities of investments . . . . . . . . . . . . . . . . . . -- 1,481
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (226)
-------- --------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . (884) (668)
-------- --------
Cash Flows from Financing Activities:
Proceeds from the exercise of stock options . . . . . . . . . . . . . . . . 1,207 431
Gross proceeds from the issuance of common stock. . . . . . . . . . . . . . 5,145 3,344
Costs incurred in connection with issuance of common stock. . . . . . . . . (342) --
Repayment of capital lease obligations. . . . . . . . . . . . . . . . . . . (24) --
-------- --------
Net cash provided by financing activities . . . . . . . . . . . . . . . . . 5,986 3,775
-------- --------
The Effect of Exchange Rate Changes on Cash . . . . . . . . . . . . . . . . . 62 (117)
-------- --------
Net Increase in Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . 617 745
Cash and Cash Equivalents, beginning of period. . . . . . . . . . . . . . . . 5,851 4,939
-------- --------
Cash and Cash Equivalents, end of period. . . . . . . . . . . . . . . . . . . $ 6,468 $ 5,684
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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EXCALIBUR TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 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, application service
providers and other strategic partners.
The Company incurred a net loss of $3.0 million in the nine month period ended
October 31, 1999 and has incurred cumulative losses of approximately $19.4
million over the last three fiscal years. The accumulated deficit at October
31, 1999 was $58.8 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
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 and nine month periods
ended October 31, 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 supercedes
Statement of Postion 97-1. The Company has implemented SOP 97-2 in fiscal year
1999 and it has not had a material financial impact on the Company.
6
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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 October 31, 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
2,564,174 shares of common stock and cumulative convertible preferred stock that
were outstanding at October 31, 1999 were not included in the computation of
diluted loss per common share for all periods presented as their effect would be
anti-dilutive. As a result, the basic and diluted loss per common share amounts
are identical.
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 October 31, 1999 and January 31, 1999, respectively.
(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 amount of 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. The lawsuit was settled
on July 21, 1999. No payment was made by ETNV as part of the settlement.
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. 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 was written off during the three months ended
April 30, 1999.
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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
included in ETNV's prepaid license is included in equity in net loss of
affiliate in the accompanying consolidated statements of operations for the nine
months ended October 31, 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 current year.
For the three and nine month periods ended October 31, 1998, the Company
recorded revenues of $269,000 and $929,000, respectively.
(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 are being used to fund ongoing
operations and for general corporate purposes of the Company. A registration
statement under the Securities Act of 1933 covering resale of the Shares was
declared effective by the Securities and Exchange Commission on July 14, 1999.
The Shares were sold pursuant to an exemption from the registration requirements
of the Securities Act of 1933.
During the nine months ended October 31, 1999, the Company issued 173,000 shares
of common stock upon the exercise of options resulting in total cash proceeds of
$1,207,000 and the utilization of $6,000 of deferred compensation. Additionally
the Company issued 14,000 shares of common stock to participants of the employee
stock purchase plan resulting in cash proceeds of $145,000.
(5) SEGMENT REPORTING
On November 17, 1999, the Company formally announced the alignment of the
business into two operating segments. The Excalibur Applications Group
develops, markets and services the Excalibur RetrievalWare suite of products and
will focus on global 2000 and government organizations building knowledge
management intranets and portals, as well as Internet based e-commerce and
online service businesses. The Excalibur Media Services Group develops, markets
and services the Screening Room product line concentrating primarily on
opportunities in association with third party application service providers
("ASP") and original equipment manufacturers ("OEM") who will host or embed
Screening Room in their product and service offerings.
Prior to the second quarter of the current year, the Company operated as a
single segment. During the second quarter of the current year, the revenue
model for the Media Services Group segment became differentiated from the
Applications Group segment. Media Services Group revenues are generated
primarily from OEM and ASP transactions, which may involve development and
customization by the Company. While OEM deals are a significant component of
the Application Group revenues, the majority of revenue is generated from
licensing the RetrievalWare suite of products directly to corporations and
government organizations building intranets and Internet based e-commerce and
online service businesses. Until the second quarter of the current year, the
Media Services Group was not forecast to meet any of the 10% significance tests
as outlined in Financial Accounting Standards Board ("FASB") SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
The following charts represent revenues, expenses and operating profit (in
thousands of dollars) attributable to the Applications Group and Media Services
Group operating segments for the three and nine month periods ended October 31,
1999 and 1998. Expenses for each segment consist of direct and allocated
expenses. Revenues are entirely from external customers.
8
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APPLICATIONS GROUP MEDIA SERVICES GROUP TOTAL
------------------ -------------------- -----
THREE MONTHS ENDED THREE MONTHS ENDED THREE MONTHS ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31,
1999 1998 1999 1998 1999 1998
------ ------ -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
TOTAL REVENUE . . . . . $7,549 $6,752 $ 817 $ 510 $ 8,366 $7,262
OPERATING EXPENSES. . . 7,310 6,184 2,067 1,840 9,377 8,024
------ ------ -------- -------- -------- -------
OPERATING INCOME (LOSS) $ 239 $ 568 $(1,250) $(1,330) $(1,011) $ (762)
------ ------ -------- -------- -------- -------
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<CAPTION>
APPLICATIONS GROUP MEDIA SERVICES GROUP TOTAL
------------------ -------------------- -----
NINE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31,
1999 1998 1999 1998 1999 1998
------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
TOTAL REVENUE . . . . . $21,264 $17,579 $ 3,932 $ 894 $25,196 $18,473
OPERATING EXPENSES. . . 21,170 18,119 6,782 4,657 27,952 22,776
------- -------- -------- -------- -------- --------
OPERATING INCOME (LOSS) $ 94 $ (540) $(2,850) $(3,763) $(2,756) $(4,303)
------- -------- -------- -------- -------- --------
</TABLE>
For the three months ended October 31, 1999, revenues from two individual
customers comprised approximately 18.5% and 12.0% of total revenues,
respectively. Revenues derived from sales to agencies of the U.S. Government
were approximately 11.8% of total revenues for the current quarter.
(6) 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.
(7) LINE OF CREDIT
The Company has available a $3,000,000 line of credit under an agreement with a
bank which expires on September 20, 2000. Up to $250,000 of borrowings may be
in the form of letters of credit. The line of credit is collateralized by
substantially all corporate assets. Borrowings under the line of credit bear
interest at the lender's prime rate (8.25% at October 31, 1999) plus up to 1%.
The agreement requires the Company to comply with certain financial covenants
that are computed on a monthly basis and prohibits additional borrowings without
the bank's approval. As of October 31, 1999, no borrowings were outstanding
under the line of credit.
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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, application service providers 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, e-commerce 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. Knowledge retrieval
products include the RetrievalWare family of products and EFS. Video 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 the Internet. 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.
In order to compete more effectively in each of these two markets, the Company
announced on November 17, 1999 the alignment of the business into two operating
segments. The Excalibur Applications Group will focus on the knowledge
retrieval market supporting knowledge management, e-commerce and online
publishing. The Excalibur Media Services Group will provide software products
and services primarily to original equipment manufacturers and application
service providers focusing on Internet and intranet video content management.
The following chart represents revenues and expenses (in thousands of dollars)
attributable to the Applications Group and Media Services Group operating
segments for the three and nine month periods ended October 31, 1999 and 1998.
Expenses for each segment consist of direct and allocated expenses.
<TABLE>
<CAPTION>
APPLICATIONS GROUP MEDIA SERVICES GROUP APPLICATIONS GROUP MEDIA SERVICES GROUP
------------------ -------------------- ------------------ --------------------
THREE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31,
1999 1998 1999 1998 1999 1998 1999 1998
------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL REVENUE . . . . . $7,549 $ 6,752 $ 817 $ 510 $ 21,264 $17,579 $ 3,932 $ 894
OPERATING EXPENSES. . . 7,310 6,184 2,067 1,840 21,170 18,119 6,782 4,657
------- -------- -------- -------- -------- -------- -------- --------
OPERATING INCOME (LOSS) $ 239 $ 568 $(1,250) $(1,330) $ 94 $ (540) $(2,850) $(3,763)
------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
10
<PAGE>
RESULTS OF OPERATIONS
Revenues
- --------
Total revenues increased 15% in the third quarter of the current year over the
third quarter last year. Revenues from the Company's flagship product Excalibur
RetrievalWare increased 13% in the third quarter of the current year to $6.2
million from $5.5 million in the third quarter of the prior year. RetrievalWare
revenues represented 89% of software product revenues in the third quarter of
the current year compared to 91% in the third quarter last year. Revenues from
the Screening Room products rose 65% to $0.8 million in the current quarter from
$0.5 million in the same quarter last year. Revenues from the Screening Room
products now represent 10% of total revenues compared to 7% in the third quarter
last year. Due to the Company's transition from the EFS product line to
RetrievalWare, $16 thousand in EFS software revenue was recognized compared to
$37 thousand in the third quarter last year.
Total software revenues increased 17% in the third quarter this year to $7.0
million from $6.0 million in the third quarter last year. North American
software revenues grew 60% in the third quarter to $5.6 million from $3.5
million in the third quarter last year. International software revenues
decreased 43% to $1.4 million in the third quarter of the current year from $2.5
million in the third quarter last year.
For the nine months ended October 31, 1999, total revenues were $25.2 million,
an increase of 36% over total revenues of $18.5 million reported for the
corresponding period last year. Revenues from RetrievalWare for the first nine
months of the fiscal year increased 30% to $17.5 million from $13.5 million for
the first nine months of last year. Revenues from the Screening Room products
were $3.8 million for the nine months ended October 31, 1999 compared to $0.8
million in the corresponding period last year. Revenues from EFS were $36
thousand for the nine months of this fiscal year compared to $265 thousand for
the same period last year.
Total software revenues for the nine months ended October 31, 1999 were $21.4
million, an increase of 47% over software revenues of $14.6 million in the
comparable period last year. Software revenues from North American sales for
the nine months ended October 31, 1999 increased 79% from the corresponding nine
month period of last year. International software revenues decreased 7% in the
first nine months of this fiscal year from the same 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 nine
month periods ended October 31, 1999 and 1998, and the percentage change in the
amounts between fiscal periods (dollars in thousands).
<TABLE>
<CAPTION>
COMPONENTS OF REVENUE AND EXPENSES INCREASE/
THREE MONTHS ENDED OCTOBER 31, (DECREASE)
1999 1998
% OF TOTAL % OF TOTAL
$ REVENUES $ REVENUES %
------ ---------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES:
RETRIEVALWARE. . . . . . . $6,199 74% $5,482 75% 13%
EFS. . . . . . . . . . . . 16 -- 37 1 (57)
SCREENING ROOM . . . . . . 788 10 479 7 65
------ ---------- ------ ---------- ----------
TOTAL SOFTWARE . . . . . . . 7,003 84 5,998 83 17
MAINTENANCE. . . . . . . . . 1,363 16 1,264 17 8
------ ---------- ------ ---------- ----------
TOTAL REVENUES . . . . . $8,366 100% $7,262 100% 15%
------ ---------- ------ ---------- ----------
EXPENSES:
COSTS OF SALES . . . . . . $1,771 21% $1,518 20% 17%
SALES AND MARKETING. . . . 4,064 49 3,367 46 21
RESEARCH AND PRODUCT
DEVELOPMENT . . . . . . 2,173 26 2,072 29 5
GENERAL AND ADMINISTRATIVE 1,369 16 1,067 15 28
------ ---------- ------ ----------- ---------
TOTAL EXPENSES . . . . . $9,377 112% $8,024 110% 17%
------ ---------- ------ ----------- ---------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
COMPONENTS OF REVENUE AND EXPENSES INCREASE/
NINE MONTHS ENDED OCTOBER 31, (DECREASE)
1999 1998
% OF TOTAL % OF TOTAL
$ REVENUES $ REVENUES %
----------- ----------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES:
RETRIEVALWARE . . . . . . . . . $ 17,528 70% $13,459 73% 30%
EFS . . . . . . . . . . . . . . 36 -- 265 1 (86)
SCREENING ROOM. . . . . . . . . 3,849 15 839 5 359
----------- ----------- ------- ---------- ----------
TOTAL SOFTWARE. . . . . . . . . . 21,413 85 14,563 79 47
MAINTENANCE . . . . . . . . . . . 3,783 15 3,910 21 (3)
----------- ----------- ------- ---------- ----------
TOTAL REVENUES. . . . . . . . $ 25,196 100% 18,473 100% 36%
----------- ----------- ------- ---------- ----------
EXPENSES:
COSTS OF SALES. . . . . . . . . $ 5,128 20% $ 3,690 20% 39%
SALES AND MARKETING . . . . . . 11,708 46 10,025 54 17
RESEARCH AND PRODUCT DEVELOPMENT 7,035 28 5,752 31 22
GENERAL AND ADMINISTRATIVE. . . 4,081 17 3,309 18 23
----------- ----------- ------- ---------- ----------
TOTAL EXPENSES. . . . . . . . $ 27,952 111% $22,776 123% 23%
----------- ----------- ------- ---------- ----------
</TABLE>
Revenue increases were driven by three primary areas. These include sales to
global 2000 and government organizations building knowledge management intranets
and corporate portals, sales to Internet businesses and web content providers,
and indirect sales via major integration and distribution partnerships. In the
coming quarters, a fourth area of growth is anticipated as the Company becomes a
supplier to application service providers (ASPs) that are looking to add video
content management capabilities to their service offerings.
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 data types that need to be effectively accessed and utilized by
the organization. In the quarter ended October 31, 1999, agreements were signed
with Raytheon Systems Company, Acxiom Corporation, GE, MasterCard International,
Autotrol, Lockheed Martin, and the YMCA. For the three months and nine months
ended October 31, 1999, intranet or knowledge management market sales were
approximately 35% and 38% of total license revenues respectively.
A second area of revenue growth came from sales of Excalibur RetrievalWare and
WebExpress to Internet web portals and e-commerce businesses looking to provide
their customers with an enhanced search experience. Typically these are online
businesses that place a high value on their content and whose customers demand
the most accurate search results from the greatest amount of information. In
the third quarter, the Company signed a significant licensing and distribution
agreement with found.com, a specialized Internet portal company. In addition to
a substantial initial cash payment, the Company is entitled to receive
additional cash or preferred stock in found.com, the value of which is not
currently determinable but which could represent significant additional future
revenue to the Company. There are now approximately 60 companies using
Excalibur products to power online information services and e-commerce
applications. For the three months and nine months ended October 31, 1999,
online services and e-commerce sales were approximately 36% and 26% of total
license revenues respectively.
The third area of growth came from new and existing OEM partners such as NCR,
Lombard, Techmath, KDN and OCS in Europe, and KDN in the Pacific Rim. During
the second quarter of this year, the Company completed its delivery of products
to StorageTek under the terms of that contract. Revenue of approximately $5.1
million dollars was recognized from the StorageTek agreement from its inception
in July 1998.
12
<PAGE>
The licensing, development and distribution agreement with NCR, the largest in
the history of the Company, gives NCR rights to use the Company's products in
NCR Teradata warehouse solutions. NCR also has rights under the agreement to
resell the full Excalibur product line and offer the Company's applications
through its worldwide services and solutions group. NCR's initial multi-million
dollar investment is for licensing, integration and support, which the Company
will recognize as development milestones are met. In addition, NCR will pay the
Company ongoing royalties for data warehouse products it develops that use
Excalibur technology. In the three and nine months ended October 31, 1999, the
Company recognized revenues of approximately $1.5 million and $2.8 million,
respectively, from the NCR agreement, which is being accounted for on a
percentage of completion basis.
During the third quarter of this year, the Company announced an agreement with
AT&T that calls for AT&T to integrate Excalibur Screening Room as part of an
intranet-based video asset management service that will be sold by both
Excalibur and AT&T. Similarly, in the second quarter of this year, Excalibur
announced an agreement with INTERVU Corporation that calls for INTERVU to use
Screening Room to create a service for the management of video content over the
Internet. These and similar agreements will be managed by the newly formed
Excalibur Media Services Group which will develop, market, and sell the
Screening Room product line, and will focus on establishing the standard for
end-to-end video solutions.
The Company's indirect sales strategy continues to focus on strategic OEM
agreements that provide potentially significant revenue opportunities. For the
three and nine months ended October 31, 1999, OEM relationships provided
approximately 29% and 36% respectively of total license revenues.
Maintenance revenue increased 8% in the third quarter this year to $1.4 million
from $1.3 million in the third quarter last year. The increase in maintenance
revenue is primarily attributable to an increase in the number of RetrievalWare
customers. Maintenance revenue declined 3% for the nine months ended October
31, 1999 compared to the same period last year. The decrease is due to the
continued transition of the business from EFS to RetrievalWare as well as the
increase in revenue from OEM agreements that do not have significant maintenance
components.
Costs of Sales
- ----------------
Costs of sales increased 17% to $1.8 million in the third quarter of the current
year from $1.5 million in the third quarter last year. For the first nine
months of the current year, costs of sales increased 39% to $5.1 million from
$3.7 million in the first nine months of last year. The increase is related
primarily to the sales volume increase and greater royalty expense associated
with new features included in the products. Costs of sales expressed as a
percentage of total revenues were 21% in the third quarter of the current year
compared to the 20% in the third quarter last year and 20% of total revenues for
the nine months of both the current and prior years.
Operating Expenses
- -------------------
Sales and marketing expenses increased 21% in the quarter ended October 31, 1999
to $4.1 million from $3.4 million in the third quarter last year, representing
49% and 46% of total revenues, respectively. For the nine months ended October
31, 1999, sales and marketing expenses increased to $11.7 million from $10.0
million for the corresponding period last year, representing 46% and 54% of
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. Also, during the
third quarter of the current year a new sales office was opened in Germany.
Total research and product development costs increased 5% to $2.2 million in the
third quarter of the current year compared with $2.1 million in the third
quarter last year, representing 26% and 29% of revenues respectively. For the
nine months ended October 31, 1999, total research and development cost
increased 22% to $7.0 million from $5.8 million in the first nine months of the
prior year, representing 28% and 31% of total revenues, respectively. The
increase in absolute dollars is largely due to the creation of the joint
development lab with StorageTek. Text and video research and development
expenses also increased in the nine month period of the current year compared to
last year as the Company continued to invest in the enhancement of its
RetrievalWare and video products. In the first quarter of the current year, 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. During the second quarter, the Company announced the
availability of RetrievalWare 6.7 and a new Power Search Plug-in for Lotus
Notes. RetrievalWare 6.7 was a major upgrade that will allow end-users a wider
degree of flexibility through automatic categorization, enhanced XML support,
and expert directories. The Power Search Plug-in for Lotus Notes allows
end-users to power search from inside the Notes environment across data
distributed enterprisewide.
13
<PAGE>
General and administrative expenses increased 28% in the third quarter to $1.4
million from $1.1 million in the third quarter last year, representing 16% and
15% of total revenues, respectively. For the first nine months of the current
year, general and administrative expenses increased 23% to $4.1 million from
$3.3 million in the same period last year, representing 17% and 18% of total
revenues, respectively. The increase in absolute dollars is attributable to
additional corporate expenses, including shareholder and legal expense, as well
as additions to bad debt expense associated with the increased revenues this
fiscal year.
Net interest income increased slightly to $55,000 in the third quarter of the
current year from $52,000 in the comparable period last year and decreased to
$179,000 for the nine months ended October 31, 1999 from $194,000 in the
comparable period last year. 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 $41,000 for the quarter ended April 30, 1999. For the three
and nine month periods ended October 31, 1998, the equity in the net loss of
ETNV was $83,000 and $299,000, respectively. The remaining balance of the
investment in ETNV of $430,000 was written off in the first quarter of this year
as a result of the termination of the distribution agreement with ETNV.
LIQUIDITY AND CAPITAL RESOURCES
In the nine months ended October 31, 1999, the Company's combined balance of
cash, cash equivalents and short term investments increased by $0.8 million to
$6.6 million as summarized below (in thousands). At October 31, 1999,
investments consist of a certificate of deposit pledged to collateralize a
letter of credit.
<TABLE>
<CAPTION>
October January
31, 1999 31, 1999 Change
--------- --------- -------
<S> <C> <C> <C>
Cash and cash
equivalents $ 6,468 $ 5,851 $ 617
Short term
investments 178 -- 178
--------- --------- -------
Total . . $ 6,646 $ 5,851 $ 795
========= ========= =======
</TABLE>
During the nine months ended October 31, 1999, cash of $4.5 million used to fund
operating activities was more than the net loss of $3.0 million primarily due to
an increase in accounts receivable of $3.6 million. Non-cash charges totaling
$1.9 million included depreciation and amortization of $1.1 million and the
write off of the balance of the investment in ETNV totaling $0.4 million. For
the nine months ended October 31, 1998, the Company's operating activities used
$2.2 million. The net loss of $4.4 million was partially offset by depreciation
and amortization and a decrease in accounts receivable.
The higher sales volume and increase in the level of accounts receivable during
the third quarter of the current year resulted in the number of days sales
outstanding ("DSO") of 103 days at October 31, 1999. Management believes that
the allowance for doubtful accounts of $625,000 at October 31, 1999 is adequate.
For the nine months ended October 31, 1999, the Company's investing activities
used $0.9 million. The purchase of a certificate of deposit used $0.2 million,
while purchases of equipment and leasehold improvements used $0.7 million. In
the first nine months of last fiscal year, the Company's investing activities
used $0.7 million principally due to the purchase of marketable securities and
equipment totaling $1.9 million offset by the proceeds from the maturity of
certain of the marketable securities.
Cash provided by financing activities was $6.0 million for the nine months ended
October 31, 1999. Net proceeds of $4.7 million were provided by a private
replacement 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 $1.2 million was provided from the exercise of employee stock options
and issuances of stock under the employee stock purchase plan. For the nine
months ended October 31, 1998, financing activities provided $3.8 million. Net
proceeds of $3.3 were provided by a private placement of 325,000 shares of
common stock at $10.00 per share, while the exercise of stock options and
issuance of stocks under the employee stock purchase plan provided $0.5 million.
14
<PAGE>
The Company has available a $3,000,000 line of credit under an agreement with a
bank which expires on September 20, 2000. Up to $250,000 of borrowings may be
in the form of letters of credit. The line of credit is collateralized by
substantially all corporate assets. Borrowings under the line of credit bear
interest at the lender's prime rate (8.25% at October 31, 1999) plus up to 1%.
The agreement requires the Company to comply with certain financial covenants
that are computed on a monthly basis and prohibits additional borrowings without
the bank's approval. As of October 31, 1999, no borrowings were outstanding
under the line of credit.
The Company believes that its current cash and cash equivalents and its funds
generated from operations, if any, will be sufficient to fund the Company's
current projected cash needs for foreseeable future. Historically, the Company
has primarily used cash provided by sales of its common stock to finance its
operations. If the actions taken by management are not effective in achieving
profitable operating results, the Company may be required to pursue 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's business environment is characterized by intense competition,
rapid technological changes, changes in customer requirements and emerging new
market segments. Consequently, to compete effectively, the Company must make
frequent new product introductions and enhancements while protecting its
intellectual property, retain its key personnel and deploy sales and marketing
resources to take advantage of new business opportunities. Future operating
results will be affected by the ability of the Company to expand its product
distribution channels and to manage the expected growth of the Company. Future
results may also be impacted by the effectiveness of the Company in executing
future acquisitions and integrating the operations of acquired companies with
those of the Company. Failure to meet any of these challenges could adversely
affect future operating results.
The Company's quarterly operating results have varied substantially in the past
and are likely to vary substantially from quarter to quarter in the future due
to a variety of factors. In particular, the Company's period-to-period
operating results are significantly dependent upon the timing of the closing of
large license agreements. In this regard, the purchase of the Company's
products can require a significant capital investment from a potential customer
which the customer generally views as a discretionary cost that can be deferred
or canceled due to budgetary or other business reasons and can involve long
sales cycles of six months or more. Estimating future revenues is also
difficult because the Company ships its products soon after an order is received
and, as such does not have a significant backlog. Thus, quarterly license fee
revenues are heavily 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
$3.0 million for the nine months ended October 31, 1999. The accumulated
deficit of the Company at October 31, 1999 was $58.8 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.
15
<PAGE>
The Company believes that inflation has not had a material effect on the results
of its operations to date.
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 the end of December 1999.
Costs to Address Year 2000 Issues
- --------------------------------------
Historical and estimated costs of remediation to this point have not been
material. The Company has resolved IT systems compliance issues through normal
replacement and upgrades of software. Non-IT systems are being addressed on a
case by case basis through the use of existing MIS resources. Most of the
Non-IT systems remedial activity to this point has involved applying low or zero
cost patches to operating systems and platforms using existing MIS resources to
achieve a date compliance level. The Company will continue to monitor Year 2000
remediation costs and will update its estimate of future remediation costs, if
any, as it completes its Non-IT systems analysis.
Key Considerations and Contingency Plans
- --------------------------------------------
At the current time, the Company's Year 2000 readiness plan anticipates that
both IT and Non-IT systems and applications will be Year 2000 compliant in all
material respects by the end of December 1999. This assessment is based on the
Company's analysis to date and detailed findings at its Vienna, Virginia and
Columbia, Maryland locations. There can be no assurance, however, of complete
compliance based on the status to date. However, since the Company is not
dependent upon any single IT or Non-IT system for the majority of its revenue,
it is unlikely that any single system will have an adverse 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.
16
<PAGE>
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.
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.
17
<PAGE>
PART II-- OTHER INFORMATION
Item 1. Legal Proceedings None.
- -------
Item 2. Changes in Securities None.
- -------
Item 3. Defaults upon Senior Securities None.
- -------
Item 4. Submission of Matters to Vote of Security Holders None.
- -------
The 1999 Annual Meeting of Shareholders was held August 24, 1999.
a) The following individuals were elected to serve as the Board of
Directors for the terms expiring at the 2000 Annual meeting:
Number of Shares Voted
----------------------
For Withheld
---------- --------
Donald R. Keough 11,949,763 183,270
Patrick C. Condo 11,949,865 183,168
Richard M. Crooks, Jr. 12,048,961 84,072
John S. Hendricks 12,048,969 84,064
W. Frank King III 11,960,443 172,590
John G. McMillian 11,960,933 172,100
Philip J. O'Reilly 12,048,749 84,284
Harry C. Payne 11,960,475 172,558
b) The shareholders voted 10,070,127 shares in the affirmative and
1,994,057 in the negative to approve the Company's 1999 stock
option plan.
Item 5. Other Information None.
- -------
Item 6. Exhibits and Reports on Form 8-K None.
- -------
18
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EXCALIBUR TECHNOLOGIES CORPORATION
----------------------------------
December 13, 1999 By: /s/ Patrick C. Condo
-----------------------
Patrick C. Condo
President and Chief Executive Officer
(Principal Executive Officer)
December 13, 1999 By: /s/ James H. Buchanan
------------------------
James H. Buchanan
Chief Financial Officer
(Principal Financial and Accounting Officer)
19
<PAGE>
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